Chapter 1

Introduction

Introduction
Learning outcomes
Chapter study guidance
Learning topics
1 Using this Workbook
2 The importance of corporate reporting
3 The role and context of modern auditing
4 Legal responsibilities of directors and auditors
5 International standards on auditing
6 Audit quality management
7 Laws and regulations
Summary
Further question practice
Technical reference
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
 Introduction

Learning outcomes
• Comment on and critically appraise the nature and validity of financial and non-financial
information included in published financial statements including how these correlate with
an understanding of the entity
• Appraise and explain the role and context of auditing
• Produce appropriate audit documentation
• Explain the nature and purpose of quality assurance (both at the level of the firm and the
individual audit) and assess how it can contribute to risk management

Chapter study guidance

Use this schedule and your study timetable to plan the dates on which you will complete your
study of this chapter.

Topic Practical significance Study approach Exam approach Interactive questions

1 Using this Workbook Approach While the majority of N/A

So far you will have The key point to the marks will always
studied corporate take in is that many be awarded for
reporting and audit of the financial demonstrating your
as separate (single reporting chapters corporate reporting
silo) subjects. have a separate knowledge, you will
However, in real life, ‘audit focus’ section, still need to explain
audit and corporate which deals with the how the audit is
reporting are closely auditing aspects of conducted if
linked. the financial required.

Your Corporate reporting area you This gives guidance

Reporting exam is an have just studied. on how to approach
integrated exam. As Stop and think the integrated
you learn the material. This is the
Remember that this first time you have
financial reporting is an integrated
topics, you will also tackled an integrated
subject so you exam.
learn how to audit should always
that particular area. consider corporate Two out of the three
reporting and questions in the exam
auditing aspects combine audit and
together. financial reporting.
2 The importance of Approach This is unlikely to be IQ1: Management
corporate reporting examined in its decisions
This will be mainly
There has never been revision so only entirety but the A quick, straight
a better time to focus focus on the areas conceptual forward question to
on the bigger picture you are unfamiliar framework could get you thinking
of reporting and this with. always be tested. about the
section reminds you Stop and think interaction of
why corporate management
reporting matters. Corporate reporting
is not just a more accounting and
This section explains advanced form of external reporting.

2 Corporating Reporting ICAB 2024

 Topic Practical significance Study approach Exam approach Interactive questions
C
what corporate financial reporting. This ties in with the H
reporting is and how It is broader, going importance of
it differs from beyond the financial
A
reporting when P
financial reporting statements and making decisions.
and management covering auditors’ T
accounting. reports and E
environmental R
reports.
3 The role and context Approach There may be a need N/A
of modern auditing Check off in your to explain why audit is 1
Clarification of what head where you necessary and how it
an audit is and why it have met these works in broad terms
is important. points before. so make sure you fully
understand these
Stop and think points.
Has anything
changed since you
last studied
auditing?
4 Legal responsibilities Approach Be prepared to apply N/A
of directors and Commit these to this knowledge if you
auditors are required to
memory.
There are some areas communicate any
Stop and think shortcomings in the
of legislation that you
just need to know! Can you auditor’s report.
differentiate
between the various
responsibilities of
directors and
auditors?
5 International Approach Due to the significant N/A
standards on Make sure you have amount of change in
auditing the profession
a good working
Standards are there knowledge of the (ironically, change is
to guide the auditor regulations behind the only constant) you
and ensure best the audit. could definitely get a
practice is question on the
Stop and think current developments
maintained.
Do you know what’s in the profession, so
This section also currently happening make sure you
describes how the to the regulation of understand the
business world is the auditing various reports and
currently in a state of profession? their implications.
considerable flux, Keep up to speed via
with changes to the ongoing research.
regulatory regime
and the audit itself
(also unchanged for
now) mirrored by the
generally volatile
nature of the current
global outlook.

ICAB 2024 Introduction 3

 Topic Practical significance Study approach Exam approach Interactive questions

6 Audit quality Approach Exam questions could IQ2: Addystone

management get you to either Fish
There is a lot of
Auditing is always content to appraise the quality What are the issues
facing a dilemma of remember – where displayed by the here and how do
commercial versus will you be able to auditor in a given they relate to the
ethical aspects and find this content in scenario or standards?
quality is usually the the exam if you recommend suitable
policies and IQ3:
victim when corners need to know it? Documentation
are cut to keep hold procedures.
Stop and think (Revision)
of clients. You need Quality management
to know what sound Make sure you are issues have generally As the title suggests,
quality is and what a familiar with the been tested in this should be
firm needs to do to standards on audit Question 3 but may revision from your
maintain it. quality. Note that also arise in Question earlier studies so
these standards 1. use it as a good
have been updated. brainstorming
activity.
IQ4: TrucksToGo
Ltd
Spotting the issues
here will not be a
problem – you need
to explain WHY and
this may cause more
of an issue.
7 Laws and regulations Approach Exam questions might N/A
Although not Review the content ask you to consider
required to be a legal with the auditing the impact of non-
expert, the auditor standards. compliance on the
does need to audit but you also
Stop and think need to be able to
understand enough
to know when any Can you distinguish explain when (and
kind of non- between the how) you can disclose
compliance could responsibilities of any non-compliance
have an effect on the the directors and without the
financial statements the auditor here? permission of the
being audited. client (compare and
contrast this with the
responsibilities that
are discussed in the
various ethical
standards in place).

Once you have worked through this guidance you are ready to attempt the further question
practice included at the end of this chapter.

4 Corporating Reporting ICAB 2024

 Learning Topics C
H
A
P
1 Using this Workbook T
E
R
Section overview

• This section gives a brief outline of how this Workbook is structured and why.
1
• The key point is that the Corporate Reporting exam is integrated, so financial reporting
and auditing must be studied together.

1.1 The importance of integration

The aim of the Corporate Reporting module is as follows:
“To enable students to apply technical knowledge, analytical techniques and professional skills
to resolve compliance and business issues that arise in the context of the preparation and
evaluation of corporate reports and from providing audit services.
Students will be required to use technical knowledge and professional judgement to identify,
explain and evaluate alternatives and to determine the appropriate solutions to compliance
issues, giving due consideration to the needs of clients and other stakeholders. The
commercial context and impact of recommendations and ethical issues will also need to be
considered in making such judgements.”
It is clear from this that the application of technical knowledge (financial reporting, audit,
assurance and ethics) is integrated, so it is appropriate that these areas are studied together
where possible.
At earlier levels you will have tended to study subjects in isolation, but this is no longer
appropriate at Advanced Level, and indeed in the real world.

Professional skills focus: Structuring problems and solutions

Although there will be a reasonably consistent structure to your exam, it is still important that
you can identify the parts that relate to auditing and those that relate to corporate reporting.
Start considering how you will address these two disciplines in the same question.

1.2 How this Workbook is structured

1.3.1 Principles and regulations in financial reporting and auditing
This chapter and Chapter 2 cover the role and context of auditing and general principles of
corporate reporting. This will largely be revision, but some of the regulations and standards
will have changed since your earlier studies. The aim is to set the more specialised topics, and
the integrated areas, in context.
1.3.2 Ethics and governance
Chapters 3 and 4 look at ethics and corporate governance. These topics underpin corporate
reporting and auditing, and ethical matters come up in all kinds of contexts, both in the exam
and in your working life as a professional. It is necessary to cover all relevant audit principles
first because, in the later chapters on reporting performance and position, the principles are
applied in audit focus sections.

ICAB 2024 Introduction 5

 1.3.3 The modern audit process
In Chapters 5 to 8 we revise and build on the auditing material covered at the Professional
Level. This will put you in the position where you can consider the audit and assurance issues
in relation to specific financial reporting topics, the aim being to study financial reporting and
auditing together.

1.3.4 Financial reporting chapters

Chapters 9 to 22 deal with the financial reporting and auditing of specific areas:
• Reporting performance
• Assets and liabilities
• Financing
• Remuneration
• Business combinations
• Reporting foreign activities
• Taxation
The financial reporting aspects are covered first, followed by an ‘audit focus’ section for each
topic, looking at the specific audit issues arising from the financial reporting of that area,
generally with examples and/or questions. For example, the chapter on share-based payment
has at the end a section on auditing share-based payment.
Audit focus sections may in turn be split into general and specific sections. For example,
Chapter 9 Reporting Financial Performance covers general issues, including creative
accounting, for which auditors need to be alert. However, a more specific section will refer
back to standards and the auditing of, for example, related party disclosures, which has its own
designated ISA and particular risks. These sections allow scope for integrated examples or
questions covering both corporate reporting and auditing elements.
Finally the Self-test questions for each chapter will contain integrated questions where
relevant.

1.3.5 Financial analysis chapters

Once you have a thorough understanding of the financial reporting and related auditing
issues, including analytical procedures, you will be in a position to analyse and interpret the
financial statements. You will not have studied financial analysis before, so Chapter 23
provides an introduction, and Chapter 24 deals with more advanced topics.

1.3.6 Assurance and other related services

The Workbook concludes with coverage of assurance and related services, which can more
easily be understood in the context of the knowledge you have gained in the earlier chapters.

2 The importance of corporate reporting

Section overview

• Corporate reporting embraces financial reporting, and both are different from
management accounting.
• Financial statements are used to make economic decisions by a wide range of users.
• All users require information regarding:
– financial position

6 Corporating Reporting ICAB 2024

 – financial performance
– changes in financial position C
H
A
2.1 What is corporate reporting?
P
2.1.1 Financial reporting T
Financial reporting is the process of identifying, measuring and communicating economic E
information to others so that they may make decisions on the basis of that information and R
assess the stewardship of the entity’s management.
Financial reporting involves:
1
• recording transactions undertaken by a business entity;
• grouping similar transactions together which are appropriate to the business; and
• presenting periodic results.
Financial reporting focuses on the preparation of published financial information. Typically,
this information is made available annually or half-yearly (sometimes quarterly) and is
presented in formats laid down or approved by governments in each national jurisdiction.

2.1.2 Corporate reporting

Corporate reporting is a broader term than financial reporting, although the two are often
used interchangeably. As will be evident from this Workbook and the exam it prepares you for,
corporate reporting covers reports other than financial statements, in particular auditors’
reports, but also assurance, internal audit and environmental reports. The definition of
corporate reporting varies and could include integrated reporting, corporate governance,
corporate social responsibility and other narrative reporting such as the Management
Commentary.
In the context of professional accountancy examinations, a corporate reporting exam is
generally higher level than a financial reporting exam. In the context of your examination,
Corporate Reporting is a more appropriate title because the exam is not just on financial
reporting.
General principles relating to corporate reporting are set out in the IASB Conceptual
Framework for Financial Reporting (Conceptual Framework), which is covered in Chapter 2,
together with regulatory matters and selected IFRS® Standards that set out principles and
frameworks.

2.1.3 Management accounting

By contrast, management accounting or reporting is internal reporting for the use of the
management of a business itself. Internal management information can be tailored to
management’s own needs and provided in whatever detail and at whatever frequency (eg,
continuous real-time information) management decides is best suited to the needs of their
business.
The distinction is not so clear-cut, in that management decisions may be affected by external
reporting issues, for example, if a director’s bonus depends on profit. These matters are
covered in Chapter 24 on the more advanced aspects of financial analysis.

Interactive question 1: Management decisions

Can you think of another example of a way in which management decisions may be influenced
by external reporting requirements?

See Answer at the end of this chapter.

ICAB 2024 Introduction 7

 2.2 Entity
Most accounting requirements are written with a view to use by any type of accounting entity,
including companies and other forms of organisation, such as a partnership. In this Workbook,
the term ‘company’ is often used, because the main focus of the syllabus is on the accounts of
companies and groups of companies, but IFRS generally refer to entities.

2.3 Financial statements

The principal means of providing financial information to external users is the annual financial
statements. Financial statements provide a summary of the performance of an entity over a
particular period and of its position at the end of that period.
A complete set of financial statements prepared under IFRS comprises the following:
• The statement of financial position
• The statement of profit or loss and other comprehensive income or two separate
statements being the statement of profit or loss and the statement that presents the other
comprehensive income (statements of financial performance)
• The statement of changes in equity (another statement of financial performance)
• The statement of cash flows
• Notes to the financial statements
The notes to the financial statements include the following:
• Accounting policies ie, the specific principles, conventions, rules and practices applied in
order to reflect the effects of transactions and other events in the financial statements
• Detailed financial and narrative information supporting the information in the primary
financial statements
• Other information not reflected in the financial statements, but which is important to users
in making their assessments (an example of this would be the disclosures relating to
contingent assets or liabilities)
The individual elements that are included in the financial statements are covered in detail
later in this chapter.

2.4 Requirement to produce financial statements

Limited liability companies are required by law to prepare and publish financial statements
annually. The form and content may be regulated primarily by national legislation, and in most
cases must also comply with Financial Reporting Standards.
In Bangladesh, all companies must comply with the provisions of the Companies Act 1994
(Amended) (CA1994). The key impact of this is as follows:
• Every registered company is required to prepare financial statements for each financial
year which give a true and fair view in accordance with the International Financial
Reporting Standards (IFRSs).

2.5 Financial reporting standards

Company financial statements must also comply with relevant reporting standards. In
Bangladesh these are as follows.
• IFRS
• The Financial Reporting Act, 2015 requires Public Interest Entities (PIE) to prepare financial
statements in accordance with the IFRSs.

8 Corporating Reporting ICAB 2024

 Important note
C
These learning materials assume the preparation of financial statements in accordance with H
IFRS. A
P
T
2.6 Fair presentation E
IAS 1, Presentation of Financial Statements requires financial statements to ‘present fairly’ the R
financial position and performance of an entity.
‘Present fairly’ is explained as representing faithfully the effects of transactions. In general
terms this will be the case if IFRS are adhered to.
1
IAS 1 states that departures from international standards are only allowed:
• in extremely rare cases; and
• where compliance with IFRS would be so misleading as to conflict with the objectives of
financial statements as set out in the Conceptual Framework, that is to provide information
about financial position, performance and changes in financial position that is useful to a
wide range of users.

2.7 Judgements and financial statements

Although IFRS narrow down the range of acceptable alternative accounting treatments, there
are still many areas which are left to the discretion of the directors of the company. On the
whole, the concept of faithful representation should result in transactions being ‘presented
fairly’. However, commercial and financial considerations may result in pressure being brought
to bear to account for and report transactions in accordance with their strict legal form rather
than their true substance. This can raise ethical questions for a professional accountant.

Professional skills focus: Applying judgement

In the exam, as in real life, you will come across a situation where the directors have applied
their own judgement about a financial reporting treatment in a way that may be influenced by
self-interest, for example showing a higher profit in order to receive a higher bonus. You will
need to challenge this judgement by applying your own judgement and knowledge.
Questions may not always have one definitive answer. Make sure you are able to consider the
best outcome for the situation as it is presented.

2.8 Users of financial statements

The form and content of financial statements must be influenced by the use to which they are
put. Financial statements are used to make economic decisions, such as:
• to decide when to buy, hold or sell an equity investment
• to assess the stewardship or accountability of management
• to assess an entity’s ability to pay and provide other benefits to employees
• to assess security for amounts lent to the entity
• to determine taxation policies
• to determine distributable profits and dividends
• to prepare and use national income statistics
• to regulate the activities of entities

ICAB 2024 Introduction 9

 Much of the information needed for these different decisions is in fact common to them all.
Financial statements aimed at meeting these common needs of a wide range of users are
known as ‘general purpose‘ financial statements.
We can identify the following users of financial statements:
• Present and potential investors
• Employees
• Lenders
• Suppliers and other trade payables
• Customers
• Governments and their agencies
• The public
Their specific information needs and how these needs may be addressed are covered in
Chapter 23, the first of two chapters on financial analysis. In most cases the users will need to
analyse the financial statements in order to obtain the information they need. This might
include the calculation of accounting ratios.

2.9 Objective of financial statements

The objective of financial statements is to provide information about the reporting entity’s
financial position and financial performance that is useful to a wide range of users in making
economic decisions.
This objective can usually be met by focusing exclusively on the information needs of present
and potential investors. This is because much of the financial information that is relevant to
investors will also be relevant to other users.

2.10 Accountability of management

Management also has a stewardship role, in that it is accountable for the safekeeping of the
entity’s resources and for their proper, efficient and profitable use. Providers of risk capital are
interested in information that helps them to assess how effectively management has fulfilled
this role, but again this assessment is made only as the basis for economic decisions, such as
those about investments and the reappointment/replacement of management.
It is also the case that in a smaller entity the owner and manager can be the same individual.
Financial reporting helps management to meet its need to be accountable to shareholders,
and also to other stakeholders (eg, employees or lenders), by providing information that is
useful to the users in making economic decisions.
However, financial statements cannot provide the complete set of information required for
assessing the stewardship of management.

2.11 Financial position, performance and changes in financial position

All economic decisions are based on an evaluation of an entity’s ability to generate cash and of
the timing and certainty of its generation. Information about the entity’s financial position,
performance and changes in financial position provides the foundation on which to base such
decisions.

2.11.1 Financial position

An entity’s financial position covers:
• the economic resources it controls;
• its financial structure (ie, debt and share finance);
• its liquidity and solvency; and
• its capacity to adapt to changes in the environment in which it operates.

10 Corporating Reporting ICAB 2024

 Investors require information on financial position because it helps in assessing:
• the entity’s ability to generate cash in the future; C
• how future cash flows will be distributed among those with an interest in, or claims on, the
H
entity; A
P
• requirements for future finance and ability to raise that finance; and
T
• the ability to meet financial commitments as they fall due. E
Information about financial position is primarily provided in a statement of financial R
position.

2.11.2 Financial performance

1
The profit and the comprehensive income earned in a period are used as the key measures of
an entity’s financial performance. Information about performance and variability of
performance is useful in:
• assessing potential changes in the entity‘s economic resources in the future;
• predicting the entity‘s capacity to generate cash from its existing resource base; and
• forming judgements about the effectiveness with which additional resources might be
employed.
Information on financial performance is provided by:
• the statement of profit or loss and other comprehensive income
• the statement of changes in equity

2.11.3 Changes in financial position

Changes in financial position can be analysed under the headings of investing, financing and
operating activities and are presented in a statement of cash flows.
Cash flow information is largely free from the more judgemental allocation and measurement
issues (ie, in which period to include things and at what amount) that arise when items are
included in the statement of financial position or performance statements. For example,
depreciation of non-current assets involves judgement and estimation as to the period over
which to charge depreciation. Cash flow information excludes non-cash items, such as
depreciation.
Cash flow information is therefore seen as being factual in nature, and hence more reliable
than other sources of information.
Information on the generation and use of cash is useful in evaluating the entity’s ability to
generate cash and its need to use what is generated.
These issues are treated more formally in the Conceptual Framework, discussed in Chapter 2.

3 The role and context of modern auditing

Section overview

• The audit provides assurance to shareholders.

• The audit enables the auditor to form an opinion as to whether the financial statements
give a true and fair view.
• An expectation gap may exist between what stakeholders expect the audit to achieve and
what it is actually designed to achieve. Despite recent efforts to narrow this gap, it remains
wider than it should be due to a number of factors.

ICAB 2024 Introduction 11

 • You should be familiar with the audit process from your earlier studies.
• All companies, except those meeting exemption criteria, must have an annual external
audit.
• The Companies Act sets down the responsibilities of the directors and auditors.

3.1 Purpose of the audit

The audit provides a mechanism for shareholders to help ensure that directors are acting in
the company’s best interests and therefore plays a fundamental stewardship role.
ISA 200 Overall Objectives of The Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing sets out the purpose of an audit as
follows:
“The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework. (ISA 200: para.3)”

3.2 Part of the economic infrastructure

The audit is also a vital function of economic activity. For that economic activity to continue to
flourish there has to be trust.
While the audit has a crucial role to play in providing assurance to shareholders, it cannot be
seen in isolation. For example, the directors of the company have a role to play in the
preparation of financial statements that show a true and fair view. The audit has to be seen in
the context of a range of interwoven laws, regulations and guidance, all of which promote
good corporate governance. (We will look at corporate governance in detail in Chapter 4.)

3.3 The audit opinion and the expectation gap

The primary role of the auditor is to perform an independent examination of the financial
statements and to form an opinion. You should be very familiar with this concept from your
earlier studies. The audit opinion will provide reasonable assurance (a high but not absolute
level of assurance) that the financial statements give a true and fair view; it does not provide a
certificate that they are completely accurate and free from every error or fraud, no matter how
small. ISA 200 explains that absolute assurance is not possible due to inherent limitations of
the audit, including those resulting from the following factors:
• The nature of financial reporting; many items involve judgement and assessments of
uncertainties
• The use of selective testing
• Inherent limitations of internal control
• The fact that most evidence is persuasive rather than conclusive
• The impracticability of examining all items within a class of transactions or account balance
• The possibility of collusion or misrepresentation for fraudulent purposes
• The fact that the work undertaken by the auditor is permeated by judgement
In some instances an ‘expectation gap‘ can lead to difficulties arising from the difference
between what shareholders and other stakeholders expect an audit to achieve and what it is
actually designed to achieve. The public increasingly expect the audit to address a number of
issues (such as whether that company will continue trading, or if it is a good investment) but in
practical terms, the auditor cannot always make these judgements beyond the requirements of
the accounting framework.

12 Corporating Reporting ICAB 2024

 Recent changes to the auditor’s report have attempted to make such communication more
meaningful (such as including details of key audit matters) but the continuing trend of C
corporate casualties such as Carillion has only served to make the public sceptical of the H
auditor’s work, and the expectation gap remains as wide as ever. A
The key judgement made by the auditor is whether the financial statements give a true and fair P
view. While there is no legal definition for these terms, ‘true’ and ‘fair’ are normally taken to T
mean the following: E
R
Definition
True: The information in the financial statements is not false and conforms to reality.
1

In practical terms this means that the information is presented in accordance with accounting
standards and law. The financial statements have been correctly extracted from the
underlying records and those records reflect the actual transactions which took place.

Definition
Fair: The financial statements reflect the commercial substance of the company’s underlying
transactions and the information is free from bias.

You will have come across examples of the application of substance over form in your financial
reporting studies.
The problem with making judgements such as these is that they can be called into question,
particularly where others have the benefit of hindsight. The major defence that the auditor has
in this situation is to show that the work was performed with due skill and care and that the
judgements made about truth and fairness were reasonable based on the evidence available
at the time. We will look at quality management in section 6 of this chapter.

3.4 The audit process

You will have covered the audit process in your earlier studies. The following diagram
summarises the key points you should be familiar with. Chapters 5 to 8 of this Workbook cover
the audit in more detail.

ICAB 2024 Introduction 13

 Figure 1.1: The audit process

Client acceptance/ Considerations

continuance • Legal
• Ethical
• Practical

Establish re-evaluate • Letter of engagement

Plan the audit • Obtain an understanding of the entity

• Evaluate internal control
• Assess risks
• Establish materiality

Develop the audit • Audit strategy

approach • Audit planning

Audit internal • Tests of controls

control
• Sampling

Audit business • Analytical procedures

processes
• Tests of details
• Sampling

Evaluate results • Analytical procedures

Issue audit report • Consider other reporting requirements

Note: ISA 200 requires that the audit should be planned and performed with an attitude of
professional scepticism. Professional scepticism is covered in detail in Chapter 5.

Professional skills focus: Assimilating and using information

What stage are you at within the audit process? Remember what you have been told in the
scenario (and therefore, by definition, what you still do not know).

3.5 Statutory audit requirement

All Bangladeshi companies must have an audit.
The basic principle is that all companies registered in Bangladesh should be audited.

14 Corporating Reporting ICAB 2024

4 Legal responsibilities of directors and auditors C
H
Section overview A
P
• The Companies Act 1994 contains many responsibilities for both directors and auditors. T
E
• Directors must consider their role carefully, being mindful of the impact that their actions
R
could have on many other stakeholders.
• As well as the financial statements and trading issues, there are also strict rules governing the
way that directors interact financially with the company.
1
• Auditors need to form an independent opinion on the truth and fairness of the financial
statements, as well as consider their preparation including any other information that the
Companies Act requires.

4.1 Companies Act 1994

The legal responsibilities regarding directors and auditors are currently contained in the
Companies Act 1994 (CA 1994). However, the corporate governance guidelines of Bangladesh
Securities and Exchange Commission, the issue of capital by the companies listed with any stock
exchange in Bangladesh shall be subject to certain further conditions in order to enhance
corporate governance in the interest of investors and the capital market.
4.2 Directors’ responsibilities
These duties as per CA 1994 are as follows:
(1) There shall be attached to every balance sheet laid before a company in general meeting a
report by its board of directors, with respect to-
a) the state of the company's affairs;
b) the amount, if any, which the board proposes to carry to any reserve in such balance
sheet;
c) the amount, if any, which the board recommends should be paid by way of dividend;
d) material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the company to
which the balance sheet related and the date of the report.
(2) The board's report shall, so far as is material for the appreciation of the state of company's
affairs by its members, deal with any changes which have occurred during the financial years:
a) in the nature of the company's business;
b) in the company's subsidiaries or in the nature of the business carried on by them; and
c) generally in the classes of business in which the company has an interest.
(3) The board shall also be bound to give the fullest information and explanations in its report
aforesaid on every reservation, qualification or adverse remark contained in the auditor's
report.
(4) The board report and any addendum thereto shall be signed by its chairman if the chairman
is authorised in that behalf by the board, and where the chairman is not so authorised and,
shall be signed by such number of directors as are required to sign the balance sheet and
the profit and loss account or the income and expenditure account, of the company by virtue
of sub-section (1) and (2) of section 189.
(5) If any person, being a director of a company, fails to take all reasonable steps to comply with
the provision of sub-section (1) to (3) or being the chairman, signs the boards report

ICAB 2024 Introduction 15

 otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of
each offence, be liable to fine which may extend to five thousand aka
These duties as per the corporate governance guideline of Bangladesh Securities and
Exchange Commission re as follows:
(i) Industry outlook and possible future developments in the industry.
(ii) Segment-wise or product-wise performance.
(iii) Risks and concerns.
(iv) A discussion on Cost of Goods sold, Gross Profit Margin and Net Profit Margin.
(v) Discussion on continuity of any Extra-Ordinary gain or loss.
(vi) Basis for related party transactions- a statement of all related party transactions should
be disclosed in the annual report.
(vii) Utilization of proceeds from public issues, rights issues and/or through any others
instruments.
(viii) An explanation if the financial results deteriorate after the company goes for Initial
Public Offering (IPO), Repeat Public Offering (RPO), Rights Offer, Direct Listing, etc.
(ix) If significant variance occurs between Quarterly Financial performance and Annual
Financial Statements the management shall explain about the variance on their Annual
Report.
(x) Remuneration to directors including independent directors.
(xi) The financial statements prepared by the management of the issuer company present
fairly its state of affairs, the result of its operations, cash flows and changes in equity.
(xii) Proper books of account of the issuer company have been maintained.
(xiii) Appropriate accounting policies have been consistently applied in preparation of the
financial statements and that the accounting estimates are based on reasonable and
prudent judgment.
(xiv) International Accounting Standards (IAS)/International Financial Reporting Standards
(IFRS), as applicable in Bangladesh, have been followed in preparation of the financial
statements and any departure there-from has been adequately disclosed.
(xv) The system of internal control is sound in design and has been effectively
implemented and monitored.
(xvi) There are no significant doubts upon the issuer company's ability to continue as a
going concern. If the issuer company is not considered to be a going concern, the fact
along with reasons thereof should be disclosed.
(xvii) Significant deviations from the last year’s operating results of the issuer company shall
be highlighted and the reasons thereof should be explained.
(xviii) Key operating and financial data of at least preceding 5 (five) years shall be
summarized.
(xix) If the issuer company has not declared dividend (cash or stock) for the year, the
reasons thereof shall be given.
(xx) The number of Board meetings held during the year and attendance by each director
shall be disclosed.
(xxi) The pattern of shareholding shall be reported to disclose the aggregate number of
shares (along with name wise details where stated below) held by:-
a) Parent/Subsidiary/Associated Companies and other related parties (name wise
details);
b) Directors, Chief Executive Officer, Company Secretary, Chief Financial Officer,
Head of Internal Audit and their spouses and minor children (name wise details);
c) Executives;
d) Shareholders holding ten percent (10%) or more voting interest in the company
(name wise details).

16 Corporating Reporting ICAB 2024

 Explanation: For the purpose of this clause, the expression “executive” means top 5 (five)
salaried employees of the company, other than the Directors, Chief Executive Officer, C
Company Secretary, Chief Financial Officer and Head of Internal Audit. H
(xxii) In case of the appointment/re-appointment of a director the company shall A
disclose the following information to the shareholders: P
T
a) a brief resume of the director;
E
b) nature of his/her expertise in specific functional areas; R
c) names of companies in which the person also holds the directorship and
the membership of committees of the board.
4.3 Loan to Director 1
(1) No company, hereinafter in this section referred to as the lending company, shall make any
loan or give any guarantee or provide any security in connection with a loan made by a third
party to- (a) any director of the lending company (b) any firm in which any director of the
lending company is a partner; (c) any private company of which any director of the lending
company is a director or member; or (d) any public company, the managing agent manager
or director where of is accustomed to act in accordance with the directions or instruction of
any director of the lending company:
Provided that nothing in this section shall apply to the making of a loan or giving of any
guarantee or providing any security by a lending company. if-- (i) such company is a banking
company or a private company not being a subsidiary of a public company, or if such
company as a holding company makes the loan or gives the guarantee or provide the
security to its subsidiary; and (ii) the loan is sanctioned by the board of directors of any
company and approved by the general meeting and, in the balance sheet, there is a specific
mention of the loan, guarantee or security, as the case may be:
Provided further that, in no case the total amount of the loan shall exceed 50% of the paid up
value of the shares held by such director in his own name
(2) In the event of any contravention of sub-section (1) every person who is a party to such
contravention including in particular any person to whom a loan is made or on whose behalf
a guarantee is given to or security provided shall be punishable with the fine which extend to
five thousand taka or simple imprisonment for six months in lieu of fine and shall be liable
jointly and severally to the lending company for the repayment of such loan or for making
good any sum which the lending company may be called up to pay under the guarantee
given or security provided by the lending company.
(3) this section shall apply to any transaction represented by a book debt which was from its
inception in the nature of a loan
4.4 Auditors’ responsibilities
Under the Companies Act 1994, it is the external auditor's responsibility to:
Form an independent opinion on the truth and fairness of the financial statements Confirm that
the financial statements have been properly prepared in accordance with the relevant financial
reporting framework and the Companies Act 1994
As per section 213 of Companies Act 1994 followings are the power and duties of auditors:
(1) Every auditor of a company shall have a right of access at all times to the books and accounts
and vouchers of the company, whether kept at the head office of the company or elsewhere
and shall be entitled to require from the officers of the company such information and
explanation as the auditor may think necessary for the performance of his duties as auditor.
(2) Without prejudice to the provisions of sub-section (1), the auditor shall, in particular inquire
into following namely:

ICAB 2024 Introduction 17

 a) whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are not
prejudicial to the interests of the company or its members:
b) whether transactions of the company which are represented merely as book-entries are
prejudicial to the interests of the company;
c) where the company is not an investment company or a banking company, whether so
much of the assets of the company as consist of shares, debentures and other securities,
have been sold at a price less than at which they were purchased by the company;
d) whether loans and advances made by the company have been shown as deposits;
e) whether personal expenses have been charged to revenue account;
f) where it is stated in the books and paper of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not misleading.
(3) The auditor shall make a report to be presented in the annual general meeting of the
company on the accounts, examined by him, and on every balance sheet and profit and loss
account and on every other document declared by CA 1994 to be part of or annexed to the
balance sheet or profit and loss accounts which are laid before the company in general
meeting during his tenure of office and the report shall state whether, in his opinion and to
the best of his information and according to the explanation given to him, the said accounts
give the information required by the CA 1994 in the manner so required and give a true and
fair view-
a) in the case of the balance sheet, of the state of the company's affairs as at the end of its
financial year;
b) in the case of the profit and loss account, of the profit or loss for its financial year.
(4) The auditors’ report shall also state-
a) whether he has obtained all the information and explanation which to the best of his
knowledge and belief were necessary for the purposes of his audit;
b) whether, in his opinion, proper books of account as required by law have been kept by
the company so far as appears from his examination of those books and proper returns
adequate for the purposes of his audit have been received from branches not visited by
him;
c) whether the company's balance sheet and profit and loss account dealt with by the
report are in agreement with the books of account and returns.
(5) There any of the matters referred to in clauses(a) and (b) of sub- section (3) or in clauses (a),
(b) and (c) of sub-section (4) are answered in the negative or with a qualification, the auditors’
report shall state the reason for the answer.
(6) The Government may, be general or special order, direct that in the case of such class or
description of companies as may be specified in the order, the auditors’ report shall also
include a statement on such matters as may be specified therein.
(7) The accounts of a company shall not be deemed as not having been and the auditors’ report
shall not state that those accounts have not been, properly drawn up on the ground merely
that the company has not disclosed certain matters, of-
a) those matters are such as the company is not required to disclose by virtue of any
provision contained in the CA 1994 or any other law for the time being in force; and
b) those provisions are specified in the balance sheet and loss account of the company.
The auditor also has a duty towards other information in documents containing audited
financial statements in accordance with ISA 720. The Auditor's Responsibilities Relating to
Other Information in Documents Containing Audited Financial Statements.

18 Corporating Reporting ICAB 2024

5 International standards on auditing C
H
Section overview A
P
• The FRC is responsible for Bangladesh auditing standards, known as ISA. T
E
• The International Auditing and Assurance Standards Board (IAASB) issues ISAs.
R

The FRC adopts and revises ethical standards and auditing standards in response to current
developments Ethical standards and guidance are also issued by the ICAB.
1
5.1.1 Codes and Standards Committee
5.1.2 Current issues from UK market
Despite the UK FRC’s mandate to oversee corporate reporting and auditing in the UK,
corporate scandals have continued to occur. The most recent significant collapse relates to UK
construction company Carillion plc, which went into liquidation in January 2018. It owed over
£1 billion to various stakeholders, despite its last audited financial statements indicating no
sign of its impending demise. In response to widespread allegations that financial regulation
has not improved almost 20 years on from Enron, the UK Government decided to review the
UKFRC and in December 2018, the Kingman review of the UK FRC was published.
In his review, Sir John Kingman concluded that the UK FRC was no longer fit for purpose and
could not deliver the regulation required to ensure effective corporate reporting, governance
and audit. He recommended the replacement of the UK FRC with a new, stronger body (the
Audit, Reporting and Governance Authority or ARGA) that would deliver a service that is
focused on “consumers of financial information, not producers” (Kingman, 2018).
In conjunction with investigations by the UK Competition and Markets Authority (CMA) into the
current state of the UK audit market, the UK Government also commissioned former Chair of
the London Stock Exchange, Sir Donald Brydon, to conduct a review of the quality and
effectiveness of UK audits. On appointment, Sir Donald was quoted as saying that: “Most
people will never read an auditor’s opinion on a company’s accounts. But tens of millions of
people depend on robust and high-quality audits” (Doherty, 2019). The following table shows
an overview of the recommendations made by the Brydon Review which carried the title
‘Assess, assure and inform - improving audit quality and effectiveness’ (Brydon, 2019).

Audit
There should be a new definition of the purpose of an audit: to provide confidence in a
company, its officers and its financial statements
Audit should be a separate profession, not seen as part of the accounting profession
Professional judgement should be redefined to include suspicion as well as scepticism
The auditor’s report
The term ‘true and fair’ should no longer be used as it ignores the reliance on estimates and
the use of materiality: the term ‘present fairly in all material respects’ should now only be
used
There should be greater continuity between successive reports and greater emphasis given
to estimates, other information and any external negative signals

ICAB 2024 Introduction 19

 Directors
There should be a rolling three-year audit programme presented by directors to
shareholders
A Resilience Statement should be used to report the following:
• Short term - similar to the current going concern assessment
• Medium term - similar to the existing viability statement
• Long term - strategic issues, such as climate change impacts
A Public Interest Statement should report how companies serve the public interest
Stakeholders
Greater shareholder involvement in the audit programme
The audit should more actively consider the role of stakeholders
Greater responsibilities for directors to consult with employees when preparing the financial
statements
Auditor to be considered a suitable individual for whistle-blowers to approach
Anti-fraud measures
A directors’ statement on the work they have done to prevent and detect fraud
Assurance on this statement by the auditors, including a review of relevant internal controls
Greater use of forensic and fraud training for auditors
Auditor Fraud Panel to consider whether enough has been done to combat fraud
Other steps
Attestation by CEO and CFO on internal controls for financial reporting (similar to the US SOX
legislation)
Controls on capital maintenance and dividend levels
Greater transparency by auditors on fees, profitability of engagements, time spent and the
circumstances leading to no longer being employed as auditor
Greater use of technology within audits
More responsible use of liability limitation agreements (LLAs) when considering auditor
liability and directors’ responsibilities
Greater scrutiny of data used in executive remuneration
Reinforcement of the Kingman recommendations on ARGA (such as defining ‘high quality
audit’, a ‘Plain English’ guide to auditing available online, publicising good audits as well as
criticism of bad ones and more formal mechanisms for shareholders and stakeholders to raise
concerns.

(Source: Brydon, D. (2019) Assess, assure and inform: Improving audit quality and
effectiveness. [Online] Available at:
[Link]
a/file/ 852960/brydon-review-fi[Link] [Accessed 27 May 2022])
In March 2021, the Department for Business, Energy and Industrial Strategy (BEIS) issued a
white paper called Restoring trust in audit and corporate governance: proposals on reforms
seeking views from stakeholders on the CMA, Brydon and Kingman proposals in relation to
audit, financial reporting, governance and regulation with the aim of improving the overall
regulatory landscape for all these essential areas. Inevitably, the structure and operation of the
audit market would also be addressed by this process.

20 Corporating Reporting ICAB 2024

 Consultation on the BEIS white paper ran from March to July 2021. In March 2022, the FRC
published their three-year plan which indicated that ARGA would be fully operational by 2025. C
This was followed soon after by confirmation from the UK Government that ARGA (now fully H
funded by a mandatory levy) would play a key part in its overall regulatory framework for audit, A
reporting and governance that would reduce the risks of further damaging corporate collapses P
like Carillion and BHS – some of the key changes planned are as follows: T
• greater control over auditors, including a ban on failing audit firms from being able to E
review the financial statements of large companies and the separation of their audit and R
non-audit functions;
• minimising the reporting burdens for many companies, especially those at the smaller end,
while allowing more companies to fall under the scope and protection of ARGA; 1
• greater scrutiny over directors as well as the power to fine them for any lack of
transparency over a company’s performance and prospects;
• highlighting the need for clawbacks from directors and shareholders when companies are
in financial difficulty and cannot afford to pay out bonuses and dividends; and
• greater representation of audit firms from outside of the Big Four for FTSE 350 listed
companies (plus a market share cap for auditors that the Business Secretary can impose if
required).
Clearly there is significant change ahead: for the purposes of your exam, while you can
assume that the regulator is still the FRC, it is expected that you will also have knowledge of
these ongoing developments.
There is also an ongoing debate about the way that going concern should be assessed with
the ongoing effects of the COVID-19 pandemic and other geo-political influences in mind to
avoid future losses that could have been foreseen with clearer levels of disclosure about the
risk of corporate failure. This will no doubt require greater input from auditors, directors and
audit committees as well as guidance from regulators and governments to reach a solution
that protects all stakeholders.
One of the key challenges facing the UK FRC as the regulator of financial reporting and
governance in the UK is striking the right balance between the need to impose controls on
businesses in order to protect stakeholders and the need to support how businesses thrive
and generate economic benefits to those same stakeholders. This is illustrated by the way that
going concern is currently under scrutiny – too much scepticism of an entity’s prospects and it
is destined to fail, but insufficient scrutiny of possible red flags and we could have another
Carillion on our hands. You will cover the way that both audits and reviews of financial
information are currently being influenced by this ongoing debate in subsequent chapters.
Given the impact of global turbulence on the UK and its partners, uncertainty for both
preparers and users of financial statements continues, although it still seems certain that the
FRC and its successor will face radical change.

5.1 Interaction between FRC and IAASB Standards

The IAASB was set up by the International Federation of Accountants (IFAC), which nominates
a majority of its members – others are nominated by the Forum of Firms – to issue professional
standards (such as those related to audits, reviews, related services and quality management).
ISAs are used for the audit of historical financial information.
In exceptional circumstances, an auditor may judge it necessary to depart from an ISA in order
to more effectively achieve the objective of an audit. When such a situation arises, the auditor
should be prepared to justify the departure. In Bangladesh ISAs are adopted by the FRC.
The system for creating an ISA (UK) currently works as follows:

ICAB 2024 Introduction 21

 5.2 IAASB Projects
The IAASB regularly makes improvements to its standards as a result of a number of ongoing
projects.
For example, in 2015, a series of new and revised standards were issued on auditor reporting.
The most notable change was the introduction of ISA 701, Communicating Key Audit Matters in
the Independent Auditor’s Report which requires auditors of listed companies to communicate
Key Audit Matters.
More recently, changes have been made in relation to the auditor’s responsibilities for other
information accompanying financial statements and the audit of accounting estimates and
related disclosures.
At the time of writing the IAASB is conducting projects that consider the identification and
assessment of risks of material misstatement, group auditing, and audit evidence.

Definition
Public interest entity:

The definition of a Public Interest Entity (PIE) in Bangla is outlined in section 2(8) of the
Financial Reporting Act, 2015 (referred to as the "Act"). Additionally, the FRC has established
the criteria for PIE through four official Gazette Notifications. It is important to note that an
official English translation of the PIE definition by the FRC has not been released yet. As a
result, the following represents an unofficial English translation of the definition of PIE in
Bangladesh, which is based on the provisions of the Act and the Gazette Notifications issued
by the FRC.
Public Interest Entity means –
A. An entity which shall meet any one of the following criteria, namely:
1. Bank-Company as defined in the Banking-Companies Act, 1991;
2. any entity that is involved in issuing securities and that is required to file a report with the
Securities and Exchange Commission in accordance with the Bangladesh Securities and
Exchange Commission Act of 1993;
3. Financial Institution as defined in the Financial Institutions Act, 1993;
4. Microfinance Institution as defined in the Microcredit Regulatory Authority Act, 2006;
5. Insurer as defined in the Insurance Act, 2010;
6. any entity that has surpassed the threshold of Tk500 million in annual revenue during the
preceding fiscal year, as determined by the Council through an official Gazette notification
(as per SRO-34 PIE, based on revenue).
7. any entity that meets either of the following two conditions at the conclusion of the prior
fiscal year, provided that:
a) it appoints at least 50 individuals as specified in the Rule 2023 issued in this regard.
b) its total assets surpass the Tk300 million threshold established by the Council through
an official Gazette notification (as per SRO-35 PIE based on total assets) and
c) the total liability, excluding shareholder equity, goes beyond the Tk100 million limit
determined by the Council through an official Gazette notification (as per SRO-36 PIE
based on liability).

22 Corporating Reporting ICAB 2024

 B. The following institutions fulfilling the criteria mentioned in (A) above shall also
be included, namely: C
H
8. state-owned companies or commercial entities; A
9. statutory authority; P
10. a non-governmental organization conducting voluntary activities in the private sector; and
T
E
11. any other similar organization or institution; R
Following recent developments in ethical standards (see Chapter 3) the term other entity of
public interest (OEPI) has emerged. While still subject to interpretation, the term essentially
refers to entities which do not meet the definition of a public interest entity but which are still 1
considered to have public interest aspects (such as a pension fund).

5.3 The global outlook

Every generation will feel that they are living in the most interesting of times, but as we
navigate the third decade of the 21st century, the global outlook is becoming increasingly
uncertain and volatile, not least due to the COVID-19 pandemic and various wars. For
example:

Political Economic
• The rise of populist, nationalist politics • A global realignment following the financial
and a push against the status quo (such crash of 2008, which has stifled growth,
as the rise of far-right politics in certain eroded confidence and encouraged trade
countries) wars
• Greater calls for independence and self- • Stagnation on global efforts to close the
determination gap between rich and poor leading to social
unrest
Social Technological
• The increasing impact of climate change • A shift towards a more digital age, with the
and the need to respond effectively associated disruption to traditional
regardless of the costs industries (including accountancy)
• Shifting demographics (eg, the rise of • The adoption of new technologies (eg, big
the #MeToo movement) highlighting data, blockchain and artificial intelligence)
the importance of diversity and the opportunities they create

What does this mean for accountants? The issues presented here paint a challenging picture,
but the profession has always been able to respond to the world around it, so demonstrating
skills such as awareness and adaptability will be crucial for the survival of the profession.

Professional skills focus: Concluding, recommending and communicating

You may be asked to discuss the ongoing developments in both corporate reporting and
auditing. You should ensure you have not only studied these developments but that you can
also communicate your thoughts in an effective and efficient manner.

ICAB 2024 Introduction 23

 6 Audit quality management
Section overview

• Quality management procedures should be adopted:

– at the firm level; and
– on an individual audit.
• Audit quality should be actively managed by the engagement partner.
• Professional bodies also have a responsibility to develop quality management standards
and monitor compliance.
• Audit documentation is an important part of quality management.
• It provides evidence of work done to support the audit opinion.
• Significant matters must be documented.
• Audit working papers should be reviewed.

6.1 Principles and purpose

Audit quality is not defined in law or through regulations, nor do auditing standards provide a
simple definition.
Although each stakeholder in the audit will give a different meaning to audit quality, at its heart
it is about delivering an appropriate professional opinion supported by the necessary
evidence and objective judgements.
Many principles contribute to audit quality including good leadership, experienced
judgement, technical competence, ethical values and appropriate client relationships, proper
working practices and effective quality management and monitoring review processes.
The standards on audit quality provide guidance for firms on how to achieve these principles.

6.2 Quality management at a firm level

The fact that auditors follow ISAs provides a general quality management framework within
which audits should be conducted. There are also specific quality management standards.
ISQM 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements,
or other Assurance or Related Services Engagements deals with quality management at a firm
level. You may have studied ISQM 1 in Audit and Assurance at the Professional Level.
ISQM 1 identifies the following eight components of the firm’s system of quality management.
• The firm’s risk assessment process
A system of quality management must be established by the firm in order to be able to
achieve its quality objectives and manage quality risks (in other words, the risk that the
firm’s quality may be under threat). This is usually achieved by implementing a series of
policies and procedures that serve as a system of quality management.
• Governance and leadership responsibilities for quality within the firm
The standard requires that the firm implements policies such that the internal culture of the
firm is one where quality is considered essential. Such a culture must be inspired by the
leaders of the firm, who must sell this culture in their actions and messages. In other words,
the entire business strategy of the audit firm should be driven by the need for quality in its
operations. Overall responsibility for quality within the firm rests with the senior leadership

24 Corporating Reporting ICAB 2024

 (such as a managing partner) while operational responsibilities fall within the remit of other
personnel (so the engagement partner or key audit partner is responsible for quality on C
any given engagement). H
• Ethical requirements A
Policies and procedures should be designed to provide the firm with reasonable
P
assurance that the firm and its personnel comply with relevant ethical requirements and in T
particular independence requirements. Firms can decide to adopt their own ethical E
guidance that goes beyond the minimum standards laid down by the current regulatory R
regime.
• Acceptance and continuance of client relationships and specific engagements
1
A firm should only accept, or continue with, a client where it has considered the integrity of
the client, it is competent to perform the engagement and has the capabilities, including
time and resources, to do so, and it can comply with ethical requirements, including
appropriate independence from the client.
ISQM 1 does not expect acceptance and continuance decisions to be based on
commercial priorities.
For the audit of a public interest entity the firm must assess whether the firm complies with
the FRC Revised Ethical Standard requirements on audit fees and prohibition of the
provision of non- audit services requirements.
• Engagement performance
The firm should take steps to ensure that engagements are performed correctly; that is, in
accordance with standards and guidance. Ensuring good engagement performance
involves a number of issues, such as direction, supervision and review, consultation and
resolution of disputes.
The firm should have policies and procedures to determine when an engagement quality
review will be necessary for an engagement. This will include all audits of financial
statements for listed companies and in Bangladesh also applies to public interest entities
and other higher risk engagements. When required, such a review must be completed
before the report is signed.
For audits of financial statements of public interest entities the engagement quality
reviewer must be an individual who possesses the competence, capabilities, authority and
independence necessary to make this process effective. ISQM 2 Engagement Quality
Reviews is the applicable standard here and specifies the following objectives:
– appoint an eligible engagement quality reviewer who is not part of the engagement
team; and
– perform an objective evaluation of the significant judgements made by the
engagement team and the conclusions they reached from those judgements.
The engagement quality review is expected to apply legal, professional and regulatory
standards and requirements and determine any areas of non-compliance (including any
that do not comply with the firm’s own system of quality management). The review will be
conducted throughout the course of the engagement and include issues such as:
– reviewing documentation produced by both the engagement team and the firm in
relation to the engagement and any possible deficiencies identified;
– discussing significant matters and judgements from the engagement;
– evaluating decisions made for evidence of logic, scepticism, ethical compliance,
consultation and sufficient involvement of the engagement partner; and
– reviewing audit documentation to ensure it satisfactorily reflects the work necessary to
support the successful implementation of ISQM 2.

ICAB 2024 Introduction 25

 • Resources
The firm needs to have policies and procedures in place regarding the resources
necessary for engagements to support quality management systems, including human
resources (including all staff and the engagement partner), technological resources (such
as data analytics software), intellectual resources (such as prescribed audit methodologies)
and the use of service providers (for example, anyone involved in a consultative or expert
capacity).
• Information and communication
The firm needs to have a system in place that supports quality management for effective
assurance work in terms of data storage and retrieval, information security, communication
across and between teams and maintaining appropriate levels of confidentiality.
• Monitoring and remediation
The standard states that firms must have policies in place to ensure that their quality
management procedures are relevant, adequate, and operating effectively. In other words,
they must monitor their system of quality management. Monitoring activity should be
reported on to the management of the firm on an annual basis. Remedial action, if
required, should be implemented to address any deficiency promptly.
There are two types of monitoring activity, an ongoing evaluation of the system of quality
management and cyclical inspection of a selection of completed engagements. An
ongoing evaluation might include such questions as “has it kept up to date with regulatory
requirements?”.
An inspection cycle would usually fall over a period such as three years, in which time at
least one engagement per engagement partner would be reviewed.

6.3 Quality management on an individual audit

You will have studied this issue in the previous Audit and Assurance exam. A summary of the
key points in ISA 220 (Revised), Quality Management for an Audit of Financial Statements is
provided below.

6.3.1 Policies and procedures

ISA 220 (Revised) states that the objective of the auditor is to implement quality management
procedures at the individual engagement level. The engagement partner is ultimately
responsible for quality management on an individual engagement.
The policies and procedures for quality management on individual audits parallel those for the
firm outlined above. For example, ethical requirements must be considered. In addition,
however, of particular significance for individual audits are the procedures of direction,
supervision and review.
(a) Direction
At the planning stage, but also during the audit, the engagement partner ensures that the
members of the engagement team are informed of:
– their responsibilities
– the objectives of the work to be performed
– the nature of the entity’s business
– risk issues
– problems that may arise
– detailed approach to the audit engagement

26 Corporating Reporting ICAB 2024

 (b) Supervision
Supervision includes: C
H
– tracking the progress of the audit engagement;
A
– considering the capabilities of individual members of the engagement team and that P
they understand their instructions; T
– addressing issues that arise and modifying the audit approach if appropriate; and E
– identifying matters for consultation or consideration by more experienced members of R
the audit engagement.
(c) Review
1
Reviewing concerns the inspection of work by engagement members by more senior
members of the same engagement. This includes ensuring that:
– the work has been carried out in accordance with professional and regulatory
requirements;
– significant matters have been raised for further consideration;
– appropriate consultations have taken place and have been documented;
– where appropriate the planned audit work is revised;
– the work performed supports the conclusions;
– the evidence obtained is sufficient and appropriate to support the audit opinion; and
– the objectives of the engagement have been achieved.
The revised ISA also includes specific guidance in relation to the engagement quality
review for audits of the financial statements of public interest entities. The purpose of the
engagement quality review is to provide an objective evaluation, on or before the date of
the auditor’s report, of the significant judgments the engagement team made and the
conclusions it reached in formulating the auditor’s report. As part of their responsibilities
for the engagement overall, the engagement partner needs to confirm that they have
dedicated sufficient time to the engagement in order to be able to be considered
responsible enough to sign off on that engagement: agreeing with the outcome of the
engagement quality review is one such example of this. In particular the review must
consider the following:
(1) The independence of the firm from the entity
(2) The significant risks and measures taken to manage them
(3) Reasoning in relation to materiality and significant risks
(4) Any request for advice from external experts and the implementation of the advice
(5) The nature and scope of corrected and uncorrected misstatements
(6) The subjects discussed with the audit committee/management/supervisory
bodies/competent authorities/third parties
(7) Whether information on the audit file supports the opinion in the auditor’s report and
additional report to the audit committee
(d) Hot and cold reviews
Hot file reviews are carried out before the auditor’s report is issued. Their purpose is to
identify any weaknesses in the application of audit procedures or to assess if results from
audit procedures have been misinterpreted. They can be done for higher risk audits. Such
reviews are usually undertaken by an audit partner not connected with the audit.
Cold file reviews are carried out after the auditor’s report has been issued. Their primary
purpose is to determine compliance with ethical and auditing standards and relevant

ICAB 2024 Introduction 27

 legislation, and to consider whether the audit work has been carried out in accordance
with the firm’s own procedures, thereby identifying any weaknesses in the firm’s quality
management procedures, and how these can be improved upon. Cold reviews are carried
out by suitably qualified individuals who are independent of the client and have had no
involvement in the audit work.
Small firms and sole practitioners may be required to arrange external reviews at least
once every three years if there is no suitable reviewer available from within the
organisation. A cold file review will result in identification of any areas of non-compliance
and the formulation of a suitable action plan with the firm.

6.4 UK FRC Audit Quality Thematic Reviews

The following section represents audit quality related notable events from UK market.
In March 2017, the FRC issued Audit Quality Thematic Review: Firms’ audit quality control
procedures and other quality initiatives to support the continuous improvement in audit quality
in the UK. Some new areas of best practice were identified (such as adopting different ‘lines of
defence’ for a firm’s procedures to interact effectively) but also some areas for further work
(such as more senior members of the audit team reviewing audit work) arose too.
Note: The term ‘quality control’ was superseded when ISQM (UK) 1 and 2 and ISA (UK) 220
(Revised) were all published in the UK in July 2021 and ‘quality management’ was
subsequently adopted across the profession. Throughout this Workbook, although you may
come across guidance published prior to this date that contains reference to the term ‘quality
control’, you can assume that it means the same thing as ‘quality management’.
This was followed in May 2018 by another Thematic Review called Firms’ activities to establish,
promote and embed a culture that is committed to delivering consistently high quality audits. In
this publication, the FRC defined culture as “a combination of the values, attitudes and
behaviours manifested by an organisation in its operations and relations with its stakeholders”.
While many might seem sceptical about the role that the FRC in particular could play in
addressing something as complex as culture among different firms, the messages contained
within these reports have outlined the need for a greater awareness of the following cultural
factors that can improve the scope and quality of audits in the UK:
• Prioritising values such as the fundamental ethical principles
• Recognising that good audits are necessary to support society in general
• Promoting good quality work practices in auditing as much as punishing poor quality work
• Using root cause analysis to identify cultural factors that led to good and bad quality audit
work
• Using independent non-executives to monitor the successful adoption of desired culture
(FRC, 2018)
The FRC continues to address quality as part of its regulatory role. In July 2020 it published
its Annual enforcement review which found that both ethical and auditing standards were
not always being followed, contributing to some instances of audit failure due to not
obtaining sufficient appropriate audit evidence and displaying inadequate levels of
professional scepticism. This was echoed in November 2020 by Developments in audit
2020 when the FRC reported inconsistent levels of audit quality on higher risk audits,
predominantly due to insufficient challenge of management in the following areas:
• complex and forward-looking judgements (such as goodwill impairment)
• assessment of an entity’s going concern status and plans to address perceived
uncertainties

28 Corporating Reporting ICAB 2024

 In addition, the FRC raised concern over several instances when group audit teams had
failed to demonstrate how they had assessed the work undertaken by component audit C
teams. There were also concerns over the approach adopted by firms when reviewing H
audit work as part of their own internal quality control processes (FRC, 2020). A
The FRC Developments in audit 2021 report concluded that the number of audits P
inspected which required either improvement or significant improvement had not T
improved and was still at a level that was not considered acceptable by the FRC. E
R
Interactive question 2: Addystone Fish
You are an audit senior working for the firm Addystone Fish. You are currently carrying out the
audit of Wicker Ltd, a manufacturer of waste paper bins. You are unhappy with Wicker’s 1
inventory valuation policy and have raised the issue several times with the audit manager. He
has dealt with the client for a number of years and does not see what you are making a fuss
about. He has refused to meet you on site to discuss these issues.
The former engagement partner to Wicker retired two months ago. As the audit manager had
dealt with Wicker for so many years, the other partners have decided to leave the audit of
Wicker largely in his hands.
Requirement
Comment on the situation outlined above. See Answer at the end of this chapter.

6.5 Audit documentation

Audit documentation is a key part of the overall quality management framework during the
course of an audit. All audit work must be documented: the working papers are the tangible
evidence of all work done in support of the audit opinion. ISA 230 (Revised June 2016), Audit
Documentation provides guidance on this issue.
In your previous studies, you have learnt the practical issues surrounding how audit working
papers should be completed. The key general rule to remember concerning what to include in
a working paper is:
“What would be sufficient to enable an experienced auditor, having no previous connection
with the audit to understand the nature, timing, and extent of the audit procedures performed
to comply with the ISAs and applicable legal and regulatory requirements and the results of
the audit procedures and the audit evidence obtained, and significant matters arising during
the audit and the conclusions reached thereon, and significant professional judgements made
in reaching those conclusions.” (ISA 230 para.8)
Review of audit working papers is important, as it allows a more senior auditor to evaluate the
evidence obtained during the course of the audit for sufficiency and reliability, so that more
evidence can be obtained to support the audit opinion, if required. It is an important quality
management procedure. ISA 500 Audit Evidence is relevant here.

Interactive question 3: Documentation (revision)

Viewco is a manufacturer of TVs and Blu-ray players. It carries out a full physical inventory count
at its central warehouse every year on 31 December, its financial year end. Finished goods are
normally of the order of £3 million, with components and work in progress normally
approximately £1 million.
You are the audit senior responsible for the audit of Viewco for the year ending 31 December
20X1. Together with a junior member of staff, you will be attending Viewco’s physical inventory
count.

ICAB 2024 Introduction 29

 Requirements
3.1 Explain why it is necessary for an auditor to prepare working papers.
3.2 State, giving reasons, what information the working papers relating to this inventory count
attendance should contain.

See Answer at the end of this chapter.

Interactive question 4: TrucksToGo Ltd

You are the audit senior on the audit of TrucksToGo Ltd. You are supervising the work of a
relatively inexperienced audit junior. The junior has been carrying out audit procedures on the
assertions of completeness and existence of non-current assets. According to the junior, audit
procedures have been completed and the memo below has been produced outlining some of
the issues found during the audit.
Memo: Issues identified during audit
The directors have confirmed that there are no further non-current assets to include in the
financial statements. This representation was received in a meeting with the Finance Director
and recorded on the audit file at this time.
Part of the existence work on non-current assets included obtaining a sample of assets from
the asset register and then physically verifying those assets. Unfortunately, a significant
number of assets were not available for verification – the vehicles were in use by the company
and therefore not on the premises. As an alternative, vehicles on the premises were agreed
back to the asset register.
A number of vehicles were noted on the company premises in a poor state of repair; for
example, engines missing. On inquiry, the vehicle manager confirmed that the vehicles were
under repair. I am therefore happy that the vehicles belonged to the company and no further
action is necessary.
I have reached the conclusion that all non-current assets are correctly stated and valued in the
financial statements.
Requirement
Explain to the junior why the evidence collected is insufficient, and detail the action necessary
to complete the audit procedures. Refer to your objectives in reviewing audit documentation
as a format for your answer.

See Answer at the end of this chapter.

7 Laws and regulations

Section overview

The auditor is responsible for obtaining sufficient appropriate audit evidence regarding
compliance with laws and regulations that have a direct effect on the financial statements

7.1 Revision
The responsibilities of the auditor for laws and regulations are covered in ISA 250 (Revised),
Consideration of Laws and Regulations in an Audit of Financial Statements. You have covered

30 Corporating Reporting ICAB 2024

 the principles contained in this standard in your earlier studies. A summary of the key points is
included below. C
The objectives of the auditor are: H
A
(a) To obtain sufficient appropriate audit evidence regarding compliance with the provisions
of those laws and regulations generally recognised to have a direct effect on the
P
determination of material amounts and disclosures in the financial statements; T
E
(b) To perform specified audit procedures to help identify instances of non-compliance with
R
other laws and regulations that may have a material effect on the financial statements; and
(c) To respond appropriately to non-compliance or suspected non-compliance with laws and
regulations identified during the audit. 1
(ISA 250.11)
An audit cannot detect non-compliance with all laws and regulations.

Definition
Non-compliance: Refers to acts of omission or commission by the entity, either intentional or
unintentional, which are contrary to the prevailing laws or regulations. Such acts include
transactions entered into by, or in the name of, the entity, or on its behalf, by those charged
with governance, management or employees. Non-compliance does not include personal
misconduct (unrelated to the business activities of the entity) by those charged with
governance, management or employees of the entity. (ISA 250.12)

7.2 Responsibility of management for compliance

Management are responsible for ensuring that a client’s operations are conducted in
accordance with laws and regulations.
The following policies and procedures, among others, may assist management in discharging
its responsibilities for the prevention and detection of non-compliance.
• Monitor legal requirements and ensure that operating procedures are designed to meet
these requirements.
• Institute and operate appropriate systems of internal control, including internal audit and
an audit committee.
• Develop, publicise and follow a code of conduct.
• Ensure that employees are properly trained and understand the code of conduct.
• Monitor compliance with the code of conduct and act appropriately to discipline
employees who fail to comply with it.
• Engage legal advisers to assist in monitoring legal requirements.
• Maintain a register of significant laws with which the entity has to comply within its
particular industry and a record of complaints.

7.3 Responsibility of the auditors

The auditor’s responsibilities depend on whether or not the law or regulation has a direct
effect on the financial statements as follows:
“The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognised to have a direct effect on the
determination of material amounts and disclosures in the financial statements.” (ISA 250.14)

ICAB 2024 Introduction 31

 These laws and regulations may relate to:
• the form and content of financial statements;
• accounting for transactions under government contracts;
• laws determining the circumstances under which a company is prohibited from making a
distribution except out of available profits; and
• laws which require auditors expressly to report non-compliance, such as not keeping
proper records.
For other laws and regulations the auditor is required to perform audit procedures to help
identify instances of non-compliance. Procedures would include inquiring of management and
those charged with governance and inspecting correspondence with relevant licensing or
regulatory authorities.
Written representations from management are also important. The standard requires the
auditor to obtain written representations. (ISA 250.17)

7.4 Procedures when non-compliance is discovered

The ISA requires the following approach.
If the auditor becomes aware of information concerning an instance of non-compliance or
suspected non-compliance, the auditor shall obtain:
• understanding of the nature of the act and the circumstances in which it has occurred; and
• further information to evaluate the possible effect on the financial statements. (ISA 50.19)
When evaluating the possible effect on the financial statements, the auditor should consider:
• the potential financial consequences, such as fines, penalties, damages, threat of
expropriation of assets, enforced discontinuation of operations and litigation;
• whether the potential financial consequences require disclosure; and
• whether the potential financial consequences are so serious as to call into question the
true and fair view (fair presentation) given by the financial statements.
If the auditors suspect there may be non-compliance they should discuss the matter with
management and those charged with governance.
Such discussions are subject to the laws concerning ‘tipping off’. If information provided by
management is not satisfactory, the auditor should consult the entity’s lawyer and, if necessary,
their own lawyer on the application of the laws and regulations to the particular circumstances.

7.5 Reporting of non-compliance

7.5.1 To management
ISA 250 requires the following:
Unless all of those charged with governance are involved in management of the entity, and
therefore are aware of matters involving suspected non-compliance already communicated by
the auditor, the auditor shall communicate with those charged with governance matters
involving non-compliance with laws and regulations that come to the auditor’s attention during
the course of the audit, other than when the matters are clearly inconsequential.
If, in the auditor’s judgement, the non-compliance is believed to be intentional and material,
the auditor shall communicate the matter to those charged with governance as soon as
practicable.
If the auditor suspects that management or those charged with governance are involved in
non- compliance, the auditor shall communicate the matter to the next higher level of authority
at the entity, if it exists, such as an audit committee or supervisory board. Where no higher

32 Corporating Reporting ICAB 2024

 authority exists, or if the auditor believes that the communication may not be acted upon or is
unsure as to the person to whom to report, the auditor shall consider the need to obtain legal C
advice. H
(ISA 250.23–.25) A
P
7.5.2 To the users of the auditor’s report T
If the auditor concludes that the non-compliance has a material effect on the financial E
statements, and has not been adequately reflected in the financial statements, the auditor R
shall, in accordance with ISA 705, express a qualified opinion or an adverse opinion on the
financial statements.
If the auditor is precluded by management or those charged with governance from obtaining 1
sufficient appropriate audit evidence to evaluate whether non-compliance that may be
material to the financial statements has, or is likely to have, occurred, the auditor shall express
a qualified opinion or disclaim an opinion on the financial statements on the basis of a
limitation on the scope of the audit in accordance with ISA 705.
If the auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances rather than by management or those charged with
governance, the auditor shall evaluate the effect on the auditor’s opinion in accordance with
ISA 705. (ISA 250.26–.28)
7.5.3 To regulatory and enforcement authorities
Confidentiality is an issue again here, but it may be overridden by the law, statute or the courts
of law. The auditor should obtain legal advice. If the auditor has a statutory duty to report, a
report should be made without delay.
Alternatively, it may be necessary to make disclosures in the public interest. In practice it will
often be extremely difficult for an auditor to decide whether making a disclosure in the public
interest is warranted. The auditor should obtain professional advice.

7.6 Withdrawal from the engagement

As is the case for fraud or error, withdrawal may be the only option if the entity does not take
the remedial action the auditor thinks is necessary, even for non-material matters.

ICAB 2024 Introduction 33

 Summary

Corporate Reporting

Financial Reporting Audit Assurance Ethics

Financial Analysis

Audit

Statutory Auditing
audit standards

Legal International standards Clarity Laws and

responsibilities on auditing Project regulations

Purpose of ISAs

Directors Auditors
Set by IAASB
and FRC

• Enhanced Opinion Apply to audit

shareholder
and assurance
value
work
• Transactions
with
Quality management
company
standards – ISQM 1

Standards are Sections of

required at: ISQM1

Firm
level • Risk assessment process
• Governance and leadership
Audit • Ethics
level • Acceptance and continuance
• Engagement performance
• Resources
• Information and communication
• Monitoring and remediation

34 Corporating Reporting ICAB 2024

 Further question practice C
H
A
P
T
E
1 Knowledge diagnostic R
Before you move on to question practice, confirm you are able to answer the following
questions having studied this chapter. If not, you are advised to revisit the relevant learning
from the topic indicated. 1

Confirm your learning

1. Do you understand what is meant by the term ‘corporate reporting’?

2. Can you remember the various phases of an audit and explain what each one is for?

3. Can you distinguish between the responsibilities of directors and auditors?

4. Can you discuss current issues that affect both corporate reporting and auditing right
now?

5. Can you describe and explain the various quality management mechanisms that should
be present in an audit firm?

6. Do you know how to report various instances of non-compliance with laws and
regulations and to whom this reporting should be directed?

2 Question practice
Aim to complete all self-test questions at the end of this chapter. The following self-test
questions are particularly helpful to further topic understanding and guide skills application
before you proceed to the next chapter.

Question Learning benefit from attempting this question

LaFa plc This is useful practice for you in two ways: firstly, it is testing your knowledge of
the subject matter on quality management which you need to understand, and
secondly, it is presented in the form of a scenario which you will need to apply
your knowledge to.

Bee5 You can test your understanding of the audit approach by applying what you
have learned to this short scenario. What changes might cause you concern?

Once you have completed these self-test questions, it is beneficial to attempt the following
questions from the Question Bank for this module. These questions have been selected to
introduce exam style scenarios that will help you improve your knowledge application and
professional skills development before you start the next chapter.

ICAB 2024 Introduction 35

 Question Learning benefit from attempting this question

Vacance plc Sometimes the question contains so much information it is difficult to know
where to start. Use this question to practise interrogating the exhibits for
matters that relate to the audit quality on show.

Newpenny Exhibit 1 asks for a change to the audit approach. Do you think this is a good
idea?
Jupiter Consider the issue of non-compliance with laws and regulations from Exhibit 3
– what are the potential implications of this for the audit?

Refer back to the learning in this chapter for any questions which you did not answer correctly
or where the suggested solution has not provided sufficient explanation to answer all your
queries. Once you have attempted these questions, you can continue your studies by moving
on to the next chapter.

36 Corporating Reporting ICAB 2024

 Technical reference C
H
A
P
T
BEIS (2021) Restoring trust in audit and corporate governance: proposals on reforms. [Online]. E
Available from: [Link] R
corporate-governance-proposals-on-reforms [Accessed 25 May 2022].
Doherty, R. (10 April 2019) Brydon lays out scope of audit review. Economia. [Online]. Available
from: [Link] 1
[Accessed 26 May 2022].
UK FRC (2018) Audit culture thematic review: Firms’ activities to establish, promote and embed
a culture that is committed to delivering consistently high quality audits. [Online]. Available
from: [Link]/getattachment/2f8d6070-e41b-4576-9905-4aeb7df8dd7e/Audit-
Culture-Thematic- [Link] [Accessed 26 May 2022].
UK FRC (2020) Annual enforcement review 2020. [Online]. Available from:
[Link]
[Link] [Accessed 26 May 2022].
UK FRC (2020) Developments in audit 2020. [Online]. Available from:
[Link]
16c7f5355586/Developments-in- [Link] [Accessed 26 May 2022]
UK FRC (2021) Developments in audit 2021. [Online]. Available from:
[Link]
Developments-in-Audit-_November-[Link] [Accessed 26 May 2022]
[Link] (2022) Audit regime overhaul to help restore trust in big business. [Online]. Available
from: [Link]
big-business [Accessed 6 June 2022]
Kingman, J. (2018) Independent Review of the Financial Reporting Council. London, The
Stationery Office.

1 What is financial reporting?

• Financial reporting is the provision of financial information about a reporting entity that is
useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity.
Corporate reporting is a broader concept, which covers other reports, such as audit or
environmental reports – Conceptual Framework for Financial Reporting (OB2)
• Financial statements comprise statement of financial position, statement of profit or loss
and other comprehensive income, statement of changes in equity, statement of cash flows
and notes. – IAS 1 (10)

2 Purpose and use of financial statements

• Users’ core need is for information for making economic decisions. – Concept Frame (OB2)
• Objective is to provide information on financial position (the entity’s economic resources
and the claims against it) and about transactions and other events that change those
resources and claims. – Concept Frame (OB12)
• Financial position: – Concept Frame (OB13)
– Resources and claims

ICAB 2024 Introduction 37

 – Help identify entity’s strengths and weaknesses
– Liquidity and solvency
• Changes in economic resources and claims: – Concept Frame (OB15-16)
– Help assess prospects for future cash flows
– How well have management made efficient and effective use of the resources
• Financial performance reflected by accrual accounting. – Concept Frame (OB17)
• Financial performance reflected by past cash flows. – Concept Frame (OB20)
3 ISA 200
• Purpose of an audit – ISA 200.3
• General principles of an audit – ISA 200.14–.24

4 ISQM 1
• Objective – ISQM 1.14
• Components of a system of quality management – ISQM 1.6
• The firm’s risk assessment process – ISQM 1.23-.27
• Governance and leadership – ISQM 1.28
• Relevant ethical requirements – ISQM 1.29
• Acceptance and continuance issues – ISQM 1.30
• Engagement performance – ISQM 1.31
• Resources – ISQM 1.32
• Information and communication – ISQM 1.33
• Monitoring and remediation – ISQM 1.35–.56

5 ISQM 2
• Objective – ISQM 2.12
• Requirements – ISQM 2.14-.16
• Engagement quality reviewers – ISQM 2.17-.23
• Performance of the review – ISQM 2.24-.27
• Documentation – ISQM 2.28-.30

6 ISA 230
• Purposes of audit documentation. – ISA 230.2–.3
• Should enable an experienced auditor to understand the procedures performed, the
results and evidence obtained and significant matters identified. – ISA 230.8–.8-1
• Auditors must document discussions of significant matters with management. – ISA 230.10
• Inconsistencies regarding significant matters must be documented. – ISA 230.11
• Departures from relevant requirements in ISAs must be documented. – ISA 230.12
• The identity of the preparer and reviewer must be documented. – ISA 230.9

7 ISA 250
• Categories of laws and regulations – ISA 250.6
• Objectives – ISA 250.11
• Auditor’s responsibilities – ISA 250.13–.14
• Reporting – ISA 250.23

38 Corporating Reporting ICAB 2024

 Self-test questions C
H
A
P
Answer the following questions. T
E
1 Performance and position R
Explain the terms ‘performance’ and ‘position’, and identify which of the financial statements
will assist the user in evaluating performance and position.
1

2 LaFa plc
The WTR audit firm has 15 partners and 61 audit staff. The firm has offices in three cities in one
country and provides a range of audit, assurance, tax and advisory services. Clients range from
sole traders requiring assistance with financial statement production to a number of small plcs
– although none is a quoted company.
LaFa plc is one of WTR’s largest clients. Due to the retirement of the engagement partner from
ill health last year, LaFa has been appointed a new engagement partner. WTR provides audit
services as well as preparation of taxation computations and some advisory work on the
maintenance of complicated costing and inventory management systems. The audit and other
services engagement this year was agreed on the same fee as the previous year, although
additional work is required on the audit of some development expenditure which had not
been included in LaFa’s financial statements before. Information on the development
expenditure will be made available a few days before audit completion ‘due to difficulties with
cost identification’ as stated by the Finance Director of LaFa. LaFa’s management were insistent
that WTR could continue to provide a similar level of service for the same fee.
Part way through the audit of WTR, Mr W, WTR’s quality management partner, resigned to take
up a position as Finance Director in SoTee plc, LaFa’s parent company. SoTee is audited by a
different firm of auditors. Mr W has not yet been replaced, as the managing board of WTR has
yet to identify a suitable candidate. Part of the outstanding work left by Mr W was the
implementation of a system of ethical compliance for all assurance staff whereby they would
confirm in writing adherence to the Code of Ethics and confirm lack of any ethical conflict
arising from the code.
Requirement
Identify and explain the risks which will affect the quality management of the audit of LaFa.
Suggest how the risks identified can be reduced.

3 Bee5
You are the audit manager in charge of the audit of Bee5, a construction company. The client
is considered to be low risk; control systems are generally good and your assurance firm,
Sheridan & Co, has normally assisted in the production of the financial statements providing
some additional assurance of the accuracy and completeness of the statements.
During the initial planning meeting with the client you learn that a new Finance Director has
been appointed and that Bee5 will produce the financial statements this year; the services of
your firm’s accounts department will therefore not be required. However, Bee5 has requested
significant assurance work relating to a revision of its internal control systems. The current
accounting software has become less reliable (increased processing time per transaction and
some minor data loss due to inadequate field sizes). The client will replace this software with

ICAB 2024 Introduction 39

 the new Leve system in the next financial year but requires advice on amending its control
systems ready for this upgrade.
Requirement
Discuss the impact on the audit approach for Bee5 from the above information. Make specific
reference to any quality management issues that will affect the audit.

Now go back to the Introduction and ensure that you have achieved the Learning outcomes
listed for this chapter.

40 Corporating Reporting ICAB 2024

 Answers to Interactive questions C
H
A
P
T
Answer to Interactive question 1 E
R
Where IFRS allows a choice of accounting policy, directors may wish to select the policy that
gives the most favourable picture, rather than the one which is most useful to users of financial
statements. For example, they may wish to adopt the direct, rather than the indirect, method of
1
preparing a statement of cash flows if they believe that gives a more favourable view of the
company’s liquidity and solvency in the eyes of a lender, such as a bank. Auditors need to be
on the lookout for this kind of manipulation.

Answer to Interactive question 2

Several quality management issues are raised in the scenario.
Engagement partner
An engagement partner is usually appointed to each audit engagement undertaken by the
firm, to take responsibility for the engagement and its quality management on behalf of the
firm. Assigning the audit to the experienced audit manager is not sufficient.
The lack of audit engagement partner also means that several of the requirements of ISA 220
(Revised) about ensuring that arrangements in relation to independence and directing,
supervising and reviewing the audit are not in place.
Conflicting views
In this scenario the audit manager and senior have conflicting views about the valuation of
inventory. This does not appear to have been handled well, with the manager refusing to
discuss the issue with the senior.
ISA 220 (Revised) requires that the audit engagement partner takes responsibility for settling
disputes in accordance with the firm’s policy in respect of resolution of disputes required by
ISQM 1. In this case, the lack of engagement partner may have contributed to this failure to
resolve the disputes. In any event, at best, the failure to resolve the dispute is a breach of the
firm’s policy under ISQM 1. At worst, it indicates that the firm does not have a suitable policy
concerning such disputes as required by ISQM 1.

Answer to Interactive question 3

3.1 Working papers are necessary for the following reasons:
• To assist the engagement team to plan and perform the audit
• To assist members of the engagement team responsible for supervision to direct and
supervise the audit procedures, and to discharge their review responsibilities in
accordance with ISA 220 (Revised)
• To enable the engagement team to be accountable for its work
• As a record of matters of continuing significance to future audits
• To enable the conduct of engagement quality reviews and inspections in accordance
with ISQM 1
• To enable the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements

ICAB 2024 Introduction 41

 3.2 Information/reasons

Information Reasons
(1) Administration
Client name Year end Enables an organised file to be produced
Title
Date prepared Enables papers to be traced if lost
Initials of preparer Any questions can be addressed to the
appropriate person
Seniority of preparer is indicated
Initials of senior to indicate review of Evidence that guidance on planning, controlling
junior’s work and recording is being followed
Evidence of adherence to auditing standards
(2) Planning
Summary of different models of TVs and Enables auditors to familiarise themselves with
Blu- ray players held and the different types of inventory lines
approximate value of each
Summary of different types of raw
material held and method of counting
small components
Summary of different stages of WIP
identified by client
Time and place of count Audit team will not miss the count

Personnel involved Auditor aware who to address questions/

problems to
Copy of client’s inventory count Enables an initial assessment of the likely
instructions and an assessment of them reliability of Viewco’s count
Assists in determining the amount of
procedures audit team need to do
Enables compliance work to be carried out; that
is, checking Viewco staff follow the instructions
Plan of warehouse To ensure all areas covered at count
Clear where to find different
models/components
Location of any third party/moving inventory
clear
Details of any known old or slow moving Special attention can be given to these at count;
lines for example, include in test counts
Scope of test counts to be performed Ensures appropriate amount of procedures
that is, number/value of items to be performed based on initial assessment
counted and method of selection. For Clear plan for audit team
Viewco probably more counting of
higher value finished goods

42 Corporating Reporting ICAB 2024

 Information Reasons
C
(3) Objectives of attendance; that is, to Reporting partner can confirm if
H
ensure that the quantity and quality of appropriate/adequate procedures performed
A
inventory to be reflected in the financial
statements is materially accurate P
T
(4) Details of procedures performed Provides evidence for future reference and E
documents adherence to auditing standards R
(a) Details of controls testing Enables reporting partner to review the
procedures performed – observing adequacy of the procedures and establish
Viewco’s counters and ensuring they are
whether it meets the stated objective 1
following the instructions and
conducting the count effectively, for
example:
• Note of whether the area was
systematically tidied
• Note of whether or how counted
goods are marked
Enable reassessment of likely reliability
of Viewco’s count
Enables assessment of chances of items
being double-counted or omitted
Note of how Viewco records and
segregates any goods still moving on
count day
Note of adequacy of supervision and Enables assessment of overall standard of count
general impression of counters and hence likely accuracy

Note whether counters are in teams of Evidence of independent checks may enhance
two and whether any check counts are reliability
performed
(b) Details of substantive procedures
performed:
Details of items of raw materials or
finished goods test counted:

From physical inventory to client’s count Evidence to support the accuracy and
sheet completeness of Viewco’s count sheets

From Viewco’s count sheets to physical Evidence to support the existence of inventory
inventory recorded by Viewco

For both of the above note inventory

code, description, number of units and
quality. Use a symbol to indicate
agreement with Viewco’s records
Details of review for any old/obsolete Details can be followed up at final audit and the
inventory, for example dusty/damaged net realisable value investigated
boxes. Note code, description, number
of units and problem

ICAB 2024 Introduction 43

 Information Reasons
Details of review of WIP

Assessment of volume of part complete Evidence in support of accuracy of quantity of

items of each stage WIP
Assessment of appropriateness of Details can be followed through at final audit to
degree of completion assigned to each final inventory sheets
stage by Viewco (could describe items Basis for discussion of any description
at various
stages)

Copies of: Enables follow up at final audit to ensure cut- off

• Last few despatch notes is correct; that is, goods despatched are
reflected as sales, goods received as purchases
• Last few goods received notes and items in WIP are not also in raw materials
• Last few material requisitions and finished goods
• Last few receipts to finished goods
Copies of client’s inventory count sheets Enables follow up at final audit to ensure that
(where number makes this practical) Viewco’s final sheets are intact and no
alterations have occurred
(5) Summary of results Senior/manager can assess any consequences
In particular: for audit risk and strategy and decide any
further procedures needed
• Details of any problems encountered
Provides full documentation of issues that could
• Details of any test count require a judgemental decision and could
discrepancies and notes of ultimately be the basis for a qualified opinion
investigation into their causes
• Details of any representations by the
management of Viewco
(6) Conclusion Indicates whether or not the initial objective has
The auditor will state their overall audit been met and whether there are any
conclusions from the procedures implications for the audit opinion
completed.

Answer to Interactive question 4

Explanation as follows:
• Has the work been performed in accordance with the audit programme?
The non-current asset procedure of agreeing non-current asset details from the asset
register to the actual asset is to confirm the existence of the asset – in other words, that the
asset should be included in the register. Agreeing physical asset details back to the
register tests for the assertion of completeness, not existence; that is, all assets that should
be recorded in the register are recorded – not that assets in the register do exist. The audit
procedure has therefore not been completed in accordance with the audit programme.
I recommend that the existence test is completed as specified. However, where physical
existence of the asset cannot be determined by seeing the asset, then alternative evidence
such as the log book is obtained.
• Have the work performed and the results obtained been adequately documented?

44 Corporating Reporting ICAB 2024

 Adequate documentation normally means that written representations by management
are recorded in writing, either in a paper document or through use of email or other C
electronic communication system that can be traced back to the client. Regarding the H
completeness of non- current assets, it is unclear how the representation from the director A
was received – although it appears that this was only verbal. The difficulty with verbal P
evidence is that it can be disputed at a later date. T
I recommend that the director’s representation is obtained in writing. E
• Have any significant matters been resolved or are reflected in audit conclusions? R
The fact that some vehicles were found obviously not in working order is cause for
concern. While your primary task was satisfying the assertions of existence and
completeness, where assets are obviously unusable, this fact needs to be recorded. The 1
issue is that assets may well be overvalued in the financial statements; in practice the asset
values need to be compared to the carrying amounts in the asset register and, where the
asset will no longer be used, complete write-off or disposal considered.
While no further action may be necessary on completeness and existence, I recommend
that you prepare a list of the assets which are in a poor state of repair so additional
valuation procedures can be performed on them.
• Have the objectives of the audit procedures been achieved?
As already noted, the objectives of audit procedures have not been achieved. There is still
insufficient evidence to confirm the existence and completeness of non-current assets.
I recommend that the procedures you were carrying out are completed as detailed in the
audit programme.
• Are the conclusions expressed consistent with the results of the work performed and do
they support the audit opinion?
The conclusion on the assertions of completeness and existence is incorrect. Your memo
states that assets were correctly stated and valued.
The point is not valid for two reasons.
First, audit procedures have not been completed correctly (see the point on completeness
testing for example) which means that the assertion of completeness cannot be confirmed.
Second, the audit procedures carried out do not relate to the valuation of those assets.
Valuation procedures include the auditing of depreciation and not simply ascertaining the
condition of those assets at the end of the reporting period.
I recommend that when audit procedures are complete that the conclusion is amended to
match the assertions being audited.

ICAB 2024 Introduction 45

 Answers to Self-test questions

1 Performance and position

Performance
The financial performance of a company comprises the return it obtains on the resources it
controls. Performance can be measured in terms of the profits and comprehensive income of
the company and its ability to generate cash flows.
Management will be assessed on their skill in achieving the highest level of performance, given
the resources available to them.
Information on performance can be found in:
• the statement of profit or loss and other comprehensive income;
• the statement of changes in equity; and
• the statement of cash flows.
Position
The financial position of the company is evaluated by reference to:
• its economic resources and claims;
• its capital structure ie, its level of debt finance and shareholders’ funds; and
• its liquidity and solvency.
The user of the financial statements can then make assessments on the level of risk, ability to
generate cash, the likely distribution of this cash and the ability of the company to adapt to
changing circumstances.
The statement of financial position is the prime source of information on a company’s position
but the statement of cash flows will also indicate a company’s cash position over a period of
time.

2 LaFa plc
Culture of WTR
The quality management standard, ISQM 1, requires that the firm implements policies and
procedures such that the internal culture of the firm is one where quality is considered
essential. Such a culture must be inspired by the leaders of the firm, who must sell this culture
in their actions and messages. In other words, the entire business strategy of the audit firm
should be driven by the need for quality in its operations.
In the WTR audit firm, there appears to be a lack of leadership on quality management leading
to the risk that the firm’s quality objectives may not be achieved. Two issues give rise for
concern:
(1) First, the partner responsible for quality management resigned during the audit of LaFa plc
and has not been replaced. This means that there is no one person in charge of
maintaining quality standards within the audit firm. There is the risk that deficiencies of
quality management will go undetected. It is also unclear whether the senior leadership
team of the firm has taken any responsibility for quality as required by ISQM 1 para. 20.
(2) Second, WTR is under fee pressure from LaFa plc to complete the audit and provide other
services for the same fee as last year, even though the scope of the audit has increased.

46 Corporating Reporting ICAB 2024

 There is the risk that audit procedures will not be fully carried out to ensure that the tight
budget is met. Lack of a comprehensive engagement quality review (exacerbated by the C
quality management partner resigning as noted above) increases the risk of poor quality H
work. A
The quality management partner should be replaced as soon as possible and in the P
interim, the senior leadership team of the firm must take temporary responsibility for T
quality, while the fee situation with LaFa should be monitored – any potential cost overrun E
must be discussed with the client and where necessary additional fees agreed. R
Ethical requirements
Policies and procedures should be designed to provide the firm with reasonable assurance
that the firm and its personnel comply with relevant ethical requirements. 1
In WTR, it is not clear that staff will comply with the code. While professional staff will be
members of ICAB or a similar body, and therefore subject to the ethical requirements of their
professional body, precise implementation has not been confirmed within WTR. While it is
unlikely that staff will knowingly break the ethical code, there is still room for inadvertent
breaches. For example, partners may not be aware of the full client list of WTR and hold shares
in an audit client. Similarly, audit staff may not be aware of WTR’s policy on entertainment and
therefore accept meals, for example, over these guidelines.
The guidelines should be circulated and confirmed by all staff as soon as possible.
Client acceptance
A firm should only accept, or continue with, a client where it:
• has considered the integrity of the client and does not have information that the client
lacks integrity;
• is competent to perform the engagement and has the necessary time and resources; and
• can comply with ethical requirements including appropriate independence from the client.
While there is little indication that LaFa lacks integrity, the client is placing fee pressure on
WTR. The client has also indicated that information regarding development expenditure may
not be available during the audit and will be subject to a separate audit check just before the
signing of the financial statements and auditor’s report. There could be an attempt to ‘force’ an
unmodified auditor’s report when WTR should take more time (and money) auditing
development expenditure. There is therefore a risk that LaFa management is losing some
integrity and WTR need to view other management evidence with increased scepticism.
The audit of LaFa plc this year includes development expenditure. As this is a new audit area,
the audit partner of LaFa should have ensured that the audit team, and WTR as a whole, had
staff with the necessary experience to audit this item. Lack of competence increases audit risk,
as the area may not be audited correctly or completely.
Mr W accepting the position of Finance Director at SoTee appears to place the independence
of WTR with LaFa in jeopardy. As Finance Director of the parent company, Mr W will be in a
position to influence the management of LaFa, and potentially the financial information being
provided by that company. While SoTee is not an audit client, the audit partner in WTR must
ensure that no undue influence is being placed on LaFa. If, however, this is the case, then WTR
must consider resignation from the audit of LaFa.
Monitoring of audit
The audit firm must have policies in place to ensure that quality management policies and
procedures are implemented and maintained.
Regarding the audit of LaFa, there is some risk that quality standards regarding audit
monitoring will be compromised because:

ICAB 2024 Introduction 47

 • the audit partner is new, and may therefore not have extensive knowledge of the audit
client; and
• there appears to be a tight audit deadline for auditing development expenditure.
To decrease audit risk, it will be appropriate to maintain similar audit staff from last year (eg,
retain the audit senior and manager) and WTR could consider an engagement quality review
using ISQM 2 to ensure WTR quality management standards have been followed.

3 Bee5
Client acceptance
In previous years Bee5 has required a standard audit from your assurance firm. However, this
year there is a request for additional assurance regarding the internal control systems. This
work will not only raise the amount of income generated from the client but will also require
the use of specialist staff to perform the work.
Before accepting the engagement for this year Sheridan & Co must ensure the following:
(1) That income from Bee5 is not approaching 15% of the firm’s total income. If income is
approaching this level then additional independence checks may be required, such as an
engagement quality review.
(2) That staff familiar with the Bee5 internal control system are available to provide the
assurance work. If these skills are not available then Sheridan & Co must either hire staff
with those skills or decline the work on internal control systems. Sheridan & Co must also
ensure that they will not be taking responsibility for designing, implementing or
maintaining internal control as under the Ethical Standard this would be a management
decision-making activity.
Plan the audit – evaluate internal control
The current internal control system is due to be upgraded in the next financial year. There is
therefore no impact on the current year’s audit as a result of this change. However, the reason
given by the client for the upgrade relates to reliability issues with the current control systems.
The control system used by Bee5 must still be evaluated to determine the extent to which the
system is still reliable. Where deficiencies are identified then control risk will increase. There
will be consequent impact on the audit approach as noted below.
Develop the audit approach
An increase in control risk will cause detection risk to increase. The impact on the audit will be
an increased level of substantive testing to obtain sufficient confidence on assertions such as
completeness and accuracy.
There will be a further impact on the quality management of the audit. Commencing the audit
with the expectation of finding control deficiencies means that audit staff must be selected
carefully. It may not be appropriate to send junior trainees with restricted experience to the
client unless their work is closely monitored and carefully reviewed.
Audit internal control – tests of controls
As noted above, detailed tests of control on the accounting system will be limited. However,
reliance will still be obtained from the overall control environment.
Evaluate results
The higher risk associated with the audit this year means that an engagement quality review
will be appropriate for this client. Sheridan & Co needs to maintain the integrity of work
performed as well as ensuring that the proposed audit opinion is appropriate. Part of the
planning process will be to book the time of the quality management partner.

48 Corporating Reporting ICAB 2024