Classification: Internal

3. Ethics & Values

Independence in mind-behave ethically & professionally. Independence in
appearance-seen to
behave ethically & professionally.
The 5 fundamental principles of the ACCA Code of Ethics (IESB)
1. Integrity
Be straightforward and honest in all professional relationships (signed AR
without any work).
2. Objectivity
No bias or conflict of interest influencing your business judgements.
(Carried out audit of a Co
where they owned shares without implementing appropriate safeguards).
3. Professional Competence & Due Care
Keep up your professional knowledge and skill so as to give a competent
professional service,
using current developments and techniques. Act diligently and within
appropriate standards
when providing professional services. (failed to advise a client to have an
audit when the Co was
required to have an audit by law)
4. Confidentiality
Don’t disclose any confidential information to third parties without proper
and specific authority.
You can, however, if there is a legal or professional right or duty to
disclose. Never use it for
personal advantage of yourself or third parties (lost possession of client’s
books and records to a
third party)
Exceptions
• Client Approval when permitted by law

• Required by law
• In course of legal proceedings
• To public authorities in case of infringements of law
• When its legal or professional right or duty
- ACCA inquiry or investigation
- Quality review of ACCA
- Comply with technical standards and ethical requirement
- Protect professional interests of a professional accountant in legal
requirements.
Obligatory Disclosures
• Money laundering
• Drug trafficking
Classification: Internal

• Treason
• Terrorist offenses
Voluntary Disclosures
• To protect members interests
• Public interest (fraud, environmental pollution etc. Then seek legal
advice and Report to
appropriate authority.)
• Authorised by statute
• To NGOs who have statutory power to compel disclosure
Conflicts of interest
a. Notify both the clients
b. Obtain consent from both the Cos
c. Use separate teams
d. Prevent access to information by teams
e. Confidentiality agreements & guidelines

f. Review of safeguards by independent senior.

g. Chinese wall
h. If threats can’t be reduced, do a commercial judgement and Retain big
client and give away
smaller one
5. Professional behaviour
A professional accountant should act in a manner consistent with the good
reputation of the
profession. Comply with relevant laws & regulations. Refrain from any
conduct which might
bring discredit to the profession. (Failed to reply to a correspondence sent
by a third party &
ACCA).
Ethical Threats
1. Self-interest
Where the auditor has a financial or other interest that will inappropriately
influence their
judgment or behavior.
2. Self-review
• Here the auditor reviews a judgment he\she has taken himself /herself.
• Where non-audit work is provided to an audit client and is then subject
to audit
• Unlikely to admit their own work or ignore the errors because of lack of
professional
skepticism.
3. Advocacy
• Here the auditor is expected to defend or justify the position of the
Classification: Internal

client, and act as an

`advocate’.
• Promote the position of a client or represent them in some way.
• Taking sides with the client

4. Intimidation
• Here the auditor can’t act independently as he is scared due to actual or
perceived pressures
from the client or attempts to exercise undue influence over the
assurance provide.
5. Familiarity
• Becomes too sympathetic or too trusting of a client and loses
professional scepticism, or where
the relationship between the auditor and client goes beyond professional
boundaries.
Safeguards
To eliminate the threats or reduce threat to an acceptably low level or
decline or resign from
engagement
1. Audit Firm Level
• A culture of independence should be created
• Training
• Quality control procedures
• Consultation-issues can be discussed internally and procedures are laid
out to facilitate this
• Ethical Codes of conduct
• Internal Controls
• Rotation or removal of the engagement partner and senior staff.
• Use of separate teams
2. The Profession, legislation or regulation level
• Disciplinary actions. (fines, suspension, termination)
• Regular rotation of auditors made compulsory
• Using audit committees
• ACCA Exams and CPD

• Corporate Governance and auditing standards

[Link] Individual level
An individual auditor can limit ethical threats by:
• Complying with CPD regulations - and staying up to date
• Keeping in contact with fellow professionals: To informally discuss issues
and problems
• Independent Mentor used to discuss individual threats
Examples of Threats & safeguards
Self-interest Threats
Classification: Internal

• Fee dependence
If the client fees are a large proportion of a
firm’s total fees, there is a significant. Self-
interest\intimidation threat that the auditor
might ignore adjustments required in the
financial statements for fear of losing the client.
Consider the following:
• The operating structure of the firm.
• Whether the firm is established or new
• The significance of the client to the firm
(both quantitatively and qualitatively).
In larger firms an individual office may exceed
these limits as long as responsibility for signing
of the audit file should be passed to a different
office.
Listed Companies
• recurring fees paid by one client or a
related group of clients for 2 consecutive
years should not exceed 15% of the
firm’s total income.
• Disclose to TCWG
• Pre issuance\post issuance reviews after
the 2nd year
Non-listed companies
• Reducing dependency on the client
• Consulting with a third party on key audit
judgments
• Having an external quality control
review

• Gifts and hospitality can create self-interest

and familiarity threats as the auditor may feel
indebted to the client.
Only accept if insignificant, trivial or
inconsequential to either party
• Financial Interest (shares)
The auditor will want to maximise return from
the investment and overlook audit adjustments
which would affect the value of their
investment. Here look for the nature of the
interest and the degree of control the accountant
has over it – the more control the higher the risk.
No member of the assurance team (or
Classification: Internal

immediate family) should hold a financial

interest in a client.
The interest should either be disclosed,
disposed, or the team member removed
from the engagement. Independent partner
review
● Overdue fees • Should be avoided as they are
practically a loan.
• Outstanding fees should be cleared
before further work or payment
arrangements should be made with the
client.
• An independent review of the work
should be performed if the fee remain
unpaid after the report has been issued.
• Discuss with TCWG
• Resign if overdue fees are not paid.
• Low balling
Setting a very low fee either to attract new
clients or ensure further work.
• Appropriate staff and time allocated to
the engagement.
• Complying with all applicable auditing
standards, guidelines and quality
control procedures

• Loans and guarantees

If the client is a bank (or similar) and the loan
is on normal course of business or commercial
terms then there is no threat to independence.
All other loans between client and team
members are not permitted
Between firm and client
Immaterial – permitted
Material -IR
• Family and personal relationships
Consider the seniority of the assurance staff and
the closeness of the relationship. (SI, F, I)
An auditor may be unwilling to criticize or upset
a family member if they work for the client.
If the family member is able to exert
significant influence over the subject matter
then the threat to independence can only be
Classification: Internal

avoided by removing the individual from

the assurance team.
• Close business relationships (JV,
marketing arrangements)
If its material, the auditor would have an interest
in the successful operation of the client.
Buying things from a client is fine if it is on
normal commercial terms and in the normal
course of business.
Firm or partners-not permitted
Team members-removed from team
• Potential employment with client
They will not wish to do anything to affect their
potential future employment.
• Should be disclosed by the member
immediately.
• an independent review should be carried
out on the judgements made by him
• Temporary staff assignments-(SR) • Permitted for a short term and no
management responsibilities undertaken.
• The audit client must be responsible for
directing and supervising the activities of
the loaned staff.

• Conducting an additional review of the

work performed by the loaned staff
• Not including the loaned staff in the audit
team
• Partner on client board • A partner or employee of an audit firm
should not serve on the board of an audit
client.
• Administrative roles like CS is permitted
• Recruitment
Recruiting senior management for an audit
client, particularly those able to affect the
financial statements, creates a self-interest
threat ((F, I) for the audit firm.
Audit firms must not make management
decisions for the client. Their involvement
could be limited to: reviewing a shortlist of
candidates, provided, the client has drawn
up the criteria for selection.
For a public interest entity audit client, the
Classification: Internal

firm is not allowed to provide the following

services in respect of a director, office or
senior management in a position to exert
significant influence over the preparation of
the financial statements:
• Searching for candidates
• Undertaking reference checks
• Contingent Fees
The auditor would have incentive to ensure a
particular outcome is achieved in order to
maximise the audit fee. (audit fee a% of profit)
Audit fees are not to be determined in this
way.
• Actual and threatened litigation • Discussing the matter with the client’s
audit committee.

• If the litigation involves an individual,

remove that individual from the
engagement team.
• Obtaining an external review of the
work done.
• Resign
• Employment with an audit client
SI. familiarity & intimidation threat occurs if
the employee still has a significant
connection i.e., he is still entitled to benefits
or payments from the firm or participates in
the firm’s business or professional activities.
Significant connection
No safeguards
No significant connection
• Modifying the audit plant
• Review & revise the composition of the
engagement team with people with no
experience with the individual
• Independent partner or quality control
review
Public interest entity, `cooling off’
periods are required.
When a key audit partner joints this
type of client either as a director or as an
employee with significant influence on the
financial statements, independence would
Classification: Internal

be deemed to be compromised unless:

(i) The client had issued audited financial
statements covering a period of not
less than 12 months since the partner
ceased to be a key audit partner.

(ii) The partner was not part of the audit

team which audited those financial
statements.
Where a senior or managing partner joins
an audit client, 12 months must have
passed since the individual was senior or
managing partner (i.e. there is no
requirement for audited financial
statements to have been issued.
Familiarity threat
• Long association of senior Personnel too
sympathetic or too trusting of a client less
sceptical
Non-listed clients
• Rotate senior staff.
• Independent partner/quality control
reviews.
Listed clients
KAP-7 years & 2 years cooling off period
(extended to 1 year in case of unavoidable
circumstances)
Self-Review threat
• Accounting / book keeping Service
unlikely to admit to errors in their own work,
or may not identify the errors in their own
work\ may be tempted to hide errors to save
face.
Unlisted clients-services of
routine\mechanical nature as permitted
• Separate teams should be used.
• Source data, underlying assumptions and
subsequent adjustments should be

originated or approved by the client.

listed clients-no.
divisions or related entities of a listed
client-
separate teams are used and the service
Classification: Internal

relates to matters immaterial to the division

/ related entity.
• Internal audit services assuming a
management responsibility
Listed audit client-not permitted where:
• the service relates to internal controls
over financial reporting,
• financial accounting systems,
• or in relation to amounts or disclosures
that are material to the financial
statements.
Non-listed – permitted with safeguards
• Taxation services
1. Tax calculations for inclusion in the financial
statements and tax planning advice which
has an impact on FS create a self-review
threat.
2. Completion of tax returns is not deemed to
create a self-review threat.
Non-listed clients
• Advice should be obtained from an
external tax professional.
• ISR
• Separate teams
Listed clients-not permitted
• IT services
If the auditor advises on or installs
accounting software for a client this will
have to be reviewed during the audit.
The firm can only provide IT services
which involve:
• Design or implementation of IT systems
unrelated to internal controls or financial

reporting.
• Implementation of off-the-shelf
accounting software.
• Evaluating and making
recommendations on a system designed
or operated by another service provide or
by the entity.
• Valuation Services Non-listed clients
• Valuation of material and subjective
Classification: Internal

matters should not be provided.

• If immaterial & insignificant -different
personnel should be used.
• A professional should review the
valuation work performed.
Listed clients
• Valuation services that are material to the
financial statements (regardless of
subjectivity) should not be provided
• Corporate finance services
Self-review and advocacy threats:
- assists an audit client in developing corporate
strategies
- identifies possible targets for the audit client
to acquire
- Advises on disposal transactions
- Assists finance raising transactions
Prohibited if its material and involves
promoting, dealing in, or underwriting an
audit client’s shares. If immaterial, use
separate teams and independent
professional review to ensure no
management responsibilities.

- Provides structuring advice.

• Former Employee of Client joining Audit
Firm (SI, F)
If this occurs there is a chance the person
could be auditing work or systems, they were
previously responsible for.
Shouldn’t be a part of the team if they
worked for the client during the period
audited (both current and prior year) if
they:
• Had served as a director or officer of the
audit client; or
• Were an employee in a position to exert
significant influence over the
accounting record (or financial
statements).
If not, appropriate safeguards can be
applied (QCR)
Advocacy threat
Classification: Internal

Taking the client’s side in a dispute

somehow acting as their advocate
promoting their opinion\position.
Representing in court or any dispute. Negotiating
on the client’s behalf for finance.
Provide evidence on client’s behalf as an expert
witness.
Carrying our corporate finance work for the
client – providing advice on debt reconstruction.
Material – NO
Immaterial-separate teams & IR
Discuss with TCWG
Withdraw if the risk is too high Intimidation threat
Risk of losing the client, bad publicity,
pressure to produce a favourable report
• Fee dependency
• Personal relationships
• Audit staff joining the client
• Litigation between the audit firm and client
Close business relationships
• Disclosing to the audit committee the
nature and extent of the litigation.
• Removing specific affected individuals
from the engagement team
• Involving an additional professional
accountant on the team to review work
Question December 2014
Auditors have a professional duty of confidentiality under ACCA’s Code of
Ethics and Conduct;
voluntary disclosure information may be necessary in certain situations.
For which TWO of the following situations should an auditor make
VOLUNTARY
disclosure?
(1) If an auditor knows or suspects his client is engaged in money
laundering
(2) Where disclosure is made to non-governmental bodies
(3) Where it is in the public interest to disclose
(4) If an auditor suspects his client has committed terrorist offences
A 1 and 4
B 1 and 3
C 2 and 4
D 2 and 3
Classification: Internal

Question December 2014 Specimen

Which TWO of the following are fundamental principles as stated in the
ACCA’s Code of
Ethics and Conduct?
1 Objectivity

2 Independence
3 Confidentiality
4 Professional skepticism
A 1 and 4
B 1 and 2
C 2 and 3
D 1 and 3
Question December 2007
Explain each of the FIVE fundamental principles of ACCA’s Code of Ethics
and Conduct (5
marks)
Question December 2012
Identify and explain each of the FIVE fundamental principles contained
within ACCA’s Code of
Ethics and Conduct. (5 marks)
Question June 2010
State the FIVE threats contained within ACCA’s Code of Ethics and
Conduct and for each threat
list ONE example of a circumstance that may create the threat. (5 marks)
Question December 2015
You are an audit manager of Pink Partners & Co (Pink) and are planning
the audit of
Golden Finance Co (Golden), a banking institution which provides a range
of financial services
including loans. Your firm has audited Golden for four years and the
company’s year end is 30
September 2015.
At the end of August, Golden’s financial controller left and the new
replacement is not due
to start until approximately two months after the year end. The finance
director, who is the sister-
in-law of the audit engagement partner, has asked if a member of the
audit team can be seconded
to Golden for three months to act as the temporary financial controller.
You are aware that a

number of the audit team members currently bank with Golden and two
team members have
Classification: Internal

significant loans owing to the company.

Pink’s taxation department also provides services to Golden. They have
been approached
by Golden to represent them in negotiations to resolve some outstanding
issues with the taxation
authorities, for which the fees quoted are substantial. The finance director
has informed the audit
engagement partner that when the audit is complete, she would like the
whole team to attend an
evening watching the national football team play a match followed by a
luxury meal.
Required:
Using the information above:
(i) Identify and explain FIVE ethical threats which may affect the
independence of Pink Partners
& Co’s audit of Golden Finance Co; and
(ii) For each threat, explain how it might be reduced to an acceptable
level.
Note: The total marks will be split equally between each part.
Question December 2013
Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified
Accountants which
has seen its revenue decline steadily over the past few years. The firm is
looking to increase its
revenue and client base and so has developed a new advertising strategy
where it has guaranteed
that its audits will minimise disruption to companies as they will not last
longer than two weeks.
In addition, Salt & Pepper has offered all new audit clients a free accounts
preparation service
for the first year of the engagement, as it is believed that time spent on
the audit will be reduced
if the firm has produced the financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to
update the
engagement letters of existing clients, on the basis that these letters do
not tend to change much
on a yearly basis.

One of Salt & Pepper’s existing clients has proposed that this year’s audit
fee should be
based on a percentage of their final pre-tax profit. The partners are
excited about this option as
Classification: Internal

they believe it will increase the overall audit fee.

Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers
Co
(Cinnamon), whose yearend is 31 December. Cinnamon requires their
audit to be completed by
the end of February; however, this is a very busy time for Salt & Pepper
and so it is intended to
use more junior staff as they are available. Additionally, in order to save
time and cost, Salt &
Pepper have not contacted Cinnamon’s previous auditors.
Required:
i) Identify and explain FIVE ethical risks which arise from the above
actions of Salt & Pepper &
Co; and
ii) For each ethical risk explain the steps which Salt & Pepper & Co should
adopt to reduce the
risks arising.
Question September 2016 Specimen
You are an audit manager of Buffon & Co, and you have just been
assigned the audit of
Maldini Co (Maldini). The audit engagement partner who is responsible for
the audit of Maldini,
a listed company, has been in place for approximately eight years and her
son has just been
offered a role with Maldini as a sales manager. This role would entitle him
to shares in Maldini
as part of his remuneration package.
Maldini’s board of directors is considering establishing an internal audit
function, and the
finance director has asked Buffon & Co about the differences in the role of
internal audit and
external audit. If the internal audit function is established the directors
have suggested that they
may wish to outsource this to Buffon & Co.
The finance director has suggested to the board that if Buffon & Co is
appointed as internal
as well as external auditors then fees should be renegotiated with at least
20% of all internal and
external audit fees being based on the profit after tax of the company as
this will align the interests
of Buffon & Co and Maldini.
Classification: Internal

1 From a review of the information above, your audit assistant has

highlighted some of the
potential risks to independence in respect of the audit of Maldini.
(1) Audit partner has been in the position for eight years
(2) Maldini has asked for advice regarding role of internal audit
(3) Maldini has asked Buffon & Co to carry out internal audit work
(4) Fees will be based on 20% of profit after tax
Which of the following options correctly identifies the valid threats the
appropriate
category?
Self-interest Self-review Familiarity
A 1 only 2 and 3 4 only
B 1 only 2 only 4 only
C 2 only 3 and 4 1 only
D 4 only 3 only 1 only
2. In relation to the audit engagement partner holding the role for eight
years and her son’s offer
of employment with Maldini: Which of the following safeguards should be
implemented in
order to comply with ACCA’s Code of Ethics and Conduct?
A. The audit partner should be removed from the audit team
B. An independent review partner should be appointed
C. The audit partner should be removed if her son accepts the position
D. Buffon & Co should resign from the audit
5. If the internal and external audit assignments are accepted, what
safeguards, if any, are needed
in relation to the basis for the fee?
A. As long as the total fee received from Maldini is less than 15% of the
firm’s total fee
income, no safeguards are needed.
B. The client should be informed that only the internal audit fee can be
based on profit after
tax
C. The fees should be based on Maldini’s profit before tax
D. No safeguards can be applied and this basis for fee determination
should be rejected

The audit engagement partner for Hazard Co (Hazard), a listed company,

has been in place for
approximately eight years and her son has just accepted a job offer from
Hazard as a sales
manager. This role would entitle him to shares in Hazard as part of his
remuneration package.
Classification: Internal

Hazard’s directors are considering establishing an internal audit

department, and the finance
director has asked the audit form, Remy & Co. about the differences
between internal audit and
external audit.
If the internal audit department is established, and Remy & Co is
appointed as internal as well

as external auditors, then Hazard has suggested that the external audit
fee should be renegotiated
with at least 20% of the fee being based on the profit after tax of the
company as they feel this
will align the interests of Remy & Co. and Hazard.
Required:
(a) Using the information above:
(i) Explain the ethical threats which may affect the independence of Remy
& Co in respect of the
audit of Hazard Co; and (3 marks)
(ii) For each threat explain how it might be reduced to an acceptable level.
(3 marks)
Sycamore & Co is the auditor of Fir Co, a listed computer software
company. The audit team
comprises an engagement partner, a recently appointed audit manager,
an audit senior and a
number of audit assistants. The audit engagement partner has only been
appointed this year due
to the rotation of the previous partner who had been involved in the audit
for seven years. Only
the audit senior has experience of auditing a company in this specialised
industry. The previous
audit manager, who is a close friend of the new audit manager, left the
firm before the completion
of the prior year audit and is now the finance director of Fir Co.
The board of Fir Co has asked if Sycamore & Co can take on some
additional work and have
asked if the following additional non-audit services can be provided:
(1) Routine maintenance of payroll records
(2) Assistance with the selection of a new financial controller including the
checking of
references

(3) Tax services whereby Sycamore & Co would liaise with the tax
authority on Fir Co’s behalf
Sycamore & Co has identified that the current year fees to be received
Classification: Internal

from Fir Co for audit

and other services will represent 16% of the firm’s total fee income and
totalled 15.5% in the
prior year. The audit engagement partner has asked you to consider what
can be done in relation
to this self-interest threat.
12. Which of the following identifies the threat which could arise as a
result of the finance
director’s previous employment at Sycamore & Co and recommends an
appropriate
safeguard?
A. A self-review threat; review the work performed by the previous audit
manager
B. A familiarity threat; a different audit manager should be appointed
C. A self-review threat; change the existing audit plan
D. A familiarity threat; the firm should resign from the engagement
13 Ignoring the potential effect on total fee levels, which of the following
options correctly
identifies the threats to independence from providing the above non-audit
services?
Self-review Self-interest Advocacy
А213
B132
C123
D312
Accepting an audit engagement

Advertising
The advt medium should not reflect adversely on the firm, ACCA or the
accountancy profession.
Adverts should not:
• Bring ACCA into disrepute or bring discredit to the professional services
firm or accountancy
profession.
• Discredit services of others.
• Be misleading
• Fall short of local regulatory or legislative requirements
Tendering
• The level of expertise each firm has in the industry
• Similar Cos audited by the firm
• National & International presence
• Proposed fee (lowballing)
Appointment Ethics
Classification: Internal

Before accepting nomination

Client screening:
Professional Clearance:
• Ask the client for permission to contact the exiting auditor

• Contact the outgoing auditor and ask him for all information relevant to
the decision to accept
the appointment (overdue fees, breaches of law & regulations and
disagreements with
management)
• Consider the response and assess any ethical or professional reasons
why they shouldn’t accept
the appointment.
Preconditions for an audit:
• Determine whether the financial reporting framework to be applied in FS
is acceptable.
• Obtain the agreement of management that it acknowledges and
understands its responsibilities
for the following:
1. Preparing the FS in accordance with the applicable financial reporting
framework.
2. Internal controls necessary for the preparation of FS is free from
material misstatement.
3. Providing the auditor with access to information relevant for the audit
and access to staff
within to obtain audit evidence.
After accepting nomination:
• Obtain a copy of the resolution passed at the general meeting regarding
his appointment.
• Valid notice of the outgoing auditor’s resignation or confirm that he was
properly removed.
• Transfer all books & papers belong to the client from the old auditors.
• Set up and submit a letter of engagement to the directors of the Co.
Continuance assessment or recurring audits – Revise-Remind-Resign
Audit engagement letter
The auditor shall agree with the client the terms of engagement and this
will be recorded in an
AEL and will be done before the audit commences.

Purpose:
• Avoid any misunderstandings betwee

the auditor & client: reduce the expectation gap.

• Confirm the acceptance of engagement.
Classification: Internal

• Set out the terms & conditions of engagement.

Form & content:
• Objective and scope of audit
• Auditor’s responsibilities
• Management’s responsibilities
• Identification of applicable financial reporting framework
• Reference to the expected form and contents of any reports to be issued
• Form of any other communication during the audit
• Fees & billing arrangements
• Expectation that management will provide written representations
• Expectation that management will provide access to all information
which management is
aware that is relevant to the preparation of FS
• Involvement of experts
• Involvement of internal auditors
• Limitations of audit
• Restriction of auditor’s liability
• Arrangement of management to provide draft FS in time to allow the
audit to be completed by
deadline
• Arrangement of management to notify the audit of subsequent events
after the audit report is
signed.
In case of Continuance assessment or recurring audits-
Remind – Revise-Reissue-Resign the terms in the following circumstances:

• Significant change in financial reporting framework, legal, regulatory or

reporting
requirements.
• Significant change in strategic level management
• Significant change in nature & size, financial condition or reputation of
the business
• Significant changes in auditor’s or management’s responsibilities
• Implementation or major change in the system
• Significant changes in industry or business environment
• Significant changes in audit-client relationship and any indications that
the entity
misunderstands the objectives and scope of audit
ISA 220 Quality Control
Firms need to be sure that the audits they perform meet quality
standards. This is to decrease the
risks of:
• Litigation against auditors for professional negligence
Classification: Internal

• Incorrect Audit opinion and hence an increased investor confidence in

the financial statements
There are 2 standards on Quality Control
Individual Level Quality Control
ISA 220 Quality Control for Audits of Historical Financial Information
specifies the following
quality control procedures that should be applied by the engagement
team in individual audit
assignments.

1. Leadership responsibilities
He must set an example with regard to the importance of quality.
2. Relevant ethical requirements
The engagement partner should consider whether members of the audit
team have complied with
ethical requirements, for example, whether all members of the team are
independent of the client.
3. Client acceptance procedures
There should be full documentation, and conclusion on, ethical and client
acceptance issues in
each audit assignment.
Additionally, the engagement partner should conclude whether all
acceptance procedures have
been followed.
• Establish the identity of the entity and its business activity e.g. by
obtaining a certificate of
Incorporation
• If the client is an individual, obtain official documentation including a
name and address, e.g.
by looking at photographic identification such as passports and driving
licenses
• Consider whether the commercial activity makes business sense (i.e. it
is not just a `front’ for
illegal activities)
• Obtain evidence of the company’s registered address e.g. by obtaining
headed letter paper
• Establish the current list of principal shareholders and directors.
4. Human resources-engagement team
Procedures should be followed to ensure that the engagement team
collectively has the skills,
competence and time to perform the audit engagement. The engagement
partner should assess
that the audit team, for example:
Classification: Internal

1. Has the appropriate level of technical knowledge

2. Has experience of audit engagements of a similar nature and
complexity
3. Has the ability to apply professional judgment
4. Understands professional standards, and regulatory and legal
requirements.

5. Engagement performance:
• Direction
- The engagement team should be directed by the engagement partner.
- The planning meeting should be led by the partner and should include all
people involved
with the audit.
- There should be a discussion of the key issues identified at the planning
stage.
Procedures such as an engagement planning meeting should be
undertaken to ensure that the
team understands:
- Their responsibilities
- The objectives of the work they are to perform
- The nature of the client’s business
- Risk related issues
- How to deal with any problems that may arise
- The detailed approach to the performance of the engagement.
• Supervision
- Tracking the progress of the audit.
- Supervision should be continuous during the engagement.
- Any problems that arise during the audit should be rectified as soon as
possible.
- Attention should be focused on ensuring that members of the audit team
are carrying out their
work in accordance with the planned approach to the engagement.
- Significant matters should be brought to the attention of senior members
of the audit team.
• Review
- The review process is one of the key quality control procedures.
- All work performed must be reviewed by a more senior member of the
audit team.
Reviewers should consider for example whether:
- Work has been performed in accordance with professional standards
- The objectives of the procedures performed have been achieved
- Work supports conclusions drawn and is appropriately documented.
Classification: Internal

Peer reviews
Review of the audit file carried by another partner in the assurance firm:
Pre-issuance review\hot review Post issuance review\cold review
Timing Before the AR is signed After the AR is signed
Objective To ensure appropriate AR is issued To ensure firm’s quality
control
procedures are operating effectively
Outcome If issues are identified, EQCR can
discuss it with the engagement
partner and ensure appropriate
opinion is issued
If issues are identified, the firm may
decide to:
• Provide more training to staff
• Update & improve their policies
& procedures
• Arrange addition QC reviews
• Take disciplinary actions
Clients All high risk and listed client A selection of completed audit files
Matters
considered
Judgmental areas such as: (product)
• Materiality
• Independence
• Matters requiring consultation
• Uncorrected misstaments
• Significant risks & responses
• Audit opinion
The reviewer will ensure working
papers are;
(process)
• On file
• Completed
• Signed as completed
• Reviewed
• Demonstrate sufficient
appropriate evidence has been
obtained
• Demonstrate all matters will
resolved before the Ar was issued
Conducted by Independent partner of suitable
experience, expertise & authority
Suitable senior person within the
Classification: Internal

firm or Firm’s own compliance

department or External consultant
Engagement Quality Control Reviewer - Independent review partner
Someone not part of the engagement team, technically

Engagement Quality Control Review

Provides an objective evaluation, before signing the report, of any
significant judgments &
Conclusions. It is for listed entity audits and anywhere the firm thinks such
a review is required.
Consultation
Finally, the engagement partner should arrange consultation on difficult or
contentious matters.
This is a procedure whereby the matter is discussed with a professional
outside the engagement
team, and sometimes outside the audit firm.
Consultations must be documented to show:
• The issue on which the consultation was sought; and
• The results of the consultation
6. Monitoring
• Ensure new developments in standards and regulations are
implemented.
• Ensure CPD is kept up to date.
• Any breaches to monitoring system dealt with
Question - September 2016
You are an audit supervisor of Chania & Co and are planning the audit of
your client, Sitia
Sparkle Co which manufactures cleaning products. Its year end was 31
July 20X6 and the draft
profit before tax is $33.6 million. You are supervising a large audit team
for the first time and
will have specific responsibility for supervising and reviewing the work of
the audit assistants in
your team.
Required:
(c) In line with ISA 220 Quality Control for an Audit of Financial
Statements, describe the audit
Supervisor’s responsibilities in relation to supervising and reviewing the
audit assistants’ work
during the audit of Sitia Sparkle Co. (4 marks)

Audit Documentation ISA 230

• Documentation provides sufficient records for the basis of the audit
report.
Classification: Internal

• It also proves that the audit was planned and performed in accordance
with ISAs and legal &
regulatory requirements.
• Could be used as a defense in court for any negligence claims.
• Tangible evidence of the work done in support of the audit opinion.
• Enables team members to be accountable to their work.
• Matters of continuing significance will be retained.
• Assist team to plan & perform the audit
Auditors must document
1. What items were tested
2. Who did the testing?
3. When was the testing?
4. Who reviewed the work and when?
5. Discussion of all significant matters with management
Types of Audit Documentation
Includes
• Planning Documentation (Strategy, plan, risk analysis)
• Audit program
• Summary of significant matters
• Letters of confirmation / management representation
• Correspondence
• checklists
Standardized working papers- improve efficiency of audit work but
auditors may adopt a
mechanical approach without judgment

Automated working papers-

• errors reduced
• neater
• easier to review
• time saved
Permanent and current audit files
• Permanent audit files contain information of continuing importance to
the audit. The
permanent file will include
- Names of management, those charged with governance, shareholders
- Systems Information
- Business and Industry background
- Title deeds and Contracts
- Copy of the company’s legal constitution, Memorandum and articles
- Board minutes of continuing relevance
- Previous years’ signed accounts, analytical procedures and management
letters
Classification: Internal

- Engagement letters
• Current audit files Contain information which is relevant to the current
year’s audit. The audit
file will follow the structure below:
- Planning-Risks, materiality, location, deadlines, strategy, time table etc.
- Performance-Audit work carried out on each section of the financial
statements (e.g. Non-
Current Assets, Inventory)
- Completion and review-Going concern, subsequent events, written
representations,
adjusted\unadjusted misstatements
They contain:
• Financial statements
• Accounts checklists
• Management accounts details

• Reconciliations of management and financial accounts

• A summary of unadjusted misstatements
• Report to partner including details of significant events and
misstatements
• Review notes
• Audit planning memorandum
• Time budgets and summaries
• Representation letter
• Management letter
• Notes of board minutes
• Communications with third parties such as experts or other auditors
Current audit files also contain working papers covering each audit area.
These include:
• A lead schedule including details of the figures to be included in the
financial statements
• Problems encountered and conclusions drawn
• Audit programs
• Risk assessments
• Sampling plans
• Analytical procedures
• Details of substantive tests and tests of control
The Auditor owns the working papers
• Auditor controls them and not the client
• This helps keep the auditor independent
• The auditor must be careful if they include copies of client generated
items
Working papers must be kept secure
Classification: Internal

• If lost, all would need to be recreated!

• It includes sensitive and confidential information

• Prevention of any unauthorized alterations to them
IT based audit systems
• Laptops are very susceptible to theft, not just for the contents, but for
the machine itself.
• Unauthorized alterations are harder to detect
• So, ensure laptops should always be locked away securely or taken
home by the audit team
• IT based systems should be subject to passwords, encryption and back
up procedures
Retention of working papers
Audit files should be updated and finished no later than 60 days after the
report.
They should then normally be kept for at least 5 years.
• So, arrangements need to be made for:
1. Secure storage
2. Archiving of the old files
3. IT back ups
Question December 2010
ISA 230 Audit Documentation deals with the auditor’s responsibility to
prepare audit

documentation for an audit of financial statements.

Required:
State FOUR benefits of documenting audit work. (4 marks)
Question-June 2014
ISA 230 Audit Documentation requires auditors to prepare audit
documentation for an audit of
financial statements on a timely basis.

Required:
Describe FOUR benefits of documenting audit work. (4 marks)
Question - June 2012
List and explain the purpose of FOUR items that should be included on
every working paper
prepared by the audit team. (4 marks)
Fraud and Error ISA 240
Fraud-An intentional act involving the use of deception to obtain an unjust
or illegal advantage.
Two main areas of fraud exist:
• Misappropriation of assets
• Fraudulent financial reporting
Classification: Internal

Error-An unintentional misstatement in financial statements, including the

omission of an
amount or a disclosure.
Examples are:
• A mistake in gathering data from which FS are prepared
• An incorrect accounting estimate due to an oversight
• A mistake in applying accounting principles
Key Learning Point
Prevention and detection of fraud is the responsibility of management.
However, the risk of
fraud is important to the auditor because it may lead to a material
misstatement in the FS.
Management (TCWG) Responsibilities
• Safeguards created to avoid fraud and error using internal controls

• Internal audit is responsible for monitoring and implementing these

• Culture of honesty, ethical behavior and active oversight by TCWG
Auditor Responsibilities
• Maintain professional skepticism throughout the audit.
• Obtain reasonable assurance that FS are free from material
misstatements caused due to fraud
and error.
• The inherent limitations of audit mean that the auditor cannot guarantee
that the financial
statements are free from fraud and error.
• At the Planning Stage-The auditor must consider the risk of material
misstatement due to fraud
and error when planning and performing their audit and reassess his
original risk assessment
• It will make the audit higher risk and hence increase the testing that
needs to be done
• Also, it may well make the auditor question further the integrity of the
management and the
effectiveness of controls.
If a misstatement is discovered, the audit impact needs to be considered
by:
1. looking at the circumstances of the offence
2. Gathering information about the FS effect
3. If material, the auditor is responsible for detecting it
4. If immaterial, these should be reported to those charged with
governance, but there is no
responsibility to detect them.
5. Find out their action to rectify it and whether it is likely to happen again
Classification: Internal

6. If not corrected modify the audit opinion by including a paragraph in the

audit report

3. Materiality may be reduced.

4. Evidence provided by the client may not be relied upon.
5. The auditor may have to generate more 3rd party evidence.
Reporting responsibilities when Fraud & error is discovered
• To appropriate level of management
• To TCWG
• To regulatory authorities after obtaining legal advice
Question - June 2012
Explain the external auditorss’ responsibilities in relation to the prevention
and detection of fraud
and error. (4 marks)
Question - Pilot 2007
Compare the responsibilities of the external and internal auditors to detect
fraud. (6 Marks)
Question-2009 June
(i) State the external auditor’s responsibilities regarding the detection of
fraud; (4 marks)
Laws & Regulations ISA 250

• Management is responsible for ensuring that the company complies with

laws and
regulations
• The auditor is not, and cannot be, held responsible for preventing
NOCLAR
The auditor needs to consider the impact of any non-compliance on the
financial statements,
and assess the risk of material misstatement by considering the various
laws and regulations
which clients must comply with and how the auditor should respond.
Categories of law and regulations Auditor’s responsibilities
Those that have a direct effect on the
determination of material amounts and
disclosures in FS
• Financial reporting regulations
• Company law
• Taxation legislation
Obtain sufficient appropriate audit evidence
about compliance with those law &
regulations.
Those that do not have a direct effect on the
determination of material amounts and
Classification: Internal

disclosures in the FS but where the compliance

may be fundamental to the operating aspects,
ability to continue in business, or to avoid
material penalties.
• Environmental legislation
• Health & safety law
• Employment law
Undertake specified audit procedures to help
to identify noncompliance with laws &
regulations
that may have a material effect on the FS
• Enquires with management
• Inspecting correspondence with relevant
licensing or regulatory authorities.
Responsibilities of Management (and Those Charged with Governance)
• Prevention and detection of fraud and error
• Strong risk management and internal control
• A culture of honesty and ethical behavior

• Compliance with applicable laws and regulations

• Monitoring legal requirements
• Developing, publicizing and following a Code of Conduct
• Training
Responsibilities of Auditor
Reporting responsibilities when NOCLAR is discovered
• To appropriate level of management
• To TCWG
• To regulatory authorities after obtaining legal advice
Question 2011 December
Explain the responsibilities of management and auditors of Chuck
Industries Co in relation to
compliance with law and regulations under ISA 250 Consideration of Laws
and Regulations in
an Audit of Financial Statements. (4 marks)
Question - 2014 December
Which of the following is NOT a responsibility of the auditor?

A. To provide an opinion on the truth and fairness of the financial

statements
B. To conduct an audit in accordance with International Standards on
Auditing
C. To express an opinion on the company’s going concern status
ISA 260 Communications with TCWG
TCWG Management
Classification: Internal

Overseeing the strategic direction of the entity

& Obligations related to the accountability of
the entity.
Executive responsibility for the conduct of
the entity’s operations.
• 2-way communication and develop Constructive working relationship
between auditor &
TCWG
• Allow auditors to obtain relevant information
• Assist TCWG in fulfilling their responsibility and hence reduce the ROMM
in FS by providing
them with timely observations
What????
• Auditor independence
• Auditor responsibilities in relation to FS audit
• Planned scope & timing of audit
• Significant findings from audit
• Accounting policies
• Risks
• Adjustments
• Disagreements
• Modifications

• Deficiency
When????
• Planning- risks, plans, audit approach, materiality
• During- any situation occurred during the audit
• Conclusion- Major findings, delay caused by management
How????
• Engagement letter
• Planning letter
• Planning meeting
• Ongoing communication
• Meeting after the audit work accompanied by a report to the
management i.e Management
letter, management report
June 2013
ISA 260 Communication with Those Charged with Governance provides
guidance to auditors in
relation to communicating with those charged with governance on matters
arising from the audit
of an entity’s financial statements. Required:
(i) Explain why it is important that auditors communicate throughout the
Classification: Internal

audit with those charged

with those charged with governance; and (2 marks)
(ii) Describe THREE examples of matters that the auditors may
communicate to those charged
with governance. (3 marks)
December 2009
ISA 260 (Revised and Redrafted) Communication with Those Charged with
Governance deals
with the auditor’s responsibility to communicate with those charged with
governance in relation

Required:
Explain FOUR examples of matters that might be communicated to them
by the auditor. (4
marks)
ISA 300 Audit Planning
• Plan the audit so that the engagement will be performed in an effective
manner.
• Adequate time shall be spent on planning the audit to ensure it is
carried out efficiently and
consequently will reduce the overall time and thus the cost.
• The planning process will also assess and thus reduce risk.
• The auditor will want to ensure that the correct team, with appropriate
capabilities and
competence, is in place to conduct the audit, they are working efficiently
and that work is
focused on material areas of risk and potential problem areas.
• Identifies & resolves potential problems on a timely basis
Planning process
• Preliminary engagement activities (step 1 & 2)
• Planning activities (step 3 & 4)

Planning Activities
1. Audit Strategy-In determining the audit strategy, the auditor should:
• Identify the characteristics of
engagement
FR Framework
Industry & Business knowledge
Internal audit function
Information technology systems
Use of service organization
• Ascertain the reporting objectives to
plan the timing of audit & the nature
of communications
Classification: Internal

Client’s Timetable for reporting

Communication with audit team
Discussions with management & TCWG
Communication with Third parties
• Consider the significant factors &
results of preliminary engagement
activities that will direct the team's
efforts
Materiality
ROMM
Professional Scepticism
Internal controls
Changes in law & regulations
Changes to accounting standards
• Ascertain the nature, timing & extent
of resources necessary to perform the
engagement
Selection of team
Assignment of work to the team members
Engagement budgeting
The strategy decided upon will be tailored to the client and the nature of
their business and their
structure. The auditor must ensure that the strategy selected is
appropriate. The audit strategy sets
out the scope, timing and direction of the audit and guides the
development of the audit plan.
The Scope: resources to deploy and amount of resources to allocate
• The scope of the audit will be determined by the reporting framework
applied as well as any
industry specific requirements.

• If there are any geographical or other factors which may affect the audit,
they will be
considered here. Selection of team
• How much audit evidence obtained in previous audits will be used
• Whether computer-assisted audit techniques will be used
• The availability of key personnel.
Timing: when the resources are to be deployed
• The timing of the audit will set out any deadlines applicable and the
dates of the interim and
final audit visits.
• The interim audit is conducted before the final audit to evaluate controls
and document the
Classification: Internal

systems in place.
Direction: how the resources are managed, directed & supervised
• The direction of the audit will be determined by the identification of
high-risk areas and
materiality.
2. The audit plan-will convert the audit strategy into a more detailed plan
to address how the
various matters identified in the overall strategy will be applied. Audit plan
includes specific
descriptions of:
• Nature of procedures- What to do and who shall do
• Extent of procedures - amount of procedures (sample size)
• Timing of audit procedures - interim vs final
Question December 2014
(a) ISA 300 Planning an Audit of Financial Statements provides guidance
to auditors. Planning
an audit involves establishing the overall audit strategy for the
engagement and developing an
audit plan. Adequate planning benefits the audit of financial statements in
several ways.

Required:
Explain the importance of audit planning. (5 marks)
Question - September 2016
(a) ISA 300 Planning an Audit of Financial Statements provides guidance
to assist auditors in
planning an audit.
Required:
Explain the benefits of audit planning.
Interim &Final Audit
The interim audit is used to lessen the amount of work at the final audit.
Although some tests
such as year-end stock take can only be performed at the year-end as the
final figures will not be
available until then.
This is a matter of timing and the auditor has the following choice:
1. Interim and Final audits
2. Final audit only
Interim Audits
• Basically, before the Year-end, allowing procedures to be more spread
out and improve
planning of the final audit and reduce the time constraints at the time of
year end.
Classification: Internal

• The interim audit should improve risk assessment and therefore make
the final procedures
more efficient.
• It will help with the levels of materiality and allow the final audit to
concentrate on year end
valuations and matters of significant subjectivity.

• Increases cost

1. The interim audit will normally be used for:

• Documenting the system
• Evaluating controls
• Testing specific transactions (e.g. NCA, purchase, sales, purchase,
payroll)
• Interim receivables circular
• Perpetual inventory counts
2. Timings
• Early enough - so not interfering with Y/E client work
• Late enough to give adequate warning of specific problems that will
need to be addressed
Final Audit
Post year-end, focus on year end valuations and areas of significant
subjectivity
Impact of Interim Audit Work on The Final Audit
• Fewer procedures
• Timely reporting
• Identify significant matters at an early stage of audit
• Help to resolve them with management assistance
• Develop an effective audit approach to address them
• Reduces time taken at final audit to gain further audit evidence
Question - June 2014
Explain the difference between an interim and a final audit. (5 marks)
Question - June 2009
Explain the difference between the interim audit and the final audit. (4
marks)

Question-2014 Specimen
Auditors usually carry out their audit work at different stages known as
the interim audit and the
final audit.
Which of the following statements, any, is/are correct?
1. Carrying out tests of control on the company’s sales day books would
normally be undertaken
during an interim audit.
Classification: Internal

2. Review of aged receivables ledger to identify balances requiring write

down or allowance
would normally be undertaken during a final audit.
A. Neither 1 nor 2
B. Both 1 and 2
C. 1 only
D. 2 only
2016 Specimen Question -
The finance director has requested that the deadline for the 20X6 audit be
shortened by a month
and has asked the audit engagement partner to consider if this will be
possible. The partner has
suggested that in order to meet this new tighter deadline the firm may
carry out both an interim
and final audit for the audit of Milla to 30 September 20x6.
Required:
(d) Explain the difference between an interim and a final audit. (3 marks)
(e) Explain the procedures which are likely to be performed during an
interim audit of Milla and
the impact which it would have on the final audit. (4 marks)
ISA 450 Evaluation of misstatements identified during audit
• Accumulate identified misstatements
• Consider if the existence of such misstatements indicates that others
may exist, which, when
aggregated with other misstatements, could be considered material

• If so, determine whether audit plan and strategy need to be revised

• Assess the materiality of the matter
• Communicate misstatements to appropriate level of management on a
timely basis
• Request all misstatements are corrected
• If management refuse, consider the reason for refusal and take these in
to account when
considering if FS are free from material misstatement
Uncorrected misstaments
• Evaluate effect of uncorrected misstatements on FS
• Report it to the TCWG
• Request written representation from management that uncorrected
misstatements are not
material
• Factual misstatements- misstatement about which there is no doubt
• Judgmental misstatement- arising on management’s judgment on
accounting policy &
Classification: Internal

accounting estimates
• Projected misstatements- the auditor’s best estimate of the total
misstatement in a population
through the projection of misstatements identified in a sample.
ISA 320 Materiality
• According to ISA 320 “An omission or misstatement is they individually
or in aggregate could
reasonably be expected to influence the economic decisions of users
taken on the basis of the
financial statements.’
• Material items could be large transactions or significant events.
• Materiality is important to the auditor because if a material item is
incorrect, the financial
statements will not show a `true and fair view.’

Materiality Levels
1. The auditor will decide materiality levels and design their audit
procedures to ensure that the
risk of material misstatements is reduced to an acceptable level.
Generally, materiality will be set with reference to the financial
statements as:
• 0.5-1 % of turnover
• 0.5-1 % GP
• 1-2 % of total assets
• 2 – 5 % of net assets
• 5 % of PBT
• 5 – 10 % of PAT
Judgement will be used by the auditor in charge and will depend on the
type of business and the
risks it faces.

2. Considerations
• Quantity- magnitude
The relative size of the item-benchmarks or financial threshold
• Quality- nature & circumstances
This might be something that’s low in value but could still affect users’
decisions e.g. Directors
wages, misstatements which turn NA to NL or NCA to NCL or profit to loss
or future legal claims
or going concern issues.
Performance Materiality
Amount or amounts set by the auditor at less than the materiality for FS
as a whole to reduce to
an appropriately low level the probability that the aggregate of
Classification: Internal

uncorrected or undetected
misstatements exceeds materiality for FS as a whole. This is lower than
normal materiality. The
idea is that this will try to prevent all those small, undetected errors which
do not aggregate to
become material.

Revision of materiality
As we know, materiality is calculated at the planning stage. But it might
not stay at that amount.
Things happen that make the auditor change the level. Such things are
often immaterial in
quantity but material by their nature. The level of materiality must be
revised for the FS as a
whole if the auditor becomes aware of information during the course of
audit that would have
caused the auditor to determine a different amount during planning.
Question 01 - June 2010
ISA 320 Materiality in Planning and Performing an Audit provides guidance
on the concept of
materiality in planning and performing an audit.
Required:
Define materiality and determine how the level of materiality is assessed.
(5 marks)
Question 02 - June 2013
Explain the concepts of materiality and performance materiality in
accordance with ISA 320
Materiality in Planning and Performing an Audit. (5 marks)
ISA 315 Identifying and assessing the ROMM through understanding the
entity & it’s
environment
What?

How??
AEIO, Prior period knowledge, client acceptance or continuance
procedures
Sources
• Permanent audit file
• Previous year’s audit file
• Website
• Publications
• Board minutes
ISA 330 Auditor’s response to assessed risks
Overall responses include such issues as emphasizing to the team the
Classification: Internal

importance of professional
scepticism, allocating more staff, using experts or providing more
supervision.
Audit Procedures
TOC SP
Audit procedures designed to evaluate the
operating effectiveness of controls in
preventing, detecting or correcting the material
misstatements at assertion level
Audit procedures designed to detect
material misstatements at assertions level
TOD-to gain information on account
balances (inventory & trade receivables)
(only during substantive testing)

AP-on large volumes of predictable

transactions (wages & salaries) (all stages)
ICORE ICCORREA
Financial Statement Assertions
Transactions & events Account balances
OCCURANCE -Transactions & events
recorded & disclosed actually occurred &
pertain to the entity
CUT OFF – transaction & events recorded in
the correct accounting period.
ACCURACY -amounts and other data
recorded appropriately
COMPLETENESS-Transactions & events
that should have been recorded have been
recorded
CLASSIFICATION – Transactions & events
have been recorded in proper accounts
EXISTENCE – Assets, liabilities and
equity interests exist
Rights & Obligations – entity holds or
control the assets and liabilities are the
obligations of the entity.
ACCURACY-assets, liabilities and equity
interests recorded appropriately
COMPLETENESS – assets, liabilities &
equity interests that should have been
recorded
CLASSIFICATION – assets, liabilities and
Classification: Internal

equity interests have been recorded in

proper accounts

PRESENTATION – Transaction & events are

aggregated or disaggregated and clearly
described in context of AFRF.
PRESENTATION – account balances are
aggregated or disaggregated and clearly
described in context of AFRF