RULES OF PROFESSIONAL CONDUCT

RULES OF PROFESSIONAL CONDUCT

Role of practitioner in maintaining:  Professional integrity
                         Objectivity
                         Independence

Practitioners should behave with integrity in all professional, business & personal relationships and should not allow their objectivity to become affected. Practitioner independence relates to individual accountants in the performance of their work & is concerned with integrity, refusal to have their opinion influenced and freedom from self interest. He has a responsibility to maintain a state of mind which results in independent actions.

The auditor must not be influenced or succumb to pressures concerning the work to be performed or techniques to be used. They must develop their own audit plans and not be pressured by mgt or any one else to change their work. Their work should only be reviewed by their professional peers & not by mgt. The auditor must not be restricted in his work and no source of information should be unavailable. Access to books & records should not be denied to the auditor.

The practitioner should be free from pressures to suppress facts revealed by their audit work. There should be no undue influence on his reporting/judgment, and there should be no sense of obligation to anyone other than the statutory duties placed on the auditor. Such pressure might be in the form of fee dependence, where the auditor is dependent on fees from one particular client.

Professional independence relates to both individuals and the profession as a whole. It is important that the image of the profession is maintained and the public is assured of the integrity of the profession.

Importance of the role of confidentiality to the auditor-client relationship

Confidentiality is a fundamental principle of IFAC’s Code of Ethics for Professional Accountants. However, it is not a fundamental principle of ACCA’s Rules of professional Conduct. It is also an implied contractual term.

The auditor should monitor & maintain confidentiality and security of information obtained during the course of their audit work. This is a mandatory competence requirement for membership of newly qualified Chartered Accountants. This applies to all professional Accountants.

In particular:

• Confidential info is only disclosed to those entitled to receive it.


• Info obtained during the course of the audit is not used for any other purpose , other than the client’s benefit


• Any decision to over ride the duty of confidence (eg if required by court order) is taken after due consideration & discussion with professional colleagues.


• The duty of confidentiality continues even after auditor-client relationship ceases


• An accountant who moves to a new employment must distinguish previously confidential info acquired


• Prospective accountants must treat info given by existing accountants in the strictest confidence


• Students registered with ACCA are also bound by the ACCA Rules of Professional Conduct.

In order to fulfill their duties, auditors need to access all information they consider necessary. A duty of confidentiality is therefore essential to ensure that the scope of their audit is not limited as a result of info being withheld.

Exceptions to the rule of confidence

ACCA states:

1. Obligatory disclosure:

If a member knows or suspects his client have committed acts of treason, he is obliged to disclose all the info at his disposal to the competent authority.

1. Voluntary disclosure:

• There is a public duty to disclose


• Disclosure is required by process of law

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

What is corporate governance
Corporate governance (CG) concerns the way the company is operated and directed. It encompasses the following aspects: * Operations of the Board & Audit Committee
                              * Overal control & risk mgt framework

CG has become increasingly important to all organizations in particular those with stock exchange listing. Eg in the UK those co are subject to the requirement of Turnbull, Cadbury & the Combined Code.

Turnbull: a co must have an ongoing process for identifying & evaluating and managing key risks of the co and it is regularly reviewed by the Board according to its guidance( at least once annually). Breach of these requirements can not only lead to a qualification of the annual a/c but also damage to reputation.

Requirements of Corporate Governance
The key requirements that should be met are:

1. Evaluate risks within the org.

The key risks within the org needs to be identified, measured and reported. Eg identify the top 20 risks, which are then fully coordinated by the Board & Audit Committee.

1. Consider the nature & extend of the risks regarded as acceptable. A clear understanding is needed regarding the risk appetite(ie risk averse, risk neutral & risk seeker)

1. The threat of such risk realizing, assessing both the impact & likelihood

1. The ability to reduce incidence & impact if risks arise. This includes a review of the contingency arrangements in place.

1. Cost & benefits relating to operating the relevant controls should be considered

1. CG concerns the culture of the co, not only from its risk appetite but also from the risk awareness & understanding. The Board & Audit Committee need to set the tone & appropriate support needs to be in place (training, policy & procedures)

1. Regular reporting to demonstrate that risks are being managed on an ongoing basis.

Role of Internal Audit (IA) in achieving Corporate Governance compliance

According to Turnbull: ‘ An objective & resourced IA function should be in a position to provide the Board with much assurance regarding the effectiveness of the system of internal control.

IA main role is normally to evaluate risk & monitor the effectiveness of the system of IC. Turnbull set out the requirements of an org. & these have key bearing on how IA should operate.
The role of IA will depend on the nature & type of the org. and what other risk type functions are in existence within the co.

Key steps in Internal Audit will be to:

1. Review co’s measures to achieve corporate governance


2. Ensure that IA operations is consistent with the major risks facing the organization


3. Produce an analysis & opinion of the effectiveness of controls, including regular info to the Board and Audit Committee

Role of the Audit Committee in demonstrating CG

The role & importance of the Audit Committee have increased as the CG requirements have increased. The Audit Committee must have at least 3 non-executive directors.
The Audit Committee should:

1. Assess the framework for CG within the co including risk policies & measures taken to achieve requirements


2. Review top 20 risks established, including likelihood and impact


3. Require regular reporting from Internal & external audit & any other review body showing how the risks are being managed0


4. Receive & review IA assignments and follow up info


5. Discuss & consider any concerns of directors and IA


6. Review annual f/s & the result of the external auditor’s examination to ensure that the auditors have performed an effective, efficient & independent audit


7. Receive & deal with external audit criticisms of mgt & ensure that recommendations for IA & EA have been implemented.

Types of regular reporting to the Audit Committee

• Listing of current major risks & up to date assessment if impact and likelihood


• Reports on control of risk including how they are being managed


• Details of issues/concerns that have arisen recently


• Audit reports issued & impact on CG


• Info & follow up on outstanding risks & findings from reports

ACCA 3.1 EXAM FORMAT

Paper: 3.1- AUDIT & ASSURANCE SERVICE

Examiner: KIM SMITH



Core topics: Based on format of the exam (ref:  NL July 01)

Q1 & 2

• Longest Q in the paper


• One will have an angle (not auditing)


• One may be new(proposed) engagement


• Strategy & planning issues ie audit planning (eg business & audit risk, materiality)


• Managing auditor-client relationship( practice management)

Q3

• Comment on matters affecting the f/s (ie audit matters) eg, materiality, a/c treatment


• Evidence

Q4

• Audit reports (examiner has a “passion” for this)


• Part (a) – introduce the subject, mostly 1 or 2 lines question


• Part (b) – there is a controversy regarding part (a)

Q5

• Ethics


• Adherence to fundamental principles


• Take a stance

Q6

• “Quotes” on current issues


• Mostly discussions & reach a conclusion

AUDIT PLANNING

AUDIT PLANNING

Planning

1. General matters


2. Materiality


3. Risk:  (Audit Risk

          (Business Risk




ISA 300 (ED) has new terminologies:
Previously: Audit plan = overall audit strategy
            Audit program = Audit plan



(I)  Understand the entity & its environment and risk assessment

The auditor should obtain and understanding of: (Entity
                                    (Environment
                                    (Internal controls

The areas to understand are:

• Nature of the entity


• Industry, Regulatory & other external factors


• Objectives, Strategies and other relating business risks


• Measurement & review of co’s performance


• Internal control

Methods of obtaining understanding:

• Inquiry of mng’t & others in the entity


• Analytical procedures


• Observation & inspection


• Audit team discussion


• Prior period knowledge

Steps in obtaining understanding:

1. Identify risks


2. Relate the risks (what can go wrong at the assertion level)


3. Magnitude of the risk (could it result in material misstatement)


4. Likelihood of the risk causing material misstatement

When a significant risk is identified, the auditor should evaluate the design & implementation of controls in that area.

(II) Auditor’s procedure in response to assessed risk (ISA315)

The auditor needs to bring down the assessed risk to an acceptable level by doing the foll:
(Evaluate the control environment
(Assign additional staff
(Use of experts
(Provide more supervision
(Must carry out substantive procedures on material items; Agree f/s to the acc/ records
                                            ; Examine material journal entry
                                            ; Examine other adj. in the prep of f/s

Documentation must be made off:

1. Discussion among the audit team


2. Key elements of understanding the entity, sources of info, risk assessment procedure carried out


3. Identified and assessed risks of material misstatements


4. Significant risks & controls


5. Overall response to address risks


6. Nature, extend & timing of further audit procedure at the assertion level


7. Reliance of the auditor on effectiveness of controls from previous audit & conclusion on how this is appropriate

MATERIALITY

An item may be material due to its: Nature(eg. Transactions  relating to directors)
                            : Value (Size, Percentages)
                            : Impact

Rules

Materiality is judgemental, but generally accepted rules are:

• Items relating to directors


• Percentages guidelines

RISK

           RISK



               (i)Audit Risk               (ii)Business Risk

               

Risk of mater. misstat.            Detection risk
in the f/s
                      

Inherent risk         Control risk     

(i) AUDIT RISK

Audit risk
The risk that the auditor may give an inappropriate opinion on the f/s


Inherent risk
The suspectibility of an account or class of trans. to material misstate.; individually or when aggregated, irrespective of related internal controls
Simply, the risk that items will be misstated due to the characteristics of these items. Auditors must use their professional judgement & understanding of the entity to assess inherent risk. If no such info is available, the inherent risk is high.

Control risk
The risk that a client control system fails to detect material misstatement.


Detection risk
The risk that audit procedures will fail to detect material errors/

The inherent and control risk assessment will influence the nature, timing & extend of substantive procedures required to reduce the detection risk.








(ii) BUSINESS RISK


Business risk: ( Financial risk
                ( Operational risk
                ( Compliance risk


Business risk: The risk inherent to the company in its operations. It is the risk at all levels of the org.

Tools to identify business risk:
(SWOT analysis
(The five forces model
(The PEST analysis
(Porters value chain
Financial risk: risk arising from financial activities or financial consequences (eg cash flow issues from overtrading)
Operational risk: risk arising with regards to operations (eg. Major supplier will be lost & the co will be unable to operate)
Compliance risk: risk arising from compliance with laws & regulations surrounding the business.

After the risk has been assessed, the correct audit strategy (approach) has to be determined (at the planning stage). The most common approach used is the risk-based approach which may be used in conjunction with other approaches.

The audit strategies/approaches are:
(Risk approach (Business risk)
(Cycles approach
(Balance sheet approach
(Directional testing (test for under /overstatements)
(Analytical procedures




GENERAL PLANNING MATTERS

Administrative details

• Logistics: Date of (inventory

                       (F/s are due to been have drafted by
                    (manager review
                    (engagement partner review
                    (engagement partner post audit meeting with client
                    (audit report is due & to be signed
                    (AGM

• Use of IT


• Time budgets


• Subsidiary objectives of the org

GROUP AUDIT

GROUP AUDIT


The principal auditor is responsible to report on the group f/s

Acceptance as principal auditor:
Consider the following:

1. Materiality of the portion of the f/s which he audits


2. Degree of knowledge


3. Risk of material misstatements audited by other auditor


4. Performance of additional procedures of components audited by the other auditor


5. General points relating to acceptance of appointment

Planning a group audit:

1. Client procedure for preparing group f/s including:* group a/c instructions

         * standard a/c forms ie layout of f/s of each subs.
         * client’s timetable to produce f/s of indiv co or subs.

1. The auditor own time table ie. * Audit staffing

* liaison with other auditor of subs/assoc
* anticipate problem areas (eg overseas subs)

Using the work of another auditor

Basic principle:
Principal auditor should consider how O.A. work will affect their audit

They should consider:

1. If their own participation is sufficient to enable them to act as principal auditors

1. The professional competence of the O.A. eg * do they belong to a professional body

* reputation; a review of their prev. audit work

      3. Obtain satisfactory evidence that the work of O.A. is adequate
          The principal auditor should also advice the O.A. of:
     (Independence requirements. Obtain written representation on compliance
     (Areas requiring special consideration(key risk)
     (Time table for completion of the audit
     ( Procedures to notify them of unusual circumstances
     (A/c, auditing & reporting requirements which are relevant


      4. Significant findings of O.A.

The principal auditor may adopt the following procedure:

1. Discussion with the O.A. on the audit procedure

1. Review written summary of these procedures. It is normal to send a questionnaire. This will provide the foll info: (a) accounting policies

   (b) acc details needed for consolidation not available from the published f/s
   (c ) info relevant for the group f/s, but not for the subs own f/s

      3. Review the O.A. working papers


Audit procedure in the consolidation process

Step 1. Check transposition from the audited acc. of the susb to the consol schedule

Step 2. Check that consol adjustments are appropriate/ consistent with previous years. This will involve:

• Record dates & cost of acq’n of subs & assets


• Calculate goodwill & pre acq’n reserves


• Prepare overall recon of movements or reserves & minority interest

Step 3. Check for business combination

• Appropriate treatment ie. Acq’n or uniting of interest


• Appropriate date used of combination


• Correct  calculation of goodwill & amortization period reasonable

Step 4. For disposals:

• Appropriate date – agree to sales documents


• Results of investment have been included up to the date of disposal & whether figure is reasonable (mgt acc. may have to be used)

Step 5. Consider whether previous treatment of existing susb/assoc is still correct (eg level of influence, degree
     of support)

Step 6. Arithmetical accuracy of consolidated workings

Step 7. Review consolidated accounts for compliance with legislation

Step 8. Review consol accounts to confirm they give a true and fair view

Evidence that may be required for the group

• Support letters

The subsidiary in isolation might not be a going concern. If this is the case, the group account should recognize this. However, the group may not allow the subs to go bust and therefore the subs is really a going concern. The auditor will need evidence to substantiate that the subs will be supported by the group. The directors will usually provide a support/ comfort letter stating that.
Assessment of the control environment:

Factors include:

• Organisational structure of the company


• Level of parents involvement


• Degree of autonomy of mgt of components

IAS 17 LEASES

IAS 17 – LEASES

Finance lease – a finance lease should be recognized as an asset and a liability.
It is a lease that transfers substantially all risk and rewards incident to ownership of an asset. Title may or may not eventually be transferred.
Finance lease gives rise to a depreciation expense. The depreciation policy should be consistent with equivalent owned assets.
At the inception of the lease, the sum to be recorded should be the fair value of the leased property, or of lower, at the PV of the minimum lease payments. The latter is derived by discounting them at the interest rate implicit in the lease.

Operating lease should be expensed in the income statement on a straight line basis over the lease term (or other systematic basis based on the pattern of benefits consumed)


Matters

• Basis of setting the discount rate used to calculate the NPV, if there is no rate implicit in the lease.

• Materiality of PV of lease value relative to total assets.

• Terms of the lease eg. Option to renew, whether the title could under any circumstances eventually be transferred.

• The extend to which risk & rewards are born, eg responsibility to pay business rates, office maintenance, repairs, insurance. Also the right to sublet office space without the lessors consent.

• Reason management wish to capitalize the lease if its and operating lease or vice versa

• The type of lease to be determined will depend on its economic substance rather than its legal form.

Evidence

• Existence and who is using the asset

• Contract setting out the lease terms – to establish its legal form and interpret its economic substance.

• Nature and amount of expenditure incurred in relation to the lease, agreed to invoices, management charges etc.( to gauge the extend of risk & rewards of ownership)

• Recalculation of PV of lease payments (should be as at inception of the lease)

• Recalculate the pre-tax cost of capital of the discount rate used. (If there is no rate implicit in the lease)

• Agree the amortization charge for the year to the income statement.

• Agree completeness & disclosure of minimum lease payments.

If after examining the evidence it appears that the lease should have been treated differently, the auditor’s opinion should be qualified “except for” for non-compliance with IAS 17