Block 1 Notes PDF

AAA-2019(SEPT) 6/25/2019
13
BLOCK 1
AAA INT
KNOWLEDGE AREAS OF SYLLABUS

EXAM FOCUS: MODERATE
KASHIF KAMRAN- FCCA- AAA (C) 2019
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TOPIC 1
AAA INT
MONEY LAUNDERING
06/14- Water & Co [11]
EXAM
06/12- Lark & Co [9]

06/16- York Co Q3(b)(i)-[7]
12/18- Clean Co Q3(a)- [10]
ARTICLE
KASHIFKAMRAN-FCCA-
kashifkamran@gmail.com 1
AAA-2019(SEPT) 6/25/2019
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Money laundering process
AAA INT
Placement Layering Integration
16
Anti-ML guidance by ACCA
1. An audit firm should appoint MLRO
1. MLRO- Receive and assess the ML reports from colleagues
and passes on a valid suspicion to regulator
AAA INT
2. More time should be spent on client identification process

(client screening process)
3. Client anti-money laundering procedures should be discussed
and reviewed (Internal control systems)
4. Audit firms should keep record [ working papers] for 5 years
5. Members should not Tip-off ( Avoid concealment)
KASHIFKAMRAN-FCCA-
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TOPIC 2
AAA INT
PROFESSIONAL LIABILITY OF AN AUDITOR

06/13 – Spaniel Co [12]
EXAM
AUDITOR LIABILITY
ARTICLE
18
Professional Liability
NEGLIGENCE
OUTLINE
AAA INT
SHAREHOLDER VS.
STAKEHOLDERS
BANNERMAN CASE
LIMITING LIABILITY
KASHIFKAMRAN-FCCA-
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How to prove negligence?
Injured Duty of care enforceable by law

party existed
AAA INT
must
Duty of care was breached
prove:
Breached caused loss
20
Auditor liability for negligence
AUDITOR LIABILITY
AAA INT
SHAREHOLDERS THIRD PARTIES
LIABILITY IN
LIABILITY IN TORT
CONTRACT
KASHIFKAMRAN-FCCA-
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Bannerman case- summary
• Royal Bank of Scotland vs. Bannerman Johnstone McLay
(1998)
 The defendants were the auditors ( Bannerman) of a company (APC)
which in 1998 went in receivership with debts of around £ 13 million owing
to RBS.
AAA INT
 RBS claimed that due to fraud the accounts of the previous years had
misstated the true financial position of the company (APC limited) and the
defendant had been negligent in not detecting it .
 RBS was the company’s main banker and as part of the lending
agreements the company need to send monthly management and
audited accounts to bank.
 The court held in favor of RBS on the basis that the auditor knew the identify
of third party, the use to which information would be put and that the
bank intended to rely on the information for a known purpose.
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Limiting auditor liability
Ways Quality of audit work
Disclaimer of liability U/S 534

AAA INT
LLA
Incorporation Limited liability

Tax
Publish accounts
LLPs Limited liability
Capping Liability Quoted

Non-quoted
KASHIF KAMRAN- FCCA- AAA (C)
2019
KASHIFKAMRAN-FCCA-
AAA-2019(SEPT) 6/25/2019
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TOPIC 3
AAA INT
PROFESSIONAL SKEPTICISM
06/12- Coot Co Q3(b)-[6]
EXAM
06/15- Tony Group Q3(a)/ b(i)-[5]/[6]

12/16- Northwest Co Q4(a)-[6]
PROFESSIONAL SKEPTICISM
ARTICLE
24
Syllabus objective
 To discuss the importance of professional scepticism in

planning and performing an audit (B1e), and
 To assess whether an engagement has been planned and
AAA INT
performed with an attitude of professional scepticism, and

evaluate the implications (B1f).
KASHIFKAMRAN-FCCA-
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Definition
 Professional scepticism
 is a component of the auditor's general duty of care
that applies throughout the audit;
AAA INT
 is an attitude that includes a questioning mind and a

critical assessment of the appropriateness and
sufficiency of audit evidence; and
 comprises three elements — auditor attributes, mind-
set, and actions.
26
Professional scepticism – overview
Three
elements
AAA INT
Attributes Mind-set Actions
KASHIFKAMRAN-FCCA-
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When does auditor apply professional
scepticism?
 Assessing engagement acceptance
 Performing risk assessment procedures
 Obtaining audit evidence
AAA INT
 Evaluating evidence
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Specific areas to apply professional
scepticism
 Fraud
 Accounting estimates
 Going concern
AAA INT
 Related party transactions

 Consideration of laws and regulations
KASHIFKAMRAN-FCCA-
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TOPIC 4
AAA INT
AUDITOR RESPONSBILITY FOR FRAUD

06/16- York Co Q3(a)-[7] + b(ii) [6]
EXAM
MASSAGING THE FIGURES

ARTICLE
30
Earning management
 Fraudulent financial reporting is a deliberate misstatement

in the financial statements.
 It can include the deliberate falsification of underlying
AAA INT
accounting records, intentionally breaching an

accounting standard, or knowingly omitting transactions
or required disclosures in the financial statements.
 For example, deliberately not disclosing a contingent
liability, or significant going concern problems, in the notes
to the financial statements means that the disclosures
required (under IAS 37 and IAS 1 respectively) have
intentionally not been made..
KASHIFKAMRAN-FCCA-
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Earning management
 ISA 240 (Redrafted) states that ‘incentive or pressure to commit
fraudulent financial reporting may exist when management is
under pressure, from sources outside or inside the entity, to
achieve an expected (and perhaps unrealistic) earnings
AAA INT
target or financial outcome – particularly since the

consequences to management for failing to reach financial
goals can be significant’.
 It can therefore be seen that in times of financial difficulty,
such as the current economic downturn, management may
feel pressurised into the non-disclosure of items that may
detract from the company’s performance during the year, or
into the use of accounting policies which produce deliberately
misstated results for the year.
32
How should auditor respond to earning
management ?
 Use of professional scepticism
 Discussion among engagement team
 Evaluation of accounting policies
AAA INT
 Completeness of disclosures
 Communication with TCWG
 Audit report
 Other reporting requirements
KASHIFKAMRAN-FCCA-
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TOPIC 5
AAA INT
AUDITOR RESPONSBILITY FOR LAWS AND REGULATIONS

12/13- Dasset Co Q3(b)- [6]
EXAM
06/15- Adder Group Q2(b)-[9]
RESPONDING TO NOCLAR
ARTICLE
34
Segregation of responsibilities
 Management is responsible to implement an internal

control system to prevent and detect any non-
compliance with laws and regulations.
AAA INT
 The auditor should be alert through out the process of

audit of any instance of non-compliance with laws and
regulations (NOCLAR) to take appropriate actions.
KASHIFKAMRAN-FCCA-
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What is NOCLAR?
 NOCLAR is defined by the new standard as comprising

acts of omission or commission, intentional or unintentional
which are contrary to the prevailing laws and regulations
AAA INT
36
Types of laws
 Laws and regulations which are generally recognized

to have a direct effect on the determination of material
amounts and disclosures in the client’s financial
AAA INT
statements
 Laws and regulations which may be fundamental to
the operating aspects of the client’s business, to its
ability to continue its business or to avoid material
penalties.
KASHIFKAMRAN-FCCA-
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Auditor responsibilities
1. Obtaining an 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
AAA INT
2. Discussing the matter with management and those charged

with governance and obtaining legal advice in certain
circumstances;
3. Evaluating the implications of NOCLAR in relation to other
aspects of the audit;
4. Evaluating the impact of NOCLAR on the audit opinion; and
5. Determining whether to report NOCLAR to an appropriate
authority outside the entity
6. Documentation
38
TOPIC 6
AAA INT
USING THE WORK OF OTHERS

12/14-Faster Jet Q3 (a)(ii) – [5]
EXAM
06/14- Adams Group Q1(b)-[8]

12/13- Stow Group Q1 (c)- [7]
12/16- Zed Group Q1(b)-[7]
Using the work of internal auditor

ARTICLE
KASHIFKAMRAN-FCCA-
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Using the work of others
 The auditor during the process of audit, may use the work
of internal auditor, expert and component auditor.
 ISA-600 ( component auditor) , 610 ( internal auditor) and
AAA INT
620 ( expert) provide similar guidance on using the work of

others.
 The use of work has certain pre-requisite:
 Independence
 Competence
 Experience
 Adequacy of work documented
40
TOPIC 7
AAA INT
AUDITOR RESPONSBILTIES FOR OPENING BALANCES

06/11- Wexford Q3 (b)-[8]
EXAM
ARTICLE
KASHIFKAMRAN-FCCA-
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Auditor responsibility for opening balance
Opening balances
AAA INT
Prior year FS was

Prior year was not
audited by another
audited at all
auditor
42
Prior period FS – audited by another auditor
1. Consider the professional competence and independence
2. Review working papers
3. If the prior period auditor’s report was modified, pay particular
AAA INT
attention in the current period to the matter which resulted in

the modification.
4. Refer in other matter para, the name of the prior year auditor,
the type of opinion given and the date of report
KASHIFKAMRAN-FCCA-
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Prior period FS were not audited
1. Collection or payment of opening accounts receivable or
payable in the current period
2. Observation of current physical inventory count and
AAA INT
reconciliation back to opening quantities ( Roll back)

3. Examination of records underlying opening non-current assets
and liabilities, including confirmation from third parties where
possible
4. Representation from management
44
TOPIC 8
AAA INT
JOINT AUDIT AND TRANSNATIONAL AUDIT

12/12- Sambora Group Q2(b)-[6]
EXAM
ARTICLE
KASHIFKAMRAN-FCCA-
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Joint audit
 Two firm jointly perform audit of a single entity

 Issues a joint opinion
 Audit reform in EU
AAA INT
46
Joint audit
Advantages Disadvantages
 Pool of experience  Conflicts
 Efficient conduct  Costly
AAA INT
 Reduces detection risk

 Growth of profession
KASHIFKAMRAN-FCCA-
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Transnational audit
 A transnational audit means an audit of financial
statements which are or may be relied upon outside the
entity’s home jurisdiction for purposes of significant lending
etc.
AAA INT
 Reliance on these audits might be for the purposes of

significant lending , investment or regulatory decision.
48
TOPIC 9
AAA INT
AUDIT COMMITTEE
12/16- Gull Co Q5(a)(ii)-[5]
EXAM
CORPORATE GOVERNANCE AND ITS IMPACT ON AUDIT PRACTICE

ARTICLE
KASHIFKAMRAN-FCCA-
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Role of the audit committee
Review of
published FS
System &
Role
AAA INT
controls
Fraud prevention General

& detection principles
Annual audit
External auditor
cycle
Provision of non-
audit services
50
External auditor- general principles
 Recommend the appointment, re-appointment & removal

 Approving fees for audit and non-audit services
 Agreeing the terms of engagement
AAA INT
 Annual review of independence

 Reviewing annually the ethical safeguards
KASHIFKAMRAN-FCCA-
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External auditor- annual audit cycle
 Should involve at all stages of audit to ensure comfort on quality
of audit
 Start – planning meeting
 plans are in place
 materiality levels and
AAA INT
 proposed resources
 Review-
 Findings of auditor
 management responsiveness
 unadjusted errors
 End – overall effectiveness of audit
 Audit vs. plan
 Robustness of audit in responding to committee
 Feedback from key personnel of management involved with auditor
 Effectiveness of management letter
 Report to board on effectiveness of auditor
52
External auditor-provision of non-audit services
 Develop a policy on supply of non-audit services

 Pre-approved
 Prohibited
AAA INT
 Take into account:

 Skills of the audit firm ( making it the suitable supplier of service)
 Safeguard in place to reduce the ethical threats
 Fees for non-audit service
KASHIFKAMRAN-FCCA-
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TOPIC 10
AAA INT
OUTSOURCING AND ITS IMPACT

06/14- Q4
EXAM
12/16- Q2
ARTICLE
54
Outsourcing and its impact on audit
 It is very common for client to outsource a function or an

activity.
 However, the function outsource could be important to
AAA INT
auditor in the audit of financial statement and the auditor

should carefully plan the audit of a client which has
outsourced a function to a service organization
 The relevant standards provide guidance to audit firm on
conduct of audit where the client has outsourced a
function.
KASHIFKAMRAN-FCCA-
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ISA 402 :Entity use of service organization
 The standard requires the entity auditor to perform extra
procedures on service organization if the entity has
outsourced a business function.
AAA INT
 These procedures include:

 Visit the service organization
 Obtain information from service organization
 Perform test of controls at service organization
 Determine extent of substantive procedures ( based on results of
TOCs)
56
ISAE 3402 : Assurance on controls at service
organization
 Further, the entity auditor can take assurance on controls
from the service organization auditor , if service
organization has an auditor.
AAA INT
 The assurance report on controls from the service

organization auditor can be a type 1 or type 2 report
based on request from entity auditor.
 Type 1 reports is an assurance on controls structure and
their overall design
 Type 2 report is an assurance on controls structure, design
and their operational effectiveness
KASHIFKAMRAN-FCCA-

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AAA-2019(SEPT) 6/25/2019

KNOWLEDGE AREAS OF SYLLABUS

KASHIF KAMRAN- FCCA- AAA (C) 2019

06/12- Lark & Co [9]

KASHIF KAMRAN- FCCA- AAA (C) 2019

Placement Layering Integration

KASHIF KAMRAN- FCCA- AAA (C) 2019

2. More time should be spent on client identification process

KASHIF KAMRAN- FCCA- AAA (C) 2019

PROFESSIONAL LIABILITY OF AN AUDITOR

KASHIF KAMRAN- FCCA- AAA (C) 2019

KASHIF KAMRAN- FCCA- AAA (C) 2019

Injured Duty of care enforceable by law

Breached caused loss

KASHIF KAMRAN- FCCA- AAA (C) 2019

SHAREHOLDERS THIRD PARTIES

KASHIF KAMRAN- FCCA- AAA (C) 2019

Ways Quality of audit work

Disclaimer of liability U/S 534

Incorporation Limited liability

Capping Liability Quoted

06/15- Tony Group Q3(a)/ b(i)-[5]/[6]

KASHIF KAMRAN- FCCA- AAA (C) 2019

 To discuss the importance of professional scepticism in

performed with an attitude of professional scepticism, and

KASHIF KAMRAN- FCCA- AAA (C) 2019

 is an attitude that includes a questioning mind and a

KASHIF KAMRAN- FCCA- AAA (C) 2019

Attributes Mind-set Actions

KASHIF KAMRAN- FCCA- AAA (C) 2019

KASHIF KAMRAN- FCCA- AAA (C) 2019

 Related party transactions

KASHIF KAMRAN- FCCA- AAA (C) 2019

AUDITOR RESPONSBILITY FOR FRAUD

MASSAGING THE FIGURES

KASHIF KAMRAN- FCCA- AAA (C) 2019

 Fraudulent financial reporting is a deliberate misstatement

accounting records, intentionally breaching an

KASHIF KAMRAN- FCCA- AAA (C) 2019

target or financial outcome – particularly since the

KASHIF KAMRAN- FCCA- AAA (C) 2019

AUDITOR RESPONSBILITY FOR LAWS AND REGULATIONS

06/15- Adder Group Q2(b)-[9]

KASHIF KAMRAN- FCCA- AAA (C) 2019

 Management is responsible to implement an internal

 The auditor should be alert through out the process of

KASHIF KAMRAN- FCCA- AAA (C) 2019

 NOCLAR is defined by the new standard as comprising

KASHIF KAMRAN- FCCA- AAA (C) 2019

 Laws and regulations which are generally recognized

KASHIF KAMRAN- FCCA- AAA (C) 2019

2. Discussing the matter with management and those charged

USING THE WORK OF OTHERS

06/14- Adams Group Q1(b)-[8]

Using the work of internal auditor

KASHIF KAMRAN- FCCA- AAA (C) 2019

620 ( expert) provide similar guidance on using the work of

KASHIF KAMRAN- FCCA- AAA (C) 2019

AUDITOR RESPONSBILTIES FOR OPENING BALANCES

KASHIF KAMRAN- FCCA- AAA (C) 2019

Prior year FS was

KASHIF KAMRAN- FCCA- AAA (C) 2019