Salient Features: Volume-1 1+ Full Coverage of ICAP's Latest Syllabus of CAF-09 (Audit & Assurance) sf "Substantial Coverage of Latest Syllabus of IOMAP & PIPFA. VY le “1 Unique Exam Focused Concept-Based Approach of Author. iS E = : for Immediate Evaluation. 1 Every Concept Supplemented by Past Exam Question(s) for RISE Step by Step Guidance on how to Attempt Case Studies for Each Relevant Chapter PNW cal AL rae hool.edu.pk Scanned with CamScanneres LO 1: ORIGIN, AND ADVANTAGES OF ASSURANCE SERVICE: —== Origin of Assurance Services: Since the Industrial Revolution in 18% century, businessmen started forming Joint Stock Companies to do business, In most situations, people who managed the company (called management o; directors) were separate from those who owned the company (called shareholders). Following concepts explain the nature of relationship between directors/management and shareholders. ee at is an individual employed by principal to provide a particular service, Management and Directors have role of an agent i.e. they are appointed to act in accordance with instructions of shareholders (the principal). "= Steward: Stewardship is the practice of managing other pérson’s property. Management and Directors have role of stewardship Le. they wisely look after the assets of the.company on behalf of shareholders. * Accountable: Management and Directors are responsible to the shareholders for their actions and decisions. To show their accountability, directors and management prepare financial statements and present them to shareholders. To judge the performance of management and directors, shareholders asked them to prepare and Present them financial statements (F/S). Soon after, it was recognized that financial statements prepared by management/directors presented “best-view” of business instead of "true-and.fair. view" due to some Incentives (eg. bonus) or Pressures (eg. fear of removal) faced by management, Thus credibility of financial statements was questioned, To enhance the credibility/ confidence/ assurBWice on these financial statements, an expert person (called assurance Provider or auditor) was hired by shareholders to verify financial statements. This person is independent of hey management and shareholders. Services of auditors were appreciated greatly. Now a days, either because: * they are required by law (called statutory assurance en, assurance engagements are performed are given to shareholders), or * they are not required by law but are vol non-statutory assurance engagement companies conducting an audit). Advantages of ‘Assurance Services to an Organization: For Shareholders: V © . Most of the misstatements are identified, * Assists in sale or purchase of business, * Assists in grant of loan by bank. For Directors/Management: 1. Auditor identifies deficiencies in entity’s internal control system, 2 Audit confirms that management is performin g its statutory and non-statutory duties, . — Scanned with CamScanner luntarily performed because of its advantages (called ts eg. sole-proprietorships, partnerships and smallduction to Assurance Services Auditing-StudyNotes chapter 1 introduction to. CONCEPT REVIEW QUESTIONS on cap, cAF 09 Level - Spring 2004) a 04) Discus the concepts of stewardship and accountability in the content of liited MPA cap g9 Level - Spring 2037) CAF 09-0. tion Banh ond of tis chapter. ‘What are the advantages of an audit to an organization? (icaP's official Ques! ni Hints to concept review questions are included at thee LO 2: DEFINITION AND ELEMENTS OF ASSURANCE ENGAGEMENT: Assurance Engagement: “Assurance engagement” means an engagement in which a practitionet 0! evaluation of a subject matter against suitable criteria, and expresses his cont confidence of the intended users (other than the responsible party). Elements of Assurance Engagement: Every assurance engagement consists of following 5 elements: btains evidence about clusion to enhance the Element Explanation | 1. Intended users (the parties who require subject matter and assurance report eg. shareholders, bankers) | Athree party | 2. A responsible party (the party which is responsible for preparation of relationship subject matter ie. management) and 3. A practitioner (the professional who verifies subject matter and provides assurance on it i.e. auditor) Subject matter is the information which is prepared by responsible party, Asubject matter | and is to be verified by practitioner eg, financial statements (historical or prospective). Criteria means Framework (Le. standard rules and regulations) which Is used | to prepare financial statements. A Suitable Criteria. | Framework may be general purpose (for wide range of users e.g, IFRS) or special purpose (for specific users e.g. Tax Laws). Suitable means it should be selected appropriately. Evidence is the information used by auditor in arriving at the conclusions on which opinion is based. Evidence should be Sufficient and Appropriate. It is a report written in standard format (as per which includes conclusion of practitiones itis panna per local Laws) intended users Y practitioner to WLany of the above element is missin, z ig, engagement will be called non. cd. non-assurance engagement. CONCEPT REVIEW QUESTIONS Evidence Written Assurance | Report Ust down the basic elements of an assurance engagement. a (ICAP, CAF 09 Le {o2) ’ vel - §} State and explain five elements of Assurance Engagements, metagates Hints to concept review questions are Include end of this ae luded at the end of o ae Scanned with CamScannerto Assurance Services puahing-stuynotge enter niacin Auditing - Study Notes SURANCE AND WHY ABSOLUTE “ASSURANCE CANNOT i 2 ELS OF ASS tos ses his conclusion. There are tivo Assurance” means confidence with which a practitioner CxPeCe ass orassurance that can be provided to assurance client le Reasonable Assurance and Limite levels of assurance that cai ‘Assurance. Limited Assurance (also called Moderate Level or Negative Assurance) conclusion Le. “nothing surance which is expressed in neg: e.abtaivetrie ant Te vel of ass as co} fair view” 1 of assurance is usually given in review of financial statements, or examination of This level forecasts/projections. i e It isa high, but not absolute, level of assurance which is expressed in positive form of conclusion ie, “financial statements give true and fair view". This level of assurance is usually given in an audit of financial statements. Auditor is responsible to obtain reasonable assurance, which is not a guarantee that financial statements are free from all misstatements. There may be some undetected misstatements even after audit due to inherent limitations of audit, Absolute assurance means guarantee that auditor has detected all misstatements. Auditor cannot provide absolute assurance because of following inherent limitations of audit: 1. Because of time and cost limitation, auditor checks only a sample of transactions. 2. Fraud involving collusion and complex techniques are harder to detect. 3. “Some accounts in financial statements involve estimates / judgments/ uncertainties which are difficult to calculate and verify, =. Many of the audit procedures are based on auditor's judgment which can be faulty. Management may not provide cgmplete information to auditor. Auditor does not have specific legal powers e.g. power to search. Most of the evidence is ygrsuiasive rather than conclusive. noes CONCEPT REVIEW QUESTIONS (2) Whatis meant by reasonable assurance? ( (©) Wy an auditor cannot provide an absolute assurance as a result of audit? Expla, (03) (ICAP, CAF 09 Level ~ Autumn 2004) in response to an audit engagement letter sent to Roof Limi * In response to nage | imited (RL), Mr. Aziz Aslam, the new chief executive of RL li Regen. /OH" frm to provide absolute assurance in the audit report, Draft an appropriate reply mentioning any four reasons why the above request cannot be complied with. (ICAP, CAF 09 Level - Autumn 201 05) i) 33) {ICAP's Official Question Bank for CAF 09-Q.# Scanned with CamScanner™ Auditing - Study Notes Chapter 1 Introduction to Assurance Services spemenn abst and reasonable surance ety theo iota an wahoo Distinguish between ase ge reasons to sty Your point of view i financial st {ICAP, CAF 09 Level - Spring 2009) {ICAP’s Official Question Bank for CAF 09 ~Q. # 2) ga imitations of external audits. 03) el (ACCA, Fundamentals Level F8 - December 2012) is it yee between an “assurance engagement” and an “audit engagement”? (01) ae ee (ICAP, CAF 09 Level - Spring 2003) 2 iefly explain with examples, the different levels of assurance that can be provided to an assurance client. (03) heey " (ICAP, CAF 09 Level - Autumn 2015) (ICAP’s Official Question Bank for CAF 09 - Q. # 133g) (b)Explain the meaning of “assurance” and give two examples of types of assurance which can be provided, distinguishing between the two in terms of the level of assurance offered by each of them. | {ICAP’s Official Question Bank for CAF 09 - Q. # 169a) | AG Company approached the Mini-Finance Bank to extend their overdraft limit in order to finance a new project. The | bank asked the company to provide cash flow projections and assurance over those projections. Requiréd: Explain the type of assurance engagement that will be undertaken by the auditor in the above scenario and form of such assurance. Also explain why such type of assurance is appropriate for cash flow projections. (03) (CMA Pakistan - Fall 2016) l Hints to concept review questions are included at the end of this chapter. APX: HINTS & COMMENTS TO CONCEPT REVIEW QUESTION: aa State advantages to both external stakeholders and directors (because question did not specify any party) Q2 Straightforward question. (02 marks for each concept. Students are advised to write in exam only what they learn from book. Do not try to produce or explain material on your ‘own, Usually, it results in ‘irrelevant’ points (which are not given any mark by ICAP). fd means only headings are to be given (without explanation). Words “basic” or “essential” or “important” have no diference in audit exam, All elements are equally important ‘ome students confused it with elements of engagement letter, and elements of audit report. eg Note that question clearly asked to “explain” the elements. (2) White explaini it -xplaining reasonable (or limited assurance) many students do not write ‘form of conclusion’ and ‘drafting (©) You can write as many limitations as possible in given time. ston’ and ‘drafting. Scanned with CamScannerChapter 1 Introduction to Assurance Se Auditing ~ Study Notes rvices vided because of inherent limitation. absolute assurance cannot be pro Ot mark for giving reason that (4 marks for four reasons. eA. ged of mentioning the IheretHmtations of ua, the Inherent iain of intern rol ent risks were mentioned. control and inhere | hors Cammtn asks for Jour reosns, however, it is better to write some extra points If any of our fst four | aoe rang een Ss pone may earn you one mark Foe here are no marks in ICAP exams for good hand-writing or presentation. You can write answer to this question | without giving format ofa letter Absolute assurance means perfect or 100% guarantee that financial statements are free from ALL misstatements, nan audit, reasonable assurance Is expected. Reasons for reasonable assurance (instead of absolute assurance) in an audit are Inherent Limitations. Students should give list of innerent limitations. Author's Comments: This question hos three sub-parts which are not pre-numbered by ICAP. There is a risk that you may skip a part while ‘tempting this question, So be careful and better to number eack part yourself Audit is also called ‘external’ audit because it is.conducted by a person outside the entity who is being audited. Opposite conceptis ‘internal’ audit, which means audit by empléyees of company. a Audit engagement is a type of assurance engagement. ag (@& b) Levels of assurance that can be provided are Reasonable assurance and Limited assurance. Limited assurance engagement (or review engageriient) will be undertaken. Such assurance is expressed in negative form of conclusion. For cash flow projection limited assurance is appropriate because it relates to future and there is more “uncertainty and auditor can obtain only moderate level of assurance about future. Note: Marks-allocation of some questions has been revised considering current pattern of exam. 6] Scanned with CamScanner“puaiting Study Notes Caper Cc HAPTER TWO BASIC CONCEPTS O' F AUDITING| — ICAP’s Study Text | _ICAP’s Question | Lo# LEARNING OBJECTIVE Reference ** Bank Reference PART A- FINANCIAL STATEMENTS [101 | FINANCIAL STATEMENTS N/A PART B - FINANCIAL REPORTING FRAMEWORK . APPLICABLE FINANCIAL REPORTING N/A 102 | FRAMEWORK Abd LO3 | WHAT IS MEANT BY TRUE AND FAIR VIEW 1.1.3 125 PART C - RESPONSIBILITIES OF PARTIES INVOLVED IN AUDIT RESPONSIBILITIES OF MANAGEMENT & TCWG 43 104 | FoR FINANCIAL STATEMENTS 1.18 a RESPONSIBILITIES (OR OVERALL OBJECTIVES) tos | Resvonsiet 14.6 8a, 163a RESPONSIBILITIES OF _ STAKEHOLDERS 7 106 | EXPECTATION GAP aed, 1338 107 | ESSENTIALS FOR PROPER CONDUCT OF AUDIT 1.4.6,3.1.2 4b, 109e PART D - REGULATORY ENVIRONMENT OF AUDITING INTERNATIONAL FEDERATION OF Lo § | AccounTANTS (IFAC) 142,144 N/A INTERNATIONAI tos | TER iL STANDARDS ON AUDITING | 7454 4 6 N/A PART E~ APPENDICES APX1 | APPLICATION OF PROFESSIONAL SKEPTICISM N/A N/A apx2 | HINTS & COMMENTS TO CONCEPT L** Lauestions ew N/A N/A “* September 2018 Edition ot a Scanned with CamScannernn Auditing - Study Note: WaiN 5 Pry uieeninn are correct. A complete set of 3 L STATEMENTS: . ee FINAN to express opinion whether financial statements Auditor is re n Taare "statements include following: tion. statement of financial posi vei oier y aeareiment of comprehensive income (= Statement of profit or loss + Oth > Statement of changes in equity. Statement of cash flows. (0 the accounts Aor > Notes "Seater naw question (02 marks) laa * rt ‘eporp ai re an audit report? aa ofa company’gannual repor)are covered by an audit rep ° cazw Professional Stage - September 2006) | Comprehensive income) i ter. Hints to concept review questions are included atthe end ofthis chapter. gi FINANCIAL REPORTING FRAMEWORK LO 2: APPLICABLE FINANCIAL REPORTING FRAMEWORK: Applicable Financial Reporting Framework (AFRF) is the financial reporting framework adopted by management and TCWG, in preparation of financial statements considering legal requirements, nature of entity, nature of financial statements, and purpose of financial statements. Study Tip Auditor shall not accept proposed audit engagement, if AFRF is NOT acceptable. SSS eee LO 3: WHAT IS MEANT BY TRUE AND FAIR VIEW: % ‘The term “True and Fair View” has not been defined in the. Com, in at anies Act in ISAs IFRSs. Therefore, itis the most important judgment auditor makes ra reachingthe cna A or in ion. Generally true means free from error, and fair means free flatements or the way in which they have been presented. True AFI have been prepared in accordance with AFRI Fequirements). SE (a, IFRS, Co from undue bias in the financial and fair méans financial st: a fatements panies Act, and other regulatory it - Study Tip ~ ees ee Tams “Bnancial statements give true and fair view” ond “finan ateralresects' are equivalent However. firsttermis morecne ee fs cial statements Presen mon in practice, itl, in all CAF (02) mi ne¥e!~ Spring 2017) Scanned with CamScanneray Chapt Concepts of Auditing Auditing - Study Notes —— Pati INVOLVED IN AUDIT ese fy) _ RESP" CWG FOR FINANCIAL STATEMENTS: RESPONSIBILITIES ‘OF MANAGEMENT & T" Lo# ccordance with AFRF. esp ration and presentation of financial date ens % For pr internal controls which are necessary for preparation of orion requested information, af n To provide auditor with al reevan foe d addition (0 po Prscor and unrestricted Bceess to persons f0 ‘prain evidence restricted ee : Guptpement is responsible: es eg, assessing entity's ability to aamisess Spe gement is also responsible for other specific responsibil continue as going concern. study Tip premise of an audit” means management (and where applicable TCWG) understands and acknowledges that ithas responsibilities as described above, ‘CONCEPT REVIEW QUESTION ents? (04) (ICAP, CAF 09 Level - Autumn 2009) (ICAP's Official Question Bank for CAF 09 - Q. # 4a) Briefly highlight the management's responsibilities relating to the financial statem Discuss as to whois responsible to prepare financial statements. (02) ; ; (ICAP, CAF 09 Level - Spring 2002) Hints to concept review questions are included at the end of this chapter. OS: RESPONSIBILITIES (OR OVERALL OBJECTIVE) OF AUDITOR: esponsible to obtain reasonable assurance whether the financial statements are free from material misstatements, a1 is ia certain matters to TCWG, ind to issue report. Auditor is also required to communicate Auditor 10" tesponsibleto communicate following matters to TCWG: unter esponsibility for the audit of financial statement gjanmed scope and timing of audit. " ignificant findings from audit. Auditor's igdey lence. , B < CONCEPT REVIEW QUESTION Primary/overall objective of an audit? (ICAP, CAF 09 Level - Autumn 2601) SS oe ‘ Scanned with CamScannerAuditing ~ Study Notes Chapter 2 Basie Concepts of Auditing ‘The purpose of an external audit and its role are not well understood. You have been asked to write some material oy inclusion in your firm's training materials dealing with these issues in the audit of large companies: Required: = Draft an explanation dealing with the purpose of an external audit and its role in the audit of large companies, for ihe inclusion in your firm’s training materials. a7 (ICAP’s Official Question Bank for CAF 09-Q.4 83) You are the audit manager of Rake Enterprises, limited lability company. The company's annual revenue is over Rs 0) Required: | Compare the responsibilities of the directors and auditors regarding the published financial statements of Rake mterprises. (icch,Fondamentas Level 8-200 | cars ota Ghar CAF 098 | - Hints to concept review questions are included at the end of this chapter. | See LO 6: RESPONSIBILITIES OF STAKEHOLDERS / EXPECTATION GAP: Itis the responsibitity of stakeholders to understandland eliminate expectation gap so that scope of audit is not misunderstood Who” nas intent 7 jo entity: Expectation gap means public perception of the role and responsibilities of the external auditor is different (and usually higher) from his statutory role and responsibilities. — is nding (2.5 ‘ " 1, Auditor prepares financial statements. 2. Auditor checks 100% transactions of entity during the accounting period. 3. Auditor provides absolute assurance (ie. he certifies or guarantees that financial statements are correct). 4, Auditor is responsible to detect all misstatements and fraud. Consequences of Expectation Gap: It increases tendency to file legal actions against auditors without any valid basis. How to Reduce Expectation Gap: Expectation gap can be reduced by: *> Mentioning management's responsibilities, and auditor's responsibilities in Engagemett Letter and Auditor's Report. > Expanding and improving the format of auditor's report. > Steps taken by SECP and ICAP eg. through implementation of Code of Corporate Governance, Public awareness on scope of audit and responsibilities of auditor. ‘CONCEPT REVIEW QUESTION inthe term ‘Expectation Gap’ in the context ofan audit and give three examples of expectation gap. (of) (ICAP, CAF 09 Level - autumn 2015) (ICAP's official Question Bank for CAF 03-0. # 132) | Scanned with CamScannerae Chapter 2 Basie Concepts of Auditing auditivg - Study Notes __— ¢ Polycrafts Limited for two years. uring the aut for te yeoe ended 30th June, 2017, the ger of Polycratts Limi ai aut manager of Por statement identified in previous year accountng Cue that was not corrected | eed enn = | iin sega by MME a ” se tu iditing profession? (04) ene expectaton gop” and how could itbe removed orréducedby theausleTe OTE ay winter 1993) What | ‘ints to concept review questions are included at the end ofthis chapter. LO 7: ESSENTIALS FOR PROPER CONDUCT OF AUDIT: Prolet eal Judgment is the application of Cumulative Audit Knowledge, Experience and Training (within the-context of accounting, auditing, and ethical standards), during an audit to reach an appropriate course of action or conclusion. i Professional skepticism is an attitude that includes: + aquestioning mind, + being alert to conditions which indicate possible misstatement (due to error or fraud), and + critical assessment of audit evidence. It means auditor should not believe everything which management tells him. Rather, he should obtain corroborative evidence and should investigate if there is a conflict. Independence means auditor should be free to perform audit procedures without any bias or jnnente: Auditor should: be Independent of financial, personal and employment relations with client. : (This concept will be discussed in detail in later chapter.) i wa CONCEPT REVIEW QUESTION Briefly discuss the concept of Professional skepticism’. (03) (ICAP, CAF 09 Level - Spring 2016) ((cAP's ofmcial Question Bank for CAF 09"-Q.# 103¢) During the audit te: b with the gtd team planning meeting, a member of the audit team management ee, N28 confident that the management of the client Per hanes and Ga eer ae eae ee maintain an ny. The audit manager Require of profesional skepticism throughoutthe audi seer “esPonded thatthe auditor should always Briefy describe’ ‘Audit Skepticism’ and elaborate on the response ofthe audit manager. (04) (ICAP, CAF 09 Level - Autumn 2009) ines to concepe rev es Mia Question Bank for CAF 09 ~Q. 2) cha lew questions are included at the end of this Scanned with CamScannerAuditing - study Notes Chapter 2 EU ea nN RO LO 8: INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC 5 ati : IFAC is the worldwide leader of audit profession. It is the global organization of professional accountants dedicated to serving the public interest. Basic Concepts of Auditing Functions/Role/Activities of IFAC: IFAC supports the development of profession in the area of auditing, ethics, professional education and public sector by follow + development of high-quality standards and guidance. + facilitating the adoption and implementation of standards and guidance. . promoting te value of professional accountants worldwide. speaking out on public interest issues where professional voice is important. Boards of IFAC: IFAC includes following four boards: + International Auditing and Assurance Standards Board (IAASB) + Interriational Ethics Standards Board for Accountants (IESBA) + International Public Sector Accounting Standards Board (IPSASB) + International Accounting Education Standards Board (IAESB) International Auditing and Assurance Standards Board (IAASB): IAASB is one of the boards within IFAC. It is a standard-setting body which enhances quality and consistency of asgugance practice throughout the world by following activities: 0% 1. It develops and promotes standards to be applied in providing the audit, review and related a services, 2. It also provides facilitatign in adoption and implementation of international standards. In doing so, [AASB enhances quality and consistency of assurance practice throughout the world. 3. In addition to ISAs, IAASB also issues International Auditing Practice Statements (IAPS) to help auditors in implementing ISAs and to promote good auditing practice in general. ‘CONCEPT REVIEW QUESTION a3 International Federation of Accountants (IFAC) provides leadership to the worldwide accountancy profession in serving the public interest. What activities are undertaken by IFAC to achieve this aim? (04) (ICAP, CAF 09 Level - Autumn 2006) gaa Explain briefly the role of International Auditing and Assurance Standards Board (IASB), (04) ; (ICAP, CAF 09 Level - Spring 2008) Hints to concept review questions are included atthe end of this chapte. a a / Scanned with CamScannerChapt study Notes a 10 9: INTER abject is selected for detailed study rs conducting comprehensive study and research, an €X 2 n idely for, ts. Mpproved by [AASB and then distributed wi 4, comments and proposed amendments are ee tered by the IASB, 4. The new ISA is then published, ; redraft is produced which i lanatory material Major parts ofan ISA are Objectives, Requirements, and Application and other explanatory r 1 In Pakistan, audit is conducted in accordance ISAs. for auditors to comply with all required procedures of all ISAs. ro obtain reasonable assurance, it is compulsory ——<—<——_ ‘A required procedure will not be performed if it is not relevant or is not practicable. However, if a procedure is not practicable, auditor shall document: «reason of departure from required procedure, and + alternative procedures performed to obtain evidence/assurance. a f. ‘CONCEPT REVIEW QUESTION International Standards on Auditing (ISAs) are issued by the International Auditing and assurance Standard Board (1AAS8). In this context, explain the following: (0) The position ofthese standards relating to external audit process (02) | (i) The extent to which an auditor must follow ISAs. (02) (ICMA Pakistan - Fall 2017) l Hints to concept review questions are included at the end of this chapter. zi E - APPENDICES Aen & APPLICATION OF PROFESSIONAL SKEPTICISM: “iow ls alist of circumstances which indicate ossibility of misstatemer i An. auditor increases his professional skey i 4 Raltuations hanna : ticism ifhe faces any of such situations in an audi 3 ated sale ofshares/business, or acquiring loan, ‘St: I mane Sait 's bonuses based on financial performance. p other evi s r j idence from one source is inconsistent with other source. 3 4 Goi 5 gn'8 Concern Issues eg. inc 6 rease i 7 Satan raed pry ees d_ competition, product failures, operating losses Mficant * 7 Identined dogo’ ExPeNSes, Assets, and Liabilities are based on estimates, 8 No internaton cries in internal control, not being corrected : 9 Lackofcomutlé function, oF ineffective internal aeait faneeton 10, Portable, moetence oF integrity in management 1 Longest Precious inventory or f ning fixed assets, 2 ees anding inventory, ew products by competitors, Scanned with CamScanner‘Auaiting ~ study Notes Chapter 2 Basle Concepts of Auditing 13, Company has launched new products but there is no increase In revenue. 14, There is dispute with major debtor. 15. There are pending litigations against company. Te Reconciliations (bank, debtors, or inventory) are not being prepared- 17, Management holds majority shares CONCEPT REVIEW QUESTION 18 op i required to maintain an attitude of ‘Professional Skepticism’ while conducting 2° audit of Financial Statements Describe by giving TWO appropriate examples, the term Professional Skepticism. (04) | erating TWO App fe FA- Summer 2015) e included atthe end of this chapter. L Hints to concept review questions are: ‘APX 2: HINTS & COMMENTS TO CONCEPT REVIEW QUESTIONS: ember that annual report contains components of financial statements as well as other information (€6, directors report) However, audit report cavers 5 components of financial statements only. While describing true and fair, don't forget to mention that this term has not been defined in law, IFRS, oF ISAS. aa Easy question to be reproduced from notes. a4 Management and TCWG. as Easy question to be reproduced from notes. [Note that question has two parts: 1. purpose of an external audit (Le. objective of audit), and 2, fole in the audit of large companies (ie. advantages of audi ‘You must present both parts separately giving sutable headings in your answer. a Easy question to be reprodyced from notes. ga Easy question tobe reproduced from notes {@) Easy question tobe reproduced from notes. Although examples are mua gee ore amps ln concep les arena specifically required in question, however 3! o. Auditor Is not responsible to detect immaterial error or prams onl ressoabc assrace case aheenimtatons faa ee aoB Maer eco or fraud, asl {c) Easy question Recall that this part relates to chapter #1 une gid Easy question to be reproduced from notes. 4 TR a cee “Ye, Scanned with CamScannerAuditing - Study Notes Chapter 2 Basie Concepts of Auditing points of professional skepticism. Explanatory line should also be written alongwith 03, os . Question oe ion of audit skepticism (Le. professional skepticism) a ertboraton. (Students should give some examples of situ ations in which itis particularly important to apply sravessionai skepticism. These examples are given inthe appendix). . a3 uestion to be reproduced from notes. However, students did not perform well in this question. ae “rvestion to be reproduced from notes. However, students did not perform well in this question (reproduce “authority/status of ISAS". {i reproduce “exception to follow requirements of ISA” Many candidates could not understand in exam what was required. Easy question to be reproduced from notes. Note: Marks-allecation of some questions has been revised considering current pattern of exam. Scanned with CamScannerAuditing - Study Notes : CHAPTER THREE AUDIT EVIDENC Chapter3 Audit Evidence veStudy Text | ICAP’s Question Low LEARNING OBJECTIVE sa eence? | Bank Reference PARTA-AUDITEVIDENCE _ = 1o1 |WHAT 15 MEANT BY SUFFICIENT AND] 44> 4.1.3,4.1.5 109b, 1481 APPROPRIATE AUDIT EVIDENCE - PART B - AUDIT PROCEDURES _ PROCEDURES/METHODS/TECHNIQUES TO 5 108a 102 | oprain AUDIT EVIDENCE 414,74 = PART C - PHASES OF OBTAINING AUDIT EVIDENCE “ LO3 | RISK ASSESSMENT 7 g20,416,72:, | 45130024 L04 | TESTS OF CONTROLS 324,332 24aii, LOS | SUBSTANTIVE PROCEDURES ASSERTIONS TESTING APPROACH TO 106 | OBTAIN EVIDENCE DEG 829 24c PART D - AUDIT DOCUMENTATION 7 Lo7 [AUDIT DOCUMENTATION, ITS PURPOSES] 4.2.1,4.22, 4.2.4, AND RETENTION N/A Log | AUDIT FILE AND ITS TYPES 106 aah 109 | FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION 94, 106c* 1010 | CHANGES IN DOCUMENTATION AFTER | AUDITOR'S REPORT | 4.2.3 98, 134, 22bii APPENDIX ‘apx | HINTS & COMMENTS TO CONCEPT REVIEW — Baily QUESTIONS N/A N/A | * Case Study Question ** September 2018 Edition RT Scanned with CamScannerAuditing - Study Notes __Chapter 3 Aua To obtain reasonable assurance, auditor shall obtain “Audit Evidence” by performing “Auait Procedures”, and shall retain “Audit Documentation”. Se LO 1: WHAT IS MEANT BY SUFFICIENT AND APPROPRIATE AUDIT EVIDENCE: | Audit evidence is the information used by auditor in arriving at the conclusions 0 auditor's opinion is based. Audit evidence should be Sufficient and Appropriate. wi Sufficiency is the measure of the quantity of audit evidence, Su(ficiency. of the audit evidence Is affected by: SL * “Assessed risk of material misstatement. ey Materiality and complexity of item, Auditor’s knowledge and experience of business. Quality of audit evidence. Strength of internal control Whati i . Appropriateness is the measure of the quality of audit evidence. Quality of evidence is affected by relevance and reliability of information on which it is based. Relevance: Relevance deals with logical connection between assertion and audit procedures e4 auton saEPOTEEE osrsttement of acrounts payable, testing recorded payables will be relevant procedure. However, if auditor wants to test understatement of accounts payable, testing information, eg. subsequent payments, unpaid invoices, pending GRN, supplier's statements will be relevant. 2, A procedure relevant for one assertion may not be relevant for other e.g. inspection of tangible assets may provide evidence for Existence, but not for Rights & Obligation. Reliability: Reliability of evidence depends on its source, nature; and circumstances under which it is obtained eg. Evidence from independent external source is more reliable than internal evidence. Evidence in documentary form is more reliable than evidence in oral form. Evidence in the form of original document is more reliable than photocopy ot fax. Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference. Evidence generated internally is more reliable when related gontrols over its preparation and maintenance are effective. * vy < A shorteut to remember the reliability criteria of evidence is that evidence should be “CODED Controlled, Original, Documentary, External and Direct. be "CODED" Le. Scanned with CamScannery ees i all: If audit evidence is not sufficient to reach opinion, a stat it 1. Discuss the matter with management and TCWG to c i 2. Obtain more evidence by performing More tests of controls and 3. ifmatter still remains unresolved, auditor shall express mo substantive procedures: d opinion. confirmation or verbal sxaminer may ask you to comment on reliblliy of @speeiied evidence (&6 external ¢ Fepresentation From management). CONCEPT REVIEW QUESTION | (04) icar, CAF 09 Level - Spring 2016) | 1 question Bank for CAF 09-Q. # 109b) | Briely describe how an auditor evaluates the sufficiency of audit evidence. (icaP’s offi | State any two factors which the auditor should consider to ensure reliability of audit evidence. (02) | (ICAP, CAF 09 Level - Autumn 2014) (ICAP’s Official Question Bank for CAF 09 -Q. # 148) Discuss the factors that influence the auaitor’s judgment as to what constitutes sufficient appropriate audit evidence?(06) (ICAP, CAF 09 Level - Spring 2008) Hints to concept review questions are included at the end of this chapter. Py RES LO 2: PROCEDURES/METHODS/TECHNIQUES TO. OBTAIN Audit procedures are methods and techniques used by the auditor to oer sudieendied nce. I Inquiry means seeking information from knowled igeable persons , entity. Inquiry alone is not sufficient appropriate audit idence Ane ah era . jould always obtain 3 corrobors . ative evidence. Reliability of man: ' py corrobaraty lagement’s response i i B gement and consistency of response with other evidence S$ affected. by integrity of Examples: 1. Inquiry from mana; ement ab oihcones 8 about legal cases against company and 2 0 asse: i Inquire management about an unusual payment in cash by eel ‘ash book, Z.Observation: ; Observation consists of | pro s ook Evidence from observation is Hitet to ee secure (eg. c being perform: ot know that they are bei rv qd (© the time of vai mand aie *y are being observed, observation, and is als, fats eh affec _ ‘ted when people 1. Observing inventory cou: i inting by p 2. Observing cash receiving process,” SNUYS personnel 3. Observing distribution of wages. Sar a Scanned with CamScannerChapter 3 Audit Evia Auditing - Study Notes. ves examining records or documents (whether internal or external), ora physical Inspection involv examination of an asset. arin f purchase invoices. 1. Inspection of ; 2. Physical examination of individual inventory items (or fixed assets). Eaernal confirmation is a process of obtaining evideice by auditor directly from a third party in written form (e.g. on paper, electronic or other medium). Examples: 1, Circularization of sample of debtors/creditors. 2. Sending confirmation letter to banks /lawyers. ‘Study Tip ~ Confirmation Vs. Supplier's Statement (or Account Statement) External Confirmation is eifferent from supplier's statement. A supplier's statement is a statement received at regular intervals from a supplier (usually each month), showing details of transactions between the supplier and its customer (eg, purchases, returns and payments) and closing balance. Tiss indirect, therefore less reliable. S.Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically. mples: 1. Recalculation of sales invoices or purchase invoices. * 2, Recalculate the profit or loss on disposal of fixed assets. E 3, Adding up list of debtors. Ee _ 4. Checking of figure of bonus paid to directors to confirm its accuracy, |= &:Reperformance: & Reperformance means auditor independently perfagningpreeedures or controls that were originally performed by entity as part ofits internal control. ay ee Examples: * 1. Reperforming ageing of accounts receivable balances, aie |= __2 Reperforming the extraction ofa trial balance from company's general ledger. | Analytical : i ___ Atalytical Procedures means evaluation of financial information through: Ane comparisons, and Plausible relationships with other financial and non-financial information, Scanned with CamScannerAuditing - Study Notes ing sal ear with last year. : sad aid Cen, rae Rat fore ‘GP Ratio, Current Ratio, Debtors Turnover : 2 Calculating Ratios , Curre erent pu isk Assessment Procedures, as | res can be performed for different purposes e8 a — * _ REET nn any sx et ing audit evidence. (i yaaa lita ee (ICAP, CAF 09 Level - Autumn 7 3 ase cadence ists down various procedures for obtaining aut evidence, Provide TWO example on scion would perform EACH of the following: (2) Recaleslation (3) Inspection of record (6 inapecion of assets (4) hasta review { (PIPFA - winter 2 as "You are planning the audit of Cuddly World and are considering using some of the procedures for gathering ‘erence recorsmented by 15A 500 as follows: (2) analytieal procedures: above procedures: in its use in gathering audit evidence; i (ACCA, Fundamentals Level B8 - June2i ; (ICAPs Official Question Bank for CAF 09 - Q. 1 Hints to concept review questions are included at the end of this hi LO 3: RISK ASSESSMENT: Risk Asse Ver rO easment Procedures are auditor's procedures tool rstandil 20 ess. thi Heap ct e risk of material misstatement at financial statement level # Examples of Hisk Assessment Procedures: © Ine ‘ \duirles of management and others within the entity (e, * Observation and Ii internal audi on nspectior audit function) records) ection (e.g, observation of entity's operations, inspection of acco" Analytical Procedures (eg. increas facing difficulty in paying and provision debtors’ turnover days indicates that debto" 'sion for bad debt is required). Scanned with CamScannerAuditing - study Notes Chapter 3 Audit Vvidenee x t Assertion Leve There are two levels of risk Le. risks at Financia Statement Level and risks a Risk at Financial Statement Level: Risks at the financial statement level refer to risks that a potentially affect many assertions. frect financial statements pervasively arc Examples: 1. Risk of 2. Risk of management override of control 3. Lack of Competence and Integrity of management. 4 Going concern Issugg, Risk at Assertion Level: Risk at assertion level refers to risks that do not affect financial statements only specific identifiable assertions. pervasively and affect Examples: 1. Risk that precious and portable assets may be misappropriated. 2. Risk that complex transactions (e.g. deferred tax, lease), and non-routine transactions (e.g purchase or disposal of fixed assets) may not be accurately recorded. 3. Risk that large transactions at year end may not have occurred (e.g. heavy at year end), or may be recorded in wrong period. y k od Noo —Sanp 4 as Response to Risk at Financial Statement Level: To address risk at financial statement level, audito verall ee Increased level of professional skepticism specially during audit of judgmental areas. Adequate planning, and reduced materiality level. Assigning rrore omperienced and speralized sath eg. use of experts if necessary. Increased_supervision and review of the audit work performed (e.g. quality control review of the engagement). Incorporating unpredictability in nature, timing and extent of audit procedures. Makingghanges to audit procedures, More audit procedures at period end rather than at interim date. Obtaining more reliable audit evidence (eg, from external sources). ————— vv vrvy Response to Risk at Assertion Level: To address risk at assertion level, auditor shall perform following audit procedures: * Tests of Controls (to be discussed in chapter # 11) and + Substantive Procedures (to be discussed in chapter # 12). ‘CONCEPT REVIEW QUESTION “The auditor shall perform risk assessment procedures to provide a bats for thei i material misstatement at the financial statement and assertion levels *'® “entification and assessment of risks of List down the risk assessment procedures as referred above. (ICAP, CAF 09 Level - Sprit (02) (ICAP’s Official Question Bank for CAF 09 "et zen) 21 — Scanned with CamScanner— videnc Auditing - Study Notes _ auditor should perform ig ts Internal control ment states th ronment, elude [BE sont leg yn essinent procedures, idence the auditor ca use as part of risk assess (ACCA, F (ICAP’s ortictal log . | {Starner acts tc one tes of control and one substantive Procedure Stee recto your asendanse : [ sessieelt eto (ACCA, Fundamentals Level F8 - December 2007) {ICAP’s Official Question Bank for CAF 09 Q.# 130) a petri sessment praedres to prvi afr th entiation and asesamen ork cena eRe feanal eaten ON gauge lve . se artand oy ne ik of material ssacrent at nan tates ew — ” el {ICAP, CAF 09 Level ~ Spring 2003) (ICAP’s Offictal Question Bank for CAF 09 ~Q. # 24a) Fanerate the possible overall responses to address the assessed risks of material misstatement at the financis statement level (08) (ICMA Pakistan, Professional Level P2 ~ Fall 2014) OS ———— LO 4: TESTS OF CONTROLS: (also called Compliance Tests) Definition/ Objective: Objective of Tests of Controls is to confirm the operating effectiveness of internal control in preventing, detecting and correcting misstatements at assertion level. ss LO 5: SUBSTANTIVE PROCEDURES: _ Objective of Substantive Procedures is to detect material misstatements i assertion level, These inlude Analytical Procedures and Tests of Detals. ieendtel statements Risk Assessment Procedi id colic ent Procedures and Substantive Procedures are required for Tests of Controls are required only if: are TenOAES (68 @eery area of fsancal sextant * controls are operating effectively and auditor plans y is | : tor plans ta ely on internal | stand nnesan drt provkasuicenceromiaamuateddanae eT) atten ‘CONCEPT REVIEW QUESTION Substantive procedures are tests to obtain audit List the two general types of substantive procedut evidence to detect material mi a rial misstatements in the’ financial statemen'® (ICMA Pakistan ~ Summer 2018) Can an auditor i tive a zed t0 ‘ignore substantive procedures fora material account balance if related internal controls are assessed t0& ‘Autumn 2002) | (ICAP, CAF 09 Lev Scanned with CamScanner maine: