Kaplan Publishing are constantly finding new ways to make a difference to your studies and our exciting online resources really do offer something different to students looking for exam success, This book comes with free MyKaplan online resources so that you can study anytime, anywhere. This free online resource is not sold separately and is included in the price of the book. Having purchased this book, you have access to the following online study materials: CONTENT Ce “teenie az pales Poca ra a v Ea v 7 a “Excludes, MA FA FB, FMA FF for ll oher paper ineudes selection af questions, released by ACCA eer are 3 we CESGNC er amin ert mon R . Kaplan Franc ders wl ead taveaRyfapla ein an seen RRBs beable Youn, ou dost nade eps agama pacessnes completed fou chad yous ‘Giinuprslens scesSng ont nt plage eee coma Howto occess your line resoulees Ifyou are not stueying with Kaplan and did nat purchase your baok via Kaplan website, io nlock your extra ‘online resources please go to wwvumykaplan.couk/adéabook (even fyau have et up apaecount anc ‘egiscered books previously), You wil then need to enter the|SBN number (onthe tile page and back cover) and ‘the unique pass key number contained in the serateh panel Below to Ban acces, You vill also be required to ‘enter adeivonal information during this process to setup or confirmyour aecount details. {yu purchased through the Kapin Publishing website yu wl automaticaly rss an emanation to tijkagion, esse rete your deals sing te eral tga acesetayourcontent youd not recs the ‘maior book content pense contact epi PUI Your Code ord Lifotmetion a & ‘This code can ony be used once forthe ristration of one book ani. 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Protihed Kopin Publening UK Unt 2'Tne Gusness Cane Moy ters ane ‘Wotan Berane ROH 202 '50N ove. 76740 868-5 (© Kaplan Financ ita, 2021 The texin is mater! and any chars made valle by any Kaplan Group company does not acto _ fables pari ata asa pt be keno uch No aos shale paced ota p2 ‘Sater a he bai for ary investor or ehrdacsion orn canracson mth ony eo ene kd saree Please cons you apoprate retest waver a naseasany, Kegan Puvieig Lines an “al er Klan go crates expres am a taby to ay parson expect of ry eres Gains wheter sec nde nadera, consequent aries ansginreaton othe use of Printed sf n Great Bian, Acknowledgements ‘These mais ate reviewed by the ACCA examiing lean. The object lhe review so ens hat {earl propery covers te seb ans tun gue oucansa used by he crarning war cong {he cxos, nthe appropriate reath and dap, The review soos entre at evry seo, amtingon or apteation of execs tops is aateased by the ACCA hpeoned Contr No oes {he review comprao a deed cia check fh comer atthe Apres Goer Prva hs te ‘nm quaty setae processes place th espe ‘Tis product ncudesproprity content of the iterators Accounting Stands Boar which is oversen he IFRS Foundaton and uses win te exsessparmisono he IS Foundation unde eoce, ‘Alrgis reserved, No part oP pubicaton may be roprodion. stared nate sys or aramtesin any form: by any means elec, mechanics polocnyig, Tecate bers, wit ror win parison Kaplan Pusting and ine FRG Foucooos, MESIFRS ‘The IFRS Foundation go, te IASB ogo. te IFRS fr SMES ogo te "Hexagon Device” IFRS otndation "SIRS, AS! 1ASD", FRG or SMEs" IFRS, Rear eRe tomatoe Accounting ‘Standard "tterrasonal Panda RepringSandaas” FRI ard FAS Taenony os ose Hane of be RS Foundston MSIFRS Trade Marks ‘The IFRS Foundation logo the IASB ogo te IFRS fx SME ope, he ‘Hexagon Deve” IFRS Foundation, IFAS. TAS” IASB "PRS for SMEr’, NIP" IAGC-PRG. PRE nein ‘Aesouning Stancara eaten! nena Reperen Standore”TFRUG” SIG" and FRG ‘Tena ures details of te Trae Mars icing dls of courts whar te Trae Ms re registered or ‘Spl ae svat tm the Foun on aqua ‘This product contains mara tate Financ! Reporting Couel Li (FRC) Ado ane reproduced vi fe knd persion oe Francs Reporing Gaur Alats reserved Pot ures eects Hoos vt wow tor. oa ote} 7a 900.Chapter 4 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13, Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Regulatory environment Money laundering Code of ethics and conduct Professional responsibilies and liability Quality control Practice management Planning, materiality and assessing the risk of misstatement Group and transnational audits Evidence ‘Completion and review Reporting Auditrelated services Review of interim financial information Prospective financial information Due diligence Forensic audits Audit of social, environmental and integrated reporting INT syllabus only: Audit of performance information in the public sector UK syllabus only: Auditing aspects of insolvency 33 a7 101 131 187 195 263 297 361 385 445 487 465 485 499 513 531 PaChapter 20 Chapter 21 Chapter 22 Chapter 23 Index Financial reporting revision ‘Questions and Answers References Employability and technology skills 559 cot 669 673Introduction ‘This document references IFRS® Standards and |AS® Standards, Which are authored by the International Accounting Standards, Board (the Board), and published in the 2020 IFRS Standards Red BookPs How to use the materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best ‘chances of success in your examinations. ‘The product range contains a number of features to help you in the study process. They include: (1) Detailed study guide and syllabus objectives, (2) Description ofthe examination (3) Study skis and revision guidance (4) Study text (6) Question practice The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies. They are designed to familiarise you with the nature and content of the examination and give you tips on how best to approach your learning. The Study Text comprises the main leaming materials and gives guidance as {o the importance of topics and where other related resources can be found. Each chapter includes: ‘+The learning objectives contained in each chapter, which have been Carefully mapped to the examining body's own sylabus learning objectives or outcomes. You should use these to check you have a clear understanding of al the topics on which you might be assessed in the examination ‘+ The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topies and how they link together. ‘+ The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail You should foliow your studying of the content with a review of the, ilustration/s. These are worked examples which will help you to Understand better how to apply the content for the topic. * Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions, Answers can be found at the back of each chapter. ‘+ Summary diagrams complete each chapter to show the important links between topics and the overall content ofthe syllabus. These diagrams ‘should be used to check that you have covered and understood the core topics before moving on, ‘+ Question practice is provided at the back of each text.Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan. com ‘with full details, or follow the link to the feedback form in MyKaplan. ‘Our Quality Coordinator will work with our technical team to verify the error and take action to ensure itis corrected in future editions. Icon Explanations [Oy supplementary reading - These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. Itis vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an exam question. Reference to this text is vital when self- studying J Petition — Key defniions that you wil need to learn from the core content Key point ~ Identifies topics that are key to success and are often ‘examined, ‘Test your understanding — Exercises for you to complete to ensure that you have understood the topics just learned. Je3] mtustration — Worked examples help you understand the core content better. AN Trek top — wen reviewing those areas care should be taken and all tlustatone and test your understanding exerues shouldbe completed to nae thatthe toi fs undrstood £99 Tutorial note — Included to explain some ofthe technical points in more detail [iD Footsteps — Hetptul tutor tps. Links to other syllabus areas ~ This symbol refers to areas of interaction with other parts of your syllabus, either in terms of other ACCA papers that you have studied, or may go on to study, or even further professional {qualifications that you may decide to pursue on completion of ACCA. Reference to ISA paragraph numbers are for copyright purposes only. ‘Students are not required to learn this level of detail APLAN PUBLISHING PrPa Online subscribers ur online resources are designed to increase the flexiblity of your learning ‘materials and provide you with immediate feedback on how your studies are progressing. Ask your local customer services staff ifyou are not already a subscriber and wish to join, Ifyou are subscribed to our online resources you wil find: (1) Online reference ware: reproduces your Study Text online, giving you anytime, anywhere access (2) Online testing: provides you with additional online objective testing so you can practice what you have learned further. (3) Online performance management: immediate access to your online testing results. Review your performance by key topies and chart your ‘@chievement through the course relative to your peer group. Syllabus for September 2021 to June 2022 Syllabus background ‘The aim of ACCA Advanced Audit and Assurance (INT & UK) is to analyse, cvaluate and conclude on the assurance engagement and other audit and. ‘assurance issues in the context of best practice and current development. Objectives of the syllabus ‘+ Recognise the legal and regulatory environment and its impact on audit and assurance practice, ‘+ Demonstrate the ability to work effectively on an assurance or other ‘service engagement within a professional and ethical framework. ‘+ Assess and recommend appropriate quality contro policies and procedures in practice management and recognise the auditors position in ‘elation to the acceptance and retention of professional appointments, * Identify and formulate the work required to meet the objectives of audit ‘assignments and apply the International Standards on Auditing, ‘+ Evaluate findings and the results of work performed and draft suitable reports on assignments, + Identify and formulate the work required to meet the objectives of non- audit assignments, * Understand the current issues and developments relating tothe provision of audit-related and assurance services. + Demonstrate employability and technology skits,Core areas of the syllabus + Regulatory environment + Professional and ethical considerations + Quality control and practice management + Planning and conducting an audit of historical financial information ‘© Completion, review and reporting © Other assignments. ‘+ Current issues and developments. Approach to INT and UK syllabus elements Due to the alignment ofthe INT and UK syllabus elements, one text has been produced to address both variants. Both streams apply the principles of International Standards on Auditing (ISAs) and International Financial Reporting Standards (IFRS® Standards). ‘The Intemational variant has beon used as the basis ofthe text. Any variances relevant only o the UK syllabus (such as compliance with the Companies Act 2008) are identiiable by reference to sections preceded with "UK syllabus", All {est your understandings have also been appended to reflect any UK specific variations, ACCA Performance Objectives In order to become a member of the ACCA, as a trainee accountant you will ‘need to demonstrate that you have achieved nine performance objectives. Performance objectives are indicators of effective performance and set the ‘minimum standard of work that trainees are expecied to achieve and demonstrate in the workplace, They are divided into key areas of knowledge Which are closely linked to the exam syllabus. ‘There are five Essential performance objectives and a choice of fteen Technical performance objectives which are divided into five areas. ‘The performance objectives which ink o this exam are: Ethics and professionalism (Essential) Governance risk and control (Essential) Prepare for an plan the audit process (Technical) Collect and evaluate evidence for an audit (Technical) 5 Review and report on the findings of an audit (Technical) ‘The following link provides an in depth insight into all ofthe performance objectives: https:/mww-accaglobal.com/contentdanvACCA_Giobal/Students/per/PER- Performance-objactives-achieve.paf KAPLAN PUBLIBHING PoProgression ‘There are two elements of progression that we can measure: first how quickly students move through individual topics within a subject; and second how Auickly they move from one course to the next. We know that there is an ‘optimum for both, but it can vary from subject to subject and from student to sludent. However, using data and our experience of student performance over ‘many years, we can make some generalisations. ‘A fixed period of study set out atthe start of a course with key milestones is Important. This can be within a subject, for example ‘I will finish this topic by 30 June’, or for overall achievement, such as ‘I want to be qualified by the end of next year. Your qualification is cumulative, as earlier papers provide a foundation for your subsequent studies, so do not allow there to be too big a gap between one subject and another. We know that exams encourage techniques that lead to | some degree of short term retention, the result being that you will simply forget ‘much of what you have already learned unless its refreshed (look up Ebbinghaus Forgetting Curve for more details on this). This makes it more dificult as you move from one subject to another: not only will you have to leam the new subject, you will also have to relearn all the underpinning knowledge as ell. This is very inefficient and slows down your overall progression which ‘makes it more likely you may not succeed at all In addition, delaying your studies slows your path to qualification which can hhave negative impacts on your career, postponing the opportunity to apply for higher level positions and therefore higher pay. You can use the following diagram showing the whole structure of your ualifcation to help you keep track of your progress. FRAN StetiostSyllabus objectives We have reproduced the ACCA’s syllabus below, showing where the objectives | are explored within this book. Within the chapters, we have broken down the textensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the | beginning of each chapter. Syllabus learning objective Chapter reference A. REGULATORY ENVIRONMENT 11 International regulatory frameworks for audit and assurance services (a) Explain the need for laws, regulations, standards and 1 other guidance relating to audit, assurance and related services. (©) Outing and explain the need forthe legal and. 1 professional framework including: (i) public oversight of audit and assurance practice (i) the impact of corporate governance principles on. ‘audit and assurance practice (UK: the impact of the UK Corporate Governance Code on auclt and assurance practice) (ii) the role of audit committees and impact on audit ‘and assurance practice. (€) Discuss the role ofthe audit committee and its impact 1 ‘on audit and assurance practice in relation to:*! (the relationship with the external auditor, including the appointment, removal and monitoring of cffectiveness; and (i) the oversight and approval of the provision of non- audit services: 2 Money laundering (@) Define ‘money laundering’ and discuss international 2 ‘methods for combatting money laundering." (©) Explain the scope of criminal offences vf money 2 laundering and how professional accountants may be protected from criminal and civl lability.) (©) Explain the need for ethical guidance in this area." (@)_ Describe how accountants meet their obligations to help prevent and detect money laundering including record keeping and reporting of suspicion to the appropriate regulatory body. APLAN PUBLISHING patSyllabus learning objective Chapter reference: (e) Explain the importance of customer due dligence 2 (CDD) also referred to as Know Your Customer (KYC) ‘and recommend the information which should be gathered as part of CDDIKYC! () Recognise potentially suspicious transactions and 2 assess thelr impact on reporting duties (@) Describe, with reasons, the basic elements of an anti 2 ‘money laundering program 3 Laws and regulations (2) Compare and contrast the respective responsibilities of 4 | ‘management and auditors concerning compliance with laws and regulations in an audit of financial statements 1 (0) Describe the ausitors’ considerations of compliance with 4 laws and regulations and plan audit procedures when possible non-compliance is discovered (6) Discuss how and to whom non-compliance should be 4 reported. (4) Recognise and recommend when withdrawal from an 4 engagement is necessary. B__ PROFESSIONAL AND ETHICAL CONSIDERATIONS 1. INT: Code of Ethics for Professional Accountants. UK: Code of ethies and conduct (2) Explain the fundamental principles and the conceptual 3 framework approach." (0) Identify, evaluate and respond to threats to compliance 3 with the fundamental principles. (6) Discuss and evaluate the effectiveness of available 3 safeguards.°1 (4) Recognise and advise on conflicts in the application of 3 fundamental principles. (0) Diccuse the importance of profeseional ecopticiom in 7 planning and performing an audit) (Consider the ethical implications of the external auditor 3 providing non-audit services to a client including an internal audit service (a) Assess whether an engagement has been planned and 7 performed with an attitude of professional scepticism, and evaluate the implications. paz KAPLAN PUBLISHINGSyllabus learning objective 2 Fraud and error (@) Identify and develop an appropriate response to ‘circumstances which indicate a high risk of error, irregularity, fraud or misstatement in the financial statements or a given situation (©) Compare and contrast the respective responsibilities of ‘management and auditors for fraud and error. (©) Describe the matters to be considered and recommend procedures to be carried out to investigate actual andlor potential misstatements in a given situation! (@) Explain how, why, when and to whom fraud and error should be reported and the circumstances in which an ‘auditor should withdraw from an engagement! (@) Consider the current and possible future role of auditors in preventing, detecting and reporting error and fraud! 3. Professional liability (@) Recognise circumstances in which professional accountants may have legal lability and the criteria that reed to be satisfied for legal liability to be recognised. (©) Describe the factors to determine whether or nat an auditor is negligent and discuss the auditors potential liability in given situations. (©) Compare and contrast liabilty owed to client with liability ‘owed to third parties (Le. contract vs establishing a duty of care). (d) Evaluate the practicability and effectiveness of ways in which liability may be restricted including the use of liability imitation agreements! (©) Discuss and appraise the principal causes of auett, failure and other factors that contribute to the ‘expectation gap’ (e.g. responsibilities for fraud and ‘eror) and recommend ways in which that gap may be bridged. © QUALITY CONTROL AND PRACTICE MANAGEMENT 1 Quality control (firm-wide) (@) Explain the principles and purpose of quality control of ‘audit and other assurance engagements." (b) Describe the elements of a system of quality controt relevant to a given firm 2! Chapter referenceSyllabus learning objective (©) Evaluate the quality control procedures which are in place for a given firm and assess if they have been ‘appropriately applied in a given engagement 9) 2 Advertising, tendering and obtaining professional work land fees (2) Evaluate the appropriateness of publicity material Including the use of the ACCA logo and reference to fees (©) Outine the determinants of fee-setting and justiy the bases on which fees and commissions may and may ‘not be charged for services." (©) Discuss the ethical and other professional problems, for ‘example, lowballing, involved in establishing and negotiating fees for a specified assignment (4) Recognise and explain the matters to be considered prior to tendering for an audit or other professional tengagement and explain the information to be included in the proposal 2! 3. Professional appointments (2) Explain the matters to be considered and the procedures that an audit frprofessional accountant should carry out before accepting a specified new client/engagement or continuing with an existing engagement, including!” (client acceptance (i) engagement acceptance (new and existing engagements) (i) establish whether the preconditions for an aucit are present (iv) agreeing the terms of engagement (b) Recognise the key issues that underlie the agreement of the scope and terms of an engagement with a stinnt 2 D__ PLANNING AND CONDUCTING AN AUDIT OF HISTORICAL FINANCIAL INFORMATION 1 Planning, materiality and assessing the risk of material misstatoment (a) Define materiality and performance materiality and ‘demonstrate how it should be applied in financial reporting and auditing. Chapter reference 5Syllabus learning objective 0) © @ © 0 @) (ny @ Discuss and demonstrate the use of analytical procedures in the planning of an assignment Evaluate and priorise business risks, audit risks and risks of material misstatement for a given assignment. Interpret the results of analytical procedures, in an Unbiased manner and apply professional scepticism to support the identification of contradictory information {and assessment of risks of material misstatement Evaluate the results of planning and risk assessment procedures t determine the relevant audit strategy, Including the auditors responses. Explain the planning procedures specific to an inital auait engagement Discuss the importance ofthe aueitor gaining an understanding ofthe ently including the applicable financial reporting framework, ts accounting policies, significant lasses of transactions, balances and disclosures and the entity's system of intemal contol land recommend additonal information which may be required o assist the auditor in obtaining an Understanding of the entity. Discuss how transnational audits may differ from other audits of historical facial information (eg. in terms of applicable nancial reporting and aueiting standards, isting requirements and corporate governance requirements)" Recognise matters that are not relevant tothe planning of an assignment 2 Evidence and testing considerations @) ©) © Identify and describe ausit procedures (including substantive and tests of contol (for both direct and indirect controls) to obtain sufficient, appropriate audit fevidence from identified sources to support the relevant assertions and disclosures. ‘Assess and describe how IT can be used to assist the ‘auditor and recommend the use of automated tools and techniques such as audit software, test data and other data analytics where appropriate.” Evaluate and interpret the results of data analytics tools when used during planning or evidence collection.” Chapter reference(@) Recommend additional information which may be required to effectively cary out a planned engagement, cra specific aspect of an engagement (©) Apply the further considerations and audit procedures. relevant to initial engagements (Apply analytical procedures to financial and non- financial data 2 (a) Explain the specific aust problems and procedures ‘concerning related parties and related party transactions 2 (6) Recognise circumstances that may indicate the ‘existence of unidentified retated parties and recommend appropriate aucit procedures!) ‘Audit procedures and obtaining evidence (@) Design appropriate audit procedures relating to!) (Inventory (including standard costing systems) (i) non-current assets (ii) intangible assets (iv) biological assets (¥) Investment properties (vi) assets held for sale and discontinued operations (vi) financial instruments (ii) accounting estimates and fair values (government grants () leases () impairment (i) provisions, contingent liabilties and contingent assets (xii) borrowing costs (xiv) employee benefts (1) share-based payment transactions. (evi) taxation (including deferred tax) (ev) related partios (evil) revenue from contracts with customers (xix) statement of cash flows (%) business combinations (a) events after the end of the reporting period 9820(oi) the effects of foreign exchange rates (oxi) segmental reporting (eaiv) earings per share (av) changes in accounting poticy (Goxv) payroll and other expenses (b) Explain how the auaitor's responsibilities for ‘corresponding figures, comparative financial statements, and ‘other information’ are discharged.®) (c) Explain the auaitor’s main considerations in respect of social and environmental matters and how they impact (on entities and their financial statements (eg. impairment of assets, provisions and contingent liabilties) Using the work of others. (@) Recognise when its justifiable to place reliance on the ‘work of an expert (e.g. a surveyor employed by the audit cient) (©) Evaluate the potential impact of an internal audit department on the planning and performance of the external audit (©) Assess the appropriateness and sufficiency of the work of internal auaitors and the extent to which reliance can bbe placed on it (a) Recognise and evaluate the impact of outsourced functions, such as payroll, on the conduct of an audit!) Group audits (a) Recognise the specific matters to be considered before ‘accepting appointment as group auditor to a group in a given situation. (0) Identify and describe the matters to be considered and the procedures to be performed at the planning stage, when @ group auditor considers the use of the work of component auditors. {(c) Identify and explain the matters specific to planning an. audit of group financial statements including: ‘+ assessment of group and component materiality ‘+ the impact of non-coterminous year ends within @ group ‘+ changes in group structure or a complex group structure.#! 9.11 7 par(a) e) @ (n) @ Recommend and discuss the communications and 8 Content therein to be provided by the group auditor to the component auditor in a given situation. Recognise the audit problems and describe audit 8 procedures specific to: + abusiness combination including the classification of investments + the determination of goodwill and its impairment ‘group accounting policies © intra-company trading + equity accounting for associates and joint ventures + changes in group structure including acquisitions. ‘and disposals accounting for a foreign subsidiary:*! In respect of the consolidation process identify and 8 explain the relevant aut risks and audit procedures: | necessary to obtain sufficient appropriate evidence.®1 Consider how the group auditor should evaluate the 8 audit work performed by a component aucitor Explain the responsibilities of the component aucitor 8 before accepting appointment, and the procedures to be performed in @ group situation. Justify the situations where a joint audit would be 8 appropriate ‘COMPLETION, REVIEW AND REPORTING ‘Subsequent events and going concern @ ) © OO) Design audit procedures to identify subsequent events 10 which may require adjustment to, or disclosure in, the financial statements of a given entity Evaluate indicators thatthe going concer basis maybe 10 in doubt and recognise mitigating factors) Recommend audit procedures, or evaluate the evidence 10 that might be expected to be available and assess the anpropriatoness ofthe goina concer bass in aiven stations. Assess the adequacy of disclosures in financial want statements relating t0 going concer and explain the implications forthe auditors report with regard to the going concern basi.2 Completion and final review @) ©) ) @ © © ‘Apply analytical procedures for the purposes of fevaluation and review and evaluate the results in the context of other aucit evidence. ‘Assess whether an engagement has been planned and performed in accordance with professional standards." Evaluate whether reports issued are appropriate in the relevant circumstances." Evaluate as part ofthe final review the matters (e.g ‘materiality isk, relevant accounting standards) and ‘audit evidence to confirm if sufficient and appropriate evidence has been obtained. ‘Justify the review procedures which should be performed in a given assignment, including the need for fan engagement quality control review and recommend ‘additional procedures or actions needed inthe circumstances. Evaluate the use of written representations from ‘management to support other audit evidence.” 3 Auditor's reports @ ) © @ ©) 0 @ Determine the form and content of an auditor's report ‘and assess the appropriateness of the contents of an ‘auditors report containing an unmoditied opinion ®) Recognise and evaluate the factors to be taken into ‘account when forming an aucit opinion in a given situation, including the effect of uncorrected ‘misstatements, and justify audit opinions that are Consistent with the results of audit procedures. Critically appraise the form and content of an aucitor’s report ina given situation. ‘Assess whether or not a proposed audit opinion is ‘appropriate. ‘Advise on the actions which may be taken by the ‘auditor in the event that a modified auditor's opinion is iseued Explain the implications for the auditor's report on the financial statements of an entity where the opinion on a ‘component is modified in a given situation Recognise when the use of an emphasis of matter paragraph, other matter paragraph and KAM disclosure ‘would be appropriate. 10 5810 5810 10 5810 10 1" " " " " 1"P20 (h) Discuss the courses of action available to an auditor fa ‘material inconsistency or material misstatement exists in relation to other information such as contained in the integrated report! Reports to those charged with governance and management (2) Citically assess the qualty ofa report to those charged. with govemance and management! (©) Advise on the content of reports to those charged with governance and management in a given situation ®! OTHER ASSIGNMENTS Audit-related and assurance services (@) Describe the nature of audit-related services, the circumstances in which they might be required and the ‘comparative levels of assurance provided by professional accountants and distinguish between: ()audit-elated services and an audit of historical financial statements (i) an attestation engagement and a direct engagement. (b) Describe the main categories of assurance services that ‘audit fms can provide and assess the benefits of providing these services to management and extemal users. (©) Describe the level of assurance (reasonable, high, moderate, limited, negative) for an engagement ‘depending on the subject matter evaluated, the criteria Used, the procedures applied and the quality and ‘quantity of evidence obtained. ‘Spocific assignments + Due diligence + Review of interim financial information ‘+ Prospective financial information + Forensic audits For each of the other assignments listed above: (a) Define and describe the purpose of each type of assignment and analyse the appropriate level of ‘assurance which may be offered by a professional frm in relation to these assignments:®) (&) Evaluate the matters to be considered before accepting the engagement. inclucing any ettical and professional considerations. "1 " " 2 12 12 18 13 14 16(©) Plan the assignment, applying professional scepticism, to gather suitable evidence and provide an appropriate level of assurance in line with the objectives of the ‘assignment. (@) Discuss the level of assurance that the auditor may provide and explain the other factors to be considered in determining the nature, timing and extent of ‘examination procedures.) (@) Describe and recommend appropriate substantive, ‘examination or investigative procedures which can be sed to gather suffciont appropriate evidence in the circumstances. The audit of social, environmental and integrated reporting (@)_ Plan an engagement to provide assurance on integrated 17 reporting (performance measures and sustainabilty Indicators) (©) Describe the diffcultes in measuring and reporting on 7 ‘economic, environmental and social performance and sive examples of performance measures and sustainability indicators (©) Describe substantive procedures to detect potential ” ‘misstatements in respect of socio-environmental ‘matters! (@) Discuss the form and content of an independent 7 verification statement of an integrated report INT Syllabus Only: The audit of performance information (pre-determined objectives) in public sector (2) Describe the ausit of performance information (pre- 18 determined objectives) and differentiate from performance auditing, (0) Plan the audit of performance information (pre- 18 determined objectives), and describe examination procedures to be used in the audit of tis type of information. (c) Discuss the auait criteria of reported performance 18 information, namely compliance with reporting requirements, usefulness, measurabilly and reliability.) (4) Discuss the form and content of a report on the auditof 18: performance information. (@) Discuss the content of an audit conclusion on an 18 integrated repor of performance against pre-determined objectives.”UK Syllabus Only: Auditing aspects of insolvency (and similar procedures) @ ©) © @ © 0 Explain the meaning of, and describe the procedures Involved in placing a company into voluntary or ‘compulsory liquidation or administration! Explain the consequences of liquidation or ‘administration for a company and its stakeholders. ‘Advise on the differences between fraudulent and \wrongful trading and the consequences for company directors. Examine the financial position of a company and determine whether itis insolvent Identily the circumstances where administration could be adopted as an alternative to liquidation, and explain the benefits of administration compared to liquidation Explain and apply the priority for the allocation of ‘company assets?! 5 Reporting on other assignments (a) ) © Analyse the form and content ofthe professional ‘accountant's report for an assurance engagement as compared with an auditor's report! Discuss the content of a report for an examination of prospective financial information. *! Discuss the effectiveness of the ‘negative assurance’ form of reporting and evaluate situations in which it may bbe appropriate to modify a conclusion.*! G CURRENT ISSUES AND DEVELOPMENTS Discuss the relative merits and the consequences of different standpoints taken in current debates and express opinions ‘supported by reasoned arguments. 1 Professional and ethical developments, @ w) p22 Discuss emerging ethical issues and evaluate the potential impact on the profession, firms and auditors.*! Discuss the content and impact of exposure drafts, ‘consultations and other pronouncements issued by FRC (UK only) and IFAC and its supporting bodies (including IAASB, IESBA and TAC).*! 19 19 19 19 19 19 2 14 122 Other current issues (@) Discuss current developments in auditing standards 1 including the need for new and revised standards and ‘evaluate their impact on the conduct of audits "1 (b) Discuss current developments in business practices, 17.9 practice management and audit methodology and ‘evaluate the potential impact on the conduct of an audit and audit quality. (©) Discuss the proposed changes to the audit profession 1 and critically evaluate the implications of these changes for companies and audit fms and their impact on audit process and audit quality.” (@) Discuss current developments in emerging 7a9 technologies, including big data and the use of ‘automated tools and technologies such as data analytics and the potential impact on the conduct of an audit and audit quality. ®) (@) Discuss the impact of significant global events on audit 1 practice. "1 H_ EMPLOYABILITY AND TECHNOLOGY SKILLS (1). Use computer technology to efficiently access and ‘manipulate relevant information. (2) Work on relevant response options, using available functions and technology, as required by the workspace, (3) Navigate windows and computer screens to create and ‘amend responses to exam requirements, using ‘appropriate tools, (4) Present data and information effectively, using the appropriate tools. ‘The superscript numbers in square brackets indicate the intellectual depth at Which the subject area could be assessed within the examination. Level 1 {(knowiedge and comprehension) broadly equates with the Knowledge module, Level 2 (application and analysis) with the Skills module and Level 3 (synthesis ‘and evaluation) to the Professional level. However, lower level skis can continue to be assessed as you progress through each module and level Fora list of examinable documents, see the ACCA website. aPLaN PuaLiSHING P23P24 The examination Examination format Section A will comprise @ Case Study, worth 50 marks, set atthe planning stage ofthe audit, for a single company, a group of companies or potentially several audit clients. Candidates will be provided with detailed information, \Which will vary between examinations, but is likely to include extracts of financial information, strategic, operational and other relevant financial Information for a client business, as well as extracts from aualt working papers, including results of analytical procedures. Candidates will be required to address a range of requirements, from sylabus sections A, B, C and D, thereby tackling 2 real word situation where candidates: may have to address a range of issues simultaneously in elation to planning, risk assessment, evidence gathering and ethical and professional ‘considerations, Four professional marks willbe available in Section A and will be awarded based on the level of professionalism with which a candidate's answer is presented, including the structure and clarity of the answer provided. Section B will contain two compulsory 26 mark questions, with each being predominately based around a short scenario. (One question will always predominantly come from syllabus section E, and consequently candidates should be prepared to answer a question relating to completion, review and reporting ‘There are a number of formats this question could adopt, including, but not limited to, requiring candidates to assess going concem, the impact of subsequent events, evaluating identified misstatements and the corresponding effect on the auditor's report. Candidates may also be asked to crtique an auditors report or report which is to be provided to management or those charged with governance. ‘The other Section B question can be drawn from any other sylabus section, including A, B, C, D and F. Quality control and ethics ‘The auultor’s assessment of effective quality control procedures and ‘consideration of ethical issues are fundamental to all stages of the auait and therefore these concepts could be examined in any section of the exam, Current issues Syllabus section G on current issues may be examined in Section A or 6 as appropriate. Current issues is unikely to form the basis of any question on its ‘own but instead will be incorporated into the Case Study or elther of the Section BB questions dependent on question content and the topical issues affecting the profession at the time of writingNumber of marks ‘Section A Planning, risk assessment, gathering evidence, ethical and 46 professional considerations, quality contol, current issues Professional marks 4 50 Section B Completion, review and reporting 25 ‘Any area of the syllabus from: 25 + Regulatory environment ‘+ Ethical and professional considerations + Quality control and practice management ‘+ Planning and conducting an auait of historical information + Other assignments © Current issues 100 Total time allowed: 3 hours 15 minutes — Examination tips We recommend that 18 minutes should be spent reviewing the format and content of the requirements so that you understand what you need to do. Read each question carefully. 1115 minutes are spent reading the examination requirements, this leaves three hhours to attempt the questions: ‘+ Divide the time you spend on questions in proportion to the marks on offer. ‘+ One suggestion for this examination is to allocate 1.8 minutes to each ‘mark available (180 minutos!100 marks), so @ 25 mark question should be completed in approximately 45 minutes. if you plan to spend more or less. than 16 minutes on reading, your time allocation per mark wil be diferent. Unless you know exaclly how to answer the question. spend some time planning your answer. Stick to the question and tailor your answer fo what you are asked. Pay particular attention to the verbs in the question, Practise plenty of questions to improve your ability to apply the techniques. ‘Spend the last few minutes reading through your answers and making any ‘additions or corrections.I you get completely stuck with a question leave it and return toi later. I you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examiner hoped, you may be civen some credit, if your assumptions are reasonable, ‘You should do everything you can to make things easy for the marker. The marker wil find it easier to Identify the points you have made if your answers are legible and well-spaced out. Be concise but make sure you explain your points in sufficient depth, Make sure that each point is clearly identifiable by leaving a line space between teach of your points. DO NOT write an essay. Question 4 will ask you to present your answer inthe form of briefing notes or other document. So use the correct format, there will be professional marks to gain here, Don't panic if you realise youve answered a question incorrectly. Try to remain ‘calm, continue to apply examination technique and answer all questions required within the time available. Strategic Professional CBE From March 2020, ACCA introduced Strategic Professional computer based ‘examinations (CBE) in selected locations. Strategic Professional CBE willbe ‘extended to other locations overtime, across subsequent examination sessions, Once CBE are offered in a location, the paper-based exam will no longer be avaliable. For more information regarding when Strategic Professional (CBE willbe introduced in your market, please refer to the ACCA Global website ‘Ths Study Text is appropriate for both CBE and paper-based exams. Itis ‘essential that students who willbe sitting the CBE become familar with the CBE environment as part of their exam preparation. For additional support please refer to the ACCA Global website. Study skills and revision guidance This section aims to give guidance on how to study for your ACCA exams and to glve ideas on how to improve your existing study techniques, Preparing to study ‘Set your objectives Before starting to study decide what you want to achieve ie. the type of pass you wish to obtain. This will decide the level of commitment and time you need to dedicate to your studies.Devise a study plan Determine which times of the week you will study. Spit these times into ‘sessions of at least one hour for study of new material. Any shorter periods ‘could be used for revision or practice. Put the times you plan to study onto a study plan for the weeks from now unti the exam and set yourself targets for ‘each period of study — in your sessions make sure you cover the course, course assignments and revision Ifyou are studying for more than one exam at a time, try to vary your subjects, 23 this can help you to keep interested and see subjects as part of wider knowiedge. When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are. ‘ahead, do some extra revision/practice questions. Effective studying Active ing ‘You are not expected to learn the text by rote, rather, you must understand What you are reading and be able to use it to pass the exam and develop good practice. A good technique to use is SA3Rs ~ Survey, Question, Read, Recall, Review: (1) Survey the chapter — look at the headings and read the introduction, ‘summary and objectives, so as to get an overview of what the chapter deals with. (2) Question — whilst undertaking the survey, ask yourself the questions that ‘you hope the chapter will answer for you (3) Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives. Attempt the exercises and activites in the text, and work through all the examples. (4) Recall at the end of each section and at the end of the chapter, ty to recall the main ideas of the section/chapter without refering to the text This is best done after a short break of a couple of minutes after the reading stage, (5) Review ~ check that your recall notes are correct, ‘You may also find it helpful to re-read the chapter to try to see the topie(s) it deals with as a whole, apa puauishine parP28 Note-taking ‘Taking notes isa useful way of leaming, but do net simply copy out the text ‘The notes must: + bein your own words + be concise + cover the key points © be woltorganised ‘+ be modified as you study further chapters in this text or in related ones. ‘Trying to summarise a chapter without refering to the text can be a useful way (of determining which areas you know and which you don't ‘Summarise the key points of a chapter. ‘Three ways of taking notes: (1) Make linear notes a list of headings, divided up with subheadings listing the key points, If you use linear notes, you can use diferent colours to highlight key points and keep topic areas together. Use plenty of space to make your notes easy to use. (2) Try diagrammatic form - the most common of which is a mind-map. To ‘make a mind-map, put the main heading in the centre ofthe paper and put a circle around it. Then draw shot lines radiating from this to the main subheadings, which again have circles around them. Then continue the process from the sub-headings to sub-sub-headings, advantages, disadvantages, etc. (3) Highlighting and underlining — you may find it useful to underline or highlight key points in your study text — but do be selective. You may also wish fo make notes in the margins. Revision “The best approach to revision isto revise the course as you work through it Aso try to leave four to six weeks before the exam for final revision. Make sure you cover the whole syllabus and pay special attention to those areas where your knowledge is weak. Here are some recommendations: Read through the text and your notes again and condense your notes into key phrases. It may help to put key revision points onto index cards to look at when you have a few minutes to spare, Review any assignments you nave completed arid look at where you lost marks ~ put more work into those areas where you were weakPractise exam standard questions under timed conditions. If you are short of time, lst the points that you would cover in your answer and then read the ‘model answer, but do try to complete at least a few questions under exam conditions. ‘Also practise producing answer plans and comparing them to the model | answer. I you are stuck on a topic find somebody (a tutor) to explain it to you, Read good newspapers and professional journals, especialy ACCA's Student Accountant, this can give you an advantage in the exam, Ensure you know the structure of the exam — how many questions and of what type you willbe expected to answer. During your revision attempt all the different styles of questions you may be asked, Further reading ‘You can find further reading and technical articles under the student section of ACCA's website Technical update This text has been updated to reflect Examinable Documents September 2021 to June 2022 issued by ACCA, aPLAN PUBLISHING P20Chapter Regulatory environment Chapter learning objectives This chapter covers syllabus areas: + A1= Intemational regulatory frameworks for audit and + G—Current issues and developments. Detailed syllabus objectives are provided in the introduction section ofthe text book. ‘One of the PER performance objectives (PO4) is ‘governance risk and control. You contribute to ‘effective governance in your area. You evaluate, ‘monitor and implement risk management procedures, complying with the spirit and the PER etter of policies, laws and regulations. Working ‘through this chapter should help you understand hhow to demonstrate that objective.Public Audit oversight committees Corporate ‘governance exam tocus This chapter considers the reasons behind the mechanisms for regulating assurance services and how standards of corporate governance are ‘maintained. You need to have an awareness of recent developments in the profession, which will require you to develop an abilty to form your own opinion and reach your own conclusions, 1 The need for assurance services [pq] Assurance professionals provide reports that give an independent opinion {as to whether the subject matter complies with pre-determined criteria, This enables the end user of that information to place more or less reliance on that information when making decisions, Dacision makers within financial markets need to have the confidence to make informed decisions. In order to make these decisions they need information they can trust. The main Investment decisions that take place concem the buying and seling of shares, Without credible, reliable information at their disposal, investors cannot make those decisions. Itis not ust shareholders who rely on this information, there are a range of other stakeholders who also rely on assurance services. For example, itis, ‘common for banks to seek audited financial statements and independently ‘examined forecasts before making lending decisions. Many companies request ‘aucited financial statements before buying from, or supplying a company. ‘As woll as investments in businesses, oll stakeholders must make: Jecisions ‘about how to deploy resources: suppliers, customers, employees and prospective lenders all need information before making significant decisions that could have damaging financial repercussions,Chapter 1 Regulation of the profession Regulation of the accountancy profession was covered briefly in Audit and ‘Assurance at the Applied Skils level. The Advanced Audit and Assurance syllabus looks at regulation from a broader perspective. ‘As a result of financial scandals, and the public concer that followed, many ‘changes were implemented in the global auditing and accountancy profession. Examples of developments include: + The IAASB's Intemational Standards on Auditing (ISAs) have been ‘adopted or are being used as a basis for national standards in over 100 ‘countries worldwide. The World Federation of Exchanges endorsed the IAASB's standard setting process and ISAs. + The IESBA's Intemational Code of Ethics for Professional Accountants has been adopted by many member institutions. + Legislative changes have been established to introduce new corporate ‘governance requirements. The most famous of these, The Sarbanes ‘Oxley Act (SOX) in the US, led to the creation of the Public Company ‘Accounting Oversight Board, who create standards for listed entities and Conduct inspections of auait firms’ work. ‘+ The Public Interest Oversight Board was sel up in 2008 to oversee the International Federation of Accountants’ auditing and assurance, ethics, ‘and education standard selting activites and its membership compliance programme. Global regulation ‘The main problem is that harmonisation requires national regimes to adopt ISAs, Many countries have adopted ISAs but they have been adapted to suit local customsslaws and, as a result, many differences stil exist in the quality of audits worldwide. o Business failures, particulary large, high-profile businesses, cause loss ‘of confidence within global financial markets. Confidence in the reliability | of financial information is essential to the functioning of these markets. ‘Whilst it is not the only factor in helping to achieve confidence, good quality, independent audit and assurance has a key role to play. A series | of recent and high profile corporate failures has eroded trust inthe: ‘assurance market and, as a result, mechanisms for increased regulation of the auditing profession have been introduced Saltregulation _ ‘The accountancy profession introduced standards to regulate financial reporting and shortly afterwards auditing standards were introduced, | Standards were set by the accounting profession for the accounting profession to follow. aan puauishine 3Seif-regulation seemed to make sense because the accountancy | organisations usually hada public interest remit witten nto their | constitutions and they understood financial reporting and auditing better | than anyone. | ono tg pcos fairs, sos Eon havens tho SS toa sey eon 1 Regulation ‘The globalisation of business, professions and investment markets has been rapid, Onca businesses started to cross national borders it soon became clear thatthe variation of laws and regulations in different | countries made ife dificult, both for the multinationals and the professions trying to provide services to them. This realisation led to the foundation ofthe International Federation of Accountants (IFAC). tion of Accountants (IFAC) is the global ‘organisation for the accountancy profession. it was formed in 1977 and is ‘based in New York. As at t January 2021, IFAC has more than 175 member and associate organisations (including the ACCA), representing 3 milion accountants from 130 separate countries. | IFAC's overall mission is to serve the public interest, strengthen the ‘worldwide accountancy profession, and contribute to the development of strong international economies by establishing and promoting adherence | to high quality professional standards, | The structure of IFAC is as follows: ‘The IFAC Council comprises one representative from each member body. It meets once a year and elects the board, ‘The IFAC Board is responsible for setting policy and overseeing the work of the various committees. The IFAC Nominating Committee makes recommendations regarding the composition of IFAC boards, advisory groups and task forces. ‘The main bodies to be aware of are: + The International Auditing and Assurance Standards Board (IAASR): develops and promotes ISAs and other assurance Standards to improve the uniformity of auditing practices and related services throughout the wort + The International Ethics Standards Board for Accountants: promotes the Code of Ethics. Significantly, the committee Continually monitors and stimulates debate on a wide range of tthical issues to ensure that its guidance is responsive to the expectations and challenges of individuals, businesses, financial institutions and others relying on the work of accountants.Chapter + ‘+ The Transnational Auditors Committee and Forum of Firms: encourages Forum members to conduct high-quality international ‘audits by requiring compliance with certain intemational standards ‘as a condition of membership. The TAC is discussed in chapter 8. (Other constituent bodies include: ‘+The Professional Accountancy Organisation Development and Advisory Group ‘+The International Accounting Education Standards Advisory Group | ‘+The Professional Accountants in Business Advisory Group + The International Public Sector Accounting Standards Board * The Small and Medium Practices Advisory Group. IFAC has encountered @ number of dificulties in carrying out its role: + Itwas set up by, and continues to be financed by, the accountancy | profession wordwie. therefore represents eel-eguatory Body. iis suggested that his san inappropriate mechanism Tor oguting the audit profession ‘+ National interests still apply leading to the implementation of | Intemational standards being bogged down in arguments between different national approaches, + Its membors are the professional accountancy bodies, whose futhorty has beon ecipsed to some extent bythe power ofthe largest accountancy fms une | ‘Although companies have had their securities listed in both the European ‘and US markets for a number of years, the abilly to be based virtually ‘anywhere in the world, and to manufacture, sell and manage businesses ‘on a truly global basis is a more recent phenomenon. Global businesses need global professional fis to support, advise and audit them. The ‘emergence of the ‘Big 4 global practices has been an accelerating | process that has its origins in the 1970s. Similar globalisation has happened In the banking and assurance industries and the introduction of external shareholders into the secures markets has led to, e.g, Nasdaq US investing in the London Stock Exchange. | span PuBLisniNe 5Regulatory environment Corporate governance The principles of corporate governance were covered in deta in Audit & ‘Assurance at the Applied Skills level. The main provisions are covered ‘again here. Corporate governance is the system of rules, practices and processes by Which a company is directed and controlled Its about ensuring public companies are managed effectively for the benefit of the company and its shareholders. Corporate governance pronouncements tend to respond to corporate scandals that arise because unscrupulous management has: + manipulated the share price for personal gain ‘© disguised poor results/mismanagement + extracted funds from the company i + raised finance fraudulently | o |Wirecard Wirecard, a payment processor and financial services provider based in Germany, is suspected to have engaged in a series of accounting fraudulent activities to infate its profit by creating forged and backdated contracts, | in 2019, KPMG was brought in to perform a special audit into the irregularities and found that Wirecarc's long-time auditor EY failed to verify the existence of cash reserves in what appeared to be fraudulent bank statements, The special audit report published by KPMG in April 2020 stated that they could net verify that profits reported from 2016 to 2018 were genuine. In June 2020, it was announced that €1.9bn of cash balances were rmissing, the chief executive was arrested, EY refused to sign off the 2019 ‘accounts and the company fled for insolvency. EY have been criticised for falling to detect the fraud which has been ‘ongoing for @ number of yoare, and in particular, why the auditor failed to ‘obtain confirmation from the bank of the cash held on behalf of Wirecard ‘which is a standard audit procedure and could have revealed the fraud ‘much sooner.Chapter 1 “There is also criticism of how the German accounting regulator, BaFin, eal with allegations against Wirecard. Despite allegations lodged | against the company, BaFin tock ile action against the company before | its eventual collapse and even filed a criminal complaint against two FT | journalists who reported the whistleblower allegations about the ‘company. Car In 2018, construction company Carillion collapsed after building up debs. of £1.5 billion, The company was a major contractor for the UK government with contracts to build hospitals and schools as well 2s facilities management and ongoing maintenance. It was the second largest construction company in the UK and employed more than 43,000 people worldwide. The company tock on too many projects and failed to ‘ealistcally price the contracts resulting in huge cost overruns and losses being made. In December 2017 the major banks refused to lend more. money to Carillon and in 2018 the company went into compulsory liquidation. This caused significant problems, not just for the shareholders ‘who will receive nothing, but also forthe significant number of employees. ‘who lost their jobs, the government contracts that were in progress that ‘would not be completed, and for the suppliers who would not be paid. One ofthe issues highlighted by Carillon was that of executive pay. Executive directors were eaming significant amounts of money despite | running the company nto the ground. In 2016, the former chief executive director eamed more than £2 milion. The head of corporate governance al the Institute of Directors said that the collapse of Carillon suggests a lack of effective governance. Directors’ remuneration allowed them to | benefit despite the collapse of the company as there were no clawback Conditions. The company could only request clawback from directors if ‘there was gross misconduct or misstatement of financial results. The directors also received payofs despite being responsible for the collapse. | The collapse of Carilion has also returned focus to the big accounting ms and their pat in allowing companies to fail by not having raised the rm much eatlier. APLAN PUBLISHING 7Regulatory environment ‘The Organisation for Economic Co-operation and Development (OECD) has produced a set of six principles of corporate govemance to guide policy makers ‘when setting regulations for their own country. ‘The six OECD Principles are: + Ensuring the basis of an effective corporate governance framework + The rights and equitable treatment of shareholders and key ownership functions ‘+ Institutional investors, stock markets, and other intermediaries ‘©The role of stakeholders in corporate governance ‘+ Disclosure and transparency ‘+The responsibilities ofthe board. ‘The UK Corporate Governance Code reflects the OECD principles. ‘The UK Corporate Governance Code is particularly important for publicly traded companies because large amounts of money are invested in them, either by "small shareholders, or from pension schemes and other financial institutions. ‘The wealth of these companies significantly effects the health of the economies where their shares are traded. The Code is spit into five parts ‘© Board leadership and company purpose ‘+ Division of responsibities * Composition, succession and evaluation + Audit, risk and internal contro! © Remuneration The Code does not set out a rigid set of rules, instead it offers flexibilty through the application of Principles and ‘comply or explain’ provisions and supporting guidance, ‘The main requirements of the Code are given below. Board leadership and company purpose Principlos + Asuccessful company is led by an effective board whose role is to promote long-term sustainable success thereby generating value for shareholders. +The board should establish the company's purpose, values and strategy. ‘The directors should lead by example and promote the desired culture,‘The board should ensure that the necessary resources are in place for the company to meet ts objectives. The board should establish a framework of effective controls to enable risk to be assessed and managed. ‘The board should ensure effective engagement with, and encourage participation from shareholders and stakeholders. ‘The board should ensure that workforce policles and practices are consistent with the company’s values. The workforce should be able to raise matters of concern Main provisions The board should describe in the annual report how opportunities and risks to the future success of the business hhave been considered and addressed. The board should assess and monitor culture. Where behaviour throughout the business is not consistent wth the company’s purpose, values or strategy, the board should ensure management has taken corrective action. In addition to formal general meetings, the chair should seek regular fengagement with major shareholders. The board as a whole should understand the views ofthe shareholders. When 20% or more of votes have been cast against the board recommendation fora resolution, the company should explain what actions it intends to take to understand the reasons behind the result. ‘The board should understand the views of the company's other key ‘stakeholders and describe how their interests have been considered in board discussions. For engagement with the workforce, the company ‘should use a director appointed from the workforce, a workforce advisory panel or a designated non-executive director (NED). “The workforce should be able to raise concerns in confidence and ‘anonymously (whistleblowing’) ‘The board should take action to manage conficts of interest Directors’ concems about the operation ofthe board or management of the company that cannot be resolved should be minuted. On resignation, a non-executive director should provide a written statement to the chair for circulation to the board if they have any concems. ‘The chair leads the board and is responsible for its overall effectiveness. ‘The chair should facilitate effective contribution of all board members. ‘The chair should ensure that directors receive clear, accurate and timely Information Kaptan PUBLISHING °10 + The board should be balanced so that no individual or small group of Individuals can dominate board decisions. ‘+ NEDs should have sufficient ime to meet thelr board responsibilties and should hold management to account ‘+ The board should ensure it has the policies, processes, information, time and resources it needs to function effectively and efficiently. Main provisions + The chair should be independent on appointment (see below for Independence criteria). + The chair and chief executive roles should not be taken by the same individual. The chief executive should not become chair of the same company. ‘+ Atleast half the board, excluding the chair should be independent NEDs, ‘+ The board should identity the independent NEDs in the annual report. Independence would be deemed to be affected if a director: = {s,orhas been, an employee of the company or group within the last five years — has, or has had within the last three years, a material business, relationship with the company either directly or indirectly has recsived or receives remuneration in addition to a director's fee, participates in the company’s share option or a performance-related ay scheme, oris a member of the company’s pension scheme has close family ties with any of the company’s advisers, directors or senior employees holds cross-directorships or has significant links with other directors ‘through involvement in other companies or bodies = represents a significant shareholder has served on the board for more than nine years from the date of their first appointment. ‘+ One ofthe independent NEDs should be appointed as a senior Independent director to provide a sounding board for the chai, ‘+ The NEDs and the senior independent director should meet without the chair present at least annually to appraise the chair’s performance, + NEDs appoint and remove executive directors and scrutinise performance against agreed performance objectives. + The responsibilities ofthe chair, chief executive, senior independent director, board and committees should be set out in writing and publicly available ‘+ The annual report should set out the number of meetings of the board and its committees and the attendance of each director.Composition, succession "New appointments to the board should take into account other demands Con the directors time. Fulltime executive directors should not take on ‘more than one NED role in a FTSE 100 company or other significant ‘appointment. Appointments should not be made without prior approval of the board. Appointment and removal of the company secretary should be a matter for the whole board, Principles ‘Appointments to the board should be subject to a formal, rigorous and transparent procedure. {An effective succession plan should be maintained for board and senior ‘management. ‘Appointments and succession should be based on merit and objective criteria and should promote diversity, ‘The board and its committees should have a combination of skills, ‘experience and knowledge. ‘Annual evaluation ofthe board should consider its composition, diversity ‘and how effectively members work together to achieve objectives. Main provisions ‘A nomination committee should be established to appoint board members. ‘A majority of the committee members should be independent NEDs. “The chair should not be a member of the committee when the committee is dealing with the appointment oftheir successor. Al directors should be subject to annual re-election ‘The chair should not remain in post for more than nine years from the date oftheir first appointment. This period can be extended for a limited time to facilitate effective succession planning ‘Open advertising andlor an external search consultancy should be used for the appointment ofthe chair and NEDs. ‘There should be a formal and rigorous annual evaluation ofthe performance of the board, its commitioes, the chair and the individual Sirectors, The chair should consider having a regular external board evaluation at least every three years for FTSE 350 companies, and the external evaluator should be identified in the annual report. PLAN PUBLISHING "