Audit Q's that need some attention..Relevant to ACCA 2.6

surf in the cinema 14 june 2007.. after exam phew~...

Working papers

a)List and explain the criteria which you would use to judge the quality of audit working papers.

(i) Evidence of review -

-All working papers prepared by each member of audit team must be reviewed by a more

senior member. Such a review must be evidenced on the working paper,detailing who has

performed it and when, to ensure that sufficient work has been performed and that the

finding support the audit conclusions.

(ii) Evidence of procedures followed and the tests performed.

- Working papers must indicate the client's name, acctg period, a file reference, the areas of

the audit being covered and the details of who performed the work and when.In the

interest of clarity, detailed explanatory information should provided on supporting

schedules which should be suitably referenced and cross-referenced.

(iii) Record of information received, problem encountered and conclusion reached.

- Documenting details of all findings furing the audit encourages the auditor to adopt a

methodical approach and ensures the problem are not overlooked. The working papers

should summarie any significant matters, and highlights any judgemental aspects together

with the auditor's conclusions thereon.

(iv) Usefulness in future years.

- Working paper should provide sufficient details to enable members of the audit team to

familiarise themselves with the assignment from year to year and to plan subsequent

audits.

(v) Evidence of adherence to ISA's and guidelines.

- In the event of auditor opinion being challenged,the working paper will provide supporting

evidence that the auditor followed the basic principles prescribed by the Auditing std as

well as the approriate application of Auditing Guidelines.

b)* Explain why working papers are prepared. (ACCA level 2 Auditing Dec 1989)

(i) allow the person who is conducting the audit to approach their work in a methodical way, thus omission will be prevented, and the successive chains of command, senior, supervisor, manager and partner able to maintain control over the audit by carrying out review procedures.

(ii) allows the partner to know the adequate work has been performed, before ascertaining whether the accounts show a true and fair view or not.

(iii) preparation of working papers in any one year will also form a basis for succeeding audits since there will be record of problems encountered for future guidance.

c) Give the main categories of items that would be included in a complete set of working papers. (ACCA level 2 Auditing December 1989 sitting)

- information of continuing importance e.g; constitutional documents.

- audit planning information.

- the auditor's assessment of the accounting system and, if applicable the internal control in

operations.

- the detailed audit work undertaken together with all the conclusion drawn therefrom

- evidence that the work performed by audit staff has been reviewed by more senior

personnel.

- analyse and summaries supporting the balances and revenue items in the financial

statements, and

- a summary of significant points affecting the audit, the financial statements and the auditor's

reports and how these were dealt with.

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*might be the area that need some attention on..

Responsibilities of external auditors

(i)In order to discharge responsibilities and duties, auditor shall have the right of access at all times to the books, papers, accounts and vouchers of the company, whether kept at the registered office of the company or elsewhere.
ii. Auditor shall be entitled to require from the company and the directors and other officers of the company such information and explanation as he thinks necessary for the performance of his duties.
iii. It is the prime responsibility of auditor to make a report to the members of the company on the accounts and books of the company and on every financial statement which are laid before the company in general meeting during his tenure of office.

2. INTERNATIONAL STANDARDS ON AUDITING
To extend this articles,i post a summarised ISA's that candidates should take a look upon..and guess what?of course its important..just a short&concise ISA's..but you should know the overall ISA's first which were taught by your lecturer/by revising notes or by surfing www.ifac.org

2.1 ISA # 200 – Objective and general principles governing an audit of financial statements
i. The auditors can discharge their responsibilities with confidence only when they possess the professional qualities which includes independence, integrity, objectivity, professional competence and due care, confidentiality, professional behavior and technical standards.
ii. The auditor should comply with the following Code of Ethics for Professional Accountants issued by the International Federation of Accountants:
a. Integrity and objectivity
b. Resolution of ethical conflicts
c. Professional competence
d. Confidentiality
e. Tax Practice
f. Activities outside Pakistan
g. Publicity and advertising by Chartered Accountants
h. Other occupations in which Chartered Accountants can engage without Council’s permission.
i. Independence
j. Professional competence and responsibilities regarding the use of non-accountants.
k. Fees and commission
l. Clients’ monies
m. Relations with other Chartered Accountants in practice.
iii. The auditors should conduct an audit in accordance with International Standards on audit (ISA).
iv. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. The attitude of professional skepticism means the auditors makes a critical assessment with a questioning mind of the validity of audit evidence obtained.
v. The procedures required to conduct an audit in accordance with ISAs should be determined by the auditor having regard to the requirements of ISAs , relevant professional bodies , legislation , regulations and where appropriate , the terms of the audit engagement and reporting requirements.

ISA # 210 – Terms of audit engagements
i. It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before the commencement of the engagement, to help in avoiding misunderstandings with respect to the engagement. The engagement letter documents and confirms the auditors’ acceptance of the appointment, the objective and scope of the audit, the extent of the auditors’ responsibilities to the client and the form of any reports.
ii. On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.
iii. The auditor should not agree to a change of engagement where there is no reasonable justification for doing so. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, the auditor should withdraw and consider whether there is any obligation, either contractual or otherwise, to report to other parties, such as the board of directors or shareholders, the circumstances necessitating the withdrawal.

ISA # 220 – Quality control for audit work( relevant to ACCA paper 3.1)
i. The audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in accordance with ISAs or relevant national standards or practices, which should be communicated to its personnel in a manner that provides reasonable assurance that these are understood and implemented.
ii. The objectives of the quality control policies to be adopted by an audit firm will ordinarily incorporate the following
a. Professional requirement: This includes principles of independence, integrity, objectivity, confidentiality and professional behavior.
b. Skills and competence of audit personnel: who have attained and maintain the professional standards required to enable them to fulfill their responsibilities with due care.
c. Assignment to personnel: who have the degree of technical training and proficiency required in the circumstances.
d. Delegation: there is to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality.
e. Consultation: Whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise.
f. Acceptance and Retention of Clients: An evaluation of prospective client and a review of existing clients, on an ongoing basis, should be conducted. In making a decision to accept or retain a client, the firm’s independence and ability to serve the client properly and the integrity of the client’s management are to be considered.
g. Monitoring: The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored.
iii. The auditor should implement those quality control procedures which are, in the context of the policies and procedures of the firm, appropriate to the individual audit.

ISA # 240 – The auditors’ responsibility to consider fraud and error
i. While this ISA focuses on the auditor’s responsibilities with respect to fraud and error in an audit of financial statements, the primary responsibility for the prevention and detection of fraud and error rests with both those charged with governance and the management of the entity.
ii. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditors should consider the risk of material misstatements in the financial statements resulting from fraud and error.
iii. In planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error. The auditors should have knowledge of fraud risk factors which are set out in Appendix to this ISA 240.
iv. When the auditor identifies a misstatement resulting from fraud or a suspected fraud or error, the auditor should consider the auditor’s responsibility to communicate that information to management, those charged with governance and, in some circumstances, to regulatory and enforcement authorities.

2.6 ISA # 250 – Consideration of laws and regulations
i. When planning and performing audit procedures and in evaluating and reporting the results thereof, the auditor should recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements.
ii. In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework. Further the auditor may also identify instances of noncompliance by inspecting correspondence with the relevant licensing or regulatory authorities.
iii. The auditor should either communicate with the audit committee, the board of directors and senior management or obtain evidence that they are appropriately informed regarding noncompliance that comes to the auditor’s attention.
iv. If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditors should express a qualified or an adverse opinion.
v. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance that may be material to the financial statements has or is likely to have occurred, the auditor should express a qualified opinion or a disclaimer of opinion on the financial statements on the basis of a limitation on the scope of the audit.

ISA # 700 – The auditors’ report on financial statements (*Important)
i. The auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion on the financial statements.
ii. The auditor’s report should contain a clear written expression of opinion on the financial statements taken as a whole.
iii. The auditor’s report should includes (a) title e.g. auditors’ report(b) addressee as required by the circumstances of the engagement and local regulations e.g. members of the company (c) introductory paragraph to identify financial statements audited and a statement of the responsibility of the entity’s management and the responsibility of the auditor (d) Scope paragraph to give reference to the ISAs or relevant national standards or practices and the description of the work the auditor performed (e) Opinion paragraph (f) date of the report (g) auditor’s address and (h) auditor’s signature. The contains of Auditor reports attached to the Companies (General Provisions and Form) Rules 1985 conform to these requirements of ISA.
iv. In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor’s opinion.
v. Auditor should express qualified opinion when he concludes that an unqualified opinion can not be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
vi. Auditor should express a disclaimer of opinion when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.
vii. Auditor should express an adverse opinion when the effect of a disagreement with the management is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.
viii. Whenever the auditor expresses an opinion that is other than unqualified , a clear description of all the substantive reasons should be included in the report and , unless impracticable , a quantification of the possible effect on the financial statements , which is also required under the Companies Ordinance 1984 as stated in Para 1 (1.1) (iv) above.

ISA # 710 - Comparatives (doesn't seem important,but at least you should know)
i. The auditor should determine whether the comparatives comply in all material respects with the financial reporting framework relevant to the financial statements being audited.
ii. The auditor should obtain sufficient appropriate audit evidence that the corresponding figures and the comparative financial statements meet the requirements of the relevant financial reporting framework.
iii. When the comparatives are presented as corresponding figures, the auditor should issue an audit report in which the comparatives are not specifically identified because the auditor’s opinion is on the current period financial statements as a whole including the corresponding figures.
iv. When the comparatives are presented as comparative financial statements, the auditor should issue a report in which the comparatives are specifically identified because the auditor’s opinion is expressed individually on the financial statements of each period presented.
v. The incoming auditor’s report should state that the prior period was audited by another auditor and the incoming auditor’s report should indicate (a) that the financial statements of the prior period were audited by another auditor (b) the type of report issued by the predecessor auditor and if the report was modified, the reasons therefore and (c) the date of that report.
vi. When the prior period financial statements are not audited, the incoming auditor should state in the auditor’s report that the corresponding figures and the comparative financial statements are unaudited. If the prior year unaudited figures are materially misstated, the auditor should request management to revise the prior figures or if management refuses to do so, appropriately modify the report.
-fin~-

I just wanna share with you some of cases due to auditors' irresponsibillties.It is not examinable in paper 2.6,for 3.1 maybe you want to state the case for and against.
. Newton vs. Birmingham Small Arms Co. Ltd _ 1906
. Armitage vs. Brewer and Knot – 1932
. Leeds estate Building and Investments Co. vs. Shepherd – 1887
. London Oil Storage Co. vs.Seear , Hasluck & Co. – 1904
. Irish Woolen Co. vs. Tyson and others – 1900
. London and general Bank Ltd. – 1895
. The Kingston Cotton Mills Co. Ltd – 1896
. Westminster Road Construction and Engineering Co. Ltd – 1932
. Royal Mail Steam Packet Co – 1931
. Enron - 2001
. Health South Corporation – 2002
. WorldCom - 2001
. Tyco - 2002
The cases listed above confirms that the audit cases due to negligence and misfeasance have occurred throughout the last 150 years or so and so-called corporate scandals committed in 2001 and onward like Enron and WorldCom are not something new or unique in this regards.
The Chief Financial Officers (CFO) of these companies were non- professional accountants like the CFO at Enron was MBA, the CFO at WorldCom had a business administration degree and that of Global Crossing had a doctorate in finance and public policy. The professional accounting training, qualification and experience instills a respect for numbers and a deeper understanding of accounting and financial reporting standards. On the other hand, it is felt that MBA, as a head of finance, stresses creativity and focuses on financing activities. It is this lack of knowledge of fundamental accounting issues and reporting standards that has many such CFO’s in such a difficult position when managing corporate earnings.

source: Syed Imtiaz Abbas Hussain (Fellow Institute of Chartered Accountants of Pakistan)

ISA 230 Audit Documentation

As you all notice,the recent Student Accountant have published the examinable Auditing Standards (ISA's). There is no significant changes made,however there are particular ISA's revised, such ISA's perhaps important for the coming exam,notably June 2007 for ACCA exam.
Here, i will post ISA 23O audit documentation standard itself which probably will be examined. As this standard revised last year,where there is insufficient time period to examine in November/December 2006 sitting.In the student accountant,there is a highlight in exam notes shows ISA 230 Audit Documentation (Revised). The word "revised" probably giving a hint to the candidates, however either will come out in the exam, nobody knows.Nonetheless, a knowledge on this ISA is useful for future reference for those who will sit for P7 Advanced Audit and Assurance in the new ACCA syllabus.As this is the last chance to sit under the current syllabus,will you make it count, or blow it? every information and topics is critical.

ISA 230 Audit Documentation

• The auditor should prepare, on a timely basis, audit documentation that
  provides:
  (a) A sufficient and appropriate record of the basis for the auditor’s
  report; and
  (b) Evidence that the audit was performed in accordance with ISAs
  and applicable legal and regulatory requirements.
• Preparing sufficient and appropriate audit documentation on a timely basis
  helps to enhance the quality of the audit and facilitates the effective review
  and evaluation of the audit evidence obtained and conclusions reached before
  the auditor’s report is finalized.

• In addition to these objectives, audit documentation serves a number of
  purposes, including:
  (a) Assisting the audit team to plan and perform the audit;
  

(b) Assisting members of the audit team responsible for supervision to
direct and supervise the audit work, and to discharge their review
responsibilities in accordance with ISA 220, “Quality Control for
Audits of Historical Financial Information;”

(c) Enabling the audit team to be accountable for its work;

(d) Retaining a record of matters of continuing significance to future audits;

(e) Enabling an experienced auditor to conduct quality control reviews and
inspections1 in accordance with ISQC 1, “Quality Control for Firms that
Perform Audits and Reviews of Historical Financial Information, and
Other Assurance and Related Services Engagements;” and

(f) Enabling an experienced auditor to conduct external inspections in
accordance with applicable legal, regulatory or other requirements.

• Definitions
  In this ISA:
  (a) “Audit documentation” means the record of audit procedures
  performed,relevant audit evidence obtained, and conclusions the
  auditor reached (terms such as “working papers” or “workpapers” are
  also sometimes used); and
  (b) “Experienced auditor” means an individual (whether internal or external
  to the firm) who has a reasonable understanding of (i) audit processes,
  (ii) ISAs and applicable legal and regulatory requirements, (iii) the
  business environment in which the entity operates, and (iv) auditing and
  financial reporting issues relevant to the entity’s industry.
• Nature of Audit Documentation
  - Audit documentation may be recorded on paper or on electronic or other
  media. It includes, for example, audit programs, analyses, issues memoranda,
  summaries of significant matters, letters of confirmation and representation,
  checklists, and correspondence (including e-mail) concerning significant
  matters. Abstracts or copies of the entity’s records, for example,specific contracts and agreements, may be included as part of audit documentation if considered appropriate. Audit documentation, however, is not a substitute for the entity’s accounting records. The audit documentation for a specific audit engagement is assembled in an audit file.

• Form, Content and Extent of Audit Documentation
  The auditor should prepare the audit documentation so as to enable an
  experienced auditor, having no previous connection with the audit, to
  understand:
  (a) The nature, timing, and extent of the audit procedures performed
  to comply with ISAs and applicable legal and regulatory
  requirements;
  (b) The results of the audit procedures and the audit evidence
  obtained; and
  (c) Significant matters arising during the audit and the conclusions
  reached thereon.

- The form, content and extent of audit documentation depend on factors such
as:
• The nature of the audit procedures to be performed;
• The identified risks of material misstatement;
• The extent of judgment required in performing the work and evaluating
the results;
• The significance of the audit evidence obtained;
• The nature and extent of exceptions identified;
• The need to document a conclusion or the basis for a conclusion not
readily determinable from the documentation of the work performed or
audit evidence obtained; and
• The audit methodology and tools used.

**Oral explanations by the auditor, on their own, do not represent adequate
support for the work the auditor performed or conclusions the auditor reached,
but may be used to explain or clarify information contained in the audit
documentation.

• Documentation of the Identifying Characteristics of Specific Items or Matters
  Being Tested
  In documenting the nature, timing and extent of audit procedures
  performed, the auditor should record the identifying characteristics of the
  specific items or matters being tested.
• Recording the identifying characteristics serves a number of purposes. For
  example, it enables the audit team to be accountable for its work and facilitates
  the investigation of exceptions or inconsistencies. Identifying characteristics
  will vary with the nature of the audit procedure and the item or matter being
  tested. For example:
  • For a detailed test of entity-generated purchase orders, the auditor may
  identify the documents selected for testing by their dates and unique
  purchase order numbers.
  • For a procedure requiring selection or review of all items over a specific
  amount from a given population, the auditor may record the scope of
  the procedure and identify the population (for example, all journal
  entries over a specified amount from the journal register).
  • For a procedure requiring systematic sampling from a population of
  documents, the auditor may identify the documents selected by
  recording their source, the starting point and the sampling interval (for
  example, a systematic sample of shipping reports selected from the
  shipping log for the period from April 1 to September 30, starting with
  report number 12345 and selecting every 125th report).
  • For a procedure requiring inquiries of specific entity personnel, the
  auditor may record the dates of the inquiries and the names and job
  designations of the entity personnel.
  • For an observation procedure, the auditor may record the process or
  subject matter being observed, the relevant individuals, their respective
  responsibilities, and where and when the observation was carried out.

-The auditor may consider it helpful to prepare and retain as part of the audit
documentation a summary (sometimes known as a completion memorandum)
that describes the significant matters identified during the audit and how they
were addressed, or that includes cross-references to other relevant supporting
audit documentation that provides such information. Such a summary may
facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits. Further, the
preparation of such a summary may assist the auditor’s consideration of the
significant matters.
-The auditor should document discussions of significant matters with
management and others on a timely basis.
-The audit documentation includes records of the significant matters discussed,
and when and with whom the discussions took place. It is not limited to
records prepared by the auditor but may include other appropriate records such
as agreed minutes of meetings prepared by the entity’s personnel. Others with
whom the auditor may discuss significant matters include those charged with
governance, other personnel within the entity, and external parties, such as
persons providing professional advice to the entity.
-If the auditor has identified information that contradicts or is inconsistent
with the auditor’s final conclusion regarding a significant matter, the
auditor should document how the auditor addressed the contradiction or
inconsistency in forming the final conclusion.

Documentation of Departures from Basic Principles or Essential Procedures
-The basic principles and essential procedures in ISAs are designed to assist the
auditor in meeting the overall objective of the audit. Accordingly, other than in
exceptional circumstances, the auditor complies with each basic principle and
essential procedure that is relevant in the circumstances of the audit.
-Where, in exceptional circumstances, the auditor judges it necessary to
depart from a basic principle or an essential procedure that is relevant in
the circumstances of the audit, the auditor should document how the
alternative audit procedures performed achieve the objective of the audit,
and, unless otherwise clear, the reasons for the departure. This involves the
auditor documenting how the alternative audit procedures performed were
sufficient and appropriate to replace that basic principle or essential procedure.

Identification of Preparer and Reviewer
In documenting the nature, timing and extent of audit procedures
performed, the auditor should record:
(a) Who performed the audit work and the date such work was
completed; and
(b) Who reviewed the audit work performed and the date and extent of
such review.

Assembly of the Final Audit File
-The auditor should complete the assembly of the final audit file on a
timely basis after the date of the auditor’s report.
-After the assembly of the final audit file has been completed, the auditor
should not delete or discard audit documentation before the end of its
retention period.

*When the auditor finds it necessary to modify existing audit
documentation or add new audit documentation after the assembly of the
final audit file has been completed, the auditor should, regardless of the
nature of the modifications or additions, document:
(a) When and by whom they were made, and (where applicable)
reviewed;
(b) The specific reasons for making them; and
(c) Their effect, if any, on the auditor’s conclusions.

Changes to Audit Documentation in Exceptional Circumstances after
the Date of the Auditor’s Report
When exceptional circumstances arise after the date of the auditor’s
report that require the auditor to perform new or additional audit
procedures or that lead the auditor to reach new conclusions, the auditor
should document:
(a) The circumstances encountered;
(b) The new or additional audit procedures performed, audit evidence
obtained, and conclusions reached; and
(c) When and by whom the resulting changes to audit documentation
were made, and (where applicable) reviewed.

ISA 230 also,are important in the following ISA's which contain specific documentation
requirements and guidance:-

• ISA 210
• ISA 220 (For paper 3.1 ACCA)
  -Quality Control For Adits Of Historical Financial Information
• ISA 240
• ISA 250
• ISA 260
• ISA 300
• ISA 315
• ISA 330
• ISA 505
• ISA 580
• ISA 600 (For paper 3.1 ACCA) -Using the Work of Another Auditor

Above are just some important heading,summarised which i think is important of the ISA 230 for the exam,a full documentation can be obtain from www.ifac.org