Audit of small entities/company

The main area of this topic discuss on the audit of small entities which concern on:

• Day-to-day of Owner-managers
• Few sources of income and uncomplete activities
• Simple record keeping(fewer ledgers,daybooks)
  
• Limited Internal control

Common ownership and management:

1. Existence of owner-manager actively involved in the day-to-day running of the business.
2. Audit risk increases as both easily override any internal control.
3. However; audit risk might be decrease as presence day-to-day substitute to formal internal control.
4. Risk assessment based on auditors knowledge of integrity and competencies of owner-manger.
5. Small entities have more going concern problem as they often vulnerable to cash flow problem, in addition bad debts.
6. Related parties:Owner-manager confuse business affair with own affair.
   

**ADVISE on 3.1 AAS Success**

1. Read examiner's student accountant articles

2. read through recent examiner's comments.

3. pass paper 2.6 before attempting paper 3.1 (ideally).

4. practise pass year questions n note down the points you didnt get from the model answer.

5. get some practical biz experience (if possible) n keep up to date by reading a quality newspaper.

6. in your answer, try to go that one step further to bring out the implication, but dont stress about trying to find it for every point.

7. dont be scared of the discussion question: the marking scheme is generous.

8. make sure u take a calculator.

Tips: www.nik-tips.blogspot.com

some questions and answers that candidates might need put some attention to:

1) Can you please explain the meaning of followings.

1. Hot Review
2. Cold Review
3. Peer Review

A: all of the reviews are part of Quality Control.
A hot review would be carried out prior to the issuing of the audit opinion, and could include a detailed technical review, a second partner review, as well as the normal hierarchical review that takes place of all work performed by the audit team.

A cold review is carried out after the audit opinion has been issues, and is usually conducted to look for audit efficiency matters, e.g. were any areas over audited, or were there any problems in gathering evidence. The efficiency points would then be carried down to next years audit.

A peer review is where audit firms review each others work. It is common in the USA, but less in the UK

2) Audit work ","matters to consider" and audit procedure.

What is the difference?i can not distinguish the three. Audit work I believe is what the auditor will do but what about the other two

A: 'Matters to consider' the requirement for Q3 means considering the following according to the examiner:

- calculating the materiality of the issue referred to in the scenario to assess its relevance in the context of the company.

You must calculate the specfic materiality of the issue in the context of the general information given about the company. Use the general rule of thumb that for an item to be material the following ranges apply: 0.5-1% of turnover, 5-10% of PBT and 1-2% of total assets. But you must relate it to the facts in the scenario to earn marks

- consider the applicable GAAP. Have the rules been complied with or not, as is usually the case. If not, comment on the changes that would be expecte3d to correct the situation and thus allow for an unqualified audit report

- consider the implications for audit reports if the client does not process the recommended changes suggested by the auditor.

'Audit work' simply requires a description of the work done by the auditor to gather the necessary evidence to support the conclusions reached

'Audit procedure' simply describes the procedures used by auditors i.e the work done, once again to provide sufficient relevant audit evidence to support the conclusions on which the audit report is based.

3) In this exam How miuch do you have to right to get a MARK?

A:The easiest answer to this question is to suggest you look at the examiner's answer - every block of writing is usually a potential mark.
In general, any well explained point (2-4 lines of writing) should be enough.So, "discuss with directors" will score zero, whereas "seek wriiten confirmation from directors that all related part transactions have been disclosed" is the level you are looking for.


4) What is current issue in the tips?

A:Q6 is usually referred to as the 'current issue' question, and is sometimes but not always preceeded by an examiners article. There is no published current issues article for this sitting. The current issues will be based on issues being discussed in the profession at the moment, and in the last 18 months. Students are advised by the examiner and the tutors to read more widey than just the student newsletter to get an understanding of topical issues.

I would recommend that you practice some of the recent Q6s from past papers to see the style of question and type of topic covered, e,g money laundering, earnings management, new ethical standards etc. You should practice some questions as it is a shame to go into the exam only being able to attempt Q4 and Q5 from section B.
-thanks to Lisa Weaver FTC 3.1 Tutor-

-ALL THE BEST-
hOPe this helps~~

Professional Ethics - Independence

I just browse through some rather old question,which i handpicked from ICAEW exam on audit paper. I just found this question quite interesting under the topic of Professional rules and counduct, well here goes; Relevant to Paper 2.6 and 3.1(Q.3)
The following situations have arisen in your audit firm:

1) The directors of Howley plc have approached your firm and requested that it tender for the audit of Howley plc. The directors have indicated that there will be additional consultancy work which is likely to be on-going.

2) The directors of Gibs Ltd, an existing audit client, have requested that an employee of your firm, who has been involved in the audit of Gibs Ltd in previous years, is seconded to the company to assist with the preparation of the monthly management accounts and the annual financial statements while the company accountant is on maternity leave.

3) The Directors of Jenkins plc, a listed company, wish to outsource the company payroll function and have requested that the business services department of your firm processes the payroll and one of the partners assumes cheque signing and payroll authorisation powers on the company behalf.

Requirement:

a)Explain the significance of the concept of independence to auditing. (5 marks)

b)Identify the potential threats to independence and suggest how the firm might deal with them. (7 marks)

c) Identify the benefits to a client of having non-audit services provided by its auditor. (3 marks)

Answers to above:

a) Significance of the concept of independence to auditing:

-S/holders are interested in F/S that potray as closely as possible the true financial position, result of operations and cash flow of the company.

- Management, knowing that it is being evaluated by the s/holder on the basis of F/S , desires to show the results of its stewardship in the most favourable light.

-Companies Act & Guide to Prof. Ethics require auditors to be independent in order to protect the s/holder.

- Auditors need to be free from prejudicial influences to maintain an :

• Obejctives(unbiased) state of mind (be independent) or should i say "independent in fact"


• Appearance (be seen to be independent)

- If users do not perceive auditor to be independent there will be a :

• Lack of credibility of financial information


• Loss in confidence in the audit process/function.

b) - Howley plc

Threat

• Self-interest/ fee dependency


• Fear of losing fee may make auditor reluctant to report adversely


• Self review in the future - may be reluctant to challenge any product or judgement of consultancy work.

Dealt with: only accept if

• Fees do not exceed recommended threshold and


• Different teams available.

- Gibbs Ltd

Threat

• self review


• Familiarity


• Too trusting of colleague and less rigorous in testing

Dealt with : Accept, as a private company but ,

• Person seconded to the company must not be a member of the audit team


• Careful consideration as to separate audit procedures.

- Jenkins plc.

Threat

• Self review - too trusting of colleagues resulting in less rigorous testing


• Payroll preparation- as a public/listed company threat may be considered too great


• Cheque signing and authorisation functions is a management function.

Dealt with: If wish to act as auditor

• Do not assume responsibility for cheque signing and authorisation function and


• If threat considered too great do not accept payroll preparation.

c) Benefit to a client having non audit services provided by its auditor

• Auditor has greater insight into clients operations and can provide a higher quality service.


• Greater degree of comfort having service provided by a trusted party


• Provide services at lower overall costs as the background information is available.

-sorry for any grammar/spelling mistakes, sleepy- :)

For Paper 3.1 June 2007:

Accounting problems/issues (the usual Q3) - Important areas include leases,
deferred tax, related parties, earnings per share, provision, government grants,
impairment, investment property, going concern.

new tips for 3.1 www.nik-tips.blogspot.com

Outsourcing internal audit

Below are the topics regarding issues of outsourcing,which for me a grey area in the syllabus, but a worth while to read it!!

Procedures to outsource internal audit

In some cases the company will outsource most of the function but retain the head of internal audit as employee.This leaves high level of responsibility within the company. The company and service provider should draw up a written contract or terms of reference covering issues as:

• What services will be provided?


• What does the service provider report to?


• What form will reports take?


• What action will be taken if problem occur?


• How will fees be determined and charged?

Benefits to the company

There are number of advantages to the company of outsourcing their internal audit function.

1.Independence

-contracting out increases independence as an in-house department can never be truly independent. Staff from an external firm will be subject to the same ethical guidelines as for external audit,and the firm should have mechanisms to ensure compliance. In addition contracting out facilitates the rotation of staff, so close relationship do not build up between auditor and auditee.

2. Skills.

-contracting out internal audit allow the company to bring in new skills. The external provider will have a range wider experience gained by auditing other companies.

3.Costs.

-A company with an in-house internal audit service must pay salaries,training and overheads. Whilist the contractors' fees will also be set to cover these there may be economies of scale. The company would only be paying resources when required and so overall the total cost may be cheaper.

4. New techniques.

-The audit market, both internal and external is very competitive. This encourages firms to develop new techniques which are more efficient and effective. I.e; E&Y have recently invested $150m to develop internal auditing methodologies. Contracting out the internal audit services gives the company access to these techniques without a high level of investment.

5. Management time.

-If internal audit is outsourced it frees management time and resources to focus on core areas of the business.

Disadvantages to the company of outsourcing

1. Constraints on service.

-The service provider will need to act in accordance with the terms of reference. This may mean they are unable to follow up suspicious circumstances outside their duties without first seeking permission from the cpmpany and re-negotiating the terms of reference.

2.Corporate culture.

-Contracting out any service involves a change to corporate culture. The change needs sensitive management to avoid a loss of morale or from other areas,who may fear for their job or resent an 'outsider' questioning them.

3. Flexibility.

-An inhouse department will provide a permanent presence whilist contracted out sevicees may only be at company discrete periods. In-house staff may also have more royalty and commitment to the company. Outsourcing may result in reduced staff availability and flexibility as an external provider may not have staff available at short notice, i.e a problem suddenly arises.

4. Skills

-An external contractor may lack the specialist skills relevant to a particular company which an in house service will possess.Once a contactor is brought in these skills may be lost forever.

Issues for provider of service.

a) Independence

• There is danger that an external provider could become dependent on client, particularly where they are also the external auditor. The ethical guidelines do not specifically deal with external auditor providing internal audit services but there are some general guidelines which are relevant.


• An auditor should not accept an audit appointment from a company which regularly provides him with unduly large proportion of his gross practice income.

b) Care must be taken so that external audit does not perform management functions or make management decisions.

c) Providing internal audit services may gives rise to the need for self review. For example the internal auditor may have recommendations regarding the system of internal controls. The external audit team,when reviewing the system,must ensure that their judgements are objective.

d) Skills - The auditor ensure he has appropriate skills and expertise to undertake the internal audit roles. For example, they may need to carry out environmental or social audits.Does the external auditor have relevant experience for this type of audit?

e) Effect on external audit - Internal audit and external audit, currently performs different roles. If both roles are performed by the same firm,the distinction could become blurred. This could lead to a reduced level of service overall and a lower level of credibility being attached to the external audit report.

Measures to be taken.

They are number of measures which the external auditor can introduced to help overcome these problems:

• Separate department which deals with internal and external audit services.


• Proper client acceptance procedures for internal audit work


• training staff to ensure they are aware of the issues involves.


• Separate audit manuals and documentation for internal and external audit work.


• regular review by independent partner to ensure independence.

Business Risk

yep..its business risk

In recent years, larger firms have extended the concepts of risk analysis as an approach to auditing.The new more and embracing is that of business risk.A definition of business risk is "The threat that an event or action will adversely affect a business's ability to achieve its ongoing objectives and can be split between external and internal factors"

External risks

Risks arising from outside the company include: (may embedded in audit case study in Q's)

• Changing legislation (e.g. the use of genetically modified foods).


• Changing interest rates(especially with highly geared companies).


• Changing exchange rates (e.g strong £ and the high price of British exports).


• Public opinion, attitudes, fashions.


• Price wars initiated by competitiors (e.g. Giant vs Tesco)


• Enviromental matters

Internal risks Risks arising from inside the company include:

• Failure to modernise products, processes,labour relations, marketing


• Employees


• Board Members


• Cash flow including overtrading


• Gearing


• Inappropriate acquisitions


• Internal controls


• Fraud


• Computer systems failures


• Lack of R&D

The client's approach to risk

The potential effect of the risks on the financial statements depends on how the client deals with risk. Possible actions are:

1. Do nothing and hope for the best.


2. Develop internal controls.There is much emphasis on internal controls in the corporate governance and management of risk is a large part of it.


3. Develop quality controls over production of goods, production of services, staff recruitment.


4. Diversify. acquisitio, new products, multiple sourcing.


5. Train staff


6. Risk reduction. raising staff awareness of risk, tighter discipline in all areas.


7. Transfer risk. by insurance, subcontracting, outsourcing


8. Avoidance. e.g. manufacturing in countries where the market is, instead of exporting, and thus avoiding exchange rate risks and government import restrictions.

Question for such approach to risks can be found in December 2002 Question 6 of ACCA 2.6

Designing the audit

• Agree the assignment in a letter of engagement


• Discuss and review the business risks with directors/management


• Plan the audit accordingly


• Carry out audit


• At final review stage of the audit, consider business risks and any possible impact on misstatements in the financial statements.


• Report.

IN the exam:

When devising substantive tests, think about the financial statement assertions that need to be met (CODRACE / PERMCOV / COMPARE). Also think about the audit procedures you can perform (AEIOU).

Examples for receivables

Cutoff - test a sample of GDN's immediately before and after year end and ensure that the receivable and sale has been recorded in the correct period. Also ensure that the inventory is not included.

Existence - circularise a sample of receivables to confirm the amount owed to the client.

Analytical Procedures - calculate receivable days for the year and compare to the credit terms given to customers. You could also compare with prior year or industry average.

Receivables provision - review the aged receivables listing and compare the amount of receivables > say 90 days to the provision to see if adequate.

Payables examples:

Cutoff - test a sample of GRN's immediately before and after year end and ensure that the payable and purchase has been recorded in the correct period. Also ensure that the inventory has been included.

Completeness - test a sample of after date payments, trace to GRN & Invoice, if it relates to a purchase before year end ensure it is included in the payables listing.

Analytical Procedures - calculate payables days and compare to the average terms given by suppliers or to prior year.

Test supplier statement reconciliations by comparing the balance on the supplier statement to the payables balance on the payables listing and if any discrepancies exist ensure there is a valid explanation from the client (eg cash in transit).

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)