Acg

Front 1

Corporate Governance

Back 1

system by which companies are directed & controlled

"purpose of CG to facilitate effective, entreprenuerial & prudent management that can deliver long-term successs of co"

Front 2

CG considers:

Important because:

Back 2

1)

- resp of directors

- how board should be run & structured

- need for good internal controls

- r'ship w/ ext auditors

2)

- owners/shareholders not usually involved in running of business

- need to ensure goal congruent decisions being made & informed of firms operations

Front 3

UK Corporate Governance Code Principle 1

Back 3

Leadership

- board collectively responsible

- clear division of duties @ head of firm. 1 Indiv shouldn't have unfettered powers of decision i.e. Chairman =/ CEO

- Min 50% of board must consist of appoiinted indie non-exec directors (on fixed fee no bonuses)

Front 4

UK Corporate Governance Code Principle 2

Back 4

Effectiveness

- board should have balance of skills /expertise

- formal, rigorous & transparent procedure for appointing director:

- nomination commitee (maj non-exec)

- appoint non-execs for max 6yr term

- should have sufficient time for their role

- should receive induction & update their skills & knowledge regularly

- should be supplied with timely quality info by management

- submitted for reelection regularly

Front 5

UK Corporate Governance Code Principle 3

Back 5

Accountability

- board presents fair, balanced & understandable assessment of firms performance & position e.g. Annual report & stock exchnage announcements made 1/4ly

- risk management procedures & internal control resp

- audit committee all non-exec (min 3)

> min 1 shoul have fin quaification & exp

> no involvement in firm's operations

> appointed following nomination commitee recmmendation

> reelection every 3yrs

Hint 5

- board presents fair, balanced & understandable assessment of firms performance & position e.g. Annual report & stock exchnage announcements made 1/4ly
- risk management procedures & internal control resp
- audit committee all non-exec (min 3)
> min 1 shoul have fin quaification & exp
> no involvmnt in firm's operations
> appointed following nomination commitee recmmendation
> reelection every 3yrs

Front 6

Role of audit committee

Back 6

1) Monitor FS

2) Review internal controls & risk management

3) review/monitor IA function

4) if no IA, consider need for one

5) monitor whistleblower safety arrangements

6) recommend auditor appointments/removals

7) approve auditor remuneration/terms

8) review/monitor auditor independence and objectivity

9) develop/implement policy for auditor provision of non-audit services

Front 7

UK Corporate Governance Code Principle 4

Back 7

Remuneration

- should be formal, transparent procedure in place to reward performance

Remuneration committee:

- min 3 non-exec directors

- level of remuneration sufficientto attract, retain & motivate good quality directors

- remuneration report inc in annual report

- no director sets own pay

Front 8

UK Corporate Governance Code Principle 5

Back 8

Relations w/ shareholders

- regular comm between board & shareholders based on firm strategy/obj e.g. AGM

- shareholders encouraged to participate & vote

Front 9

Obtaining & accepting engagements

Client screening / evaluation 1

Back 9

Pre-conditions for audit

ISA 210:

- determine suitable financial framework is being used e.g. ifrs

- acknowledgement by management of their responsibility to:

i) prepare FS acc w/ fin framework

ii) implement internal controls to prevent fraud / errors

iii) provide auditor w/ unrestricted access to info/ staff

Front 10

Client screening / evaluation 2

Back 10

Professional clearance

- Contact existing auditor for relevant info ( legally obliged to provide)

- unpaid fees? client pressures? fraud / litigation

- access prev audio files

Front 11

Client screening / evaluation 3 and 4

Back 11

3) client rep

- lacking ethical practices

- tarnish firms rep

4) practice expertise

- does firm have sufficient training expertise for client consider:

- type of business e.g. football clubs/banks

- size e.g. small green grocer vs Tesco

Front 12

Client screening / evaluation 5 and 6

Back 12

5) professional ethics

- conflict of interest

- objectivity threats (SSAFI) e.g. how much fees make up income

6) mgmt integrity

- risk of fraud / intimidation

Front 13

Screening / evaluation 7 and 8

Back 13

7) Resources available and fees

- enough staff capacity

- reporting deadlines

- agreeing a fee that covers all costs

- will client pay

8) audit risk assessment for potential areas

Front 14

Obtaining & accepting engagements

Engagement letter

Back 14

records agreed terms of engagement

Should incl:

1) Objective & scope of audit

2) Resp of auditor

3) Resp of mgmt

4) Indentificat'n of applicable fin reporting framework

5) Exp form & content in any reports issued

6) Disclaimer statement - circumstances in which report content may differ to what was expected

Can also inc:

- basis of fees & payment terms

- agreem't of mgmt

- limitations of audit

Front 15

Why we need engagem't letter?

Back 15

- Provides legal contract between auditor & client

- helps avoid litigation over disagreem'ts

- sets out terms & conditions so no misunderstandings

Front 16

Planning the audit: Risk assessment

Misstatement

Back 16

Difference between amt, classification, presentation of the reported FS item and that required in acc w/ the fin reporting framework

Front 17

Planning the audit: risk assessment

Materiality

Back 17

Misstatements, incl omissions - material if individually or in aggregate could influence economic decisions of users of FS

Front 18

What is material?

Back 18

1) material by size:

ISA 320

- 0.5% - 1% of rev (PorL)

- 5% - 10% of PBT (PorL)

- 1% - 2% of total assets (SFP)

2) material by nature:

- turns profit to loss

- turns net assets to net liabilities

- disclosures re litigation / going-concern

- transactions w/ directors e.g. salaries / benefits

Front 19

Performance materiality

Back 19

ISA 320

an amt < materiality set to ⬇️ probability tht aggregate misstatem'ts aren't > materiality

- reduces audit risk

- usually a % of materiality

Front 20

Audit risk formula

Back 20

audit risk = Inherent risk x control risk x detection risk

risk of material misstatement = inherent risk x control risk

Front 21

Inherent risk

Back 21

Risk of errors regardless of internal controls e.g. nature of industry complex acc'g item

Front 22

Control risk

Back 22

Risk that clients internal controls will fail to prevent / detect material errors / frauds

e.g. poor design of controls, overriding controls

Front 23

Detection risk

Back 23

Risks that audit procedures fail to detect material misstatement

Front 24

Responses to audit risk

Back 24

1) plan to have more experienced audit team

2) more intensive review process

3) larger sample sizes for testing

4) change order procedures

5) ⬆️ substantive testing than analytical

6) ⬆️ professional scepticism of audit team members

Front 25

Risk assessment procedures

Back 25

ISA 315

1) Conduct enquiries w/ mgmt, individuals in firm & others abt ext & int chnages in firm

2) analytical procedures

- ratio analysis year-on-year & industry avg

- compare prior periods

- r'ships correlation

3) observation of internal controls & inspection of procedure manuals

Front 26

Professional ethics - IESBA code of ethics

Back 26

Pb - Professional behaviour

I - Integrity

C - Confidentiality

O - Objectivity

Pc - Professional Competence & due care

Hint 26

PICOP

Front 27

Threats to Objectivity

Back 27

S - self-interest

S - self-review

A - Advocacy

F - Familiarity

I - Intimidation

Hint 27

SSAFI

Front 28

ICAEW Ethics Framework

Back 28

1) Gather relevant facts

2) Identify affected parties

3) identify ethical issues

4) what are related fundamental principles?

5) established procedures within the firm

6) are there alternative courses of action?

7) implement course of action & monitor

Front 29

Money laundering

Back 29

required to report to SOCA

Anti money laundering program:

- customer identification procedures

- enhance record keeping

- procedures for reporting to fin intelligence unit incl appointing MLRO

Front 30

Audit evidence procedure 1

Back 30

Inspection of Records or documents

- external more reliable than internal

- evidence of existence of an asset/liability e.g. shares

- evidence for application of an account'g standard

Front 31

Audit evidence procedure 2

Back 31

Inspection of tangible assets

- physical verification of existence e.g. inventory count

Front 32

Audit evidence procedure 3

Back 32

Observation

- watch process/procedure being performed e.g. sales transaction

Front 33

Audit evidence procedure 4

Back 33

Enquiry - asking q's to client's personnel

- needs corroboration

Front 34

Audit evidence procedure 5

Back 34

Confirmation

-obtaining confirmation from 3rd party

e.g. AR circulations, Supplier statement requests, bank balances vs bank letter

Front 35

Audit evidence procedure 6

Back 35

Recalc mathematical accuracy of figures

Front 36

Audit evidence procedure 7

Back 36

Reperformance of task to confirm they achieve same outcome

e.g. redo VAT return

Front 37

Audit evidence procedure 8

Back 37

Analytical procedures - r'ships between fin & non-fin data

e.g:

-ratio analysis

- compare to prior periods

- compare no's w/ managem't explanations

Front 38

Advantages & disadvantages of entity using service organisation

Back 38

e.g. debt fatorers, payroll providers, fsc

✅ independent ⬆️ reliable

✅specialists - ⬆️ reliable info

✅ can place ⬆️ degree of reliance on reports provided

❌ may not be able to obtain info provided

❌ may not be allowed to test controls of service organisation

Front 39

Financial statement assertions

Back 39

Accuracy

Completeness

Cutoff

Allocation

Classification

Occurence

Valuation

Existence

Rights/obligations

Hint 39

ACCACOVER