AUDITING AND ASSURANCE
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to conduct the audit of an entity.
A candidate who passes this paper should be able to:
- Describe the regulatory framework governing the external audit of financial statements,
- Have an understanding of International Standards of Auditing where appropriate and the International Code of Ethics for Professional Accountants (including International Independence Standards.
- Explain the process of planning an audit and prepare audit programs in order to undertake the audit as may be required clients.
- Undertake audit risk assessments (excluding group accounts)
- Apply the risk based audit approach to audit of limited companies
- Describe the audit evidence required in specified situations
- Describe the audit work required at the final review and report stage of an audit
- Prepare non – complex audit reports for audit engagements.
- Nature and purpose of an audit
- Nature and objectives of an audit.
- Development of audit (early audit and modern audit)
- Users of audited financial statements.
- Features of audits
- Distinction between auditing and accounting.
- Types and classification of audits
- Situations when different audits are performed (interim, continuous, final, operational)
- Advantages and disadvantages of types of audits.
- Nature of work done for different audits
- Inherent limitations of an audit.
2. Assurance and non- assurance engagements
– Definition and objectives of assurance engagements
– Audit as an assurance engagement.
-. Elements of an assurance engagement
– Types of assurance engagements (Audit, Review assignments)
– Differences between audit and review engagements.
– International Standard on Assurance Engagement-ISAE 3000.
– Accepting appointment to perform assurance engagement.
– Review of interim financial information-.ISRE 2410
– Levels of assurance and reports issued on assurance engagements.
– Non-assurance engagements (Agreed upon procedures engagement –ISRS 4400 and compilation assignments-ISRS 4410
– Attestation and direct reporting engagements.
3. Legal and professional framework
- Regulatory framework for external audits.
- Appointment of the auditors
- Qualifications and disqualifications of auditors.
- Removal and resignation of auditors.
- Remuneration of the auditors
- Rights and duties of auditors
- Mechanisms of regulations of auditors-role of ICPAK, Audit committee, rotation of audit firms.
- Professional ethics/code of ethics for professional accountants
- Importance of the professional ethics
- Basic/fundamental principles for Code of Ethics for accountants
- Other professional guidelines on audit fees, conflict of interest, advertising and publicity and opinion shopping clients.
- Auditors independence /objectivity and its importance.
- Threats to independence and safeguards.
- Threats on adherence to other fundamental principles and safeguards to the threats.
- Development and status of ISAs in execution of audits
- Relationship between International Standards of Auditing and Kenya Auditing Standards.
- Purposes/importance of adoption of ISA in the audit.
Planning and Risk Assessment
4.1 Obtaining, accepting and retention of an audit engagement.
- Matters to consider before and after acceptance of nomination
- Pre-conditions of an audit
- Engagement letter, procedure of sending letter, purposes and contents of the letter-ISA 210
- Circumstances for revision of engagement terms.
- Understanding the entity and its environment
- Background information about the entity or client.
- Ways of gathering knowledge about the business
- Reasons/importance of information gathered about the client.
- Reasons of review of previous audit files and communication with previous auditors.
- Overview of audit process
4.2 Audit risk assessment
– Components of audit risk (Inherent, Control and Inherent risks)
– Assessment of different types of audit risks
– Factors leading to increase or decrease of inherent, control and detection risks.
– Adoption of risk based audit, reasons and procedure. Advantages and Disadvantages of the approach.
– Evaluating and prioritising risk and control factors.
– Mechanisms to minimize the risks associated with client audits.
4.3. Audit planning
– Purposes/importance of audit planning
- Problems of audit planning
- Planning for new and existing clients
- Development of the overall audit strategy
- Contents of audit planning memorandum/ overall plan.
- Relationship between audit strategy and audit plan.
- Design of audit programs, importance and problems of the programs.
- Impact of material misstatements on audit strategy and degree of work done
- Influence of interim audit work on the year end / final audit.
- Audit documentation
- Reasons and importance of audit documentation
- Sources, features and purposes of working papers
- Storage of working papers-permanent audit file and current audit file
- auditors note book or diary
- Lien or custody on working papers
- Standardisation of working papers- advantages and disadvantages
- Safe custody and retention of working papers.
- Form and content of working papers
- Automated working papers.
- Quality control policies and procedures implemented audit firm
- Objectives of quality controls to the audit firm/ auditors.
- Peer review and its objectives
6. Internal control systems and Internal Audit Function
6.1 Internal control systems
- Objectives of internal control system
- Component of internal control system
- Features of Internal control system
- Designing of internal control system.
- Auditors and management responsibility over ICS
- Advantages and disadvantages /inherent limitations of ICS
- Indicators of weaknesses in ICS and actions taken management
- The evaluation of internal control systems auditors using Internal Control Questionnaire, Flow charts and narrative notes
- Tests of controls on specific control environments
- Internal controls theory and practice-sales and debtors, purchases and creditors, inventories and work in progress, fixed assets, salaries and wages
- Communication of improvements on ICS weaknesses/ risks associated- Management letter.
6.2 Internal Audit Function
- Scope and objectives of internal audit.
- Criteria of using internal audit work
- Areas of support on external auditors’ work
- Internal audit review reports and actions management and those charged with governance
- Design of risk based internal audit plan
- Internal audit key performance indicators
- Managing and monitoring follow up of audit recommendations made to board/ management.
- Outsourcing internal audit function-advantages and disadvantages.
- Audit committee-functions, merits and demerits.
- Internal check systems-scope, features, advantages and disadvantages
- Information technology threats and control
- Auditors duty on compliance with laws and regulations.
- Overview of Forensic Accounting, Errors, Frauds and Irregularities
7.1 Overview of forensic accounting
- Nature, purpose and scope of forensic accounting
- Types of forensic investigations: corruption, asset misappropriation, financial
- statement fraud, others
- Asset Recovery process and legal framework
7.2 Errors, Frauds and Irregularities
- Differences between error and frauds
- Types of errors-omission, commission, principle, reversal of entries
- Types of Frauds-Teeming and lading, ghost employees, window dressing, misappropriation of goods and fraudulent financial reporting
- Causes of frauds and fraud triangle
- Indicators of errors and frauds
- Detection and prevention of errors and frauds and deterrence-role of internal audit.
- Materiality and Implications of errors and frauds in the financial statements
- Impact of errors and frauds on the audit plan.
- Reporting on error and frauds
- External auditors and Management responsibility on error and frauds
- Auditors professional skepticism.
8. Audit evidence
- Financial statement assertions and audit evidence
- Types and features of audit evidence (sufficiency, reliability and relevance)
- Audit evidence gathering procedures/ techniques
- Materiality and limitations of audit evidence
- Financial statement assertions and audit evidence
- Audit sampling techniques- statistical and non-statistical
- Analytical reviews procedures- nature, objectives, timing and extent of support evidence.
- Types of analytical Procedures-Variance analysis, reasonableness tests, trend analysis.
- Using the work of experts- areas of support and considerations.
- Using management representations (importance, procedures adopted and matters covered).
9. Auditing in the public sector
- Introduction to auditing in the public sector and regulatory provisions
- Objective and scope of public sector audit (compliance, performance, financial, value for money)
- Establishment, mandate and functions of public sector auditors
- The parties to audit in public sector-auditor, responsible party and intended users.
- Role of internal audit function in public entities
- Relationship between external and internal auditors in the public sector
- Audit reports office of Auditor General.
- Functions of audit advisory board and executive committee in Auditor General office.
- Auditors Reports
- Purposes of auditors’ report and concept of true and fair view.
- Legal /Statutory provisions on audit reports
- Basic elements contents of audit reports
- Emphasis of the matter paragraph and key audit matters
- Types and Consequences of different types of audit reports issued.
- Features of unqualified and qualified audit reports
- Reasons for qualifications of audit reports (Limitation of scope, inherent uncertainties, disagreements)
- Types of qualifications-disclaimer, except for and adverse opinions.
Overall audit review and finalization
- Subsequent events/Post balance sheet events review (adjusting and non – adjusting events, auditor’s responsibility and audit procedures)
- Going concern review (Auditors and management responsibility, indicators of going concern difficulties, audit procedures, mitigation plans and reporting)
- Management representations on contentious matters affecting financial statements like guarantees made, capital commitments, borrowings, unusual accounting adjustments.
- Review of compliance with accounting policies, opening balances, prior period audits other auditors
- Format for presentation of independent auditor’s report.
- Audit in computerised system
– Audit objectives in computerised systems
– Differences between computerised and manual systems
– Benefits and drawbacks of computerised accounting systems
– Types of controls in computerised systems (Administrative, system development, processing controls, application controls, master files and standing data.
– Auditors use of computers in the course of audit
– Planning the audit in computerised systems
– Audit approaches- audit around, with and through the computer and circumstances when each is applied.
– Loss of audit trail, causes and measures to mitigate the loss of audit trail.
– Computer Assisted Audit Techniques(CAATS) –Audit software and test data
– Types of audit software and functions and types of test data.
– Factors considered before using CAATS and steps in CAATS application.
– Advantages and disadvantages of CAATS.
– Use of embedded audit modules and integrated test facilities
– Information security controls (Encryption, Firewalls, Passwords, Antivirus).
12. Emerging issues and trends
– E- commerce auditing
– Cloud documentation
– Use of data analytics tools in audit (Anomaly detection, diagnostic analysis, predictive analysis.
- Ravinder Kumar Fundamentals of Practical Auditing
- Allan Millichamp Auditing
- Gramling Rittenberg Auditing
- T.T. Simiyu Auditing I: Principles and Concepts