Transcript for:
Understanding Assurance and External Audits

this video is going to cover the topic of assurance and how it relates to an external audit we're going to cover the definition of assurance the external audit the five elements of an assurance engagement and the levels of assurance that can be provided when we give Assurance we are giving our opinion on something therefore an external audit this is an example of giving assurance to Define Assurance we are given the following a practitioner evaluates a subject matter that is the responsibility of another party against a criteria to express a conclusion to the user of the subject to help remember this definition we will highlight the key words practitioner subject matter responsible party conclusion and user we can apply this terminology to what we know about an external audit to see how it relates our practitioner is our external auditor our subject matter is the financial statements the responsible party is the client management the conclusion is the audit opinion and the users are the shareholders or other intended users this definition applies to any other Assurance provider also for example building surveyors for new properties and by personalizing the definition in this way it helps remember the key terminology by providing Assurance like the Auditors provide Assurance on the financial statements you are giving confidence to the users when making decisions and enhancing The credibility of the information in the financial statements there are five elements of any Assurance engagement the three parties involved the practitioner the responsible party and the user the subject matter a suitable criteria which the subject matter is evaluated sufficient appropriate evidence and a written Assurance report therefore for our external audit the three parties are the auditor the management and the shareholders the subject matter is the financial statements the suitable criteria is the applicable financial reporting framework used to prepare the financial statements sufficient appropriate evidence is collected by the auditor through the audit procedures carried out and review of the financial statements and the Assurance report is the audit report finally we should review the levels of assurance and insurance provider can give the iaasb tell us there are two levels reasonable and limited for reasonable Assurance to be provided the practitioner must provide sufficient appropriate evidence in order to form reasonable conclusions this requires a high level of assurance to be provided and so a high level of detail is provided in the practitioner's procedures the practitioner will then issue a positive report or opinion therefore our external auditor carries out thorough audit procedures to gather enough evidence which ensures an external audit provides reasonable assurance the audit report is a positive report as it states that the financial statements are or are not true and fair in comparison a limited Assurance engagement provides sufficient appropriate evidence in order to form limited conclusions this requires a moderate level of assurance and a moderate level of detail required in the practitioner's work the practitioner will then issue a negative report or opinion Auditors May provide other services to their clients and may be asked to review information for them as a separate assignment therefore to review something for a client requires less detailed work in comparison to an external audit also when reviewing information regarding future events for example a review of a cash flow forecast it is impossible to give a positive opinion as we cannot predict future events the wording is different in a negative opinion typically the term nothing has come to our attention when reviewing is used in this type of report to summarize this video Assurance is giving your opinion on something external Auditors are Assurance providers there are five elements of an assurance engagement the three parties the subject matter the suitable criteria the sufficient appropriate evidence and the Assurance report and there are two levels of assurance that can be provided reasonable and limited with the external audit providing reasonable assurance I hope you found this video useful thank you for watching the aim of this video is to give you an understanding of the external Auditor's role the key areas to cover are understanding what is an audit the expectation Gap the audit process and the pros and cons of an external audit an organization has shareholders who invest money into the company the directors who are then responsible for looking after that investment and Reporting on how the company is performing and the financial statements which are prepared by the directors so the shareholders can see how their investment is doing as well as other users to review for their own decisions in order for the shareholders to feel reassured that the information they review in the financial statements is prepared properly it is reviewed by an independent party on their behalf the Independent party is the external auditor our external Auditor's objective is to review the financial statements and to form an independent opinion the opinion has specific wording and the auditor must communicate whether the financial statements are true and fair and properly prepared this opinion is stated in the audit report this is prepared by the Auditors once all audit work is completed and included within the financial statements when presented to define the term true and fair we must first understand that the auditor cannot say the financial statements are accurate the reason for this is that the external auditor does not review every single transaction in the financial statements nor do they spend every day at the client's offices and production sites observing every single process being carried out the time the auditor has to complete an external audit means they should take a snapshot of the client's transactions and systems and controls it is from this snapshot that they form an overall opinion on the financial statements we say that the auditor reviews the financial statements on a sample basis as they select samples of transactions to review rather than test them all therefore when an auditor states that the financial statements are true and fair they are saying that they are factual they agree with the underlying records clear unbiased and generally free from material misstatements material misstatements are errors within the financial statements that if not corrected could influence the decisions made on the information given it is the auditor's role to identify any material misstatements within the financial statements so that they can be corrected by the client before the accounts are published in terms of reporting on whether the financial statements are properly prepared they are saying they are prepared in accordance with the applicable reporting framework the audit report prepared by the auditor will therefore State whether the financial statements are true and fair and properly prepared there is a misconception of the role of an external auditor many users of the financial statements believe the Auditors test all transactions and balances in fact they test transactions on a sample basis they believe that Auditors should detect all fraud and error when in fact it is the auditor's responsibility to report on whether the financial statements are free from Material misstatements whether caused by fraud and error and many believe it is the responsibility of the Auditors to prepare the financial statements this responsibility always lies with the directors of the company not the auditors this is known as the expectation Gap ideally Auditors wish to reduce this Gap as much as possible to ensure everyone understands the role of the auditor for the auditor to form an independent opinion on the financial statements there will be considerable time spent with the client and reviewing the books and Records to ensure the work is carried out properly the audit has a standard structure this audit process can be outlined as follows Step 1 acceptance the Auditors must consider before they begin the audit work whether they want to accept a new client or continue the audit for an existing one they should identify if there are any factors which could cause the auditor's problems when working with the client Step 2 engagement if they are happy to continue the external audit work they will need to ensure an agreement is in place between the client and the auditor this is known as the engagement letter step 3 the plan once the agreement is in place the auditor must then carefully plan the audit and identify any risks and other issues that need to be managed during the audit step 4 assess controls and systems the auditor must then review the systems and control procedures at the client the aim here is to identify whether they have strong controls or poor controls this helps decide how reliable the financial statements may be and the amount of work the auditor should carry out on transactions and balances step 5 substantive testing this is the testing stage where the auditor performs audit procedures on transactions and balances within the financial statements to identify potential misstatements step 6 completion and review at this stage the audit manager will review the evidence collected and the work completed to ensure it is enough to form an opinion step 7 the audit report finally the audit partner responsible for the audit will review the audit work and the financial statements and form an opinion on whether the financial statements are true and fair and properly prepared or not we must understand what happens at each stage of the audit process to fully appreciate the external auditor and the opinion that is formed on the financial statements external audits are often not viewed fondly by many the negativity arises for many reasons but believe it or not there are many benefits for having an external audit here I'm going to identify some of the pros and cons of an external audit to give the argument balance the pros by having an independent team review the financial statements it means they are likely to spot any material misstatements therefore detecting fraud and error it enhances the credibility of the financial statements so users of the information can trust what is given to help make decisions for example if looking to give Finance for the client it's improves the quality and reliability of the information which then improves shareholder confidence and the company reputation Auditors can recommend improvements to systems and controls based on their experiences with similar clients and their independent advice can also help resolve disputes between management and assist in better decision making from the management team the cons they do not test every transaction as they have to use a sample basis so there could be misstatements in transactions that have not been seen by the auditor financial statements include estimates which are difficult to audit as they are subjective and hard to prove the Auditors may have to rely on evidence provided by the client management for some areas if external evidence cannot be obtained systems and controls have their own limitations and the Auditors rely on some information provided by these systems therefore to summarize an external audit is an independent review of the financial statements there are three parties involved the user of the financial statements for example the shareholder the provider of the financial information the directors and the external auditor performing an independent review Auditors form an independent opinion on the financial statements and state whether the financial statements are true and fair and properly prepared Auditors follow a standard process during the audit to ensure they form the correct opinion an external audit has limitations but they enhance the credibility of the financial statements and help improve confidence in the client's operations I hope you found this video useful thank you for watching this video has been prepared to help understand the topic of ethics ethics is an important topic for all accountants as there is a huge focus on how they behave to maintain the reputation of the profession accountants should act in the public interest and ethics is essentially guidance on how to behave morally and professionally ifac the International Federation of accountants issued a code of ethics which has been adopted by accountancy professional bodies these ensure the right decisions can be made in any situation one of the key pieces of information supplied is in the code known as the fundamental principles ethics is one of the key areas that Auditors must consider when deciding whether they should accept a new client or continue to act for an existing audit client an auditor should not act for a client if it will affect their judgment during the assignment to help remember the fundamental principles we can use the mnemonic opic we will go through each principle so you can understand the importance of each one the O is for objectivity Auditors must be objective when making decisions this means they must ensure they do not allow bias or other factors to influence their judgment when making decisions on the audit assignment if Auditors remain objective during the audit then they will be able to make an independent opinion on the financial statements it is important for Auditors to not only be independent but to be seen to be independent by others they therefore need to be careful not to be too connected to the client so they can maintain their objectivity the P is for professional Behavior Auditors must ensure they comply with relevant laws and regulations and act properly to ensure they maintain Professional Standards at the end of the day Auditors are trusted to give an independent opinion which is important to users making decisions based on these financial statements their opinion will only be taken seriously if they are regarded as someone to trust the other pay is for professional competence and due care Auditors need to ensure that they maintain their Professional Knowledge and skill needed to do their work properly they must also follow all relevant regulations for example the auditing standards in order to maintain the reputation of the profession Auditors should not take on work they are not technically competent to do just because you have audited one company it does not mean you can audit all each industry has its own regulations and Niche reporting requirements that must be understood by the auditor otherwise mistakes may be made the I is for integrity this is probably the most simple principle to Define Auditors should be straightforward and honest in all matters those relying on the information Auditors provide need to trust them but they also need to be able to understand the information being presented finally the sea is confidentiality for the business to trust sensitive information being handled by the Auditors they must be able to keep information confidential no information should be passed to third parties without Authority and length should be taken to ensure information is not leaked strong controls should be in place within an audit firm to prevent this from happening such as passwords to access data restricted access to client information and training on the importance of confidentiality to the audit team therefore no gossiping about clients in summary for ethical standards to be maintained the five fundamental principles should be followed and applied if Auditors do not follow them the opinion they make on the financial statements lacks The credibility needed by the users of this information if the Auditors feel that their ethics would be called into question when working with a client they should decline the offer to do the work if it's an existing client then they should resign I hope you found this video useful thanks for watching in this video we are going to talk about ethical risks relating to external auditors the aim is to gain an understanding of the Practical issues that Auditors must consider relating to ethics at the acceptance stage of an audit there are three main areas we need to cover here threats to objectivity or Independence conflicts of interest and breaking confidentiality each of these issues need to be addressed when they arise and considered at the acceptance stage of an audit to ensure they do not cause problems for the auditor later on in the audit process firstly let's look at threats to objectivity objectivity is one of the fundamental principles given in the ethical code we are told that Auditors and accountants as a whole should remain objective when making decisions they should not allow bias and not be influenced by others however during an audit there are many situations where influences could be present making it difficult to maintain objectivity these are known as threats to objectivity we can categorize them into five types of threat self-interest self-review familiarity advocacy and intimidation firstly we need to understand what each type of threat is then I will take you through some practical examples and how the auditor should manage them a self-interest threat is where the auditor has a personal interest in the client which could affect the decisions they make on the audit this could be a financial interest or any other interest that could affect their judgment which could affect the whole audit including the opinion a self-review threat arises where an audit firm May provide other services other than external audits to a client other services such as tax and accounting preparation could be completed by an individual who then goes on to work on the audit assignment the issue is that if they were to audit their own work and discover an error it would be unlikely that they would admit to it thereby leaving a potential material misstatement in the financial statements familiarity threats are when the auditor is too connected to the client which affects their reaction to things the client does they can become too trusting of the client's actions which can affect decisions made on the audit compared to other less familiar clients advocacy threat is where the Auditors could be representing them in some way or promoting them this could be seen as holding their hand and lacking objectivity needed to form an independent opinion finally intimidation threat is where the client may put pressure on the Auditors to threaten them in order to influence the outcome of the audit if the auditor identifies any of these threats relating to one or more of their clients they need to put safeguards in place to reduce the threat to an acceptable level and so our next step is to identify some typical situations that Auditors find themselves in relation to these threats and the necessary safeguards that you could recommend self-interest threats include owning shares in a client being too dependent on client fees and accepting gifts from clients owning shares in a client and auditing them could mean you have sensitive information available to your investment if errors were discovered that reduced the profit for example you may not identify them to protect the return on your investment you should therefore recommend that all shares are sold if taking part on an audit or the individual should not be involved in the audit process being too dependent on client fees increases the need to keep them as a client Auditors May therefore be too lenient with them and allow bias into decisions being made on the audit the recommendations are that there are fee limits for clients within an audit firm no more than 15 percent of total fee income should come from an individual client this relates to recurring fees only and regular fee reviews should take place on clients to ensure limits are not exceeded accepting gifts can be seen as a way to influence the audit Auditors may want to please the client so they continue to receive gifts which could affect decisions being made the recommendation is to only accept modest gifts if it is a small token it is unlikely to affect the audit anything else should be politely declined the Auditors should also document any gifts offered on the audit file self-review threats include accounting and tax services internal audit services and if a client's staff joined the audit firm provision of accounting OR tech services is allowed as long as it is not a listed client if listed they must politely decline the offer the same applies to internal audit Services if it is a listed client it is not allowed the general recommendation for provision of other services is as long as it is not listed separate teams should be used so individuals do not audit their own work if a client member of Staff joins the audit firm they have a close connection to the client and may have personal feelings towards staff there which could affect their judgment they could also technically be auditing their own work and may not identify mistakes made it is recommended that they should not take part in the audit of this client for at least two years since their employment ended there familiarity threats include the length of time the client has been at the audit firm and family or friends working for the client the longer the audit firm has worked with a client naturally the less objective and more trusting they can become the audit partner who is responsible for the audit should therefore be rotated on a regular basis to improve objectivity seven years is currently the recommended maximum that an audit partner should be working with a client family and friends working at a client would naturally cause problems for an auditor remaining objective and not allowing personal feelings affect their judgment therefore the auditor should not take part in the audit assignment if they have family and friends working there advocacy threats include representing a client in court or any dispute and negotiating on the client's behalf of Finance if representing a client to resolve a dispute or to assist in a court case happens remember it is impossible to remain independent and work alongside them speaking on their behalf the same applies to negotiating on their behalf the perception given by representing them means Auditors would almost certainly not be seen as independent the recommendation is that Auditors are not allowed to act in this way they must politely decline any offer of these services intimidation threats include overdue fees and litigation between clients and auditors if fees are overdue there is a risk the client is withholding fees to try and influence the outcome of the audit the recommendation should be to discuss the issue with the client then delay further work until the fee is paid if there is a court case between the client and the audit firm it is almost impossible to maintain a professional relationship and be objective during the audit process the audit firm should therefore resign as it is not possible to complete an audit assignment effectively and so you should now have an understanding of the five threats to objectivity that an auditor May face and also how to manage those threats if they arise our next step is to look at another ethical risk conflicts of interest a conflict of interest arises when the audit firm has the opportunity to audit two connected clients for example to audit two competitors or clients that are in a major supplier customer relationship this situation may arise if you have a client and due to your experience in that field you have been approached by the other client it can also arise when audit firms merge together and they find that both parties have a client that is connected to the other the main issue with the conflict of interest is confidentiality both clients will be concerned with sensitive information being leaked from one party to another which the other client could react to it is advised that audit firms should avoid conflicts wherever possible but if a conflict is present they should ensure sufficient safeguards are in place the safeguards are as follows the audit firm should discuss with both clients whether they are both happy to continue with the same audit firm if it's a no then they must decline the audit assignment or resign from one if it is a yes then they need to ensure confidentiality can be maintained having separate audit Partners heading up the audit teams separate audit teams and offices if possible should be set up training on the importance of confidentiality should be given to all staff on either audit team confidentiality agreements can be signed by the audit staff to enforce the importance of not discussing the client data if the audit firm cannot guarantee safeguards are strong enough they should not continue with both audits the final issue to discuss in this video is breaking confidentiality we have discussed the importance of keeping client information confidential and it is one of the fundamental principles from the ethical code which should be followed however there are instances where confidentiality can and should be broken there are three situations with which we can categorize disclosing information regarding the audit client and they are when the client has given permission to disclose where there is a legal Duty and where it may be in the public interest the client may give the Auditors permission to disclose information about them to a third party this may be part of the normal process of an audit for example when first accepting an audit assignment a professional clearance letter is sent to the previous Auditors this asks for any professional reasons why the Auditors should not accept the assignment the client permission must be obtained before writing to the old Auditors and Responding back to the potential new auditors other independent parties may also be approached by the audit firm including the bank to confirm the bank balance the Auditors contact the bank asking for a bank report to confirm directly again permission is needed before any contact is made with the bank there may be a legal duty to disclose information about the client this could be if there is a concern that they may be involved in any illegal activity such as money laundering before any disclosure is made the Auditors must ensure they have sufficient evidence to prove this and should seek legal advice first the Auditors may also be summoned to court to give evidence regarding the client in this situation the court takes precedent and they must attend and give the evidence required the auditor may also find themselves in court defending themselves against a client for example in this case the auditor has the right to provide information about the client to defend themselves rather than be silent acting in the public interest is important for an auditor to maintain the reputation of their profession if they find the client they are working with is doing something immoral they may decide to disclose this information externally examples could include environmental issues such as pollution or the client not acting in the public interests caution must be taken as proving something is in the public interest is difficult discussions within the audit firm should include audit partners for additional advice and even legal advice should be taken before any disclosure is made to summarize this video we have covered ethical risks relating to Auditors these were threats to objectivity conflicts of interest and breaking confidentiality all three issues are addressed at the acceptance stage of an audit to identify How likely it is that these issues will cause problems for the audit process confidentiality is then an ongoing issue for the Auditors and should be considered if any of the issues mentioned arise when working for the client if the auditor's ethical Behavior would be affected during an audit assignment they should consider whether they should continue working on the audit assignment as ethical advice is in place to protect the reputation of the audit firm and the profession as a whole I hope you found this video useful thank you for watching this video is going to cover the topic of corporate governance we are going to discuss the impact corporate governance has on external audits we therefore need to cover what corporate governance is what is needed for an organization to follow corporate governance the role of the audit committee and what the external auditor reports on for a listed company corporate governance is a set of guidelines that listed companies should follow it is quite simply advice on how to run your company well the aim of corporate governance is to allow these companies to operate in the shareholders interests and help protect their investment from poor management decisions globally there are variations on corporate governance we are going to focus on the UK version which is the corporate governance code the corporate governance code is a set of guidelines that should be followed by listed companies many non-listed organizations also follow them as they are deemed best practice the code gives us five main principles leadership look the board of directors are collectively responsible for the success of the organization and decisions are made Fairly non-executive directors who are part-time are not involved in the day-to-day activities should assist with decisions made effectiveness the board of directors should have appropriate skills and be provided with the relevant information on a timely basis to ensure the right decisions are made accountability the board of directors should ensure risks are identified and that strategies are formed while communicating openly with the auditors remuneration directors pay should be fair and still be able to attract the right individuals to the role pay should not be set by one individual and no one should set their own pay and shareholder relationships communication should be clear and objectives and any issues should be dealt with on a timely basis in Practical terms in order for these principles to be implemented the company must organize the board of directors so that responsibilities are shared and decisions are made Fairly heading up the board of directors should be the chairman and the chief executive officer or CEO the chairman should be a non-executive director and lead the board to ensure strategic decisions are made in the shareholders interests the next tier of management would consist of executive and non-executive directors executive directors run the company on a day-to-day basis and non-executives monitor and assist in decisions being made ideally there should be an equal board mix of the two types of directors this tier of management would then form committees who take on responsibilities for the company the Committees are the audit committee the risk committee the remuneration committee and the nomination committee the audit committee is responsible for financial reporting and system control matters it should be comprised of at least three non-executive directors two is permitted for smaller companies at least one should have Finance experience which makes sense given the responsibilities they are taking on for the company this committee should ensure that they increase confidence in the published financial information they liaison advise the board of directors to ensure they meet the responsibilities for providing financial information and improve Independence of the external auditor as they communicate directly with them some of the responsibilities of the audit committee include reviewing the internal controls and recommending changes often with the assistance of the internal auditor communicating with the internal and external auditors reviewing the reliability of the financial statements recommending the appointment and removal of external auditors and arranging for a confidential whistleblowing system for employees and potentially investigate any issues found as this committee improves confidence credibility expertise and the control environment it is a welcomed recommendation for shareholders it may be difficult to find the right individuals with the necessary skills and these individuals may prove expensive for the company the risk committee are responsible for assessing the risks associated with the company and recommending the best approach to reduce these risks this committee is also made up of non-executive directors whose role is to identify risks and ways to manage those risks once identified they need to prioritize them in order of importance and then assess whether the risk can be transferred to another party for example by an insurance cover be avoided altogether be reduced by improving controls or if not likely to happen and low impact risks be accepted business risks must be reviewed and reported to the board regularly to ensure that they are identified in a timely manner this is an ongoing process for the committee as the risks can come from the company itself and from external factors for example changes in regulations and economic climate changes the remuneration committee set pay for the board of directors remember the corporate governance code recommends pay is not set by an individual and is fair but competitive the remuneration committee is therefore made up of non-executive directors to ensure the executive directors are not paid excessive amounts performance is considered in the decisions and they are not setting their own pay the nomination committee is responsible for appointing directors to the board once again the board is made up of non-executive directors this ensures the best person for the role is appointed and reduces the risk of bias in decisions being made on recruitment otherwise personal feelings may be involved when recruiting directors for the company if a company is listed or wishes to follow best practice these recommendations should be followed listed companies then produce much more detailed financial information in their annual report it will report on the corporate governance code and whether they have followed all of the principles the Auditors must audit the financial statements plus they must report and review the compliance of the corporate governance code the Auditors must prepare their audit report and report on whether the financial statements are true and fair this is based on performing audit procedures and Gathering evidence on the system's balances and transactions of the company they must also report on any inconsistencies found with the other information in the annual report including the director's statement any concerns with the information provided will also be included in the audit report I hope you found this video useful thank you for watching this video will cover internal Auditors and how they impact on an external audit to fully understand this we are going to cover the internal Auditor's role the key differences between an internal and external auditor how the external auditor can rely on the work of an internal auditor who requires an internal auditor and Outsourcing the internal audit function to an audit firm the internal Auditor's role can vary depending on the requirements of The Entity they can cover a broad range of activities their main aim is to advise management the internal audit team usually work within and report to the management of The Entity the expected role of an internal auditor includes the review of control activities this would be a review of the control systems within the entity and would highlight any control deficiencies that may need to be addressed this will assist in reducing the risk of Fraud and error to examine the timeliness of control information this will enable management to react appropriately to information received from their systems the internal auditor will regularly review Systems and ensure issues are reported value for money audits this is to identify whether a decision is appropriate for the organization this could include a new product service or even whether to go ahead with a new supplier they will review the three E's the economy the best price the efficiency the best use of resources and Effectiveness the best result to help decide whether to go ahead with the plan identifying business risks internal Auditors are best placed when reviewing the entity and its control systems to identify potential risks to the company they will then report these to management and recommend how the entity can reduce that risk they will examine compliance again they have the expertise to identify non-compliance of laws and regulations they can report these to management and assess how they can be avoided in the future they work with and support the audit committee the audit committee is a group of non-executive directors who manage external and internal auditors if internal Auditors report to this committee they improve independence from the board and also very often improve the effectiveness of decisions made of their work finally they complete special investigations requested by The Entity management this can include fraud investigations mystery shopper reviews inventory counts and asset inspections each of these investigations will assist the management in improving the organization it is worth noting that internal and external Auditors have some key differences these are Independence scope of work objectives reporting appointment and removal and whether they are a legal requirement external Auditors must be independent in order for them to form an opinion that will be trusted by the users of the financial statements internal Auditors however work within the organization and often report directly to the directors they therefore are not independent from The Entity and may lack objectivity when performing their work the scope of detail of what these Auditors do is also different the external auditor plans and performs audit procedures on the control systems and the transactions and balances within the financial statements this identifies whether the financial statements are true and fair internal Auditors as we have already seen cover many areas looking at the systems and controls used by The Entity the amount of work will depend on the requirements of management the objective of the external auditor is to form an independent opinion on whether the financial statements are true and fair this is provided in a written report at the end of the audit process the objective of an internal auditor is to advise management and improve the control systems external Auditors report to the shareholders of The Entity internal Auditors report to the directors or the audit committee if available external Auditors are appointed and removed by the shareholders this is done by vote usually at the AGM internal Auditors are appointed and removed by the board of directors or the audit committee if available an external audit is required by law there may be exemptions for example in the UK there is a small company exemption which allows smaller companies to not carry out an audit but all medium to large size companies will need one internal audits are not required by law they are recommended by corporate governance to ensure sound control systems external Auditors may be able to use some of the work that an internal auditor produces for example the review of control systems to highlight deficiencies and testing of control systems is something that the external auditor carries out as part of their audit work it may be possible to use some of this work with permission so that they can then concentrate on other more complex areas of the audit before they decide whether they can use the work of the internal auditor they must consider how reliable it is considerations would be the scope of work they would address how much detail has gone into the work as external Auditors must provide reasonable Assurance on the work they carry out the technical competence they would need to review the experience and qualifications of the internal auditing the report quality they would need to identify whether there is enough written evidence to ensure it forms sufficient appropriate evidence for the audit Independence if the internal Auditors report the audit committee this would improve Independence and also how reliable they would be for the external auditor based on what we've just mentioned the external auditor would then decide whether they can use some of the internal Auditor's work as evidence not all companies require an internal auditor for example if the company has simple systems is small in size and only one location there is very little need to have the internal auditor support the organization there are some indicators of requiring an internal audit function including if the company is large if it has complex systems and regulations that must be followed if it is listed on the stock exchange if it has been known to have problems for example fraud or internal control deficiencies that led to fraud and error each organization must decide whether an internal audit function would benefit them and fit in the plans for their future if an entity would benefit from an internal audit department but it is not prepared to have a full-time employed internal audit function they may Outsource audit firms have the expertise to take on the role of an internal auditor for the organization many have internal audit departments with dedicated staff who work on assignments for these clients and assist the management with the role of the internal auditor this setup has many advantages and disadvantages the advantages are it can be cost effective as using an external audit firm to take on a short-term assignment would be cheaper than having an employed internal auditor or internal audit team this option also removes employment costs such as Recruitment and tax audit firms may have more specialized skills from The Experience they gain with other clients this means the company May benefit more from the work completed by an outsourced function this option increases Independence for the internal auditor if the internal auditor is not employed by the management and working full time then their work may be seen as more reliable it reduces the burden of having a department to manage it will allow them to focus on more important areas the disadvantages of an outsourced internal audit function are they may lack the knowledge of the business to fully understand the whole operation this may lead to them misinterpreting something incorrectly they can be expensive thanks to the generous charge out rates issued by the audit firm therefore long-term use may become less cost effective they may not be available immediately due to other responsibilities they may not be ready for the client when they need them leading to delays in decisions there is a possible conflict of interest if the audit firm carries out the external audit many countries will not allow this for example in the UK ethical standards stop external Auditors being the internal Auditors if they are to place much Reliance on the work during the external audit we have covered lots of areas relating to our internal auditor you should Now understand the varied role of an internal auditor how they differ from an external auditor how the external auditor can often Place Reliance on the work of the internal auditor as evidence and what they must consider before they do this when an internal auditor is beneficial for an organization and how Outsourcing the internal audit function to an audit firm works and what are the key advantages and disadvantages I hope you found this video useful thank you for watching in this video we are going to cover what needs to be considered by the auditor at the acceptance stage of an external audit this is the very first stage in the audit process and it is in general terms whether they should continue the audit assignment there are two situations either the auditor will be considering whether they continue to enter an existing client or they will be considering whether to accept a new engagement either way both of these situations will require the same process to ensure the correct decision is made by the auditor the new audit clients are generally gained by three methods client request advertising and tendering clients are often recommended by existing clients and may contact the Auditors directly to take on their audit work and other services advertising Services often results in new clients approaching them the tendering process often occurs with larger often listed clients it is where several audit firms will set up presentations to the potential client to promote themselves as the best audit firm for the assignment the company will then select which audit firm they were most impressed with whichever way the auditor gains a new client care should be taken as to whether the client should be accepted there are many considerations as to why they may not want to accept an audit assignment these considerations can be split into two stages the preconditions of an audit and any other acceptance considerations stage one is the preconditions of an audit if the Auditors are not satisfied with the preconditions then the auditor should not continue any further with the audit assignment Isa 210 tells us that the preconditions are is the client following an acceptable financial reporting framework and does the client management accept their responsibilities the auditor would need to consider whether the financial reporting framework is appropriate for example is it consistent with previous years as well as if it is appropriate to the organization in terms of management responsibilities they must accept that they prepare the financial statements in accordance with applicable reporting framework ensure controls are sufficient to ensure financial statements are free from material misstatements and provide the auditor with all relevant information and explanations necessary to complete the audit assignment as I mentioned before if the preconditions are not present then they should not accept the audit assignment once the preconditions have been identified the auditor must move on to any other considerations that may affect their decision to continue the audit we will go through each consideration in detail professional clearance if the audit firm has been approached to audit a new client the best source to identify if there were any issues which may cause them not to accept would be the previous auditors therefore they should write to the previous Auditors and ask them if there are any professional reasons why they should not accept the audit assignment this is known as a professional clearance letter professional reasons not to accept may include overdue fees still owing to the previous auditors breach of Law and regulations discovered by the previous auditors disagreements with management during that audit and a lack of Integrity from management which may affect the auditor's reputation it is important to review this feedback to ensure a client is not accepted who may risk causing the audit firm to act unethically or unprofessionally this feedback affects confidentiality as it is discussing client information with the third party therefore permission is needed from the client to write to the previous Auditors and the previous Auditors must also get permission in order to respond if permission is not given it is unlikely that an audit firm would feel comfortable continuing with this assignment auditor considerations I gather all practical concerns the auditor may have under one heading they must review the time needed the skills required and the fee the audit firm must ensure it is practical to take on an audit client audit firms must ensure that they have the time to complete the audit work properly if they already have a very busy time of year where a lot of their clients have the same year end it would not be sensible to take on another client with the same year end and therefore similar deadlines to other clients this may affect the quality of the audit work provided they must also ensure that they are able to complete the audit work competently just because in order to can audit one type of business it does not mean they have the skills to audit them all therefore they must ensure they have the necessary skills and experience to deal with every client the fee should also be considered fees must be based on the amount of work expected from a client any contingency should not be accepted the risk of non-payment should also be considered by the audit firm audit risk considerations while the Auditors may not yet have access to all books and Records it is important to identify any issues that may indicate audit risk is high audit risk is the risk of the auditor giving an inappropriate opinion and this risk should always be kept to an acceptable level if there are indications that there is an unacceptable level of audit risk associated with the client then the audit assignment should not be accepted ethical considerations the Auditors need to ensure they maintain their ethical standards so as not to affect their reputation or the reputation of the profession at the acceptance stage they must identify if there are any potential conflicts of interest with existing clients if there are both clients need to be made aware and if they are both happy to continue being audited by the same audit firm then appropriate safeguards for confidentiality must be implemented the Auditors must also identify any potential threats to objectivity these are self-interest self-review familiarity advocacy and intimidation again any threats must be identified and they must consider if they can be managed if not the assignment should not be accepted based on all of these issues a decision is then made as to whether they should accept or reject the client if the risks are too high being associated with the client then they should reject if they accept the Auditors then move on to the next stage of the audit process the engagement letter I hope you found this video useful thank you for listening this video will cover the engagement letter the engagement letter is an agreement that is put in place at the start of the audio process once the auditor has concluded the acceptance stage and agrees to continue with or accept a new audit engagement the engagement letter is prepared in this video we must cover the purpose Isa 210 agreeing the terms of audit engagements and the contents of an engagement letter the engagement letter is a way of communicating and agreeing the audit process with the audit client its main purpose is to minimize the risk of any misunderstandings between the two parties and reduce the expectation Gap this is the difference between what Auditors actually do and what many perceive them to be doing explain the audit process and the terms and conditions of the audit engagement and it acts as a way of both parties accepting the audit process in writing isotu 10 states that the engagement letter should be prepared agreed and signed by both the auditor and the client before any audit work starts the engagement letter contents should be reviewed every year to ensure it is up to date any changes in the engagement would mean the engagement letter should be updated a new engagement letter is not required every year if changes have not occurred Isa 210 also outlines the contents of an engagement letter the main contents should include the objective and scope of the audit the auditor's responsibilities the client management responsibilities the financial reporting framework and the form and content of any reports used the objective of the audit is to provide sufficient appropriate evidence to form an independent opinion on the financial statements the scope of the audit is to plan and perform audit procedures to audit the financial statements including the statement of financial position the statement of profit and loss statement of changes inequity and the statement of cash flows the auditor's responsibilities are to carry out their audit in accordance with auditing standards they must plan and perform audit procedures to give reasonable Assurance on whether the financial statements show a true and Fair View they must obtain sufficient and appropriate evidence to form an independent opinion and they must communicate any issues including any deficiencies found in control systems to management the client management responsibilities are to prepare the financial statements properly following relevant financial reporting standards ensure controls are sufficient to ensure the financial statements are free from material misstatements and to provide the auditor with access to all relevant books and records and provide information and explanations required the engagement letter would also include a mention of the financial reporting framework being followed when preparing the financial statements for example International financial reporting standards throughout the engagement letter it will mention the form and contents of reports for example the formal written audit report at the end of the audit process will show the audit opinion any control deficiencies will also be reported in writing in the form of the management letter or report to management in addition other matters may also be included for example confirming the use of experts during the audit engagement the basis of fees the Reliance of some of the internal Auditors work if appropriate acknowledgment of any specific regulations relating to the audit provision of additional services the limitations of an audit and the timings of any Communications during the audit if the engagement letter is not reviewed every year the information within it may be out of date the Auditors May provide additional services not included or the fee basis may have changed in addition if there is not an up-to-date signed copy of an engagement letter then the auditor has not received confirmation that the management accept their responsibilities this could cause problems later on in the audit and without an engagement letter the audit standard ISO 210 is not being followed I hope you found this video useful thank you for watching this video is going to cover the topic of audit risk the aim of this video is to gain an understanding of the factors that must be considered by Auditors when deciding what is an acceptable level of risk associated with a client the definition of audit risk is the risk that the auditor gives an inappropriate audit opinion I.E there are material misstatements present in the financial statements before we go into the practicalities of audit risk let us ensure we understand what material misstatements are this is defined in ISO 450 as a difference between the amount classification presentation or disclosure of a reported financial statement item and the amount classification presentation or disclosure that is required for the item to be in accordance with the applicable financial reporting framework misstatements can arise from error or fraud this is a very wordy definition and difficult to remember to help remember we could summarize as follows a misstatement is the difference between what is in the financial statements and what should be in the financial statements in accordance with the applicable financial reporting framework these material misstatements if present in the financial statements could cause inappropriate decisions to be made by the users of the information for example a decision could be made by the bank to give Finance to the company based on the financial statements in reality if a material misstatement is present in liabilities causing them to be understated once corrected the lender may not come to the same conclusion if there are material misstatements present and the auditor States in their opinion that the financial statements are true and fair then their opinion is wrong this leads to users making incorrect decisions but also could lead to others questioning the auditor's competence therefore affecting their reputation and future client relationships the aim is therefore to keep audit risk as low as possible for every client Auditors must identify the risks associated with the client at the planning stage of an audit to calculate audit risk for each client they use the audit risk model this is shown as follows AR which stands for audit risk is equal to IR times CR times Dr each of the three components of audit risk in the model need to be considered by the auditor to decide the level of risk IR is inherent risk this is the risk of a material misstatement in the financial statements due to the nature of the client whether it be the business itself or the industry which they operate Within inherent risk may be high due to the level of Regulation that must be followed by the client if heavily regulated there is a stronger risk they may have not followed industry rules and disclosure in the financial statements may be inadequate it could also be related to what they trade in or produce for example if the products are frequently being improved and replaced by new products there is a risk inventory held in the financial statements may not be valued correctly leading to material misstatements clients trading in technology are always high inherent risk clients the auditor cannot change the level of inherent risk they must identify it and then plan how to manage it CR is control risk this is the risk of a material misstatement in the financial statements due to poor client controls control risk may be higher due to the financial reporting system itself for example it may not be integrated with other systems which provide it with information if human input is required this increases the risk of misstatements being present control risk may also be higher as the client does not perform adequate control procedures within their business to give you an example if the client does not perform a year-end inventory count it increases the risk of the Infantry balance being materially misstated again the auditor cannot change the level of control risk the Auditors can recommend changes for the future for now these issues must be identified to decide the level of and type of audit work needed Dr is detection risk this is the risk of a material misstatement in the financial statements due to the auditor not spotting the error this is the one element of the audit risk model that the auditor can do something about the auditor must ensure that their order procedures carried out during the audit process are able to detect misstatements that could be material the level of work needed will depend on the client's circumstances if the client is imposing a tight deadline it may mean the long working hours could cause misstatements to be missed or the auditor may cut Corners to get the work completed on time and perform less procedures than they should if the client is new the audit team may lack knowledge of the business which could mean they miss something important in spotting a misstatement so we can see that inherent and control risk cannot be changed the auditor therefore needs to identify these risks which will then help them decide what the detection risk level can afford to be this audit risk model needs to ensure the overall audit risk is kept as low as possible if the Auditors have a tricky client an inherent and control risk are high then detection risk must be low the only way to reduce detection risk is to increase the work carried out on the audit more audit procedures would be needed more time should be spent on the audit sample sizes should be increased and even more experienced audit staff should be used to help detect material misstatements if the client is a fairly stable one with no previous or current issues in a non-risky industry then detection risk can afford to be a little higher this does not mean the auditor relaxes the rules when carrying out the audit work as they still must follow auditing standards and ensure they have collected sufficient appropriate evidence to form their independent opinion what it does mean is that they can afford to test smaller samples of transactions and therefore spend less time on the audit in comparison to a more high-risk client the audit risk model is key to understanding audit risk the three components inherent risk control risk and detection risk identify the overall risk of the auditor forming an inappropriate opinion on the financial statements remember that the nature of the client's business and industry and the quality of their Control Systems could cause material misstatements and these risks must be identified by the audit team at the planning stage they then need to decide on the level of acceptable detection risk for detection risk to be low more audit work and time spent is needed by the audit team this all then helps decide on the audit procedures needed to be carried out and the key financial statement balances that need most Focus if audit risk is assessed correctly the audit opinion will be appropriate at the end of the process I hope you found this video useful thank you for watching this video is going to take you through the Practical steps that in order to Follows in order to identify audit risk we have covered the theoretical understanding of audit risk in another video and we use this knowledge just like the auditor does to find the issues that increase audit risk with the client audit risk is the risk of the auditor giving an inappropriate opinion on the financial statements for example stating the financial statements are true and fair when there is a material misstatement uncorrected the auditor has the audit risk model to understand and calculate audit risk they categorize the risks into three areas inherent risk control risk and detection risk the aim is to identify the risks and then plan how to manage these issues to keep the overall audit risk at an acceptable level Isa 315 requires Auditors to perform risk assessment procedures ISO 200 requires Auditors to apply professional skepticism during the audit including planning the audit this means they must be alert to issues that may cause misstatements and have a questioning mind when carrying out their work both of these auditing standards help guide the auditor through the planning stage and ensure audit risk is assessed properly the auditor must somehow identify audit risks so they can be included in the plan the risk assessment includes two main pieces of work carried out at this stage understanding The Entity and its environment and using analytical procedures both of these methods will help identify potential material misstatements and will allow the auditor to factor in the time and work needed to ensure their opinion is an appropriate one when obtaining knowledge of the business the auditor must gain an understanding of the structure of the organization the industry it operates in as well as any events that may be relevant to the audit at the planning stage the auditor will have access to all books and Records plus they will also be able to discuss issues with the client management and staff therefore the three main methods of gathering information about the client are inquiry with management and staff observation of control procedures carried out and inspection of important documents and procedure manuals to understand an entity fully the auditor must gather information on the following industry and other external factors that impact on the client and its accounts laws and regulations directly affecting the operations of financial statements the client organizational structure including how it operates who owns it any investment it makes and the management structure the accounting policies it follows the client business plan and risks the financial performance and internal controls this is a lot of information together at the planning stage however there are many sources where this information can be obtained the four main sources of information are within the audit firm from external sources from the client and from the individual auditor if the client is an existing one much of the information can be gathered internally within the audit firm the previous audits will have gained a lot of background information about the client and its structure therefore the previous year's audit files holding the working papers and the permanent audit file will be a good source of information discussions with the audit partner who will have much knowledge about the client along with the audit manager is also advisable previous year's audit teams will also be able to assist in the understanding of the client external sources will give you some independent information about the client these include company's house where information on the structure and financial statements can be found the internet and trade press where Auditors may find events relating to the client that may be relevant to the audit and the financial statements industry surveys and credit reference agencies will also give relevant information on how they've been performing and their financial position from the client regarding their systems and controls and any events relevant can be obtained from The Following discussions with client management and staff observation of procedures their website and any brochures finally understanding the client also takes a mortgage experience past experience from similar clients for example will ensure the auditor can identify what is necessary for this particular audit now we have discussed the work in understanding The Entity we can move into the other key piece of work in identifying audit risks analytical procedures the definition of analytical procedures is given in ISO 520 as evaluations of financial information through analysis of plausible relationships among both financial and non-financial data I like to put it more simply as comparing financial and non-financial data to understand changes this is an important tool within the audit process and it must be used at the planning stage Auditors are also advised they must again use analytical procedures at the end of the audit process at the completion and review stage and can use it to gather evidence during the substantive testing stage the purpose of Performing analytical procedures at the planning stage is to understand the business the client operates identify unusual balances and transactions and events that may indicate potential audit risks and identify potential material misstatements due to fraud and error the way the auditor does this is to compare the most up-to-date set of financial statements for example a draft set of financial statements to the previous year budgets or forecasts and Industry averages with the use of ratios knowledge of ratio calculations is required here as this accounting tool will help highlight potential issues with the numbers better than just looking at the figures in the financial statements ratios can be categorized to review the following profitability efficiency liquidity and return profitability ratios include the gross profit margin calculated as gross profit divided by Revenue multiplied by a hundred percent net margin is calculated as profit before tax divided by revenue and multiply by 100 percent and these ratios will give you the proportion of profit to revenue in a percentage form efficiency ratios include receivable days Ratio calculated as receivables divided by Revenue multiplied by 365 days payable days Ratio calculated as payables divided by purchases multiplied by 365 days and inventory days Ratio calculated as inventory divided by cost of sales multiplied by the 365 again these ratios will give you the average number of days customers take to pay the client pays suppliers and inventory is held in the business liquidity ratios include the current Ratio calculated as current assets divided by current liabilities and the quick Ratio calculated as current assets minus inventory divided by current liabilities these ratios will show you how comfortably the company can repay its current liabilities return ratios such as the gearing ratio will show you how much debt is in the business this is calculated as debt divided by Equity or borrowings divided by share capital and Reserves the auditor can calculate ratios on the current figures in the financial statements and compare them to the previous year budgets and Industry averages this will then highlight unusual differences in results which can then be investigated in more detail during the audit any unusual results from analytical procedures could be the result of a material misstatement therefore lots of variations in figures and disclosures would increase audit risk to summarize to help calculate audit risk the auditor must identify potential issues that could cause misstatements there are two main methods the auditor uses understanding The Entity and its environment and analytical procedures the less that is known about the client the more work is needed to ensure the auditor understands fully the potential issues that could cause misstatements there are many sources where information can be obtained and the auditor must use those resources available including talking to and observing the client staff and management review of the financial statements is also important and using analytical procedures is required as per auditing standards all of this information obtained from the work we have discussed must be documented in the audit file this will ensure there is evidence that the work to identify audit risks was in accordance with auditing standards I hope you found this video useful and thanks for watching this video is going to cover the laws and regulations that surround our external auditor we will need to cover the regulatory body who requires an external audit who is allowed to form an opinion on the financial statements the rights and duties of an auditor and Auditor's appointment and removal external Auditors are regulated to ensure their work is effective consistent and their credibility remains intact there have been historical events such as the collapse of Enron that have caused issues with the reputation of the profession this has led to tighter controls on what the Auditors do when carrying out an external audit external Auditors must therefore follow strict guidance to ensure their work is of the correct standard and maintains that credibility needed so that their opinion is valued this includes the code of ethics which is guidance on behavior of the auditor this is covered in detail in another video auditing standards must be followed which is specific advice on areas of the auditor's work and corporate law specific to where they are based and where the client operates the ifac International Federation of accountants is a global supervisory body they are an organization working on consistency of accountants across the globe they have subgroups which then take on specific more detailed responsibilities for each area of the profession the iaasb international auditing and Assurance Standards Board is the group that looks after the external auditor they have two key outputs the development of the international standards of auditing or ices of which there are currently 36 and the international standard on quality control or isqc of which there is only currently one Isis are published in a book regularly reviewed and periodically updated by the iaasb each Isa gives the auditor specific guidance on elements of the audit process and must be understood and followed by the auditor only in exceptional cases would in order to be able to depart from the standard guidance their decision would need to be justified for a new Isa to be developed there is a lengthy process this will include lots of discussions with interested parties and debates over whether a new standard should be created or a current one adapted the steps include a debate within the iaasb on the issue if concluded there is a need for a change in the Isis they will issue an exposure draft which is a draft of the standard made public for feedback from interested parties comments from external parties are taken on board an approval from the iaafb is sought finally the new or adapted Isa is published many countries may have created their own version of auditing standards and choose not to follow the international ones this is permitted as the ifac has no legal standing in each country in the UK the financial reporting Council has adopted and modified the international auditing standards in addition to auditing standards the auditor must also ensure they follow relevant corporate law corporate law differs from one country to another so we are going to look at the general requirements for an auditor from UK law and the company's Act 2006. registered companies are required to have an external audit in the UK there is a small company's exemption which allows small companies to not appoint external auditors these companies need to have Revenue at less than 6.5 million they can still have an external audit if they wish but there is no legal requirement this helps small companies who are often owner managed and have fewer control systems and staff to not be burdened with an external audit whose expense often outweighs any benefits there were no real restrictions on who can be part of the audit team however those responsible for the audit and the decisions made on it are referred to as practitioners these practitioners are required to be a member of a recognized supervisory body or RSB and be allowed to be a practitioner by their rules examples of these rsbs include the Acca and the icaew once a member they are allowed to form an opinion on the financial statements and sign the audit report for the auditor to conduct their audit properly they need to ensure they have everything in place to allow them to do their job their key rights are they must be allowed access to all relevant company books and Records they must be given all information and explanations necessary to complete their audit they must be informed of when and be allowed to attend any general meetings between the management and the shareholders including the AGM and they are allowed to be heard at such meetings they must also be given copies of any written resolutions of the company the auditor's Duties are to audit the financial statements and form an independent opinion on them stating whether or not they are true and fair they must also report on any specific legal requirements relevant to the company being audited and they must also ensure they follow the auditing standards and their ethical code while carrying out the audit Auditors are generally appointed by the shareholders this is usually done by vote with the majority decision being taken however there are some exceptions to the rule if it's the first year that the audit has been required or it is the first year the company has been set up the directors are allowed to appoint the Auditors initially this is to ensure that they have an auditor in place as soon as possible rather than waiting until the AGM at the end of the year once the first audit has been completed it is then the shareholders right to vote to decide whether to keep or change the external auditor going forward if neither the directors or shareholders have appointed the Auditors and deadlines for submission of an audit report have passed then the government would usually step in they would then appoint an audit firm to complete the work for the company this is an extreme measure and is quite rare but the rules are in place to deal with this if it happens there are two main situations where an auditor would no longer act for the company either they are no longer able to act for them and resign as Auditors or they are sacked or removed there are many reasons why the Auditors May resign it may be that being the auditor could affect their ethical Behavior or the Integrity of the directors and their relationship with them has changed and they feel they should not continue with the audit whatever the reason the Auditors must notify the company and the shareholders in writing as soon as possible they issue a statement of circumstances which gives the reasons for the resignation and would then be available to assist with a Handover to the next audit firm appointed the shareholders will be responsible for removing the auditors if the majority vote to remove or sack the Auditors then they continue with this decision once decided the shareholders then need to inform the directors and the auditors notice is given to both the directors and auditors written confirmation is sent to both parties informing them of the decision and giving notice to ensure any issues are tied up before the auditor leaves if the auditor feels that the decision is unjust they have the right to send a response to all parties explaining why they should not be removed to summarize Auditors are regulated by the iaasb they are expected to follow the auditing standards and ethical code when carrying out their work as an auditor they must also follow any other relevant laws and regulations for example local legislation that is relevant when working for the client the laws and regulations not only ensure the auditor carries out their work properly but it also protects the auditor for example giving them rights that enable them to carry out their work with few complications not every country follows International auditing standards many countries may have their own set of auditing standards however very often like in the UK the international standards are adopted with some modifications I hope you found this video useful thank you for watching this video will cover how fraud relating to an audit client is managed by the audit team Isa 240 the auditor's responsibilities relating to fraud tells us that the Auditors have a duty to identify and communicate any evidence found that fraud is present Auditors have a responsibility to obtain reasonable assurance that the financial statements as a whole are free from Material misstatements whether they arise from fraud or error the key difference between fraud and error is whether the misstatement was intentional or not fraud is criminal activity there are two types the auditor may see one is where there is a deliberate misstatement in the financial statements this is known as fraudulent financial reporting the other is the theft of company assets or misappropriation of assets the auditing standard does not state that it is the auditor's responsibility to prove whether fraud has happened their responsibility is to identify misstatements during the audit process and assess whether they are as a result of fraud or error the responsibility for ensuring fraud is not present in the financial statements and the company as a whole Still Remains with the directors this is sometimes referred to as a primary responsibility towards fraud with the auditor's responsibility being referred to as secondary this is because the Auditors are given some responsibility not all as they assess the risk of fraud based on the systems and transactions reviewed during the audit process for the auditor to maintain their responsibility they must maintain professional skepticism throughout the audit process an inquiring mind can open up things that have been concealed within the organization assess any audit risks that could lead to fraud incentives to commit fraud should be considered for example bonus schemes based on profit margins generally assess the risk of material misstatements for The Entity review how management react to and manage fraud talk to management to see if they are aware of any instances of Fraud and gather sufficient appropriate evidence from audit procedures designed to assess the risk of fraud if the risk of fraud is high the auditor must plan appropriate procedures to ensure that they are in the best position to detect fraud they can ensure more experienced audit staff are available for the audit team increase sample sizes change audit procedures from what they would normally do as being less predictable could catch out anyone trying to conceal fraud focus more on balances containing estimates from management as this would be a popular area to manipulate figures and also focus on the transactions posted around the year end as cut off errors often are an intentional way of increasing or reducing balances if fraud is frowned by the auditor there are some simple steps to follow report it to those responsible for the audit team for example the audit manager and audit partner they should then consider the evidence obtained and report this to the highest level of management at the client if the auditor is suspicious that the management are involved they should seek legal advice and consider whether they would report externally caution should be taken when reporting externally as the auditor has a duty to maintain confidentiality if the evidence collected on fraud is incorrect they would have had no reason to break confidentiality if the fraud detected is material to the users of the financial information then the auditor would need to modify the audit report to make the shareholders aware of the issue in summary fraud is an intentional act to deceive the auditor May detect this as fraudulent financial reporting or misappropriation of assets ISO 240 states that they have a responsibility to assess the risk of Fraud and perform audit procedures to identify fraud however it is the director's responsibility to ensure fraud is not present in the organization and the financial statements if fraud is found the auditor must report this and consider whether it is material on whether the audit report should be modified I hope you found this video useful thank you for watching this video is going to walk you through the planning process of an external auditor we're going to cover the purpose of the plan how the auditor spots risks the audit strategy materiality and performance materiality and the written audit plan to be included in the audit file Isa 300 states that the objective of planning the audit is to ensure it is performed in an effective manner indeed the purpose of planning anything is to ensure it goes well and so the more effective the plan the more effective the audit will be there are some key reasons why a plan is so important for an audit it will ensure the auditor can give enough attention to the more problematic areas it gives the auditor time to assess the risks associated with the audit before they start the audit work they are able to plan appropriate audit procedures in relation to these risks they can select the right level of experience needed on the audit team and consider the need for experts and assistance from internal Auditors which can then be planned properly this should all ensure that the audit meets deadlines so that the financial information can be presented on a timely basis the first stages of an audit process must include the audit team ensuring they will not have any problems being able to follow their ethical code and ensuring they understand the specific requirements of this audit client by reviewing the engagement letter initially the audit plan begins with identifying potential audit risks this is the risk of the auditor providing an inappropriate opinion for example reporting that the financial statements are true and fair when they are not the auditor must assess risks using the audit risk model identifying inherent risks the risk of material misstatements due to the nature of the entity control risks the risk of material misstatements due to poor controls and detection risk the risk of material misstatements due to the auditor not spotting the error there are two main pieces of work that assist them in identifying anything that could increase these risks these are analytical procedures and understanding The Entity and its environment or knowledge of the business analytical procedures are a comparison of Financial and non-financial data to help the auditor understand material changes in the financial statements used at the planning stage they will have a set of draft financial statements that they can compare to the previous year industry averages and any budgets or forecasts produced with the use of ratios they can identify changes in balances which may then need to be investigated when carrying out their audit procedures later on at the planning stage once identified they can design audit procedures that will focus on any areas where more investigation is needed understanding The Entity and its environment is important as if the auditor lacks a fundamental understanding of what the client does there is a real risk that they may make poor decisions and issue an inappropriate opinion thorough investigation of what the client does through the audit firm through the client themselves any external sources and using the auditor's expertise will enable them to find anything that could indicate the audit risk could be higher than expected once any risks have been identified and considered then the auditor must produce an audit strategy the audit strategy is to identify the overall plan for the audit it always comes before the detailed plan as it enables the audit team to see what should be included and how much work will be required we can separate the audit strategy into three components the auditor will need to consider the scope the timing and the overall direction of the audit the scope is the specific details relating to the audit for the client this could include the auditor identifying how many locations the client has so they can plan where they need to travel to it could include the systems that the client uses and whether there have been any changes for example a new upgraded financial reporting system this would require the auditor to ensure the system is reliable and is understood by them which will take time these specific details relating to the client are now identified so plans can be made to address them during the audit the timing of the audit is also important the audit team must ensure they provide their audit report in a timely manner so that the financial information could be presented at the AGM to the shareholders the Auditors therefore need to consider when areas of the audit process should be completed by they should book all its staff so that they are available to be part of the team and arrange when they are visiting the client depending on the size of the entity the auditor may need to include an interim and a final audit medium to large size companies usually require both so there is enough time to complete all of the audit work an interim audit will take place before the year end this can be shortly before the year end where much of the events have already occurred here they can plan assess control systems and perform some of the substantive audit procedures on transactions that have already occurred this then frees up much needed time after the year end for the final audit where further substantive testing and completion and review procedures are finalized the direction of the audit is where the auditor decides what style of procedures are required and the volume of work needed based on the work to identify risks and some review of control systems the auditor will be able to determine whether Control Systems look reliable if this is the case then the direction will be controls based where they can include systems are reliable and Sample sizes in the overall level of work needed for the audit can be reduced if Control Systems look unreliable or there appears to be many indicators of high audit risk the direction is procedural there will be detailed audit testing larger sample sizes skilled staff needed and more time one of the important decisions to make at the planning stage is to decide what is a material misstatement remember if something is material it means it can influence the users of the financial information the auditor has guidelines to follow on what materiality can mean in relation to the financial statements something can be material by its size or by its nature If an item is material by size if incorrect the auditor would request that the client correctly in the financial statements if they don't the auditor would conclude that the financial statements are not true and fair the guidelines on materiality are that an item is material if it is above five to ten percent of profit a half to one percent of Revenue and one to two percent of total assets at the planning stage the auditor must decide what bases they are going to use and what percentage they use their own experience and judgment to decide this for example if the company has many high audit risk indicators and they believe there is a risk of many material misstatements they may choose to lower the percentage for example set up materiality at five or six percent of profit this will allow Willem to investigate more misstatements in detail if they feel that profit may be distorted as costs may not all be present then they may select Revenue to calculate what materiality should be some balances by their very nature are going to be material to the users a prime example is directors transactions which must be transparent to the users if the auditor finds any misstatements relating to this they must be corrected regardless of their size the auditor must also consider and set performance materiality at the planning stage this is a smaller amount than materiality usually a percentage of the materiality they have calculated the idea is that if any misstatements identified while performing audit procedures are Above Performance materiality they are recorded this is usually in a spreadsheet often called the summary of unadjusted errors or evaluation of misstatements at the end of the audit process at the completion stage this spreadsheet is reviewed the auditor is looking to see if there is an accumulation of smaller errors that actually add up to a material misstatement the auditor would then request that this group of Errors which are now collectively material be adjusted in the financial statements let me give you an example let's say a company has a profit of twenty thousand dollars and a set materiality at ten percent this means any misstatements found that are two thousand dollars or more are material to the users and should be corrected the auditor also sets performance materiality let's say twenty percent of materiality this means any misstatement above four hundred dollars should be recorded on a spreadsheet to be reviewed later the auditor then performs their audit procedures and finds the following errors in the payables balance five hundred dollars sixteen hundred dollars and fourteen hundred dollars in isolation none of these are material however they all relate to the same balance and collectively add up to three thousand five hundred dollars which is material to the users in this example there would be a request to amend the financial statements for this amount once the auditor has spent time on the audit strategy and considered details relating to the audit client then they can put together the audit planning document this document is the detail it proves whether the auditor has planned the audit properly and includes all information needed to then carry out the rest of the audit process remember this is not set in stone things change and if things come to light that mean the conclusions made at the planning stage are no longer appropriate then the plan must be amended the planning document must be completed before the audit work begins and should be stored in the audit file it should include the following assessment of materiality and performance materiality details from the analytical review performed at the planning stage key audit risks background information regarding the client in understanding The Entity any specific laws and regulations staff booked for the audit team and budget set the overall audit strategy and deadline set to ensure the audit process is completed on time with the detailed evidence now in place the auditor is now ready to continue the audit process and follow the plan to ensure an appropriate opinion is decided on the financial statements in the audit report to summarize we have covered the purpose of the audit plan some specific reasons and overall it is to ensure the audit is effective that the order to spot risks relating to the audit by performing analytical procedures and understanding The Entity and its environment they must then decide the audit strategy where they consider the scope timing and Direction the audit should take materiality by size and performance materiality must be calculated specifically for the client using their judgment and the guidelines set for auditors and a planning document must be prepared including all of the detailed decisions made for this audit this plan may not be set in stone and could be amended during the audit process if necessary I hope you found this video useful thank you for watching this video is going to cover audit documentation the auditor's objective is to form an independent opinion on the financial statements in order to do this they must gather sufficient appropriate evidence perform audit procedures and follow auditing standards and ensure ethical Behavior while carrying out their work Auditors must prove they have carried out their work properly they must therefore gather as much tangible evidence as possible so they can back up their opinion Isa 230 audit documentation states that the Auditors must ensure they have written documentation that proves that the audit was planned and performed in accordance with auditing standards and any other legal requirements helps the audits team plan and perform the audit helps more senior members of the audit team direct and supervise as well as review the work completed is a sufficient appropriate record of audit work completed to assist informing the audit opinion assists future audits and enables the audit team to prove they did the work therefore audit documentation needs to be detailed enough to ensure Auditors can show evidence that the audit was conducted properly for every audit client the audit firm will keep files to organize the documentation collected there will be a current audit file which will store all relevant evidence and documentation relating to the current audit and there will be a permanent audit file which will store all client-related documentation that would be useful for current and future audits this would include previous year's financial statements client organization structure Key Personnel contact details and so on all correspondence must also be stored so there is a trail of evidence that proves that communication between the auditor and the client is effective for most audit firms these files are now electronic this is a more secure option of storing the information needed plus it saves space in the office which can reduce Administration costs for an audit firm the current audit file will back up the audit opinion it should be completed in a timely manner over the course of the audit process with the finalization of evidence just after the audit report has been signed these files must be retained by the audit firm for a minimum of five years from the date of the audit report this enables the auditor to prove what they did for example if the client was to take legal action against the audit firm for negligence the current audit file has three main sections the planning section audit performance and completion the planning section will document all of the considerations made during the planning stage and clearly show the direction the audit should take the audit planning document must prove that the audit team planned effectively and would include the following an assessment of materiality and performance materiality details from the analytical review performed at the planning stage key audit risks background information regarding the client in understanding The Entity any specific laws and regulations staff booked for the audit team and budget set the overall audit strategy and deadlines set to ensure the audit process is completed on time we can see that this is a very detailed document which reflects the importance of the planning stage if the audit is not planned properly it may cause significant problems later on in the audit including possibly forming an inappropriate audit opinion the audit performance section will include all documentation and evidence collected that relates to the audit procedures carried out these are the audit procedures carried out on the systems transactions balances and disclosures relating to the financial statements the audit procedures are carried out when the audit team is out at the client the team must ensure that they can prove this work was carried out properly without this work and the evidence collected from it the auditor cannot form an opinion on the financial statements for every test carried out the auditor needs to prepare something called working papers these are several documents organized to prove the balance in the financial statements is true and fair to illustrate let's pick the bank and cash balance in the financial statements the working papers relating to this will include a lead schedule backup schedules and audit programs the lead schedule is the first document seen in the section for each balance it will show the total balance which will agree with the balance shown in the financial statements therefore for this example it would show the total bank and cash figure shown under current Assets in the statement of financial position behind this will be the backup schedules these will be individual schedules for each sub-balance which makes up the total balance in the financial statements for example if the client has five bank accounts and a petty cash float there will be six backup schedules one for each individual balance they will all total to the front lead schedule then behind each of these backup schedules will be the audit programs these are the detailed documents which explain the audit procedures carried out on the balance they will be separate tests carried out on the current bank account savings account Etc each of these tests will have a sheet explained in the test and its outcome in detail each audit program must show The Following the objective of the test for example the financial statement assertion that is being tested a description of the audit work being carried out how the sample was chosen to test the outcome or conclusion from the work carried out shown clearly who did the work by a signature and name the date it was completed and who reviewed the work at the completion stage any other documents that back up this audit program are then filed behind in this section as additional evidence for example copies of the bank statements the bank report and the letter sent to confirm balances and a copy of the bank reconciliations will all be stored with the audit programs the third section is the completion area of the audit file this is where the final review is carried out and post year-end audit procedures are carried out all evidence connected to this work should be stored together here the key areas of the completion stage are the final analytical procedures disclosure checklist for accounting standards summary of unadjusted errors a record of adjustments made since the trial balance was produced the subsequent event review the going concern review written representations the draft financial statements and a draft management letter or report to those charged with governance again evidence needs to be thorough and conclusions must be clear in this section the review should be made by a senior member of the audit team and evidence of who reviewed the audit work must be shown the audit file and all of the working papers produced by the audit team belong to the auditor access to the working papers is only permitted if authorization is given by the auditor some of the reasons for this are that some of the information held in the file will contain sensitive information about the client they therefore have a duty to protect this if any of the work is lost or stolen it would need to be recreated in order to form an opinion this would be at an expense there is a risk of evidence being tampered with this could affect the opinion being formed at the end of the audit process all evidence must be kept secure to summarize Isa 230 gives guidance on what documentation is needed for an audit and how it should be managed documentation is retained for the current audit for relevant information to assist the auditor and any correspondence between the auditor and the client documentation for the current audit is split between the planning audit performance and completion sections of the audit file evidence collected relating to the audit procedures carried out is referred to as working papers and must be sufficient and appropriate to prove the balance it relates to in the financial statements evidence who did the work and who reviewed it in the audit team must be present and the documentation must be completed shortly after the audit report is signed I hope you found this video useful thank you for watching this video is going to cover the topic of quality control this relates directly to the auditing standard ISO 220 quality control for an audit of financial statements this auditing standard focuses on the audit firm's own quality control procedures an audit firm has an obligation to ensure they follow Professional Standards and that their reports are appropriate for the client's requirements for this to happen the standard gives a recommended set of policies and procedures that should be carried out to help remember the key policies and procedures from the standard you could use hear me the H is for human resources the audit firm and in particular the engagement partner who is responsible for the client should ensure that their audit team is capable they should assess the competence of the team members to ensure that the audit is performed at an appropriate standard they should ensure that the audit team has sound knowledge of the client being audited and therefore understands the entity and its environment however they must also ensure the technical skills within the audit team are enough to reach appropriate conclusions the E is for ethical requirements quite simply the audit firm must ensure that they comply with the Acca code of ethics they must ensure the fundamental principles are followed and that they manage any ethical threats conflicts of interest or other risks appropriately the A is for acceptance and continuance of clients the audit firm must consider whether they should accept every engagement once they have accepted the client engagement they must then review every year to ensure the entity should continue to be their client the key issue is that the audit firm must only accept clients with an acceptable level of risk the r is for responsibilities of leadership the engagement partner must take overall responsibility for the audit team and the audit process this means that they must also ensure the quality control procedures within the firm Are of a high standard so as to follow Professional Standards accordingly the M is for monitoring we have already said that strong policies and procedures should be in place however to ensure these are followed there must be an element of review from the audit firm the standard recommends two types of monitoring a hot and cold review an independent partner within the audit firm undertakes the hot review usually they review the audit work and conclusions reached this is to ensure that the overall conclusion IB opinion is appropriate hot reviews are usually carried out for listed clients or those with significant audit risks a hot review is carried out before the audit report is signed it is also known as an eqcr or engagement quality control review a senior member of staff at the audit firm performs a cold review an external consultant can also carry it out they review the work carried out for the client and the conclusions reached the key difference is that the review takes place after the audit has been completed and the audit report signed a sample of clients is selected across the audit firm to review this ensures consistency across audit teams and identifies if there is a risk of non-compliance of Professional Standards finally e is for engagement performance this looks at the overall performance of the audit assignments across the audit firm this is made up of three elements the direction supervision and review of the audit the direction focuses on ensuring everyone is aware of the objectives of the audit knowledge of the client business the risks and any problems that may arise supervision is looking to ensure that the audit is reviewed by someone senior who can ensure the team is competent and the deadlines are met to provide timely information for the client the review is to ensure Professional Standards have been followed that there is evidence to back up conclusions made and the evidence collected is sufficient and appropriate each of these six components is explained in ISO 220 to enable audit firms to ensure the highest quality of work is performed this therefore ensures that an appropriate audit opinion is formed on the financial statements for every client I hope you found this video useful thank you and good luck this video will cover the topic of internal control systems we're going to look at the auditor's approach to assessing these controls and systems at the client for us to do this we need to cover the following understand what a control is the objectives of control systems the limitations of a control system the auditor's expectation of an internal control system and finally what the auditor does or their approach a control is a procedure put in place to achieve company objectives for any organization to run well it needs sound control systems in place the key objectives of a control system should be to ensure accurate accounting records to safeguard assets held by the organization to prevent and detect fraud and to ensure an efficient working environment there are limitations to internal controls including human error when making decisions and processing in a system fraudulent collusion staff working together to commit fraud and abuse of authority those officially making decisions within a system and overriding controls Isa 315 tells us that Auditors must understand the client's internal controls for an auditor to assess whether a control system is strong or weak they must have an understanding of what is expected of a control system to give the Auditors a benchmark of what is a good control system the standard also gives us the five components of an internal control system to help us remember these components remember it is a crime not to have strong controls the C is control activities the r is risk assessment procedures the I is Information Systems the m is monitoring of controls and the E is environment the control activities include all of the individual procedures and policies that make up the system as a whole these control activities within a system will ensure errors and fraud are reduced if implemented and followed properly examples of control activities include authorization regular performance review accounting reconciliations segregation of duties it controls and physical controls authorization or approval of transactions can assist in preventing non-business related transactions from occurring it can also assist in areas such as cost control as if approval is required by management for purchases then review of the need for these items can be made before the order is carried out authorization should be made by a senior official of the organization and ideally the higher the value the more senior the approval should be regular performance review by an organization will help identify potential misstatements by the client themselves if the client performs its own analytical procedures comparing their transactions with previous periods and budgets they can highlight unusual Trends or differences which can then be investigated internally they can also compare figures to key competitors to keep an eye on their market share and performance accounting reconciliations are a brilliant way to identify misstatements in the accounting records regular accounting reconciliations ensure misstatements are dealt with on a timely basis and help identify if there is a problem with the control system as a whole the key accounting reconciliations are bank receivables payables and inventory control reconciliations differences highlighted from this work is then investigated so that potential misstatements can then be corrected before the auditor arrives to complete the audit segregation of Duties is the sharing of responsibilities within a control system Imagine One employee responsible for everything within a control this increases the risk of errors and potentially the risk of fraud also as there is no supervision or checking one another's work to have more than one employee working within the system sharing the role and even rotating duties increases accuracy it controls cover a range of activities to protect the computer systems being used they also ensure other control activities are managed examples include backup procedures of data software installation and update procedures security including passwords sequence checks and batch total checks when posting transactions and authorization limits to ensure transactions are valid a good computer system should include these control procedures physical controls are present to ensure access into the system and the business itself is authorized these controls include restricted access such as swipe card or code access into the warehouse CCTV and alarm systems each control activity is in place to protect the entity which is made up of many control systems now we have covered control activities let's move on to discuss the remaining four components of an internal control system risk assessment procedures carried out by the client should be to identify and manage potential business risks the level of risk assessment will depend on the type of organization as for example smaller business with standard systems will have less risks than large complex highly regulated businesses if a business reviews and manages its own risks it will reduce the risk of misstatements caused by error and fraud information systems are an organized system for the collection organization storage and communication of financial information it includes both computer and manual systems and the auditor should be able to understand the system and how it works with the help of manuals and staff communication monitoring of control systems is important to ensure the controls are working effectively as an entity progresses the need for internal controls may change and therefore the organization must react to these changes on a timely basis the internal auditor is useful here as they are best placed to take on this role finally the control environment this is the overall environment of the entity for there to be a strong control environment management attitude awareness and actions are important if the management are enthusiastic about ensuring control systems are strong this will encourage the entire organization to have the same attitude having an internal audit Department in place is an indicator of a strong control environment as they will be reviewing and implementing Control Systems as part of their role ensuring the correct people work in the organization is also important so having good Recruitment and training procedures is also a good indicator now we have discussed the five components of an internal control system that the auditor is looking for we can now discuss how the auditor reviews these systems to decide whether they are satisfied with their effectiveness the auditor has a step-by-step approach when reviewing Control Systems as part of the audit assignment the aim of the auditor is to assess whether the internal control systems would ensure material misstatements are identified and corrected if control systems are poor this increases the risk of material misstatements being within the financial statements firstly the auditor needs to identify and understand the control system for example the sales purchases payroll inventory cash and asset systems they can use methods to help understand including inquiry with management and staff inspection of documentation such as manuals and observation of the control system itself and those working within that system the next step is to document the system Auditors must prove that they understand the system and so by documenting and including within the audit file they have gathered sufficient appropriate evidence on this there are various methods to document the system the most popular being detailed written notes or flowcharts detailed notes are easy to put together but can be difficult to identify any missing controls due to the level of detail flowcharts could be easier to spot any deficiencies however they can be more time consuming as detailed notes may also be needed in order to prepare them either method then gives the auditor an understanding of the system for their audit work the next step is to assess the system the Auditors must initially identify whether the internal control system is strong or weak whilst understanding the system talking to staff observing and inspecting documentation the auditor will have an idea of what kind of system they're reviewing in addition to this the auditor can send out internal control questionnaires to the client staff to get feedback on how the system operates there are two types of client questionnaires the auditor can use internal control questionnaires or icqs and internal control evaluation questionnaires or IC eqs internal control questionnaires are a series of questions on the system that require a yes or no answer they are therefore quick and easy for the client staff to fill out for example a question could be does the payroll system require a password to access staff data an internal control evaluation questionnaire requires a little more feedback the question would be formatted differently for example is the payroll system secure and please explain your answer this type of question can therefore give you some more understanding of the system and who operates within it Auditors would now have an idea as to whether the control system is strong or weak if the system appears to be strong the auditor must gather further evidence to prove that they agree with this conclusion this is in the form of control tests or control procedures a control test is a test that gathers evidence on whether the system is effective these tests are carried out by the auditor and all evidence collected is then filed on the audit file to back up their conclusions once again using the methods inquiry inspection and observation are useful when designing control tests the objective of every control test should be to prove whether the control works an example could be when reviewing the security of the payroll system with the client's permission attempt to gain access to the payroll system without the password to ensure only authorized access is possible or inquire about the security procedures over the payroll system including the type of password needed and whether it is regularly changed both of these control tests would identify if the payroll system security is appropriate once the control tests have been performed the auditor must conclude whether they agree with the earlier evidence that the control system is strong or whether they disagree and the system is weak this is critical for the audit as it then decides how much further audit work is needed to form the audit opinion on the financial statements the next stage of the audit process is substantive testing and this is where the audit tests or procedures are performed to identify if there are any material misstatements within the financial statements if the auditor has concluded that the internal control system is weak there is a greater risk of material misstatements present they must increase the level of substantive testing required the sample size of transactions being tested would be increased and more procedures would be designed this would mean more time spent on the audit also if the control systems are strong there is a smaller risk of material misstatements and therefore no need to test as many transactions this means smaller sample sizes and less time needed in addition to control testing and deciding how effective the control systems are the auditor has a responsibility to report any issues found with the client if deficiencies in the internal control system have been found the auditor reports to the client along with recommendations on how to improve the system this is discussed in more detail in another video to conclude internal control systems are in place to achieve company objectives Control Systems have limitations and so the auditor cannot rely wholly on a strong control system ensuring no material misstatements are present the auditor is looking for five components of an internal control system control activities risk Information Systems monitoring and environment and they follow a step-by-step approach to conclude whether the internal control system can be relied upon I hope you found this video useful thanks for watching this video will take you through what the auditor does to identify and then communicate internal control deficiencies to the client we will need to cover the following how the auditor identifies deficiencies the management report and the timing of communicating deficiencies when performing the audit work Auditors must review the control systems that relate to the financial statements these can include the following systems sales purchases inventory payroll cash and bank and non-current assets each system must be reviewed and understood by the auditor they then document the system for their own evidence and begin the task of deciding whether the system could cause potential material misstatements as they are performing this work and testing the systems they will identify if there are any issues with the way the system operates using their skills and experience they may notice control activities missing within the system that could cause problems time taken to understand the system review documentation and use internal control questionnaires gives the auditor the opportunity to find deficiencies within the system under review here are some examples to help you understand what is meant by deficiencies for a sales system the auditor may discover that discounts for customers are manually input onto the face of the invoice by the sales clerk the issue here is that the discount may be input incorrectly by the clock human error is always an issue when manual input into a system is present this could lead to misstatements in the sales and receivables balance this scenario could also lead to the sales clock in putting unauthorized inappropriate discounts onto the invoice for every control deficiency found the auditor has an obligation to recommend how the entity could improve that control a recommendation for the control deficiency that we have just discussed could be to have authorized discounts included on the customer account on the system so the invoices automatically updated with the correct amount for a purchase system a control deficiency could be where the warehouse receiving the goods delivered agree the goods receive note to the physical goods and then file a copy of the grn and send a copy to the accounts Department there is evidence of good controls here as they do review the goods received with the goods received note however they do not review the original order to see if the goods received are what was originally requested the goods may have not been ordered and the entity could be invoiced for goods not required a recommendation would be for every delivery into the warehouse to agree the goods to the grn and the purchase order before accepting the goods for inventory systems a control deficiency could be that they do not Mark inventory when it has been counted during the inventory count if not marked the inventory could be counted again or missed altogether and not detected which could cause a misstatement in the inventory balance a recommendation would be to Mark the areas of the warehouse where counting has been completed this way it will be clearer to see if areas have been missed or to not count them again for a payroll system a control deficiency could be the monthly payroll report is not reviewed if the balances are not reviewed for each payroll run there could be a misstatement not detected the recommendation should be to ensure a responsible official such as the payroll manager reviews the payroll report and compares the balances to previous months to identify potential misstatements evidence of checking such as a signature should be present for cash and Bank a control deficiency could be that the cash is not banked regularly if cash is held at the business and builds up it increases the temptation of theft a sensible recommendation therefore should be to regularly bank money these task should be undertaken by more than one employee and rotation of Duty should also reduce the risk of Fraud and error in a non-current asset system a control deficiency could be that the request for a new asset is not approved if not approved assets could be ordered for personal use therefore the risk of fraud is higher all asset requisitions should be approved by a senior official decisions on purchasing of assets should be made with the reference to budgets also once the auditor has identified control deficiencies they will then collate them and include within a report to the management of The Entity this report has various terms associated with it you may hear it called any of the following a report to those charged with governance a management letter and a management report the auditor has Isa 265 to give guidance on communicating deficiencies it tells us that significant deficiencies should be communicated in writing to the entities management this is usually prepared in a letter or report format the management report should be addressed to the directors of The Entity it will detail all of the deficiencies found by the auditor during their audit they will also explain the impact of the deficiency and a recommendation the deficiency should be a clear description of what is wrong the impact should be an explanation of what could happen if the deficiency is not addressed by management for example as we've already discussed deficiencies could lead to theft errors in the accounts and unnecessary costs the recommendation should be a realistic suggestion to improve the specific deficiency this is to help the client improve its control systems for the future which will assist future audits if it is then implemented in addition to outlining deficiencies the auditor must give specific information regarding the evidence being provided within the report they will explain that the report is not a comprehensive list of all deficiencies the deficiencies are only those found during the work of the auditor and there may be more that have not been detected the report and the information within it is for the sole use of the company they should not disclose anything within the report to a third party without written permission from the auditor and no responsibility is assumed to any other parties timing of the management report is agreed at the beginning of the audit assignment before work commences management reports are usually given to the client at the end of the audit process once the audit report has been prepared often the client will have a meeting with the Auditors and discuss these deficiencies to enable them to clearly identify what needs to be done in summary Auditors use their experience and feedback from the client to understand the control systems and this enables them to identify deficiencies they are required to identify deficiencies and recommend improvements to control systems and this is laid out in ISO 265 there are various control systems that relate to the financial statements including sales purchases inventory payroll cash and assets once deficiencies are identified they are included in the management report along with the impact and recommendations the management report is usually communicated at the end of the audit once all of the audit work is complete I hope you found this video useful thanks for watching this video is going to cover the key control systems or Cycles it has been prepared to help you understand the stages of the key control systems and their objectives the risks within the systems and the controls that will help reduce the risk of the problems occurring the control Cycles we are going to cover are the systems linked to the financial statements they have an impact on whether the financial statements are true and fair and are the sales purchases assets inventory payroll and cash systems for each system I will outline the stages of the system and examples of the objectives risks and controls at each stage we're going to start with the sales system it has five key stages where control should be designed to ensure mistakes do not happen stage one is when the order is received stage two is when the goods are dispatched stage three is when the invoice is sent stage four is when the transaction is recorded in the financial statements and stage five is when the cash is received stage one when the order is received is usually in the sales department it could be taken over the phone via a website or by email a sales order should be produced for each order received the objective of controls at this stage is that all orders are processed and customer orders are only accepted for customers who can pay an example of risks are an order is taken for a customer who has exceeded their credit limit or the order is not recorded properly controls to be put in place could be access to the customer account where the credit limit can be reviewed when the order is taken stage two when the goods are dispatched is usually in the warehouse a delivery note or Goods dispatch notes should be produced the objective of this stage would be for goods dispatched to be on time to the correct customer and all sent out an example of a risk is that Goods sent out offer the wrong quantity controls put in place could be the dispatch team must agree the original order to the dispatch note and the goods to indicate with the signature that this has been checked stage 3 when the invoice is prepared and sent would occur in the accounts Department the objective would be all Goods have been invoiced for and all are invoiced with the correct amounts an example of a risk is a customer was not invoiced with the right product and controls put in place could be a copy of each dispatch note is sent to the accounts Department sequentially numbered the accounts team should review the dispatch note when preparing the invoice stage four when the transaction is recorded would also be in the accounts Department the objectives would be to include all invoices on the system for the correct amounts a risk would be that sales are not recorded accurately or in the correct period and a control would be to prepare invoices with sequential numbering on entering the invoice to use that reference and regularly check the system to ensure the sequence is not missing an invoice number stage five is the payment from the customer the objective is to ensure cash is received on a timely basis and recorded correctly in the correct customer account a risk could be that the cash is not paid on time and a control would be to having a member of Staff perform Credit Control procedures such as reviewing the sales account regularly for debts that have reached their payment deadline and Chase customers for payments the purchase cycle has six stages where controls should be in place to reduce the risk of Fraud and error stage one is the requisition stage stage two is where the order is placed stage three is where the goods are received stage four is where the invoice is received from the supplier and Stage 5 is where the invoice is recorded on the account system stage six is where the payment is sent to the supplier stage one the requisition stage is where the business or division within the business will recognize the need for more Goods a requisition note will be passed to the purchasing department detailing the supplies needed the objective is to ensure goods are requested and are for business purposes a risk could be the requisition note may not be received by the purchasing department and the order not made a control could be requisitions are made by email to the purchasing department who must respond when they have made the order stage two the ordering stage takes place in the purchasing department there should be a purchase order for each order made which details the goods ordered the quantity price and supplier used the objective is to ensure suppliers used have been checked for reliability quality and price and orders made considering disruptions to production if not delivered on time a risk could be a supplier is used who is not reliable and delivers late leaving to a delay in production a control could be to select a supplier from an authorized supplier list this list could be authorized by senior officials and regularly reviewed to ensure suppliers quality and price have not changed stage three is when the goods are received this is usually in the warehouse where a delivery note or Goods receive note will be prepared the objective is to ensure only Goods ordered are received and accepted and received on time a risk could be look Goods received have not been ordered by the company and a control would be for every delivery the goods should be inspected and agreed to the delivery note and a copy of the purchase order this should then be signed by that staff member stage four is when the invoice is received this will be in the accounts Department the objective is to ensure invoices received are for goods received that is for business purposes and for the correct amounts and products a risk could be that the invoice is not for goods ordered and they control would be each invoice received should be matched with the corresponding purchase order and requisition note any that have missing orders should be investigated with the supplier stage five is the recording of the invoice on the accounting system the objective is to ensure all invoices are recorded and they are recorded accurately and in the correct period a risk is that invoices may be missed and payables and purchases understated a control could be ensure each invoice when received is allocated as sequential invoice number the sequence should be checked regularly on the system to ensure no invoices have been missed stage six is the payment to the supplier the objective is to ensure payments are made for the correct amounts for goods ordered and received and made on time a risk could be the payment is not made and the supplier May no longer Grant credit a control could be to have regular payment runs and to review the Aged payables list regularly for older debts and ensure they are paid on time the control system for assets would work in the same way as the purchase system there would be some additional controls required due to the size of the values being spent on these items in comparison to the standard goods and services one would be the authorization of costs this would need to be approved from a much senior level of management than your standard purchase the other would be the use of the asset register this spreadsheet will record all details in relation to the Assets in the business including the date cost depreciation carrying value location and Disposal data and proceeds this should be updated and reviewed regularly and compared to the accounting system to ensure there are no errors the inventory cycle works very much like a cycle the business will make an order for inventory the inventory will be received in the warehouse sales will be made the inventory will then be dispatched to the customers so more Goods will be needed and they can make an order for more inventory we have seen many of the controls already in this process as the inventory cycle is Blended with the sales and purchase Cycles looking more specifically at other inventory controls what we haven't yet seen are storage controls for inventory and controls over monitoring the amount of inventory in the warehouse or inventory Counting when the business is storing its inventory the key objective is to keep it safe and maintain its value the risks are Goods could be stolen Goods could be damaged and goods may become obsolete examples of controls to reduce the risk of theft are increased security such as cztv alarm systems and security guards restricted access to the warehouse for example limited exits and only authorized access for example swipe card access or fingerprint recognition at entry points examples of controls to reduce the risk of damage could be practical packaging of inventory items shelving for organized storage and training for handling of items and examples of controls to reduce the risk of obsolescence are a first in first out system for items being dispatched not to hold excessive amounts of inventory regular monitoring of aged infantry list for old slow moving items and special offers potentially to shift items that are not selling faster the Infantry counting process requires tight controls for it to be effective the external auditor will always review this control carefully as if there are deficiencies it could lead to material misstatements in the inventory balance this would affect the statement of financial position and the p l if the company carries out a year-end inventory count the auditor will attend if they carry out several counts during the year as a continuous counting process the auditor will attend a sample there are elements of the account that are important to have controls these are people counting the admin or paperwork the count itself and the end process of the count the people counting the inventory should be objective they will be staff members but should not be the warehouse staff this reduces the risk of theft being hidden by those who are in a position to steal the counting should be carried out in teams of two or more and the process should be supervised by someone senior for example the internal audit manager there are two key pieces of paperwork the count instructions and the count sheets the count instructions should be clear and easy to follow they should be given out before the count and the staff should be briefed so they fully understand what they are to do the count sheets should be sequentially numbered spare sheets for inventory found not on them should also be pre-numbered so sheets cannot go missing these sheets should include the product details such as the description and code but should not include the quantities as per the system this stops count teams just agreeing with the number during the count the count sheet should be divided between the teams the sheets should be signed out so they know who is counting which area count staff should inspect inventory for evidence of damage which could affect the valuation and flag this on the count sheets or to the count supervisor there should be a systematic organized account to reduce the risk of areas being missed or counted twice areas can also be marked once counted to reduce the risk of mistakes when recording the quantities on the count sheets they should Mark him pen and not pencil this will identify if any changes are made after the count at the end of the count the sheet should all be signed back in and the sequence checked to ensure no inventory sheets are missing these are then used to calculate the valuation of inventory to include in the financial statements external Auditors would take a copy of the count sheets as evidence before they leave if attending the payroll cycle identifies important stages where controls should be present stage one is where fixed and variable data regarding the employees is recorded on the payroll system stage two is where the calculations are made by the system stage 3 is where the outputs from the system are created such as the payroll report and the payslips stage four is where the payments are made to the employees and the government fixed data regarding employees includes bank accounts hourly pay holiday days Etc variable data would come from the clock cards or timesheets in the form of hours worked to help calculate pay this data needs to be kept secure so locking away this paperwork and only allowing authorized access is important the other risk is that information is open to manipulation for example including fraudulent working hours controls to reduce this risk include CCTV over the clock card area as a deterrent authorization of overtime from a senior official and supervision of employees the calculations made by the payroll system must be monitored regularly as there is a risk of misstatements the software used should be up to date and regularly checked for updates having updates via the Internet reduces the risk of these being missed for example also regular checks on calculations taking samples and recalculating the pay and deductions would identify if the system is working properly the system itself should also be secure ensuring only authorized access is permitted will avoid the risk of individuals changing pay or setting up fake employees therefore secure password access is important the payroll report and the payslip should only be accessed by those authorized to see them therefore locking payroll reports away is a good control and sending payslips straight to employees home addresses would avoid this information getting into the wrong hands the payroll report should be reviewed by the payroll manager comparing to previous months the previous year and budgets will identify if something looks unusual evidence that this has been carried out such as a signature and date would enforce the control finally stage four is the payments payments to employees and the government must be made on time therefore setting deadlines for submissions such as overtime should be in place the correct amounts must be paid and only to valid employees therefore having a senior official such as the payroll manager reviewed this information from the payroll report and the payment sheets will reduce the risk of an incorrect payment cache controls are our final system to review in this video the stages of a cash cycle are stage one a payment for an item is requested stage two the payment is authorized stage 3 the payment is made and receipts come in stage four all movement in cash is then recorded in the books and Records the objective for controls over cash are to ensure cash is kept to a minimum at the company premises payments and transfers can only be made with authorization from a senior official they are for business purposes only cash is protected from theft and banked regularly an example of some controls to achieve the objectives include using an impressed system for petty cash having a manager signature for all payments made regular review of the cash book and petty cash book by management locking away cash in a safe at the premises and regular banking patterns using different staff taking different routes to the bank to avoid theft we have now reviewed the key control systems that connect to the financial statements of an organization for each system a good understanding is needed of the objectives risks and effective controls such a company should have in place the specific controls within a control system will reduce the risk of Fraud and error they will not eliminate the risk as controls have limitations as we have discussed in another video the stronger these control systems are the less chance of material misstatements being present this in turn assists the external auditor audit risk will be reduced making it more straightforward to form their audit opinion I hope you found this video useful thank you for watching this video will cover the topic of the financial statement assertions these assertions relate directly to the substantive audit procedures that the auditor carries out during the audit process in simple terms the financial statement assertions represent the key objectives of the substantive audit procedures that are prepared if a substantive procedure does not address an assertion it does not assist the auditor informing the opinion the overall objective of the external auditor is to decide whether the financial statements are true and fair and properly prepared true and fair can be described as free from bias free from material misstatement and factually correct the auditor should also ensure the accounts have been prepared using an appropriate reporting framework we look at this when we look at the auditor reviewing the financial statements as a whole however when the auditor reviews the financial statements in detail it is more difficult to relate the term true and fair to the individual balances and transactions that make up the whole set of accounts how can they see whether a balance is true and fair therefore to assist the auditor in planning audit procedures that review whether the balance is free from Material misstatement they are given the financial statement assertions these are outlined in Isa 315 to help remember the assertions I use crave poke the C is for completeness the r is for rights and obligations the A is for accuracy the V is for valuation and allocation and the E is for existence then the P is for presentation the O is for occurrence the C is for classification and the final C is for cutoff the assertion completeness is to ensure that all transactions and events recorded are present in the financial statements audit tests would be designed to identify if anything has been missed an example would be reviewing the bank balances including overdrafts there is always a greater risk of items being missed in liabilities and so the auditor requests a bank report to be sent directly to them from the bank confirming all balances this will include any loans and overdrafts held at the year end this will help confirm the completeness of bank and Loan balances in the financial statements the assertion writes and obligations is to ensure that ownership and responsibility of assets and liabilities is reviewed audit tests would be designed to identify if assets are owned by The Entity and liabilities owed an example would be the auditor inspecting invoices of assets purchased in the year to ensure they are in the company name accuracy is to ensure that all transactions balances and other items have been accurately recorded audit tests are designed to identify individual misstatements an example would be to select a sample of sales invoices and recalculate the balances the valuation and allocation assertion is to ensure that items in the statement of financial position are in the correct place and at the correct values audit tests are designed to identify if the valuation is reasonable and if Accounting Standards have been used appropriately an example would be performing analytical procedures on the depreciation charge for non-current assets comparing the treatment to previous years and Industry methods existence is to ensure that items in the statement of financial position actually exist audit tests are designed to assess whether assets are being used within the business an example would be to physically inspect a sample of assets recorded in the asset register presentation is to ensure that transactions events and disclosures are clearly described relevant understandable and required by the applicable financial reporting framework there is a term used in the auditing standards Isa 315 stating that transactions should be appropriately aggregated and disaggregated this simply means that items should be added together and shown separately where appropriate audit tests are designed to assess whether the information in the financial statements is presented properly and of assistance to the users an example test would be to compare the revenue figure in the statement of profit and loss to the revenue note to the accounts and general ledger to agree that the breakdown is presented clearly and accurately occurrence is to ensure transactions and events actually happened audit tests should be designed to identify if these events are real an example would be to verify employees on the payroll report to ensure that they work for the entity classification is to ensure that transactions are in the proper accounts and items have been disclosed correctly audit tests should be designed to identify transactions posted to the wrong account an example would be to review the asset and expense accounts for evidence that transactions may have been misclassified as an asset or expense finally cut off is to ensure transactions are recorded in the correct Financial period audit tests are designed to identify if sales and purchase invoices have been recorded in the period where the goods were delivered or dispatched an example would be to inspect the goods dispatch notes just before and after the year end and compare to the sales invoice recorded if the delivery date is before the year end the sale should be recorded this year if the delivery is after the year end it should be recorded in the following year each of these assertions should be used within the substantive testing phase each of the assertions within crave so completeness rights and obligations accuracy valuation and allocation and existence are used to test balances within the statement of financial position these would be all assets liabilities and equity each of the assertions within Pock so presentation occurrence classification and cut off are used to test balances within the statement of profit and loss or income statement these would be all income and expenses for The Entity there are a few assertions we have covered that are important for the whole of the financial statements and can therefore be used for all balances and transactions these are completeness as the auditor would need to review whether all transactions are present accuracy as all transactions tested should be flagged if not accurate classification as recording improper accounts crosses both statements and presentation as the whole set of financial statements needs to be clear and understandable I hope you found this video useful thank you for watching this video is going to cover the area of gathering evidence for us to understand the process of gathering evidence during the external audit assignment we will need to cover which audit procedures gather evidence the objectives the quality of evidence required the methods available sampling and conclusions made from the evidence obtained the external audit is made up of many audit procedures or audit tests each test will gather evidence to help the auditor form an opinion on the financial statements the two main areas of audit procedures are controls procedures and substantive procedures there is a clear difference between the two and to be successful in an exam question which are specifically for controls or substantive procedures you must be confident with the differences control procedures are procedures which identify whether the control systems being reviewed actually work substantive procedures are procedures which identify material misstatements present in the financial statements they will assist the auditor in giving the opinion whether the financial statements are true and fair controls procedures are carried out when an auditor is assessing the internal control systems which relate to the financial statements the auditor has a responsibility to identify whether the control system is strong or weak the system should then be tested by the auditor to gather evidence to back up their conclusion an example would be when an auditor is reviewing the payroll system a control identified could be if the payroll system has restricted access with the use of an encrypted password a control procedure could be with permission from the client try to gain access to the payroll system without knowledge of the password this procedure would not discover a material misstatement in the financial statements but it does test whether the control the client has told you about Works effectively substantive procedures are carried out in the main after the controls have been assessed the level of substantive testing will depend on how reliable the control systems are as the more reliable the controls the less likely there will be material misstatements the main aim of the auditor is to identify material misstatements and ensure the financial statements are true and fair the objective of substantive procedures is broken down into the financial statement assertions these are completeness rights and obligations allocation and valuation existence cut off occurrence classification and accuracy crave Coker can assist in Remembering these assertions every substantive test must achieve at least one assertion in its objective these financial statement assertions are covered in more detail in another video we have now identified the two main audit procedures controls and substantive discuss the differences and the objectives now we need to consider the quality of evidence required on an external audit the quality of evidence is important in gaining confidence with the opinion made at the end of the audit process Isa 500 tells us that audit procedures must be designed in such a way so that the auditor gathers sufficient appropriate evidence so we need to understand what is sufficient and appropriate we can Define both sufficient and appropriate in relation to the auditor sufficient means enough evidence so the auditor must obtain enough evidence to form an opinion when deciding what is enough evidence the auditor must consider the following the risk of material misstatement identified at the planning stage how material the balance or item is how reliable the control systems are the conclusions of the control tests performed previously the size of the sample being tested and how reliable the evidence that can be collected is certain balances will be able to gather enough evidence with very little effort for example the bank balance in the financial statements can be confirmed by gathering evidence such as the bank statements the bank report confirming balances direct to the auditor and the bank reconciliation which reconciles the balance in the accounts to the bank statements other balances will require much more evidence to be obtained before the auditor is satisfied that it is sufficient the term appropriate can be explained by splitting it into two areas for evidence to be appropriate it must be relevant and reliable for evidence to be relevant it must achieve the objectives for example evidence collected must achieve the objective of the audit procedure that gathered the evidence if we're looking at control procedures the evidence collected from these procedures should identify whether the control system operates effectively if looking at substantive procedures the evidence must achieve at least one of the financial statement assertions remember that these assertions help ensure the auditor can conclude whether the financial statements are true and fair evidence collected to be deemed reliable it needs to be the best possible evidence that could be obtained in the circumstances evidence must be trusted so it can be used to form the audit opinion therefore ideally evidence should be independent obtained directly by the auditor if obtained from the client then from a strong control system written and in its original form if Auditors can obtain evidence that represents all of the appoints we've just mentioned then very little else needs to be obtained for that area there will be areas of the financial statements where this is difficult and then more types of evidence will then need to be collected now we have covered the quality of evidence we must discuss the methods available to the auditor to gather this evidence when designing audit procedures there are methods available that should be used by the auditor isof 500 gives eight methods that can be used to design audit procedures for both controls and substantive testing analytical procedures this is the comparing of data in the financial statements to gather evidence on whether there are possible misstatements inquiry talking to the client staff and management will ensure explanations are obtained to help form conclusions inspection inspecting documentation that confirms balances and transactions in the financial statements as well as control procedures observation observing processes at the client to understand and review reliability recalculation recalculating transactions and balances for accuracy confirmation written confirmation of balances and transactions in the financial statements and re-performance the auditor carrying out a procedure the client has performed to see if they did it right each method can be used to design audit procedures and the most appropriate method should be selected the next area of gathering evidence is choosing the transactions which should be tested sampling is defined in ISO 530 as the application of audit procedures to less than 100 of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population this requires auditor judgment and skill there is always going to be an element of risk that a transaction not selected will contain a material misstatement this is known as sampling risk the auditor must ensure the sample size selected is sufficient enough to reduce sampling risk to an appropriate level they must also ensure the sample chosen represents the whole population of transactions the auditor decides on an appropriate method they should use to choose the sample to test again the auditor has a number of options to choose from and these options can be categorized into two headings statistical sampling methods and non-statistical methods statistical sampling methods generally are where the auditor has not influenced the selection of transactions random selection and probability Theory are the common examples of choosing a sample in this way any other method would be categorized as non-statistical sampling methods commonly used by the auditor to select samples are random number tables which select the transaction numbers on the list to choose systematic selection where the transaction is selected across the population using an even pattern for example every tenth balance chosen block selection where transactions are selected from one period in the financial year and cutoff testing is an example of this monetary unit selection where the largest balances and transactions are selected to test if mistakes are found they are more likely to be material and haphazard methods these are any other methods that could be used by the auditor to select transactions the auditor should be careful not to allow bias Gathering evidence for the audit is critical in forming an opinion on the financial statements Auditors identify what type of evidence is needed from the objectives the auditor will either be gathering evidence via control procedures to test whether controls work or via substantive procedures to test whether there are material misstatements in the financial statements they must consider the quality of evidence that is required and available to them this will depend on what is being reviewed but they must ensure evidence collected is sufficient and appropriate there are eight methods available to them which they design their audit procedures around and the auditor must also decide on the size of the sample of transactions to test as well as the method of selecting the sample to perform the audit procedures statistical or non-statistical is acceptable once the evidence has been gathered and the audit procedures performed the auditor must then review what they have found if for example misstatements have been found they must decide whether these are material or not if material they could be misleading to the users of the accounts if they remain the Auditors therefore asked the client to amend the financial statements if not Material they must record on a spreadsheet often called the summary of unadjusted errors all of these smaller errors collected could accumulate into a material misstatement and so the spreadsheet can be reviewed at the end of the audit for evidence of this I hope you found this video useful thank you for watching this video will cover the audit of smaller entities and not-for-profit organizations or nfps the aim is to identify how the audit would differ when reviewing the two entities financial statements Auditors must be capable of auditing The Entity under review having experience in auditing a smaller entity or a not-for-profit organization such as a charity is important if they miss something important they may issue an inappropriate opinion in the audit report at the end of the audit process the ethical code states that one of the fundamental principles that should be followed is professional competence this also enforces the importance of understanding the client and its industry we are going to start by looking at the audit of a smaller entity this entity may not even require a statutory audit in some countries smaller entities are given an exemption from auditing the UK for example but they may still request an audit if they feel it benefits them the reasons for not requiring a statutory auditor the shareholders are often the directors of the entity operating and managing their own business and so there is less concern about whether their investment is being looked after they may have only a few members of Staff this makes the disruption of the Auditors coming in more of a burden on the company audits are expensive this cost May outweigh any benefits an audit would have for the company Control Systems may be limited with fewer resources the systems may be more straightforward and not requiring expert advice from the auditor if a smaller entity requires an external audit the Auditors would ensure that they have the correct audit team in place with the experience needed to conduct the audit properly an audit of this client has advantages and disadvantages some advantages are that it can be relatively low audit risk if a business operates in a straightforward field that is easily understood by the auditor there will be fewer transactions and therefore more time to review the business more thoroughly in some audits it may even be more effective to test a hundred percent of the transactions the shareholders run the company with Direct Control the management will have full understanding and responsibility for the organization and can assist the auditor effectively they may be met with less resistance from management because of this the systems will often be straightforward and easier to understand and this makes the assessment of control systems and their reliability easier some disadvantages are due to the direct control of the company by the shareholders they are in a position to manipulate the figures in the financial statements or hide personal expenses simple systems can often be manual this increases the risk of human error which needs to be addressed by the auditor and identified due to limited staff they may be a lack of segregation of duties having one staff member responsible for an entire control system can increase the risk of fraud they may not be very formal in their Communications documentation on systems may be limited minutes of board meetings may be non-existent this limits the amount of written evidence the auditor can obtain from the client to conclude depending on the specifics of the small business there may be elements of an audit that are far more straightforward than dealing with a larger organization there will possibly be less substantive testing however careful planning is still needed to assess the risks and review the control systems and any limitations to identify whether fraud risk is high and decide how to approach the audit not-for-profit organizations include Charities and public sector entities the way these entities are structured and how to prepare their financial information will be significantly different to how a private sector entity would operate it is even more important that specialized audit staff are involved in the audit process for this kind of entity the key differences we would see with a not-for-profit organization are they are not driven by profits their objectives may vary but as an example it could be to provide a service and not to make money they will not have shareholders there will be no investors looking for a return on their money and there will be no dividend payments the format of the financial information being presented will also be different for example a charity would prepare a statement of financial activities which is formatted differently to a statement of profit and loss as they are not in operation to make a profit auditing not-for-profit organizations come with their own audit risks an example of some of these are as with smaller entities their resources are restricted and so there may be a lack of segregation of Duties and simple systems not documented this could increase the risk of Fraud and error these entities are controlled by trustees they often work part-time and they may not have the expertise or time to make good strategic decisions volunteers are used to keep costs down they may lack skills and make mistakes but also they may not stay long and then not be available to assist the auditor with explanations after the year end income may depend on external factors government grants may be needed which may depend on criteria being met and changes in these criteria being made donations may also be relied upon which may depend on the economic climate and their public profile they may have very complex regulations to follow these must be understood by the auditor to ensure they can assess whether they have been followed correctly and this increases the risk of disclosure notes being inadequate the going concern review is more difficult as there is often Reliance on donations and grants for income external factors are very important in assessing the survival of the entity any Sudden Change in circumstances could affect the entity short term the audit's approach for this type of entity should include careful planning the materiality percentage will be low to address the high risk this will increase the amount of audit testing performed a specialized audit team will be required if controls are not deemed effective pure substantive testing may be required analytical procedures will be useful if control systems are limited they will provide the auditor with evidence to assess whether further testing is necessary and if there are any issues Gathering the evidence needed to form an audit opinion as always the auditor may need to modify their audit report I hope you found this video useful thank you for watching this video is the first of a series that will take you through some practical examples of substantive audit procedures you can carry out on specific balances in the financial statements we will cover the general principles in designing and Performing audit procedures some general procedures you can perform on any balance and then substantive audit procedures for non-current assets Bank receivables inventory estimates trade payables the statement of profit and loss and share Capital reserves and directors emoluments this video will cover the general principles General procedures and non-current assets we have covered the topic of gathering evidence in another video many of the principles discussed relate to substantive audit procedures it is recommended that you review the Gathering evidence and financial statement assertion videos before you watch this one it will give you a better understanding of what we are covering here remember substantive audit procedures are procedures that identify if material misstatements are present within the financial statements they are testing the transactions balances and disclosures for these misstatements the steps to performing a substantive test are identify the item to test and set the objectives of the test consider the quality of evidence required it must be sufficient and appropriate design the test and ensure it meets the objective select the sample of transactions to perform the test on record the test method results and other evidence as working papers in the audit file consider the conclusion of the test is further work required are there material misstatements to be amended in the financial statements the objective of a substantive test must be at least one of the financial statement assertions again covered in the Gathering evidence and financial statement assertions videos as a recap here are the financial statement assertions completeness rights and obligations allocation and valuation existence cut off occurrence classification and accuracy there are many examples of practical substantive tests we are going to discuss a few for each area of the financial statements you would typically see in the exam this will give you some specific practical ideas you can use before we do this there are some things you could do for any balance some ideas can be remembered using toad T is trial balance Auditors will want to ensure that the financial reporting system agrees with what has been presented in the financial statements an audit procedure would therefore be to agree the balance in the financial statements to the trial balance any balance is not included in the financial statements would then be investigated with the client o is opening balance every balance in the statement of financial position will have an opening balance carried forward from the previous year for the closing balance to be correct the opening balance must also be correct an audit procedure would therefore be to agree the opening balance to last year's closing balance and investigate any differences with the client a is add up and recalculate there is always something the auditor can add up all balances need to be checked for accuracy examples could be to add up the receivables list to agree the balance recalculate a sample of employees net pay or add up the bank reconciliation each of these and many more will ensure the assertion accuracy is achieved D is disclosure check the auditor needs to ensure that any specific guidance on how the balance or disclosure is formed and presented has been followed they therefore need to review any specific Accounting Standards relating to the area of the financial statements and ensure they have been followed when preparing the financial statements with a few General procedures out of the way we can now look at some specific balances you might see in an exam we will start with non-current assets in order to ensure non-current assets are audited effectively the auditor will need to review the financial statements including the statement of financial position and the non-current asset note the asset register which includes all details relating to the assets held by the company and the trial balance and ledger accounts forming the non-current asset balance each of these sources should tie in with one another and it is the auditor's job to test whether that is the case non-current assets key assertions to be verified are completeness rights and obligations valuation and existence if we visualize the non-current asset note the auditor needs to ensure each balance has been audited therefore auditing opening and closing balances new assets purchased or additions disposals of Assets in the year depreciation and revaluations audit procedures for opening and closing balances include agreeing the opening balance to last year's financial statements adding up the non-current asset note to ensure the auditor agrees with the closing balance shown and agree the closing balance for non-current assets in the note to the balance shown on the statement of financial position for new assets purchased audit procedures include agreeing the addition's balance in the financial statements to the asset register this will verify completeness adding up the additions in the asset register to ensure they agree with the total in the financial statements this also verifies completeness and for additions in the year Trace to the invoice to agree the amounts recorded and whether the invoice is in the company name this verifies rights and obligations for disposals in the year the auditor should obtain a list of all disposals of assets made in the year and agree to the asset register to ensure that they have now been removed they can agree disposals to documentation for example sales receipts and bank statements to prove that they were disposed of and review the profit or loss on disposal and agree with what has been recorded in the statement of profit and loss these verify existence and accuracy depreciation must be audited by recalculating the depreciation charge for a sample of assets reviewing the accounting policies to see if the treatment being used is consistent with prior years and inspecting the budgets for capital expenditure to see if plans for disposals and new assets mean the depreciation methods are appropriate these will help you verify valuation and accuracy the revaluation of assets must be carefully reviewed some ideas for procedures would be to inspect the values report and agree the amount concluded by them with what has been recorded in the financial statements review the methods used by the valuer described in their report and ensure they agree with what is required by the accounting standards for evaluations the key for an auditor is to gather as much sufficient appropriate evidence when performing these types of audit procedures remember that the more written detailed independent evidence they can collect the better each audit procedure must verify at least one of the financial statement assertions that is key to the balance being audited I hope you found this video useful when ready move on to the next video which covers the audit of current assets this video will cover some practical ideas and examples of how an auditor will audit current assets we are going to cover the audit of Bank receivables estimates and inventory bank is an asset presented in the financial statements it is shown Under The Heading current Assets in the statement of financial position the key assertions that should be verified are existence and valuation the evidence that the auditor would obtain to audit the bank balance can be referred to as the Three B's these are the bank statement the bank report and the bank reconciliation the bank statement is a piece of independent evidence it will show all movements in the bank balance During the period that can be agreed with the movements in the cash book it can also be used to agree the balance used in the bank reconciliation and make sure it agrees with the bank records this evidence verifies existence and valuation the bank report is written confirmation from the bank it is sent directly to the auditor from the bank and so is a brilliant piece of evidence as it is independent direct written and in its original form the bank report confirms all of the bank balances held by the client for the year it will also confirm any balances of liabilities held by them so it will assist the audit of that area of the financial statements also the auditor should ensure the bank accounts have been included in the financial statements by agreeing the bank accounts of the trial balance the balance itself may not agree due to timing differences and so they should also agree the balances to any Bank reconciliations prepared this verifies existence valuation and also completeness the bank reconciliations will show the differences between what the cash book States as the bank balance and what the bank States is the balance for each bank account if the client prepares these the auditor must inspect them ensure the movement between the balances is not due to a material misstatement one of the first procedures is to cast or add up the bank reconciliation to ensure there are not arithmetic mistakes they should also ensure the balances agree to the bank statement Bank report and cash book they would then audit the timing differences any payments that have not yet cleared the bank are unpresented checks the auditor would need to verify that all of these payments have been included correctly and so would usually agree the amounts on the bank reconciliation to the check stubs and cash book ensure none of the payments are missing or belong in the following period and inspect the bank statements after the year end to ensure the payments have now cleared investigating any that have not then any uncleared receipts would be audited they would need to agree that all uncleared receipts on the bank reconciliation are in the cash book ensure that there are no missing receipts from the cash book and inspect the bank statements after the year end to ensure the receipts have now cleared the next balance to review is the receivables balance this balance is actually made up of two in The Ledger the trade receivables and any provision for bad debts we therefore need to look at some practical ideas how to audit not just receivables but the estimate that is the provision included firstly let's look at trade receivables there are three important tests that should carry out on this balance circularization cash received after the year end and cut off circularization is writing to a sample of trade receivable customers requesting that they confirm the balance they owe from the records this is a great independent piece of evidence as the letter is sent from the client requesting that the information is sent directly to the auditor not all responses will be received as it is not a legal requirement and so customers do not have to respond the auditor can send follow-up letters or a call to the customer to request the information but should not harass them if the response is sent and it agrees with the client Ledger then there is no further work needed and it can be filed as evidence in the audit file if the response does not agree with The Ledger the auditor will then need to complete a Reconciliation between the client and customer balance to identify if the difference is due to timing issues or due to a misstatement if there is no response then the auditor may wish to investigate that the customer does in fact exist an example would be to inspect post year-end bank statements for evidence of customer payments the auditor will also select a sample of receivable customer balances and then agree these balances to receipts in the post year-end bank statements this will again verify existence of these customers and any where there have been no payment should be investigated further cut-off testing should be performed to ensure the sales invoice is recorded on The Ledger are in the correct Financial period as receivables is an asset they will be concerned that this balance may be overstated the client may push invoices into the current year to make this balance and the revenue balance look healthier the auditor should review invoices just before and after the year end and inspect their goods dispatch notes reviewing the delivery date to ensure they are in the correct period the next step is then to audit the provision for bad debts like any estimate in the accounts this is difficult to audit as there will be little in the way of external evidence the key assertion to verify is valuation this provision has been created by the client using their own judgment and so the auditor must obtain evidence to ensure they agree with it examples of procedures include comparing the provision to the previous year and investigating any differences other analytical procedures such as calculating the receivable days ratio and comparing to the previous year reviewing the Aged receivables list and investigating old balances to see if they should be included in the provision or written off inquiry with management about any specific provisions and post year-end event review to see if the customer has paid or is maybe now unable to repay the debt the final balance to review from current assets is inventory the key assertions are valuation existence completeness and rights and obligations this balance has a very specific accounting standard which shows us how the balance should be included the most important and remembered element from is2 is that inventory should be valued at the lower of cost and net realizable value the auditor must prove that the balance has been correctly accounted for to verify valuation they should ensure they review sales around the year end sales prices of items should be compared to the calculations for net realizable value to ensure the selling price looks reasonable they should also trace the cost used in valuation to the source documents such as the purchase invoice existence can be verified by attending the inventory count if the auditor attends they can observe the count and the actual inventory this not only verifies this assertion but it also enables the auditor to review the control procedures carried out by the client the audit team will need to be organized and ensure there are staff available to attend the account whilst at the count they also re-perform samples of the account to verify existence and completeness of the counting records inspection of ownership documentation should also be carried out review of the purchase invoices for them to be addressed to the client to verifies rights and obligations also inspection of any inventory stored at third-party warehouses needs to be carried out the auditor should inspect agreements with the client and ensure inventory belongs to them we have now covered some specific ideas in auditing the current asset balances the next video will cover the audit of liability balances thank you for watching this video will give you some practical examples in how Auditors would audit some of the liability balances in the financial statements we are going to discuss the audit of accruals Provisions other payables and trade payables Auditors must assess the risks associated with balances being materially misstated at the start of the audit when planning their audit procedures the concern of liabilities is that the client may have understated the balance to make the business look healthier and more liquid than it is with this in mind the key assertion being tested is completeness other important assertions to verify are rights and obligations and evaluation the accruals balance will have been prepared by the client based on costs that may have not yet been invoiced in the year but belong to the current year the auditor should obtain a breakdown of the accrual's balance and ensure it heads up and agrees with the accruals balance in the financial statements in addition to this analytical procedures are useful here as this is a balance where estimates have been used and judgments made by the client it is open to manipulation therefore key analytical procedures include comparing the accruals balance to last year and investigating differences and review invoices dated after the year end to identify if the cost belongs in the current year anything found should then be recorded as evidence and discussed with the client for possible Amendment Provisions may be included in the financial statements the client needs to ensure they have followed IIs 37 Provisions contingent liabilities and assets correctly it is the auditor's job to review the evidence and decide whether a provision should be included Provisions could arise from events such as potential compensation payments from court cases remember the rules from the standard if there is a remote chance of the client suffering an outflow of resources then there should be nothing included in the financial statements if there is a possible chance of the client suffering an outflow of resources then there should be a disclosure note called a contingent liability note explaining the possible event but still no provision if there is a probable outflow of resources then a provision may be included in the financial statements and the disclosure note explaining the balance there are three criteria that must be met for a provision to be allowed there must be a present obligation due to a past event there must be a probable outflow of resources and there must be a reliable estimate the final criteria is the sticking point the auditor must gather evidence to be satisfied that all three criteria are present if a provision has been included they must inspect correspondence for example from the company lawyer and also discuss the event with them they can inspect any other external evidence such as press reports if it relates to a court case they must then obtain evidence on the estimate of costs and ensure it is from a reliable source this can be a lawyer but must not be an estimate from the client management other liability balances include sales tax employee tax payroll and Bank overdrafts each of these there is a piece of external evidence that can help verify the balance in the financial statements the bank statement agree each of these balances to the bank statement as the payment should be shown after the year end if not found or if it does not agree the difference should be discussed with the client The Only Exception is the Bank overdraft this may not completely agree with the bank statement as there may be timing differences the same procedures will be applied to this balance as we have already discussed in the second video in this series looking at current assets the bank reconciliation will also play a part in verifying the Bank overdraft balance along with the bank report trade payables is the total balance of all outstanding balances owed to trade suppliers this could be a significant balance with many transactions and Therefore several audit procedures will be carried out on many transactions selected audit procedures will include cut off testing reconciling supplier statements post year-end invoice review and some analytical procedures as the payable balance is made up on purchase invoices it is important to ensure that the invoices have been recorded in the correct period the auditor must therefore review the invoices posted just before and after the year end where the risk of misstatement is high the procedure would be to identify the invoices posted just before and after the year end compare them to the goods received note review the delivery date and ensure the invoice is posted in the correct period if the delivery date is on or before the year end the purchase and liability belongs this year if not it belongs in the following year the client would receive Supply statements from the suppliers which will show the transactions such as invoices and payments made and the outstanding balance these are usually sent monthly the auditor should select a sample of suppliers and reconcile the supplier statement sent at the year-end to The Ledger timing differences such as invoices sent but not received at that point are acceptable but any other differences that cannot be explained should be investigated with the client as completeness is an important assertion the auditor must be satisfied that all transactions have been included therefore inspecting purchase invoices since the year end and reviewing the detail will be required to ensure that there were not any invoices that should have been included in the current year there are a few analytical audit procedures that can be carried out on the trade payables balance these include comparing the balance to the previous year and investigating any significant differences calculating the payable days ratio and comparing to the previous year identifying the trade payables balance for each month and comparing the level of payables to the expected trend of the company and inspecting the Aged payables analysis in particular identifying the old and slow moving balances and investigating these with the client in summary we have looked at Key liability balances that are regularly seen in the statement of financial position when auditing liabilities the key assertion is completeness as it is possible the client May manipulate figures to reduce liabilities and costs analytical procedures are a very useful tool when reviewing these balances and reviewing transactions and events after the year end should not be overlooked as this may identify potential liabilities that have been missed I hope you have found this video useful the fourth video on the audit of specific balances will cover auditing balances in the statement of profit and loss including directors transactions and equity and Reserves this video will cover some practical ideas in how to audit the following areas of the financial statements the statement of profit and loss directors emoluments and the equity and reserves area each of these areas have some specific issues which need to be addressed by the auditor remember much of the transactions in the statement of profit and loss have already been tested via the corresponding debit or credit balance that was included in this statement of financial position whether it be payroll Revenue purchases or any of the expense accounts there will already have been some evidence collected that we have already seen the key assertions for the statement of profit and loss balances are cut off occurrence completeness classification and accuracy the additional audit procedures that should be carried out on these custom Revenue balances would include some substantive analytical procedures and some specific audit work to ensure the assertions are verified for the payroll balance a few specific audit procedures include for a sample of employee balances recalculate the deductions such as the tax and investigate any differences agree the net pay as per the payroll records to the bank statements and cash book and agree total wages and salaries from the payroll system to the trial balance and the financial statements analytical procedures for payroll include proof in total of the wages and salaries balance this is where the auditor will estimate the balance from the information obtained from the client such as average wages and the percentage pay rise and compare it to the actual balance any significant differences will be investigated also comparing the current year balance to the previous year will also identify potential misstatements if significantly different the revenue balance substantive tests include for a sample of invoices recalculate the sales tax and discounts for accuracy agree a sample of customer orders to the dispatch notes and invoices to ensure they were recorded and inspect credit loads issued shortly after the year end and the supporting documentation for evidence that they were relating to actual sales and not created to overstate revenue analytical procedures would include comparing the revenue balance to the previous year calculating and comparing gross profit margins to the previous years and comparing the balance to budgeted figures the purchase and other expense balance procedures include inspecting purchase orders and agreeing these to the goods received notes and invoices recorded recalculating sales tax and discounts on a sample of invoices and agreeing the balance on The Ledger to the trial balance and the financial statements analytical procedures include calculating the operating profit margin to compare to the previous year and investigating any significant differences and comparing each expense account to budget to identify anything to investigate further directors emoluments are reviewed for accuracy remember that the Auditors regards any directors transactions as material by nature and so must be satisfied that the transactions and disclosures are accurate an example of audit procedures would be obtain the detailed list of directors transactions which shows the split between wages bonuses pensions Etc and cast it to ensure all of the totals are correct inspect payroll records and agree the balances to the list and inspect bank statements and agree the amounts actually paid and obtain a written representation from the directors that they have included all director's remuneration to the auditor the equity section of the statement of financial position will include the following balances share Capital dividends and other Reserves the financial statements will also include the statement of changes in equity which will show the movement in these balances from the beginning of the year for each of these balances ensuring the closing position agrees with the trial balance and the statement of financial position will be important to audit share Capital the auditor will need to inspect share certificates or other official documentation and agree to disclosures made in the financial statements inspect board minutes for evidence of a share issue and inspect the cash book for evidence of money coming in from a share issue dividends paid and included in the financial statements will require the auditor to inspect board minutes to ensure the amount and the date declared was before the year end inspect the bank statement and agree the amounts paid and that they were before the year end also other reserves could include the revaluation Reserve as an example to audit this balance the auditor must ensure that the opening balance agrees to last year the movements in reserves add up to the closing balance and that any movements agree with supporting documentation for example evaluation report there are many examples of good substantive audit procedures to carry out on individual balances within the financial statements having a strong understanding of the financial statements and how they are prepared will help you remember the key audit procedures that help identify material misstatements analytical procedures feature as a key substantive procedure for many of the balances included in these videos these procedures allow the auditor to assess the risk of misstatements being present so they can decide whether to investigate further practice makes perfect reviewing procedures and practicing questions will ensure you retain this knowledge and grow in confidence I hope you found these videos useful this video will be covering the area of computer assisted audit techniques widely known as cats when Gathering evidence and Performing audit procedures the external auditor can often use computers and special techniques this can improve efficiency and speeds up the audit process the two main areas where this can help is with the controls work the order to complete and the substantive testing stage of the audit process when the auditor is assessing the control systems used by the client they can use something called test data when the auditor is performing substantive tests or procedures they can use something called audit software test data is where the auditor will access the client's computer controls they will perform audit tests on the system Itself by entering dummy data into the system and monitoring how it progresses through the control cycle this method of testing will allow the auditor to see if the control functions of the computer system perform properly for example they could enter a fictitious sales order in the sales ordering system and then monitor whether it is posted correctly and whether the controls over ensuring it is authorized before being accepted are effective there are two ways the auditor can perform test data live and dead data live data is where the auditor has access to test the computer systems during the operating hours for the client the benefits of testing computer controls during working hours is that it allows the auditor to assess whether demand has an impact on the efficiency of the controls it could detect that the system does not cope when there are multiple users all posting onto and reviewing the data on the system the drawbacks are at these dummy entries into the system may be forgotten and not reversed there's nothing more embarrassing than the auditor being responsible for the misstatement detected in the following Year's audit that data is where the auditor can enter dummy data into a batch after working hours this is easier to reverse as all entries are all together alternatively the client may only permit the auditor to test the system by taking a copy to install on their own computer this will remove the risk of leaving misstatements in the system altogether and very often the client feels most comfortable with this option the drawback to this approach is the auditor will not have assessed whether the system can have problems when busy however this is still an effective way of testing the computer system controls this is a cheap way of testing the computer controls of a client as it only requires the auditor and their skills without test data the auditor is only testing the controls around the paperwork that is produced from the system plus any manual Control Systems the client may have therefore this method ensures there is a thorough review of the entire control systems that relate to the financial statements and not just some of it our other method of cats is audit software this assists the auditor at the substantive testing stage where the auditor is performing audit procedures that help detect potential material misstatements audit software is a piece of software that is used by the auditor there are many variations of this software around each of the larger audit firms have designed their own versions there may also have bespoke audit software for clients with complex financial data the smaller audit firms May purchase audit software from the larger firms we just need an understanding of how generally audit software works the auditor should be able to import all of the clients transactions and balances onto the audit software now they hold all of this data the audit software is programmed to perform some audit procedures on it some of the procedures that can be performed are analytical procedures selecting samples checking calculations and exception reporting the audit software would be programmed to calculate ratios at a press of a button it can produce the results needed to compare to previous year's results budgets and Industry averages the auditor can then investigate unusual results with the client to decide whether potential material misstatements may have occurred the audit software can select samples of transactions to perform audit procedures this is a systematic method of selecting the sample as it requires no influence from the auditor in choosing the sample to test audit software can also check calculations it can be programmed to add up transactions to agree balances in the system and recalculate other transactions for example vat calculations the software allows more of these calculations to be performed as it works faster than an audit team member with a calculator or an ad list it also reduces the risk of human error on the audit the software can also be programmed to produce exception reports it can highlight unusual Trends in the financial information that has been imported it can also detect balances that look unusual an example would be producing a list of balances on The receivables Ledger that have credit balances suggesting overpayments or possible missing invoices these balances and transactions detected by the system can then be investigated by the auditor with the client for potential material misstatements audit software has many benefits including it can save time on the audit due to automatic procedures being carried out by the software it can then also save on labor costs for the audit assignment and it also reduces the risk of human error due to the software automatically performing some of the audit procedures drawbacks include the expense if a bespoke system is needed or if the audit firm has to purchase the software this can be very expensive they therefore need to ensure the benefits of using the software outweigh the price clients are often apprehensive allowing the system to be connected to the client system when importing the transactions there is a risk of data corruption when carrying out this process as the auditor is now holding all transactions and balances on the software there is a risk that this data could be leaked and therefore confidentiality would be a concern strong security controls are required to summarize cats are computer-assisted audit techniques they assist with assessing control systems at the clients by performing test data they also assist with performing substantive audit tests using audit software held by the audit firm cats ensure the transactions and systems are tested more thoroughly they also potentially reduced costs and speed up the audit process I hope you found this video useful thank you for watching this video will discuss how the external auditor relies on the work of others we must understand who the auditor would rely on and why considerations made before Reliance is placed and relying on evidence from service organizations during the audit process the auditor must ensure they obtain sufficient appropriate evidence in order to do this they may need to obtain evidence from Individual parties who can then back up the auditor's findings to ensure they come to an appropriate opinion on the financial statements this may be due to a lack of technical knowledge on a matter or it is the most efficient way of obtaining evidence we can split when Auditors rely on others into two groups when the auditor uses their own expert and when they rely on the client's experts Auditors may use their own experts in the following situations using a property valuer to verify property figures in the financial statements bringing in an inventory expert to assist with valuing specialist inventory such as jewelry experts to assist with work in progress values in the financial statements and legal advice on Provisions made for any legal cases connected to the client when an auditor uses their own expert they must assess their competence and independence from the client if they're going to rely on their work they need to ensure they will still be able to form an appropriate independent auditor opinion overall Isis 620 states that the auditor is to ensure that they obtain sufficient appropriate evidence from the expert so they can provide reasonable Assurance on the client's financial statements in order for the evidence to be adequate for the audit the auditor should review qualifications experience and membership to any professional bodies and review any connections with the client to identify any business or personal relationships with them this is to ensure objectivity will not be affected any use of an independent expert should be communicated to the client before work begins this is usually laid out in the engagement letter so both parties agree to the terms of the audit at the start of the audit process Auditors may also wish to rely on Experts used by the client in operating their business and preparing the financial statements this could be relying on the client's lawyers documentation for assessments of legal provisions and disclosure in the financial statements or relying on the internal Auditor's work to assist with the external audit the internal audit Department would be a fundamental part of the entities control system they also carry out procedures on the control systems connected to the financial statements identify deficiencies and Implement changes the external auditor must also assess control systems for deficiencies this helps them plan whether controls can be relied upon and decide the level of substantive testing needed therefore the type of work the auditor could rely on would be tester control risk assessment and any special investigations such as fraud investigations for any experts used by the client care needs to be taken before the auditor can go ahead and rely on any of their work as evidence the auditor must consider the following the scope of work the auditor should review the level of detail put in by the client expert remember the auditor must provide reasonable Assurance on the financial statements and therefore there must be sufficient detailed work carried out by the expert if the work is not sufficient the auditor will need to carry out further work or gather further evidence on this area technical competence the auditor must assess whether the expert has the required technical competence to carry out the quality of the work required the auditor should review qualifications and experience of the expert to assess whether Reliance can be placed report quality evidence collected is fundamental in forming an independent opinion if sufficient appropriate evidence cannot be obtained the expert cannot be relied upon wholly for example it may be that the internal auditor communicates much of their findings with presentations or discussions with the board of directors ideally Auditors want detailed written evidence and without it they may still need to carry out further work themselves Independence if used by the client themselves Independence is unlikely in many cases the internal Auditors are employees however if an audit committee is formed of non-executive directors and they liaise with the internal Auditors then Independents from the board is improved the less Independence the expert has from The Entity the less Reliance can be placed on their work finally let's look at the considerations the auditor makes on relying on a service organization used by the client this is an outsourced function the client has used instead of having a fully functioning Department employed by the business a popular example is the payroll department being outsourced to a skilled Payroll Company if the client outsources one of its functions such as payroll the auditor must understand the service organization and assess the risk of material misstatements decide on the level of audit testing and design audit procedures appropriate in identifying potential material misstatements and consider visiting the service organization advantages of the client using a service organization include increased expertise and skills which potentially reduce material misstatements and increased independence from directors which improves reliability disadvantages include being able to obtain information on a timely basis which may be difficult they may not be allowed to perform audit work at the service organization and this could lead to not being able to obtain sufficient appropriate evidence which would affect the audit opinion there are many sources who can assist the auditor in gathering evidence the key is to assess whether these experts are needed before the audit commences that way the auditor can plan the work required so evidence can be collected on a timely basis and no disruption is made to the audit and ultimately the forming of the audit opinion I hope you found this video useful thank you for watching this video will take you through the process the auditor follows to complete the subsequent event review the subsequent event review is carried out at the completion and review stage its aim is to identify if events since the year-end have an impact on the current Financial year and require inclusion in the financial statements the auditor must identify any posterior events and apply them to the accounting standard is 10 events after the reporting period carry out audit procedures during the review as per the auditing standard ISO 560. Identify and discuss with management any changes needed to the financial statements and consider the impact any event identified have on the audit report and opinion is 10 states that there are two types of events that occur after the reporting period they are either adjusting or non-adjusting the definition of adjusting events are events that may have been discovered after the year but where there is evidence that the conditions actually existed at the reporting date an example would be a receivable customer that has communicated their inability to pay after the year end it is unlikely that their inability to pay happened overnight they were unable to pay at the period end but did not communicate this until after the year ended therefore the advice from the standard is to write off the debt as it should be an adjustment in the financial statements the definition of non-adjusting events are material events where the conditions did not exist at the reporting date but arose after they are material enough to feel necessary to inform the users and so should be disclosed in the financial statements an example could be a disaster after the year end like a factory fire this event would impact on future productivity and so would be misleading not to inform the users of the financial statements a disclosure note explaining the event and its impact would be required The Entity should include any subsequent events as per the accounting standard treatment the auditor must then review any events and their treatment in the financial statements plus perform other audit procedures to obtain evidence of any further events that may have been missed they do this with the guidance from their auditing standard ISO 560. ISO 560 subsequent events states that sufficient appropriate evidence must be obtained on events that occur from the year-end date to the date the audit report is signed during this period the auditor has an active duty to obtain evidence and identify events which may need adjustment or disclosure in the financial statements having an active duty is to perform audit procedures examples of typical audit procedures carried out are inspection of post-your-end financial information for example management accounts this may identify significant changes to Performance that may need to be communicated to the users inspection of board minutes of meetings held since the year end these May identify significant events that may have not been included within the financial statements the auditor will also review the procedures carried out by The Entity when identifying events and preparing the financial statements it may highlight a risk of subsequent events not being disclosed correctly this may mean the auditor needs to increase the amount of work on this area the auditor will obtain a written representation from the directors that events have been disclosed correctly this acts as backup evidence and other audit procedures must also be performed inquiry with the management of the entity is also likely the Auditors will ask the management if there are any events that have occurred that may need disclosure inspecting correspondence for example with legal parties May identify significant events affecting The Entity if audit procedures identify events that have not been included correctly or omitted from the financial statements the next step is to discuss these events with management the auditor should explain the changes necessary to the financial statements they should then inspect the financial statements to ensure amendments to the balances or disclosures have been made as discussed if management refused to amend the financial statements there will be a misstatement in the financial statements if the auditor has concluded that this is material then this will impact on the audit's opinion if management cannot be persuaded to make the changes it is likely that the audit report will be modified with a qualified opinion due to a material misstatement if the event has been disclosed correctly but it relates to a material uncertainty surrounding the client the auditor may consider modifying the audit report with an emphasis of matter paragraph remember that this type of audit report will still state that the financial statements are true and fair but reference will be made to the event disclosed in the financial statements to highlight its importance once the audit report has been signed it tells us the audit report has a passive duty to identify and react to events discovered therefore once the audit report is signed the financial statements will be issued and the AGM will be held during this period if anything comes to light regarding a material event that should have been but has not been disclosed in the financial statements the auditor must take necessary action remember the auditor has no obligation to perform audit procedures during this period if they become aware of an event at this point they must first discuss the event with the management and explain the changes needed to the financial statements they must then perform audit procedures to identify whether the changes have been made correctly the Auditors must then officially withdraw their audit report remember this would have been prepared based on the financial statements before the event was discovered and so a new audit report needs to be issued to take into consideration the event that has come to light if the management have made the changes to the financial statements the auditor will issue a new audit report with the new date signed they will also modify it with an emphasis of matter paragraph that highlights that the audit report has been reissued if management refused to make necessary changes the audit report should be modified with a qualified opinion due to a material misstatement this information must be communicated by the Auditors to ensure the users are aware of the events not disclosed I hope you found this video useful thank you for watching this video will cover the going concern review this forms part of the completion and review stage of an external audit the aim of the going concern review is to ensure the auditor has considered whether the client is likely to continue in the foreseeable future and whether they have prepared their financial statements including appropriate disclosures The Entity must decide when preparing their accounts whether they believe they will continue to trade in the foreseeable future for example within the next one to two years based on their decision the format of the financial statements will change if yes then they will prepare their financial statements using the normal or going concern basis this is how we see most financial statements being prepared if they are not sure maybe due to financial difficulties then they should prepare on the going concern basis but with additional disclosure this disclosure should then explain the uncertainties to inform the users if they believe they will no longer continue for example if they have decided to close the business or it is impossible to continue trading then the financial statements will be prepared using the breakup basis it is the director's responsibility to assess their ability to continue when preparing the financial statements they should therefore review this using the cash flow forecasts and budgets considering Finance needs and sources of finance and their profitability with the financial statements now prepared demonstrating the client's perception of their business it is the auditor's responsibility to review them and decide whether they agree with the basis Isa 570 states that the auditor must identify if the financial statements are being prepared using the appropriate basis the only way they can do this is to perform specific audit procedures that will obtain evidence on the client's ability to continue this is Left To the End of the audit to ensure that events since the year end can also be reviewed as these may have an impact on their foreseeable future the auditor should look for indicators of going concern problems for example indicators include imminent Bank overdraft reviews by the bank slow payments to suppliers failure to pay staff customers not paying or significantly slower to pay defaults on loan payments tax payments missed and fines industry or competitor changes loss of market share net current liabilities let's cash outflow and making losses the auditor should perform audit procedures to obtain evidence that supports or questions the decision made by the directors on their going concern basis the evidence that will typically be obtained will be correspondence from external sources board minutes post urine accounts cash flow forecasts loan agreements written representations and inquiry with management and Company lawyers correspondence should be reviewed to identify any possible issues that have not been highlighted by management customer correspondence should be reviewed to identify problems with customer relationships and if any big customers are no longer trading or no longer trading with the entity Supply correspondence should be reviewed to identify if suppliers are supplying on time with credit or if there are any problems for example if the entity is not paying on time Bank correspondence should be reviewed for evidence such as if the Bank overdraft review is due which could indicate cash flow problems if it is in use and tax correspondence would be reviewed for evidence of non-payment fines and penalties board Minix would be inspected to identify discussions on any issues that could cause problems for the entity review of the board minutes before and after the year-end would be advisable the auditor would inspect any post year and financial information such as management accounts or interim financial statements to identify if the performance of The Entity is consistent with the current year being audited it may highlight if revenue and profits have fallen or if there are large sales of assets just after the year end any of these issues should be discussed with the client if detected an analysis of cash flow forecasts the client has prepared would also help identify potential going concern issues the auditor should assess how reasonable the assumptions are that have been used to prepare the forecast audit procedures such as agreeing the opening balance to the actual balance in the cash book comparing income and expenditure from the budget to the movements in cash in the forecast and post your accounting information will all go some way in deciding how reliable the cash flow forecast is then considering the level of cash planned for the business will also help decide whether the client is a going concern negative cash planned would be an indicator of going concerned problems where disclosure may be necessary in the financial statements inspecting loan agreements held by the client is important so the auditor can highlight if any known covenants exist or if a loan repayment is due if conditions are attached to loans for example the company must ensure debt is kept below a certain limit the auditor must assess if these covenants are in breach inquiry with management to discuss their future plans or give explanations to anything found by the auditor or help them decide if going concern disclosure is required inquiry with the company lawyer will identify any existing litigation issues which could cause future problems for the entity if a court case is looming compensation payments may be possible and an effect on their reputation may affect future Revenue growth audit procedures such as these mentioned will assist the auditor in gathering evidence to decide whether they agree with the going concern base is used if in agreement with the client and the entity is a going concern there is no further work needed if there are issues or the order to disagree with the basis used in preparing the financial statements then the auditor must discuss this with the client and advise what will happen next firstly if the auditor believes the entity has a going concern problem and disclosure is necessary as long as disclosure is adequate in the financial statements then the auditor can issue an unmodified unqualified opinion however the audit report should be modified with an emphasis of matter paragraph to highlight the uncertainty and make reference to the disclosure included in the financial statements if disclosure is needed and the client refuses to include anything in the financial statements the auditor should discuss the impact this will have on the audit and the audit report from the auditor's perspective if they believe disclosure is required then without it there is a material misstatement the audit report would be modified with a qualified opinion this is likely to be an adverse opinion and the basis of opinion paragraph explaining the uncertainty to the client's future in this video we have covered the aim of the going concern review how going concern affects the financial statement and the director's responsibilities the auditor's responsibility towards going concerned disclosure the typical indicators of going concern issues for The Entity the typical audit procedures carried out by the auditor to establish whether the clients to go and concern and finally the conclusion of the auditor's work in this area and how it affects the audit report and opinion I hope you found this video useful thank you for watching this video will explain the purpose and practicalities of written representations written representations are written confirmations of certain Matters from the directors to the Auditors it is a form of evidence to assist the auditor in forming their independent opinion they are often also referred to as the letter of representation but both terms mean the same thing the purpose of written representations as evidence is to obtain confirmation that management have fulfilled their responsibilities in preparing the financial statements this includes preparing the financial statements in accordance with financial reporting Frameworks providing relevant explanations information books and Records to the auditor and including all transactions and events within the financial statements written representations also act as supporting evidence of matters that the auditor feels necessary to form sufficient appropriate evidence this could be if required by auditing standards or if there are areas of the financial statements that are more challenging to gather on for example balances that contain estimates or judgment decisions made by the directors guidance is given from Isa 580 written representations for there to be enough evidence to form an independent opinion the auditor must obtain a written representation statement from the client management as written representations are client generated they may be subject to bias and are therefore not the most reliable forms of evidence to obtain this is why the auditor request this at the end of the audit process so they can evaluate the evidence collected so far and ensure that with the written representation evidence as a whole is sufficient and appropriate when written representations are obtained if they are not consistent with the evidence collected so far the auditor must consider whether the representations are reliable whether audit risk the risk of giving an inappropriate opinion is higher than first planned and if the audit procedures completed so far are enough and whether further testing is needed if deemed unreliable the auditor may decide they can no longer continue the audit engagement it will also potentially affect the audit opinion as if not reliable there will be not enough sufficient appropriate evidence and so a disclaimer may be issued if the management provide a written representation to the auditor with no inconsistencies then the auditor will be satisfied that as evidence this will assist forming the audit opinion if the management refused to provide written representations steps should be followed by the auditor firstly the auditor should discuss with management the the reasons why they will not provide written representations they should also explain the importance of them to the client they should then consider whether client management Integrity is impaired and whether other evidence gathered internally from the client may be unreliable if the client will still not provide the written representation then the Auditors do not have sufficient appropriate evidence they will therefore modify the audit report with a disclaimer stating that they are unable to form an opinion format of the written representation can vary it can be a written statement prepared by the client or it can be a letter or statement prepared by the auditor and then finalized by the client on headed paper either way the written representation must be signed by a senior member of the management of the client for example the chief executive or the Chief Financial Officer the written representation must be signed on the same date that the financial statements are authorized this should be before the audit report is finalized as the opinion needs to take into account the content of this evidence to conclude we have covered written representations are evidence required by the auditor their purpose is to confirm matters of importance by the directors and also back up areas where evidence has been difficult to obtain guidance on this evidence is from Isa 580 they are not always the most reliable evidence and the client May refuse to provide this written representation the auditor must consider the impact any issues regarding representations have on the audit report and if obtained ensure they are prepared dated and signed before the audit report is prepared I hope you found this video useful thank you for watching we are going to cover the completion stage of an external audit in this video the aim is to outline the components of this important stage so you have an understanding of the work required the audit process so far has seen the following completed the acceptance stage where the auditor considered whether they should accept the audit engagement the engagement letter where the client and auditor agreed the terms of the audit assignment the planning stage where any audit risks were identified and a strategy formed documenting a plan needed to complete the audit properly the assessment of control systems where the auditor identified any control deficiencies and tested controls for their reliability and the substantive testing stage where the auditor completed audit procedures to identify any material misstatement within the financial statements the completion and review stage is where most of the audit work has been completed and it is now time to review what has been done and finalize any outstanding issues the auditor may have there are several specific pieces of work that must be completed at this stage each one is of importance to the auditor these include the overall review the evaluation of misstatements subsequent event review going concern review and obtaining written representations the overall review is where the auditor will review the financial statements and the audit file here the auditor should ensure that both the financial statement and the audit file are complete and consistent with one another the financial statements should be reviewed at the end stage to ensure an appropriate financial reporting framework has been followed any relevant laws and regulations have also been followed the information within the financial statements is consistent with other published information for example the director's report and whether the auditing has addressed the important issues within the balances and transactions analytical procedures are used at the completion stage to ensure the financial statements have been reviewed thoroughly these procedures must be carried out by the auditor and it is one last attempt to ensure sufficient appropriate evidence has been collected on any changes or unusual events included within the accounts the audit file is reviewed at this final stage to ensure the evidence collected is sufficient and appropriate at the completion stage they must ensure the evidence will support the audit opinion that will be formed the documentation within the audit file will be reviewed to identify whether the audit was planned properly whether auditing standards have been followed has sufficient appropriate evidence being gathered and if conclusions made are appropriate this work is usually carried out by the audit manager reviewing the work of the audit team a disclosure checklist may also be used in many audit firms as a prompt to ensure the audit team has considered all that is necessary and that there is evidence collected in the audit file in addition to reviewing the audit file and financial statements the auditor must also review the misstatements that were collated during the audit process at the planning stage the auditor decide what is going to be a material misstatement for example six percent of profit material misstatements must be detected by the auditor so they can highlight to the client for Amendment all misstatements detected are usually recorded on a spreadsheet during the course of the audit at the completion stage the Auditors should evaluate these misstatements to see if there is a material misstatement that should be amended in the financial statements remember this could be an accumulation of many small errors within a balance that add up to a material misstatement all missed statements identified with the exception of very small ones are discussed with the client for Amendment if any are not amended by the client the auditor must assess whether the remaining errors are material to the users this should be reviewed individually and in aggregate the Auditors should then explain the impact if any on the audit report and obtain written representations to confirm the uncorrected errors are immaterial as well as the overall review and the evaluation of misstatements the auditor has some specific audit procedures to carry out at the completion stage subsequent event review is one of these areas to cover this is where the auditor reviews events that have occurred or come to light since the year end they must consider whether there should be amendments made to the financial statements this process reviews whether the accounting standard is-10 has been followed correctly by The Entity the standards state that material events after the reporting period should be included in the current period's financial statements audit procedures to identify events must be carried out in the period up to when the audit report is signed by the auditor the going concern review is another process the auditor must follow at the completion stage audit procedures must be carried out to assess whether the going concern status of the entity is disclosed correctly within the financial statements if the auditor disagrees with the going concern disclosure or lack of it within the financial statements discussions must be made with the client to recommend Amendment written representations are written confirmation of Matters from the directors of the entity to the auditors certain matters must be confirmed in writing by the management to ensure the auditor has sufficient appropriate evidence on the financial statements overall if the management will not provide written representations again discussions must be made with the directors without written representations there will be a lack of sufficient appropriate evidence which would have an impact on the audit opinion subsequent event review going concern review and written representations are all carried out at the completion stage as this is the final stage of the audit process this enables the auditor to review the year being audited plus events that have occurred since to ensure there are no emissions from the financial statements and disclosures are in accordance with accounting standards we cover these three processes in separate videos due to the detail needed in understanding them fully all five areas have been covered from the completion and review stage of an external audit once complete in simple terms the audit is complete and no other evidence would be obtained The Next Step based on the financial statements and evidence collected is to form the independent opinion on them and prepare the audit report I hope you found this video useful thank you for watching this video is going to cover the topic of the audit report the audit report is the final report at the end of the audit process that is communicated to management and the shareholders of The Entity it is within the audit report that the independent audit opinion is shown in this video we will be covering the following topics regulations surrounding the audit report the contents of the report forming an opinion and communicating to those charged with governance the audit report is regulated by auditing standards Isis 700 revised is the standard that informs us of the objectives and format within the report the standard states that the objectives of an auditor are to form an opinion on the financial statements based on the conclusions made from the evidence collected and to express their opinion clearly through a written report when the auditor forms the opinion that the financial statements are true and fair and properly prepared they issue an unmodified opinion if there are no issues to draw attention to for the users the audit report will be referred to as an unmodified audit report the contents of an audit reporter laid out in the standard this is based on an unmodified audit report where there are no material misstatements and no issues unresolved during the audit within this audit report there should always be the title clearly showing that this is an independent Auditor's report the addressee showing the intended users of the audit report the audit opinion is included underneath where they will state that the financial statements give a true and Fairview basis for opinion which explains the Professional Standards used when reaching the opinion shown above this helps give confidence to the users and includes more details on the opinion given if necessary key audit matters is next this section will highlight any of the important matters that have been dealt with during the course of the audit its purpose is to highlight significant areas to the users to help with decision making this is compulsory for listed companies and can be included for non-listed as it is best practice other information explains the management are responsible for the preparation of the other information which may be published with the financial statements an example would be the director's report remember that the Auditors only review the other information submitted for any inconsistencies with the financial statements and therefore do not audit and form an opinion on this area management responsibilities is shown as a paragraph explaining the key responsibilities of management during the audit process remember they must prepare financial statements free from Material misstatements using good control systems in accordance with relevant accounting standards Auditors responsibilities are also included in a paragraph explaining that they must form an opinion on the financial statements based on sufficient appropriate evidence collected through audit procedures the audit was conducted in accordance with Isis and the audit was planned and performed to provide reasonable Assurance on whether the financial statements are free from material misstatement other reporting responsibilities would be included underneath this if there are other responsibilities to report under local legislation and regulations finally at the very end would be the engagement partner's name signature and address of the audit firm carrying out the audit and the date the audit report was signed we have now seen what would be included in an audit report if the Auditors conclude that the financial statements are true and fair however when concluding an audit it may not always be appropriate to State this and there may be complications that need to be communicated the forming of the audit opinion is usually made by the audit or engagement partner based on all of the evidence collected and discussions made with the audit team and the client the format of the audit report May therefore change depending on what they conclude the audit partner initially needs to decide whether the financial statements are true and fair that will be a simple yes or no if it's a yes then as we've mentioned before with no unresolved issues and the financial statements being true and fair then the audit report is unmodified with an unmodified audit opinion another term you may see used is an unqualified opinion and this is just another term for an unmodified opinion okay going back to the audit partner what happens if the audit firm have concluded that the financial statements are not true and fair well Nick they need to ask themselves why it will either be because there is a material misstatement still within the financial statements or there is a lack of sufficient appropriate evidence obtained during the audit process for each of these issues the auditor must modify the audit report with what we call a qualified opinion the auditor then needs to decide whether the matter is material or material and pervasive material means the matter is important to the users this is based on the auditor's judgment referring also to the guidelines given on materiality for example an item is material if it is greater than five to ten percent of profit a half to one percent of Revenue or one to two percent of total assets material and pervasive means the matter is very significant to the users in simple terms it means the matter is so fundamental it makes the financial statements unreliable focusing on if there is a material misstatement if the matter is concluded as material the auditor must modify the audit report remember the standard audit report is an unmodified one and so if the opinion wording needs to change the auditor is modifying the audit report the audit opinion for a material misstatement would state that the financial statements are true and fair except for the matter that was not corrected this is known as an except for opinion to give you an example let's say the auditor discovered a receivable customer was unable to pay the client but the client refused to write off the debt if the debt was 20 of profit and the customer can clearly not pay it would be a material misstatement as the client has not followed the correct accounting treatment if the client refuses to amend the financial statements the auditor must modify the audit report with a qualified opinion due to a material misstatement as its material the opinion is an except for opinion if the matter is material and pervasive as we've said before this will mean that the financial statements as a whole are unreliable the auditor must modify the audit report but this time the wording in the opinion section will state that the financial statements as a whole are not true and fair this is known as an adverse opinion an example would be if the client had not presented the financial statements using the correct going concern basis if the directors had produced the account using the going concern basis on the assumption that they could continue in the foreseeable future but the Auditors did not believe this to be realistic the accounts could be seriously misleading to the users if not resolved the Auditors would disagree with the accounting treatment and so modify the audit report with a qualified opinion the matter is material and pervasive and so an adverse opinion would be included stating the financial statements are not true and fair going back to deciding whether the accounts are not true and fair this time let's look at the types of opinion if it's due to a lack of sufficient and appropriate evidence once again the auditor needs to decide whether the matter is material or material and pervasive if material the auditor must modify the audit opinion similarly to a material misstatement the wording will indicate the impact of the lack of evidence making it clear the lack of evidence is in isolation the opinion will once again be an except for opinion an example would be if the client did not perform an end-of-year inventory count if the auditor attends they are able to verify the existence of inventory if existence cannot be verified by other methods there is a lack of sufficient and appropriate evidence in this matter in isolation if evidence can be obtained in all other matters then the audit report will be modified with a qualified opinion due to a lack of sufficient or appropriate evidence the matter is material and if so an except for opinion is included if the lack of sufficient and appropriate evidence is material and pervasive then the auditor has a dilemma without enough quality evidence they will not have the confidence to provide reasonable Assurance on the financial statements the auditor will modify the audit report with a disclaimer the disclaimer will state that they were unable to form an opinion an example would be if the client has refused to give any written representations to the auditor these must be obtained as evidence and must confirm matters such as that the financial statements are free from Material misstatement events have been disclosed correctly and all books and Records have been provided to the audit team without such confirmations the auditor will not have the confidence to provide reasonable Assurance on the accounts if the directors cannot be persuaded to provide a written representation the Auditors would have no choice but to modify the audit report with the disclaimer so far we've established that if the financial statements are true and fair the audit report will be unmodified with an unqualified opinion if the financial statements are not true and fair whether it be due to a material misstatement or a lack of sufficient appropriate evidence the auditor must modify the audit report with a qualified opinion they then need to decide whether the matter is material or material and pervasive to conclude the wording within the opinion section there is one more type of audit report modification we must conclude with the final scenario is if the auditor has concluded the financial statements are true and fair but there is something of fundamental importance within the financial statements that the auditor wishes to identify there are three scenarios the first is if there are concerns over the client's ability to continue in the foreseeable future if this has been disclosed adequately in the financial statements then the auditor will highlight this important issue in the audit report this will be shown Under The Heading material uncertainties relating to going concern another paragraph that may be included is an emphasis of matter paragraph this paragraph will highlight something that has been included in the financial statements but is of significant importance to the users this could be for example a large provision and disclosure for an ongoing court case the other would be a section-headed other matters this would include anything else that is of importance in understanding The Entity and the financial statements for each of these sections the issue will be included in the financial statements and therefore they are only present to draw attention to the matter communication to those charged with governance is outlined in ISO 260 and Isa 265 where it highlights the formal communication of issues between the client and the auditors the first formal communication is the engagement letter where the agreement of responsibilities and the outline of the auditor's role is documented and signed the next formal communication is the management letter where any issues found including deficiencies in control systems are documented any recommendations are also included in this report and usually communicated at the very end of the audit process the audit report as we have now seen in this video outlines the overall independent opinion made on the financial statements this report is included with the finalized accounts and presented at the AGM for the shareholders to review if there are potential modifications to the audit report these should be discussed as soon as possible with the client before the audit report is signed I hope you found this video useful thank you for watching