ICAP CFAP CFAP-6: Audit, Assurance and Data Syllabus

What are the financial statement assertions about classes of transactions and events?

Occurrence, Completeness, Accuracy, Cutoff, Classification, and Presentation.

What are the assertions about account balances at period end?

Existence, Rights and obligations, Completeness, Accuracy/Valuation and allocation, Classification, and Presentation.

Under ISA 600 (Revised), define 'component' and 'group financial statements'.

A component is an entity, business unit, function or activity for which group or component management prepares financial information included in the group financial statements. Group financial statements include the financial information of more than one component, and include consolidated/combined financial statements.

In a group audit, what is the responsibility split between group engagement partner and component auditors?

The group engagement partner is responsible for the direction, supervision and review of the group audit and for the group audit opinion. Component auditors perform work on the financial information of components; the group engagement team is involved in their work but cannot make sole reference to a component auditor's opinion as a basis for the group opinion.

Under ISA 610, what two factors must the auditor evaluate before using the work of the internal audit function?

(1) The internal audit function's objectivity and organisational status, level of competence, and application of a systematic and disciplined approach (including QC); and (2) whether the work is appropriate for the auditor's purposes. The external auditor has sole responsibility for the opinion and cannot reduce it by using internal audit.

Under ISA 620, who is an 'auditor's expert' and what must the auditor evaluate about them?

An individual or organisation with expertise in a field other than accounting or auditing, whose work is used to assist in obtaining audit evidence. The auditor must evaluate the expert's competence, capabilities and objectivity, obtain an understanding of their field, agree the scope of work, and evaluate the adequacy of their work for audit purposes.

Distinguish an auditor's expert from a management's expert.

An auditor's expert is engaged/employed by the auditor to assist the audit (ISA 620). A management's expert is engaged/employed by management to assist in preparing the financial statements; the auditor evaluates that expert's competence, objectivity and work under ISA 500.

Under ISA 250, distinguish the two categories of laws and regulations.

(1) Laws/regulations with a direct effect on the determination of material amounts and disclosures in the financial statements (e.g. tax, pension laws) — the auditor obtains sufficient appropriate evidence of compliance. (2) Other laws/regulations central to operations/ability to continue (e.g. licences, environmental) — the auditor performs limited procedures to identify non-compliance that may materially affect the FS.

What should the auditor do upon identifying or suspecting non-compliance with laws and regulations (NOCLAR)?

Obtain an understanding of the nature and circumstances; evaluate the possible effect on the financial statements; discuss with management/TCWG; consider implications for other aspects of the audit (including reliability of representations); document; and consider the need to report to TCWG, regulators or withdraw from the engagement.

Under ISA 570, define the 'going concern basis of accounting'.

Financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future, with no intention or necessity to liquidate or cease trading. Assets and liabilities are recorded on the basis that the entity can realise assets and discharge liabilities in the normal course of business.

What is the auditor's reporting consequence when a material uncertainty related to going concern exists but is adequately disclosed?

The auditor expresses an unmodified opinion and includes a separate section headed 'Material Uncertainty Related to Going Concern' drawing attention to the relevant disclosure note. The opinion is not modified for this matter.

Under ISA 570, what happens if a material uncertainty related to going concern is NOT adequately disclosed?

The auditor expresses a qualified or adverse opinion (depending on pervasiveness) because the financial statements are materially misstated due to inadequate disclosure.

What is the reporting consequence if management refuses to extend its going concern assessment when requested?

The auditor considers the implications for the report and may need to qualify or disclaim the opinion due to an inability to obtain sufficient appropriate audit evidence regarding the use of the going concern assumption.

Under ISA 550, who is a 'related party'?

A person or entity related to the reporting entity, including: those with control or significant influence; entities under common control; and (per the applicable framework definition) parents, subsidiaries, associates, joint ventures, key management personnel and their close family members.

Why are related party relationships and transactions a significant audit risk?

Because they may not operate at arm's length, can be used to commit fraud or manipulate results, may be hard to detect due to undisclosed relationships, and accounting records may not be designed to capture them — increasing the risk of material misstatement and inadequate disclosure.

Under ISA 580, what is a 'written representation' and what is its evidential value?

A written statement by management provided to the auditor to confirm certain matters or support other audit evidence. It is necessary audit evidence but does not on its own provide sufficient appropriate evidence about any of the matters dealt with, and does not relieve the auditor of obtaining other evidence.

Name two written representations the auditor is required to obtain under the ISAs.

(1) That management has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable framework; and (2) that it has provided the auditor with all relevant information and access as agreed and that all transactions have been recorded and reflected. (Also commonly required re fraud, laws/regs, going concern, related parties, subsequent events.)

Under ISA 560, define a 'subsequent event' and the two types.

Events occurring between the date of the financial statements and the date of the auditor's report, and facts that become known after the report date. Two types under IAS 10: (1) Adjusting events — provide evidence of conditions existing at the FS date; (2) Non-adjusting events — indicative of conditions arising after the FS date.

What is the auditor's active duty regarding subsequent events between the FS date and the date of the auditor's report?

To perform audit procedures designed to obtain sufficient appropriate evidence that all events requiring adjustment of or disclosure in the financial statements have been identified (e.g. reviewing post year-end procedures, minutes, interim accounts, and making inquiries of management).

Under ISA 560, what is the auditor's responsibility for facts discovered after the report date but before the FS are issued?

The auditor has no obligation to perform procedures after the report date, but if a fact becomes known that, had it been known at the date of the report, may have caused amendment, the auditor must discuss with management, determine if FS need amendment, and if amended, perform procedures and provide a new report dated no earlier than the date the amended FS are approved.

Under ISA 402, who is a 'service organization' and a 'user entity'?

A service organization is a third party that provides services to user entities that are part of those entities' information systems relevant to financial reporting (e.g. payroll processing, IT hosting). A user entity is the entity that uses the service organization and whose financial statements are being audited.

Distinguish a Type 1 from a Type 2 report under ISA 402.

Type 1: a report on the description and design of controls at the service organization at a point in time (no operating effectiveness opinion). Type 2: a report on the description, design and operating effectiveness of controls over a specified period (includes tests of controls and results), and can provide evidence to support a lower control risk assessment.

Under ISA 700, when does the auditor express an unmodified (clean) opinion?

When the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Under ISA 705, what are the three types of modified opinion and when is each used?

(1) Qualified opinion — material but not pervasive misstatement, or inability to obtain evidence that is material but not pervasive ('except for'). (2) Adverse opinion — misstatements that are both material and pervasive. (3) Disclaimer of opinion — inability to obtain evidence whose possible effects are both material and pervasive.

Define 'pervasive' in the context of modified opinions (ISA 705).

Effects on the FS that, in the auditor's judgement: are not confined to specific elements/accounts/items; or if so confined, represent or could represent a substantial proportion of the FS; or in relation to disclosures, are fundamental to users' understanding of the FS.

List the key elements of the Independent Auditor's Report under ISA 700 (Revised).

Title; addressee; Opinion section (first); Basis for Opinion; (Material Uncertainty re Going Concern if applicable); Key Audit Matters (for listed entities); Other Information; Responsibilities of Management and TCWG; Auditor's Responsibilities for the audit; other reporting responsibilities; name of engagement partner (listed); signature; auditor's address; and date.

Under ISA 701, what are 'Key Audit Matters' (KAM) and which entities require them?

KAMs are those matters that, in the auditor's professional judgement, were of most significance in the audit of the current period's financial statements, selected from matters communicated with TCWG. Reporting KAMs is required for audits of complete sets of general purpose financial statements of listed entities (and when otherwise required or voluntarily decided).

Distinguish an Emphasis of Matter paragraph from an Other Matter paragraph (ISA 706).

Emphasis of Matter: refers to a matter appropriately presented/disclosed IN the financial statements that is of such importance it is fundamental to users' understanding. Other Matter: refers to a matter NOT presented/disclosed in the FS that is relevant to users' understanding of the audit, the auditor's responsibilities, or the report. Neither modifies the opinion.

Under ISA 710, distinguish 'corresponding figures' from 'comparative financial statements'.

Corresponding figures: prior period amounts are included as an integral part of the current period FS and the auditor's opinion refers only to the current period. Comparative financial statements: prior period amounts are presented for comparison and the auditor's opinion refers to each period for which FS are presented.

Under ISA 720, what is the auditor's responsibility regarding 'other information' (e.g. annual report)?

To read the other information and consider whether it is materially inconsistent with the financial statements or with the auditor's knowledge obtained in the audit, or otherwise appears to be materially misstated. The auditor does not audit it but includes an 'Other Information' section in the report and reports any uncorrected material misstatement.

Under ISA 800, what is a 'special purpose framework'? Give an example.

A financial reporting framework designed to meet the financial information needs of specific users. Examples: tax basis of accounting, cash receipts and disbursements basis, the financial reporting provisions of a regulator, or the provisions of a contract. The auditor must include an Emphasis of Matter paragraph alerting users to the special purpose framework and restricted use.

Under ISA 805, what is the engagement scope, and can a separate opinion on a single statement be issued alongside a qualified opinion on the complete set?

ISA 805 deals with audits of a single financial statement (e.g. a statement of cash flows) or a specific element/account/item. An unmodified opinion on a single statement/element may be issued even if the opinion on the complete set is modified, provided the single statement/element is not a major portion of the complete FS and the unmodified opinion is not published together with, and is clearly differentiated from, the adverse/disclaimer report.

Under ISRE 2400/2410, what level of assurance does a review engagement provide and what is the form of conclusion?

A review provides limited (moderate) assurance. The conclusion is expressed in the negative form: 'nothing has come to our attention that causes us to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable framework.'

What are the two primary procedures used in a review engagement of historical financial statements?

Inquiry and analytical procedures (primarily), supplemented by other procedures where necessary. A review does not generally include tests of controls, inspection, observation, confirmation or recalculation as in an audit.

What is the assurance framework continuum from highest to lowest assurance?

Audit (reasonable assurance, positive conclusion) > Review (limited assurance, negative conclusion) > Agreed-upon procedures and compilation engagements (no assurance — related services under ISRS, only factual findings or compilation).

Under ISAE 3000, what are the elements of an assurance engagement (the '5 elements')?

(1) A three-party relationship (practitioner, responsible party, intended users); (2) an appropriate underlying subject matter; (3) suitable criteria; (4) sufficient appropriate evidence; and (5) a written assurance report. (Plus an appropriate subject matter information/outcome.)

Under ISAE 3000, distinguish a 'reasonable assurance engagement' from a 'limited assurance engagement'.

Reasonable assurance: evidence is gathered to reduce engagement risk to an acceptably low level as the basis for a positive form of conclusion. Limited assurance: the nature/timing/extent of procedures is reduced relative to reasonable assurance but is still meaningful, giving a level of assurance that is more than inconsequential, expressed in a negative form of conclusion.

Distinguish an 'assertion-based' from a 'direct' assurance engagement.

Assertion-based (attestation): the responsible party measures/evaluates the subject matter against the criteria and presents the subject matter information, on which the practitioner reports. Direct engagement: the practitioner directly measures/evaluates the underlying subject matter against the criteria and presents the resulting information in the assurance report.

Under ISAE 3400, define 'prospective financial information' and its two forms.

Financial information based on assumptions about events that may occur in the future and possible actions by an entity. Two forms: (1) a forecast — based on best-estimate assumptions; and (2) a projection — based on hypothetical assumptions, or a mixture of best-estimate and hypothetical assumptions.

What type of assurance does an examination of prospective financial information provide (ISAE 3400)?

It provides moderate (limited) assurance. The practitioner reports that nothing has come to attention to suggest the assumptions do not provide a reasonable basis, that the PFI is properly prepared on the basis of the assumptions and presented in accordance with the relevant framework — with a caveat that actual results are likely to differ since anticipated events may not occur.

What is 'pro forma financial information' and what does an assurance report on it address?

Pro forma financial information illustrates the impact of a significant event or transaction (e.g. an acquisition) on unadjusted historical financial information as if the event had occurred at an earlier date. The assurance report addresses whether the pro forma information has been compiled, in all material respects, on the basis of the applicable criteria — it does not provide assurance on the underlying historical information.