Audit and Assurance Introduction

Requirement  Preview before class. Ask more, and discuss more. Ask more, and discuss more. Make notes. Make notes. Review, review, review. Review, review, review.

How to give regular marks?  20% Attendance  70% Case study  10% Performance in class

What F8 is about  To develop knowledge and understanding of the process of carrying out the assurance engagement and its application in the context of the professional regulatory framework.

Characteristics of F8  High demand of practical application;  High demand of knowledge of accounting;  High demand of knowledge of business operation;  High demand of literate ability.

The exam paper Section A: 8 multiple choice questions ×2 marks = 16 marks 4 multiple choice questions ×1 marks = 4 marks Subtotal 20 marks Section B: 4 shorter case questions ×10 marks = 40 marks 2 longer scenario questions ×20 marks = 40 marks Subtotal 80 marks Section A and B Total 100 marks

Styles of question  Theory define, explain, distinguish, describe, identify… define, explain, distinguish, describe, identify…  Applications illustrate, tabulate, evaluate, analyze… illustrate, tabulate, evaluate, analyze…

Instructions ‘ List ’ i.e. make a list of like things. ‘ List ’ i.e. make a list of like things. ‘ State ’ i.e. express in words. ‘ State ’ i.e. express in words. Use one short sentence (bullet point) to make each answer point. Use one short sentence (bullet point) to make each answer point. ‘ Describe ’ Use brief sentences but give more depth than if the instruction was ‘ state ’ ‘ Describe ’ Use brief sentences but give more depth than if the instruction was ‘ state ’ ‘ Explain ’ i.e. make plain, clarify ‘ Explain ’ i.e. make plain, clarify ‘ Discuss ’ i.e. give balanced views on and conclude (where appropriate). ‘ Discuss ’ i.e. give balanced views on and conclude (where appropriate). ‘ Identify ’ e.g. from the scenario. ‘ Identify ’ e.g. from the scenario. ‘ Comment ’ i.e. make observations ‘ Comment ’ i.e. make observations ‘ Suggest ’ i.e. propose or put forward. ‘ Suggest ’ i.e. propose or put forward.在做题过程中也要体会这些答题要求并研究答案的体例

1 Part A Audit framework and regulation Audit and other assurance engagements

The purpose of external audit engagement  An external audit is a type of assurance engagement that is carried out by an auditor to give an independent opinion on a set of financial statements. Objective of external audit is ‘ to enable the auditor to express an opinion on whether the F/Ss are prepared, in all material respects, in accordance with an applicable financial reporting framework ’ ‘ to enable the auditor to express an opinion on whether the F/Ss are prepared, in all material respects, in accordance with an applicable financial reporting framework ’

Audit  In paper F8, it mostly refers to Financial statements (F/Ss) audit Financial statements (F/Ss) audit

Statutory and non-statutory audit  Statutory audit limited liability company, charities (not all), investment business and trade unions … limited liability company, charities (not all), investment business and trade unions …  advantages  advantages shareholders receive impartial view from auditors; company ’ s benefits might include recommendations in relation to accounting and control system, and possibility fraud and error found by auditors shareholders receive impartial view from auditors; company ’ s benefits might include recommendations in relation to accounting and control system, and possibility fraud and error found by auditors

 Non-statutory audit auditing may extend to every type of undertaking which produces accounts, including clubs, sole traders and partnerships. auditing may extend to every type of undertaking which produces accounts, including clubs, sole traders and partnerships. advantages advantages

Accountability and stewardship  最早出现于宗教用语，后延伸至欧洲中世纪的庄园主和管 家之间的、最早出现的明确、稳定的委托代理责任关系中， 其英文表述为 custodianship  随后，随着受托责任在经济生活中的普遍化，其英文表述 逐渐衍生为 stewardship( 经管责任 ) ，意为资源的管理者 对资源的所有者承担的、对资源所有者交付的资源进行有 效经营和管理的责任。  以后，以日裔美籍会计学家井尻雄士（ 1975 ）为代表的 一批学者，认为应该由 accountability 代替 stewardship ， A 的意义除了可以包容 S 所具备的意义之外，还具有与公 司治理相关的特殊意义：资源的受托者对资源的委托方负 有解释、说明其经营活动及其结果的义务，这与公司治理 中的 ‘ 说明责任观 ’ 不谋而合。  此外，随着公司治理的 ‘ 利益相关者 ’ 的逐渐蔓延和发展， 受托责任的内涵也逐步扩展到 social responsibility

Agency theory  Ownership separate from mgt ( 两权分离 )  Interest group, interested parties 利益相关者  Agency relationships occur when the principal employs the agent to perform a task on their behalf  Agency contract is one offered by the agents to reassure principals that they will act in the principal ’ s interests such as agreeing to provide information enabling the principal to monitor their performance  assumption: shareholders will only buy shares if safeguards are in place to protect their interests  Mgt have an incentive to engage an independent auditor since investor make decision according to certain assurance

Agency theory  Agency risk (agency relationship conflicts): the agents (mgt) act in their own self- interest the agents (mgt) act in their own self- interest  Steps: Audited F/Ss make up the information provided by mgt to prove that they have acted in the shareholders ’ interest (desirability of an audit) Audited F/Ss make up the information provided by mgt to prove that they have acted in the shareholders ’ interest (desirability of an audit) statutory audit statutory audit

Director ’ s responsibility  General : accountable to the shareholders for the assets that they control on the shareholder ’ s behalf  Specific: - safeguard assets - safeguard assets - prevent fraud and errors - prevent fraud and errors - keep proper accounting record - keep proper accounting record - prepare and deliver annual F/Ss - prepare and deliver annual F/Ss - set up Internal control - set up Internal control

Types of assurance services  External audit (both statutory and non-statutory)  Review  Internal audit

True and fair  No definition in legislation or standards  Impossible to define  A term of art, different from scientific truth  In accordance with accounting standards  Free from any bias,  Sometimes use clearly and equitably  Clear, Distinct, plain, impartial, just, not misleading  Objective, relevant  Prepared on a consistent basis

F/Ss (Subject matter 审计对象 ) Determined largely by national legislation and accounting standards  Balance sheets  Income statements  Cash flow statements  Statements of changes in equity  Notes  Any other explanatory materials

Applicable F/R framework (Criteria)  Establish and inform the intended user of the basis against which the F/Ss are evaluated or measured  Provide a frame of reference to prevent individual misunderstanding  IASs, IFRS  The national standards of a particular country

In all material respects Not certify or guarantee the F/Ss correct In practice, absolute assurance is generally not attainable  Only provide reasonable Assurance

Reasonable assurance (inherent limitations )  use of sampling  use of judgment  Most audit evidence is persuasive rather than conclusive  Internal control systems have inherent limitations  Large-scale fraud is often deliberately concealed  the characteristics of the subject matter when evaluated or measured against the identified criteria

Materiality  Related with Audit Risk  Very useful in all process of audit  Very important in exam  We will explain in chapter 6

Level of assurance  High level （ audit – reasonable assurance)  Moderate level (review – negative assurance)  No assurance (agreed-upon procedure, compilation engagement)