• Paper 3.1


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    • Abstract: Paper 3.1Audit and Assurance Services(INT)AIM3.6 Advanced Corporate Reporting 3.1 Audit and Assurance ServicesTo ensure that candidates can exercisejudgement and apply techniques in theanalysis of matters relating to the provision

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Paper 3.1
Audit and Assurance Services
(INT)
AIM
3.6 Advanced Corporate Reporting 3.1 Audit and Assurance Services
To ensure that candidates can exercise
judgement and apply techniques in the
analysis of matters relating to the provision
2.5 Financial Reporting 2.6 Audit and Internal Review
of audit and assurance services, and can
evaluate and comment on current practices
and developments.
1.1 Preparing Financial Statements
OBJECTIVES
On completion of this paper candidates
should be able to:
• demonstrate their ability to work within
a professional and ethical framework
• understand current issues and POSITION OF THE PAPER IN THE • extending the application of procedures
developments relating to auditing and OVERALL SYLLABUS involved in planning, conducting and
the provision of audit-related and Candidates need a thorough understanding reporting on audit assignments to group
assurance services of Paper 2.6 Audit and Internal Review and audits, audit-related services and non-
• explain and evaluate the auditor’s knowledge of Paper 2.5 Financial Reporting audit assignments
position in relation to the acceptance concerning the preparation and presentation • critically evaluating procedures and
and retention of professional of financial statements. Paper 3.1 may draw reports
appointments on aspects of information technology, covered • introducing current issues and
• evaluate and recommend quality control in Paper 2.1 Information Systems, by developments.
policies and procedures considering its impact on assignments.
• identify and describe the work required SYLLABUS CONTENT
to meet the objectives of audit and non- Paper 3.1 develops the knowledge gained 1 Professional and ethical considerations
audit assignments in Paper 2.5 Financial reporting by (a) Rules of professional conduct
• apply and evaluate the requirements of introducing the audit implications of (i) integrity, objectivity and
relevant International Standards on accounting treatments. independence
Auditing (ii) professional duty of confidence
• evaluate findings and the results of Paper 3.1 develops the knowledge gained (iii) changes in professional
work performed and draft suitable in Paper 2.6 Audit and Internal Review by: appointments
reports on assignments • extending the basic awareness of (iv) books, documents and papers
• demonstrate the skills expected in Part 3. professional codes and fundamental (v) corporate financial advice
principles to a detailed understanding of (vi) conflicts of interest.
rules of professional conduct
• introducing practice management
PAGE 3
Audit and Assurance Services (INT) (Continued)
(b) Professional responsibility and liability (b) Planning including 5 Reporting
(i) fraud and error (i) materiality (a) Auditor’s reports.
(ii) professional liability (including (ii) risk assessments. (b) Conclusions and reporting for
negligence) (c) Evidence including agreed-upon procedures and
(iii) misconduct (i) documentation assurance services.
(iv)expectation gap (ii) related parties (c) Reports to management.
(v) professional indemnity insurance (iii) management representations
(vi)insider dealing. (iv) using the work of others. 6 Current issues and developments
(c) Regulatory environment (d) Evaluation and review including (a) Professional ethics.
(i) corporate governance (i) opening balances and (b) Corporate governance.
(ii) Code of Best Practice comparatives (c) Fraud.
(iii) audit committees (ii) other information (d) Environmental issues.
(iv) internal financial control (iii) subsequent events (e) Information technology.
effectiveness (iv) going concern. (f) Multinational accountancy firms.
(v) laws and regulations in an audit (g) SMEs and audit exemption.
of financial statements. 4 Assignments
(a) Audit of financial statements. EXCLUDED TOPICS
2 Practice management (b) Group audits. The following topics are specifically
(a) Quality control practices and (c) Audit-related services including: excluded from the syllabus:
procedures. (i) reviews • Stock Exchange Listing Requirements
(b) Advertising, publicity and obtaining (ii) agreed-upon procedures • International Accounting Standards
professional work. (iii) compilations. Exposure Drafts
(c) Fees. (d) Assurance services including: • effects on a company of insolvency law
(d) Tendering. (i) risk assessment and of employment and social security
(e) Terms of engagement. (ii) performance measurement law (e.g. wrongful trading and national
(iii) systems reliability insurance contributions).
3 Audit process (iv) electronic commerce.
(a) Audit strategy including (e) Prospective financial information. KEY AREAS OF THE SYLLABUS
(i) risk-based auditing (f) Internal audit. The key topic areas are as follows:
(ii) systems audits (g) Outsourced finance and accounting • rules of professional conduct
(iii) balance sheet approach functions. • quality control practices and procedures
(iv) revenue, expenditure and other (h) Social and environmental audits. • audit strategy
cycles • assignments
(v) directional testing • auditor’s reports
(vi) analytical procedures. • current issues and developments.
PAGE 4
Audit and Assurance Services (INT) (Continued)
APPROACH TO EXAMINING THE ADDITIONAL INFORMATION These articles and other communications
SYLLABUS Candidates need to be aware that questions from the examination can be downloaded via
The examination is a three hour paper involving knowledge of new examinable the Students section of www.accaglobal.com.
constructed in two sections. Questions in regulations will not be set until at least six
both sections will be almost entirely months after the last day of the month in
STUDY SESSIONS
discursive. However, candidates will be which the regulation was issued.
expected, for example, to be able to assess
The Study Guide provides more detailed 1 Rules of professional conduct I
materiality and calculate relevant ratios
guidance on the syllabus. Examinable Candidates should be able to interpret,
where applicable.
documents are listed in the ‘Exam Notes’ apply and appraise specified statements
section of student accountant. of professional ethics which govern the
Section A questions will be based on ‘case
auditor’s conduct and are included in
study’ type scenarios. That is not to say
RELEVANT TEXTS ACCA’s ‘Rules of Professional Conduct’
that they will be particularly long, rather
There are a number of sources from which and IFAC’s ‘Code of Ethics for
that they will provide a setting within
you can obtain a series of materials written Professional Accountants’.
which a range of topics, issues and
for the ACCA examinations. These are (a) Integrity, objectivity and
requirements can be addressed. Different
listed below: independence
types of question will be encountered in
(i) revise the purpose of a professional
Section B and will tend to be more Foulks Lynch – ACCA's official publisher
ethical code from Paper 2.6
focussed on specific topics, for example Contact number: +44 (0)20 8831 9990.
(ii) compare and contrast the
‘auditor’s reports’, ‘quality control’ and Website: www.foulkslynch.com
Fundamental Principles of ACCA’s
topics of ISAs which are not examinable in
‘Rules of Professional Conduct’
Paper 2.6 Audit and Internal Review. (This Accountancy Tuition Centre (ATC)
with those of IFAC’s ‘Code of Ethics
does not preclude these topics from International
for Professional Accountants’
featuring in Section A.) These questions Contact number: +44 (0)141 880 6469.
(iii) outline the contents of ACCA’s
will have less scenario than in Section A Website: www.ptc-global.com
and IFAC’s codes of ethics
and one will be a discussion question.
(iv) identify and explain common
Number BPP
threats to independence and
of marks Contact number: +44 (0)20 8740 2211.
explain how the risks may be
Section A: 3 compulsory questions 70 Website: www.bpp.com
minimised or resolved
Section B: Choice of 2 from 3
(v) discuss and evaluate the
questions (15 marks each) 30 The Financial Training Company
effectiveness of available
100 Contact number: +44 (0)174 785 4302.
safeguards
Website: www.financial-training.com
(vi) outline the practical implications
Wider reading is also desirable, especially for an audit practice in relation to
regular study of relevant articles in ACCA's quality control procedures
student accountant.
PAGE 5
Audit and Assurance Services (INT) (Continued)
(vii) discuss the benefits of providing (iii) describe the procedures for “fraud” and “misstatement”
other services (including internal agreeing the terms of an (ii) compare and contrast the
audit) to audit clients and whether engagement respective responsibilities of
the drawbacks (eg objectivity (iv) outline the procedures for the management and auditors for
impairment) can be overcome transfer of books, papers and fraud and error
(viii) define “specialist valuations” information following a new (iii) describe the matters to be
and discuss how the objectivity appointment considered and procedures to be
of the audit may be threatened (b) Books, documents and papers carried out to investigate actual
(ix)explain how and why an auditor (i) explain the general principals and/or potential misstatements
should respond to a request to governing the ownership of, and (iv) explain how, why, when and to
provide a second opinion rights of access to, documents whom fraud and error should be
(b) Professional duty of confidence and papers reported and the circumstances
(i) explain the importance of the role (ii) explain the legal right of lien and in which an auditor should
of confidentiality to the auditor- describe the circumstances in withdraw from an engagement
client relationship which it may be exercised (v) discuss the current and possible
(ii) distinguish between disclosure (iii) discuss the extent to which future role of auditors in
and use of information clients and third parties may preventing, detecting and
(iii) identify circumstances in which have access to documents and reporting error and fraud
disclosure is permitted or required papers (b) Professional Liability
(iv) discuss the factors which may (c) Corporate financial advice and (i) identify the circumstances in which
justify disclosure in the “public conflicts of interest auditors may have legal liability
interest” (i) outline the role of auditors in (ii) describe the factors to determine
(v) describe how a client’s advising clients involved in take- whether or not an auditor is
information should be protected over bids and share issues and negligent in given situations
when the auditor also acts for a explain how conflicts can arise (iii) explain the other criteria for legal
competitor company (ii) distinguish conflicts between liability to be recognised
members’ and clients’ interests (including “due professional care”
2 Rules of professional conduct II from those between the interests and “proximity”)
(a) Changes in professional appointments of different clients (iv) distinguish between liability to
(i) discuss the reasons why entities (iii) describe how conflicts may be client and liability to third parties
change their auditors avoided or managed with (v) comment on precedents of case law
(ii) explain the matters to be safeguards (vi) identify and evaluate the
considered and the procedures practicability and effectiveness of
which an audit firm/professional 3 Professional responsibility and liability ways in which liability may be
accountant should carry out (a) Fraud and error restricted
before accepting new clients and (i) define and distinguish between (vii) discuss how the audit and other
new engagements the terms “error”, “irregularity”, opinions may be affected by
PAGE 6
Audit and Assurance Services (INT) (Continued)
limiting audit liability and importance of corporate design and operation of systems
(viii) discuss the advantages and governance and controls, and the reliability of
disadvantages of audit liability (ii) discuss the relative merits and management information
claims being settled out of court disadvantages of voluntary codes (financial and non-financial)
(c) Misconduct and legislation (iii) describe the factors to be taken
(i) explain and illustrate what is meant (iii) discuss current issues in into account when assessing the
by professional misconduct corporate governance need for an internal audit function
(ii) outline the penalties and (b) Code of Best Practice (e) Laws and Regulations in an Audit of
sanctions which may be imposed (i) outline the provisions of the Code Financial Statements
by disciplinary bodies of Best Practice (based on the (i) compare and contrast the
(d) Expectation gap Cadbury Report) that are most respective responsibilities of
(i) identify and discuss the factors relevant to auditors management and auditors
which contribute to the expectation (ii) outline the requirements of the concerning compliance with laws
gap (e.g. responsibilities for fraud Combined Code (of the Committee and regulations
and error, litigation) on Corporate Governance) relating (ii) describe the auditors
(ii) suggest ways in which the gap to directors’ responsibilities (e.g. for considerations of compliance and
might be bridged risk management and internal audit procedures when possible
(e) Professional indemnity insurance control) and the reporting non-compliance is discovered
(i) explain the terms professional responsibilities of auditors
indemnity insurance (PII) and (iii) outline the content of a 5 Practice management I
fidelity guarantee insurance (FGI) corporate governance statement (a) General
(ii) discuss arguments for and (c) Audit Committees (i) describe the risks to which
against mandatory cover (i) explain the structure and roles of practices are exposed and the
(f) Insider dealing audit committees and discuss steps which can be taken to
(i) explain the term “insider dealing” their benefits and drawbacks manage them
and why it is damaging (ii) discuss the relative merits and (b) Quality control practices and
(ii) relate the Fundamental Principles disadvantages of regulation by a procedures
to insider dealing voluntary code of practice rather (i) outline the regulatory framework
(iii) suggest measures to reduce the than law for ensuring quality services
exposure of partners and staff to (iii) discuss independence in respect (ii) outline the organization of
the risks arising of non-executive directors international accountancy
(d) Internal financial control effectiveness practices
4 Regulatory environment (i) outline the importance of internal (iii) specify the objectives of quality
Revision of Regulatory Framework from control and risk management control policies
Paper 2.6 (ii) compare the responsibilities of (iv) identify the factors which affect
(a) Corporate governance management and auditors the nature, timing and extent of
(i) explain the objective, relevance (internal and external) for the an audit firm’s quality control
PAGE 7
Audit and Assurance Services (INT) (Continued)
policies and procedures to submit a proposal or fee quote (iii) describe the consequences of
(v) recommend policies and procedures for an audit such a “top down” approach to
which can be exercised internally at (ii) identify the information required evidence gathering procedures
the level of the audit firm and on for the proposal (e.g. tests of controls, analytical
individual audits (iii) outline the content of an procedures and test of detail)
(vi) describe review procedures engagement proposal document (c) Systems audits
including second partner reviews (for both continuing and new (i) describe the components of an
(vii) discuss the matters particularly clients) effective system of internal controls
relevant to smaller firms relating to (iv) suggest the criteria which might (ii) identify the factors which
quality control be used to evaluate tenders contribute to a strong control
received from audit firms environment
6 Practice management II (v) suggest reasons why audit fees (iii) revise control objectives, control
(a) Advertising, Publicity, Obtaining may be lowered from the procedures, walk-through tests and
Professional Work and Fees previous year’s fees tests of control (“compliance tests”)
(i) explain the need for guidance in (vi) describe “lowballing” and
these areas discuss whether or not it impairs 8 Audit process II
(ii) illustrate the circumstances in independence (a) Balance sheet approach
which advertising is acceptable (c) Terms of engagement (i) explain the importance of the
(iii) discuss the restrictions on practice (i) explain the key issues which balance sheet as a primary
descriptions, the use of the ACCA underlie the agreement of the statement
logo and the names of practising scope and terms of an audit (ii) discuss why this approach may
firms engagement with a client be more appropriate for the audit
(iv)discuss the extent to which fees of small businesses than a
may be referred to in promotional 7 Audit process I business risk approach
material (a) General (approaches to auditing) (iii) discuss the limitations of this
(v) outline the determinants of fee- (i) select and justify an appropriate approach
setting and describe the bases on approach to a given assignment (b) Revenue, expenditure and other
which fees and commissions may (ii) explain the circumstances in cycles
and may not be charged for which a specified approach is not (i) illustrate how accounting
services appropriate transactions can be analysed into
(vi)discuss the problems involved in (b) Risk-based auditing “cycles” which correspond to line
establishing and negotiating fees, (i) describe the business risk approach items in the balance sheet and
etc to auditing and its relationship to income statement
(b) Tendering the audit risk model (ii) identify cycles relevant to a given
(i) describe the matters to be (ii) outline the reasons why it is situation (e.g. the conversion cycle
considered when a firm is invited adopted in preference to other for a manufacturing enterprise)
methodologies
PAGE 8
Audit and Assurance Services (INT) (Continued)
(iii) describe the approach to each – preliminary materiality 10 & 11 Evidence
cycle – financial statement or other (a) General
(c) Directional testing assertions (i) critically appraise the
(i) explain the concept of directional – components of audit risk appropriateness and sufficiency of
testing as a methodology – audit strategy different sources of audit evidence
(ii) describe how this approach helps (b) Materiality and the procedures by which
to detect misstatements and (i) define materiality and describe evidence may be obtained
determines the populations from how it is applied in financial including
which samples are drawn reporting and auditing – management representations
(iii) illustrate the use of directional (ii) explain the criteria which – the work of others (including
testing within cycles determine whether or not a internal auditors and experts )
(iv) discuss the advantages and matter is material – sampling techniques and
limitations of this approach (iii) discuss the use and limitations selection methods
(d) Analytical procedures of prescriptive rules in making – direct confirmation
(i) explain the nature and role of decisions about materiality – audit automation tools
analytical procedures in the (c) Risk Assessments (ii) identify and illustrate suitable
conduct of an assignment (i) identify and distinguish between investigative methods (eg audit
(ii) recognise situations in which assignment (eg audit) and procedures such as enquiry and
analytical procedures may be business risks observation) to obtain sufficient
used extensively (ii) describe the factors which evidence from identified sources
(iii) describe the criteria for influence the assessment of a (iii) select and explain substantive
assessing the extent to which specified risk (e.g. inherent risk) analytical procedures appropriate
reliance can be placed on for a given assignment to given financial and other data
substantive analytical procedures (iii) explain how and why the (iv) identify and evaluate the audit
assessments of risks and evidence expected to be available
9 Planning materiality affect the nature, timing to:
(a) General and extent of auditing procedures – verify specific assets,
(i) identify and illustrate the matters (iv) critically appraise the audit risk liabilities, transactions and
to be considered in planning an model events; and
assignment including: (v) recognise and assess the – support financial statement
– logistics (e.g. staff and client implications of a specified assertions and accounting
management, multiple computer system (e.g. network) treatments (including fair
locations, deadlines) on an assignment values)
– use of IT in administration (b) Documentation
– time budgets (i) explain the reasons for preparing
– assignment objectives and and keeping working papers and
reports required the importance of reviewing them
PAGE 9
Audit and Assurance Services (INT) (Continued)
(c) Related parties (b) Opening balances and comparatives (iv) understand the implications for
(i) explain the specific audit (i) describe how the auditor’s the auditor’s report where doubts
problems and procedures responsibilities for corresponding about the going concern basis
concerning related parties and figures and comparative financial – have been resolved
related party transactions statements are discharged – remain unresolved
(ii) recognise circumstances that may (ii) describe the further considerations (v) comment on the auditors
indicate the existence of and audit procedures relevant to responsibilities in respect of going
unidentified related parties initial engagements concern statements
(d) Management representations (c) Other information
(i) illustrate the use of written (i) explain the auditor’s 14 & 15 Audit of financial statements
management representations as responsibilities for “other (a) Explain the objectives and principal
the primary source of audit information” characteristics of statutory audit and
evidence and as complementary (ii) discuss the courses of action discuss its value (e.g. in assisting
audit evidence available to an auditor if a management to reduce risk and
(ii) discuss the implications of material inconsistency exists improve performance)
contradictory evidence being (d) Subsequent events (b) Distinguish between the respective
discovered (i) specify the nature and timing of responsibilities of auditors and
(e) Using the work of others audit procedures designed to management in relation to the audit
(i) explain when it is justifiable to identify subsequent events that of financial statements
place reliance on the work of an may require adjustment to, or (c) Describe the limitations of assurance
expert (e.g. a surveyor employed disclosure in, the financial provided by a statutory audit
by the audit client) statements (d) Evaluate the matters (e.g.
(ii) assess the appropriateness and materiality, risk, relevant accounting
sufficiency of the work of internal 13 Evaluation and review II standards, audit evidence) relating
auditors (a) Going concern to:
(i) give examples of indicators that (i) inventory
12 Evaluation and review I the going concern basis may be (ii) standard costing systems
(a) General in doubt and recognise mitigating (iii) cash flow statements
(i) explain review procedures factors (iv) construction contracts
(including the use of analytical (ii) evaluate the evidence which (v) deferred taxation
procedures and checklists) might be expected to be available (vi) segmental information
(ii) evaluate findings quantitatively and assess the appropriateness of (vii) fair value
and qualitatively, e.g. the going concern basis in given (viii) leases
– the results of audit tests and situations (ix) revenue recognition
procedures (iii) describe the disclosures in (x) government grants and
– the effect of actual and financial statements relating to assistance
potential misstatements going concern (xi) borrowing costs
PAGE 10
Audit and Assurance Services (INT) (Continued)
(xii) related party transactions (vii) discuss support letters as audit (usually) meet the requirements
(xiii) investments evidence


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