CERTIFIED PUBLIC ACCOUNTANTS
PART II
SECTION 4
AUDITING AND ASSURANCE
STUDY TEXT
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CONTENT
10.1 Assurance engagements
- Definition and objectives
- Elements of an assurance engagement
- Types of assurance engagements
- Levels of assurance and reports
- Non-assurance engagements
10.2Nature and purpose of an audit
- Nature and objectives
- Audit as an assurance engagement
- Development of audit (early audit and modern audit)
- Types of audit and limitations
10.3Legal framework and regulation
- Regulatory framework within which external audits take place
- Statutory regulations; auditors' liability, appointment, removal, remuneration,
resignation, rights and duties of auditors
- International standards on auditing and other regulations
- Professional ethics/code of ethics for professional accountants
- Fundamental principles, threats and safeguards, other professional guidelines on
audit fees, conflict of interest, advertising and opinion shopping
10.4Planning and risk assessment
- Obtaining clients acceptance and retention
- Understanding the entity and its environment
- Audit planning, audit programmes and documentation
- Assessing audit risks
- Errors, fraud and other irregularities
10.5Overview of forensic accounting
- Nature, purpose and scope of forensic accounting
- Types of forensic investigations: Corruption, asset misappropriation, financial
statement fraud, others
- Fraud prevention and deterrence
10.6 Internal control systems
- Internal controls theory and practice
- Evaluation of internal control system and test of control
- Communication on internal control system (management letter)
- Information technology threats and control
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10.7 Audit evidence
- Financial statement assertions and audit evidence
- Audit evidence procedures/techniques
- Audit sampling and other means of testing
- The audit of specific items (income/expenses/assets/liabilities)
- Using the work of others (internal audit and experts)
- Computer assisted audit techniques
10.8 Overall audit review
- Subsequent events review
- Going concern review
- Contingencies and commitments
- Management representations
- Quality control and review
- Role of auditors in receiverships and liquidation
10.9 Audit reports
- 7th Schedule provisions on audit reports
- Basic elements
- Types of opinions
- Emphasis of master paragraph
- Features of audit reports
10.10 Auditing in the Public Sector
- Introduction to auditing in the Public Sector; regulatory provisions
- Establishment, mandate and functions of public sector auditors; Kenya National Audit
Office (KENAO) and similar national audit bodies
- Role of internal audit function in public entities
- Relationship between external and internal auditors in the public sector
- International Standards on Supreme Auditing Institutions
10.11 Emerging issues and trends
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CONTENT
TOPIC PAGE
1. Assurance engagements………………………………………………………………..5
2. Nature and purpose of an audit………………………………………………………12
3. Legal framework and regulation………………………………………………….….31
4. Planning and risk assessment…………………………………………………………66
5. Overview of forensic accounting…………………………………………………….113
6. Internal control systems…………………………………………………….…….…..125
7. Audit evidence……………………………………………………………….….……..139
8. Overall audit review……………………………………………………….………….193
9. Audit reports…………………………………………………………….….…………211
10.Auditing in the Public Sector………………………………………………...….…..224
Revised on: November 2016
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TOPIC 1
ASSURANCE ENGAGEMENTS
DEFINITION AND OBJECTIVES
The term assurance refers to the expression of a conclusion that is intended to increase the
confidence that users can place in a given subject matter or information. For example, an
auditor’s report is a conclusion that increases the confidence that users can place in a
company’s financial statements.
Audit engagement refers to audit performed by an auditor. It is the very first stage of an audit
procedure where the client is notified by the auditor that the work pertaining to audit has been
accepted by him/her and also provides clarifications with regard to the scope and purpose of
audit. To be more specific, audit engagement can be referred to the written letter that the
auditor uses to notify the client that he/she would be engaging in auditing services. Thus, the
audit engagement procedure is basically a negotiation based on professional terms that takes
place between prospective customer and a public accounting entity. This procedure is used for
finding new customers and offer accounting related services to different businesses.
The auditor uses the term ‘audit engagement’ when the entity has to undergo the auditing
procedure. This could imply varied things and therefore it is necessary that the auditor clarifies
what she/he exactly means by the term. Irrespective of the definition followed by the auditor,
he/she makes it a point to follow certain specific guidelines and procedure for offering the
services.
Full Engagement
Audit engagement consists of several steps that basically revolve around planning,
substantiation, control testing and finalization. The very first step involves providing a letter to
the client reminding him about the audit. Once the client has been contacts, both the auditor
and client meet with each other to determine how, why and when the auditing would take
place. In addition to this, the client also needs to provide the auditor with relevant resources
for conducting the procedure smoothly. Following this, the auditor carries out surveys to find
out more about the organization and its controls. This is followed by testing of controls and
garnering of as much detail and information as is possible. On the basis of the results and
information, the auditor prepares a temporary draft and shares the same with client. Once the
client has gone through the draft report, he responds to the recommendations and findings
made in it. After this, the auditor prepares a final audit report and may also request the client
to fill a survey form to better understand his/her performance. The audit is completed after a
follow up meeting with client, which usually happens within 6 months.
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Objectives of the Practitioner
A practitioner is an the individual(s) conducting the engagement (usually the engagement
partner or other members of the engagement team, or, as applicable, the firm) by applying
assurance skills and techniques to obtain reasonable assurance or limited assurance, as
appropriate, about whether the subject matter information is free from material misstatement
In conducting an assurance engagement, the objectives of the practitioner are:
a) To obtain either reasonable assurance or limited assurance, as appropriate, about
whether the subject matter information (that is, the reported outcome of the
measurement or evaluation of the underlying subject matter) is free from material
misstatement;
b) To express a conclusion regarding the outcome of the measurement or evaluation of the
underlying subject matter through a written report that clearly conveys either
reasonable or limited assurance and describes the basis for the conclusion; and
c) To communicate further as required by relevant ISAEs.
In all cases when .reasonable assurance or limited assurance, as appropriate, cannot be
obtained and a qualified conclusion in the practitioner's assurance report is insufficient in the
circumstances for purposes of reporting to the intended users, the ISAEs require that the
practitioner disclaim a conclusion or withdraw (or resign) from the engagement, where
withdrawal is possible under applicable laws or regulations.
NON-ASSURANCE ENGAGEMENTS
Non-assurance Engagements
If an engagement lacks the five elements of assurance engagements, it is considered nonassurance (residual definition). Examples of non-assurance engagement are the following:
1. Agreed-upon procedures
2. Compilations engagements
3. Preparation of Income tax returns where no conclusion conveying assurance is
expressed
4. Management advisory services and Consulting
5. Engagement that includes rendering of professional opinions not intended to be an
assurance report
Elements of Assurance Engagements
There are five elements that must all be present in order to qualify the engagement as an
assurance engagement.
1. A three-party relationship involving a practitioner, a responsible party, and intended
users;
2. An appropriate subject matter;
3. Sufficient appropriate evidence;
4. Suitable Criteria;
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5. A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.
Appropriate Subject Matter
The subject matter and the subject matter information of an assurance engagement can take
many forms, such as:
Financial performance or conditions
Non-financial performance or conditions
Physical characteristics
Systems and Processes
Behavior
An appropriate subject matter is
Identifiable and capable of consistent evaluation or measurement against the identified
criteria
Capable of being subjected to procedures for gathering sufficient appropriate evidence
to support a reasonable assurance or limited assurance conclusion, as appropriate
Sufficient Appropriate Evidence [Show Less]