ACCA AA Study Text 2024-2025 PDF

Valid for September 2024, ACCA (AA) December 2024, March 2025 and June 2025 Exam-focused...

Valid for September 2024, ACCA (AA) December 2024, March 2025 and June 2025 Exam-focused ACCA Kaplan’s vast classroom experience helps many students pass first time. The books are designed to cover the whole syllabus and they reflect how topics are taught in Assurance Audit and the classroom, focusing on what will be required of you in the exam. Audit and Student-friendly Using accessible language and engaging Assurance (AA) formats to help you understand more complex areas, Kaplan simplifies the learning process to make it easier for you to succeed. December 2024, March 2025 and June 2025 Valid for September 2024, Written by our expert tutors All Kaplan study materials are written by our subject specialists, experienced tutors who teach the paper so they know what works for students and how best to deliver it. Innovative solutions More than just books, our study materials are supported by a wealth of free online resources, including testing and course assessments. All accessible from our online learning environment MyKaplan. All the resources have been designed to keep you on your study plan and help you pass first time. Kaplan Publishing UK Study Text Study Text ISBN 978-1-83996-665-1 9 781839 966651  ACCA Applied Skills Audit and Assurance (AA) Study Text  KAPLAN PUBLISHING’S STATEMENT OF PRINCIPLES LINGUISTIC DIVERSITY, EQUALITY AND INCLUSION We are committed to diversity, equality and inclusion and strive to deliver content that all users can relate to. We are here to make a difference to the success of every learner. Clarity, accessibility and ease of use for our learners are key to our approach. We will use contemporary examples that are rich, engaging and representative of a diverse workplace. We will include a representative mix of race and gender at the various levels of seniority within the businesses in our examples to support all our learners in aspiring to achieve their potential within their chosen careers. 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P.2 KAPLAN PUBLISHING  British library cataloguing-in-publication data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-83996-665-1 © Kaplan Financial Limited, 2024 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain. 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KAPLAN PUBLISHING P.3 P.4 KAPLAN PUBLISHING  Contents Page Chapter 1 Introduction to assurance 1 Chapter 2 Rules and regulation 17 Chapter 3 Corporate governance 33 Chapter 4 Ethics and acceptance 63 Chapter 5 Risk 115 Chapter 6 Planning 153 Chapter 7 Evidence 197 Chapter 8 Systems and controls 243 Chapter 9 Internal audit 309 Chapter 10 Procedures 329 Chapter 11 Completion and review 403 Chapter 12 Reporting 445 Chapter 13 Summary of key ISAs 487 Chapter 14 Financial reporting revision 505 Chapter 15 Employability and technology skills 515 Chapter 16 Questions and Answers 523 Chapter 17 References 579 Index I.1 KAPLAN PUBLISHING P.5 P.6 KAPLAN PUBLISHING  Introduction This document references IFRS® Accounting Standards which are authored by the International Accounting Standards Board (the Board), and published in the 2023 IFRS Standards Red Book. KAPLAN PUBLISHING P.7  How to use the materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. The product range contains a number of features to help you in the study process. They include: (1) Detailed study guide and syllabus objectives (2) Description of the examination (3) Study skills and revision guidance (4) Study text (5) Question practice The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies. They are designed to familiarise you with the nature and content of the examination and give you tips on how best to approach your learning. The Study text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes  The learning objectives contained in each chapter, which have been carefully mapped to the examining body's own syllabus learning objectives or outcomes. You should use these to check you have a clear understanding of all the topics on which you might be assessed in the examination.  The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topics and how they link together.  The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail. You should follow your studying of the content with a review of the illustration/s. These are worked examples which will help you to understand better how to apply the content for the topic.  Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions. Answers can be found at the back of each chapter.  Summary diagrams complete each chapter to show the important links between topics and the overall content of the syllabus. These diagrams should be used to check that you have covered and understood the core topics before moving on.  Question practice is provided at the back of each text. P.8 KAPLAN PUBLISHING  Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details, or follow the link to the feedback form in MyKaplan. Our Quality Coordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations Supplementary reading – These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. It is vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an exam question. Reference to this text is vital when self- studying. Definition – Key definitions that you will need to learn from the core content. Key point – Identifies topics that are key to success and are often examined. Test your understanding – Exercises for you to complete to ensure that you have understood the topics just learned. Illustration – Worked examples help you understand the core content better. Tricky topic – When reviewing these areas care should be taken and all illustrations and Test your understanding exercises should be completed to ensure that the topic is understood. Tutorial note – Included to explain some of the technical points in more detail. Footsteps – Helpful tutor tips. Links to other syllabus areas – This symbol refers to areas of interaction with other parts of your syllabus, either in terms of other ACCA papers that you have studied, or may go on to study, or even further professional qualifications that you may decide to pursue on completion of ACCA. KAPLAN PUBLISHING P.9  Online subscribers Our online resources are designed to increase the flexibility of your learning materials and provide you with immediate feedback on how your studies are progressing. If you are subscribed to our online resources you will find: (1) Online reference material: reproduces your Study Text online, giving you anytime, anywhere access. (2) Online testing: provides you with additional online objective testing so you can practice what you have learned further. (3) Online performance management: immediate access to your online testing results. Review your performance by key topics and chart your achievement through the course relative to your peer group. Syllabus for September 2023 to June 2024 Syllabus background The aim of ACCA Audit and Assurance is 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. Objectives of the syllabus  Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics and professional conduct.  Demonstrate how the auditor obtains and accepts audit engagements, obtains an understanding of the entity and its environment, assesses the risk of material misstatement (whether arising from fraud or other irregularities) and plans an audit of financial statements.  Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and communicate control risks and their potential consequences, making appropriate recommendations. Describe the scope, role and function of internal audit.  Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives of audit engagements and the application of the International Standards on Auditing (ISAs).  Explain how consideration of subsequent events and the going concern principle can inform the conclusions from audit work and are reflected in different types of auditor's report, written representations and the final review and report.  Demonstrate employability and technology skills. P.10 KAPLAN PUBLISHING  Core areas of the syllabus  Audit framework and regulation.  Planning and risk assessment.  Internal control.  Audit evidence.  Review and reporting.  Employability and technology skills. ACCA Performance Objectives In order to become a member of the ACCA, as a trainee accountant you will need to demonstrate that you have achieved nine performance objectives. Performance objectives are indicators of effective performance and set the minimum standard of work that trainees are expected to achieve and demonstrate in the workplace. They are divided into key areas of knowledge which are closely linked to the exam syllabus. There are five Essential performance objectives and a choice of fifteen Technical performance objectives which are divided into five areas. The performance objectives which link to this exam are: (1) Ethics and professionalism (Essential) (2) Governance risk and control (Essential) (3) Prepare for and plan the audit and assurance process (Technical) (4) Collect and evaluate evidence for an audit or assurance engagement (Technical) (5) Review and report on the findings of an audit or assurance engagement (Technical) The following link provides an in depth insight into all of the performance objectives: https://www.accaglobal.com/content/dam/ACCA_Global/Students/per/PER- Performance-objectives-achieve.pdf KAPLAN PUBLISHING P.11  Progression There are two elements of progression that we can measure: first how quickly students move through individual topics within a subject; and second how quickly they move from one course to the next. We know that there is an optimum for both, but it can vary from subject to subject and from student to student. However, using data and our experience of student performance over many years, we can make some generalisations. A fixed period of study set out at the start of a course with key milestones is important. This can be within a subject, for example ‘I will finish this topic by 30 June’, or for overall achievement, such as ‘I want to be qualified by the end of next year’. Your qualification is cumulative, as earlier papers provide a foundation for your subsequent studies, so do not allow there to be too big a gap between one subject and another. We know that exams encourage techniques that lead to some degree of short-term retention, the result being that you will simply forget much of what you have already learned unless it is refreshed (look up Ebbinghaus Forgetting Curve for more details on this). This makes it more difficult as you move from one subject to another: not only will you have to learn the new subject, you will also have to relearn all the underpinning knowledge as well. This is very inefficient and slows down your overall progression which makes it more likely you may not succeed at all. In addition, delaying your studies slows your path to qualification which can have negative impacts on your career, postponing the opportunity to apply for higher level positions and therefore higher pay. You can use the following diagram showing the whole structure of your qualification to help you keep track of your progress. P.12 KAPLAN PUBLISHING  Syllabus objectives and chapter references We have reproduced the ACCA's syllabus below, showing where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. Syllabus learning objective Chapter reference A AUDIT FRAMEWORK AND REGULATION 1 The concept of audit and other assurance engagements (a) Identify and describe the objective and general 1 principles of external audit engagements. (b) Explain the nature and development of audit and other 1 assurance engagements. (c) Discuss the concepts of accountability, stewardship 1 and agency. (d) Define and provide the objectives of an assurance 1 engagement. (e) Explain the five elements of an assurance 1 engagement. (f) Describe the types of assurance engagement. 1 (g) Explain the level of assurance provided by an external 1 audit and other review engagements and the concept of true and fair presentation. 2 External audits (a) Describe the regulatory environment within which 2 external audits take place. (b) Discuss the reasons and mechanisms for the regulation 2 of auditors. (c) Explain the statutory regulations governing the 2 appointment, rights, removal and resignation of auditors. (d) Explain the regulations governing the rights and duties 2 of auditors. (e) Describe the limitations of external audits. 1 (f) Explain the development and status of International 2 Standards on Auditing (ISAs). (g) Explain the relationship between International 2 Standards on Auditing and national standards. KAPLAN PUBLISHING P.13  Syllabus learning objective Chapter reference 3 Corporate governance (a) Discuss the objectives, relevance and importance of 3 corporate governance. (b) Discuss the provisions of international codes of 3 corporate governance (such as OECD) that are most relevant to auditors. (c) Describe good corporate governance requirements 3 relating to directors' responsibilities (e.g. for risk management and internal control) and the reporting responsibilities of auditors. (d) Evaluate corporate governance deficiencies and 3 provide recommendations to allow compliance with international codes of corporate governance. (e) Analyse the structure and roles of audit committees 3 and discuss their benefits and limitations. (f) Explain the importance of internal control and risk 3 management. 4 Professional ethics and ACCA's Code of Ethics and Conduct (a) Define and apply the fundamental principles of 4 professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. (b) Define and apply the conceptual framework, including 4 the threats to the fundamental principles of self-interest, self-review, advocacy, familiarity, and intimidation. (c) Discuss the safeguards to offset the threats to the 4 fundamental principles. (d) Describe the auditor's responsibility with regard to 4 auditor independence, conflicts of interest and confidentiality. (e) Discuss the steps an auditor should take in relation to 4 any breaches of ACCA’s Code of Ethics and Conduct. P.14 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference B PLANNING AND RISK ASSESSMENT 1 Obtaining, accepting and continuing audit engagements (a) Discuss the requirements of professional ethics and 4 ISAs in relation to the acceptance/continuance of audit engagements. (b) Explain the preconditions for an audit. 4 (c) Explain the process by which an auditor obtains an 4 audit engagement. (d) Discuss the importance and purpose of engagement 4 letters and their contents. (e) Explain the overall objectives and importance of quality 6 management procedures in conducting an audit. (f) Explain the quality management procedures which 6 should be in place over engagement resources, engagement performance, monitoring and remediation and compliance with ethical requirements. (g) Evaluate quality management deficiencies and provide 6 recommendations to allow compliance with quality management requirements. 2 Objective and general principles (a) Identify the overall objectives of the auditor and the 1&6 need to conduct an audit in accordance with ISAs. (b) Explain the need to plan and perform audit 5 engagements with an attitude of professional scepticism, and to exercise professional judgement. 3 Assessing audit risks (a) Explain the components of audit risk. 5 (b) Describe the audit risks in the financial statements and 5 explain the auditor's response to each risk. (c) Define and explain the concepts of materiality and 5 performance materiality. (d) Explain and calculate materiality levels from financial 5 information. KAPLAN PUBLISHING P.15  Syllabus learning objective Chapter reference 4 Understanding the entity, its environment and the applicable financial reporting framework (a) Explain how auditors obtain an initial understanding of 5 the entity, its environment and the applicable financial reporting framework. (b) Describe and explain the nature and purpose of 5 analytical procedures in planning. (c) Compute and interpret key ratios used in analytical 5 procedures. 5 Fraud, laws and regulations (a) Discuss the effect of fraud and misstatements on the 6 audit strategy and extent of audit work. (b) Discuss the responsibilities of internal and external 6 auditors for the prevention and detection of fraud and error. (c) Explain the auditor's responsibility to consider laws and 6 regulations. 6 Audit planning and documentation (a) Identify and explain the need for, benefits of and 6 importance of planning an audit. (b) Identify and describe the contents of the overall audit 6 strategy and audit plan. (c) Explain and describe the relationship between the 6 overall audit strategy and the audit plan. (d) Explain the difference between interim and final 6 audit. (e) Describe the purpose of an interim audit, and the 6 procedures likely to be adopted at this stage in the audit. (f) Describe the impact of the work performed during the 6 interim audit on the final audit. (g) Explain the need for, and the importance of, audit 6 documentation. (h) Describe the form and contents of working papers and 6 supporting documentation. (i) Explain the procedures to ensure safe custody and 6 retention of working papers. P.16 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference C INTERNAL CONTROL 1 Systems of internal control (a) Explain why an auditor needs to obtain an 8 understanding of the components of internal control relevant to the preparation of the financial statements. (b) Describe and explain the five components of internal 8 control. (i) the control environment (ii) the entity's risk assessment process (iii) the entity’s process to monitor the system of internal control (iv) the information system and communication (v) control activities. 2 The use and evaluation of systems of internal control by auditors (a) Explain how auditors record systems of internal control 8 including the use of narrative notes, flowcharts and questionnaires. (b) Evaluate internal control components, including 8 deficiencies and significant deficiencies in internal control. (c) Discuss the limitations of internal control 8 components. 3 Tests of controls (a) Describe computer systems controls including general 8 IT controls and information processing controls. (b) Describe control objectives, control procedures, control 8 activities, direct controls, indirect controls and tests of control in relation to: (i) The sales system (ii) The purchases system (iii) The payroll system (iv) The inventory system (v) The bank and cash system (vi) Non-current assets. KAPLAN PUBLISHING P.17  Syllabus learning objective Chapter reference 4 Communication on internal control (a) Discuss the requirements and methods of how 8 reporting significant deficiencies in internal control are provided to management and those charged with governance. (b) Explain, in a format suitable for inclusion in a report to 8 management, significant deficiencies within a system of internal control and provide control recommendations for overcoming these deficiencies to management. (c) Discuss the need for auditors to communicate with 8 & 12 those charged with governance. 5 Internal audit and governance, and the differences between external audit and internal audit (a) Discuss the factors to be taken into account when 9 assessing the need for internal audit. (b) Discuss the elements of best practice in the structure 9 and operations of internal audit. (c) Compare and contrast the role of external and internal 9 audit. 6 The scope of the internal audit function, outsourcing and internal audit assignments (a) Discuss the scope of internal audit and the limitations 9 of the internal audit function. (b) Explain outsourcing and the associated advantages 9 and disadvantages of outsourcing the internal audit function. (c) Discuss the nature and purpose of internal audit 9 assignments including value for money, IT, financial, regulatory compliance, fraud investigations and customer experience. (d) Discuss the nature and purpose of operational internal 9 audit assignments. (e) Describe the format and content of internal audit review 9 reports and make appropriate recommendations to management and those charged with governance. P.18 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference D AUDIT EVIDENCE 1 Assertions and audit evidence (a) Explain the assertions contained in the financial 7 statements about: (i) Classes of transactions and events and related disclosures (ii) Account balances and related disclosures at the period end. (b) Describe audit procedures to obtain audit evidence, 7 including inspection, observation, external confirmation, recalculation, re-performance, analytical procedures and enquiry. (c) Discuss the quality and quantity of audit evidence. 7 (d) Discuss the relevance and reliability of audit 7 evidence. 2 Audit procedures (a) Discuss substantive procedures for obtaining audit 7 evidence. (b) Discuss and provide examples of how analytical 7 procedures are used as substantive procedures. (c) Discuss the problems associated with the audit and 10 review of accounting estimates. (d) Describe why smaller entities may have different 10 control environments and describe the types of evidence likely to be available in smaller entities. (e) Discuss the difference between tests of control and 7 substantive procedures. 3 Audit sampling and other means of testing (a) Define audit sampling and explain the need for 7 sampling. (b) Identify and discuss the differences between statistical 7 and non-statistical sampling. (c) Discuss and provide relevant examples of, the 7 application of the basic principles of statistical sampling and other selective testing procedures. (d) Discuss the results of statistical sampling, including 7 consideration of whether additional testing is required. KAPLAN PUBLISHING P.19  Syllabus learning objective Chapter reference 4 The audit of specific items For each of the account balances stated in this sub- capability: Explain the audit objectives and the audit procedures to obtain sufficient, appropriate evidence in relation to: (a) Receivables: 10 (i) direct confirmation of accounts receivable (ii) other evidence in relation to receivables and prepayments (iii) other evidence in relation to current assets (iv) completeness and occurrence of revenue. (b) Inventory: 10 (i) inventory counting procedures in relation to year- end and continuous inventory systems (ii) cut-off testing (iii) auditor's attendance at inventory counting (iv) direct confirmation of inventory held by third parties (v) valuation (vi) other evidence in relation to inventory. (c) Payables and accruals: 10 (i) supplier statement reconciliations and direct confirmation of accounts payable (ii) obtain evidence in relation to payables and accruals (iii) other evidence in relation to current liabilities (iv) purchases and other expenses, including payroll. (d) Bank and cash: 10 (i) bank confirmation reports used in obtaining evidence in relation to bank and cash (ii) other evidence in relation to bank (iii) other evidence in relation to cash. P.20 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference (e) Tangible and intangible non-current assets: 10 (i) evidence in relation to non-current assets (ii) depreciation (iii) profit/loss on disposal. (f) Non-current liabilities, provisions and contingencies: 10 (i) evidence in relation to non-current liabilities (ii) provisions and contingencies. (g) Share capital, reserves and directors' emoluments: 10 (i) evidence in relation to share capital, reserves and directors' emoluments. 5 Automated tools and techniques (a) Explain the use of automated tools and techniques in 7 the context of an audit, including the use of audit software, test data and other data analytics tools. (b) Discuss and provide relevant examples of the use of 7 automated tools and techniques including test data, audit software and other data analytics tools. (c) Explain and evaluate the benefits and challenges of using automated tools and techniques in an audit engagement. 6 The work of others (a) Discuss why auditors rely on the work of others. 7 (b) Discuss the extent to which external auditors are able 7 to rely on the work of experts, including the work of internal audit. (c) Explain the audit considerations relating to entities 7 using service organisations. (d) Explain the extent to which reference to the work of 7 others can be made in the independent auditor's report. 7 Not-for-profit organisations (a) Apply audit techniques to not-for-profit organisations. 10 KAPLAN PUBLISHING P.21  Syllabus learning objective Chapter reference E REVIEW AND REPORTING 1 Subsequent events (a) Explain the purpose of a subsequent events review. 11 (b) Explain the responsibilities of auditors regarding 11 subsequent events. (c) Discuss the procedures to be undertaken in performing 11 a subsequent events review. 2 Going concern (a) Define and discuss the significance of the concept of 11 going concern. (b) Explain the importance of and the need for going 11 concern reviews. (c) Explain the respective responsibilities of auditors and 11 management regarding going concern. (d) Identify and explain potential indicators that an entity is 11 not a going concern. (e) Discuss the procedures to be applied in performing 11 going concern reviews. (f) Discuss the disclosure requirements in relation to going 11 concern issues. (g) Discuss the reporting implications of the findings of 11 going concern reviews. 3 Written representations (a) Explain the purpose of and procedure for obtaining 11 written representations. (b) Discuss the quality and reliability of written 11 representations as audit evidence. (c) Discuss the circumstances where written 11 representations are necessary and the matters on which representations are commonly obtained. P.22 KAPLAN PUBLISHING  Syllabus learning objective Chapter reference 4 Audit finalisation and the final review (a) Discuss the importance of the overall review in 11 ensuring that sufficient, appropriate evidence has been obtained. (b) Describe procedures an auditor should perform in 11 conducting their overall review of financial statements. (c) Explain the significance of uncorrected 11 misstatements. (d) Evaluate the effect of dealing with uncorrected 11 misstatements. 5 The Independent Auditor's Report (a) Identify and describe the basic elements contained in 12 the independent auditor's report. (b) Explain unmodified audit opinions in the auditor's 12 report. (c) Explain the circumstances in which a modified audit 12 opinion may be issued in the auditor’s report. (d) Explain the impact on the auditor’s report when a 12 modified opinion is issued. (e) Describe the format and content of key audit matters, 12 emphasis of matter and other matter paragraphs. F Employability and technology skills 1 Use computer technology to efficiently access and 13 manipulate relevant information. 2 Work on relevant response options, using available 13 functions and technology, as requirements, using the appropriate tools. 3 Navigate windows and computer screens to create and 13 amend responses to exam requirements, using the appropriate tools. 4 Present data and information effectively, using the 13 appropriate tools. KAPLAN PUBLISHING P.23  The superscript numbers in square brackets indicate the intellectual depth at which the subject area could be assessed within the examination. Level 1 (knowledge and comprehension) broadly equates with the Knowledge module, Level 2 (application and analysis) with the Skills module and Level 3 (synthesis and evaluation) to the Professional level. However, lower level skills can continue to be assessed as you progress through each module and level. References to ISA paragraph numbers within the study text are for copyright purposes only. Students are not required to learn this level of detail. For a list of examinable documents, see the ACCA website: accaglobal.com/audit-and-assurance P.24 KAPLAN PUBLISHING  The Examination Examination format The syllabus is assessed by computer-based examination (CBE). The CBE will contain 100 marks of exam content that needs to be completed within 3 hours. Prior to the start of the exam candidates are given an extra 10 minutes to read the exam instructions. All questions are compulsory. The exam will contain both computational and discursive elements. Some questions will adopt a scenario/case study approach. The pass mark is 50%. All questions follow a dating convention whereby the ‘current date’ is set at 1 July 20X5. This information will be stated in the question where relevant. Year-end dates of the entity being audited will then be flexed appropriately around this. For example, in a planning question the entity could have a year end of 31 August 20X5. In an audit evidence/reporting question the year end could be 31 March 20X5. The application of this consistent dating convention allows candidates to be able to quickly determine where they are in the audit process. Section A Section A of the exam comprises three 10-mark case-based questions. Each case has five objective test questions worth 2 marks each. There are no dependencies between the individual questions. Therefore, if you get one question wrong, it will not affect your ability to get the others correct. OT questions in section A will be of varying styles as follows:  Multiple choice – where you are required to choose one answer from a list of options provided by clicking on the appropriate ‘radio button’.  Multiple response – where you are required to select more than one response from the options provided by clicking on the appropriate tick boxes. The question will specify how many answers need to be selected, but the system won’t stop you from selecting more answers than this.  Fill in the blank – where you are required to type an answer into a box (usually numerical, but may be text). Any specific rounding requirements will be displayed.  Drag and drop – where you are required to drag an answer and drop it into place. Some questions could involve matching more than one answer to a response area and some questions may have more answer choices than response areas, which means not all available answer choices need to be used.  Drop down list – where you are required to select one answer from a drop- down list. Some questions may contain more than one drop-down list and an answer has to be selected from each one. KAPLAN PUBLISHING P.25   Hot spot – where you are required to select one point on an image as your answer. When the cursor is hovered over the image, it will display as an ‘X’. To answer, place the X on the appropriate point on the diagram.  Hot area – these are similar to hot spot questions, but instead of selecting a specific point, you are required to select one or more areas in an image. Section B Section B of the exam comprises one 30-mark question and two 20-mark questions. This section of the exam will predominantly examine one or more aspects of audit and assurance from planning and risk assessment, internal control or audit evidence, although topics from other syllabus areas may also be included. Examination tips Be sure you understand how to use the software before you start the exam. If in doubt, ask the assessment centre staff to explain it to you. Questions are displayed on the screen and answers are entered using keyboard and mouse. We recommend that 10 minutes should be spent reviewing the format and content of the requirements so that you understand what you need to do. Pay particular attention to section B, where questions will be based on longer scenarios than the 2-mark OT cases in section A. Read each question carefully.  Divide the time you spend on questions in proportion to the marks on offer.  One suggestion for this examination is to allocate 1.8 minutes to each mark available (180 minutes/100 marks), so a 20-mark question should be completed in approximately 36 minutes. Section A You should begin by reading the OT questions that relate to the case, so that when you read through the information for the first time, you know what it is that you are required to do. Once you have read through the information, you should first answer any of the OT questions that can be quickly answered. You should then attempt the other OT questions utilising the remaining time for that case. If you don’t know the answer, eliminate those options you know are incorrect and see if the answer becomes more obvious. After you have eliminated the options that you know to be wrong, if you are still unsure, guess. Answer every question. P.26 KAPLAN PUBLISHING  Each OT question is worth two marks. Therefore, you have 18 minutes (1.8 minutes per mark) to answer the five OT questions relating to each case. It is likely that all of the cases will take the same length of time to answer, although some of the OT questions within a case may be quicker than other OT questions within that same case. Work steadily. Rushing leads to careless mistakes and the OT questions are designed to include answers which result from careless mistakes. Section A questions can be found at the end of each chapter. Section B The constructed response questions in section B will require a written response rather than being OT questions. Therefore, different techniques need to be used to score well. Unless you know exactly how to answer the question, spend some time planning your answer. Stick to the question and tailor your answer to what you are asked. Pay particular attention to the verbs in the question e.g. 'Describe', 'State', 'Explain'. If you get completely stuck with a question leave it and return to it later. If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examining team hoped, you may be given some credit, provided that your assumptions are reasonable. When answering the constructed response questions, be concise. DO NOT write an essay. Make sure that each point is clearly identifiable by leaving a line space between each of your points. Some questions ask you to present your answer in the form of a report or letter. Use the correct format as there are easy marks to gain here for presentation. Guidance on exam technique for the constructed response questions is given in the relevant chapters of the study text. Section B style questions can be found in most chapters and also in the chapter ‘Questions and Answers’. All sections Don’t skip parts of the syllabus. The AA syllabus has 18 different questions so the examination can cover a very broad selection of the syllabus each sitting. Spend time learning definitions. Practice plenty of questions to improve your ability to apply the techniques. Spend the last few minutes reading through your answers and making any additions or corrections. Don't panic if you realise you've answered a question incorrectly. Try to remain calm, continue to apply examination technique and answer all questions required within the time available. KAPLAN PUBLISHING P.27  ACCA support For additional support with your studies please also refer to the ACCA Global website. Study skills and revision guidance This section aims to give guidance on how to study for your ACCA exams and to give ideas on how to improve your existing study techniques. Preparing to study Set your objectives Before starting to study decide what you want to achieve i.e. the type of pass you wish to obtain. This will decide the level of commitment and time you need to dedicate to your studies. Devise a study plan Determine which times of the week you will study. Split these times into sessions of at least one hour for study of new material. Any shorter periods could be used for revision or practice. Put the times you plan to study onto a study plan for the weeks from now until the exam and set yourself targets for each period of study. In your sessions make sure you cover the course, course assignments and revision. If you are studying for more than one exam at a time, try to vary your subjects as this can help you to keep interested and see subjects as part of wider knowledge. When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions. P.28 KAPLAN PUBLISHING  Effective studying Active reading You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the exam and develop good practice. A good technique to use is SQ3Rs – Survey, Question, Read, Recall, Review: (1) Survey the chapter – look at the headings and read the introduction, summary and objectives, to get an overview of what the chapter deals with. (2) Question – whilst undertaking the survey, ask yourself the questions that you hope the chapter will answer for you. (3) Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives. Attempt the exercises and activities in the text, and work through all the examples. (4) Recall – at the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text. This is best done after a short break of a couple of minutes after the reading stage. (5) Review – check that your recall notes are correct. You may also find it helpful to re-read the chapter to try to see the topic(s) it deals with as a whole. Note-taking Taking notes is a useful way of learning, but do not simply copy out the text. The notes must:  be in your own words  be concise  cover the key points  be well-organised  be modified as you study further chapters in this text or in related ones. Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don't. KAPLAN PUBLISHING P.29  Summarise the key points of a chapter. Three ways of taking notes: (1) Make linear notes – a list of headings, divided up with subheadings listing the key points. If you use linear notes, you can use different colours to highlight key points and keep topic areas together. Use plenty of space to make your notes easy to use. (2) Try a diagrammatic form – the most common of which is a mind-map. To make a mind-map, put the main heading in the centre of the paper and put a circle around it. Then draw short lines radiating from this to the main subheadings, which again have circles around them. Then continue the process from the sub-headings to sub-sub-headings, advantages, disadvantages, etc. (3) Highlighting and underlining – you may find it useful to underline or highlight key points in your study text – but do be selective. You may also wish to make notes in the margins. Revision The best approach to revision is to revise the course as you work through it. Also try to leave four to six weeks before the exam for final revision. Make sure you cover the whole syllabus and pay special attention to those areas where your knowledge is weak. Here are some recommendations: Read through the text and your notes again and condense your notes into key phrases. It may help to put key revision points onto index cards to look at when you have a few minutes to spare. Review any assignments you have completed and look at where you lost marks – put more work into those areas where you were weak. Practise exam standard questions under timed conditions. If you are short of time, list the points that you would cover in your answer and then read the model answer, but do try to complete at least a few questions under exam conditions. Also practise producing answer plans and comparing them to the model answer. If you are stuck on a topic find somebody (a tutor) to explain it to you. Read good newspapers and professional journals, especially ACCA's Student Accountant, this can give you an advantage in the exam. Ensure you know the structure of the exam – how many questions and of what type you will be expected to answer. During your revision attempt all the different styles of questions you may be asked. P.30 KAPLAN PUBLISHING  Further reading You can find further reading and technical articles under the student section of ACCA's website. Technical update This text has been updated to reflect Examinable Documents September 2023 to June 2024 issued by ACCA. KAPLAN PUBLISHING P.31 P.32 KAPLAN PUBLISHING Chapter 1 Introduction to assurance Chapter learning objectives This chapter covers syllabus areas:  A1 – The concept of audit and other assurance engagements  A2e – Limitations of external audits Detailed syllabus objectives are provided in the introduction section of the text book. One of the PER performance objectives (PO4) is governance risk and control. You contribute to effective governance in your area. You evaluate, monitor and implement risk management procedures, complying with the spirit and the letter of policies, laws and regulations. Working through this chapter should help you understand how to demonstrate that objective. KAPLAN PUBLISHING 1 Introduction to assurance 1 What is assurance? An assurance engagement is: 'An engagement in which a practitioner obtains sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.’ [International Framework for Assurance Engagements, 7] Giving assurance means offering an opinion about specific information so the users of that information are able to make confident decisions knowing that the risk of the information being 'incorrect' is reduced. Elements of an assurance engagement There are five elements of an assurance engagement: 1 Three party involvement Practitioner – the reviewer of the subject matter who provides the assurance. Intended users – the people using the subject matter to make economic decisions. Responsible party – the party responsible for preparing the subject matter. 2 Appropriate subject matter The information subject to examination by the practitioner. 3 Suitable criteria The criteria against which the subject matter is evaluated, i.e. standards, guidance, laws and regulations. 4 Sufficient appropriate evidence Sufficient appropriate evidence is needed to provide a basis for the opinion/ conclusion. 5 Written assurance report in an appropriate form The output of the assurance engagement expressing a conclusion/opinion about the subject matter. [International Framework for Assurance Engagements, 20] 2 KAPLAN PUBLISHING  Chapter 1 Element In relation to an audit In relation to a forecast 1 Three party involvement Practitioner Auditor Assurance provider Intended user Shareholders Directors/provider of finance Responsible Directors Directors party 2 Appropriate Financial statements Forecast subject matter 3 Suitable Financial reporting Appropriate assumptions criteria framework and financial reporting framework 4 Sufficient Obtained by performing Obtained by performing appropriate audit procedures such as examination procedures evidence tests of controls, tests of such as inspection of detail and analytical documents, enquiries and procedures analytical procedures 5 Written Independent auditor’s Independent assurance assurance report providing an report providing a report in an opinion as to whether the conclusion on whether appropriate financial statements give a anything has come to the form true and fair view practitioner’s attention to suggest the assumptions are not a reasonable basis for the forecast, and an opinion on whether the forecast has been prepared on the basis of those assumptions KAPLAN PUBLISHING 3 Introduction to assurance Illustration 1 – Buying a house Consider someone who is buying a house. There is a risk that the buyer pays a large sum of money to purchase a structurally unsafe property which needs further expenditure to make it habitable. To reduce this risk, it is normal for house buyers (the users) to pay a property surveyor (the practitioner) to perform a structural assessment of the house (the subject matter). The surveyor communicates any structural deficiencies identified (measured against building regulations/best practice and other criteria) in a written report to the house buyer. With this information, the potential buyer can make a decision whether or not to buy the house with the confidence that they know its structural condition. In this example, the responsible party is the current house owner, and the evidence would be obtained through visual inspection of the property. Assurance engagements Examples of assurance engagements include:  Audit of financial statements  Review of financial statements  Systems reliability reports  Verification of social and environmental information  Review of internal controls  Value for money audit in public sector organisations. General principles the assurance provider must follow when performing such engagements include:  Comply with ethical requirements.  Apply professional scepticism and judgement.  Perform acceptance and continuance procedures to ensure only work of acceptable risk is accepted.  Agree the terms of engagement.  Comply with quality management standards.  Plan and perform the engagement effectively.  Obtain sufficient and appropriate evidence.  Consider the effect of subsequent events on the subject matter.  Form a conclusion expressing either reasonable or limited assurance as appropriate.  Document the evidence to provide a record of the basis for the assurance report. 4 KAPLAN PUBLISHING  Chapter 1 Types of assurance engagement Two types of assurance engagement are permitted: Reasonable assurance Limited assurance engagements engagements The practitioner: The practitioner: Gathers sufficient appropriate Gathers sufficient appropriate evidence to be able to draw evidence to be able to draw limited reasonable conclusions. conclusions. Performs very thorough procedures Performs significantly fewer to obtain sufficient appropriate procedures, mainly enquiries and evidence including tests of controls analytical procedures. and substantive procedures. Concludes that the subject matter Concludes that the subject matter, conforms in all material respects with respect to identified suitable with identified suitable criteria. criteria, is plausible in the circumstances. Gives a positively worded Gives a negatively worded assurance opinion. assurance conclusion. Gives a high level of assurance Gives a moderate or lower level of (confidence). assurance than that of an audit. In our opinion, the financial Nothing has come to our attention statements give a true and fair view that causes us to believe that the of (or present fairly, in all material financial statements of Murray respects) the financial position of Company as of 31 December, 20X4 Murray Company as at December are not prepared, in all material 31, 20X4, and of its financial respects, in accordance with an performance and its cash flows for applicable financial reporting the year then ended in accordance framework. with International Financial Reporting Standards. The confidence inspired by a reasonable assurance report is designed to be greater than that inspired by a limited assurance report. Therefore:  There are more regulations/standards governing a reasonable assurance assignment.  The procedures carried out in a reasonable assurance assignment will be more thorough.  The evidence gathered will need to be of a higher quality. KAPLAN PUBLISHING 5 Introduction to assurance 2 External audit engagements An external audit is an example of a reasonable assurance engagement. Purpose of an external audit engagement ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing states the purpose of an external audit engagement is to ‘enhance the degree of confidence of intended users in the financial statements.’ This is achieved by the auditor expressing an opinion on whether the financial statements:  Give a true and fair view (or present fairly in all material respects).  Are prepared, in all material respects, in accordance with an applicable financial reporting framework. [ISA 200, 3] The financial reporting framework to be applied will vary from country to country. In Audit & Assurance, it is assumed that International Financial Reporting Standards are the basis for preparing the financial statements. The accounting standards examinable for Audit & Assurance are those from Financial Accounting at the Applied Knowledge level. True and fair  True: factually correct information which conforms with accounting standards and relevant legislation, and agrees with the underlying records.  Fair: clear, impartial and unbiased information which reflects the commercial substance of the transactions of the entity. Objectives of the auditor The objectives of an auditor are to:  Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.  Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.  Report on the financial statements, and communicate as required by ISAs, in accordance with the auditor's findings. [ISA 200, 11] 6 KAPLAN PUBLISHING  Chapter 1 Need for external audit  Shareholders provide the finance for a company and may or may not be involved in the day to day running of the company.  Directors manage the company on behalf of the shareholders in order to achieve the objectives of that company (normally the maximisation of shareholder wealth).  The directors must prepare financial statements to provide information on performance and financial position to the shareholders.  The directors have various incentives to manipulate the financial statements and show a different level of performance.  Hence the need for an independent review of the financial statements to ensure they give a true and fair view – the external audit. In most developed countries, publicly quoted companies and large companies are required by law to produce annual financial statements and have them audited by an external auditor. Companies that are not required to have a statutory audit may choose to have an external audit because the company's shareholders or other influential stakeholders want one, and because of the benefits of an audit. Benefits of an audit  Higher quality information which is more reliable, improving the reputation of the market.  Independent scrutiny and verification may be valuable to management.  Reduces the risk of management bias and fraud and error by acting as a deterrent. An audit may also detect bias, fraud and error.  Enhances the credibility of the financial statements, e.g. for tax authorities or lenders.  Deficiencies in the internal control system may be highlighted by the auditor. KAPLAN PUBLISHING 7 Introduction to assurance Expectation gap Some users incorrectly believe that an audit provides absolute assurance – that the audit opinion is a guarantee the financial statements are 'correct'. This and other misconceptions about the role of an auditor are referred to as the 'expectation gap'. Examples of the expectation gap  A belief that the auditor tests all transactions and balances – tests are performed on a sample basis.  A belief that the auditor will detect all fraud – the auditor is required to provide reasonable assurance that the financial statements are free from material misstatement, which may be caused by fraud.  A belief that the auditor is responsible for preparing the financial statements – this is the responsibility of management. Limitations of an audit  Financial statements include subjective estimates and other judgemental matters.  Internal controls may be relied on which have their own inherent limitations.  Representations from management may have to be relied upon as the only source of evidence in some areas.  Evidence is often persuasive not conclusive.  Do not test all transactions and balances, only a sample are tested. The auditor provides reasonable assurance which is not absolute assurance. The limitations of an audit mean that it is not possible to provide a 100% guarantee of accuracy. Limitations of an audit  Nature of financial reporting – financial statement amounts are affected by management judgement and therefore subject to bias.  Nature of audit procedures – information provided by the client may be incomplete or falsified documents may be provided.  Timeliness of financial reporting – the relevance of information diminishes over time and the auditor cannot investigate every matter exhaustively. [ISA 200, A48 – A50] 8 KAPLAN PUBLISHING  Chapter 1 3 Review engagements A review engagement is an example of a limited assurance engagement. Purpose and objective of a review engagement A company which is not legally required to have an audit may choose to have a review of its financial statements instead. The review will still provide some assurance to users but is likely to cost less and be less disruptive than an audit. The procedures will mainly focus on analytical procedures and enquiries of management. In particular, no tests of controls will be performed. As only limited assurance is being expressed, the work does not need to be as in depth as for an audit. The objective of a review of financial statements is to perform primarily inquiry and analytical procedures, to enable the practitioner to conclude whether anything has come to their attention that causes them to believe that the financial statements are not prepared in all material respects in accordance with the applicable financial reporting framework. [ISRE 2400, 14] KAPLAN PUBLISHING 9 Introduction to assurance Incorporation and the separation of ownership and control Businesses can operate as sole traders, partnerships or limited companies. Limited company status offers protection to investors as they cannot be held personally responsible for the company’s debts. The creation of a limited company is referred to as incorporation. Incorporation has the following implications:  The creation of a legal distinction between the owners of the business and the business itself.  The opportunity for the owners/investors to detach themselves from the operation of the business.  The need for managers to operate the business on a daily basis. Incorporation provides financial protection for shareholders, but leads to a potentially significant conflict:  Shareholders seek to maximise their wealth through increasing the value of their shareholding. This is driven by the profitability of the company.  Directors/management seek to maximise their wealth through salary, bonuses and other employment benefits. This reduces the company’s profitability. This conflict led to the legal requirement for financial statements to be produced by directors to allow the shareholders to assess the performance of management. Accountability, agency and stewardship Key definitions: Accountability means that people in a position of power can be held to account for their actions, i.e. they can be compelled to explain their decisions and can be criticised or punished if they have abused their position. Accountability is central to the concept of good corporate governance – the process of ensuring that companies are well run – which we will look at in more detail in the chapter ‘Corporate governance’. Agency occurs when one party, the principal, employs another party, the agent, to perform a task on their behalf. 10 KAPLAN PUBLISHING  Chapter 1 Stewardship is the responsibility to take good care of resources. A steward is a person entrusted with management of another person’s property, for example, when one person is paid to look after another person’s house while the owner goes abroad on holiday. The steward is responsible for the way they carry out their role. This relationship, where one person has a duty of care towards someone else is known as a ‘fiduciary relationship’. A fiduciary relationship is a relationship of ‘good faith’ such as that between the directors of a company and the shareholders of the company. There is a ‘separation of ownership and control’ in the sense that the shareholders own the company, while the directors make the decisions. The directors must make their decisions in the interests of the shareholders rather than in their own selfish personal interests. Therefore:  The directors are the stewards of the company.  The shareholder is the principal, employing the directors (the agents) to run the company on their behalf.  The directors are accountable to the shareholders for the way in which they run the company. Examples of stakeholder groups Stakeholder groups with an interest in the financial statements  Shareholders can decide whether to alter their shareholdings.  Employees may be able to judge whether they think their levels of pay are adequate compared to the directors. They may also be interested in the results of the company as this may impact their employment decisions.  Those charged with governance can see whether they think management has struck the right balance between its own need for reward (remuneration, share options, etc.) and the needs of other stakeholders.  Customers can make judgements about whether the company has sufficient financial strength (i.e. liquidity) to justify future trading.  Suppliers and lenders can assess financial stability before giving credit.  The government can decide whether the right amount of tax has been paid and whether the company appears to be compliant with the relevant laws and regulations. KAPLAN PUBLISHING 11 Introduction to assurance Test your understanding 1 List and explain the elements of an assurance engagement. (5 marks) Test your understanding 2 Explain the term ‘limited assurance’ in the context of an examination of a company's cash flow forecast and explain how this differs from the assurance provided by an external audit. (5 marks) Test your understanding 3 Your firm has been approached to perform the external audit of Perth Co. Perth Co has grown over the last two years and has now reached the audit threshold. As this is the first year the company has required an audit, the directors are unsure about the purpose of the audit. They have been informed that an audit need not be as inconvenient or intrusive as they expect it to be as there are additional benefits that may arise from having an audit. The directors have indicated that they expect your firm to detect every fraud and error in the accounting records so that when they need to apply for finance to help them grow further, they can use the audited financial statements to support the loan application and this should make it easier to obtain the loan. 1 What level of assurance will be provided by the independent auditor's report? A Absolute B Reasonable C Moderate D Limited 2 Which of the following is NOT one of the five elements of an assurance engagement? A Subject matter B Suitable criteria C Assurance file D Written report 12 KAPLAN PUBLISHING  Chapter 1 3 Which of the following is NOT a benefit of an audit? A Increased credibility of the financial statements B Deficiencies in controls may be identified during testing C Fraud may be detected during the audit D Sampling is used 4 Which of the following statements is FALSE? A The auditor will express an opinion as to whether the financial statements give a true and fair view B The auditor must obtain sufficient and appropriate evidence to be able to form an audit opinion C If the financial statements are found to contain material misstatements a negative audit opinion will be given D An audit may not detect all fraud and error in the financial statements 5 Which of the following are examples of the expectation gap? (i) The independent auditor's report confirms the financial statements are accurate. (ii) An unmodified opinion means the company is a going concern. (iii) The auditor tests all transactions. (iv) The auditor can be sued for negligence if they issue an inappropriate opinion. A (i), (ii) and (iii) B (i), (ii) and (iv) C (i) and (ii) only D (ii) and (iii) only KAPLAN PUBLISHING 13 Introduction to assurance 4 Chapter summary 14 KAPLAN PUBLISHING  Chapter 1 Test your understanding answers Test your understanding 1 1 An assurance engagement will involve three separate parties: (i) Intended user − the person who requires the assurance report. (ii) Responsible party − the person or organisation responsible for preparing the subject matter to be reviewed. (iii) Practitioner (i.e. an accountant) − the professional, who will review the subject matter and provide the assurance. 2 A suitable subject matter. This is the information that the responsible party has prepared and which requires verification. 3 Suitable criteria. The subject matter is compared to the criteria in order for it to be assessed and an opinion/conclusion provided. 4 Sufficient and appropriate evidence has to be obtained by the practitioner in order to give the required level of assurance. 5 An assurance report contains the opinion/conclusion that is given by the practitioner to the intended user. Test your understanding 2 Limited assurance in the Assurance provided by an context of a cash flow forecast external audit Limited assurance is a moderate An audit provides reasonable level of assurance. assurance, which is a high level. The objective of a limited The objective of an audit is to assurance engagement in the obtain sufficient appropriate context of a cash flow forecast is to evidence that the financial obtain sufficient appropriate statements conform in all material evidence that the forecast is respects with the relevant financial plausible in the circumstances i.e. reporting framework. prepared on the basis of reasonable assumptions. KAPLAN PUBLISHING 15 Introduction to assurance A limited assurance report An auditor’s report provides a provides a negative conclusion. positive opinion as to whether or The practitioner will state that not the financial statements give nothing has come to their a true and fair view. A positive attention which indicates that the opinion means the auditor is assumptions used to prepare the confident about the statement cash flow forecast are not they are making, i.e. confident reasonable. that the financial statements give a true and fair view or confident The assurance is therefore given that they do not give a true and on the absence of any indication to the contrary. fair view. With limited assurance, limited More evidence will need to be procedures are performed. In the obtained to provide reasonable context of a forecast, procedures assurance, and a wider range of will be limited as the transactions procedures performed, including and events haven't occurred yet. tests of controls. A forecast relates to the future, Financial statements relate to the which is inherently uncertain, and past, and so the auditor should be therefore it would not be possible able to obtain sufficient and to obtain assurance that it is free appropriate evidence. from material misstatement. Less reliance can therefore be placed on the forecast than the financial statements. Test your understanding 3 1 B Reasonable assurance is given in an independent auditor's report. 2 C Assurance file. 3 D Sampling provides a limitation of the audit process, not a benefit. 4 C A negative conclusion is used for limited assurance engagements. 5 A The auditor cannot confirm the accuracy of the financial statements as they contain estimates and judgements of management. The company may not be a going concern and the financial statements may correctly reflect this resulting in an unmodified audit opinion. The auditor does not test all transactions. 16 KAPLAN PUBLISHING Chapter 2 Rules and regulation Chapter learning objectives This chapter covers syllabus areas:  A2 – External audits Detailed syllabus objectives are provided in the introduction section of the text book. One of the PER performance objectives (PO4) is governance risk and control. You contribute to effective governance in your area. You evaluate, monitor and implement risk management procedures, complying with the spirit and the letter of policies, laws and regulations. Working through this chapter should help you understand how to demonstrate that objective. KAPLAN PUBLISHING 17 Rules and regulation 1 The need for regulation The role of the auditor has come under increased scrutiny over the last 30 years due to an increase in high profile audit failures. The most high-profile case, and the catalyst for