Audit, Business Processes & Digitalization BL5 Tutorial PDF

Audit, Business processes & Digitalization Business Level 5 [BL5] Tutorial / Video - 2 Dinith Kularathna ACA, AAT Passed Finalist B.B.Mgt.(Finance), University of Kelaniya Contact numb...

Audit, Business processes & Digitalization Business Level 5 [BL5] Tutorial / Video - 2 Dinith Kularathna ACA, AAT Passed Finalist B.B.Mgt.(Finance), University of Kelaniya Contact number – 070 2427286 AGREEING THE TERMS OF AUDIT ENGAGEMENTS Applicable auditing standard – SLAUS 210 Precondition for the Acceptance and Continuance of an audit Financial reporting framework used by the management to prepare financial statements should be acceptable. (Subject criteria) Obtain acknowledgement from management that they are taking the responsibility for the preparation of financial statements in accordance with applicable financial reporting framework. Agreeing with the management within the organization to provide unrestricted access to all the information which are required to conduct the audit. After the acceptance terms and condition in the audit need to be agreed by the both parties. Hence those items need to recorded in and engagement letter. Engagement letter It is a written document which is signed by the management and auditor agreeing the pre-condition and requisitions. The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: (a) The objective and scope of the audit of the financial statements; (b) The responsibilities of the auditor; (c) The responsibilities of management; (d) Identification of the applicable financial reporting framework for the preparation of the financial statements; and (e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. Other than the above required references, following also can be referenced in an engagement letter. Elaboration of the scope of the audit, including reference to applicable legislation, regulations, SLAUSs, and ethical and other pronouncements of professional bodies to which the auditor adheres. The form of any other communication of results of the audit engagement. The fact that because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with SLAUSs. Arrangements regarding the planning and performance of the audit, including the composition of the audit team. The expectation that management will provide written representations The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable. The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued. The basis on which fees are computed and any billing arrangements. A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein. For recurring engagement no need to send engagement letter annually unless following points arise which will appropriate to change the terms of the engagement letter. 1. Significant change in ownership 2. A change in laws and regulations. 3. A change in financial reporting framework. 4. Significant change in nature of the entity. 5. Revision in fees arrangement. Request to Change the Terms of the Audit Engagement A request from the entity for the auditor to change the terms of the audit engagement may result from a change in circumstances affecting the need for the service, a misunderstanding as to the nature of an audit as originally requested or a restriction on the scope of the audit engagement, whether imposed by management or caused by other circumstances. The auditor, considers the justification given for the request, particularly the implications of a restriction on the scope of the audit engagement. A change in circumstances that affects the entity’s requirements or a misunderstanding concerning the nature of the service originally requested may be considered a reasonable basis for requesting a change in the audit engagement. In contrast, a change may not be considered reasonable if it appears that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory. An example might be where the auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the entity asks for the audit engagement to be changed to a review engagement to avoid a qualified opinion or a disclaimer of opinion. Appendix – Engagement Letter Private and Confidential DD/MM/YYYY The Board of Directors XYZ (Private) Limited No. 35, Colombo 05 Dear Sirs Engagement Letter – Statutory Audit of financial statements for the year ending 31 March 2017 1 The purpose of this letter is to set out the basis on which we, (name of the audit firm), act as auditors of XYZ (Private) Limited the “Company”) and the respective areas of responsibility of the directors and of ourselves. 2 (Name of the firm) uses the word partner in respect of its members in its dealings with you, to describe a member of (name of the firm) in their capacity as such. Responsibilities of the directors 3 As directors of the Company, you are responsible for ensuring that the Company maintains accounting records which disclose with reasonable accuracy, at any time, the financial position of the Company, and enable the preparation of financial statements which give a true and fair view, in accordance with Sri Lanka Accounting Standards and for establishing and maintaining an internal control structure. 4 Under Sections 150 (1) and 151 (2) of the Companies Act, No. 7 of 2007 (the “Act”) the directors shall ensure that the financial statements of the Company comply with any regulations made under this Act, which specifies the form and content of the financial statements and with any requirements which apply to the Company’s financial statements under any other law. 5 The directors are also responsible for making available to us, as and when required, all the Company's accounting records, all other relevant records, including minutes of all directors’, management and shareholders’ meetings, and such information and explanations as we consider necessary for the performance of our duties as auditors. Responsibilities of the auditors 6 We have a statutory responsibility to report to the members of the Company whether in our opinion the financial statements give a true and fair view, in accordance with Sri Lanka Accounting Standards, of the state of the Company’s affairs and the profit or loss for the year, and whether they have been properly prepared in accordance with the Act. 7 In arriving at our opinion, we are required to consider the following matters and to report on any in respect of which we are not satisfied: (a) Whether proper accounting records have been kept by the Company sufficient to enable the financial statements to be prepared and audited; and (b) Whether we have obtained all the information and explanations which we consider necessary for the purposes of our audit. 8 We have a professional responsibility to report if the financial statements do not comply in any material respect with applicable accounting standards, unless in our opinion the non-compliance is justified in the circumstances. In determining whether or not the departure is justified we consider whether: the departure is required in order for the financial statements to give a true and fair view; and Adequate disclosure has been made concerning the departure. 9 Our professional responsibilities also include: providing in our report a description of the directors’ responsibilities for the financial statements where the financial statements or accompanying information do not include such a description; and Considering whether other information in annual reports and other documents containing audited financial statements is consistent with those financial statements. 10 We are also responsible to deliver to the Company a statement of: the existence of any relationship (other than that of auditor) which the auditor has with, or any interests which the auditor has in, the Company; and the amounts payable by the Company to the person or firm holding office as auditor of the Company as audit fees and expenses and as a separate item, any fees and expenses payable by the Company for other services provided by that person or firm. Scope of audit 11 Our audit will be conducted in accordance with Sri Lanka Auditing Standards(“SLAuS”) issued by the Institute of Chartered Accountants of Sri Lanka, and will include such tests of transactions and of the existence, ownership and valuation of assets and liabilities as we consider necessary. We shall obtain an understanding of the accounting and internal financial control systems to the extent necessary in order to assess their adequacy as a basis for the preparation of the financial statements and to establish whether proper accounting records have been maintained by the Company. 12 We shall expect to obtain such appropriate evidence as we consider sufficient to enable us to draw reasonable conclusions there from. The nature and extent of our procedures will vary according to our assessment of the Company's accounting system and, where we wish to place reliance on it, the internal financial control system and may cover any aspect of the business operations. Our procedures will also include examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements. 13 Our work will be planned in advance and incorporated into an audit plan. This may be varied on the basis of our findings during the course of an audit and from year to year. Accordingly, we may modify our audit scope, rotate our audit emphasis and propose matters of special audit emphasis, as the circumstances dictate. 14 Our audit includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements. It also includes an assessment of whether the accounting policies are appropriate to the Company's circumstances, are consistently applied and adequately disclosed. 15 The concept of materiality affects our audit planning and our consideration of matters arising from our audit. We take into account both qualitative and quantitative factors when assessing materiality. 16 In forming our opinion we will also evaluate the overall presentation of information in the financial statements. Other statutory responsibilities of the auditor 17 As the auditor, we may be required to provide solvency certifications with respect to regulatory provisions in the Act. We will report on those matters under this engagement letter. In issuing such certifications, we will rely on procedure performed during the statutory audit and perform additional procedures. We will agree in advance, and fees applicable for such certification which will be separate from our statutory audit fees. Management representations 18 The information used by the directors in preparing the financial statements will invariably include facts or judgments which are not themselves recorded in the accounting records. As part of our normal audit procedures, we shall request the directors or senior officials/ management to provide written confirmation each year of such facts or judgments and any other oral representations that we have received during the course of the audit on matters having a material effect on the financial statements. We will also ask them to confirm in that letter that all important and relevant information has been brought to our attention. In addition, we shall present to those charged with governance a schedule of any unadjusted misstatements that have come to our attention in the course of our audit work. 19 In connection with representations and the supply of information to us generally, attention is drawn to the following: that the financial report has been prepared in accordance with Sri Lanka Accounting Standards; that sufficient records and related information have been maintained; that all important information relevant to the Services provided has been brought to our attention. that to the best of the knowledge and belief of the directors or management (as applicable) there are no irregularities involving management or employees who have significant roles in the internal control structure; and  reasons for not adjusting the unadjusted misstatements identified during the course of the audit. Detection of fraud, error and non-compliance with laws and regulations 20 The responsibility for safeguarding the assets of the Company and for the prevention and detection of fraud, error and non-compliance with law or regulations rests with the directors. However, we shall endeavour to plan our audit so that we have a reasonable expectation of detecting material misstatements in the financial statements or accounting records (including any material misstatements resulting from fraud, error or non-compliance with law or regulations), although our examination should not be relied upon to disclose all such material misstatements or frauds, errors or instances of noncompliance as may exist. 21 There is an unavoidable risk that audits planned and executed in accordance with the Sri Lanka Auditing Standards may not detect a material error or irregularity, particularly where there has been concealment through collusion, forgery and other illegal acts. There are inherent limitations in performing an audit - for example, audits are based on selective testing of the information being examined - therefore errors and irregularities may not be detected. Reports to those charged with governance 22 Our audit is not designed to identify all weaknesses in the Company's accounting and internal control systems. However, we shall report in writing to those charged with governance any material weaknesses in the Company's systems or other business matters which come to our notice during the course of our normal audit work and which we consider should be brought to the attention of those charged with governance. Our review of internal financial control systems is only performed to the extent required to express an opinion on the Company's financial statements and therefore our comments on these systems will not necessarily address all possible improvements which might be suggested as a result of a more extensive special examination. 23 No such report may be provided to a third party without our prior written consent. Such consent will be granted only on the basis that such reports are not prepared with the interests of anyone other than the Company in mind and that we accept no duty or responsibility to any other party. Access to working papers 24 Our working papers and other internal documentation created for the purpose of carrying out our duties as auditors belong solely to (name of the auditors) and will not be provided to you. 25 We have a professional responsibility as auditors of the subsidiary undertaking to give the auditors of the parent company such information and explanations as those auditors may reasonably require for their audit. This could include our giving them access to our working papers and discussing relevant matters with them. 26 However, we may be required to give access to our audit working papers for regulatory purposes or because of other statutory obligations. Other requirements 27 In order to assist us with the audit of your financial statements, we shall request early sight of all documents or statements (including the chairman's statement, operating and financial review and directors' report) which are due to be issued with the financial statements. We are also entitled to attend all general meetings of the Company and to receive notice of all such meetings. 28 Once we have issued our audit report we have no further responsibility in relation to the financial statements for that financial year. However, in accordance with SLAuS 560 – Subsequent Events, if after the financial statements have been issued we become aware of a fact which existed at the date of the auditor’s report, which if known at that date, may have caused us to modify our audit report, we must consider whether the financial statements need revision. As such, we expect that you will inform us of any material event occurring between the date of our audit report and that of the Annual General Meeting which may affect the financial statements. 29 In accordance with Section 168 of the Act the contents of the annual report must disclose the amount of remuneration received by the auditors for audit and non audit services in the year. In accordance with these regulations we shall provide the directors with such information as is required to enable the directors to make this disclosure. Preparation of financial statements 30 Assistance with the preparation of financial statements does not form a part of an audit function, but we shall discuss the Company's accounting policies with you, particularly in any problem areas, and we may propose adjusting entries for your consideration. Taxation 31 Any taxation services will be the subject of a separate engagement letter. Other services 32 We shall not be treated as having notice, for the purposes of our audit responsibilities, of information provided to members or employees of (name of the firm) other than those engaged on the audit. Fiduciary responsibilities 33 Because our audit is directed at forming an opinion on the Company’s financial statements, our audit procedures will not normally extend to assets or documents of title in respect of assets that are in the Company’s possession but owned by others. Client identification 34 As with other professional services firms, we are under stringent requirements to identify our clients for the purposes of the anti-money laundering legislation. We are likely to request from you, and retain some information and documentation for these purposes and/or make searches of appropriate databases. If satisfactory evidence of your identity is not provided within a reasonable time, there may be circumstances in which we are not able to proceed with the audit appointment. Money laundering reporting 35 Under the Prevention of Money Laundering Act, No. 5 of 2006 if we know or have a reason to believe from information or other matters obtained in the course of the audit, that any property has been derived or realised from any unlawful activity, we are required, as soon as it is practicable, to disclose our knowledge or belief to the Financial Intelligence Unit of the Central Bank. In such circumstances it is not our practice to discuss such reports with you because of the restrictions imposed by the tipping off provisions of the prevention of -money laundering legislation. Reporting to third parties 36 There may be situations, for example in relation to loan agreements, where a third party seeks to require us, in our capacity as auditors, to report to them. Any contractual arrangements between you and a third party which seek to impose such requirements upon us will not, as a matter of law, be binding on us. However, depending on the circumstances we may agree to provide reports to third parties, but not in our capacity as auditors. Any such possible requirements must be discussed with us at the earliest opportunity and well before the loan agreement or other arrangement is finalised. In this regard, however, it is our policy not to extend our duty of care in respect of our audit report in the financial statements. 37 Our audit opinion will be prepared for and only for the Company’s members as a body and for no other purpose. In those circumstances, we will not, in giving our audit opinion, accept or assume responsibility (legal or otherwise) or accept liability for or in connection with any other purpose for which our audit report including the opinion may be used, or to any other person to whom our report is shown or into whose hands it may come, and no other persons shall be entitled to rely on our audit opinion. 38 The Company by executing this letter agrees to indemnify and hold harmless (name of the firm) from all third party claims, damages, liabilities and costs other than those resulting from our wilful misconduct, dishonesty or negligence. If any claim, action or proceeding against us arises with respect to which we are entitled to indemnity hereunder, we shall promptly notify the Company which shall be entitled to retain counsel (who shall be satisfactory to us) to defend such action or proceeding and the Company shall be responsible to pay the costs, fees and disbursements of such defence. No admission of liability and/or settlement of any action, claim or proceeding shall be made on behalf of or bind us without our written consent. Safeguarding service 39 It is our desire to provide you at all times with a high quality service to meet your needs. If at any time you would like to discuss with us how our service to you could be improved or if you are dissatisfied with any aspect of our services, please raise the matter immediately with the engagement leader responsible for that aspect of our services to you. If, for any reason, you would prefer to discuss these matters with someone other than the engagement leader, please contact our Assurance Partner, Mr. xxxxxxx on (contact number). 40 In this way we are able to ensure that your concerns are dealt with carefully and promptly. We undertake to look into any complaint carefully and promptly and to do all we can to explain the position to you. This will not affect your right to complain to the Institute of Chartered Accountants in Sri Lanka. Electronic communications 41 We may communicate with you electronically. Electronically transmitted information cannot be guaranteed to be secure or virus or error free and consequently such information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete or otherwise be adversely affected or unsafe to use. We will use commercially reasonable procedures to check for the then most commonly known viruses before sending information electronically, but we will not be liable to you in respect of any error, omission or loss of confidentiality arising from or in connection with the electronic communication of information to you. You remain responsible for protecting your own systems and interests in relation to electronic communications. If you do not accept these risks, you should notify us in writing that you do not want us to communicate electronically with you. 42 We shall each be responsible for protecting our own systems and interests and you and (name of the firm) (in each case including our respective directors, members, partners, employees, agents or servants) shall have no liability to each other on any basis, whether in contract, tort (including negligence) or otherwise, in respect of any error, damage, loss or omission arising from or in connection with the electronic communication of information between us and our reliance on such information or our use of your network and internet connection. 43 The exclusion of liability in the previous paragraph shall not apply to the extent that such liability cannot by law be excluded. Electronic and other publication of auditors' reports 44 The auditors’ reports on the financial statements may not be published or distributed other than accompanied by the full financial statements to which they relate. 45 We acknowledge that as directors of the Company you may wish to publish the Company's financial statements and the auditors' report on the Company's website or distribute them to shareholders by means such as e-mail. Your responsibilities concerning the preparation, dissemination and signing of the financial statements do not change simply because the financial statements are reproduced or distributed electronically; it is your responsibility to ensure that any such publication properly presents the financial information and any auditors' report. We request that you advise us of any intended electronic publication before it occurs. 46 By giving our consent to the issue of our audit opinion with the financial statements on the website we do not accept any duty of care and deny any liability beyond our statutory duties as auditors. As auditors, we will review the process by which the financial statements to be published electronically are derived from the financial information contained in the manually signed accounts, check that the proposed electronic version is identical in content with the manually signed accounts and check that the conversion of the manually signed accounts into an electronic format has not distorted the overall presentation of the financial information, for example by highlighting certain information so as to give it greater prominence. 47 The directors of the Company are responsible for the controls over and the security of the website and, where applicable, for establishing and controlling the process for electronically distributing annual reports and other financial information to shareholders and to the Registrar of Companies. We remind you that the examination of controls over the maintenance and integrity of the Company's website is beyond the scope of the audit of the financial statements and if the directors' responsibilities statement does not include reference to this we will include it as a note at the end of the electronic version of our auditors' report. Accordingly, we accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. However, if we do become aware of any subsequent amendments, we will notify the directors that the financial statements no longer correspond with the manually signed financial statements. 48 Uncertainty regarding legal requirements is compounded as information published on the internet is accessible in many countries with different legal requirements relating to the preparation and dissemination of financial statements. If the statement of directors' responsibilities does not refer to this, or if we otherwise consider it appropriate, we will include a note describing this uncertainty at the end of the electronic version of our auditors' report. Fees 49 Our fees are computed on the basis of the time spent on your affairs by our partners and staff and on the levels of skill and responsibility involved. The fees will be subject to review by us each year and will vary with a number of factors including the extent of our reliance upon the work of the internal auditors and the assistance we receive from them and other members of your staff in preparing routine schedules and analyses. Our fees will be billed at appropriate intervals during the course of the year and will be due on presentation. Any queries concerning an invoice must be raised within xx days of the invoice date. It is our usual practice to provide estimates of our fees in advance of commencing the audit. 50 Our fees will exclude out of pocket expenses. We have agreed that out of pocket expenses will be reimbursed by you and will be billed as incurred. The fees and reimbursable expenses invoiced will also include Value Added Tax at the prevailing rates and any other taxes prevalent at the time of invoicing. 51 In the event that either (i) we are required by regulation, statute, court order or other legal process, or (ii) that we agree at our sole discretion following a request made by you, to produce our working papers or our personnel as witnesses with respect to our engagement by you, you will reimburse us for our professional time and expenses, as well as the fees and expenses of our counsel, incurred in responding to such a request. For the avoidance of doubt, this paragraph shall not apply in the event of legal proceedings brought against us by you in relation to this engagement. Working for other clients 52 We will not be prevented or restricted by virtue of our relationship with you, including anything in this engagement letter, from providing services to other clients. Our standard internal procedures are designed to ensure that confidential information communicated to us during the course of this assignment will be maintained confidentially. Data protection 53 In connection with this engagement letter, each party will comply with and warrants that it has complied with all applicable data protection and privacy legislation and regulations in any relevant jurisdiction. 54 You agree that we may share your confidential information and personal data with any firm within the (name of the firm) global network of member firms and any subcontractors we use to provide the services set out in this engagement letter (or more generally to support our office administration and management) on the understanding that we shall ensure that all appropriate confidentiality obligations and technical and organisational security measures are in place to prevent any unauthorised or unlawful disclosure or processing of such information and data and the accidental loss or destruction of or damage to such information and data. Our partners and staff 55 Independence rules impose restrictions on senior audit team members subsequently being employed by an audit client. You should be aware that if, within a period of two years from the date of our audit report, you or any of the subsidiaries whose audits form the subject of this letter employ as a director or in a key management position any senior audit team member involved in the relevant audit, then this may represent a threat to our independence so significant that we may be required to resign our audit appointment. 55 (name of the firm) is a worldwide organisation of individual partnerships and companies. This engagement letter is between the Company and (name of the firm) only. In the course of providing the services set out in this engagement letter, (name of the firm) may, at its discretion, draw on the resources of Beneficiaries. The term ‘Beneficiary’ includes (a) another entity (whether or not incorporated) which carries on business under a name which includes all or part of the (name of the firm) name or is otherwise within (or associated or connected with an entity within) or is a correspondent firm of the worldwide network of (name of the firm) (together, including such entities' partners, members and employees, “(name of the firm) Affiliates”), (b) contractors, and (c) the respective partners and employees of (name of the firm), (name of the firm) Affiliates and contractors. 56 Unless a Beneficiary is contracted by you or a group entity to provide any of the services which are the subject of this letter, provision of the services remains the responsibility of (name of the firm) alone. In these circumstances any Beneficiary who deals with you in the course of providing the services does so on behalf of (name of the firm).’ 57 You therefore agree that you will not bring any claim in respect of or in connection with this engagement whether in contract, tort (including negligence), breach of statutory duty or otherwise against any Beneficiary. Resolving disputes 59 Should any dispute arise in connection with this engagement each party will work together in good faith with a view to resolving the dispute. Where each party agrees, the parties will seek to resolve the dispute through mediation. Each party agrees that if the dispute is not resolved through negotiation or mediation, the parties irrevocably agree to submit to the exclusive jurisdiction of the Sri Lankan Courts. Governing Law and Jurisdiction 60 The contract formed by this engagement letter when accepted by you shall be governed by, and construed in accordance with, Sri Lankan law and it is hereby irrevocably agreed and accepted that the Courts of Sri Lanka shall have exclusive jurisdiction to settle any claim, difference or dispute (including without limitation claims for set-off or counterclaims) which may arise out of or in connection with such contract. Acknowledgement and acceptance 61 This letter forms the entire agreement between us in connection with the services set out above. It supersedes any previous proposals, contracts or other communications, written or oral, save in relation to any fraudulent misrepresentation. 62 Once it has been agreed, this letter will remain effective, from one audit appointment to another, until it is replaced. We should be obliged if you would confirm in writing your agreement to the terms of this letter by signing and returning the enclosed copy. If you wish to discuss the terms of our appointment further before replying, please let us know. Yours truly, Acknowledgement of acceptance I have read the above letter and accept the terms and conditions set out therein and confirm that I am authorised to accept and sign for and on behalf of XYZ (Private) Limited. Signed:................................................................................................. (Name and position) (date) for and on behalf of XYZ (Private) Limited.