1 AUDIT FRAMEWORK & REGULATION (Audit & Other Assurance Engagements) Assurance Engagements - is one where a professional accountant

evaluates or measures a subject matter that is the responsibility of another party against suitable criteria and expresses an opinion which provides the intended user with a level of assurance about that subject matter. An external audit is a type of assurance engagement that is carried out by an auditor to give an independent opinion on a set of financial statements. Internal auditing is an appraisal or monitoring activity established within an entity as a service to the entity. The purpose of an audit is to enable auditors to give an opinion on the financial statements. International Framework for Assurance Engagement (IFAE) gives guidance for carrying out assurance engagements. Practitioner (Audit Firm/Auditor) Evaluates or measures subject matter against suitable criteria. Responsible Party (X Company Ltd.) Responsible for the subject matter. User (Shareholders/Individuals etc.)

Express an opinion which provides the user with a level of assurance about the subject matter of X Company Ltd. Five (5) Elements of an assurance engagement: (CREST) - Criteria. The subject matter is evaluated or measured against a suitable criteria in order to reach an opinion. - Report. An assurance report containing the practitioners opinion is issued to the intended user. - Evidence. Sufficient appropriate evidence needs to be gathered to support the required level of assurance. - Subject matter. The data to be evaluated that has been prepared by the responsible party. - Three party relationship. The practitioner, the responsible party and the intended user. Types of Assurance Engagements (Statutory & None Statutory) Audit (Reasonable assurance) - Review & Internal Audit. (Negative assurance) - Agreed-upon procedures. (No assurance) - Compilation engagement. (No assurance) Reasonable Assurance Engagements gives a positive assurance report and a high level of assurance. Example: A Statutory Audit. Limited Assurance Engagements gives a negative assurance report and a moderate level of assurance. Example: Risk Assessment Reports and Performance measurement reports.

2 AUDIT FRAMEWORK & REGULATION (Audit & Other Assurance Engagements) Types of review engagements: 1) An attestation engagement: where an accountant declares that a given premise is either correct or incorrect. Example: when ask to review interim financial information. 2) A direct reporting engagement: where an accountant reports on issues that have come to his or her attention during the course of the review. Example: due diligence engagement where an adviser is engaged by one company taking over another to perform an assessment of the material risks associated with the transaction, to ensure the acquirer has all the necessary facts. Due diligence can also be requested by sellers. Agreed-upon procedures: the auditor simply provides a report of the findings of the engagement agreed by the auditor, entity and any appropriate third parties, so no assurance is expressed. Example: Examination of statement of financial position and Examination of segmental sales and profit. Compilation engagement: the accountant is engaged to use his accounting expertise to collect, classify and summarise financial information, so no assurance is expressed. Example: Preparation of financial statements and preparation of tax returns. Stakeholders various parties interested in the accounts of a company. Example: Shareholders, Suppliers, Lenders, the Government, Customers, Employees & Tax Authorities. Accountability a person in position of power held accountable for his actions. Stewardship The responsibility to take good care of resources. Agent One party (the principal) employs another party (the agent) to perform a task on his behalf. Materiality information is material if its omission or misstatement could influence the decision of a user or addressee of the financial statements. < 5% Profit before tax may not be considered material. > 10% Profit before tax may be considered material. External auditors give an opinion on the truth and fairness of financial statements. Example: Reasonable Assurance in an Audit Engagement and a Negative Assurance under Review Engagements. True Information is factual and conforms with reality. Fair Information is free from discrimination and bias and in compliance with expected standards and rules.

3 AUDIT FRAMEWORK & REGULATION (Statutory Audit & Regulation) Most companies are required by law to have an audit. The maximum turnover of a company which qualifies as exempt under EC rules is 5.6 Million Pounds. Arguments for and against abolition of small company audit could be discussed among: Shareholders, Banks & Other Creditors, Suppliers, Tax Authorities, Management and Employees.

The Audit Opinion imply: (PRADA) - Proper accounting records have been kept. - Returns adequate to the audit have been received from branches not visited. - Accounting records are consistent with the financial statements. - Directors report is consistent with the financial statements. (Details of emoluments & benefits) - All information and explanations have been received from the officers. ISA 700 sets out the required elements and format of the audit report. Unqualified and qualified Audit Reports. The Auditor (Duties): - To report to the members on whether the financial statements give a true and fair view and have been properly prepared. - To form an opinion as to (PRADA) The Auditor (Rights): - Access at all times to all books and records of the company. - To receive information and explanations from the officers of the company. - To receive notice to attend company meetings. - To receive notice of any intention to propose removal. - To requisition an Extraordinary General Meeting on resignation. - Right to require laying of accounts and reports before the company. May act as an Auditor: A member of a recognized supervisory body (RSB). Example: ACCA May not act as an Auditor: An officer (Director or secretary) of the company, employee, a business partner etc.

4 AUDIT FRAMEWORK & REGULATION (Statutory Audit & Regulation) Appointment of Auditors: - The members (Shareholders) of the company. - The Directors can appoint first auditor and fill a casual vacancy but needs approval at next AGM - Appointment runs from end of AGM until the end of the next AGM. - Where no AGM automatic annual reappointment unless a shareholder objects. Removal of Auditors: - Notice of removal via a special notice (28 days) with a copy sent to auditor. - Resignation (Auditors may have to submit to members a Statement of Circumstances surrounding their resignation). This statement must be deposit at the companys registered office within (14 days) of ceasing to hold office.

5 AUDIT FRAMEWORK & REGULATION (Regulatory Environment & Corporate Governance) International Standards on Auditing (ISA) are produced by the International Auditing & Assurance Standards Board (IAASB), a technical standing committee of International Federation of Accountants (IFAC) based in New York, is a non-profit, non-governmental, non-political international organization of accountancy bodies. (UK) FRC-Financial Reporting Council (Regulates Accounting Profession) ASB-Accounting Standards Board & UITF-Urgent Issues Task Force (Sets UK accounting standards) APB-Auditing Practices Board (Sets auditing standards and ethical standards for assurance engagements)

(International) IFAC IAASB ISA

Other IAASB Pronouncements include: International Standards on Review Engagements (ISREs), International Standards on Assurance Engagements (ISAEs), International Standards on Related Services (ISRSs), International Standards on Quality Control (ISQCs) and International Auditing Practice Statements (IAPSs). ISA 200 Objective and general principles governing an audit of financial statements. ISA 300 Planning and audit of financial statements. ISA 320 Materiality in planning and performing an audit. ISA 500 Audit evidence. ISA 600 Using the work of another auditor. ISA 700 The independent auditors report on a complete set of general purpose financial statements. ISA 800 The auditors report on special purpose audit engagements. (Corporate Governance) The system by which companies are directed and controlled.

Standards of Corporate Governance are documented in the Organisation for Economic Co-operation & Development (OECD) Principles of Corporate Governance issued 1999 and reviewed 2004. (OECD): 6 Principles of Corporate Governance - Should ensure an effective corporate governance framework. - Should protect the rights of the shareholders. - Should ensure the equitable treatment of shareholders. - Should recognize the rights of stakeholders as established by law and their role - Should ensure timely and accurate disclosure on all matters of disclosure and transparency. - The responsibilities of the board.

6 AUDIT FRAMEWORK & REGULATION (Regulatory Environment & Corporate Governance) In the UK Cadbury Report issued 1992 Identified Directors, Shareholders and Other relevant parties. Hampel Report (1998) ensures good governance (Stakeholders) are fully taken into account. Combined Code is recommended best practice for companies particularly listed companies. Board of Directors (Key Responsibilities) - Reviewing and guiding corporate strategy. - Monitoring the effectiveness of the company governance practices. - Selecting, compensating, monitoring and replacing key executives. - Aligning key executive and board remuneration. - Managing potential conflicts of interest. - Ensuring the integrity of the corporations accounting & financial reporting system. Audit Committee is a sub-committee of the board of directors usually containing at least 3 non executives. At least one member should have recent and relevant financial experience. Audit Committee (Objectives);- (PAL) - Public confidence in the credibility and objectivity of the financial statements. - Assisting Directors in meeting their responsibilities in respect of financial reporting. - Liaising with external auditors. Audit Committee (Functions) :- (D 3(MR)) - Developing and implementing policy on the engagement of the external auditor to supply nonaudit services. - Monitoring the integrity of the financial statement. - Monitoring and reviewing the internal audit function. - Making recommendations re: appointment, removal and remuneration of external auditor. - Review internal financial controls. - Review and monitor the external auditors independence and objectivity. - Review arrangements for confidential reporting by employees and investigation of improprieties whistle blowing. Audit Committee: - Should review and assess the annual internal audit work plan. - Should receive reports on the results of internal audit work. - Should ensure that the internal auditor has direct access to the board chairman and to the audit committee. - Should monitor the effectiveness of internal audit. NB: Internal Controls: Safeguard the company assets, Help to prevent & detect fraud and safeguard the shareholders investment.