The document provides an outline of a lecture on advanced audit principles and practice. It covers key topics such as statutory audits, audit committees, codes of best practice, internal control effectiveness, money laundering, laws and regulations, and auditing standards. The introduction defines an audit as a systematic process of obtaining and evaluating evidence to ascertain the degree of correspondence between assertions and established criteria. It also discusses theories explaining the demand and supply of audit services. Statutory audits are regulated in that certain companies must have them by law. [/SUMMARY]

1. ADVANCED AUDIT
PRINCIPLES AND
PRACTICE

2. Lecture Outline
 INTRODUCTION
 STATUTORY AUDIT
 AUDIT COMMITTEES
 CODES OF BEST PRACTICE
 INTERNAL CONTROL EFFECTIVENESS
 MONEY LAUNDERING
 LAW AND REGULATIONS
 AUDITING STANDARDS

3. INTRODUCTION
• DEFINITION
“AN AUDIT IS A SYSTEMATIC PROCESS OF OBJECTIVELY OBTAINING AND
EVALUATING EVIDENCE REGARDING ASSERTIONS ABOUT ECONOMIC
ACTIONS AND EVENTS TO ASCERTAIN THE DEGREE OF CORRESPONDENCE
BETWEEN THESE ASSERTIONS AND ESTABLISHED CRITERIA AND
COMMUNICATING THE RESULTS TO INTERESTED USERS.”
(AMERICAN ACCOUNTING ASSOCIATION)

4. DEMAND AND SUPPLY OF AUDIT SERVICES
 SEVERAL THEORIES EXPLAIN THE DEMAND AND
SUPPLY FOR AUDIT SERVICES
• POLICEMAN THEORY
• LENDING CREDIBILITY THEORY
• THEORY OF INSPIRED CONFIDENCE
• AGENCY THEORY
 DEMAND AND SUPPLY OF AUDIT SERVICES ARE
REGULATED I.E. STATUTORY AUDITS

5. WHO HAS TO HAVE A STATUTORY AUDIT?
 SMALL COMPANIES – PRIVATE LIMITED COMPANIES, WHICH ARE NOT PART
OF A LARGER GROUP, AND ARE NOT BANKING OR INSURANCE COMPANIES.
THEIR TURNOVER MUST BE £6.5M OR LESS, THEIR ASSETS TOTAL £3. 26M
OR LESS AND THEY SHOULD EMPLOY FEWER THAN 50 PEOPLE.
 SMALL COMPANIES WHO FULFIL TWO OUT OF THESE THREE OF THESE
CRITERIA DO NOT HAVE TO HAVE A STATUTORY AUDIT.
 COMPANIES WHO HAVE BEEN OR ARE A PUBLIC COMPANY OR ONE
INVOLVED IN BANKING, INSURANCE OR CERTAIN FINANCIAL SERVICES
CANNOT QUALIFY FOR EXEMPTION.
REFERENCE: HTTPS://WWW.GOV.UK/AUDIT-EXEMPTIONS-FOR-PRIVATE-
LIMITED-COMPANIES

6. AUDITORS’ ROLE
 AUDITORS HAVE TO OBTAIN SUFFICIENT RELIABLE EVIDENCE TO ENSURE
FINANCIAL STATEMENTS COMPLY WITH RELEVANT LAWS AND
REGULATIONS
 AUDITOR ALSO HAS TO HAVE REGARD TO LAWS AND REGULATIONS WHICH
PROVIDE A FRAMEWORK FOR THE BUSINESS ENVIRONMENT IN WHICH
ORGANISATION OPERATES.
 AUDITORS SHOULD CONDUCT AUDIT WITH A DEGREE OF PROFESSIONAL
SCEPTICISM (ISA 250) RECOGNISING THAT THE AUDIT MAY REVEAL
INSTANCES OF NON COMPLIANCE OR AREAS WHERE NON COMPLIANCE
MAY BE POSSIBLE

7. AUDIT COMMITTEES
ADVANTAGES OF AUDIT COMMITTEES
 INCREASED CONFIDENCE IN CREDIBILITY OF REPORTING
 FREES EXECUTIVE DIRECTORS TO MANAGE
 REPORTING LINES FOR INTERNAL AUDIT/IMPARTIAL LINK FOR
EXTERNAL AUDIT
 CREATES CULTURE OPPOSED TO FRAUD
DISADVANTAGES
 DIFFICULTY SELECTING SUITABLE INDEPENDENT NON-EXECS
 FORMALITY MAY DISSUADE REPORTING ON JUDGMENTAL ISSUES
 COST MAY BE PROHIBITIVE

8. AUDIT COMMITTEES
DUTIES OF AUDIT COMMITTEE
 LIAISON WITH EXTERNAL AUDITOR
 MONITOR AND REVIEW EFFECTIVENESS OF THE INTERNAL
AUDIT FUNCTION
 REVIEW OF INTERNAL CONTROLS
 SPECIAL INVESTIGATIONS

9. CODES OF BEST PRACTICE
ADVANTAGES OF VOLUNTARY CODES
 CAN BE APPLIED FLEXIBLY AND WHERE RELEVANT
 SMALLER ENTITIES CAN PICK AND CHOOSE
 DOES NOT CREATE EXCESSIVE ‘BURDEN OF
REQUIREMENT’
DISADVANTAGES
 INSUFFICIENT PROTECTION FOR SHAREHOLDERS
 CHOICE OF NON COMPLIANCE

10. CODES OF BEST PRACTICE
 THE CORPORATE GOVERNANCE CODE HAS BEEN ADAPTED
BY THE UK LISTING AUTHORITY
 IT IS PRIMARILY RELEVANT TO LISTED COMPANIES ALTHOUGH
CONSIDERED BEST PRACTICE FOR ALL COMPANIES
 IT IS VOLUNTARY ALTHOUGH LISTED COMPANIES MUST REPORT
ON NON-COMPLIANCE
 AUDITORS OF LISTED COMPANIES MUST REVIEW COMPLIANCE
WITH CODE AND ISSUE STATEMENT OF COMPLIANCE / NON-
COMPLIANCE

11. CODES OF BEST PRACTICE
UK CORPORATE GOVERNANCE CODE:
 THE BOARD: BALANCE OF EXECUTIVE AND NON-EXECUTIVE DIRECTORS (SOME
NON-EXECS TO BE INDEPENDENT)
 CHAIRMAN: ROLES OF CHAIRMAN AND CHIEF EXEC DISTINCT
 INTERNAL CONTROLS: SOUND SYSTEM MAINTAINED TO SAFEGUARD
SHAREHOLDERS’ INVESTMENT AND COMPANY’S ASSETS
 AUDIT COMMITTEE: SHOULD BE ESTABLISHED
 INTERNAL AUDIT: CONSIDER ANNUALLY WHETHER NEEDED
 AUDITOR: FTSE 350 COMPANIES MUST PUT EXTERNAL AUDIT OUT TO TENDER AT
LEAST EVERY 10 YEARS

12. INTERNAL CONTROL EFFECTIVENESS
DIRECTORS’ RESPONSIBILITIES
 INTERNAL CONTROLS CONTRIBUTE TO SAFEGUARDING THE
COMPANY'S ASSETS AND HELPING TO PREVENT AND DETECT FRAUD
 THEREFORE INTERNAL CONTROLS ARE ESSENTIAL TO MANAGEMENT
IN SAFEGUARDING THE SHAREHOLDERS' INVESTMENT
 DIRECTORS ARE ULTIMATELY RESPONSIBLE FOR A COMPANY’S
SYSTEM OF INTERNAL CONTROLS
 DIRECTORS SHOULD SET UP A SYSTEM OF INTERNAL CONTROL,
REGULARLY REVIEW ITS EFFECTIVENESS AND CONSIDER THE NEED
FOR INTERNAL AUDIT

13. INTERNAL CONTROL EFFECTIVENESS
AUDITOR'S RESPONSIBILITIES
 AS PART OF THE AUDIT, THE AUDITOR IDENTIFIES, REVIEWS
AND EVALUATES CONTROLS
 AUDITOR DETERMINES AUDIT APPROACH BASED ON
EVALUATION OF CONTROLS
 AUDITORS CAN ALSO OFFER ASSURANCE SERVICES,
SEPARATELY FROM THE EXTERNAL AUDIT, SUCH AS REVIEWING
CONTROLS

14. MONEY LAUNDERING
 MONEY LAUNDERING IS THE PROCESS BY WHICH CRIMINALS
ATTEMPT TO CONCEAL THE TRUE ORIGIN AND OWNERSHIP OF
THE PROCEEDS OF THEIR CRIMINAL ACTIVITY
 THIS ALLOWS THEM TO MAINTAIN CONTROL OVER THE
PROCEEDS AND, ULTIMATELY, PROVIDING A LEGITIMATE COVER
FOR THEIR SOURCES OF INCOME.

15. MONEY LAUNDERING
THERE ARE 3 STAGES IN A MONEY LAUNDERING REGIME:
1. PLACEMENT – INTRODUCTION OF ILLEGAL FUNDS INTO
FINANCIAL SYSTEM, E.G. FICTITIOUS SALES IN A CASH-
INTENSIVE BUSINESS
2. LAYERING – PASSING MONEY THROUGH ‘LAYERS’ OF
TRANSACTIONS, E.G. TRANSFERS THROUGH MULTIPLE BANK
ACCOUNTS ACROSS DIFFERENT NATIONAL BOUNDARIES
3. INTEGRATION – TAKING ‘CLEANED’ MONEY BACK INTO
LEGITIMATE ECONOMY, E.G. BANK TRANSFER INTO
CRIMINAL’S ACCOUNT

16. MONEY LAUNDERING
CRIMINAL OFFENCES IN THE UK
 POSSESSING, DEALING WITH OR CONCEALING THE PROCEEDS OF
ANY CRIME
 ATTEMPTING, ASSISTING OR INCITEMENT TO COMMIT MONEY
LAUNDERING
 FAILURE OF AN INDIVIDUAL IN THE REGULATED SECTOR TO
REPORT A SUSPICION OF MONEY LAUNDERING
 TIPPING-OFF: DISCLOSING SOMETHING THAT MIGHT PREJUDICE
THE INVESTIGATION. THIS IS A PARTICULARLY RISKY AREA FOR
PROFESSIONAL ACCOUNTANTS AND AUDITORS.

17. MONEY LAUNDERING
UK MONEY LAUNDERING REGULATIONS 2007
 APPOINT A MONEY LAUNDERING REPORTING OFFICER
(MLRO)
 UNDERTAKE CUSTOMER DUE DILIGENCE (CDD)
 REPORT SUSPICION OF MONEY LAUNDERING
 MAINTAIN SPECIFIC RECORDS
 PUT INTERNAL CONTROL SYSTEM IN PLACE TO ENSURE
CONTINUED COMPLIANCE WITH THE REGULATIONS
 TRAIN STAFF IN ALL THESE ISSUES

18. LAW AND REGULATIONS
 MANAGEMENT ARE RESPONSIBLE FOR ENSURING THAT
LAWS AND REGULATIONS ARE KEPT
 THE AUDITOR IS NOT RESPONSIBLE FOR PREVENTING NON-
COMPLIANCE

19. LAW AND REGULATIONS
AUDITOR'S RESPONSIBILITIES (ISA 250)
 PROCEDURES: PERFORM SPECIFIC AUDIT PROCEDURES TO
IDENTIFY ANY EXAMPLES OF NON-COMPLIANCE
 EVIDENCE: OBTAIN SUFFICIENT APPROPRIATE AUDIT EVIDENCE
OF COMPLIANCE WITH LAWS AND REGULATIONS THAT MAY
HAVE A MATERIAL EFFECT ON THE FS
 DOCUMENTATION AND REPORTING: DOCUMENT NON-
COMPLIANCE AND REPORT IDENTIFIED / SUSPECTED FINDINGS

20. LAW AND REGULATIONS
REPORTING NON-COMPLIANCE
 MANAGEMENT: NON-COMPLIANCE SHALL BE COMMUNICATED
TO THOSE CHARGED WITH GOVERNANCE
 SHAREHOLDERS: CONSIDER THE IMPACT ON AUDITOR’S REPORT
– MODIFIED OPINION?
 THIRD PARTIES:
oIS THERE A STATUTORY DUTY?
oIS IT IN THE PUBLIC INTEREST?
oAUDITOR MAY NEED TO OBTAIN LEGAL ADVICE

21. INTERNATIONALAUDITING STANDARDS
INTERNATIONAL AUDITING AND ASSURANCE STANDARDS BOARD (IAASB)
‘TO IMPROVE AUDITING AND ASSURANCE STANDARDS AND THE QUALITY AND
UNIFORMITY OF PRACTICE THROUGHOUT THE WORLD, THEREBY STRENGTHENING
PUBLIC CONFIDENCE IN THE GLOBAL AUDITING PROFESSION AND SERVING THE PUBLIC
INTEREST’.

22. UK REGULATORY FRAMEWORK
 ALL PERSONS CARRYING OUT AUDITS HAVE TO BE APPROVED
BY AUTHORITIES OF MEMBER STATES
 IN UK HAVE TO BE MEMBER OF AN RSB – ACCA IS ONE,
ICAEW IS ANOTHER AS ARE ICAS ANDS ICAI
 FINANCIAL REPORTING COUNCIL IS REGULATOR OF
CORPORATE REPORTING AND GOVERNANCE

23. UK REGULATION – FINANCIAL REPORTING
COUNCIL
 THE FRC BOARD IS DIRECTLY RESPONSIBLE FOR ISSUING AUDITING
STANDARDS , THE UK VERSION OF INTERNATIONAL STANDARDS ON
AUDITING (ISA’S). THE FRS BOARD IS ADVISED BY THE CODES AND
STANDARDS COMMITTEE, WHICH IN TURN IS ADVISED BY THE AUDIT
AND ASSURANCE COUNCIL. THIS WAS FORMALLY DONE BY THE
AUDITING PRACTICES BOARD
 OTHER COMMITTEES INCLUDE
o ACCOUNTING COUNCIL
o ACTUARIAL COUNCIL
o CONDUCT COMMITTEE
o MONITORING COMMITTEE
o FINANCIAL REPORTING REVIEW PANEL (FRRP)
o CASE MANAGEMENT COMMITTEE

24. UK Regulation of Auditing

25. INTERNATIONAL REGULATION – IAASB
 THE INTERNATIONAL AUDITING AND ASSURANCE STANDARDS BOARD
(IAASB) RESPONSIBLE FOR ISA.
 IAASB FUNCTIONS AS AN INDEPENDENT STANDARD SETTING BODY
UNDER THE AUSPICES OF THE IFAC
 “THE IAASB WORKS TO ESTABLISH HIGH QUALITY AUDITING,
ASSURANCE, QUALITY CONTROL AND RELATED SERVICES STANDARDS AND
TO IMPROVE THE UNIFORMITY OF PRACTICE BY PROFESSIONAL
ACCOUNTANTS THROUGHOUT THE WORLD, THEREBY STRENGTHENING
PUBLIC CONFIDENCE IN THE GLOBAL AUDITING PROFESSION AND SERVING
THE PUBLIC INTEREST”.

26. INTERNATIONAL REGULATION – IAASB CONT.
IAASB PRONOUNCEMENTS ARE OF SEVERAL TYPES:
 INTERNATIONAL STANDARDS ON QUALITY CONTROL AND THE INTERNATIONAL
FRAMEWORK FOR ASSURANCE ENGAGEMENTS APPLY TO ALL TYPES OF
ASSURANCE ENGAGEMENTS
 INTERNATIONAL STANDARDS ON AUDITING (ISAS) AND INTERNATIONAL
AUDITING PRACTICE STATEMENTS (IAPSS) APPLY TO AUDITS
 INTERNATIONAL STANDARDS ON REVIEW ENGAGEMENTS APPLY TO REVIEWS
 INTERNATIONAL STANDARDS ON ASSURANCE ENGAGEMENTS
AND INTERNATIONAL STANDARDS ON RELATED SERVICES APPLY TO ASSURANCE
ENGAGEMENTS OTHER THAN AUDITS AND REVIEWS.

27. INTERNATIONAL REGULATION – IAASB
IAASB ISSUES NON-AUTHORITATIVE MATERIALS AS WELL
 INTERNATIONAL AUDITING PRACTICE NOTES (IAPNS)
 PRACTICE NOTES RELATING TO OTHER INTERNATIONAL STANDARDS E.G.
IN RELATION TO ISRES, ISAES OR ISRSS)
 STAFF PUBLICATIONS – TO RAISE AWARENESS AND DIRECT ATTENTION
 CONSULTATION PAPERS – GENERATE DISCUSSION WITH STAKEHOLDERS

28. INTERNATIONAL REGULATION – IAASB CONT.
 PUBLIC OVERSIGHT
• PUBLIC INTEREST OVERSIGHT BOARD
(PIOB)
o MONITORING STANDARD SETTING BODIES
o OVERSEEING THE NOMINATION PROCESS FOR MEMBERSHIP
o CO-OPERATION WITH NATIONAL OVERSIGHT AUTHORITIES E.G. UK’S
PROFESSIONAL OVERSIGHT OF THE FRC

29. INTERNATIONAL REGULATION - IAASB
 ISA
 ISQC
 ISRE
 ISRS
IFAC
(International Federation
of Accountants
IAASB
(International Auditing
and Assurance
Standards Board
IESBA
(International Ethics
Standards Board for
Accountants
 Code of Ethics

30. ADVANTAGES OF INTERNATIONAL AUDITING
STANDARDS
 WORLDWIDE
• INCREASES CONFIDENCE IN NON-DOMESTIC INVESTMENT
 CONSISTENT
• INTERNATIONAL INVESTORS COMPREHEND FINANCIAL STATEMENTS FROM
DIFFERENT COUNTRIES
 HIGH QUALITY
• NON-NATIONAL STANDARDS ENCOURAGE BETTER QUALITY, LESS POLITICAL
INFLUENCE