12. Describe the auditor's responsibility with regard to auditor independence, conflicts of interest and confidentiality

Auditor independence

The auditor shall communicate the following for listed entities:

• A statement that the engagement team and others in the firm, the firm, and network firms have complied with relevant ethical requirements regarding independence

• All relationships between the firm and entity that may reasonably be thought to bear on independence

• Related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level

1.5 Conflicts of interest

In some ways conflict of interest issues are similar to the difficulties firms have in maintaining independence. They can arise in a variety of circumstances and each problem has to be dealt with on its own merits.

A professional accountant must take reasonable steps to identify circumstances that could pose a conflict of interest because such circumstances may create threats to compliance with the fundamental principles.

When considering whether to accept a client or when there is a change in a client's circumstances, audit firms must take reasonable steps to ascertain whether there is a conflict of interest or if there is likely to be one in the future.

Confidentiality requires members to refrain from disclosing information acquired in the course of

professional work except where:

(a) Disclosure is permitted by law and is authorised by the client or the employer;

(b) Disclosure is required by law, for example:

Production of documents or other provision of evidence in the course of legal proceedings; or

(ii) Disclosure to the appropriate public authorities of infringements of the law that come to light;

and

(c) There is a professional duty or right to disclose, when not prohibited by law:

(i) To comply with the quality review of ACCA or another professional body;

(ii) To respond to an inquiry or investigation by ACCA or a regulatory body;

(iii) To protect the professional interests of a professional accountant in legal proceedings; or

(iv) To comply with technical standards and ethics requirements.

There are a number of factors to consider when deciding whether to disclose confidential information and the following factors are identified in the ACCA Code:

• Whether the interests of all parties, (including affected third parties) could be harmed if the client or employer consents to the disclosure of information by the professional accountant

• Whether all the relevant information is known and substantiated, to the extent it is practicable

• The type of communication that is expected and to whom it is addressed

• Whether the parties to whom the communication is addressed are appropriate recipients.

A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party.

In general, where there is a right (as opposed to a duty) to disclose information, a member should only make disclosure in pursuit of a public duty or professional obligation.

A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement.

Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the client's affairs to any other person except with the client's consent or within the terms of certain recognized exceptions, which fall under obligatory and voluntary disclosures.

13. Justify the importance of engagement letters and their contents

14. Explain the need for, and the importance of, audit documentation.

15. Describe the form and contents of working papers and supporting documentation.

16. Explain the procedures to ensure safe custody and retention of working papers

17. Identify and describe the contents of the overall audit strategy and audit plan

18. Explain the components of audit risk

19. Explain how auditors obtain an initial understanding of the entity and its environment

20. Explain the importance of internal control and risk management

21. Describe and explain the five components of internal control

22. Discuss the limitations of internal control components

23. Explain how auditors record internal control systems including the use of, narrative notes, flowcharts, internal control questionnaires and internal control evaluation questionnaires

24. Define and explain the concepts of materiality and performance materiality

25. Discuss the effect of fraud and misstatements on the audit strategy and extent of audit work

26. Describe computer systems controls including general IT controls and application controls

27. Discuss substantive procedures for obtaining audit evidence

28. Describe audit procedures to obtain audit evidence, including inspection, observation, external confirmation, recalculation, reperformance, analytical procedures and enquiry

29. Discuss and provide examples of how analytical procedures are used as substantive procedures

30. Define audit sampling and explain the need for sampling

Auditors usually seek evidence from less than 100% of items of the balance or transaction being tested by using sampling techniques.

Audit sampling is the application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection. This will enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population. Audit sampling can be applied using either statistical or non-statistical approaches.

The population is the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.

Auditors do not normally examine all the information available to them as it would be impractical to do so and using audit sampling will produce valid conclusions. ISA 530 Audit sampling provides guidance to auditors.

Some testing procedures do not involve sampling, such as:

• Testing 100% of items in a population

• Testing all items with a certain characteristic as selection is not representative

Auditors are unlikely to test 100% of items when carrying out tests of controls, but 100% testing may be appropriate for certain substantive procedures. For example, if the population is made up of a small number of high value items, there is a high risk of material misstatement and other means do not provide sufficient appropriate audit evidence, then 100% examination may be appropriate.

Audit sampling can be done using either statistical sampling or non-statistical sampling methods.

Statistical sampling is an approach to sampling that involves random selection of the sample items, and the use of probability theory to evaluate sample results, including measurement of sampling risk.

Non-statistical sampling is a sampling approach that does not have these characteristics.

So, bearing in mind the definitions above, sampling is non-statistical when it does not meet the criteria required of statistical sampling. If each item of the population does not have an equal chance of selection, the sampling technique is non-statistical.

The difference between the two types of sampling is that, with statistical sampling, the sampling risk can be measured and controlled (we look at sampling risk in Section 3.2). With non-statistical sampling it cannot be measured.

Although the audit procedures performed on the items in the sample will be the same, whether a statistical or non-statistical approach is used, meaningful extrapolation can only occur from a statistical sample which has been selected randomly.

The auditor may alternatively select certain items from a population because of specific characteristics they possess. The results of items selected in this non-statistical way cannot be projected onto the whole population but may be used in conjunction with other audit evidence concerning the rest of the population.

• High value or key items. The auditor may select high value items or items that are suspicious, unusual or prone to error.

• All items over a certain amount. Selecting items this way may mean a large proportion of the population can be verified by testing a few items.

• Items to obtain information about the client's business, the nature of transactions, or the client's accounting and control systems.

• Items to test procedures, to see whether particular procedures are being performed