Compliance with these fundamental principles may potentially be threatened by broad range of circumstances. Many threats fall into the following categories:

• Self-interest threats
  This may occur as result of the financial or other interest of a professional accountant or of an immediate or close family member. Examples of circumstances that may create self-interest include:
   Financial interest in a client or jointly holding a financial interest with a client
   Undue dependence on total fees from a client
   Having a close business relationship with a client
   Concern about the possibility of losing a client
   Potential employment with the client
   Loan to or from an assurance client or any of its directors.
• Self-review threats
  This may occur when a previous judgment needs to be re-evaluated by the accountant originally responsible for that judgment. Example of circumstances that may create self-review threats include, but not limited to:
   The discovery of a significant error during a re-evaluation of the work of the professional accountant
   Reporting on the operation of financial systems after being involved in their design or implementation.
   Having prepared the original data used to generate records that are the subject matter of the engagement
   A member of the assurance team being or having recently been, employed by the client in a position to exert direct and significant influence over the subject matter of the engagement.
   A member of the assurance team being, or having recently been, a director or officer of that client
   Performing a service for a client that directly affects the subject matter of the assurance engagement.
• Advocacy threats
  This may occur when an accountant promotes a position or opinion to the point that subsequent objectivity may be compromised. Examples of circumstances that may create advocacy threats include, but not limited to:
   Promoting shares in a listed entity when that entity is a financial statement audit client.
   Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.
• Familiarity threats
  This may occur when, because of a close relationship, a professional accountant becomes too sympatric to the interests of others. Examples of circumstances that may create familiarity threats include, but not limited to:
   A member of the engagement team having a close or immediate family relationship with a director or officer of the client
   A member of the engagement team having a close or immediate family relationship with an employee of the client who is in position to exert direct and significant influence over the subject matter of the engagement.
   A former partner of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement.
   Accepting gift or preferential treatment from a client, unless the value is clearly insignificant.
   Long associate of senior personnel with the assurance client.
• Intimidation threats
  This may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived. Examples of circumstances that may create intimidating threats include, but not limited to:
   Being threatened with dismissal or replacement in relation to a client engagement
   Being threatened with litigation
   Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.

Purpose and role of external audit
Basic definition
The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable accounting framework. The opinion is often worded as …………… give a true and fair view.
The nature of the audit is to give reasonable (but not absolute) assurance that the financial statements are free from material misstatement. This should add to the credibility of the financial statements.
Regulatory framework
In a large company, the owners of the business, the shareholders, are unlikely to be involved in the management of the business.
They therefore, depend on the information provided to them by the directors to let them assess the performance of the business and to make decisions such as whether to stay invested in that business or how to cast their votes in respect of the director’s appointment.
The directors have a duty of stewardship of the company on behalf of the shareholders and the preparation of annual financial statements is part of their accountability towards the shareholders.
An unmodified audit opinion should reassure the shareholders that the information is free from any significant misstatement, whether due to fraud or error.
Although it is the directors who are responsible for prevention and detection of fraud, the auditors must consider the risks that a material misstatement may arise from fraud, and maintain professional skepticism when carrying out the audit. Because of this an audit may act as a fraud deterrent even though this is not the primary audit objective.
The role of the auditor is that of an independent expert who gathers evidence and issues an opinion that will indicate, to shareholders and other third parties who may use the financial statements, the degree of reliance that should be placed on the information.
Third parties who may benefit from the assurance given in the auditor’s report could include lenders, potential investors or potential suppliers. Large companies often raise funds through capital markets and high quality auditing is therefore integral to capital market confidence.
Under the legal framework, and the rules of recognised professional bodies such as the ICAG, there are strict requirements as to who may carry out audits to ensure that only properly qualified people can perform this service.
The ICAG also issues ethical rules to ensure that auditors are genuinely independent. This regulatory framework should maintain the credibility of the role of the audit.

• Misstatements in the financial statements where the effect is only material but not pervasive. The misstatement may be done to.
• Selection of accounting policies used in the preparation of the financial statements.
• The application of the accounting policies in the preparation of the financial statements.
• Presentation and disclosure of information in the financial statements.
• Inability to obtain sufficient appropriate audit evidence. This may be due to
• Circumstances beyond the control of both management and the auditors, for example timing of the appointment of the auditors which makes it impossible for them to attend stock –taking
• Management imposed scope limitations. For example prohibiting the auditor from carrying out circularisation of debtors.
• Auditors own inability to perform necessary audit procedures to obtain the evidence due to time constraints as cost of doing it.                                                                                                                                                                          (Any 2 points)

• Qualified opinion where effect of misstatements in the financial statements or inability to obtain sufficient appropriate audit evidence is only material but not pervasive.
• Adverse opinion where the effect of misstatements in the financial statements is both material and pervasive.
• Disclaimer of opinion is where the effect of reliability to obtain sufficient appropriate audit evidence is both material and pervasive

Going Concern – This assumes that the entity will continue to operate for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulation.
The following are tests and procedures the auditor needs to perform to form an opinion on management’s conclusion that the company is a going concern:

• Check whether management has carried out going concern assessment and evaluate the assessment done by management.
• Perform further processes as follows:
• Review the cash flow forecast in the subsequent accounting period for improvement
• Review management accounts and the financial records in the subsequent accounting period
• Review correspondence with creditors/suppliers so as to ensure that pressures are not being mounting by them
• Review the client profit forecast prepared for the subsequent accounting period
• Where financial assistance is to be given by banks and other sister companies, review their degree of commitment.
• Review minutes of meeting of directors and management.
• Review management rescue plans and ensure that they are consistent with facts already known to the auditor.

ISA 265 requires that communication of deficiencies on internal control to management must be in written form by way of a letter. It is this letter that is referred to as the management letter.
Contents

• The list of weakness in the structure of accounting system and internal controls eg. there may be no serial numbering of sales invoice so that it is possible for a sales invoices to be lost and not be entered in the records.
• A list of deficiencies in operation of the records or controls.
• Unsuitable accounting policies and practices
• Non-compliance with accounting standards or legislations
• Explanations of the risks arising from each weakness.
• Comments on inefficiencies as well as weaknesses.
• Recommendations for improvement

• At any time before the first annual general meeting of a company, the directors of the company may appoint, or (if the directors do not make an appointment) the company at a general meeting may appoint, a person to be the auditor of the company, and any auditor so appointed shall, subject to this section, hold office until the conclusion of the first annual general meeting.
• A company shall at each annual general meeting of the company appoint a person to be the auditor of the company, and any auditors so appointed shall, subject to this section, hold office until the conclusion of the next annual general meeting of the company.
• Subject to subsections (7) and (8), the directors of a company may appoint an approved company auditor to fill any casual vacancy in the office of auditor of the company, but while such a vacancy continues the surviving or continuing auditor, if any, may act.
• An auditor of a company may be removed from office by resolution of the company at a general meeting of which special notice has been given, but not otherwise.
  An auditor appointed in pursuance of subsection (7) or (8) shall, subject to this section, hold office until the conclusion of the next annual general meeting of the company.
• If a company does not appoint an auditor as required by this section, the Registrar may on the application in writing of any member of the company make the appointment.
• Subject to subsection (7), a person shall not be capable of being appointed auditor of a company at an annual general unless he held office as auditor of the company immediately before the meeting or notice of his nomination as auditor was given to the company by a member of the company not less than twenty-one days before the meeting.
• Where notice of nomination of a person as an auditor of a company is received by the company whether for appointment at an adjourned meeting under subsection (7) or at an annual general meeting, the company shall, not less than seven days before the adjourned meeting or the annual general meeting, send a copy of the notice to the person nominated, to each auditor, if any, of the company and to each person entitled to receive notice of general meetings of the company.
• If, after notice of nomination of a person as an auditor of a company has been given to the company, the annual general meeting of the company is called for a date twenty-one days or less after the notice has been given, subsection (11) shall not apply in relation to the person and, if the annual general meeting is called for a date not more than seven days after the notice has been given and a copy of the notice is, at the time notice of the meeting is given, sent to each person to whom, under subsection (12), it is required to be sent, the company shall be deemed to have complied with that subsection in relation to the notice.

• Title
  The audit report should have a title which includes the wording ‘independent auditor’ to distinguish this report from others that may be prepared internally by the company.
• Addressee
  The report should be appropriately addressed as required by the engagement and local regulations. This is normally to the shareholders of the company or to those charged with governance.
• Introductory paragraph/ Report on Financial statement
  This section identifies the financial statements being audited, including the date and period covered. It also identifies the title of each statement that comprises the financial statements being audited.
• Management’s responsibility for the financial statements
  This part of the report is included to describe the responsibilities of those who are responsible for the preparation of the financial statements including those in respect of internal control.
• Auditors responsibility
  This section describes the auditor’s responsibility for expressing an opinion, notifies users that the audit was carried out in accordance with ISAs and explains what an audit involves.
• Opinion
  This indicates the financial reporting framework used to prepare the accounts and states the auditor’s opinion as to whether the financial statements present fairly, in all material respects (or show a true and fair view of) the financial position of the audited entity in accordance with that framework.
• Date
  The audit report should be dated as at the completion of the audit, to show that the auditor has considered any events after the reporting period date up to the date of completion and how these might affect the financial statements. The report should not be dated earlier than the date on which the accounts are signed or approved by management.
• Auditor’s address
  The audit report should name a specific location, which is normally the city or town where the auditor maintains the office that has responsibility for the audit.
• Auditor’s signature
  The audit report should be signed in the name of the audit firm, the personal name of the auditor, or both, as appropriate. It is usually signed in the name of the firm because the firm assumes responsibility for the audit.
• Report on Legal and other requirement
                                                                                                                                                                                  (Any 6 points)

• Materiality
  Material items will require more evidence to support them than immaterial items, which might be tested by comparative analytical review only.
• Risk
  The sufficiency of audit evidence required is affected by the level of risk in the area being audited.
• Source and quality of evidence
  If the evidence is high quality, then less may be required than if it were of poorer quality. In general, audit evidence from external third parties is more reliable than that from the client’s record because it is independent. Similarly evidence generated by the auditor is more reliable than that from the client. Original documents are more reliable than copies which can be tampered with.
• Internal control system
  Evidence obtained from the client’s records is more reliable when the related control system is operating effectively (as tested by the auditor).

Statistical sampling: – is any approach to sampling that involves random selection of a sample, and the use of probability theory to evaluate sample results, including measurement of sampling risk.
Non-statistical sampling: – is where the auditor does not use statistical methods and draws a judgmental opinion about the population.