Welcome to Specific Assignments!
In your ACCA journey so far, you have spent a lot of time learning how to audit a standard set of historical financial statements. But what happens when a client asks for something different? In this chapter, we explore Specific Assignments. These are engagements where the practitioner uses their audit and assurance skills to investigate specific areas like a company purchase, an interim report, a suspected fraud, or future projections. Don't worry if this seems a bit different from a statutory audit—it is one of the most exciting areas of practice because every assignment has a unique scope and purpose!
1. Due Diligence
Imagine you are about to buy a second-hand car. You wouldn't just look at a photo and pay the money. You would check the engine, look for rust, and make sure the paperwork is genuine. Due Diligence is the business equivalent of this investigation.
What is it?
Due diligence is an investigation of a target company's financial, operational, and commercial position, usually performed on behalf of an acquirer planning an acquisition or merger.
Why do we do it?
The main goal is to identify risks and deal-breakers before contracts are signed. It helps the buyer evaluate:
- Should we proceed with the acquisition?
- Is the purchase price appropriate, or should it be adjusted?
- Are there unrecorded liabilities, commitments, or pending litigation?
- Are the expected operational benefits and synergies realistic?
Key Differences: Due Diligence vs. Statutory Audit
1. Purpose: A statutory audit gives an opinion on whether historical statements present a true and fair view. Due diligence helps a buyer evaluate an investment decision.
2. Scope: A statutory audit scope is defined by statute and ISAs. Due diligence scope is agreed directly with the client in the engagement letter.
3. Level of Assurance: An audit provides Reasonable Assurance (positive expression). Due diligence typically provides Limited Assurance or is conducted as an agreed-upon procedures engagement (ISRS 4400 (Revised)) providing a report of factual findings with no assurance.
2. Review of Interim Financial Information
Listed entities often publish half-yearly or quarterly financial statements. Rather than conducting a full audit, management often engages the external auditor to perform an interim review under ISRE 2410 (Review of Interim Financial Information Performed by the Independent Auditor of the Entity).
Acceptance and Role
ISRE 2410 applies specifically when the review is conducted by the entity's appointed external auditor. Because the auditor already possesses cumulative knowledge of the entity's internal control and accounting environment from the year-end audit, the interim review can be focused and efficient.
Nature of Procedures
An interim review does not test internal controls or perform extensive substantive testing like inventory observation or circularisation of receivables. Instead, procedures consist almost entirely of:
- Inquiries: Inquiring of management responsible for financial reporting regarding significant changes, non-routine transactions, and new accounting policies.
- Analytical Procedures: Comparing current interim figures against prior periods and budgets to identify unexpected fluctuations.
- Reading Minutes: Reviewing board minutes and identifying events that require disclosure.
Level of Assurance and Conclusion
The auditor provides Limited Assurance expressed in a negative form:
"Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not give a true and fair view (or is not prepared, in all material respects, in accordance with the applicable financial reporting framework)."
3. Forensic Auditing
The word forensic means "suitable for use in a court of law." A forensic audit involves applying accounting and investigative techniques to resolve legal disputes or investigate alleged wrongdoing.
Three Key Parts of Forensic Work
1. Forensic Investigation: Gathering factual evidence about how an irregularity or suspected fraud occurred.
2. Forensic Accounting: Quantifying the exact financial loss or impact for insurance claims or legal recovery.
3. Expert Witness: Appearing in court to provide objective, expert testimony explaining findings to the court.
The Fraud Triangle
Forensic practitioners evaluate fraud risks through three conditions:
- Incentive (Pressure): E.g., personal debts, unattainable performance targets, or bonus thresholds.
- Opportunity: E.g., inadequate segregation of duties or overridden internal controls.
- Rationalisation: E.g., an individual justifying misconduct because they feel underpaid or unappreciated.
Statutory Audit vs. Forensic Audit
In a statutory audit, auditors rely on sampling and test for material misstatements. In a forensic audit, sampling is often inappropriate; the investigator examines 100% of relevant transactions in the suspect area to gather admissible evidence proving intent and quantifying loss.
4. Prospective Financial Information (PFI)
While audits examine historical financial statements, PFI looks into the future. Engagements to examine PFI are governed by ISAE 3400 (The Examination of Prospective Financial Information).
Types of PFI
1. Forecasts: PFI prepared on the basis of assumptions as to future events which management expects to take place (best-estimate assumptions).
2. Projections: PFI prepared on the basis of hypothetical assumptions about future events (e.g., "what would happen if sales doubled") or a mixture of best estimates and hypothetical scenarios.
The Practitioner's Role and Assurance
Because the future is inherently uncertain, the practitioner can never state that the forecast results will actually be achieved. Therefore, practitioners never provide reasonable assurance on PFI. Instead, ISAE 3400 provides moderate / limited assurance expressed negatively:
"Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast."
Core Audit Procedures for PFI
- Evaluate whether management's assumptions are realistic and consistent with past performance and external market data.
- Verify the mathematical accuracy of the underlying calculations and cash flow models.
- Ensure that the PFI is prepared consistently with the entity's historical accounting policies.
- Maintain heightened professional scepticism regarding management bias and over-optimism, especially when PFI is prepared to secure bank financing.
5. Assurance on Sustainability Information
Entities increasingly publish sustainability information alongside financial statements, covering environmental, social, and governance (ESG) factors under frameworks such as IFRS Sustainability Disclosure Standards and assurance under ISSA 5000 (General Requirements for Sustainability Assurance Engagements) or ISAE 3000 (Revised).
Key Challenges in Sustainability Assurance
1. Measurement Uncertainty: Many metrics (such as Scope 3 greenhouse gas emissions or biodiversity impact) involve complex scientific estimates, conversion factors, and data sourced from external supply chains.
2. Subjectivity and Qualitative Data: Reporting on social metrics (like health and safety compliance, gender pay gaps, or diversity) requires assessing qualitative policies as well as quantitative data.
3. Risk of Greenwashing: Management may be tempted to highlight positive initiatives while omitting adverse environmental impacts.
The Practitioner's Procedures
- Evaluate Controls: Assess the systems and controls used by the entity to capture and aggregate non-financial data.
- Corroborate Source Data: Test utility bills, meter readings, waste collection receipts, or independent certifications rather than relying purely on management spreadsheets.
- Check Consistency: Check that sustainability targets (e.g., commitments to decommission high-emission plants) align with assumptions used for asset impairment and useful lives in the historical financial statements.
Summary Checklist for the Exam
When tackling Section F questions in AAA, work through this structured checklist:
1. Objective & Scope: Identify why the assignment is commissioned and determine the agreed scope from the engagement letter.
2. Standard & Assurance Level: Identify the relevant standard (ISRE 2410, ISAE 3400, ISSA 5000, ISRS 4400 (Revised)) and determine whether the report provides limited assurance (negative conclusion) or no assurance (factual findings).
3. Specific Procedures: Tailor procedures to the unique risks of the engagement (e.g., inquiries and analytical procedures for interim reviews; 100% substantive transaction tracing for forensic engagements; testing underlying assumptions for PFI).