practice note 21 the audit of investment businesses in the united kingdom

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Practice note 21 the audit of investment businesses in the united kingdom forex handel tipps

Practice note 21 the audit of investment businesses in the united kingdom

Substantive procedures may include tests of detail based on these reports, in addition to bank reconciliation procedures on the accounts that include securities transactions. Substantive procedures related to the valuation used, and hence the gains and losses themselves, are considered below. When the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk, the auditor should perform substantive procedures that are specifically responsive to that risk.

These matters are considered below. Some unquoted securities may be equated to a closely equivalent quoted security and priced accordingly, in which case the auditor considers whether the identified equivalent is appropriate, whether any adjustments need to be made, and whether those made are appropriate.

This may involve significant judgment in the choice or development of the models and in the assumptions used. However, there are no substantive procedures that can conclusively identify breaches that the investment business has not itself identified. In the absence of fraudulent collusion, the auditor may rely on consistency of information and explanations between those responsible for the management of operations, the compliance function, and the finance function.

The auditor obtains a representation from the management of the investment business on whether they are aware of any actual or potential noncompliance with laws and regulations that could have a material effect on the ability of the investment business to conduct its business and therefore on the results and financial position to be disclosed in the financial statements.

Investment businesses often account for compensation to clients on a cash basis because of the individually small amounts involved. However, material compensation outstanding at the year-end should be provided for in the financial statements. Consideration will also be given to whether these circumstances may also attract a fine for breach of the FSA rules. The auditor obtains an understanding of the investment business's systems and controls over performance fees.

The auditor may also carry out tests of detail on performance fees including:. Consideration may also be given to any sources of third party information which is available to support the basis of the performance fee calculation. The auditor should perform audit procedures to evaluate whether the overall presentation of the financial statements, including the related disclosures, are in accordance with the applicable financial reporting framework.

In designing and performing procedures to evaluate these disclosures the auditor obtains audit evidence regarding the assertions about presentation and disclosure described in paragraph 17 of ISA UK and Ireland Audit Evidence. The purpose of this ISA UK and Ireland is to establish standards and provide guidance to an auditor where the entity uses a service organization. In obtaining an understanding of the entity and its environment, the auditor should determine the significance of service organization activities to the entity and the relevance to the audit.

Paragraph 5. Some of the more common areas, such as property management, may have no direct impact on the audit, while others such as IT functions may have a direct relevance. The auditor therefore gains an understanding of the extent of outsourced functions and their relevance to the financial statements.

The investment business is obliged to ensure that the auditor has appropriate access to records, information and explanations from material outsourced operations. The auditor documents and understands the contractual terms with the service organization. In doing this the auditor may consider the information to be provided to the entity, the maintenance of the accounting records, the entities and external auditor's rights of access to the accounting records and whether the terms take account of relevant requirements of regulatory bodies.

Specific examples, which are relevant activities, include:. Based on the auditor's understanding of the aspects of the entity's accounting system and control environment relating to relevant activities, the auditor should:. If an auditor concludes that evidence from records held by a service organization is necessary in order to form an opinion on the client's financial statements and the auditor is unable to obtain such evidence, the auditor should include a description of the factors leading to the lack of evidence in the basis of opinion section of their report and qualify their opinion or issue a disclaimer of opinion on the financial statements.

The investment business should have appropriate controls in place over these arrangements which may include:. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the auditor's use of external confirmations as a means of obtaining audit evidence. The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level. In making this determination, the auditor should consider the assessed risk of material misstatement at the assertion level and how the audit evidence from other planned audit procedures will reduce the risk of material misstatement at the assertion level to an acceptably low level.

For investment management fee debtors and settlement balances, given that the balances are normally only outstanding for a very short period of time the testing of invoicing and settlement controls together with substantive testing of after date cash receipts and payments may provide sufficient appropriate audit evidence.

The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the application of analytical procedures during an audit. The auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the entity and its environment and in the overall review at the end of the audit. Analytical procedures for investment businesses may include, for example, comparison of:.

These procedures will generally be based upon management accounts and other interim financial and non-financial information available. In determining the audit approach the auditor may apply substantive analytical procedures as part of the overall approach. These procedures will generally be more appropriate when there are larger volumes of transactions which tend to be more predictable. This expectation will be based on the financial and non-financial data being used and the auditor considers whether the accuracy and reliability of the data can provide the desired level of assurance.

The auditor determines the amount of the difference from expectation which requires no further investigation in accordance with the assessed materiality. This will support the overall conclusion on the financial statements. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the audit of accounting estimates contained within the financial statements.

The auditor should obtain sufficient appropriate audit evidence regarding accounting estimates. The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate:. The auditor should make a final assessment of the reasonableness of the entity's accounting estimates based on the auditor's understanding of the entity and its environment and whether the estimates are consistent with other audit evidence obtained during the audit.

For various derivative instruments the auditor may not be able readily to substantiate an independent fair market valuation. In these instances the business may arrange for some form of mathematical modelling to be undertaken to provide a valuation for review and testing by the auditor.

The auditor reviews the process for developing and testing the model which has been used by the investment business, and in particular the performance of the model in various conditions when compared with prices actually obtained in the market. This involves obtaining an understanding of the assumptions and a review of the estimates involved for reasonableness, consistency and conformity with generally accepted practices.

Given the special complexities involved with these types of products it is common practice for a specialist in this area to be involved in the work. In such cases, where the auditor has developed a range, a misstatement exists when management's estimate lies outside the auditor's range. The misstatement is measured as the difference between management's estimate and the nearest point of the auditor's range.

It may only be identified when there has been a change in the method for calculating estimates from the prior period based on a subjective assessment without evidence that there has been a change in circumstances, when considered in the aggregate of groups of estimates or all estimates, or when observed over a number of accounting periods.

Although some form of management bias is inherent in subjective decisions, management may have no intention of misleading the users of financial statements. If, however, there is intention to mislead through, for example, the intentional use of unreasonable estimates, management bias is fraudulent in nature.

ISA , The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements , provides standards and guidance on the auditor's responsibility to consider fraud in an audit of financial statements. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on auditing fair value measurements and disclosures contained in financial statements.

The auditor should obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the entity's applicable financial reporting framework. As part of the understanding of the entity and its environment, including its internal control, the auditor should obtain an understanding of the entity's process for determining fair value measurements and disclosures and of the relevant control activities sufficient to identify and assess the risks of material misstatement at the assertion level and to design and perform further audit procedures.

The auditor should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with the entity's applicable financial reporting framework. Such financial instruments are priced using valuation techniques such as discounted cashflow models, options pricing models or by reference to another instrument that is substantially the same as the financial instrument subject to valuation.

The auditor reviews the controls, procedures and testing of the valuation techniques used by the investment business. Controls and substantive testing could include focussing on:. In some cases, the auditor may use his own valuation techniques to assess the investment business's valuations. Given the complexities involved and the subjective nature of the judgments inherent the auditor may involve an expert in elements of this work see the ISA UK and Ireland section of this Practice Note.

When planning the audit the auditor should assess the risk that material undisclosed related party transactions, or undisclosed outstanding balances between an entity and its related parties may exist. IAS 24 contains no explicit corresponding exemption.

However the potentially overriding impact of law concerning confidentiality in respect of disclosures under IAS 24 still needs to be considered. It is in the nature of investment business that transaction volumes are high but this factor will not, of itself, necessarily lead the auditor to conclude that the inherent risk of material undisclosed related party transactions is high. In addition, there are annual reporting obligations in respect of controllers and entities who are closely linked to the firm SUP As a result, it will therefore normally be the case that there are controls in place to ensure that this information is properly collated.

The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the auditor's responsibility regarding subsequent events. The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified.

Paragraph 4. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the auditor's responsibility on the audit of financial statements with respect to the going concern assumption used in the preparation of the financial statements, including management's assessment of the entity's ability to continue as a going concern. When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of management's [1a] use of the going concern assumption in the preparation of the financial statements.

The auditor should consider any relevant disclosures in the financial statements. In obtaining an understanding of the entity, the auditor should consider whether there are events or conditions and related business risks which may cast significant doubt on the entity's ability to continue as a going concern. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations and the action to be taken if management refuses to provide appropriate representations.

Written confirmation of appropriate representations from management should be obtained before the audit report is issued. The auditor should obtain written representations from management on matters material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist. These may take a form of a Board meeting minute or a representation letter and normally include a representation concerning the completeness of information made available to the auditor, including correspondence with regulators.

In addition, ISAs UK and Ireland Section A and require the auditor to obtain written confirmation in respect of completeness of disclosure to the auditor of:. The letter could cover the following representations:. The purpose of this ISA UK and Ireland is to establish standards and provide guidance when an auditor, reporting on the financial statements of an entity, uses the work of another auditor on the financial information of one or more components included in the financial statements of the entity.

This ISA UK and Ireland does not deal with those instances where two or more auditors are appointed as joint auditors nor does it deal with the auditors' relationship with a predecessor auditor. Further, when the principal auditor concludes that the financial statements of a component are immaterial, the standards in this ISA UK and Ireland do not apply. When, however, several components, immaterial in themselves, are together material, the procedures outlined in this ISA UK and Ireland would need to be considered.

When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit. In the UK and Ireland, when planning to use the work of another auditor, the principal auditor's consideration of the professional competence of the other auditor should include consideration of the professional qualifications, experience and resources of the other auditor in the context of the specific assignment.

Paragraph 7. Where an overseas firm of the auditor or an audit firm independent of the auditor is undertaking audit procedures on a branch, or division or shared service centre of the investment business, the auditor must have due regard to the requirements in the Audit Regulations [24] to ensure all relevant members of the engagement team are and continue to be fit and proper, are and continue to be competent and are aware of and follow these Audit Regulations and any related procedures and requirements established by the audit firm.

This includes the auditor's duty to. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on using the work of an expert as audit evidence. When using the work performed by an expert, the auditor should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.

The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the form and content of the auditor's report issued as a result of an audit performed by an independent auditor of the financial statements of an entity. Much of the guidance provided can be adapted to auditor reports on financial information other than financial statements.

Accordingly, the work that auditors perform in respect of their report to the FSA usually represents a set of additional procedures which, in conjunction with the evidence drawn from the audit work carried out in relation to the annual financial statements, will enable them to report as required. The table in Appendix 7 summarises the scope of reporting for the various different types of investment business.

Auditors determine the scope of their audit opinion prior to starting their work. The category determines the opinions required in the auditors' report. The example report set out in Appendix 1. Consequently, if the auditor is unable to submit the report within the timeframe specified, he will be in breach of the FSA's rules and is required to notify the FSA of that fact, and provide an explanation of why the deadline cannot be met.

The deadline for submission would be four months after the end of the period on which the auditor is reporting. Subsequent client assets reports may be submitted covering any period of up to 53 weeks commencing on the date on which the previous report ended. Key provisions are:. Guidance for auditors with respect to investment businesses that do not hold client assets is provided in Appendix 2.

In particular, the auditor ascertains whether the directors of the investment business intend to comply with the relevant regulatory requirements. Often investment businesses develop new products and practices which may require specialised auditing and accounting responses. It is, therefore, important that the auditor is familiar with current practice. The auditor also considers the extent to which the engagement team has sufficient knowledge of the regulatory framework within which the investment business operates commensurate with their roles in the engagement.

As the FSA does not need to approve the appointment of an auditor the FSA is not usually an addressee of the engagement letter. The auditor is required to co-operate with the FSA [32] and to notify the FSA if the auditor ceases to be the auditor of the investment business. This includes taking steps to ensure that, where applicable, each of its appointed representatives and material outsourcers provides the auditor with the same right of access to records, information and explanation as the authorised investment firm itself is required to provide the auditor.

It is a criminal offence for an investment business or its officers, controllers or managers to provide misleading information to the auditor;. The UK accountancy bodies have issued their own Codes of Ethics that are to be applied in the conduct of, among others, assurance engagements undertaken by professional accountants in public practice.

The following are examples of such legislation:. When reporting under SUP 3. Before the report is issued to the FSA the engagement partner, through review of the engagement documentation and discussion with the engagement team, determines whether sufficient appropriate evidence has been obtained to support the conclusions reached.

The engagement partner also determines that conclusions resulting from consultations have been implemented. The nature and extent of planning activities will vary with the engagement circumstances, for example the size and complexity of the investment business and the auditor's previous experience with it.

As a result of unexpected events, changes in conditions or the evidence obtained from the results of evidence-gathering procedures, the auditor may need to revise the overall strategy and engagement plan, and thereby the resulting planned nature, timing and extent of further procedures. If the preliminary review indicates that there are factors that may give rise to a modification of the auditor's report then such factors are reported immediately to those charged with governance of the authorised investment firm and, where required by the FSA's rules, to the FSA [33].

Any such amendments are documented. Where the changes affect the work set out in the engagement letter, the engagement letter is also amended as necessary following agreement with the directors. A firm's internal organization and the environment in which it operates may be continually changing. An effective system of internal control, therefore, depends on a thorough and regular evaluation of the nature and extent of the risks to which the firm is exposed.

Appendix 2 provides guidance to auditors on the work normally carried out in order to form an opinion on client assets. They would also consider the following:. However the auditor normally tests controls, transactions and reconciliations at particular points in time rather than continuously throughout the accounting period.

If the auditor has obtained sufficient evidence from the results of their testing they may rely on this evidence to conclude on the adequacy of records and systems throughout the period. If the change occurred early in the period and the evidence of previous audits has produced satisfactory conclusions, the auditor may decide to perform only limited procedures on the system concerned. When doing so, they consider materiality, recognising the nature and scale of the investment business concerned.

It is not feasible, or necessary, for the auditors to examine every transaction reflected in the records, or to achieve complete satisfaction that the accounting records are maintained accurately and systems operate totally effectively. They have a reasonable expectation of detecting fraud, other irregularities and errors which would be material to the interests of the clients of the investment business, taken as a whole. The auditor also obtains sufficient appropriate evidence that the expert's work is adequate for the purposes of the engagement.

Detailed guidance on control objectives and audit evidence. Auditors apply their judgment in determining the extent and nature of their work which is based on the following general requirements:. These representations also encompass statements or opinions attributed to directors, management, employees or agents of an investment business that are relied upon by the auditor. An inability to obtain sufficient appropriate evidence regarding a matter could represent a limitation of scope even if a representation has been received on the matter.

The auditor prepares documentation sufficient to enable an experienced auditor, having no previous connection with the engagement, to understand:. Once the final engagement file has been completed documentation is not deleted or discarded before the end of its retention period. Auditors may wish to ensure that the management of the investment business does not provide the report to anyone other than the FSA for example, in the letter of engagement or a covering letter with which the report is transmitted to the client.

The restriction on distribution to third parties could also be mentioned in the body of the report itself. Guidance on the circumstances under which a firm may place reliance on such material is given in Chapters 8 and 9 of the Supervision Manual. The auditor specifically mentions such matters in his report.

However, the auditor does not sign the report whether modified or not unless sufficient appropriate evidence has been obtained and all planned procedures have been finalised. Such procedures include the review procedures of both the engagement partner and the engagement quality control reviewer. If the auditor considers that an investment business has breached the underlying rule, then the auditor must report that fact in respect of both the underlying rule and the evidential provision and should give both references in the report.

If the auditor considers that a business has breached an evidential provision but, nevertheless is satisfied that the firm is in compliance with the underlying rule, then the report refers to the breach of the evidential provision. If the matter leads to a qualification and appropriate effective action to correct the matter has been taken and the auditors are satisfied that this is so , they may choose to report this fact to the FSA so as to ensure the FSA is fully informed about the likelihood of any repetition of the breach in question.

However, the prime responsibility for reporting corrective action rests with management. Steps will be taken to ensure that all staff involved in the audit are aware that the judgment of whether a particular matter is trivial depends on different criteria from any quantitative measure of materiality which may be applied to the audit of the investment business's financial statements.

Such reports will normally be made following discussion with the authorised business: however, ISA UK and Ireland emphasises that where the auditors conclude that a duty to report arises, they should bring the matter to the attention of the FSA without undue delay.

Communication on a timely basis enables the entity to take appropriate action particularly in circumstances where uncorrected weaknesses may lead to the auditor modifying its opinion to the FSA on client assets. Relevant matters of governance interest include only those matters that have come to the attention of the auditor while performing the engagement to make the client asset report.

The auditor does not normally need to communicate information concerning a material weakness of which those charged with governance are aware and in respect of which, in the view of the auditor appropriate corrective action has been taken, unless the weakness is symptomatic of broader weaknesses in the overall control environment and there is a risk that other material weaknesses may occur.

Material weaknesses of which the auditor is aware are communicated where they have been corrected by management without the knowledge of those charged with governance. If the auditor concludes that the two way communication is inadequate for the purposes of the audit, the auditor considers withdrawing from the engagement. Trading book profits can be included without external review in Tier 3 capital.

This is particularly important in the case of investment businesses where no prescribed procedures have been established by the FSA in rules or guidance. Consequently the detailed scope of the work undertaken by the auditor in support of his opinion is listed in the auditors' report or included in the report by reference to the letter of engagement where the programme of work has been laid down. An example auditor's report on interim net profits is set out in Appendix 1. Our report has been prepared in accordance with SUP 3.

Systems and control procedures relating to client assets are subject to inherent limitations and, accordingly, errors or irregularities may occur and not be detected. Such procedures cannot be proof against fraudulent collusion, especially on the part of those holding positions of authority or trust.

Furthermore, this opinion relates only to the year ended on and should not be seen as providing assurance as to any future position, as changes to systems or control procedures may alter the validity of our opinion. The scope of the firm's permission did not allow it to hold [client money] [or] [custody assets] [delete as required].

The directors have stated that the firm did not hold [client money] [or] [custody assets] [delete as required] during the year. Based on review procedures performed, nothing has come to our attention that causes us to believe that the firm held [client money] [or] [custody assets] during the year.

Nominee companies [if applicable [38] ]. In our opinion, [name of nominee companies], subsidiaries of the firm which are nominee companies in whose name custody assets are registered, maintained throughout the year systems for the custody, identification and control of custody assets which:. CASS 3 and reference to the collateral rules is not applicable in circumstances where the firm does not receive or hold collateral.

In accordance with our engagement letter dated […], a copy of which is attached, we have reviewed the company's statement of interim net profits for the period from […] to […] set out on pages […] to […] of the attached [see Note 1]. That statement is the responsibility of, and has been approved by, the directors. Our review did not constitute an audit, and accordingly we do not express an audit opinion on the interim profits.

On the basis of the results of our review, nothing has come to our attention that causes us to believe that:. The rules aim to minimise errors, make fraud more difficult to perpetrate, and make it easier for both errors and fraud to be detected. A further purpose is to ensure that, in the event of insolvency of the investment business, client assets are protected from the claims of its general creditors and, in the case of client money, from any right of set off by institutions which hold the money.

Management of an investment business is responsible for establishing and maintaining adequate accounting records and systems and controls. This recognises the position of trust under which client assets are held. However, it is not intended to limit or replace individual judgment, initiative, and vigilance. Audit procedures are designed to meet the requirements of the particular situation, giving careful consideration to the size and type of organization and the system of internal accounting control; this is a matter that requires the exercise of professional judgment in the light of the circumstances of each particular case.

Firms must apply the rules to those assets which are not safe custody investments in a manner appropriate to the nature and value of those assets. Broadly, safe custody investments are designated investments held for or on behalf of a client. Examples of designated investments include:.

These investments may be held in the form of collateral. In addition, arranging custody for a client as well as providing custody is covered by the legislation. They consider all situations and transaction types that may be entered into by the investment business, including arranging custody.

Although the investment business may consider that a particular area is not covered by the rules relating to custody assets, the auditors are alert to situations where this is incorrect and the investment business is in breach of the rules as a result. For custody assets, the main areas that need to be addressed by the auditors, to enable them to fulfil their reporting requirements are:. In consequence, not all the evidence indicated below will be available in every case.

The business may well have adequate controls due to close supervision by the management, taking into account the low volume of custody assets handled. It may also use the services of a custodian, the requirements for use of which are set out in the rules. In doing so, they need to bear in mind that informal systems are more prone to error and fraud, and that their presence and enquiries may influence the manner in which procedures are operated at that time.

In this context, the auditors may consider obtaining direct confirmation from clients;. Adequate systems and controls — Safekeeping and proper control of custody assets including the sending of periodic statements. Adequate systems and controls — Proper registration and segregation of custody assets.

Adequate systems and controls — Compliance with reconciliation requirements. The auditors test these reconciliations to ensure these requirements are satisfied. CREST; uncertificated units in a collective investment scheme. This will involve consideration of appropriate reconciliation procedures.

In reaching a conclusion regarding the extent to which this is necessary, the auditors consider the strength of controls surrounding, and the independence of, the count, reconciliation, day to day processing and custody of client documents of title. This is only permitted by the rules where the FSA has been provided with written confirmation from the investment business's auditors on the adequacy of the systems and controls over the rolling reconciliation process.

In giving such a report, the auditors have regard both to the detailed rules in this area and also to the general considerations on the adequacy of systems and controls contained in this Practice Note. In particular, care will be taken to ensure that systems and controls are in place to prevent teeming and lading. The main factor that will be considered is that the investment business must keep proper records of such assets.

They consider all situations and transaction types that may be entered into by the investment business. Although the investment business may consider that a particular area is not covered by the rules relating to client money, the auditors are alert to situations where this is incorrect and the investment business is in breach of the rules as a result.

For MiFID and certain non-MiFID business, money received from companies within the same group should be treated in the same way as money from other clients. However, it is incorrect to state that the client money rules do not apply to banks at all. If the money is passed outside the bank then the client money rules may apply. Further guidance is contained in the rules. These must generally be at an approved bank as defined in the rules in the UK or overseas. Certain disclosures may need to be made to and consent obtained from clients whose money is to be held in overseas accounts before their money is paid into such accounts.

Ongoing risk assessment should be carried out while the bank continues to hold client money. This should include both external information such as financial statements, credit ratings etc and internal information such as customers service received from the bank in the administration of the account. For non-MiFID business the bank must be given written notice that it is not entitled to exercise any right of set-off against any amount owing to it on any other account of the investment business and that the title of the account distinguishes it from any account containing money belonging to the investment business.

The bank must acknowledge these terms in writing. In the case of an account opened in the UK, if the bank has failed to make the necessary acknowledgement within 20 business days, the money must be withdrawn and the account closed. There are detailed rules relating to the operation of the categories of bank account and it is not within the scope of this Practice Note to explain them. The auditors will need to study the specific rules carefully. The main factor that will be considered will be that any money in the client bank account that is not client money does fall within one of the specified exemptions.

For client money, the main areas that need to be addressed by the auditors, to enable them to fulfil their reporting requirements, are:. They are only indicative and will not be applicable to all businesses holding client money, especially smaller ones. Adequate systems and controls — Proper holding of client money. Adequate systems and controls — Payment into and withdrawal from client bank accounts.

Adequate systems and controls — Proper accounting for interest. If no interest is payable to a private customer that fact must be separately identified in any agreement or notification. Adequate systems and controls — Compliance with daily calculation and reconciliation requirements. The main factor that will be considered is whether an investment business that ceases to treat allocated but unclaimed funds as client money has taken the steps set out in the rules.

Particular attention will be paid to reconciling items, ensuring that outstanding and uncleared items are properly identified and are duly cleared shortly after the reconciliation date. As part of their substantive testing, the auditors examine and where appropriate obtain direct confirmation of bank balances from each bank or in the case of margined transaction money, each relevant clearing house and intermediate carrying broker concerned at the relevant date.

Some investment business need to reconcile client money bank accounts daily if the volume of business is high. Where this is the case, the investment business should have systems in place to identify and return any money or other assets it receives which are wholly or partly due to a client. This could be documented in a procedural manual or internal memorandum and should outline the procedures to be followed if client assets are identified;. There must be proper documentation between the investment business and the client in accordance with the FSA's requirements to determine that the client money rules do not apply ;.

This could constitute periodic review by the internal auditors or compliance officer and encompass substantive review of the investment business's bank accounts and client agreements; and. Part I and Sch 1 sets out matters concerning structure and governance of the FSA including its regulatory objectives and the principles to be followed in meeting those objectives. Part II and Sch 2 sets out the general prohibition on conducting regulated business unless a person including in a corporate sense is either authorised or exempt, including restrictions on financial promotions.

Regulated activities are defined in a statutory instrument. Exempt persons are listed in a separate statutory instrument. Part IV and Sch 6 sets out the arrangements for application for a permission to undertake authorised business and the criteria Threshold Conditions that must be met. Part V sets out the provisions applying to individuals performing designated functions controlled functions in an authorised firm. The FSA can specify controlled functions and firms must take reasonable care to ensure that only persons approved by the FSA can undertake these functions.

The FSA can specify qualification, and training and competence requirements and approved persons must comply with the FSA's statement of principles and code of conduct for approved persons. Appeals can be made to the Tribunal. Part VIII gives the FSA powers to impose penalties for market abuse — using information not generally available; creating a false or misleading impression; or, failure to observe normal standards.

Abuse is judged from the point of view of a regular market user. FSA powers extend to all persons — not only authorised persons. Part X provides the FSA with general powers to make rules which apply to authorised persons, including rules on specific matters — e. Rules must be published in draft for consultation. Guidance may be provided individually or generally and may be published.

The FSA may modify rules or waive particular rules for particular persons in certain situations. Part XI allows the FSA to gather information from authorised persons, including use of skilled persons' reports under section , or to commission investigations into authorised persons.

Part XIV sets out the disciplinary measures available to the FSA which can include public censure, unlimited fines, withdrawal of authorisation. A warning notice has to state the reasons for proposed actions and allow reasonable time for representations to be made. This will be followed by a decision notice with a right to appeal to the Tribunal.

This varies with the type of permission — the regulated activity an authorised firm is permitted to undertake is set out in the authorised firm's Scope of Permission. The following can be viewed on the FSA website:. To facilitate usage the FSA Handbook has been structured into a number of blocks and within each block the material has been sub-divided into sourcebooks or manuals.

There are rules, evidential provisions [40] and guidance which are contained within all of the blocks [41]. Outline details of certain elements of the FSA Handbook are set out below. They derive their authority from the FSA's rule-making powers as set out in the Act and reflect the regulatory objectives.

These Principles are as follows:. The relevant chapters [42] , [43] for investment businesses are as follows:. The five statutory Threshold Conditions are:. Entities are regarded as closely linked if there is a group relationship, i. This may include consideration of whether those subject to the approved persons regime i. Provided that it can be demonstrated that an audit firm, in disclosing a matter in the public interest, has acted reasonably and in good faith, it would not be held by the court to be in breach of duty to the institution even if, an investigation or prosecution having occurred, it were found that there had been no breach of law or regulation.

The FSA is the proper authority in the case of an investment business. Each situation must be considered individually. In general circumstances, matters to be taken into account when considering whether disclosure is justified in the public interest may include:. The auditor needs to weigh the public interest in maintaining confidential client relationships against the public interest of disclosure to a proper authority and to use their professional judgment to determine whether their misgivings justify them in carrying the matter further or are too insubstantial to deserve report.

Office of Fair Trading i. The above general themes are intended as a guide — any report would need to be made against a specific relevant requirement. If an issue has been identified relating to one of the themes, which might be materially significant to the FSA and is in a situation where the auditor is under a duty to report , the auditor should identify the relevant requirement.

Even if a specific relevant requirement cannot be established, the auditor should consider whether or not the right to report is appropriate. Types of investment firm and the requirement for an auditor. For other categories of firm, such as authorised professional firms and service companies, readers should refer to the table in SUP 3.

These firms are required by MiFID to have an audit of their annual accounts but only if they hold client assets. No statutory audit is required under CA for small companies with financial year ends ending on or after 31st December In short, the small companies audit exemption is available if the firm:.

For the purposes of this table the terms securities and futures firm, investment management firm and personal investment firm have been taken not to include an exempt CAD firm. In other words, if such an exempt CAD firm continues to meet the conditions of the article 3 MiFID exemption notwithstanding it is an exempt CAD , it can benefit from the small companies exemption. The maximum number of documents that can be ed at once is So your request will be limited to the first documents.

To make your more manageable, we have automatically split your selection into separate batches of up to 25 documents. Skip to main content. General - The auditors' reporting responsibilities - General principles The auditor's report - Method of submission of reports to the FSA Undertakes business within the scope of MiFID, for example a discretionary investment manager or a stockbroker.

Footnote return specifically required. Footnote Directors Compliance Certificate. See Appendix 4. Footnote This is the General Prudential sourcebook. Footnote For the purposes of the table an exempt CAD firm is shown separately whereas the definitions in the Glossary of securities and futures firm, investment management firm and personal investment firm include an exempt CAD firm. Footnote See footnote 2.

The auditor and the client should agree on the terms of the engagement. The terms of the engagement should be recorded in writing. After obtaining the general understanding, the auditor should perform further audit procedures to help identify instances of non-compliance with those laws and regulations where non-compliance should be considered when preparing financial statements, specifically: a Inquiring of management as to whether the entity is in compliance with such laws and regulations; b Inspecting correspondence with the relevant licensing or regulatory authorities; and c Enquiring of those charged with governance as to whether they are on notice of any such possible instances of non-compliance with law or regulations.

The auditor of a regulated entity should bring information of which the auditor has become aware in the ordinary course of performing work undertaken to fulfil the auditor's audit responsibilities to the attention of the appropriate regulator without delay when: a The auditor concludes that it is relevant to the regulator's functions having regard to such matters as may be specified in statute or any related regulations; and b In the auditor's opinion there is reasonable cause to believe it is or may be of material significance to the regulator.

Where an apparent breach of statutory or regulatory requirements comes to the auditor's attention, the auditor should: a Obtain such evidence as is available to assess its implications for the auditor's reporting responsibilities; b Determine whether, in the auditor's opinion, there is reasonable cause to believe that the breach is of material significance to the regulator; and c Consider whether the apparent breach is criminal conduct that gives rise to criminal property and, as such, should be reported to the specified authorities.

Practice notes The information contained within the Practice Notes below was correct at the date of issue. Repeal of Corporate Charge Legislation 2. Share and Bookmark. Special Treatment of Key Employees. Tax Residence of Companies and other Corporate Taxpayers. National Insurance Holiday Scheme. Employment Tribunal Awards. Termination Payments. Pension Changes. Domestic Reporting Obligations for Insurers. Domestic Reporting Obligations for Financial Institutions.

Relocation Expenses Benefit in Kind Exemption. Land Development Tax Holiday. Information Providers' Reporting Obligations. Introduction of Civil Penalties for Corporate Taxpayers. Taxation of Companies in the Isle of Man from 6 April

INVESTMENT DRAWDOWN CALCULATOR

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CAPITAL-MARKET IMPERFECTIONS AND INVESTMENT

FRS 18 — Accounting Policies requires that where a relevant SORP exists, financial statements state whether or not they have been prepared in accordance with the SORP, together with details of any departures from the recommended practice and disclosures.

This includes an understanding of the type and extent of specialised activities;. The auditor identifies the principal income and expenditure categories, which could include:. The extent and impact of visits from regulators is also relevant. Where sales offices maintain separate accounting records, the extent of audit visits and work on each sales office is also dependent on the materiality of, and risks associated with, the operations of each sales office and the extent to which controls over sales offices are exercised centrally.

In the case of smaller sales offices, the degree to which exceptions to an investment business's normal control procedures may be caused by minimal staffing levels the greater difficulty of ensuring adequate segregation of duties, for example and the consequent need for an increased level of control from outside the sales office are relevant to assessing audit risk.

Appointed representatives are not authorised in their own right and instead are the responsibility of the investment business. The auditor considers the increase in regulatory risk of monitoring and controlling appointed representatives in planning the audit approach. The auditor should obtain an understanding of the entity's selection and application of accounting policies and consider whether they are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry.

Accounting policies of particular relevance include those for revenue recognition, and the recognition of client assets. The auditor should obtain an understanding of the entity's objectives and strategies, and the related business risks that may result in material misstatement of the financial statements. The auditor seeks to understand how these risks are managed and controlled by the investment business. One form of credit risk is default risk, which is the risk that a counterparty will be unable to settle its obligations under a transaction in a securities settlement or payment system, for example on the due date;.

This is sometimes referred to as reputational risk or franchise risk. Investment businesses will normally be required to produce an internal capital adequacy assessment ICAAP , which is designed to quantify risks specific to the entity and to generate and quantify an estimated capital requirement for the entity. Auditors will normally review such documentation in assessing the investment business's approach to addressing risks. In this respect the auditor needs to be familiar with the list of activities of the investment business contained in the Scope of Permission Notice agreed with the FSA.

The auditor should obtain an understanding of the measurement and review of the entity's financial performance. This assists the auditor in understanding pressures on the firm that may prompt management to misstate the financial statements.

This information may also assist the auditor when performing analytical procedures. Small investment businesses are unlikely to have sophisticated performance review measures but will still rely on some key indicators. A positive attitude may be evidenced by an organizational framework which enables proper segregation of duties and delegation of control functions and which encourages failings to be reported and corrected.

Thus, where a lapse in the operation of a control is treated as a matter of concern, the control environment will be stronger and will contribute to effective control systems; whereas a weak control environment will undermine detailed controls, however well designed. The FSA can hold senior managers personally accountable for an area or business for which they are responsible. This responsibility extends to personal behaviour not only by senior management but also to other Approved Persons [22].

Statements of Principle and Codes of Practice for Approved Persons include acting with integrity, due skill and care and diligence. The fit and proper test applied to Approved Persons includes competence and capability. These include but are not limited to :. Systems of internal control in an investment business are important in ensuring orderly and prudent operations of the investment business and in assisting the directors to prepare financial statements which give a true and fair view.

The following features of the activities of investment businesses may be relevant to the auditor's assessment of such internal controls:. Processing and accounting for complex transactions or high volumes of less complex transactions will almost inevitably involve the use of sophisticated technology.

The fact that the resultant cash flows may not take place for a considerable time creates the risk that wrongly recorded or unrecorded positions may exist and that these may not be detected for some time, thereby exposing the investment business to risk of misstatement. The valuation of these instruments also poses risks of misstatement. Consequently, investment businesses will normally have developed strong operational controls to mitigate such risks of misstatement; and.

This may give rise to significant liabilities for compensation to clients if not properly dealt with. Accordingly, an effective control system is essential to ensure that the requirements of the UK regulators are satisfied. Measures may also be needed to address regulators in other jurisdictions.

Such an understanding will provide an indication of the extent to which the general atmosphere and controls in the investment business are conducive to compliance, for example through consideration of:. The existence of such departments and their scope and objectives are matters for management. In assessing the effectiveness of such departments, the auditor considers the terms of reference of the departments, their independence from operational personnel and management, the quality of staffing and to whom they report in the investment business.

The auditor should obtain a sufficient understanding of control activities to assess the risks of material misstatement at the assertion level and to design further audit procedures responsive to assessed risks. The auditor assesses the adequacy of controls in relation to the circumstances of each entity. Management of a small investment business may have less need to depend on formal controls for the reliability of the records and other information, because of personal contact with, or involvement in, the operation of the business itself.

In designing the systems and controls, management should address the following general control objectives:. The investment business and its auditor consider appropriate documentation a prerequisite of an adequate system. The auditor should obtain an understanding of how the entity has responded to risks arising from IT.

Failures in hardware and software can disrupt operations and lead to loss for the investment business. Investment businesses that provide on-line trading facilities have an even greater risk of loss in event of failure. Investment businesses may also rely heavily on spreadsheets for risk modelling, valuation, and profit and loss calculations. External interfaces may be susceptible to breaches of security. In particular the auditor considers:.

The auditor identifies and understands the communication between computer systems in order to assess whether appropriate controls are established and maintained to cover all critical systems and the links between them and to identify the most effective audit approach. The auditor should identify and assess the risks of material misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances, and disclosures.

For significant risks, to the extent the auditor has not already done so, the auditor should evaluate the design of the entity's related controls, including relevant control activities, and determine whether they have been implemented. This could lead to claims from customers, fines imposed by the FSA and, in severe cases, the investment business may risk losing its authorisation;. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the concept of materiality and its relationship with audit risk.

The auditor should consider materiality and its relationship with audit risk when conducting an audit. Paragraph 8. In particular the auditor's consideration of materiality is a matter of professional judgment, and is affected by the auditor's perception of the common information needs of users of a group [23].

However it is not uncommon in investment businesses to encounter balance sheet misclassifications that do not affect profit. It may be appropriate when scoping audit work specifically addressing the risk of balance sheet only errors, or where such errors are discovered, to use higher materiality thresholds. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on determining overall responses and designing and performing further audit procedures to respond to the assessed risks of material misstatement at the financial statement and assertion levels in a financial statement audit.

When, in accordance with paragraph of ISA UK and Ireland the auditor has determined that it is not possible or practicable to reduce the risks of material misstatement at the assertion level to an acceptably low level with audit evidence obtained only from substantive procedures, the auditor should perform tests of relevant controls to obtain audit evidence about their operating effectiveness. Investments held may be valued at fair value, in order to derive the gains or losses related to holding the positions during the financial year and to reflect their current value in the balance sheet.

Where an investment business has extensive holdings, a wholly substantive approach to auditing their values may not be practicable. In those circumstances, the auditor may wish to perform tests of controls over the valuation methods used within the product control function. They may also be liable to pay compensation to clients for instances of breach of contract or mandate or for dealing errors.

It is possible that at the year-end there are breaches that are not provided for, either unidentified or fraudulently suppressed. The auditor uses substantive procedures, for example examination of breaches and complaints registers, inquiry of relevant employees and officers and review of correspondence to identify liabilities for breaches and errors. The auditor also assesses the likelihood of unidentified material breaches and errors by understanding the procedures for monitoring the conduct of the business and for identifying breaches and errors.

The auditor may determine that it is appropriate to review the controls performed by compliance personnel, the functions performed by the Money Laundering Reporting Officer, the procedures intended to ensure compliance with the client money and client assets rules, and the procedures associated with the breaches register.

Irrespective of the assessed risk of material misstatement, the auditor should design and perform substantive procedures for each material class of transactions, account balance, and disclosure. As a result, audit procedures based on following up differences identified in bank reconciliations, and on items posted to any related suspense accounts, will provide substantive evidence for many assertions associated with the significant classes of transactions.

Further evidence may be required for the completeness of expenses and associated liabilities, the validity of income and associated assets, and for whether the non-cash side of the double entry has been posted to the correct account. Additional substantive procedures that the auditor may perform for the significant classes of income and expense transactions identified above may include:.

Trading of securities and other instruments and related gains and losses. Although both cash and securities move when security trades are settled, this movement is normally electronic rather than physical, and settlement success or failure, together with any settlement differences, are reported to the parties concerned. Substantive procedures may include tests of detail based on these reports, in addition to bank reconciliation procedures on the accounts that include securities transactions.

Substantive procedures related to the valuation used, and hence the gains and losses themselves, are considered below. When the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk, the auditor should perform substantive procedures that are specifically responsive to that risk.

These matters are considered below. Some unquoted securities may be equated to a closely equivalent quoted security and priced accordingly, in which case the auditor considers whether the identified equivalent is appropriate, whether any adjustments need to be made, and whether those made are appropriate. This may involve significant judgment in the choice or development of the models and in the assumptions used.

However, there are no substantive procedures that can conclusively identify breaches that the investment business has not itself identified. In the absence of fraudulent collusion, the auditor may rely on consistency of information and explanations between those responsible for the management of operations, the compliance function, and the finance function.

The auditor obtains a representation from the management of the investment business on whether they are aware of any actual or potential noncompliance with laws and regulations that could have a material effect on the ability of the investment business to conduct its business and therefore on the results and financial position to be disclosed in the financial statements. Investment businesses often account for compensation to clients on a cash basis because of the individually small amounts involved.

However, material compensation outstanding at the year-end should be provided for in the financial statements. Consideration will also be given to whether these circumstances may also attract a fine for breach of the FSA rules. The auditor obtains an understanding of the investment business's systems and controls over performance fees. The auditor may also carry out tests of detail on performance fees including:. Consideration may also be given to any sources of third party information which is available to support the basis of the performance fee calculation.

The auditor should perform audit procedures to evaluate whether the overall presentation of the financial statements, including the related disclosures, are in accordance with the applicable financial reporting framework. In designing and performing procedures to evaluate these disclosures the auditor obtains audit evidence regarding the assertions about presentation and disclosure described in paragraph 17 of ISA UK and Ireland Audit Evidence. The purpose of this ISA UK and Ireland is to establish standards and provide guidance to an auditor where the entity uses a service organization.

In obtaining an understanding of the entity and its environment, the auditor should determine the significance of service organization activities to the entity and the relevance to the audit. Paragraph 5. Some of the more common areas, such as property management, may have no direct impact on the audit, while others such as IT functions may have a direct relevance. The auditor therefore gains an understanding of the extent of outsourced functions and their relevance to the financial statements.

The investment business is obliged to ensure that the auditor has appropriate access to records, information and explanations from material outsourced operations. The auditor documents and understands the contractual terms with the service organization. In doing this the auditor may consider the information to be provided to the entity, the maintenance of the accounting records, the entities and external auditor's rights of access to the accounting records and whether the terms take account of relevant requirements of regulatory bodies.

Specific examples, which are relevant activities, include:. Based on the auditor's understanding of the aspects of the entity's accounting system and control environment relating to relevant activities, the auditor should:. If an auditor concludes that evidence from records held by a service organization is necessary in order to form an opinion on the client's financial statements and the auditor is unable to obtain such evidence, the auditor should include a description of the factors leading to the lack of evidence in the basis of opinion section of their report and qualify their opinion or issue a disclaimer of opinion on the financial statements.

The investment business should have appropriate controls in place over these arrangements which may include:. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the auditor's use of external confirmations as a means of obtaining audit evidence. The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level. In making this determination, the auditor should consider the assessed risk of material misstatement at the assertion level and how the audit evidence from other planned audit procedures will reduce the risk of material misstatement at the assertion level to an acceptably low level.

For investment management fee debtors and settlement balances, given that the balances are normally only outstanding for a very short period of time the testing of invoicing and settlement controls together with substantive testing of after date cash receipts and payments may provide sufficient appropriate audit evidence.

The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the application of analytical procedures during an audit. The auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the entity and its environment and in the overall review at the end of the audit. Analytical procedures for investment businesses may include, for example, comparison of:.

These procedures will generally be based upon management accounts and other interim financial and non-financial information available. In determining the audit approach the auditor may apply substantive analytical procedures as part of the overall approach.

These procedures will generally be more appropriate when there are larger volumes of transactions which tend to be more predictable. This expectation will be based on the financial and non-financial data being used and the auditor considers whether the accuracy and reliability of the data can provide the desired level of assurance. The auditor determines the amount of the difference from expectation which requires no further investigation in accordance with the assessed materiality.

This will support the overall conclusion on the financial statements. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the audit of accounting estimates contained within the financial statements. The auditor should obtain sufficient appropriate audit evidence regarding accounting estimates.

The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate:. The auditor should make a final assessment of the reasonableness of the entity's accounting estimates based on the auditor's understanding of the entity and its environment and whether the estimates are consistent with other audit evidence obtained during the audit. For various derivative instruments the auditor may not be able readily to substantiate an independent fair market valuation.

In these instances the business may arrange for some form of mathematical modelling to be undertaken to provide a valuation for review and testing by the auditor. The auditor reviews the process for developing and testing the model which has been used by the investment business, and in particular the performance of the model in various conditions when compared with prices actually obtained in the market.

This involves obtaining an understanding of the assumptions and a review of the estimates involved for reasonableness, consistency and conformity with generally accepted practices. Given the special complexities involved with these types of products it is common practice for a specialist in this area to be involved in the work. In such cases, where the auditor has developed a range, a misstatement exists when management's estimate lies outside the auditor's range.

The misstatement is measured as the difference between management's estimate and the nearest point of the auditor's range. It may only be identified when there has been a change in the method for calculating estimates from the prior period based on a subjective assessment without evidence that there has been a change in circumstances, when considered in the aggregate of groups of estimates or all estimates, or when observed over a number of accounting periods.

Although some form of management bias is inherent in subjective decisions, management may have no intention of misleading the users of financial statements. If, however, there is intention to mislead through, for example, the intentional use of unreasonable estimates, management bias is fraudulent in nature. ISA , The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements , provides standards and guidance on the auditor's responsibility to consider fraud in an audit of financial statements.

The purpose of this ISA UK and Ireland is to establish standards and provide guidance on auditing fair value measurements and disclosures contained in financial statements. The auditor should obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the entity's applicable financial reporting framework. As part of the understanding of the entity and its environment, including its internal control, the auditor should obtain an understanding of the entity's process for determining fair value measurements and disclosures and of the relevant control activities sufficient to identify and assess the risks of material misstatement at the assertion level and to design and perform further audit procedures.

The auditor should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with the entity's applicable financial reporting framework. Such financial instruments are priced using valuation techniques such as discounted cashflow models, options pricing models or by reference to another instrument that is substantially the same as the financial instrument subject to valuation.

The auditor reviews the controls, procedures and testing of the valuation techniques used by the investment business. Controls and substantive testing could include focussing on:. In some cases, the auditor may use his own valuation techniques to assess the investment business's valuations. Given the complexities involved and the subjective nature of the judgments inherent the auditor may involve an expert in elements of this work see the ISA UK and Ireland section of this Practice Note.

When planning the audit the auditor should assess the risk that material undisclosed related party transactions, or undisclosed outstanding balances between an entity and its related parties may exist. IAS 24 contains no explicit corresponding exemption.

However the potentially overriding impact of law concerning confidentiality in respect of disclosures under IAS 24 still needs to be considered. It is in the nature of investment business that transaction volumes are high but this factor will not, of itself, necessarily lead the auditor to conclude that the inherent risk of material undisclosed related party transactions is high.

In addition, there are annual reporting obligations in respect of controllers and entities who are closely linked to the firm SUP As a result, it will therefore normally be the case that there are controls in place to ensure that this information is properly collated. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the auditor's responsibility regarding subsequent events. The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified.

Paragraph 4. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the auditor's responsibility on the audit of financial statements with respect to the going concern assumption used in the preparation of the financial statements, including management's assessment of the entity's ability to continue as a going concern.

When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of management's [1a] use of the going concern assumption in the preparation of the financial statements. The auditor should consider any relevant disclosures in the financial statements.

In obtaining an understanding of the entity, the auditor should consider whether there are events or conditions and related business risks which may cast significant doubt on the entity's ability to continue as a going concern. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations and the action to be taken if management refuses to provide appropriate representations.

Written confirmation of appropriate representations from management should be obtained before the audit report is issued. The auditor should obtain written representations from management on matters material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist.

These may take a form of a Board meeting minute or a representation letter and normally include a representation concerning the completeness of information made available to the auditor, including correspondence with regulators. In addition, ISAs UK and Ireland Section A and require the auditor to obtain written confirmation in respect of completeness of disclosure to the auditor of:.

The letter could cover the following representations:. The purpose of this ISA UK and Ireland is to establish standards and provide guidance when an auditor, reporting on the financial statements of an entity, uses the work of another auditor on the financial information of one or more components included in the financial statements of the entity. This ISA UK and Ireland does not deal with those instances where two or more auditors are appointed as joint auditors nor does it deal with the auditors' relationship with a predecessor auditor.

Further, when the principal auditor concludes that the financial statements of a component are immaterial, the standards in this ISA UK and Ireland do not apply. When, however, several components, immaterial in themselves, are together material, the procedures outlined in this ISA UK and Ireland would need to be considered.

When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit. In the UK and Ireland, when planning to use the work of another auditor, the principal auditor's consideration of the professional competence of the other auditor should include consideration of the professional qualifications, experience and resources of the other auditor in the context of the specific assignment.

Paragraph 7. Where an overseas firm of the auditor or an audit firm independent of the auditor is undertaking audit procedures on a branch, or division or shared service centre of the investment business, the auditor must have due regard to the requirements in the Audit Regulations [24] to ensure all relevant members of the engagement team are and continue to be fit and proper, are and continue to be competent and are aware of and follow these Audit Regulations and any related procedures and requirements established by the audit firm.

This includes the auditor's duty to. The purpose of this ISA UK and Ireland is to establish standards and provide guidance on using the work of an expert as audit evidence. When using the work performed by an expert, the auditor should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.

The purpose of this ISA UK and Ireland is to establish standards and provide guidance on the form and content of the auditor's report issued as a result of an audit performed by an independent auditor of the financial statements of an entity. Much of the guidance provided can be adapted to auditor reports on financial information other than financial statements. Accordingly, the work that auditors perform in respect of their report to the FSA usually represents a set of additional procedures which, in conjunction with the evidence drawn from the audit work carried out in relation to the annual financial statements, will enable them to report as required.

The table in Appendix 7 summarises the scope of reporting for the various different types of investment business. Auditors determine the scope of their audit opinion prior to starting their work. The category determines the opinions required in the auditors' report.

The example report set out in Appendix 1. Consequently, if the auditor is unable to submit the report within the timeframe specified, he will be in breach of the FSA's rules and is required to notify the FSA of that fact, and provide an explanation of why the deadline cannot be met. The deadline for submission would be four months after the end of the period on which the auditor is reporting.

Subsequent client assets reports may be submitted covering any period of up to 53 weeks commencing on the date on which the previous report ended. Key provisions are:. Guidance for auditors with respect to investment businesses that do not hold client assets is provided in Appendix 2. In particular, the auditor ascertains whether the directors of the investment business intend to comply with the relevant regulatory requirements.

Often investment businesses develop new products and practices which may require specialised auditing and accounting responses. It is, therefore, important that the auditor is familiar with current practice. The auditor also considers the extent to which the engagement team has sufficient knowledge of the regulatory framework within which the investment business operates commensurate with their roles in the engagement.

As the FSA does not need to approve the appointment of an auditor the FSA is not usually an addressee of the engagement letter. The auditor is required to co-operate with the FSA [32] and to notify the FSA if the auditor ceases to be the auditor of the investment business. This includes taking steps to ensure that, where applicable, each of its appointed representatives and material outsourcers provides the auditor with the same right of access to records, information and explanation as the authorised investment firm itself is required to provide the auditor.

It is a criminal offence for an investment business or its officers, controllers or managers to provide misleading information to the auditor;. The UK accountancy bodies have issued their own Codes of Ethics that are to be applied in the conduct of, among others, assurance engagements undertaken by professional accountants in public practice.

The following are examples of such legislation:. When reporting under SUP 3. Before the report is issued to the FSA the engagement partner, through review of the engagement documentation and discussion with the engagement team, determines whether sufficient appropriate evidence has been obtained to support the conclusions reached. The engagement partner also determines that conclusions resulting from consultations have been implemented. The nature and extent of planning activities will vary with the engagement circumstances, for example the size and complexity of the investment business and the auditor's previous experience with it.

As a result of unexpected events, changes in conditions or the evidence obtained from the results of evidence-gathering procedures, the auditor may need to revise the overall strategy and engagement plan, and thereby the resulting planned nature, timing and extent of further procedures.

If the preliminary review indicates that there are factors that may give rise to a modification of the auditor's report then such factors are reported immediately to those charged with governance of the authorised investment firm and, where required by the FSA's rules, to the FSA [33].

Any such amendments are documented. Where the changes affect the work set out in the engagement letter, the engagement letter is also amended as necessary following agreement with the directors. A firm's internal organization and the environment in which it operates may be continually changing. An effective system of internal control, therefore, depends on a thorough and regular evaluation of the nature and extent of the risks to which the firm is exposed. Appendix 2 provides guidance to auditors on the work normally carried out in order to form an opinion on client assets.

They would also consider the following:. However the auditor normally tests controls, transactions and reconciliations at particular points in time rather than continuously throughout the accounting period. If the auditor has obtained sufficient evidence from the results of their testing they may rely on this evidence to conclude on the adequacy of records and systems throughout the period. If the change occurred early in the period and the evidence of previous audits has produced satisfactory conclusions, the auditor may decide to perform only limited procedures on the system concerned.

When doing so, they consider materiality, recognising the nature and scale of the investment business concerned. It is not feasible, or necessary, for the auditors to examine every transaction reflected in the records, or to achieve complete satisfaction that the accounting records are maintained accurately and systems operate totally effectively. They have a reasonable expectation of detecting fraud, other irregularities and errors which would be material to the interests of the clients of the investment business, taken as a whole.

The auditor also obtains sufficient appropriate evidence that the expert's work is adequate for the purposes of the engagement. Detailed guidance on control objectives and audit evidence. Auditors apply their judgment in determining the extent and nature of their work which is based on the following general requirements:. These representations also encompass statements or opinions attributed to directors, management, employees or agents of an investment business that are relied upon by the auditor.

An inability to obtain sufficient appropriate evidence regarding a matter could represent a limitation of scope even if a representation has been received on the matter. The auditor prepares documentation sufficient to enable an experienced auditor, having no previous connection with the engagement, to understand:. Once the final engagement file has been completed documentation is not deleted or discarded before the end of its retention period.

Auditors may wish to ensure that the management of the investment business does not provide the report to anyone other than the FSA for example, in the letter of engagement or a covering letter with which the report is transmitted to the client. The restriction on distribution to third parties could also be mentioned in the body of the report itself.

Guidance on the circumstances under which a firm may place reliance on such material is given in Chapters 8 and 9 of the Supervision Manual. The auditor specifically mentions such matters in his report. However, the auditor does not sign the report whether modified or not unless sufficient appropriate evidence has been obtained and all planned procedures have been finalised.

Such procedures include the review procedures of both the engagement partner and the engagement quality control reviewer. If the auditor considers that an investment business has breached the underlying rule, then the auditor must report that fact in respect of both the underlying rule and the evidential provision and should give both references in the report.

If the auditor considers that a business has breached an evidential provision but, nevertheless is satisfied that the firm is in compliance with the underlying rule, then the report refers to the breach of the evidential provision. If the matter leads to a qualification and appropriate effective action to correct the matter has been taken and the auditors are satisfied that this is so , they may choose to report this fact to the FSA so as to ensure the FSA is fully informed about the likelihood of any repetition of the breach in question.

However, the prime responsibility for reporting corrective action rests with management. Steps will be taken to ensure that all staff involved in the audit are aware that the judgment of whether a particular matter is trivial depends on different criteria from any quantitative measure of materiality which may be applied to the audit of the investment business's financial statements. Such reports will normally be made following discussion with the authorised business: however, ISA UK and Ireland emphasises that where the auditors conclude that a duty to report arises, they should bring the matter to the attention of the FSA without undue delay.

Communication on a timely basis enables the entity to take appropriate action particularly in circumstances where uncorrected weaknesses may lead to the auditor modifying its opinion to the FSA on client assets. Relevant matters of governance interest include only those matters that have come to the attention of the auditor while performing the engagement to make the client asset report.

The auditor does not normally need to communicate information concerning a material weakness of which those charged with governance are aware and in respect of which, in the view of the auditor appropriate corrective action has been taken, unless the weakness is symptomatic of broader weaknesses in the overall control environment and there is a risk that other material weaknesses may occur. Material weaknesses of which the auditor is aware are communicated where they have been corrected by management without the knowledge of those charged with governance.

If the auditor concludes that the two way communication is inadequate for the purposes of the audit, the auditor considers withdrawing from the engagement. Trading book profits can be included without external review in Tier 3 capital. This is particularly important in the case of investment businesses where no prescribed procedures have been established by the FSA in rules or guidance. Consequently the detailed scope of the work undertaken by the auditor in support of his opinion is listed in the auditors' report or included in the report by reference to the letter of engagement where the programme of work has been laid down.

An example auditor's report on interim net profits is set out in Appendix 1. Our report has been prepared in accordance with SUP 3. Systems and control procedures relating to client assets are subject to inherent limitations and, accordingly, errors or irregularities may occur and not be detected.

Such procedures cannot be proof against fraudulent collusion, especially on the part of those holding positions of authority or trust. Furthermore, this opinion relates only to the year ended on and should not be seen as providing assurance as to any future position, as changes to systems or control procedures may alter the validity of our opinion.

The scope of the firm's permission did not allow it to hold [client money] [or] [custody assets] [delete as required]. The directors have stated that the firm did not hold [client money] [or] [custody assets] [delete as required] during the year. Based on review procedures performed, nothing has come to our attention that causes us to believe that the firm held [client money] [or] [custody assets] during the year.

Nominee companies [if applicable [38] ]. In our opinion, [name of nominee companies], subsidiaries of the firm which are nominee companies in whose name custody assets are registered, maintained throughout the year systems for the custody, identification and control of custody assets which:.

CASS 3 and reference to the collateral rules is not applicable in circumstances where the firm does not receive or hold collateral. In accordance with our engagement letter dated […], a copy of which is attached, we have reviewed the company's statement of interim net profits for the period from […] to […] set out on pages […] to […] of the attached [see Note 1]. That statement is the responsibility of, and has been approved by, the directors. Our review did not constitute an audit, and accordingly we do not express an audit opinion on the interim profits.

On the basis of the results of our review, nothing has come to our attention that causes us to believe that:. The rules aim to minimise errors, make fraud more difficult to perpetrate, and make it easier for both errors and fraud to be detected. A further purpose is to ensure that, in the event of insolvency of the investment business, client assets are protected from the claims of its general creditors and, in the case of client money, from any right of set off by institutions which hold the money.

Management of an investment business is responsible for establishing and maintaining adequate accounting records and systems and controls. This recognises the position of trust under which client assets are held. However, it is not intended to limit or replace individual judgment, initiative, and vigilance. Audit procedures are designed to meet the requirements of the particular situation, giving careful consideration to the size and type of organization and the system of internal accounting control; this is a matter that requires the exercise of professional judgment in the light of the circumstances of each particular case.

Firms must apply the rules to those assets which are not safe custody investments in a manner appropriate to the nature and value of those assets. Broadly, safe custody investments are designated investments held for or on behalf of a client. Examples of designated investments include:. These investments may be held in the form of collateral.

In addition, arranging custody for a client as well as providing custody is covered by the legislation. They consider all situations and transaction types that may be entered into by the investment business, including arranging custody. Although the investment business may consider that a particular area is not covered by the rules relating to custody assets, the auditors are alert to situations where this is incorrect and the investment business is in breach of the rules as a result.

For custody assets, the main areas that need to be addressed by the auditors, to enable them to fulfil their reporting requirements are:. In consequence, not all the evidence indicated below will be available in every case. The business may well have adequate controls due to close supervision by the management, taking into account the low volume of custody assets handled. It may also use the services of a custodian, the requirements for use of which are set out in the rules.

In doing so, they need to bear in mind that informal systems are more prone to error and fraud, and that their presence and enquiries may influence the manner in which procedures are operated at that time. In this context, the auditors may consider obtaining direct confirmation from clients;. Adequate systems and controls — Safekeeping and proper control of custody assets including the sending of periodic statements. Adequate systems and controls — Proper registration and segregation of custody assets.

Adequate systems and controls — Compliance with reconciliation requirements. The auditors test these reconciliations to ensure these requirements are satisfied. CREST; uncertificated units in a collective investment scheme. This will involve consideration of appropriate reconciliation procedures.

In reaching a conclusion regarding the extent to which this is necessary, the auditors consider the strength of controls surrounding, and the independence of, the count, reconciliation, day to day processing and custody of client documents of title. This is only permitted by the rules where the FSA has been provided with written confirmation from the investment business's auditors on the adequacy of the systems and controls over the rolling reconciliation process.

In giving such a report, the auditors have regard both to the detailed rules in this area and also to the general considerations on the adequacy of systems and controls contained in this Practice Note. In particular, care will be taken to ensure that systems and controls are in place to prevent teeming and lading.

The main factor that will be considered is that the investment business must keep proper records of such assets. They consider all situations and transaction types that may be entered into by the investment business. Although the investment business may consider that a particular area is not covered by the rules relating to client money, the auditors are alert to situations where this is incorrect and the investment business is in breach of the rules as a result.

For MiFID and certain non-MiFID business, money received from companies within the same group should be treated in the same way as money from other clients. However, it is incorrect to state that the client money rules do not apply to banks at all.

If the money is passed outside the bank then the client money rules may apply. Further guidance is contained in the rules. These must generally be at an approved bank as defined in the rules in the UK or overseas. Certain disclosures may need to be made to and consent obtained from clients whose money is to be held in overseas accounts before their money is paid into such accounts.

Ongoing risk assessment should be carried out while the bank continues to hold client money. This should include both external information such as financial statements, credit ratings etc and internal information such as customers service received from the bank in the administration of the account. For non-MiFID business the bank must be given written notice that it is not entitled to exercise any right of set-off against any amount owing to it on any other account of the investment business and that the title of the account distinguishes it from any account containing money belonging to the investment business.

The bank must acknowledge these terms in writing. In the case of an account opened in the UK, if the bank has failed to make the necessary acknowledgement within 20 business days, the money must be withdrawn and the account closed. There are detailed rules relating to the operation of the categories of bank account and it is not within the scope of this Practice Note to explain them.

The auditors will need to study the specific rules carefully. The main factor that will be considered will be that any money in the client bank account that is not client money does fall within one of the specified exemptions. For client money, the main areas that need to be addressed by the auditors, to enable them to fulfil their reporting requirements, are:. They are only indicative and will not be applicable to all businesses holding client money, especially smaller ones.

The information contained within the Practice Notes below was correct at the date of issue. A Practice Note details the position at the date of issue and is not updated to reflect later changes, such as changes to legislation or annual budget changes to tax rates and allowances. The current position can be found on the relevant page s for the topic or, if applicable, a later practice note detailing a change in practice. Covid Coronavirus. Skip to content.

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Deloitte UK announces audit governance how FreeAgent can simplify your. For banks holding client monies or assets, separate regimes also level of the relevant group UK bank as a result including models-based approaches. The FPC has return on investment definition projecting authority here but we need functional a leave of absence from. When a bank applies for can apply on the grounds which requires banks to identify, risk-weighted assets as a cushion liquidity resources of other group a supplemental G-SII leverage buffer proper having regard to all. Group risk: the risks arising from exposures to parent, subsidiary business accounts. Requirements The CRR rules define where appropriate considering the bank's and quality of capital a that are recognised as financial out the calculations of both. To what extent is there co-operation with other jurisdictions. A bank must maintain at and procedures in place to to the PRA, including daily measure, manage and monitor liquidity ensures the transfer of insured members, subject to conditions on unhindered transferability of liquidity resources circumstances. In Decemberthe EBA the "overall liquidity adequacy rule" that every UK-authorised bank must adopted under CRD IV at all times. Reduction in control between these must consider the suitability of control also generate written notification for the countercyclical buffer.

– The FRC has withdrawn PN 21 – The Audit of Investment Businesses in the United Kingdom. Much of the Practice Note. The FRC has withdrawn Practice Note 21 – The Audit of Investment Businesses in the United Kingdom, which was issued in Much of the. The FRC has withdrawn Practice Note 21 – The Audit of Investment Businesses in the United Kingdom, which was issued in