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ACCA Paper F8
Audit and Assurance
(INT)
December 2 11 Exams
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Syllabus
A Audit framework and regulation
B Internal audit
C Planning and risk assessment
D Internal control
E Audit evidence
F ReviewG Reporting
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Examiner and Exam Format
Question 1 Application of audit procedures to a scenario 30
Question 2 Short factual questions on ISAs and other
knowledge-based areas10
Question 3 20
Questions with short practical scenarios
Question 4 covering topics such as: internal audit, risk 20assessment, planning, controls, evidence,
Question 5 conclusions and reporting 20
Total 100
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Chap 1
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Definition of an audit
An audit is the independent examination
of the financial statements of an entity
by a duly appointed auditor.
Once the examination is done, the
auditor provides a report to the
shareholders that the FS show a ture
and fair view.
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Objective of an audit
Auditor to state an opinion as to whether
the FS:
Give a true and fair view
Are prepared in accordance with applicable
frameworks
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Types of external audits
Statutory
Required by law to undertake an audit (all
public and large companies)
Non-Statutory
No legal requirement to do so.
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Reasons to undertake a non-
statutory audit
Providing assurance to the owners over financialresults
Making accounts more acceptable to taxauthorities
Making a sale of the business more easy
Providing assurance to those providing financeto the business
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Accountability, stewardship and
agency.
Stewardship: someone is responsible of
taking care of something on behalf of
another person. Ex. directors.
Accountability: people in positions of power
can be held to account for their actions.
Agency: where an agent acts on behalf of a
principle to perform tasks for them.
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Materiality
If the omission or misstatement of an item
in the FS could influence the economic
decision of users, that item is said to be
material.
Errors found by an auditor in the FS could
be substantial, influencing the decision of
the investors. Hence such an error isknown as a material misstatement.
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Types of assurance engagements:
The framework permits only 2 types of
assurance engagement:
reasonable assurance engagement)
limited assurance engagement)
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Reasonable assurance
engagement Auditor gathers sufficient evidenceto conclude
that the subject matter agrees in all materialrespects to the agreed criteria.
The assurance given is in the form of positiveassurance, meaning that in their opinion, thesubject has been prepared in accordance withthe criteria required.
Reasonable assurance engagements providehigh levelof assurance.
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Reasonable assurance
engagement
An example of a reasonable assurance
engagement is an audit.
Auditor gives his report in the form of
positive assurance
The financial statements have been prepared
in accordance with applicable legislation and
standards
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Limited assurance engagement
Auditor gathers sufficient appropriate audit
evidence to be satisfied that the subject matter is
probable in the circumstances.
Report given in the form of negative assurance
Nothing has come to our attention that causes us to
believe that the financial statements are not prepared
(in all material aspects) in accordance with anapplicable financial reporting framework.
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Limited assurance engagement
Limited assurance engagements provide moderate
assurance.
An example of a limited assurance engagement is areview. A review engagement is undertaken b an
auditor using less evidence than required by an audit.
The users of the review report will be those who havecommissioned the review, example banks, and not
the shareholders.
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Chap 2
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Regulatory environment
International Federation of Accountants: Serves to strengthen the profession worldwide
Serves the public interest, and
Promote adherence to high quality standards.
International Auditing and Assurance StandardsBoard:
Subsidiary of the IFAC and sets InternationalStandards on Auditing.
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Duty of auditors
Form an opinion as to whether the FSprovide a true and fair view, and preparedin accordance with applicable accountingstandards.
Prepare and issue a report.
It is the management of the company whohas the responsibility of preparing the FS.
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Benefits of statutory audits
Investors more able to rely on the informationprovided in the FS
Management able to verify that the systems /
controls in pace are effective Management are less likely to undertake
fraudulent activities if they know that an audit isto take place
Auditor will highlight any weaknesses in amanagement letter.
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Appointment, resignation and removal
Appointment
Member of a recognised supervisoryboard ex ACCA
Allowed to act as an auditor by that boardOr
Directly authorised by the state
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Appointment, resignation and removal
Appointment
Resolution at each general meeting (re-appointment not automatic).
Directors pre first GM and to fill casualvacancy.
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Appointment, resignation and removal
Exclusions by law
Those involved with the management off acompany cannot audit it:
Directors
Employees
Business partners
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Appointment, resignation and removal
Removal
Special notice sent to auditor
Auditors can make representations about why they
should stay in office.
If resolution passed, company must notify regulatoryauthority.
Auditors must deposit statement of circumstances at
companys office + sent to regulatory authority. Auditors can receive notice and speak at GM where their
term of office would have expired.
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chap3
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Corporate Governance
Corporate governancesystem by whichcompanies are directed and controlled.
Corporate governance - concerned withmatters such as directors responsibilities, boardof directors, audit committee and relationshipwith external auditors.
The focal point of corporate governance is toensure that companies are run in the interests oftheir shareholders and the wider community.
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OECD: Principles of Corporate Governance
Ensuring the basis for an effective corporate governanceframework
making sure everyone involved is aware of their individualresponsibilities so no party is in doubt as to what they areaccountable for.
The rights of shareholders
management should recognise that they are agents of theshareholders and act in their interests.
The equitable treatment of shareholdersAll shareholders should be treated fairly and in a just manner.
The rights of stakeholders
The corporate governance framework encourage active cooperationbetween the entities and stakeholders in creating wealth, jobs andthe sustainability of financially sound entities.
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OECD: Principles of Corporate Governance
Disclosure and transparency
The corporate governance framework should ensure that timely
and accurate disclosure is made on all material matters
regarding the entity, including the financial situation,
performance, ownership and governance of the entity. Responsibility of the board
The corporate governance framework should ensure the
strategic guidance of the entity, the effective monitoring of
management by the board, and the boards accountability to the
entity and its shareholders.
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Combined Code of Corporate Governance
The Board
Should meet regularly
Rigorous/transparent nomination process
Directors to submit for re-election Roles of chairman and CEO to be separate
Board should establish a sound system ofinternal control
Audit committee should be established
Consider the need for internal audit
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Corporate governance in action
Segregation of roles
Chairman of the board and CEO must be
different people.
Chairman:
Ensures full information and
discussion at board meetings
Runs the board of directors
CEO:
Ensures the operational
functioning of the company
One person m ight end u p hav ing too much power and dec is ions m ight be
taken whic h are no t in the best interest of th e shareho lders.
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Corporate governance in action
Audit committees - structure
At least one member should have relevant
financial expertise.
At lest 2 NEDs for smaller companies, and 3for larger ones.
Listed com panies sh ould have and audi t commit tee with at least 3 NEDs
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Corporate governance in action
Audit committees - role To improve the quality of financial reporting and
increase the confidence of the public in the FS
Assist directors in meeting their responsibilities in
respect of financial reporting. Provide a channel to external auditors to report
concerns or issues.
Review the companys internal control systems
Strengthen the position of internal audit by providinggreater independence from management.
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Corporate governance in action
Audit committees - advantages Provides the internal audit function with an
independent reporting mechanism. Without thismanagement may be tempted to hide unfavourablereports.
leaves top management free to manage by providingexpertise on financial reporting
Ensures that corporate governance requirements arebrought to attention of the board
Ensure that proper internal control systems aremaintained.
Communication between directors, external audit andmanagement is facilitated.
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Corporate governance in action
Audit committees - disadvantages Finding NEDs with the necessary expertise
may be difficult
Additional costs will be involved
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Chap 4
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PROFESSIONAL ETHICS AND
ACCAS CODE OF CONDUCT
ACCA sets out a code of ethics formembers and disciplinary action is taken
against those who fail to uphold them.
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PROFESSIONAL ETHICS AND
ACCAS CODE OF CONDUCT
The fundamental principles are the following:
Integrity
Members should be straightforward and honestin all
business and professional relationships Objectivity
Members should not allow bias, conflicts of interest or undue
influence of others to override professional or business
judgements.
Professional competence and due care
duty to maintain professional knowledgeand skill at a level
required to ensure that a client or employer receives competent
professional service
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PROFESSIONAL ETHICS AND
ACCAS CODE OF CONDUCT
Confidentiality
respect the confidentialityof information acquired as a result
of professional and business relationships and should notdisclose any such information to third parties without proper or
specific authority or unless there is a legal or professional
right or duty to disclose
Professional behaviour Members should comply with relevant laws and regulations and
should avoid any action that discredits the profession.
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Threats to objectivity
Five potential threats are identified in the
ACCAs code of ethics. Safeguards aresuggested in order to counter each of the
threats.
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Threats to objectivity
1. Self interest - when the auditor has either a financial or
personal interest in the client.
Examples:
Dependence on client
If a client makes up too high a percentage of an auditors income, they
may be afraid of losing the income.
SafeguardIf a Listed company makes up more than 10% of a firms
income, they should not audit that client. (15% for non listed
companies)
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Threats to objectivity
1. Self interest
Examples:
Lowballing
Lowballing is setting a very low fee either to attract new clients or
ensure further work.
SafeguardAuditors should not set fees in this way, the fee must be
based on a pre-determined level of work required.
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Threats to objectivity
1. Self interest
Examples:
Loans, Guarantees and overdue fees
If an auditor fears he may not get such items paid back his objectivity may
be threatened. In this case significant overdue fees constitute a loan.
SafeguardDo not offer loans, guarantees or allow fees to go unpaid for
a significant time.
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Threats to objectivity
1. Self interest
Other Examples:
Hospitality and Benefits
Contingent Fees
Financial or Business interest
Financial interest such as shares etc.
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Threats to objectivity
2. Self review threat - if an auditor provides other services
to a client such as Tax advice, then the auditor will be
reviewing their own work during the course of the audit.
Examples:
Accounting Services
If an auditor prepares the accounts it is 100% sure that they will be reviewing
their own work. They may be tempted to hide errors to save face.
Safeguard - Auditor must not undertake accounting services for a client is they
are a LISTED company.
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Threats to objectivity
2. Self review threat
Examples:
IT
If the auditor advises on or installs accounting software for a client this will have
to be reviewed during the audit.
Safeguard - If the IT system is important to a significant part of the accountingsystem, the auditor should not design, provide or implement it.
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Threats to objectivity
2. Self review threat
Examples:
Valuation Services
A valuation made by the auditor could have a material effect on the financial
statements.
SafeguardIf valuation requires a degree of judgement and have a material
effect on the financial statements, then the auditor should not undertake to
provide it.
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Threats to objectivity
2. Self review threat
Examples:
Valuation Services
A valuation made by the auditor could have a material effect on the financial
statements.
SafeguardIf valuation requires a degree of judgement and have a material
effect on the financial statements, then the auditor should not undertake to
provide it.
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Threats to objectivity
2. Self review threat
Other Examples:
Tax Services
Corporate Financial Services
Internal Audit Services
Former Employee of Client joining Audit Firm
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Threats to objectivity
3. Familiarity threat - If the auditor is too familiar with the
client, then this may give rise to a familiarity threat.
Examples:
Participation in Client Affairs
The auditor may be too familiar with the client and be unwilling to
upset them.
SafeguardAuditor cannot be a director, employee or business
partner of client. Cannot be part of team if have been one of these in
the last 2 years.
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Threats to objectivity
3. Familiarity threat
Examples:
Family/Personal Relationship
An auditor may be unwilling to criticise or upset a family member if
they work for the client.
SafeguardNo member of the audit team may have a family memberor close personal relation in the client firm.
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Threats to objectivity
3. Familiarity threat
Examples:
Audit Partners joining client
If a partner joins the client firm this may affect the judgement of the
auditors involved.
SafeguardAll links to audit firm severed. Removed from audit teamas soon as appointment made. If made director or key management
and has worked for auditor in previous two years the audit firm must
resign. (Can be reappointed after 2 yr period is up).
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Threats to objectivity
3. Familiarity threat
Examples:
Acting as Auditor for prolonged period
If a partner has acted as auditor for a client for too long a period, they
may become complacent or over familiar with them.
Safeguard - If client is listed company engagement partners should
act for maximum of 5 yrs with 5 yr break in between rotations.
A Key audit partner must have a break of 2 yrs after a period of 7 yrs
and senior staff on listed audits should also not act for more than 7
yrs. For non-listed clients it is advised that partners act for no longer
than 10 years.
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Threats to objectivity
4. Advocacy threat - Advocacy threat is where an auditor
represents the client or is involved in representing
them.
Examples:
Legal Services
If an auditor provides legal services, they may be perceived to take
the same view as the client and therefore lose independence.
SafeguardNo legal services to be offered to client or defence in
dispute material to the financial statements.
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Threats to objectivity
4. Advocacy
Examples:
Corporate Financial Services
May be seen to be less than independent if advising on such matters
SafeguardDont negotiate on clients behalf with the bank or advise
on debt restructuring
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Threats to objectivity
5. Intimidation threat
Intimidation threat is simply what it says, i.e. that the
auditor feels unable to give an independent opinion forfear of losing the client or upsetting someone. The
safeguards will be the same as those outlined above.
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Dealing with Threats
The way in which an audit firm should deal with potential
threats to independence is to have in place procedures
to:
Identify any potential threatsEvaluate what level of risk they pose
Check that necessary safeguards are in place
Correct any problems if necessary.
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Confidentiality
Information should only be disclosed by auditors:
If the client has given their consent
Under a legal obligation e.g. money laundering,terrorism, drug trafficking
If required by regulatory body e.g. FSA
Under a court order
If in the public interest e.g. environmental pollution.
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Engagement letters
Define auditors responsibilities
Written evidence of auditors acceptance
Send to board of directors/or audit
committee prior first audit
Identify any reports to be produced in
addition to audit report
Update for changes
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Engagement letters
Contents:
Objective of audit
Management responsibilities
Applicable reporting framework Test natureinherent responsibilities
Unrestricted access to records
Confidentiality of reports
Planning Fees
Role of Internal audit
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Chap 5
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Internal audit
A department within the company which
oversees internal control systems and
ensures that procedures are in place toensure good corporate governance.
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Internal audit
Provides assurance to the board by:
Reporting on and monitoring the effectiveness of internal controls.
Assisting with implementation of required accounting standards.
Ensuring that laid down procedures are being followed.
Liaising with external auditor to reduce time and expense of external audit.
Ensures compliance with OECD Principles.
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Internal auditOne of the key concepts surrounding internal audit is the
independence of internal audit from management.
Ways to keep internal audit independent are to:
Have them report to an independent committee i.e. the Audit
Committee.
Ensure that the internal audit function is well regarded by
other departments.
Have a whistle blowing function for internal audit to report
serious misconduct when found.
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Outsourcing of Internal audit
Advantages The provider will have specialiststaff.
Cost of employing and training
full time staff is avoided.
Outsourcing provides an
immediate internal audit
department.
The time scale is flexible with the
contract for the appropriate time.
Independence may be improved.
Audit methodology andtechnologies will be up to date.
Disadvantages If Internal and External audit areprovided by the same firm (prohibited
under ethics rules in UK) then there
may be a conflict of interest.
Independence may not be ensured by
outsourcing due to threat ofmanagement not renewing the
contract.
The cost of outsourcing may be so high
as to encourage the firm not to have an
internal audit function at all.
Lack of understanding of firms culture,
objectives and attitudes.
The standard of service provided
cannot be controlled.
Blurring of the distinction between
internal and external audit function.
Types of Internal audit
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Types of Internal audit
assignmentsValue for Money
Value for money can be broken down into 3 sectors:
Economy: Are goals achieved at a minimum cost (still paying attention to
quality)?
Efficiency: Are resources being used to maximise output?
Effectiveness: Are objectives being achieved?
These three areas can be thought of as InputProcessOutput.
InputsEconomyAs cheap as possible given quality
ProcessEfficiencyPerform the process as efficiently as possible
OutputsEffectivenessThese match objectives set
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Chap 6
ISA 200 Overall Objective of the
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ISA 200 Overall Objective of the
Independent Auditor
To obtain reasonable assurance, the
auditor shall obtain sufficient
appropriate audit evidence to reduceaudit risk to an acceptably low level.
Audit risk = the risk that the auditorexpresses an inappropriate audit
opinion.
ISA 200 Overall Objective of the
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ISA 200 Overall Objective of the
Independent Auditor
In order for the auditor to reduce audit
risk he identifies the areas which are
more likely to be risky, and then he
plans the audit testing accordingly.
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The need to plan
- required by ISA 300 to plan the audit sothat the engagement will be performed in
an effective manner.
- planning will make the audit addresssalient issues and hence less time is
wasted.
- ensuring the correct audit team is inplace
- the team is working efficiently
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ISA 300 Audit planning
The audit plan involves a number of
activities:
Risk Assessment - the identification of risk will
determine the entire audit process
Aud it Strategy - The audit strategy sets out thescope, t im ing and direct ion of the audit.
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ISA 300 Audit planning
The scopeof the audit will be determined by thereporting framework applied as well as any industry
specific requirements
The timing of the audit will set out any deadlinesapplicable and the dates of the interim and final audit
visits.
The direction of the audit will be determined by theidentification of high risk areas and materiality.
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ISA 300 Audit planning
Prevention and detection of fraud is the responsibility of management.
The risk of fraud is important to the auditor because it may lead to a
material misstatement.
This will impact the audit strategy in the following ways:
Testing may be focused on the areas in which fraud is suspected.
The auditor may choose not to rely on the representations of management if
they are suspected of involvement in fraud.
Materiality may be reduced. Evidence provided by the client may not be relied upon.
The auditor may have to generate more 3rdparty evidence.
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Knowledge of the business - KOB
Auditors are required to obtain an
understanding of their clients, their
business and their internal controls.
The purpose is to identify the risks that the
business is exposed to and how these
could lead to a risk of materialmisstatement in the financial statements.
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Knowledge of the business - KOB
This generally includes:
Industry and regulatory factors;
Operations of the entity;
Ownership and governance structures;
Type of investments it makes;
Accounting policies used by the entity; Entitys objectives;
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Where to get the info from?
Information from the audit firm ex. partner;
Information from external sources ex.
newspaper;
Information from past audits;
Information from the client ex. website;
Understanding the entity and its
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Understanding the entity and its
environment
We are required to:
Make enquiries with management and
others within the company;
Analytical procedures;
Observation and inspection.
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Analytical procedures
Evaluation of financial information, used in:
Planning stage of the audit;
Testing stage of the audit;
Review stage of the audit;
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Analytical procedures
They incorporate the comparison of:
Current and prior year figures;
Current and budgeted/forecast figures;
Client and industry averages.
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Analytical procedures
At the planning stage analyticalprocedures are useful to gain an
understanding of the clients performance
over the last 12 months and to identify anychanges.
Chap 7
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Chap 7
ISA 320 M t i lit
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ISA 320 Materiality
Information is material if its omission or
misstatement could influence the
economic decisions of users taken on thebasis of the financial statements.
ISA 320 M t i lit
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ISA 320 Materiality
Materiality is important to the auditor
because if a material item is incorrect, the
financial statements will not show a trueand fair view.
ISA 320 M t i lit
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ISA 320 Materiality
Establishing materiality:
(1) 0.5-1% of turnover
(2) 5-10% of profit before tax
(3) 1-2% of total assets
Prevention and detection of fraud
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Prevention and detection of fraud
and error
ISA 240 recognises that misstatement in the
financial statements can arise from fraud
or error. The first one being intentional
and the latter being unintentional.
F d
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Fraud
Fraud can be split into 2 types:
Fraudulent financial reporting
Misstating the accounts of the company
Misappropriation of assets
Theft of companys assets
Th dit ibilit
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The auditors responsibility
Obtaining reasonable assurance that thefinancial statements are free from
material misstatement, either due to
fraud or error; Communicate any identification of fraud
to management;
Th di t ibilit
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The directors responsibility
Prevent and detect fraud;
Implement an effective system of internal
control;
Ch t 8
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Chapter 8
Ri k t
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Risk assessment
Audit risk
The risk that the auditor expresses an
inappropriate opinion on the financial
statements.
Ri k t
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Risk assessment
Audit risk:
Inherent risk x control risk x detection risk
I h t i k
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Inherent risk
This is the risk related to the nature ofthe activities of the company.
Considered in the planning stages of the
audit.
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Control risk
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Control risk
Risk of material misstatement due toinadequate internal controls within the
business
Control risk
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Control risk
Examples: No segregation of duties
No controls over assets
No controls over IT
Large number of signatories
Detection risk
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Detection risk
The work carried out by the auditor doesnot uncover a material misstatement that
exists
This may be due to samplingand non-sampling risk
Detection risk
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Detection risk
Sampling risk
The risk that the conclusion reached
because of a sample being taken would
differ from the conclusion given had the
whole population been tested.
i.e. the sample taken was not correct!!!
Detection risk
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Detection risk
Non-sampling risk
The risk that the conclusion reached by the
auditor would be incorrect due to factors otherthan the sample being taken.
Example:
Procedures used
Interpretation of results
Affecting audit risk
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Affecting audit risk
Auditor cannot affect inherent risk or control
risk as these are internal to the client.
Affecting audit risk
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Affecting audit risk
If the auditor assesses both the inherent
risk and control risk as being high, hehas to make sure that detection risk is
low, so as to even out the other results.
Reducing detection risk
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Reducing detection risk
Increase amount of tests
Increase sample
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Chap 9
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Internal Control Systems
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Internal Control Systems
The purpose of internal controls is to help
prevent fraud and errors which would
make the accounting information incorrect.
Internal Control Systems
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Internal Control Systems
strong controls by the entity
=
auditor relies on info. produced
Components of an Internal Control
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System
1 - Control activities
Approval and Control of Documents (approval by senior
management)
Controls over IT (passwords etc) Reconciliations
Arithmetical Accuracy
Control Accounts
Restricted access to physical assets
Compare physical counts with accounting records
Segregation of Duties
Components of an Internal Control
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System
2Risk assessment
Management should be undertaking regular riskassessments to ensure that all risks are identified and
mitigated.
Components of an Internal Control
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System
3Information system
The auditor must obtain an understanding of the
information system, including the related businessprocesses, relevant to financial reporting.
The auditor must decide what areas of the information
system are relevant to the financial reporting of the entityand only concentrate on those systems.
Components of an Internal Control
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System
4Monitoring of controls
Controls may be monitored either by management or by
the internal audit function if one exists.
The auditor may be able to rely on some of the work of
internal audit, but must first gain an understanding of
how controls are monitored and how effective themonitoring is.
Components of an Internal Control
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System
5The control environment
The control environment refers to the framework around
which the controls of the organisation operate.
Management attitude will largely determine the nature of
the control environment.
Controls over IT systems
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Controls over IT systems
(i)General controls
protect the system by restricting access through
passwords, usernames etc. Other general controls willinclude back-up procedures, controls over changes to
the system or software, controls to prevent access to
sensitive data.
Controls over IT systems
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Controls over IT systems
(ii)Application controls
specific control procedures over the accounting
applications that are built into the system. They willinclude checks to ensure the arithmetical accuracy of
transactions as well as controls preventing the reversing
of transactions
Chapter 10
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Chapter 10
Internal control and the audit
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Internal control and the audit
Tests of controltest the systems in place by determining whether
the controls over it are sufficient or not. If the control in place is
strong, then the auditor is able to place reliance on the information
generated by that particular system.
Substantive procedures on the other hand are procedures to gain
direct assurance over a figure in the financial statements
Internal control fraud and error
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Internal control fraud and error
If the auditor decides that the internal controls are strong, this may
mean that they may not have to gain less evidence from other
sources.
Chapter 11
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Chapter 11
Specific internal controls - Revenue
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Specific internal controls Revenue
Taking orders
CONTROL OBJECTIVE CONTROL PROCEDURE
Orders should be raised
accurately.
The customer should be
credit worthy.
Credit limits should not be
exceeded.
The company should be able
to fulfil the order.
All orders should be in writing from
customer or confirmed with customer.
All customers undergo credit checks.
Credit limits should be checked before
accepting an order.
Inventory should be checked before issuing
an order.
Specific internal controls - Revenue
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Specific internal controls Revenue
Dispatch of goods
CONTROL OBJECTIVE CONTROL PROCEDURE
All orders should be sent
to the warehouse.
The goods required
should be in inventory.
The correct goods
should be sent to the
correct customers.
Order pads or computer generated
orders should be sequentially
numbered to ensure none gomissing.
Goods should be selected from
inventory using the customers order.
The order should be authorised and
signed when goods selected.
Match GDN with customer order.
Customer signs GDN & returns to
company.
GDN recorded and filed with
sequential numbers.
Specific internal controls - Revenue
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Specific internal controls Revenue
Raising invoice
CONTROL OBJECTIVE CONTROL PROCEDURE
An invoice should be
raised for all
deliveries.
The invoice should be
for the correct
amount.
Any credit notes
should be valid and
authorised.
GDN sent to invoicing dept. Invoice
raised to match and copy attached to
GDN and filed sequentially.
Order agreed to GDN. GDN agreed
to invoice.
Invoice agreed to price list.
Above checked and signed by person
in authority.
All credit notes allocated and copy
attached to invoice to which it relates.
All credit notes authorised by line
manager.
Specific internal controls - Revenue
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Specific internal controls Revenue
Recording of the sale
CONTROL OBJECTIVE CONTROL PROCEDURE
All sales should be
recorded.
The correct amount
should be recorded for
each sale.
The sale should be
recorded against the
correct customer.
Review debtors ledger for credit
balances where invoices may nothave been recorded.
Reconcile the debtors ledger.
Check all entries to invoices
Send out statements to all customers
regularly.
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Specific internal controls -
P h
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Purchases
Raise requisition and place order
CONTROL OBJECTIVE CONTROL PROCEDURE
The requisition should be for a
valid business reason.
The cost of the requisition should
be reasonable.
Items should only be
requisitioned when required.
Orders should be raised for allrequisitions.
Line manager authorises all requisitions.
All purchasing is centralised.
Suppliers used are approved.
Inventory levels checked before ordering.
Sequentially pre-numbered requisition pads withorder matched to requisition.
Orders confirmed in writing.
Check price is the same as price list being used.
Specific internal controls -
P h
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Purchases
Goods received
CONTROL OBJECTIVE CONTROL PROCEDURE
For all orders that are made, the
goods are actually received.
The goods should be the correct
goods as ordered.
The quality of the goods should
be acceptable.
The quantity of goods receivedshould be as ordered.
All goods received are delivered to one area which is
secure.
Records are updated as soon as the goods arrive.
Sequentially numbered purchase order matched to the
GRN and checked correct.
Inspect the goods received to ensure quality and
quantities.
Sign and authorise GRN
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Specific internal controls -
P h
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Purchases
Recording of the purchase
CONTROL OBJECTIVE CONTROL PROCEDURE
The correct amount should be
recorded for all purchases.
All purchases should be
recorded.
The transaction should be
recorded in the correct supplier
account.
All invoices checked and stamped.
All invoices filed away should
therefore be stamped.
Suppliers statements should be
reconciled regularly
Reconcile purchase ledger controlaccount.
Specific internal controls -
P h
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Purchases
Payment to supplier
CONTROL OBJECTIVE CONTROL PROCEDURE
All invoices should be paid.
All invoices should be paid ontime.
All invoices should be paid only
once.
All invoices should be paid at
the correct amount.
All payments should be for valid
business expense.
All invoices stamped as paid when
done.
Ensure system in place to pay on
time to retain credit limits and supplier
goodwill.
Ensure stamped invoice is not paid
again by keeping separate once paid.
Vouch payment amount to invoice
amount.
All invoices should be authorised
before payment.
All payments should be authorised.
Specific internal controls - Payroll
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p y
Timesheets submitted
CONTROL OBJECTIVE CONTROL PROCEDURE
All of the sheets or cards
should be received.
All sheets or cards
should be valid
All of the hours
submitted should have
been actually worked.
The number of sheets or cards
should be counted to ensure the
number matched the number ofemployees.
Access to additional sheets or cards
should be restricted.
All sheets and cards should be
authorised by line managers.
Specific internal controls - Payroll
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p y
Inputting of information
CONTROL OBJECTIVE CONTROL PROCEDURE
All information should be
input with none missedor omitted.
Information should be
input accurately.
No information should
be included twice.
No bogus employees
should exist.
Totals should be checked.
Sheets should be signed once input.
No duplicate employees should be
possible on the system.
Passwords and usernames should
restrict access to data.
New employees should only be set
up on the computer by a senior
manager.
Segregation of duties should exist.
Specific internal controls - Payroll
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p y
Standing data / date kept for long term inputted
CONTROL OBJECTIVE CONTROL PROCEDURE
Payments to leavers
should cease oncethey have left.
The data on the
system should be
accurate.
Managers should authorise and
promptly inform the payroll dept of
leavers and joiners.
Regular checks of standing data
should be undertaken by senior
management.
Forms should be signed to verify
leavers/joiners are recorded on thesystem.
Changes should be authorised by
senior member of staff.
Specific internal controls - Payroll
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p y
Processing and recording of payroll
CONTROL OBJECTIVE CONTROL PROCEDURE
The payroll calculations should
be correct.
The correct wages, PAYE &
NICs should be recorded on the
system.
A sample printed out and checked
manually.
System produces report automatically
for over/under payments.
Print out signed by clerk to confirm
accuracy.
Senior management review to ensurereasonable.
Specific internal controls - Payroll
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p y
Payment made to staff
CONTROL OBJECTIVE CONTROL PROCEDURE
All staff should
receive payment.
No bogus employees
should be paid.
The correct amount
should be paid to
staff.
If cash wages are paid ensure that
two people are present whenpayment is made.
BACS summary should be reviewed
by manager and authorised prior to
payment.
List of BACS payments should be
reviewed to verify all payments made.
Specific internal controls -
Inventory
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Inventory
Goods arrive into inventory
CONTROL OBJECTIVE CONTROL PROCEDURE
All goods should be
protected from theft on
arrival.
New deliveries should
be kept separate from
returns.
Goods received should
be of suitable quality.
Inventory should be
recorded.
Only inventory ordered
should be accepted.
Locations kept secure with access
restricted.
Separate areas for new deliveries
and returns.
Goods checked for quality on arrival.
Purchases cycle controls should be in
place. (see above)
Specific internal controls -
Inventory
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Inventory
Inventory stored until needed
CONTROL OBJECTIVE CONTROL PROCEDURE
Inventory should be
stored safely andsecurely to ensure
good condition.
Oldest inventory
should be used first
to prevent
obsolescence.
Inventory should be
protected from theft.
Ensure that storage area is
weather proof, has fireprotection and is at the correct
temperature.
Ensure inventory system is
based on FIFO.
Access to stores should be
restricted.
Warehouse should have a single
secured exit.
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Specific internal controls -
Inventory
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Inventory
Finished goods sent to customers
CONTROL OBJECTIVE CONTROL PROCEDURE
The correctgoods should be
sent.
Quality should be
maintained.
Records shouldbe updated
promptly and
accurately.
The same procedures as thesales cycle apply here.
Specific internal controls -
Inventory
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Inventory
Inventory is counted
CONTROL OBJECTIVE CONTROL PROCEDURE
The count shouldbe accurate. Counted areas marked toprevent double counting.
Managers check accuracy by
spot counts.
Counting done in pairs.
Employees dont count areasthey are responsible for.
Count sheets sequentially
numbered.
Controls over inventory arrivals
during the count.
Specific internal controls - Cash
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Cash amounts should be safeguarded
CONTROL OBJECTIVE CONTROL PROCEDURE
Cash should be
locked in safe.
Access to cash
restricted.
Security
movements for
large amounts.
Banking
times/routes
varied.
Perform surprise cash count.
Ensure only authorised staff
have access to cash.
Check sequential numbering
of cash receipts.
Check mail is opened by twomembers of staff to reduce
the chance of fraud.
Specific internal controls - Cash
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Cash held at premises is kept to a minimum
CONTROL OBJECTIVE CONTROL PROCEDURE
Cash should be
banked regularly.
Cash balances in
tills should be
emptied regularly
Check all cash lodged intact
to bank regularly.
All lodgements are
authorised.
Examine bank reconciliations
and ensure regularly
performed.
Investigate old outstanding
items.
Specific internal controls - Cash
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Withdrawals authorised
CONTROL OBJECTIVE CONTROL PROCEDURE
Limited number of
authorised signatories.
Banking online should have
restricted access.
Cheques should not be
signed in advance.
Cheque books should be
kept under lock and key.
Cheque book should be reviewed to
ensure no cheques are missing and nocheques are signed in advance.
Verify that cash payments are
arithmetically correct.
Direct debits should be consistent and
authorised.
Petty cash balances should be counted
and checks made that controls are in
place over petty cash.
Chapter 12
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Reporting control weaknesses
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If management are interested, the auditorcan also offer to provide what is called a
MANAGEMENT LETTERwhereby
weaknesses in the controls of thecompany are highlighted.
Reporting control weaknesses
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The weaknesses highlighted in this letterare those found during the audit testing
and not necessarily all the weaknesses in
the controls of the company.
Reporting control weaknesses
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It should be highlighted that:
The list only includes weaknesses that came to light
during the audit
The report is for the sole use of the company
No disclosure should be made to 3rdparties without prior
notification to the auditor
No responsibility is assumed to other parties.
Reporting control weaknesses
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the structure of the report will be as follows:
(i) WEAKNESSES
(ii) CONSEQUENCE
(iii) RECOMMENDATION
Chapter 13
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Audit evidence
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ISA 500 mentions that differentassertions apply to different figures in
the financial statements. These
different figures include:
Transactions and events
Account balance Presentation and disclosure
Transactions and events
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Mainly, figures relating to transactions and
events relate to entries which are reflected
in the statement of comprehensive income/ income statement.
Account balance
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Items found in the balance sheet
Presentation and Disclosure
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The notes to the accounts, whichincorporate how the financial statements
have been presented and items disclosed.
Transactions and events
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COMPLETENESS: all transactions that should have been recorded,have been recorded.
OCCURRENCE: transactions which have been recorded, have occurredand pertain to the company.
CUT-OFF: transactions have been accounted for in the proper accountingperiod
CLASSIFICATION: transactions have been recorded in the properaccounts
ACCURACY: transactions have been recorded appropriately
Account Balance
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COMPLETENESS: all assets, liabilities and equitythat should have been recorded, have been recorded.
EXISTENCE: assets, liabilities and equity really exist
RIGHTS AND OBLIGATIONS: the company hasa right over the asset and the obligation over the liability
VALUATION: assets, liabilities and equity are correctlyvalued in the financial statements
Presentation and Disclosure
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COMPLETENESS: all disclosures that should havebeen disclosed, have been disclosed.
OCCURRENCE: disclosed events have beenrecorded and pertain to the entity
CLASSIFICATION: disclosures are appropriatelypresented and expressed.
ACCURACY: disclosures have been disclosedappropriately
How to test these assertions.
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INSPECTION OF RECORDS/TANGIBLE ASSETSinvoices,contracts etc.
OBSERVATIONobservation of events like mail opening, stocktakeetc
ENQUIRYasking management, accountant, staff.
CONFIRMATIONcontacting third parties
RECALCULATIONexample depreciation, accruals.
RE-PERFORMANCEredo procedures like stock take, reconciliations
ANALYTICAL PROCEDUREScomparing the figures.
How to test these assertions
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COMPLETENESS
Inspection of records
Analytical review
Recalculation
confirmation
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RIGHTS AND OBLIGATIONS
Inspection of records
Confirmation
How to test these assertions
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VALUATION AND ALLOCATION
Inspection of records
Recalculation
Confirmation
How to test these assertions
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EXISTENCE
Inspection of assets
Confirmation
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OCCURANCE
Inspection of records
Inspection of assets
Enquiry
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ACCURACY
Re performance
Analytical review
confirmation
Chapter 14
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Audit evidence
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ISA 500 states that..
The objective of the auditor is to design and
perform audit procedures in such a way toenable the auditor to obtain suff ic ient
appropr iateaudit evidence to be able to
draw reasonable conclusions
Audit evidence
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SUFFICIENT EVIDENCE
There must be ENOUGH evidence to support the auditorsopinion. Determining whether evidence is sufficient
depends on:
Risk of material misstatement
Results of tests of controls
Size of population being tested
Size of sample selected
Quality of evidence obtained
Audit evidence
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APPROPRIATE EVIDENCE
This is made up of:
Reliabilityof evidence
Relevanceof evidence
Reliability
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Evidence is considered reliable when:
It is obtained from independent sources
Generated internally but subject toeffective internal control
Obtained directly by the auditor
In documented form
In original form
Relevance
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To be relevant, audit evidence has to
address the objective of the procedure.
Accounting estimates
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Characteristics of accounting estimates:
Confirmation of estimates is difficult
Prone to inaccuracy
No physical evidence
Prone to management bias
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Not for profit organisations
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Evidence implications:
Same auditing rules apply
Quantity of evidence may be well less than for a largerorganisation
It may be more efficient to carry out 100% testing ie no
sampling
Not for profit organisations
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Problems:
Management override
No segregation of duties
Less formal approach
Not for profit organisations
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Differences from privately owned entities
NFPs:
Do not have profit maximisation as their main objective
Do not have external shareholders
Will not distribute dividends
Not for profit organisations
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Problems auditing NFPs
Weaker systems due to: Lack of segregation of duties
Use of volunteers
Less formalised systems and controls
Income received by way of donation
Assessing going concern may be difficult
Opening balances and comparative
information
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When taking on new clients, the auditor must ensure that:
Opening balances are correct
Prior period closing balances have been brought forwardcorrectly
Appropriate accounting policies been consistently used
or changes appropriately disclosed.
Opening balances and comparative
information
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Audit procedures:
Consult clients management
Reviewing documentation of prior period
Consulting previous auditor and reviewing his working
papers
Substantive testing if all the above are unsatisfactory
Chapter 15
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Audit sampling
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CONTROLS TESTING
LARGE SAMPLE TO BE
SELECTED
SMALLER SAMPLE TO BE
SELECTED
IMP: SUBSTANTIVE TESTING MUST BE ALWAYS CONDUCTED!!!
Audit sampling
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Substantive procedures are carried out on samples of
the transactions making up a figure in the financial
statements.
The amount of substantive testing can be varied
depending on the size of the sample being chosen.
Due to the auditor choosing a SAMPLE he cannot give
ABSOLUTE ASSURANCE.
Ways to extract a sample
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(i)Statistical sampling
(ii)Non-Statistical sampling
Statistical sampling
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An approach to sampling that uses:
Random selection of samples; and
Probability theory to evaluate the results
Considerations when designing a
sample
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The purpose of the procedure Combination of procedures being
performed
Nature of evidence sought Possible misstatements
Types of samples
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Random selection: use of random number tables
Systematic selection: sampling interval used
Monetary unit sample: selecting sample based on the
value
Haphazard selection: no structured technique but oneavoids bias
Block selection: involves selecting a block of items whichare next to each other in the population.
Non-Statistical sampling
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Judgement is used to select itemsto be tested. This usually leads to
focusing on higher value items.
Chapter 16
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Audit documentation
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Imp things to note:
1. If the working papers do not exist, then the auditor will be unable to
prove how and why the opinion expressed was arrived at.
2. Working papers should provide evidence that a qualified practitioner
could easily follow and report the same conclusions.
3. Unclear working papers are USELESS.
Audit file structure
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Planning stage:
1. Risk assessment.
2. Materiality.
3. Knowledge of the business.
4. Use of any experts.
5. Composition of the audit team.6. Timing.
7. Reporting (does the client form part of a group of companies to which
we must report?)
Audit file structure
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Testing:
1. Property plant and equipment
2. Intangible assets
3. Receivables
4. Cash
5. Payables6. Share capital
7. Etc.work carried out on the specific sections which we ll be
auditing. Each section will contain its lead schedule
Audit file structure
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Completion and review:
1. Final analytical review
2. Documentation of issues found
3. Subsequent events
4. Specific topic questions
5. etc
The lead schedule
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Components of a lead schedule
1. Title: client name / year end / prepared by section / subject
2. Prior year figures
3. References
Chapter 17
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Analytical Procedures
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Used to highlight unusual figures in order tofocus the audit on them or to establish that
a trend has continued.
Analytical Procedures
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compulsory at the planning and final stageof the audit. Also an effective tool for
gathering evidence throughout the audit.
Analytical Procedures
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Profitability Ratios
Gross margin(gross profit/sales)100
Net margin(net profit/sales)100 ROCE(profit before interest and tax / share capital +
reserves + borrowings)
Analytical Procedures
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Liquidity Ratios
Receivables days(receivables/sales)365
Payables days(payables/purchases)365
Inventory days(inventory/cost of sales)365
Current ratio(current assets/current liabilities)
Quick ratio(current assetsinventory/current
liabilities)
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Auditing specific items
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Questions in the exam will focus on a scenario with the audit ofspecific items.
For this section of the exam paper, the approach to such a question
should focus on three things:
What are the assertions for the item in the question.
What procedures should be carried out to test the balance?
Always relate these steps to the scenario in the questiona list of
procedures not relevant to the scenario will not get any marks!
Receivables
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Payables
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Tangible Non Current Assets
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Non Current Liabilities
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Bank and Cash
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Inventory
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Chapter 19
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THE WORK OF OTHERS
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ISA 600 deals with the use of the work of an expert by the auditor.
The auditor may not have the expertise to make judgements on all aspects
of a clientsbusiness and may seek help in the form of an expert. Examples
of this are specialist inventory, property valuation and complex work inprogress.
If the auditor chooses to rely on the work of an expert, they must ensure that
the expert is independentand sufficiently competent.
THE WORK OF OTHERS
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The auditor will decide whether the expert is competent based on theirqualifications and their experience.
If an expert in the inventory of the entity being audited is consulted on
valuation of inventory, but works for a subsidiary of the entity then the auditor
may consider them to be not sufficiently independent.
The auditor should make no reference to the use of the work of others in the
audit report. It is the auditorsopinion in the report and the work of others is
simply one type of evidence that may be used, if sufficient and reliable, to
come to that opinion.
THE WORK OF OTHERS
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ISA 610 sets out the considerations the auditor must make before relyingon work carried out by internal audit.
The auditor should consider:
Whether the internal audit staff are sufficiently independent to retainobjectivity.
The qualifications and technical competence of the internal audit staff.
The professionalism of the staff and the standing of internal audit within
the organisation.
Are internal audit constrained in any way by management?
THE WORK OF OTHERS
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If these considerations are fulfilled the auditor may assess the reliability of
the work carried out by internal audit by ensuring:
Internal audit working papers are well documented hand have been
reviewed.
Evidence gained by internal audit is sufficient and appropriate.
Any conclusions drawn are reasonable and valid.
Management have acted on recommendations made by internal audit.
Chapter 20
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Computer assisted audittechniques
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USING THE COMPUTER TO TEST OR
ASSIST THE AUDITOR INTESTING DURING THE AUDIT
PROCEDURES
CAATS
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EXAMPLES:
1. To run client data to check for errors
2. To extract samples
3. Check calculations4. Produce reports
5. Match transactions
6. Create test data, input it in the clients system and
compare the result to what was expected (auditing
around the computerinput vs output).
Chapter 21
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Subsequent events and goingconcern
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During the audit it is likely that the auditor will come
across errors in the FS. The auditor should keep a record
of these and report to management.
The auditor will not be concerned with immaterial errors,
however, individual immaterial errors could aggregate to
amount to a material misstatements.
Also, there might be material misstatements.
Subsequent events and goingconcern
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If management amend material errors, then the auditorwill issue an unqualified report.
If management do not amend the errors then a qualified
report will be issued.
Subsequent events and goingconcern
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Between the year end and the date
of signing the audit report, the
auditor has an active dutytosearch for all material events.
Subsequent events and goingconcern
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Between the date of signing the
audit report and the date of issue
(usually AGM date), this turns to apassive duty.
Subsequent events and goingconcern
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Subsequent events review
Review of post year end management accounts
Review of post year end board minutes
etc
Adjusting vs non-adjustingevents
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Adjusting events
Provide additional evidence relating to conditions
existing at the balance sheet date.
Example: a debtor going bankrupt after year end.
Adjusting vs non-adjustingevents
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Non-adjusting events
Events taking place after balance sheet date but do
not fall under the definition of adjusting events.
Example: fire destroying inventory after balance
sheet date.
Subsequent events
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A question on subsequent events will usually
involve a scenario with events which you
must decide are adjusting or non-adjusting
events.
IS THE EVENT MATERIAL?
DOES THE EVENT PROVIDE ADDITIONAL EVIDENCE OF
YES
NO ACTION
REQUIRED
NO
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ADJUSTING EVENT
DOES THE EVENT PROVIDE ADDITIONAL EVIDENCE OF
CONDITIONS EXISTING AT THE YEAR END?
FINANCIAL STATEMENTS
MUST BE ADJUSTEDIF
MANAGEMENT REFUSE
THE AUDIT REPORT WILLBE QUALIFIED.
NON-ADJUSTING EVENT
NO REQUIREMENT TO ADJUST THE
FINANCIAL STATEMENTSEVENT
MUST BE DISCLOSED - IF
MANAGEMENT REFUSE THENQUALIFY THE AUDIT REPORT FOR
DISAGREEMENT
YES NO
Going concern review
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Consider economic conditions of the industry inwhich the company is operating
Contact providers of finance to the business to
ensure they are happy to continue to do so.
Assess managements intentions of the future. Review any budgets
Chapter 22
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Management representations
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The auditor may ask management to confirm in writingcertain issues which arose during the audit.
There are specificand non-specific items to beincluded in the management representation letter.
Specific items: those required by ISAs
Non-specific items: items relevant to that particularaudit. Ex. No evidence was available on specificelements of the FS.
Chapter 23
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Audit reportsISA 700 sets out the elements /contents of an audit report. They are:
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Title Identifies the report as an Independent Auditors Report
Addressee
The shareholders i.e. for whom the report is produced.
Introductory Paragraph
Sets outwhich pages in the report have been subject to audit and which have not.
Statement of responsibilities of management
Management have prepared financial statements in accordance with GAAP and
representing a true and fair view. Application of accounting policies and estimates as well
as responsibilities for systems and controls.
Statement of responsibilities of auditor
The audit was planned and assessed the risk of material misstatement considering internal
controls and obtaining sufficient appropriate evidence. That the auditor will express an
opinion.
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Audit reports
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If the auditor disagrees with some aspect of the financial statements or
is unable to state that they provide a true and fair view, then a
modified audit reportwill be issued.
There are two types of modified audit report:
An unqualified audit report with an emphasis of matter paragraph
A qualified audit report.
Emphasis of matter
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If the auditor wishes to draw attention to a particular matter, but agrees
with the financial statements an emphasis of matter paragraph will be
included in the audit report.
The matter referred to will be fully disclosed in the accounts and the
auditor is simply drawing the users attention to it.
The paragraph will make it clear that the opinion is not qualified and
will be given a separate heading after the opinion paragraph.
Qualified Reports
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There are two reasons that an auditor may qualify an audit report:
Disagreement
Limitation of scope
DisagreementA qualified report for the reason of disagreement will be issued if the
auditor disagrees with the application of accounting policies, the
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policies used, treatment of a particular item or the adequacy ofdisclosures.
The disagreement can be such that it is either:
Material Material and pervasive
Material
A material disagreement will mean that the auditor agrees with the
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g g
rest of the financial statements, but disagrees with that particularelement of them.
In this situation the auditor will qualify the audit with an except for
paragraph i.e. In our opinion, except for the effect on the financial
statements of the matter referred to in the preceding paragraph, thefinancial statements give a true and fair view,
Material and pervasive
A disagreement which is material and pervasive is of such
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g p
significance that the financial statements do not give a true and fairview.
In such a situation an adverse opinion is issued i.e. the financial
statements do not give a true and fair view.
Limitation of scopeIf the auditor is unable to form an opinion, then the report will be
qualified for limitation of scope.
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Limitation of scope will be due to being unable to obtain sufficient
evidence which should have been available.
A material limitation of scope will mean that the auditor agrees with
the rest of the financial statements, but is unable to agree with thatparticular element of them.
In this situation the auditor will qualify the audit with an except for
paragraph i.e. In our opinion, except for the matter referred to in the
preceding paragraph, the financial statements give a true and fair view,
Limitation of scope
A limitation of scope which is material and pervasive is of such
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significance that auditor is unable to state whether the financialstatements give a true and fair view.
In such a situation a disclaimer of opinion is issued i.e. the auditors
do not express an opinion on the financial statements.
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