rick stephan hayes, philip wallage, and hans gortemaker

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 13.1

Overview of a Group Audit Principles of Auditing: An Introduction to

International Standards on Auditing - Ch 13

Rick Stephan Hayes,

Philip Wallage, and Hans Gortemaker


Slide 13.2

Definitions

A component auditor is the auditor who, at the request of the group engagement team, performs work on the financial information related to a component.

A component is an entity or business activity which financial information is included in the group financial statements.

The group engagement partner is the partner or other person in the firm who is responsible for the group audit engagement and its performance, and for the auditor’s report on the group financial statements that is issued on behalf of the firm.


Slide 13.3

Important matters to be considered from management of the group to be audited are:

The structure of the group company;Significant components;The use of service organizations;A description of group-wide controls;The complexity of the consolidation process;Component auditors not being part of the network of

the group auditor;Having unrestricted access to relevant persons and

information;Ability to perform work on the financial information

of the components.


Slide 13.4

Understanding the Group Being Audited, Its Components and Their Environments

Matters to be considered are: Industry, regulatory and other external factors; The applicable financial reporting framework; The nature of the entity; Objectives and strategies and related business risks; Measurement and review of the entity’s

performance; Instructions issued by group management to

components: accounting manual, reporting package and a timetable;

Identification and assessment of risks of fraud


Slide 13.5

Risks of material misstatement of the group financial statements that should be considered are:

A complex group structure or complex transactions; Poor corporate governance Ineffective group-wide controls; Components operating in foreign jurisdictions; Business activities that involve high risk; Specific consolidation items; Unusual related party relationships and transactions; Reconciliation issues; Components’ accounting policies differ from group policies; Components with different financial year-ends; Aggressive tax planning; Frequent changes of auditors


Slide 13.6

A component could be a head office, parent, division, location, business unit, branch, subsidiary, activity, shared service center, joint venture, associated company, or other entity whose financial information is included in the group financial statements.

Determining what is a component will require professional judgment and is guided by: the structure of the group, the flow of the financial information and the audit approach.


Slide 13.7

Illustration 13.1 Type of Work to be Performed for Components

Significant components Audit of financial statements (component materiality)

Components likely to include significant risks Audit of the financial information;

Audit of one or more account balances, classes of

transactions or disclosures relating to the significant risks;

Specified audit procedures relating to the significant risks

Not significant components Analytical procedures

If not sufficient audit evidence is available: the group

engagement team selects not significant components and

performs or request the component auditor to perform one

or more of the following procedures: audit of the financial

information, audit of one or more account balances,

classes of transactions or disclosures, a review or specific

procedures.


Slide 13.8

Information Required in Group Auditor Communication to the Component Auditor

Confirmation that the component auditor will cooperate with the group engagement team;

Work to be performed by the component auditor; Ethical requirements that are relevant to the group, in

particular the independence requirements; Component materiality and the threshold above which

misstatements cannot be regarded as clearly trivial to the group financial statements;

Identified significant risks of material misstatements of the group financial statements due to fraud or error, that are relevant to the work of the component auditor;


Slide 13.9

Communications from Group to Component Auditor (cont.)

List of related parties; Timetable; Dates of planned visits; List of key contacts; Work to be performed on intra-group transactions; Guidance on other statutory reporting responsibilities; Specific instructions for subsequent events; Findings of the group engagement team’s tests of

control activities of a processing system that is common for all or some components and tests of controls to be performed by the component auditor;


Slide 13.10

Findings of internal audit; Request for timely communication of audit evidence that

contradicts the audit evidence on which the group engagement team originally based the risk assessment at group level;

Request for a written representation on component management’s compliance with the applicable financial reporting framework;

Matters to be documented including unusual events; Request for reporting: significant accounting, financial

reporting and auditing matters, going concern issues, litigation or claim events, significant deficiencies in internal control and information that indicates the existence of fraud.


Slide 13.11

Contents of Group Audit Instructions

General Specific procedures Company Audit scope, fees & coverage Critical and Significant audit concerns . Management Letters New Accounting Standards Independence


Slide 13.12

Contents of Audit Planning Memo- Strategy Part

I. Introduction II. Follow- up from last yearIII. Insights IV. Initial Risk analysisV. Internal controls & control

procedures VI. Identification of Critical Audit ObjectivesVII. Client Service Aspects item- actionVIII. Important contactsIX. Service Audit Team


Slide 13.13

Audit Planning Memo – Plan Part

• The plan part of the audit planning memorandum summarizes technical matters,client service matters and logistical matters.

• It expands on the strategy part and provides an overview of the client company, the industry environment, significant audit concerns, and areas of interest to the audit team.

• The audit program primarily focuses on substantive year-end procedures to provide guidance for the audit work in a practical way


Slide 13.14

Contents of Audit Planning Memo - Plan Part

I. Introduction

II. Audit approach

III. Critical audit objectives

IV. Significant audit areas and accounting issues

V. Fees

VI. Timetable

VII. Client contacts

VIII. MaasTec Firm service team


Slide 13.15

Audit Program (Audit Plan)

• The audit plan, traditionally called “audit program” is a set of standardized audit procedures that are needed to substantially test the account balances and transactions outlined in the audit planning memorandum.

• The audit program starts out with the basic data about value of assets and revenue, the basis on which the testing will be made and the gauge or monetary precision or materiality, the amount of maximum misstatements allowed.

• Illustration 13.6 shows an Audit Plan.


Slide 13.16

Investments Audit Objectives & Audit Program

• For investments audit procedures there are three objectives: – Objective II is Investments exist and are owned by

the entity. (The financial statement assertions of management are existence and ownership).

• Procedure Number 3 (from Objective II) is agree to authorization in the minutes of the Board of Directors– MaasTec this year bought controlling interest in

Newco, Design Information Planning and Programming Resources (DIPPER), Financial Investment National Enterprises (FINE) and 15 per cent of Zap. Check the minutes of the board of directors to see if the board of directors authorized the purchases.


Slide 13.17

Objective II Oohh-Oh• Ask management for purchase agreements for

Newco, DIPPER and FINE. The team traces the purchase amounts to the bank statement to verify the amount and payment. Review a due diligence report for the purchase of FINE.

• One purchase agreement shows Sister Information Systems (SIS), not MaasTec (who was thought to be the owner), has entered into a share purchase agreement to purchase all shares of Newco. A discussion with management indicates that Newco is owned by SIS, which is owned by Brother, which is supposedly owned by MaasTec. There is no documentation supporting ownership of Brother by MaasTec. Send a confirmation letter to Newco to determine ownership.


Slide 13.18

Expenses and Payables OBJECTIVES

1 All unpaid amounts due to suppliers or others for goods and services received prior to year-end are included or otherwise accrued. (Completeness, existence, accuracy, and ownership.)

2. All cash disbursements are valid and properly recorded (i.e., they are for goods and services received by the entity; classification as asset, expense, liability, and other accounts is appropriate.) (Existence and accuracy.)

3. Accounting principles are appropriate and applied consistently (e.g., interest adjustments, if required, are recognized.) (Valuation, presentation and disclosures.)


Slide 13.19

Expenses and Payables Audit Program

3 Review liabilities recorded after the end of the period and review subsequent cash payments.

5. Vouch claims for credit from suppliers (e.g., receivables from suppliers) to supporting documents


Slide 13.20

Revenue and Accounts Receivable OBJECTIVES

4 Trade accounts receivable represent uncollected sales or other charges to bona fide customers and are owned by the entity. (Existence and ownership.)

5 All cash collections are accurately recorded. (Completeness and accuracy.)

7 Valuation of trade receivables is appropriate (i.e., provision is made for uncollectable amounts). (Valuation, presentation and disclosures.)


Slide 13.21

Revenue and Receivables Procedures

1. Vouch sales from shipping records to sales authorization, sales invoices, and sales I register, including relevant data (e.g. party, price, description, quantity, and dates).

2. Test sales invoice price of items to authorized lists. 3. Test processing to general and subsidiary ledgers. 4. Determine sequential numbering of sales invoices. 5. Analyze the VAT-payable to total sales

(Netherlands). 6. Evaluate propriety and consistency of accounting

principles. 7. Verify cut-off for sales, cash receipts, returns, etc. 8. Verify the mathematical accuracy of relevant

supporting schedules and agree to trial balance and subsidiary records.

9. Confirm recorded receivables (amount, date, terms, interest rate, etc.).


Slide 13.22

Revenue and Accounts Receivable Audit Program

Confirm recorded receivables.Check replies to confirmations

and investigate exceptions.Send second requests where

replies to positive requests are not received. (Exceptions to sending second requests for nonresponding positive confirmations should be rare and the reasons for not sending them should be fully documented.)

Investigate undelivered requests returned by post office. If possible obtain better addresses and mail again.


Slide 13.23

Trade Accounts Receivable Audit Program (continued)

Confirm recorded receivables (amount, date, terms, interest rate, etc.).Where replies are not received

to positive requests for confirmation apply alternative audit procedures (e.g. check subsequent remittance advices, shipping documents, billing records, customer orders and correspondence files.)

Summarize results of confirmation requests and alternative procedures.


Slide 13.24

Inventory and Cost of Sales OBJECTIVES

1. Inventory is accurately compiled and priced in conformity with acceptable methods (e.g., FIFO, LIFO) consistently applied. (Accuracy.)


Slide 13.25

Inventory Audit Program

Test priced inventory listing. Check the mathematical accuracy of the listing. Agree test counts with recorded quantities. Compare items on final inventory listing to physical

inventory tags, sheets, or lists, and vice versa. Determine that unused, voided, and no-quantity tags are

accounted for property. Reconcile totals with general ledger control Ascertain that corrections and adjustments to the final

listing are proper. Scan the inventory listing and investigate unusual

quantities or amounts.


Slide 13.26

Obsolete Inventory

• To review if inventory is obsolete you talk to management and see if they have any products or product lines they plan to cancel in the future.

• You also take a look at the sales budget to see what products sales are based on.

• You look at inventory turnover on a historical basis and determine that the product management intends to cancel is a very slow-moving product and should have increased allowances for obsolescence.


Slide 13.27

Objective: Amounts prepaid, deferred or capitalized provide future benefits; amounts and related amortization are calculated correctly; and write-down or loss provision is recorded. (existence, accuracy, valuation, ownership, presentation and disclosure)

Asset Balances / Expenses Objective


Slide 13.28

Audit procedure number 6 is: Test write-offs during the period.

■ Does the Board of Directors authorize assumptions by which the write-offs are calculated?

■ Have these assumptions changed because of change in financial accounting standards?

■ Are the projections management used to determine recoverability of assets reasonable and are they upgraded on a regular basis?

■ Are the valuation methods used in the projections the same as those used in the financial statements?

■ Is the allocation of overheads properly and consistently done?

■ Is the recovery of goodwill amortized over a reasonable period of time?

Asset Balances / Expenses Audit Program


Slide 13.29

Contents of Completion Memorandum

I. General

II. Critical audit areas

III. Accounting issues

IV. Special audit problems (FINE)

V. Other matters

VI. Outstanding matters

VII. Attached schedules


Slide 13.30

General – Completion Memo

• The first item in the completion memorandum is the statement that the engagement manager and partner have reviewed the audit papers related to critical areas.

• The other important elements to discuss immediately are audit schedules, going concern considerations and your overall opinion on the work.


Slide 13.31

Critical Audit Areas / Accounting Issues / Other Matters

• Critical Areas are those to do with risk and significant concerns.

• Accounting issues are broadly defined. Other topics described in the completion memorandum are foreign exchange, pension plan and postretirement benefits.

• Other matters are a round-up of miscellaneous matters including illegal and questionable acts, management letter, summary of unadjusted audit differences and the status of statutory financial statements.


Slide 13.32

Thank You for Your Attention

Any Questions?

rick stephan hayes, philip wallage, and hans gortemaker

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