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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

Resolution at each general meeting (re-appointment not automatic).

Directors pre first GM and to fill casualvacancy.

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Exclusions by law

Those involved with the management off acompany cannot audit it:

Directors

Employees

Business partners

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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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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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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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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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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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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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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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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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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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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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1. Self interest

Other Examples:

Hospitality and Benefits

Contingent Fees

Financial or Business interest

Financial interest such as shares etc.

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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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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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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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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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Other Examples:

Tax Services

Corporate Financial Services

Internal Audit Services

Former Employee of Client joining Audit Firm

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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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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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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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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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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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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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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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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.


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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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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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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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They incorporate the comparison of:

Current and prior year figures;

Current and budgeted/forecast figures;

Client and industry averages.

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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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Auditor cannot affect inherent risk or control

risk as these are internal to the client.


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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

Chap 9

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Chap 9

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Internal Control Systems

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The purpose of internal controls is to help

prevent fraud and errors which would

make the accounting information incorrect.


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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


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System

2Risk assessment

Management should be undertaking regular riskassessments to ensure that all risks are identified and

mitigated.


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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.


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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.


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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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(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.


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(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.


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Dispatch of goods


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.


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Raising invoice


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.


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Recording of the sale


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


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.


P h

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Purchases

Goods received


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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P h

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Purchases

Recording of the purchase


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.


P h

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Purchases

Payment to supplier


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


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.


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p y

Inputting of information


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.


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p y

Standing data / date kept for long term inputted


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.


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p y

Processing and recording of payroll


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.


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p y

Payment made to staff


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.


Inventory

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Inventory

Goods arrive into inventory


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)


Inventory

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Inventory

Inventory stored until needed


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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Inventory

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Inventory

Finished goods sent to customers


The correctgoods should be

sent.

Quality should be

maintained.

Records shouldbe updated

promptly and

accurately.

The same procedures as thesales cycle apply here.


Inventory

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Inventory

Inventory is counted


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


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.


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Cash held at premises is kept to a minimum


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.


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Withdrawals authorised


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.


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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.


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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.


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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


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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.


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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


Confirmation


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VALUATION AND ALLOCATION


Recalculation

Confirmation


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EXISTENCE

Inspection of assets

Confirmation


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OCCURANCE


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


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Problems:

Management override

No segregation of duties

Less formal approach


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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


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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?)


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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


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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.


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compulsory at the planning and final stageof the audit. Also an effective tool for

gathering evidence throughout the audit.


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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)


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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.


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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.


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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.


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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.


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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.

114771318 F8 Presentation

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