Local Govt-Audit Manual

REPUBLIC OF ZAMBIA

Ministry of Local Government and Housing

Local Government Audit Manual

February 2007

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TABLE OF CONTENTS

FOREWORD.............................................................................................................................11

LIST OF ACRONYMS..............................................................................................................12

CHAPTER 1 INTRODUCTION AND BACKGROUND INFORMATION..............................14

1.1 INTRODUCTION ..........................................................................................................14

1.2 BACKGROUND INFORMATION.................................................................................14

1.3 STRUCTURE OF THE MANUAL ................................................................................14

CHAPTER 2 EXECUTIVE SUMMARY..............................................................................16

2.1 INTRODUCTION ..........................................................................................................16

CHAPTER 3 AUDIT OF PLANNING ....................................................................................19

3.1 INTRODUCTION ..........................................................................................................19

3.2 PLANNING RESPONSIBILITIES ................................................................................20

3.3 TIMING CONSIDERATIONS .......................................................................................21

3.4 PREPARATORY WORK..............................................................................................22

3.5 INHERENT RISK ASSESSMENT................................................................................24

3.6 PLANNING PROCEDURES ........................................................................................24

3.7 CONTROL RISK ASSESSMENT ................................................................................24

3.8 ANALYTICAL PROCEDURES ....................................................................................24

3.9 SMALLER AUDIT DIFFERENCES..............................................................................24

3.10 JOINT AUDIT ENGAGEMENTS..................................................................................25

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3.11 INFORMATION TECHNOLOGY CONSIDERATIONS ...............................................25

3.12 PLANNING DOCUMENTS...........................................................................................26

CHAPTER 4 AUDIT FIELD WORK ......................................................................................28

4.1 INTRODUCTION ..........................................................................................................28

4.2 EXECUTION OF AUDIT PROGRAMMES...................................................................28

4.3 COLLECTION OF AUDIT EVIDENCE.........................................................................28

4.4 ANALYSIS OF AUDIT EVIDENCE..............................................................................28

4.5 DOCUMENTATION OF AUDIT....................................................................................29

4.6 MAKING AUDIT CONCLUSIONS ...............................................................................29

CHAPTER 5 AUDIT OF REVENUE......................................................................................30

5.1 PROFESSIONAL AND REGULATORY PRONOUNCEMENTS ................................30

5.2 ELEMENTS OF AUDIT AREA.....................................................................................30

5.3 AUDIT OBJECTIVE .....................................................................................................31

5.4 CRITICAL ASSERTIONS ............................................................................................32

5.5 EXISTENCE OR OCCURRENCE................................................................................32

5.6 COMPLETENESS ........................................................................................................32

5.7 CUT-OFF ......................................................................................................................32

5.8 RIGHTS AND OBLIGATIONS .....................................................................................32

5.9 VALUATION .................................................................................................................33

5.10 PRESENTATION AND DISCLOSURE........................................................................33

5.11 RELEVANCE AND IMPORTANCE OF ASSERTIONS ..............................................34

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5.12 AUDIT OBJECTIVE .....................................................................................................35

5.13 AUDIT STEPS ..............................................................................................................35

CHAPTER 6 AUDIT OF SALARIES AND PERSONAL EMOLUMENTS ...........................40



6.3 AUDIT OBJECTIVE .....................................................................................................41


6.5 AUDIT STEPS ..............................................................................................................42

CHAPTER 7 PROCUREMENT OF GOODS AND SERVICES............................................45



7.3 AUDIT OBJECTIVE .....................................................................................................45


7.5 AUDIT STEPS ..............................................................................................................46

CHAPTER 8 AUDIT OF STORES AND STOCKS...............................................................47



8.3 AUDIT OBJECTIVE .....................................................................................................48


8.5 AUDIT STEPS ..............................................................................................................48

8.6 ATTENDANCE AT PHYSICAL INVENTORY COUNTING.........................................48

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CHAPTER 9 AUDIT OF CASH AND BANK ........................................................................51



9.3 AUDIT OBJECTIVE .....................................................................................................51


9.5 AUDIT STEPS ..............................................................................................................52

CHAPTER 10 GRANTS AND OTHER PAYMENTS............................................................55



10.3 AUDIT OBJECTIVE .....................................................................................................55


10.5. AUDIT STEPS ..............................................................................................................56

CHAPTER 11 AUDIT OF LOANS .........................................................................................60



11.3 AUDIT OBJECTIVE .....................................................................................................60


11.5 AUDIT STEPS ..............................................................................................................61

CHAPTER 12 AUDIT OF INVESTMENTS ........................................................................63


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12.3 AUDIT OBJECTIVE .....................................................................................................63


12.5 AUDIT STEPS ..............................................................................................................64

CHAPTER 13 AUDIT OF STATUTORY OBLIGATIONS ....................................................65

13.1 RELEVANT PROFESSIONAL AND REGULATORY PRONOUNCEMENTS ...........65


13.3 AUDIT OBJECTIVE .....................................................................................................65


13.5 AUDIT STEPS ..............................................................................................................65

CHAPTER 14 AUDIT OF COMMERCIAL VENTURES.......................................................67



14.3 AUDIT OBJECTIVE .....................................................................................................67


14.5 AUDIT STEPS ..............................................................................................................68

CHAPTER 15 AUDIT OF COUNCIL PROCEEDINGS ........................................................69



15.3 AUDIT OBJECTIVE .....................................................................................................69


15.5 AUDIT STEPS ..............................................................................................................70

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CHAPTER 16 AUDIT OF FINANCIAL STATEMENTS........................................................71

16.1 PROFESSIONAL AND REGULATORY PRONOUNCEMENTS PROVISIONS ........71


16.3 AUDIT OBJECTIVE .....................................................................................................73


16.5 AUDIT STEPS ..............................................................................................................74

CHAPTER 17 FIXED ASSETS .............................................................................................75



17.3 AUDIT OBJECTIVE .....................................................................................................75


17.5 AUDIT STEPS ..............................................................................................................76

CHAPTER 18DEBTORS........................................................................................................79



18.3 AUDIT OBJECTIVE .....................................................................................................79


18.5 AUDIT STEPS ..............................................................................................................80

CHAPTER 19 AUDIT OF CREDITORS................................................................................84



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19.3 AUDIT OBJECTIVE .....................................................................................................84


19.5 AUDIT STEPS ..............................................................................................................85

CHAPTER 20 INSPECTIONS...............................................................................................87

20.1 RELEVANT PROFESSIONAL AND REGULATORY PRONOUNCEMENTS ...........87


20.3 AUDIT OBJECTIVE .....................................................................................................87

20.4 CRITICAL ASSERTIONS. ...........................................................................................87

20.5 AUDIT STEPS ..............................................................................................................87

CHAPTER 21 VALUE FOR MONEY....................................................................................88



21.3 AUDIT OBJECTIVE .....................................................................................................88


21.5 AUDIT STEPS ..............................................................................................................89



22.3 AUDIT OBJECTIVE .....................................................................................................91


22.5 AUDIT STEPS ..............................................................................................................92

CHAPTER 23 CONCLUDING PROCEDURES....................................................................94

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CHAPTER 24 REPORTING..................................................................................................99

24.1 INTRODUCTION ..........................................................................................................99

24.2 DEFINITIONS ...............................................................................................................99

24.3 THE AUDITORS REPORT........................................................................................100

24.4 ELEMENTS OF THE AUDITORS REPORT.............................................................101

24.5 STANDARD REPORT................................................................................................104

24.6 MODIFIED REPORTS................................................................................................105

24.7 COMPARATIVE FINANCIAL STATEMENTS...........................................................106

24.8 OTHER AUDITORS ...................................................................................................107

24.9 PRIOR PERIOD FINANCIAL STATEMENTS NOT AUDITED .................................108

24.10 SUBSEQUENT EVENTS ...........................................................................................108

24.11 FACTS DISCOVERED AFTER THE FINANCIAL STATEMENTS HAVE BEEN ISSUED.......................................................................................................................109

24.12 OFFERING OF SECURITIES TO THE PUBLIC .......................................................109

24.13 OTHER INFORMATION.............................................................................................109

24.14 MATERIAL INCONSISTENCIES...............................................................................109

24.15 MATERIAL MISSTATEMENTS OF FACT ................................................................110

24.16 REPORT TO MANAGEMENT ...................................................................................110

24.17 RECORD KEEPING...................................................................................................110

24.18 ACTION TAKEN ON AUDIT REPORTS ...................................................................110

24.19 PREPARATION OF THE MINISTERS EXECUTIVE REPORTS.............................111

24.20 EXIT MEETINGS ........................................................................................................111

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CHAPTER 25 INTERNAL AUDIT.......................................................................................112

25.1 INTRODUCTION ........................................................................................................112

25.2 DEFINITION................................................................................................................112

25.3 FUNCTIONS OF LOCAL GOVERNMENT INTERNAL AUDITORS ........................112

25.4 PLANNING INTERNAL AUDIT WORK.....................................................................113

25.5 INTERNAL VS. EXTERNAL AUDIT ..........................................................................113

25.6 INDEPENDENCE AND REPORTING .......................................................................113

25.7 ROLE AND OBJECTIVES.........................................................................................114

25.8 STANDARDS ............................................................................................................114

25.9 RELATIONSHIPS .......................................................................................................114

CHAPTER 26 CONCLUSION.............................................................................................116

APPENDIX I SPECIMEN AUDIT PLANNING MEMORANDUM (APM)............................117

APPENDIX II SPECIMEN AUDIT PROGRAMME..............................................................119

APPENDIX III SPECIMEN INCOME AND EXPENDITURE STATEMENT .......................124

APPENDIX IV SPECIMEN BALANCE SHEET..................................................................125

APPENDIX V SPECIMEN TRADING, PROFIT AND LOSS ACCOUNTS ........................126

APPENDIX VI SPECIMEN CASHFLOW STATEMENT - INDIRECT METHOD.............127

APPENDIX VII SPECIMEN EXIT MEETING FORM ..........................................................128

APPENDIX VIII GLOSSARY OF TERMS...........................................................................129

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FOREWORD

The Government of the Republic of Zambia is committed to advancement of integrity, accountability and transparency in the management of public affairs in order to promote democratic governance. The Ministry of Local Government and Housing recognises the importance of Auditing as a tool for ensuring integrity, accountability and transparency in the management of local government and delivery of services by Councils established under the Local Government Act (Cap 281 of The Laws of Zambia.) In this regard the Ministry has revised and updated the Local Government Audit Manual, which was first published in 1965. The revision of the Manual was made possible with support from the Japan International Cooperation Agency (JICA). The Revised and Standardised Manual is expected to be followed by all auditors appointed to audit any Council under the provisions of the Local Government Act. Auditors and supporting auditing staff in the Councils will be expected to use the Manual as a basis for their work. It is expected that development of auditing capacity will also contribute to cost-effective utilisation of the scarce resources available to Local Government to enable it deliver services to the people in a responsive and responsible manner.

Hon Sylvia T Masebo, MP MINISTER OF LOCAL GOVERNMENT AND HOUSING

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List of Acronyms AAWP - Annual Audit Work Plans AGO - Auditor Generals Office APM - Audit Planning Memorandum CAF - Current Audit File CAF - Current Audit File CDF - Constituency Development Fund CIPFA - Chartered Institute of Public Finance and Accountancy CIPFA - Chartered Institute of Public Financial Accountants ECSAFA - East, Central and Southern African Federation of Accountants GAAP - Generally Accepted Accounting Principles IAS - International Accounting Standards IFAC - International Financial Accounting Council IFRS - International Financial Reporting Standards INTOSAI - International Organisation of Supreme Auditing Institutions IPAS - International Public Sector Accounting Standards ISAs - International Standards on Accounting IT - Information Technology JICA - Japan International Cooperation Agency LA - Local Authority LGA - Local Government Act LGAZ - Local Government Association of Zambia MLGH - Ministry of Local Government and Housing MoU - Memorandum of Understanding

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PAF - Permanent Audit File PLGO - Provincial Local Government Office PS - Permanent Secretary QoERs - Quality of Expenditure Reviews TA - Technical Assistance VfM - Value for Money ZICA - Zambia Institute of Chartered Accountants ZMK - Zambian Kwacha

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CHAPTER 1 INTRODUCTION AND BACKGROUND INFORMATION

1.1 INTRODUCTION

This manual is a revision and modernization of the first ever Local Government Audit Manual which was developed in 1965. The revision of the 1965 Audit Manual was necessitated by the need to reflect best practice in the execution of Local Government audits

The purpose of the Manual is to offer practical guidance to Local Government auditors and Private sector auditors that are contracted to audit Local Authorities (LA) in Zambia. The manual is designed to meet the requirements of both Internal and External Auditors.

1.2 BACKGROUND INFORMATION

This Manual has been modernized using the 1965 version as the basis. In modernizing the Manual we took cognizance of relevant IFRS, IASs, IPSASs and the INTOSAI Auditing Standards which are an adaptation of ISAs as published by IFAC and ECSAFA.

To this end the following institutions and institution websites played a critical role in the sourcing of information for the development of this manual:

a) INTOSAI;

b) IFAC;

c) ECSAFA;

d) AGO

e) ZICA; and

f) MLGH

1.3 STRUCTURE OF THE MANUAL

This manual is structured into three parts constituting the three major audit phases:

a) Part I - Audit planning; b) Part II - Audit Field Work; and c) Part III - Reporting

The Manual is not exhaustive and therefore should not stifle the auditors use of initiative and professional judgment in the execution of their duties. The Manual provides a framework and should remain dynamic to new developments in auditing and accounting. The MLGH should therefore strive to periodically update the Manual when need arises.

Auditing planning can be categorized in two broad levels:

a) level 1 - Inherent Risk Assessment;

b) level 2 - Council Business Environment appreciation/(understanding).

Audit field work comprises all the work that an auditor carries out while in the council premises.

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Reporting involves the communication of an auditors opinion of a Councils financial statements based on the analysis of the audit evidence gathered during the audit fieldwork.

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CHAPTER 2 EXECUTIVE SUMMARY 2.1 INTRODUCTION

This Chapter presents an overview of a generic audit methodology which should be adaptable for the audit of LAs in Zambia. This generic methodology is designed to achieve objectives of an audit in an efficient manner while providing a platform for an informed basis for offering constructive best practice advice. Although the generic methodology is the same regardless of the size of a Council, the procedures to be used and the extent of work to be performed will vary considerably for each Council. This generic methodology is an inference of the provisions of ISA.

Nature o f the

CouncilOb jectives &

S trateg ies

Perfo rmance

Measures

Governmen t

Regu lato ry &

O the r Exte rnal

Factors

Interna l Con tro l

A ctiv ities - Level

Con tro ls

Deve lop Expectations

& Perfo rm Ana lytics

Perfo rm Inquiries,

obse rva tions & W a lk

Throughs

(as necessary)

Eva lua te Design

E ffectiveness of

In terna l Contro ls

Assess App licability

of Inhe rent R isk

Ind ica to rs

Identify R isks o f

Misstatemen t

In terna l Con tro l

Designed

E ffective ly?

Identity and Test

Governance and

Activ ities - Level

Key Internal Con tro ls

Key Contro ls

Operating

E ffective ly?

Tailo red Substantive P rocedures

O the r F inancia l S ta temen t

R isk A reas"C ritica l" A ssertions "No t C ritica l" Assertions

Tailored

Procedures

"D " or No

ProceduresNO - "B " or "C " P rocedures

No

"A" or "B " P rocedures

Yes

Yes

Understand & Document Knowledge of a Council

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Key A - Procedures are mostly analytical procedures B - Procedures involve usage of basic substantive procedures C - Procedures entail execution of comprehensive testing D - Procedures entail detailed testing of audit evidence.

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PART I - PRE-AUDIT

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CHAPTER 3 AUDIT OF PLANNING

Summary Audit planning involves developing an appropriate overall audit strategy. This Chapter discusses the various audit planning aspects that need to be considered. The importance of effective planning cannot be overemphasized. It is absolutely vital in the decentralization era in which Local Authorities (LAs now operate that Auditors have an audit approach that appropriately meets professional standards, but does not cause to over audit. The audit team is expected to devote appropriate time and attention to the planning process.

3.1 INTRODUCTION

All audits need to be adequately planned. The need to plan exists regardless of the size and complexity of the LA. However, the extent of audit procedures that need to be performed will be affected by factors such as:

a) the nature of the engagement;

b) the size and complexity of the financial statements;

c) past experiences with the LA; and

d) the specific terms of the engagement. The importance of effective planning cannot be over emphasized. All members of the audit team are expected to contribute to this objective. Planning identifies the work to be done, by whom and when. The main objectives of planning are to: a) establish the audit strategy;

b) help direct and control the audit work;

c) ensure appropriate attention to important aspects of the audit;

d) make the most effective use of available staff (this is essential to maximize audit efficiency); and

e) ensure the work is completed efficiently.

One of the key planning decisions is the determination of critical and not critical assertions. If this determination is not made properly, auditors could be applying the wrong audit strategy with a possible ineffective or inefficient audit.

Reference to the audit "planning stage" (i.e., the time before substantial fieldwork starts, when information is gathered about the LA and design of an audit strategy), actually continues throughout the audit. For example:

a) auditors plan throughout the audit to accommodate changes in the LAs size, the economic environment and in professional pronouncements, Local Government regulations, etc;

b) during fieldwork, there may be changes to planned procedures because of unexpected circumstances;

c) at the end of fieldwork, a list is made as part of work papers of that which needs to be

considered in the following period, while they are still fresh in the auditors mind.

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3.2 PLANNING RESPONSIBILITIES

As a minimum, a typical audit team will comprise: a) final supervising officer;

b) in-charge auditor;

c) audit team members; and

d) where applicable, a specialist.

The final supervising officer is responsible for initiating the planning process. He retains overall responsibility for the audit plan. The supervising officer is responsible for the entire audit assignment. He supervises the entire audit team and also responsible for quality control. The supervising officer participates in the planning process to ensure that the audit plan properly addresses the risks associated with the engagement.

The Auditor-in-Charge is responsible for executing the audit plan. He is in charge of the day to day audit field work of the audit team members. Especially in first-time audits or where the in-charge auditor is new to the particular engagement, it might be more efficient for other audit team members to participate in the detailed planning.

The audit team members are responsible for various aspects of the fieldwork. A team member may be assigned one or more audit field work area such as audit of:

a) revenue;

b) payroll; and

c) cash.

Within the constraints of the particular engagement discussed above, the auditor in-charge is generally responsible for the direct supervision of the planning. The audit supervising officer should be involved throughout the planning process and should approve the audit plan, after ensuring that planning objectives are accomplished and documented.

Regardless of who performs the detailed planning work, because of its importance, sufficient time should be allotted to the planning process, including appropriate time and attention by the audit supervising officer.

Specialists, if any, need to be involved as early in the process as possible. For example, a professional with specialized computer audit knowledge may need to be involved to assist the audit team in understanding the complexity of an automated accounting system, designing appropriate audit strategies and testing of internal controls, if members of the audit team do not already have the background and experience to do this.

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3.3 TIMING CONSIDERATIONS

Effective planning enables auditors to organize audits in a way that ensures auditors perform work in accordance with professional standards within reasonable time limits. Generally, such planning should be performed as early as possible. The following considerations contribute significantly to this objective:

a) prepare the overall engagement plan well in advance of the time when the current year's fieldwork is to be started. This allows for individual job planning and maximum utilization of available staff time;

b) audit planning should usually take place prior to the financial statement date (before December). For most audits, planning should start no later than the close of the third quarter of the fiscal year. (However, planning for audits of many smaller LAs might be later in the year, and for some, just prior to the start of substantive fieldwork.)

c) emphasize those investigative and analytical auditing approaches that will help perform an audit more efficiently. This type of knowledge results in far more effective auditing than can be accomplished through a vast volume of detailed work;

d) where permitted by professional standards, ensure that the auditor appropriately consider accounting and other non-audit work (e.g., preparing or reviewing tax analyses) when determining the extent of audit work for particular assertions;

e) assign new personnel to the engagement to provide them with opportunities for learning and to permit the in-charge auditor to develop supervisory capabilities. Effective utilization of personnel increases the flexibility in staff scheduling and lessens unproductive time;

f) consider the availability of LA personnel to prepare schedules and other mechanical assistance in relation to the LAs normal operating demands for such personnel; and

g) arrange for a qualified technical specialist personnel to perform computer controls reviews and develop any necessary computer-assisted audit procedures for interim or final work.

Regardless of the intended approach, certain planning procedures can always be done during the non-busy season. These include:

a) meeting with the Council officials to develop a better knowledge and appreciation of the Councils business;

b) updating documentation of the LAs accounting system and control procedures (and performing tests of controls, when necessary); and

c) consider likely areas of LA advisory comments and other similar communications.

Procedures such as confirming understanding of the accounting system and internal control, including walk-through tests, can be performed shortly after other planning procedures.

The results of planning help determine the nature, timing and extent of substantive audit procedures, and the identification of any additional work that can be performed prior to year end.

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3.4 PREPARATORY WORK

Discussions with the Council

Usually, auditors should have preparatory discussions with the Councils to enable them update their knowledge of the council operations and to develop preliminary audit strategy. These discussions should be held as early as practicable before the fieldwork begins or early in the planning stage. The audit supervising officer should ordinarily be involved. A meeting should generally be held with the council to make necessary arrangements for the conduct of the engagement and to assist in gaining knowledge of the council's business. The agenda of this meeting should include:

a) updating knowledge of the councils operations;

b) identifying matters and events that occurred during the year that could influence the audit

approach or the councils financial statements;

c) identifying specific laws and regulations, or changes in such, that might directly affect the

financial statements;

d) defining the scope of the engagement, including any known restrictions or limitations;

e) arranging for necessary records (e.g., electronic data files) for use during the audit;

f) ascertaining a tentative timetable, including inventory observations and council locations to

be visited;

g) reviewing prior year, and, if available, interim reports to establish current year needs and to

identify format changes;

h) reviewing new professional pronouncements expected to be applicable;

i) gathering information to assist in assessing the risk of misstatements resulting from errors

or fraud;

j) maximizing use of council personnel;

k) reviewing the manner in which and to whom any advisory comments will be delivered (for

example, will the report be written or oral);

l) determining if any additional reports are necessary for presentation to Council or the audit

committee (for example, a formal audit plan);

m) establishing physical work-space requirements for each phase of the work;

n) appointing a member of the councils staff to act as the audit contact person with auditors;

and

o) existence and work of internal auditors.

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Appointment letter An appointment letter should be obtained to document understanding of the terms of the engagement with the council. The appointing authority is contained in section 52 of the Local Government Act while the scope of an ordinary Council audit is covered under sections 53 to 55 of the Local Government Act. Planning Meeting A planning meeting should be held with the key staff to be involved in the audit and key staff from other departments in the Council. The meeting should be held very early in the planning process.

Other Preparatory Work In addition to preparatory discussions with the council and among members of the audit team as discussed above, the audit team should also talk to other partners and staff of the Council who have done work for the Council during the year and may also wish to talk to key staff involved in the previous year's audit. This may help identify matters that auditors should be aware of, or suggestions for performing the work more efficiently. A brief review of the previous year's work papers should also be carried out to make sure that points noted in the previous year are adequately covered in the planning. The correspondence file should also be reviewed to make sure that knowledge about the Council and its business is up-to-date.

In addition to the above procedures, the audit team should scan the prior years work papers and correspondence with the Council during the year, noting any significant matters that will affect the audit. Staff Scheduling

Staff scheduling is an important aspect of planning. While the scheduling process may differ depending on the size of the office, effective scheduling recognizes the exercise of judgment in choosing among alternatives that may affect the assignment of staff.

The following factors should be considered:

a) engagement size and complexity;

b) matching of council and staff personalities;

c) personnel availability;

d) efficient conduct of the engagement;

e) continuity and periodic rotation of audit personnel;

f) special expertise;

g) opportunities for on-the-job training;

h) circumstances where questions about independence or conflicts of interest might be raised;

i) ability to perform the work within a reasonable period of time; and

j) involvement of supervisory personnel.

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3.5 INHERENT RISK ASSESSMENT

Inherent Risk Assessment concentrates on the environment in which the Council operates and the risks posed by the engagement in assessing inherent risk. This encompasses general and industry economic trends, the interrelationship between the Council's business and its industry, its management, the fraud factors and many other factors that impact on audit risk. This, in turn, focuses on the early identification and consideration of critical assertions; the nature of internal control (including assessments of control risk) and the council personnel involved in critical assertions; situations that have caused financial statement difficulties in the past; and other similar factors.

3.6 PLANNING PROCEDURES

Understanding the Councils Business

Knowledge of the Council's business is a key element of Inherent Risk Assessment. This knowledge also assists in providing the audits with other important services.

Audit planning should first be directed toward updating (or, in an initial audit, gathering) the information on files about the Councils business and operations that will enable to enhance professional relationship with the Council.

3.7 CONTROL RISK ASSESSMENT

Assessing control risk is the process of evaluating the effectiveness of the internal control process to prevent or detect material misstatements in the financial statements. During planning, auditors assess control risk for critical assertions.

3.8 ANALYTICAL PROCEDURES

Analytical procedures at the planning stage are used as attention-directing procedures, to highlight areas of concern or where problems may be expected. The types of procedures that may be used at this stage are considered in more details later.

3.9 SMALLER AUDIT DIFFERENCES

The audit team may determine an amount below which audit differences need not be included on the Summary of Unrecorded Misstatements

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3.10 JOINT AUDIT ENGAGEMENTS

Public Auditors occasionally participate in joint audit engagements with other auditors. For this purpose, a joint audit is defined as one where two or more teams work together on an audit and produce an audit report signed by both. Such engagements may be authorized when it is believed they may lead to a long-term relationship or to other long-term benefits.

3.11 INFORMATION TECHNOLOGY CONSIDERATIONS

Information Technology (IT) governance controls should be designed and operate effectively if we plan to perform tests of automated controls at the activities level.

The extent of involvement of a professional with specialized computer audit knowledge will depend on the complexity of IT used in the significant transaction cycles, control risk assessments and the IT skills available in the audit team. The role of this specialist should be to assist the audit team in the following areas:

a) documenting IT controls;

b) evaluating the design effectiveness of IT controls;

c) designing and implementing tests of controls and substantive tests related to IT, including the use of computer-assisted audit techniques (caats);

d) interpreting the test results; and e) preparing comments for the management letter.

When a computer audit specialist is used, the audit team's responsibility for the IT aspects of an audit cannot be transferred to that specialist. The audit team is responsible for:

a) determining, in consultation with the computer audit specialist, the objectives of the review of IT and the procedures to be performed;

b) participating appropriately in performing the work;

c) reviewing the results of the specialist's work;

d) evaluating the results of their work and determining how it will affect audit risk, audit strategy and tailoring appropriate audit; and

e) ensuring that the work papers adequately document all IT aspects of the engagement.

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3.12 PLANNING DOCUMENTS

The planning process is usually evidenced by the production of the following planning documents: a) audit planning memorandum;

b) audit work plan;

c) time budget; and

d) audit programme.

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PART II - AUDIT FIELD WORK

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CHAPTER 4 AUDIT FIELD WORK 4.1 INTRODUCTION

The audit field work commences when the audit team goes out in the field. The audit team moves physically onto Council premises and commences the actual fieldwork. The fieldwork should cover the following: a) execution of audit programmes;

b) collection of audit evidence;

c) analyzing the audit evidence;

d) documenting audit work; and

e) making audit conclusions.

4.2 EXECUTION OF AUDIT PROGRAMMES

Execution of audit programmes involves the implementation by an auditor of all audit steps that are contained in an audit programme. An example of an Audit Programme is included at Appendix II to this Manual.

4.3 COLLECTION OF AUDIT EVIDENCE

Collection of audit evidence involves extraction of such explanation and documentation from management of a council as to back particular steps of an audit programme. The evidence obtained may take the following forms:

a) source documents;

b) management representations;

c) previous audit reports (internal and external);

d) council minutes;

e) trend analyses interpretations; and

f) collaborative inferences

4.4 ANALYSIS OF AUDIT EVIDENCE

This entails interpretation of data and information in the light of the actual audit test undertaken. The analysis may entail comparing analytical review tests with already developed expectations and seeking explanations for the variances or deviations from expected norms.

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4.5 DOCUMENTATION OF AUDIT

An audit can only be relied upon if it is properly documented. All audit work undertaken should thus be documented through the generation of audit work papers. These work papers should in turn be properly cross-referenced to the source of the information or audit evidence. Various marks are adopted in this regard as references which should be supported by an appropriate key.

4.6 MAKING AUDIT CONCLUSIONS

At the end of each work paper an auditor should make informed conclusions based on the work undertaken and the evidence gathered. Audit conclusions can only reliably be drawn once the evidence gathered is: a) sufficient;

b) appropriate;

c) relevant; and

d) reasonable

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CHAPTER 5 AUDIT OF REVENUE 5.1 PROFESSIONAL AND REGULATORY PRONOUNCEMENTS

IAS 18 prescribes when to recognise revenue, including sale of goods, provision of services, and entitlement to interest, royalties and dividends. Other standards deal with particular revenues. Revenue is recognised when it is probable that benefits will flow to the Council and these benefits can be measured reliably. For sales of goods, this is when: a) significant risks and rewards of ownership have been transferred to the buyer, and b) the Council has neither continuing managerial involvement nor effective control over the goods. For services, revenue is recognised when work is performed. This is commonly referred to as the percentage of completion method. When the outcome of a service contract cannot be estimated reliably, revenue is recognised only to the extent of expenses that are recoverable. Interest is recognised on a time proportion basis, at the effective yield on the asset. Dividends are recognised when the shareholder has the right to receive payment. Revenue is measured at the fair value of the consideration received or receivable by the Council on its own account. It does not include amounts collected on behalf of third parties. When receipt of cash is deferred, the nominal consideration is split between sales revenue and interest revenue. An exchange of goods or services for similar items does not generate revenue. An exchange for dissimilar items generates revenue measured at the fair value of the goods or services received.

5.2 ELEMENTS OF AUDIT AREA

A Councils revenue system typically comprises the following revenue lines although the mix however varies from one LA to another: a) owners rates; b) ground rent ( from improved statutory housing areas); c) levies include but are not restricted to the following:

- personal levy; - street vending - fish - charcoal - grain - parking - bus station

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d) government grants; e) fees and charges; f) market fees; g) community income; h) engineering income; i) medical fees; j) health permits; and k) trading licences:

- retail - wholesale - liquor - scrap metal - hawkers - peddlers - stall - restricted - agent fees etc

5.3 AUDIT OBJECTIVE

To verify whether: a) all billable council revenue lines have been billed; b) all revenue due to Council is collected; c) all income/revenues collected are properly brought to account by receipting, recording in the

cashbook, deposited in the correct bank account without delay; d) the figures are posted to the appropriate ledgers and final accounts; e) the procedures for the security, collection, receipting and recording of all cash are adequate and

in accordance with procedures; and f) the system is adequate, in order that the postings to the relevant accounts will be carried out

correctly and promptly.

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5.4 CRITICAL ASSERTIONS

Assertions are the fundamental assumptions that management of a Council use as a basis for the preparations of financial statements. The assertions are broadly categorized as follows:

a) existence or occurrence

b) completeness ;

c) cut-off ;

d) rights and obligations ;

e) valuation on allocation (Gross or net) ; and

f) presentation and disclosure .

5.5 EXISTENCE OR OCCURRENCE

Assertions about existence or occurrence deal with whether assets or liabilities exist at a given date (referred to as existence), and whether recorded transactions have in fact occurred during a given period (referred to as occurrence). The audit of the existence and occurrence assertions is essentially concerned with establishing that balances within transaction cycles are not overstated.

5.6 COMPLETENESS

Assertions about completeness deal with whether all balances and transactions that should be presented in the financial statements are properly recorded. The audit of the completeness assertion is essentially concerned with establishing that balances within transaction cycles are not understated.

5.7 CUT-OFF

Assertions about cut-off deal with whether all assets, liabilities, income and expenses are reported in the appropriate period. Cut-off is a separate assertion because the substantive procedures to verify it are typically different from those applied to the other components of completeness.

5.8 RIGHTS AND OBLIGATIONS

Assertions about rights and obligations deal with whether assets are the rights of the client (i.e., whether the client has ownership and title to assets) and liabilities represent all the clients obligations at a given date. These assertions relate to whether the client was, in actuality, party to a transaction, and whether the transaction was for valid business purposes.

Rights and obligations assertions may in many cases be inseparable from the existence and completeness assertions, and do not normally require separate audit attention. However, where a client deals with assets, liabilities or transactions pertaining to other parties, this may not be so. For example, audit procedures will normally establish that all cash receipts are completely accounted. However, for clients who handle cash on behalf of other parties, there is need to establish not only that receipts are completely accounted, but also that cash receipts that properly relate to clients have not been accounted for as relating to the other parties.

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5.9 VALUATION

Assertions about valuation deal with whether assets and liabilities have been included in financial statements at appropriate amounts. The valuation assertion for asset and liability accounts can be subdivided into gross and net. Valuation gross deals with the recorded cost amounts and valuation net deals with whether assets and liabilities can be recovered (liquidated) at their stated value. These assertions are separated because the substantive procedures to verify valuation gross are typically different from those used to verify valuation net.

5.10 PRESENTATION AND DISCLOSURE

Assertions about presentation and disclosure deal with whether particular items in the financial statements are properly classified, described and disclosed. Presentation and disclosure assertions are considered during the course of the audit by procedures that call for gathering information that is necessary to determine that disclosures are complete. In addition, many firms use a financial statement disclosure checklist, generally completed at the conclusion of the audit, to assist in determining that disclosures are complete. The presentation and disclosure guidelines may vary considerably from country to country.

The audit implications of assertions can be summarized as follows:

Assertion Balance Sheet Income Statement

Existence or Occurrence Do recorded assets and recorded liabilities exist?

Did recorded transactions occur?

Completeness Have all assets and liabilities been recorded?

Have all income and expenses been recorded?

Cut-off Are all assets and liabilities recorded in the appropriate period?

Have all income and expenses been recorded in the appropriate period?

Rights and Obligations Does the client own the recorded assets? Are the liabilities attributable to the client recorded?

Was the client really a party to the transactions, and were they for valid business purposes?

Valuation: Gross Net

Are amounts attributed to the assets and liabilities appropriately valued? Can assets (liabilities) be recovered (liquidated) at their stated value?

Have income and expenses been measured appropriately? Have income and expense been measured appropriately?

Presentation and Disclosure Have the assets and liabilities been properly presented and disclosed?

Have income and expense been properly presented and disclosed?

To further illustrate, consider the following comparison of various financial statement assertions, the related audit objectives and sample procedures in the B approach to achieve such objectives:

Assertion Audit Objectives Audit Procedures

Existence or Occurrence Existence of debtors. Confirmation of accounts receivable balances.

Completeness A liability has been recorded for all purchases.

Review unmatched receiving reports and unprocessed invoices.

Cut-off Sales are recorded in the proper period. Review sales records for a period before

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and after year-end.

Rights and Obligations Cash in bank is held in accounts and not subject to restrictions.

Confirm arrangements directly with an appropriate official of the financial institution.

Valuation: Gross Net

Fixed assets are appropriately recorded at acquisition cost. Debtors are stated at net realizable value.

Examine appropriate supporting invoices or other documentation for additions. Review and evaluate aging of debtors to evaluate adequacy of allowance for doubtful accounts.

Presentation and Disclosure Appropriate disclosure of loss contingencies not required to be accrued.

Inquire of the client's management and lawyers concerning litigation claims and assessments.

5.11 RELEVANCE AND IMPORTANCE OF ASSERTIONS

Audit procedures are selected to provide evidence supporting the assertions contained in the financial statements. However, there is not a one-to-one relationship between these assertions and our procedures. Some procedures may relate to more than one assertion and some assertions may require more than one procedure.

Not every assertion is relevant to every audit cycle. For example, the presentation and disclosure assertion may not be relevant to the operating expenses cycle.

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5.12 AUDIT OBJECTIVE

For purposes of auditing the revenue cycle of the Council the following assertions are considered critical:

Completeness All collectable revenues have been collected, recorded and banked

Validity All the recorded revenues pertain to relevant activities and are real

Measurement All revenues have been recorded correctly

Occurrence/Cut off All transactions are recorded in the period in which they occurred.

Classification All revenues have been correctly described and recorded in the books of accounts.

Regularity All computation, payments and recordings have been made in compliance with rules and regulations and best practice.

5.13 AUDIT STEPS

1 Test the castings of levies subsidiary ledgers and agree the total with the general ledger control

2 Select a sample of levies and other revenue source documents and trace them to the

recorded transactions:

a) select a representative sample from the population; b) trace each sample item to the recorded transaction (i.e levies journal); c) evaluate the results of the sample; d) depending on the evaluation results, you may need to increase the sample size; e) discuss exceptions with appropriate council personnel; and f) record the projected error on the summary of unrecorded misstatements.

3 Test cutoff procedures at the end of the prior period.

a) inquire of billings and accounting personnel as to the cutoff procedures employed at

the end of the prior period.

b) review levies journal for a reasonable period prior and subsequent to the end of the prior period, investigate any unusual entries, and document the period covered.

c) investigate large and unusual levies transactions that occurred near the close of the

prior period.

4 Verify the appropriate cutoff of levies: a) obtain last levies invoice number;

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b) ascertain whether the last levies invoice number was included in the current periods recorded levies; and

c) ascertain that the subsequent levies invoice numbers are included in the

subsequent periods recorded levies.

5 Scan the levies records for the last business day of the year for large or unusual entries and verify that they were recorded in the proper period.

6 Review the levies and other revenue recognition policies for appropriateness and consistency with the prior year, giving particular attention to: a) effects of new levy types and other changing circumstances; and b) one time or unusual transactions.

7 Consider whether transactions may be occurring between the Council and related parties

that are not being given appropriate accounting treatment.

8 Consider whether balances or transactions that are large or unusual indicate the existence of a previously undisclosed related party.

9 Obtain or prepare a schedule of levies revenue by month in sufficient detail (e.g., by levies type) and perform the following procedures: a) develop expectations and acceptance ranges;

b) compare recorded values to expectations;

c) identify significant deviations from the expectations;

d) discuss deviations with appropriate Council personnel; and

e) consider plausibility of responses and corroborate explanations and responses

where appropriate.

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10 Confirm all receivable balances or transactions over an agreed value ZMK using positive confirmations (coverage should be at least 80% of population value).

a) identify accounts using predetermined amounts or criteria;

b) prepare confirmations;

c) send second requests to non-responding customers;

d) for non-responding customers, perform alternative audit procedures; and

e) if differences are reported on returned confirmations, document follow-up procedures and results.

- discuss unresolved difference with appropriate Council personnel; and

- carry audit differences to summary of Unrecorded Misstatements work paper

11 Scan the levies journal for significant levies revenue transactions after the confirmation date and trace to supporting documentation.

12 Compare the following ratios to prior periods and to expectations:

a) levies debtors/current assets; and

b) levies debtors/total assets.

13 Scan the levies revenue accounts in the general ledger for large or otherwise unusual entries:

a) large amounts recorded at or near year end;

b) large volume of transactions at or near year end;

c) unusual posting sources; and

d) large journal entries at or near year end.

14 If unusual or complex transactions have been identified, inquire of individuals outside of the accounting department who initiate or process such transactions about the following:

a) existence or suspicion of fraud;

b) undisclosed side agreements; and

c) Activities or directives by management that are out of the ordinary.

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15 Test the levies values: a) select 60 items from the file or listing levies; and

b) verify the listed values with appropriate council personnel and statutory

instrument.

16 Test the allowance for doubtful accounts by:

a) Test the aging of levies receivable subsidiary records:

obtain an aging by customer of accounts receivable; and

trace relevant documentation on levies and payment activity to verify that levies debtors have been properly aged.

b) Identify customers that potentially post a credit risk:

customers with significant past due accounts

customers whose credit situation has declined during the year by comparing the aging Levies Debtors by significant customer to that existing at a previous period (e.g.; last year).

customers where significant amounts were written off during the year.

c) review identified customers with appropriate council personnel;

d) review experience of recoveries of accounts previously written-off;

e) develop an estimate (or range) of the allowance for doubtful accounts;

f) with appropriate council personnel;

g) discuss estimate (or range) of the allowance for doubtful accounts with appropriate council personnel; and

h) if any, carry to the summary of unrecorded misstatements the appropriate amount

between estimate (or range) and the recorded amount.

17 Determine subsequent payment of past due accounts by examining remittance advices, bank deposit slips and bank statements.

18 Scan the accounting records for write-offs and other credits to accounts receivable subsequent to the reporting period and determine whether adjustments are required.

19 Examine write-offs and other credits to accounts receivable subsequent to the confirmation date and trace supporting documentation for authorization and appropriateness.

20 Examine accounts written-off during the year for authorization and appropriateness

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21 Compare the following ratios to prior periods and to expectations: a) allowance for doubtful accounts/accounts receivable;

b) bad debt expense/levies; and

c) average levies receivable collection period.

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CHAPTER 6 AUDIT OF SALARIES AND PERSONAL EMOLUMENTS 6.1 PROFESSIONAL AND REGULATORY PRONOUNCEMENTS

IAS 19 prescribes the accounting treatment of and disclosure of employee benefits by employers. IAS 19 does not deal with measurement or recognition as expenses of benefits based on, or in the form of, equity instruments (Employee Share Option Plans). The accounting treatment for share-based payments is discussed in IFRS 2 Share-based Payment. Employee benefits are all forms of consideration paid for services of employees. They include:

a) short-term benefits such as wages, salaries, paid annual leave and sick leave, profit-sharing and bonuses, and non-monetary benefits (such as medical care, housing, cars, and free or subsidised goods or services);

b) post-employment benefits such as pensions, life insurance, and medical care;

c) other long-term benefits such as long-service leave, and bonuses and other benefits not

payable within 12 months; and

d) termination benefits such as early retirement and redundancy pay. A liability is recognised when an employee has provided service in return for benefits to be paid in the future. An expense is recognised as the Council benefits from services provided by employees. Short-term employee benefits are recognised as an expense as the employee provides services. Leave that does not accumulate (for example, in some countries, sick leave) is recognised only when the leave is taken. Profit-sharing and bonus payments are recognised when the Council has an obligation to pay. A liability is recognised for unpaid short-term benefits. Post-employment benefits, including those provided through multi-employer plans, are classified as either defined contribution plans or defined benefit plans. The arrangements may be formal or informal. Under a defined contribution plan, an Council pays fixed contributions to a separate Council (a fund) and has no obligation to pay further contributions if the fund does not hold sufficient assets to pay employee benefits. All other post-employment benefit plans are defined benefit plans. Contributions payable to a defined contribution plan are recognised as an expense as the employee provides services. Defined benefit plans may be unfunded, or wholly or partly funded. For a defined benefit plan, the Council recognises the defined benefit obligation, based on actuarial assumptions, net of the fair value of plan assets. Changes in actuarial assumptions and unexpected changes in the fair value of plan assets result in actuarial gains or losses. Such gains and losses within a 10 per cent corridor of the obligation or asset value need not be immediately recognised.

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For other long-term benefits, such as long-service leave, the Council recognises the defined benefit obligation net of the fair value of plan assets (if any). Actuarial gains and losses and past service costs are recognised immediately.

Termination benefits arise only on termination, rather than during employment. They are recognised as an expense and a liability when the Council is demonstrably committed to the termination and cannot withdraw from it.


The major areas of payroll for most Councils would comprise:

a) salaries and wages;

b) housing allowance;

c) other personal emoluments;

d) pay as you earn; and

e) other deductions

6.3 AUDIT OBJECTIVE

The audit objectives is to satisfy auditor that:

a) the approved procedures are followed, that the payments made are correct and are in accordance with terms and conditions of service, that the records maintained are accurate and adequate

b) proper security is exercised over collection, make-up, custody and pay out of cash or cheques;

c) management has satisfied the requirements set regarding payroll routines and routines relating to other personal emoluments; and

d) the expenditure recorded in the accounts do not contain material errors or dispositions that cannot be accepted.


Completeness All expenditure on personal emoluments connected to the Council has been recorded in the books of accounts.

Validity All expenditure on personal emoluments pertains to relevant activities and is real.

Measurement All expenditure on personal emoluments has been computed and recorded correctly.

Occurrence/Cut off All transactions are recorded in the period in which they occurred.

Presentation and classification All expenditure on personal emoluments has been correctly classified in the books of accounts and has been described correctly.

Regularity All computations and disbursements have been made in compliance with rules and regulations and best practice.

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6.5 AUDIT STEPS

1 Review employment contracts council conditions of service and other compensation

policies.

2 Review accrual for salaries, wages and withholding, commissions and leave pay.

a) obtain an analysis of such accounts, test its arithmetical accuracy and compare amounts to general ledger balances;

b) trace bonuses and similar accruals to proper authorizations;

c) trace bonuses to subsequent payments;

d) test accrued salaries and wages by tracing last payment date to payroll journals and estimating the accrual by reference to subsequent payrolls; and

e) analytically review leave pay accrual for reasonableness.

3 Examine other payroll taxes and determine that appropriate accruals have been made and paid on a timely basis.

4 Review accrual for employee benefit plans (LASF and NAPSA deductions).

a) test the clerical accuracy of an analysis of employee benefit plans (LASF and NAPSA) and compare amounts to general ledger balances (Current and prior years);

b) test current payments by examining appropriate supporting data;

c) review employee benefit plans; and

d) determine whether the accounting method recognizes employee benefits in accordance with current accounting standards.

5 Review accrual for deferred compensation and post employment benefits (Other than pensions).

a) test the clerical accuracy of an analysis of deferred compensation and post employment benefits agreements and compare amounts to general ledger balances (current and prior years);


c) review employee deferred compensation and post employment benefits agreements;

d) determine whether the accounting method recognizes deferred compensation cost on the accrual basis (over the employees service life); and

e) consider confirming unpaid balances and terms of payment.

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6 Review accrual for post retirement benefit plans.

a) test the clerical accuracy of an analysis of post retirement benefit plans and compare amounts to general ledger balances (current and prior years);


c) review post retirement benefit plans; and

d) determine whether the accounting method recognizes postretirement benefits in accordance with current accounting standards.

7 For each employee compensation account as of the close of the period: a) obtain the relevant schedules;

b) determine that accounting policies and procedures are appropriate;

c) obtain and review schedules supporting accruals; and

d) test schedules supporting significant accruals.

8 Prepare or update a permanent file schedule indicating monthly payroll. a) develop expectations and acceptance ranges;

b) compare recorded values to expectations;

c) identify significant deviations from the expectations;

d) discuss deviations with appropriate council personnel; and

e) consider plausibility of responses and corroborate explanations where

appropriate.

9 Select a sample of the lesser of 30 employees or 50% of the total number of employees from the Councils personnel file. a) verify employee identification was obtained (social security card, drivers license,

birth certificate, etc) and approved wages documented in the personnel file;

b) review reasonableness of pay and benefits, including authorization for withholding amounts;

c) verify rate paid for position held;

d) review overtime accrued to date;

e) compare rate paid to previous year for unusual changes; and

f) discuss findings with appropriate personnel.

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10 Trace Employee remuneration, including bonuses, to the minutes of the council/agreements with the trade union.

11 Examine payroll tax forms in order to verify that payroll tax returns are properly filed and related taxes are being timely remitted. a) compare the amounts shown on the forms with the total deductions shown in the

payroll journals and agree the amount recorded as a liability to the general ledger account.

b) trace amounts to subsequent payments and note any undue delay in payments.

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CHAPTER 7 PROCUREMENT OF GOODS AND SERVICES 7.1 PROFESSIONAL AND REGULATORY PRONOUNCEMENTS

Procurement procedures we regulatory by tender provisions as documented.


a) major procurements, including contracts;

b) maintenance of buildings, plant and equipment etc;

c) advance payments to suppliers; and

d) outstanding bills

7.3 AUDIT OBJECTIVE

a) management has satisfied the requirements of Management Tender Committee provisions

or Zambia National Tender Board and stores regulations set regarding public procurements; and

b) the expenditure recorded in the books of accounts do not contain material errors.


Completeness All the Councils procurements have been recorded in the books of accounts

Validity All the procurements pertain to the operations of the audited Council and are real

Measurement All expenditure on goods and services has been recorded correctly

Occurrence All transactions are recorded in the period in which they occurred.

Presentation and classification All expenditure on goods and services has been correctly classified in the books of accounts and described correctly

Regularity All procurements have been made in compliance with rules and regulations in force (tender procedures, stores regulations

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7.5 AUDIT STEPS

1 Identify the contracts and list them; 2 Identify payments to major contracts;

3 Establish the legality of the contract(s)

a) tender board authority;

b) contract terms;

c) work relates to the budget line; and

d) review council minutes for resolution/authority

4 Establish the legality/regularity of the payments

5 If advance payments/recovery is it as in contract terms?

6 If interim payments

a) payments within the approved amount;

b) adequately documented

c) supporting documents: Claim for payment, progress report, stage completion certificate, acknowledgement of payment etc

7 If final payment

a) payment within the approved amount;

b) adequately documented;

c) all contracted work done/delivered;

d) delays and consequences;

e) variations of contract (scope, time schedule, price, etc); and

f) completion certificate.

8 If payment of retention amount

a) made after expiry of defect liability period; and

b) correct amount

9 Establish correctness of accounting

a) authorization of the payment (voucher, cheque etc);

b) approval of the voucher;

c) charged with correct amount to correct account./vote

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CHAPTER 8 AUDIT OF STORES AND STOCKS 8.1 PROFESSIONAL AND REGULATORY PRONOUNCEMENTS

IAS 2 defines inventories and deals with recognition of inventory as an asset, and an expense; measurement of inventories; and disclosures about inventories IAS 2 does not apply to inventories that are covered by other standards: work in progress on construction contracts; financial instruments; biological assets; and agricultural produce at the point of harvest. Inventories are measured at cost. Certain inventories are excluded from this requirement: agricultural products (after harvest) and mineral products measured at net realisable value; and the inventories of commodity broker-traders measured at fair value less costs to sell. In all such cases changes in inventory value must be recognised in profit or loss as they occur. The cost of inventory includes costs of purchase and production or conversion. Cost does not include wastage, administrative overheads that are not production costs, and selling costs. Borrowing costs are not usually included. Cost is assigned to each item of inventory specifically, or to similar items by using an allowable cost formula, such as first-in, first-out (FIFO) or weighted average cost. Inventories are reduced to net realisable value (NRV) when this is lower than cost. NRV is estimated selling price less estimated costs of completion and of making the sale.

With effect from 2005, use of the last-in, first-out (LIFO) cost formula is no longer permitted.


The following are the major audit areas: a) register of goods ordered and received; b) stores ledgers and bin cards; c) stores demand and issue vouchers; and d) motor vehicles, spares, equipment and other stores.

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8.3 AUDIT OBJECTIVE

a) management has satisfied the requirements set regarding stores management and control b) stores ledgers and other records do not contain material errors in respect of the quantity

and value of the stores and stocks. 8.4 CRITICAL ASSERTIONS

Completeness The stores ledgers and other records include all the stores and stock items that the Council owns

Existence The stores and stocks physically exist and in the appropriate place

Ownership The recorded stores and stocks belong to the Council

Regularity Stores and stocks management and control and the maintenance of stores ledgers and other records are in accordance with the applicable rules and regulations in force and best practice

8.5 AUDIT STEPS

a) verify whether stores ledgers have been maintained; b) verify whether stores ledgers and bin cards have been maintained;

c) verify whether major procurements have been recorded in the ledgers;

d) verify whether issuance of stores are recorded in line with the regulations;

e) verify whether registered stores are in place;

f) verify whether stores are owned by the Council; and

g) verify whether stores are written off and scrapped in accordance with the rules and regulations.

8.6 ATTENDANCE AT PHYSICAL INVENTORY COUNTING

Management ordinarily establishes procedures under which inventory is physically counted at least once a year to serve as a basis for the preparation of the financial statements or to ascertain the reliability of the perpetual inventory system.

When inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. The auditors attendance serves as a test of controls or substantive procedure over inventory depending on the auditors risk assessment and planned approach. Such attendance will enable the auditor to inspect the inventory, to observe compliance with the operation of managements

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procedures for recording and controlling the results of the count and to provide audit evidence as to the reliability of managements procedures. If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor should take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on tests of intervening transactions.

Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation. For example, documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory count may provide sufficient appropriate audit evidence.

In planning attendance at the physical inventory count or the alternative procedures, the auditor would consider the following:

a) for physical inventory counting;

b) the timing of the count;

c) the locations at which inventory is held; and

d) whether an experts assistance is needed.

When the quantities are to be determined by a physical inventory count and the auditor attends such a count, or when the Council operates a perpetual system and the auditor attends a count one or more times during the year, the auditor would ordinarily observe count procedures and perform test counts.

If the Council uses procedures to estimate the physical quantity, such as estimating a coal pile, the auditor would need to be satisfied regarding the reasonableness of those procedures.

When inventory is situated in several locations, the auditor would consider at which locations attendance is appropriate, taking into account the materiality of the inventory and the risk of material misstatement at assessment of inherent and control risk at different locations.

The auditor would review managements instructions regarding:

a) the application of control activities procedures, for example, collection of used stock sheets, accounting for unused stock sheets and count and re-count procedures;

b) accurate identification of the stage of completion of work in progress, of slow moving,

obsolete or damaged items and of inventory owned by a third party, for example, on consignment; and

c) whether appropriate arrangements are made regarding the movement of inventory between

areas and the shipping and receipt of inventory before and after the cutoff date. To obtain audit evidence assurance that managements control activities procedures are adequately implemented, the auditor would observe employees procedures and perform test counts. When performing test counts, the auditor performs procedures over would test both the completeness and the accuracy of the count records by tracing items selected from those records to the physical inventory and items selected from the physical inventory to the count records. The auditor would consider the extent to which copies of such count records need to be retained for subsequent audit procedures testing and comparison.

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The auditor would also consider cut-off procedures including details of the movement of inventory just prior to, during and after the count so that the accounting for such movements can be checked at a later date.

For practical reasons, the physical inventory count may be conducted at a date other than period end. This will ordinarily be adequate for audit purposes only when the Council has designed and implemented controls over changes in inventory control risk is assessed at less than high. The auditor would determine and assess whether, through the performance of appropriate audit procedures, changes in inventory between the count date and period end are correctly recorded.

When the Council operates a perpetual inventory system which is used to determine the period end balance, the auditor would evaluate and assess whether, through the performance of additional procedures, the reasons for any significant differences between the physical count and the perpetual inventory records are understood and the records are properly adjusted.

When inventory is under the custody and control of a third party, the auditor would ordinarily obtain direct confirmation from the third party as to the quantities and condition of inventory held on behalf of the Council. Depending on materiality of this inventory the auditor would also consider the following:

a) the integrity and independence of the third par

Local Govt-Audit Manual

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