Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
DATE:
Autumn 2008
TUTOR:
Learning Objectives
At the end of this session students should be able to:
2.
Do not rote learn ISAs, but understand the key principles underlying auditing.
5.
What is an audit?
An exercise whose objective is to enable auditors to express an opinion
whether the financial statements are prepared in all material respects, in
accordance with an identified financial reporting framework. The auditor has
to an express an opinion, whether or not the financial statements give a true
and fair view or present fairly, in all material respects.
True = information is
1. Factual and conforms with reality, is not false.
2. Conforms with required standards and laws.
3. The accounts have been correctly extracted from accounting records.
Fair = Information is
1. Free from discrimination and bias.
Materiality:
An item is said to be material if its omission or misstatement would
reasonably influence the economic decisions of the individuals to whom the
audit report is addressed. The item can be qualitative or quantitative.
Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement.
It is important that the auditors ensure that the financial statements are free
from material error for the following reasons:
There is a legal requirement to audit financial statements and present an
opinion on those financial statements. If the auditors do not detect a material
error then their opinion on the financial statements could be incorrect
The auditor has a responsibility to the members to ensure that the financial
statements are materially correct.
There are also other users of the financial statements who will include the
taxation authorities and the bank that may have may have made a loan to
the company. They will want to see true and fair accounts. The auditors
must therefore ensure that the financial statements are free from material
misstatement to avoid any legal liability to third parties if they audit the
financial statements negligently.
Types of Audits
1. External audit:
Gives confidence in the integrity of corporate reporting for the benefit of
stakeholders and society as a whole by providing an external and objective
view on the reports given by management. The auditors report is usually
addressed to the shareholders as the principal stakeholders.
This should result in the efficient allocation of capital as investors are able to
make rational decisions on the basis of transparent financial information.
(v) The requirement for an audit can help prevent investors from being
defrauded, although there is no guarantee of this because the external audit
has inherent limitations. Reducing the possibility of false information being
provided by managers to owners is achieved by the requirement for external
auditors to be independent of the managers upon whose financial statements
they are reporting.
(vi) The purpose of the external audit under International Standards on
Auditing is for the auditor to obtain sufficient appropriate audit evidence on
which to base the audit opinion. This opinion is to the effect that the financial
statements give a true and fair view (or present fairly in all material
respects) of the position, performance (and cash flows) of the entity. This
opinion is prepared for the benefit of shareholders.
2. Internal audit:
An independent, objective assurance and consulting activity designed to add
value and improve and organisations operation. Objective is to assist
management and staff in the effective discharge of their duties.
3. Value for money audit:
An investigation into whether or not the use of resources is economic,
efficient and effective. To identify and recommend ways in which the return
for resources employed may be maximised.
3. Assess risk.
Audit Committee
10
2.
3. Use of the audit committee will enable the external auditor to discuss
issues with the financial statements with the internal auditor, prior to
providing a final summary of key points to the board.
4. The audit committee will monitor the work of the board and provide
helpful guidance, where corporate governance requirements do not
appear to be being met. The audit committee should have detailed
knowledge of corporate governance as part of its monitoring function
of the company and can share this with the board who may not have
the time to obtain detailed information.
The disadvantages of an audit committee:
11
as
the
non-executive
directors
will
require
some
The directors may appoint the first auditor until the next AGM.
The directors have a power to fill any casual vacancy before the next
AGM as a result of death, removal or resignation of the auditors.
2. Removal of auditors:
-
1 (i) Those shareholders wishing to remove the auditors must give special
notice of
an ordinary resolution.
12
2 (iii) On removal, the auditors have a duty to make a written statement of the
circumstances connected with the removal which they think should be
brought to the attention of the shareholders and creditors.
3
4 (iv) The directors must circularise this to all shareholders and file a copy with
the
regulatory authority.
5 (v) The ex-auditor has the right to attend the AGM at which their office would
normally have ended.
13
6. Qualifications of auditors:
The auditor must be members of one of the members of International
Federation of Accountants (IFAC) include:
1
14
2
3
- The auditor should be a fit and proper person and comply with
professional rules of conduct.
Fundamental
Ethical
PROFESSIONAL CONDUCT
Principles
-THE
ACCA
RULES
OF
professional
accountant
should
be
straightforward
and
honest
in
2. Objectivity
15
minor children,
2. The firm, its partners or staff have any financial interest in an audit
client;
1
between the
1
2
3
16
not use or disclose any such information without proper and specific authority
or unless there is a legal or professional right or duty to disclose.
ACCAs Code of ethics Obligatory disclosure
The actual disclosure will depend on the laws of the jurisdiction where the
auditor is located.
The auditor may also be obliged to provide information where a court
demands disclosure. Refusal to provide information is likely to be considered
contempt of court with the auditor being liable for this offence.
ACCA Code of ethics voluntary disclosure
A member may also disclose client confidential information voluntarily, that is
without client permission
To protect a members interest e.g. to allow a member to sue a client for
unpaid fees or defend an action for negligence.
Where there is a public duty to disclose e.g. the client has committed an
action against the public interest such as unauthorised release of toxic
chemicals.
18
- The obligation to refrain from any conduct which might bring discredit
to the profession requires IFAC member bodies to consider, when
developing ethical requirements, the responsibilities of a professional
accountant to clients, third parties, other members of the accountancy
profession, staff, employers, and the general public.
3
4
Technical
Standards
professional
accountant
should
carry
out
6. Conflicts of interest
ACCAs Rules of Professional Conduct state that auditors should avoid
conflicts of interest (both conflicts between the firm and clients, and conflicts
between clients) wherever possible.
If such conflicts are unavoidable:-
(i)
(ii)
One or both companies may object to the firm acting for the other
company and the auditor may be forced to make a decision as to
which company to resign from. However, this is not an attractive
course of action because the audits may already have commenced
19
(iii)
(iv)
(v)
director
20
an
significant
(iii). Performing services for an assurance client that directly affect the
subject
2
2. Familiarity threat: occurs when, by virtue of a close relationship with
an assurance client, its directors, officers or employees, a firm or a
member of the assurance team becomes too sympathetic to the
clients interests.
21
a position to exert direct and significant influence over the subject matter
of the assurance engagement.
4 (iii) A former partner of the firm being a director, officer of the assurance
client or an employee in a position to exert direct and significant influence
over the subject matter of the assurance engagement.
5 (iv) Long association of a senior member of the assurance team with the
assurance client.
from
the
assurance
client,
its
directors,
officers
or
employees.
assurance
client.
directors or officers.
22
include:
an
order to
reduce fees.
23
5. Advocacy threat: This arises when member of the audit team promotes
or seems to promote an audit client opinion or position (for example
selling or underwriting in financial matters for audit client or acting as
the clients advocate in a legal proceeding).
1
assurance
client.
24
Communicate with present auditors to find out whether there are any
circumstances behind the change that the new auditors need to be
aware of.
Outgoing
auditors
removal
or
resignation
has
been
properly
conducted.
25
Letter of Engagement
ISA 210 The letter of engagement must define the terms of Audit
Engagement
Purpose:
To all existing clients who have not previously had such a letter.
Steps:
Draft and sign the letter before commencing any part of the
assignment.
Every year review and update the letter and consider if nature of the
engagement has changed.
26
(ii). Prepare the financial statements that show true and fair view.
1 (iv) To ensure that they have received all the relevant information and
explanation from the directors of the company before an opinion is formed.
2
3 (v) To check the directors report is consistent with the financial statements.
27
The fees and the basis on which they are charged (based on time and
expertise used in client affairs).
Request
for
written
acknowledgement
of
the
letter
creates
28
The internal activity is designed to add value to and improve the operations
of an organisation. The internal auditor reports to management.
The internal auditor is normally an employee of the organisation but often
their work is outsourced.
On the other hand, the external auditor expresses an opinion on the financial
statements and reports to the shareholders.
Internal Auditors should be assumed to members of the ACCA and are bound
by the rules of professional conduct.
30
produced
(outputs)
and
the
resources
(inputs)
used.
and
therefore
effectiveness
provides
assurance
that
31
development
process,
change
management,
networks,
asset
audits
are
audits
of
the
operational
process
of
the
Outsourcing the Internal Audit Function to an outside source. Audit firms offer
internal audit services as part of their portfolio.
Advantages of outsourcing:-
1. Service provider can provide the necessary expertise for internal audit
work. They may be able to provide a broader range of expertise and
specialist skills and as they serve many different clients therefore staff
may be available for specialist work that the company may not be able
to afford.
6. Outsourcing will remove the need for training internal staff. Effectively
training will be provided for free as the outsourcing firm will be
32
2. The outsourced firm may not have any prior knowledge of the
company and will need time to ascertain the accounting systems and
controls before commencing work.
(i)
access
to
accounting
information.
The
department
can
(ii)
33
(iii)
Application of ISA and IASs. The board need to have a policy for
applying appropriate International Statements on Auditing (ISA) and
International Accounting Standards (IAS) to the organisation.
Internal audit will be aware of new auditing standards and will have
the technical expertise to identify changes required by accounting
standards.
(iv)
(v)
(vi)
34
Role of external auditor in respect to evaluating and testing the work of the
internal auditor include:
They external auditor must:Check that the work is performed by persons having adequate technical
training and proficiency as internal auditors, by ensuring that appropriate
training
programmes
are
in
place
and
the
auditor has
appropriate
qualifications.
Ensure that the work of assistants is properly supervised, reviewed and
documented by reviewing the procedure manuals of internal audit and the
audit working papers produced.
Determine that sufficient and appropriate audit evidence is obtained to
afford a reasonable basis for the conclusions reached, by reviewing the
internal auditors working papers.
Check that the conclusions reached are appropriate in the circumstances
and that any reports prepared are consistent with the results of the work
performed by reviewing the work performed and the reports produced.
Ensure that any exceptions or unusual matters disclosed by internal audit
are properly resolved by the external auditor and management.
35
36
ACCA Paper F8
AUDIT AND INTERNAL REVIEW INTERNATIONAL
STREAM
Lecture 2: Audit Evidence, Sampling and
Documentation
DATE:
Autumn 2008
TUTOR:
Learning Objectives:
At the end of this session, the students should be able to:-
Audit
evidence
is
obtained
by
performing
risk
assessment
audit
procedure
to
be
performed
is
important
to
an
Risk
assessment
procedures.
The
auditor
obtains
an
Results of procedures.
1. Observation.
This
includes
physical
examination
and
circularisation
letter
does
not
provide
evidence
of
A letter from the third party holding the inventory will provide
evidence of the existence of that inventory because the third party
has confirmed this in writing. However, the letter does not provide
evidence regarding the valuation of the inventory; confirming
something exists does not necessarily mean it is in good condition.
depends
on
reliability
of
the
underlying
Disadvantages of CAATs
10.
audit
evidence
contained
in
letter,
written
by
the
So
that
the
directors
can
acknowledge
their
collective
10
separately,
the
item
which
includes
that
for
selection.
Another
example
includes
11
Auditors
should
record
in
their
working
papers
their
Verification.
Statutory documents.
Letter of Engagement.
12
Legal
documents
(e.g.
debenture
deeds,
leases,
loan
agreements etc).
Minutes.
The auditor should record who performed the work on which date
and who reviewed the work on which date.
Documents should be retained for at least 5 years from the date of
the audit report.
Types of Documentation:
Narrative Notes
Flow Charts
Questionnaires
Checklists
13
14
ACCA Paper F 8
AUDIT AND ASSURANCE SERVICES (INTERNATIONAL
STREAM)
Lecture 3
Audit Planning and Risk
DATE:
Autumn 2008
TUTOR:
Planning procedures:
closing
balances
which
will
affect
this
years
financial
statements.
1. Systems
3. Accounting policies
4. Management
315.2 The auditor must obtain an understanding of the entity and its
environment, including internal controls, so that they can identify and assess
the risks of material misstatement on financial statements due to fraud or
error and design and perform further audit procedures.
The objective of this standard is to ensure that auditors obtain sufficient
knowledge of the business of the entity to enable them to identify and
understand the events, transactions or practice that may have a significant
effect on the financial statements or the audit. This knowledge of the
business helps to assess the levels of control and inherent risk and to
determine audit procedures.
Procedures to follow:
Enquiry of management
Analytical procedures.
Financial risk which arises from the company activities such as going
concern problems, overtrading, credit risk, interest risk, currency risk
and breakdown of accounting systems.
Operational risk arising from the operation of the business such as lost
business opportunities, loss of physical assets and lack of business
orders.
2. Audit risk is the risk that the auditor come to an invalid conclusion in
audit report and come to an incorrect opinion that either:
1
1. Inherent risk
2. Control risk
Inherent and control risk together form risk of material misstatement.
Detection risk mainly a part of sampling risk
1. Inherent risk is the risk that misstatement will occur due to factors
inherent in the companys business or environment or the nature of
individual transaction or balance. It is the risk attached to an assertion
that could cause a material misstatement. Certain assertions, related
classes of transactions and account balances such as stock are more
prone to risk.
Inherent risk depends on the type of business.
1
2
2 This is the risk that the clients internal control system will not prevent
errors occurring or will not detect them after the occurrence so that
they may be prevented.
Example of control risk corporate culture of slack control procedures,
lack of
possibility
that
from
the
the
auditors
conclusion
procedure.
The nature, timing and extent of audit procedures (e.g. sample sizes).
The size of the item. For example, an item may be large in relation to
certain items in the financial statements profit, turnover, gross assets,
individual assets, and liabilities.
Quantitative materiality
1
2
3
4
5
repaying according to an agreed schedule, the terms of which the auditor has
confirmed in previous years and the other work carried out by the auditor
including tests of controls indicates that the terms of the loan have not
10
changed, this means that the risk of material misstatement level of inherent
and control risk is low, and the auditor can limit substantive procedures to
testing details of the payments made, rather than again confirming the
balance directly with the lender.
as
an
overall
response,
for
example,
performing
11
12
The auditors assessment of the identified risks at the assertion level provides
a basis for considering the appropriate audit approach for designing and
performing further audit procedures.
14
subject
matter
have
not
fundamentally
changed,
and
audit
procedures have been performed during the current period to establish its
continuing relevance.
15
Conclusions
16
whether due to fraud or error, at the financial statement and assertion levels,
through
understanding the entity and its environment, including the entitys internal
control, thereby providing a basis for designing and implementing responses
to the assessed risks of material misstatement.
2. In planning the audit and in performing audit procedures to reduce audit
risk to an acceptably low level, auditor must consider the risks of material
misstatements in the financial statements due to fraud.
3. Auditors must be aware of the possibility of material misstatements due to
fraud. The auditor must adopt an attitude of professional scepticism during
the audit and be alert to circumstances that may lead to fraud.
4. Risk assessment procedures for fraud:
17
The auditor needs to assess 4 issues in relation to an expert:1. Necessity to use him
2. Competence and objectivity is he an employee or a contracted third
party.
3. Scope of work of the expert.
19
20
ACCA Paper F 8
AUDIT AND ASSURANCE SERVICES (INTERNATIONAL STREAM)
Lecture 4
DATE:
Autumn 2008
TUTOR:
Test of Controls
Control Environment:
1
2 The control environment is design by the senior management
3
Factors that are included in the control environment are:
1
1. Management's philosophy and operating style
1
conscientiousness
estimates;
and
conservatism
in
developing
accounting
2
3
1
1
In order to emphasise the importance of integrity and ethical values among all
personnel of an organisation the management should:
1
2
3
4
5
4 * Nature and extent of their interaction with internal and external auditors.
Internal audit
Internal audit function strengthens the control environment. To be effective,
internal audit auditor need to:
1
skilled
integrity;
Have appropriate access to the board of directors and the audit committee,
and to the external auditors.
Evaluating,
counselling
and
promoting
people
based
on
periodic
performance appraisals.
1
Control procedures:
Control procedures are those policies and procedures which established to
achieve the entitys specific objective.
1
Control procedures are details check and control which are built into the
system
1. Narrative Notes
Advantages
Disadvantages:
Comprehensive list of questions on all sub systems and all possible aspects of
control automatically highlights strengths, weakness and omissions.
Disadvantages:
The questions concentrate on the controls themselves rather than the error,
fraud or irregularity the control is designed to prevent or detect.
payment function?
(b) Alternatively is the reconciliation independently checked?
3. Does the person preparing the bank reconciliation obtain statements direct from
the bank and retain them until the reconciliation is effected?
4. Does the independent reconciliation include?
(a) A comparison of the debits and credits shown on the bank statements with the
cashbook?
(b) A comparison of paid cheques with the cashbook as to names, dates and
amounts?
(c) A test of the detailed paying-in-slip with the cashbook?
(d) An enquiry into contra items?
(e) Are items more than one month old investigated to?
3. Flowcharts
Advantages:
Continuity of the audit is facilitated where audit staff changes take place.
Disadvantages:
Advantages
1
They provide a logical basis for subsequent design and selection of detailed
audit tests-they are easily cross-referenced to audit programme.
Disadvantages:
1
2 Too many supplementary questions can turn the ICEQ and ICQ and hence
cause confusion.
Organisational chart
Procedures manual
Systems notes
Gather information about the system and perform walk through test.
At Final audit:
Report opinion
To ensure that all cash and cheques received by post are accounted for and
accurately recorded in the books. To ensure all such receipts are promptly
deposited in the bank.
Measures:
1 - Regular independent comparison of the post list with banking records. The
tests should be of total, detail and dating to detect teeming and lading at a
later stage in the processing
2
3
Immediately banked the cash and payments for petty cash should be on
imprest system.
1
1
Persons handling cash should not have access to other cash funds or
maintain sales ledger records.
Cash Balances:
Objective:
1
2 To prevent mis-appropriation of cash balance and to prevent unauthorised
cash payments
Measures:
1
2
3 To establish of cash floats of specified amount and location
1
1 Use of imprest system on the basis that petty cash is replenished by the
amount of what the company has spent and there are specific rules on
reimbursement only against authorised vouchers.
Bank balances:
Objective:
To prevent misappropriation of bank balance and to prevent teeming and lading.
Measures:
Reconciliation should be prepared on regular basis.
1
A comparison of debit and credit in the cash book with corresponding entries
in the bank statements.
A comparison of returned cheques with cash book entries noting dates, payee
and amounts.
Any unusual
investigated
The balance at the bank should be independently verified with the bank at
intervals.
items
e.g.
contras
or dishonoured
cheques should
be
Cheque payments:
Objective:
1
2 To prevent unauthorised payments being made from bank accounts.
Measures:
1
2 Control over custody and issue of unused cheque book. A register should be
kept if necessary.
1
Established who should sign cheques. All cheques should be signed by a least
two persons, with no person being permitted to sign if he is a payee.
2
3
4
5
6
7
8
No cheque should be made out to bearer except for the collection of wages or
reimbursement of cash funds.
All cheque should be restrictively crossed.
The signing of blank cheques must be prohibited.
Special safeguards should be implemented where cheques are signed
mechanically or have pre-printed signatures. Such signing is often made for
dividends payments, salary cheques and for others.
9
10 Rules to ensure prompt despatch and to prevent interception or
misappropriation.
11
12 Special rules for authorising and checking direct debits and standing orders.
To ensure that all wages are computed in accordance with records of work
performed whether in respect of time, output, and sales made or other
criteria.
To ensure that payroll deduction are correctly accounted for and paid over to
the appropriate government bodies.
To ensure that all transactions are correctly recorded in the books of account.
Measures:
1
2 There should be separate records kept for each employee. The records
should contain such matters as date of engagement, age, next of kin, agreed
wages, deduction, qualification, skill and experience.
3
4
To ensure that goods and services received are inspected and only
acceptable items are accepted.
To ensure that all invoices are checked against authorised orders and
receipts of the subject matter good condition.
To ensure that all goods and services invoiced are properly recorded in the
books.
2
Measures:
1
2 There should be procedures for the requisitioning of goods and services only
by specified personnel on specified forms with spare for acknowledgement of
performance.
1
All goods should be inspected for condition and agreement with order and
counted on receipts. The inspection should be acknowledged.
Procedures for dealing with rejected goods or services should be include the
creation debit notes with subsequent sequence check and follow up of
receipts of suppliers credit notes.
Invoices should have consecutive numbers put on them and batches should
be pre-list.
A proper coding system is required for purchase of goods and services so that
the correct nominal accounts are debited.
To ensure that sales on credit are only to bona fide good credit risks.
To ensure that all sales on credit are invoiced, that authorised prices are
charged and that before issue all invoices are completed and checked as
regards price, trade discounts and vat.
To ensure that all customers claims are fully investigated before credit notes
are issued.
All sales orders should be recorded and if necessary acknowledged on prenumbered forms.
Procedures on credit control for verify the credit worthiness of all persons
requesting goods on credit.
Sales invoices should be pre-numbered before entry into the sales day book.
Legal action should be taken against accounts receivables refusing pay the
debts on time.
Bad debts should only be written off after investigation and acknowledged by
senior management.
At the year end cut off procedures will be required, particularly attention will
be paid to orders despatched but not invoiced.
26
ACCA Paper F 8
AUDIT AND INTERNAL REVIEW INTERNATIONAL STREAM
Lecture 5 : Substantive Testing
DATE:
Autumn 2008
TUTOR:
Rules on Materiality:1
Item is material if it is :-
Audit Objectives:
1
1. Existence
2. Ownership
3. Completeness
4. Valuation
The accounts are prepared under the Historic cost convention. The assets
and liabilities, expenses and revenues usually shown in the accounts at
actual or original cost.
Authorization:
1
2
Existence:
1
The asset must exist, otherwise it has been misappropriated or lost and it has
been badly maintained.
Beneficial ownership:
1
Accounting Standards:
IAS 16: Property, Plant and Equipment
Disclosure
For each class of property, plant, and equipment
* Reconciliation of the carrying amount at the beginning and the end of the
period, showing:
o
additions;
disposals;
revaluation increases;
impairment losses;
depreciation;
other movements
* The carrying amount that would have been recognized had the assets been
carried under the cost model;
Internal sources:
IAS 24: Related Party Disclosures : If sale was made to related parties disclose
separately.
IAS 10: Events after Balance Sheet Date.
Event after the balance sheet date: An event, which could be favourable or
unfavourable, that occurs between the balance sheet date and the date that the
financial statements are authorised for issue.
Adjusting event: An event after the balance sheet date that provides further
evidence of conditions that existed at the balance sheet, including an event that
indicates that the going concern assumption in relation to the whole or part of the
enterprise is not appropriate.
Non-adjusting event: An event after the balance sheet date that is indicative of a
condition that arose after the balance sheet date.
Acquisition:
1
2
Disposal:
* Examine documentation
Depreciation:
1
2
3
4
Internal control:
1
* Physical inspection of the existence of the assets and inspect the title deed
and certificates of ownership.
* The disclosure of an asset as separate items e.g. between non current and
current assets.
Taxation
Insurance
Expert advise
* Obtain summary of all non-current assets under the categories shown in the
balance sheet.
* Check casting and compare the opening balance brought forward from
previous year.
* Obtain schedules of addition during the year for all classes of assets
(including intangible assets)
* If the non-current assets constructed using own labour check all the labour
cost is properly accounted.
* Verify that the original cost and accumulated depreciation have been
eliminated from non-current assets accounts.
* Check calculation of profit or loss on sales and agree with profit and loss
account.
10
Investments:
Objective:
1
Physical examination
Verify the interest received and dividend received and accrued by reference
to supporting documents and published data.
11
The customers are asked to communicate only if he does not agree the
balance. This method is mostly where internal control is very strong.
Appropriate when:
1
Positive:
1
12
Procedures:
1
Select samples from positive, negative balances and all customers can be
circularised stating the balance in circularization letter.
Letter sent on clients note paper requesting reply to auditors and including
stamped addressed envelope to auditors address.
The
circularization
should
be
carried
out
auditors
without
clients
interventions.
1
The auditors should follow up any legal disputes between the client and it is
customers.
Account receivables are the large item among the assets of most companies and
their verification is essential.
1
13
Once recorded the debts are only eliminated by receipts of cash or on the
authority of a responsible person
Balances are regularly reviewed and aged, a proper system for follow up
exists and if necessary, adequate provision for bad and doubtful debts is
made.
Enquire into credit balance and consider the valuation of the account
receivables.
14
1
2
The state of legal proceedings and the legal status of the account receivables
e.g. in liquidation or bankruptcy
Is there any evidence of any debt in dispute e.g. for non-delivery, breakage,
poor quality.
Prepayments:
1
2
15
Cash in hand include petty cash and receipt from customers not
deposited.
Cash at bank include cash held in saving, current accounts (assets) and
cash overdrawn on current accounts (a liability)
16
Audit test:
1 Check the opening and comparative figures brought forwards and review the
previous year working papers.
1 Review activity in the nominal ledger for any unusual transaction requiring
investigation.
1 Obtain client summaries, check arithmetic and agree with nominal ledger.
1 Perform analytical procedures
1 Test the cut-off
1 Count un-deposited cash on hand and reconcile with imprest systems
1 Confirm bank balance by sending a confirmation request to all banks used by
the client.
1 Verify bank and cash reconciliation
1 Follow up and obtain reasons for any un-cleared items appearing in the yearend reconciliation in the month following the year-end.
Check that cash and bank is properly classified in the balance sheet
Cash at Bank = Current assets
Bank overdraft = Current liability
1
17
Audit of Inventories
Standard: IAS 2 Inventories
Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business
(work in process), and materials and supplies that are consumed in production (raw
materials).
IAS 2 Does not apply to work in process arising under construction contracts. This is
covered by IAS 11 Construction Contracts.
Inventories are required to be stated at the lower of cost and net realisable value
(NRV).
Costs include:1. Costs of purchase (including taxes, transport, and handling) net of
trade discounts received
2. Costs of conversion (including fixed and variable manufacturing
overheads)
3. Other costs incurred in bringing the inventories to their present
location and condition
18
Disclose:
* Carrying amount of any inventories carried at fair value less costs to sell.
Auditors duties
1
2
The auditor must satisfy himself as to the validity of the amount attributed to
inventories and work in progress in the balance sheet.
1. Periodical counts
Periodical counts usually undertaken at the end of the financial year of the
enterprises.
19
1
2
3
4
5
Review previous years working paper and discuss with management any
significant changes from previous year.
Location of store
Internal audit
Expert advise
20
Observe the counting procedures to ascertain that the clients employees are
carrying out the instructions.
Check the count of a selected number of lines and crossed reference to the
inventory records.
Observe and identify the obsolete, damaged and slow moving inventories.
To obtain copies the clients inventories records for working paper file
Check the cut-off with details of the last numbers of inventories movement
forms and goods inward and goods outward notes during the year after the
year end.
Test the final inventories records have been properly prepared from the
count records.
21
Inform the management of any problems encountered during the counts for
action in subsequent count.
Work in Progress:
1
Audit test:
1
Compare the quantities of each kind of inventories held with purchase and
sales
22
Test the inventory records with relevant documents such as Purchase invoice
Check the consistency with which the amount have been computed
VERIFICATION OF QUANTITIES
1
23
VERIFICATION OF VALUE
IAS 2 requires inventories should be valued at the lower of cost and net realizable
value.
Cost: All costs incurred in getting inventory to its present location and condition.
The cost therefore comprises:
Cost of purchase:
1
In getting the inventory to its present location, the following costs will be
incurred:
- Carriage inward
Establish these costs with reference will be made to purchase and expense
invoices.
Cost of conversion:
1
IAS 2 states that this should be based on normal levels of activity in normal
operating condition, taking one year with another.
24
Conversion cost includes both direct and indirect cost incurred in converting
the
raw
material
into
finished
product.
These
cost
are
allocated
1
2
- Production capacity
NRV= What can be realised for inventory at their present condition at the
balance sheet date in the case of raw material, finished goods and WIP.
Valuation method:
1
The IAS 2 requires the inventory valuation should be determined using the
FIFO and Weighted average method.
Extract from inventory records, items held longer than their normal turnover
period (slow moving)
25
Discuss with management any intended sales, special offer or discounts offer
to existing customers.
Determine actual selling prices realised from post balance sheet receipts.
Check the post balance sheet cashbook or nominal ledger expense accounts
for actual selling and distribution costs.
Check for estimated selling and distribution etc costs and for further costs to
completion.
Disclosures:
1
By way of note to the accounts, the following disclosures should be made i.e.
proper accounting policy adopted.
- Finished goods x
Contract costs should include:Costs that relate directly to the specific contract
+ Costs that are attributable to the contractor's general contracting activity to the
extent that they can be reasonably allocated to the contract.
+ Other costs that can be specifically charged to the customer under the terms of
the contract.
If the outcome of a construction contract can be estimated reliably, revenue and
costs should be recognized in proportion to the stage of completion of contract
activity. (Percentage of completion method of accounting).
If the outcome cannot be estimated reliably, no profit should be recognized.
Instead, contract revenue should be recognized only to the extent that contract
costs incurred are expected to be recoverable and contract costs should be
expensed as incurred
The stage of completion of a contract can be determined by:_
27
The proportion that contract costs incurred for work performed to date bear
to the estimated total contract costs.
Amount of retentions
Presentation
* The gross amount due from customers for contract work should be shown
as an asset.
* The gross amount due to customers for contract work should be shown as a
liability.
28
High level inventories held in storage resulting poor cash flow management
and financial loss for the enterprises.
29
2. Accrued expenses
4. Bank overdraft
5. Provisions
2. Debentures
3. Deferred tax
30
1
London School of Business and Finance 2008
of 40 31
2
3
technique
that
used
with
trade
receivables
(circularisation).
1
Provisions:
Contingent liability:
of 40 32
Contingent Asset
A possible asset that arises from past events, and
Whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within
the control of the enterprise.
of 40 33
after
Land contamination
Customer refunds
of 40 34
Disclosures
Reconciliation for each class of provision:
Opening balance
Additions
of 40 35
Audit Tests:1
2
of 40 36
1
2
Audit of debentures:
1
2
2
3
of 40 37
Audit Procedures:
1
2
3
of 40 38
ACCOUNTING
POLICIES,
CHANGES
IN
ACCOUNTING
of 40 39
those
statements.
Such
errors
result
from
of 40 40
ACCA Paper F8
AUDIT AND INTERNAL REVIEW INTERNATIONAL STREAM
Autumn 2008 Lecture 6
Application of the Going Concern Concept to Audits.
DATE:
Spring 2008
TUTOR:
Actions that an auditor should carry out to try and ascertain whether an entity is a
going concern:During planning and performing audit procedures and in evaluating the results the
auditors should consider the appropriateness of management assumptions when
preparing the financial statements of the enterprise
Since financial statements are prepared on the assumption of going concern, it is
essential for the auditor to give positive consideration to the applicability of the
going concern basis at the planning stage and throughout the audit. Risk evaluation
and findings during the audit may uncover indicators of going concern problems:
Operational problems:
1
2
Continued Trading loss
1
Increased competitions
Financial problems:
1
Loan defaults
1
Refusals to renew/extend overdraft limits
Personnel problems:
1
2
Loss of key personnel
1
If the above indicators are detected, the auditor should seek evidence to support
the going concern assumption.
The evidence includes:1
Profit and cash flow projection covering the period at least 12 months from
ISA 570 requires that the auditor, when forming an opinion as to whether financial
statements gives a true and fair view should consider the entitys ability to continue
as a going concern and make any relevant disclosure in the financial statements.
Audit Procedures:
1
Assess the adequacy of the means by which the directors have satisfied
Examine all relevant evidences available to support the going concern status.
Review the directors business review and their assessment of the future.
Assess the systems or other means by which the directors have identified
Examine budgets and other future plans and assess the reliability of such
Review the board minute for any discussion of going concern matters.
Enquire of the directors plan for resolving any issue that may threaten the
Review managements plans for future actions based on its going concern
assessment.
Based on the audit evidence obtained, the auditor should determine if in his
concern, then issue an unqualified audit report but with explanatory paragraph in
the basis of opinion section. Highlight the existence of material uncertainty relating
to the event or condition that may cast significant doubt on the entitys ability to
continue as going concern and draws attention to the note in the financial
statement that discloses the matter.
1
If in the auditors judgement the entity will not be able to continue as a going
concern, the auditor should express an adverse opinion if the financial statements
have been prepared on a going concern basis.
Page of 7