f8 Practice & Revision Notes 2014-15

Full text

(1)ACCA Audit and Assurance Paper F8 Practice & Revision Notes ISBN: 9781472764669.

(2) Blank. 2.

(3) Contents. Page. Introduction How to use the Practice & Revision material. 4. The examination paper and syllabus aims. 5. Analysis of past papers. 6. Skills bank. 11. Knowledge bank. 23. Appendices. 81. 3.

(4) INTRODUCTION. Introduction How to use the Practice & Revision material Step 1. Learn. Until now you have been introduced to the core skills needed to pass this paper. You must now focus on developing these new skills to address the ultimate test – the exam itself.. Step 2. Practise. Your revision course material will help you to apply this knowledge to the context of the exam-style questions. Using real exam questions written by the examiner you’ll learn the unique exam skills required to achieve success in each paper. Your revision material consists of:. . Skills bank (in these notes) This illustrates the main skills needed to pass this paper. We will teach you how to: – – – – –. . Use your reading time effectively Analyse the question’s requirements Manage your time Produce well-constructed numerical and discussion answers Produce tailored answers that are relevant to the specifics of the question. Knowledge bank (in these notes) During the Step 1 phase of your studies (Learning phase) you have already gained the knowledge required to pass the exam. During this phase reinforcement of this knowledge is critical. To help this reinforcement you will find that the same diagrams contained in your taught course notes are used here with additional information added if we feel it is necessary. If you feel that your knowledge level is weak at the Step 2 phase we recommend you purchase the i-Learn CD from BPP Learning Media.. . Question and answer bank The Practice & Revision Kit contains: – – –. Step 3. Questions that will be covered in class Questions you will do during home study following guidance provided by your tutor Additional questions for further practice. Rehearse. All your skills need to be applied on the day of the exam to deal with a complete exam paper. This can be developed through use of mock exams within the Practice & Revision Kit, attending a question day at BPP where a final mock exam is sat in full and feedback provided, or through purchasing a mock exam and online debrief. Please see our website for further details www.bpp.com.. 4.

(5) INTRODUCTION. The examination paper and syllabus aims The examination paper The examination is a three hour paper with 15 minutes reading and planning time. All questions are compulsory. Some questions will adopt a scenario/case study approach. All questions will require some form of written response although questions on planning or review may require the calculation and interpretation of some basic ratios. 100% Discussion 10% Knowledge. 90% Application. Format of the Exam. Marks. Section A. Comprises 8 two mark and 4 one mark multiple choice questions.. Section B. Comprises:. 20. Four 10 mark questions. These will tend to test one of the five syllabus areas of the Study Guide (A, B, C, D or E). 40. Two 20 mark questions. The 20 mark questions will predominantly examine one or more aspects of audit and assurance from planning and risk assessment, internal control or audit evidence, although topics from other syllabus areas may also be included.. 40. 100. Time pressure warning. Section A. Section B. Aims The syllabus aims to test the student’s ability to: A. B. C D E. Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics and professional conduct, describing the scope and distinguishing between the functions of internal and external audit. Demonstrate how the auditor obtains and accepts audit engagements, obtains an understanding of the entity and its environment, assesses the risk of material misstatement (whether arising from fraud or other irregularities) and plans an audit of financial statements. Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and communicate control risks and their potential consequences, making appropriate recommendations. Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives of audit engagements and the application of the International Standards on Auditing. Explain how consideration of subsequent events and the going concern principle can inform the conclusions from audit work and are reflected in different types of audit report, written representations and the final review and report.. 5.

(6) INTRODUCTION. Analysis of past papers Below provides an overview of the syllabus and details of when each element has have been examined. Further details are included in the relevant chapter of the knowledge bank. Specimen Paper. Audit framework and regulation The concept of audit and other assurance engagements. A Q7. External audits Corporate governance Professional ethics and ACCA's Code of Ethics and Conduct. A Q5 B Q1a. Internal audit and governance and the differences between external and internal audit. B Q1b. The scope of the internal audit function, outsourcing and internal audit assignments. A Q3. Planning and risk assessment Obtaining and accepting audit engagements Objective and general principles Assessing audit risks. A Q10 B Q5a. Understanding the entity and its environment Fraud, laws and regulations Audit planning and documentation. A Q6. Internal control Internal control systems. A Q4 A Q12. The use and evaluation of internal control systems by auditors Tests of control. B Q6a. Communication on internal control Audit evidence Financial statement assertions and audit evidence. A Q2 B Q4a. Audit procedures. B Q2a. Audit sampling and other means of testing. A Q1. The audit of specific items. B Q2b B Q4b B Q6b. Computer-assisted audit techniques The work of others Not-for-profit organisations. 6. A Q8.

(7) INTRODUCTION. Specimen Paper. Review and reporting Subsequent events. A Q11. Going concern. B Q5b. Written representations Audit finalisation and the final review. B Q3a. Audit reports. A Q9 B Q3b. 7.

(8) 8.

(9) Skills bank This section explains and demonstrates the key skills required to enable you to maximise your chance of exam success. Knowledge of the syllabus is insufficient on its own. Through question practice you will develop a set of skills that will enable you to pass this paper.. 9.

(10) 10.

(11) SKILLS BANK. Key skills required to pass Our analysis of the examiner’s comments on past exams, together with our experience of preparing students for this type of exam, suggests that to pass F8 Audit and Assurance you will need to develop a number of key skills.. 5 Producing a tailored answer to the scenario in the exam question. 1 Effective use of the 15 minutes reading time at the start of the exam. 2 Quick and accurate analysis of a question’s requirements. 4 Tackling multiple choice questions 3 Disciplined time management to ensure that all parts of the question are answered in the time allowed. Each of these key skills is analysed on the following pages, with example(s) from past exam questions of the importance of these skills and how these skills should be applied.. 11.

(12) SKILLS BANK. Skill 1 – Effective use of the 15 minutes reading time at the start of the exam 1 Take some time to plan the order in which you will attempt the questions All of the questions in this paper are compulsory so there is no choice to make in terms of which questions you will attempt, but you should give some thought to the order in which you should attempt them. Section A comprises multiple choice questions so you would be better to spend your reading time concentrating on the longer questions in Section B. Focus particularly on questions which include a scenario. The scenarios are likely to contain some detailed narrative about a client company and its systems or it may also include some numerical information. To answer these types of questions successfully you will need to use the information in the scenario so make sure you read the requirements and then spend your reading and planning time annotating key information from the scenario.. 2 Reading scenario based questions. STEP 1. Read the requirements. STEP 2. Focus on the longest requirements. STEP 3. Read the question actively identifying data relevant to each requirement. There is no point in wasting time reading through a long scenario before you have identified exactly what you have been asked to do! See key skill 2 for detailed guidance.. This will make sure that you concentrate on a manageable amount of the question on your first read through.. This will ensure that you are actively attacking the question, ie that you are trying to achieve something. This should involve highlighting points that are relevant to your answer and making brief notes in the margin. In many questions this will form the basis of an answer plan and mean that you do not have to re-read all of the highlighted points just to remind yourself why you thought they were important in the first place. In some scenarios, numerical information may be included, and you should use the reading and planning time to make relevant observations on this and in some cases calculate ratios that may be relevant to your answer.. For example, in the Specimen Paper, Q6 (a) had the following requirement: (a) In respect of the internal control of Garcia International Co: (i) Identify and explain SIX deficiencies; (ii) Recommend a control to address each of these deficiencies; and (iii) Describe a test of control Suarez & Co would perform to assess if each of these controls is operating effectively.. 12.

(13) SKILLS BANK. In reading the scenario, therefore, you have two aims:  . Familiarise yourself with the deficiencies in the sales system set out in the scenario, and Think up appropriate internal controls which could address these deficiencies.. If you use this time to understand the scenario then you will have taken a big step towards another of the key skills that the examiner demands in this paper, the ability to produce an answer tailored to the scenario in the question (see skill 5). . By analysing the flow of information you will be able to suggest internal controls that are relevant to the specific deficiencies in the question.. . Reading the scenario closely will prevent you falling into “traps” such as writing about substantive procedures when the question is clearly asking for tests of control.. Skills practice When you practice any of the scenario questions from the practice and revision kit you should give yourself around 5 minutes reading and planning time to highlight and annotate the scenario ahead before you start writing your answer.. 13.

(14) SKILLS BANK. Skill 2 – Quick and accurate analysis of a question's requirements 1 Be aware of the verbs used in exam questions You need to be aware of the meaning of the key verbs used by the examiner; these are reproduced in full in the BPP Practice & Revision Kit. You don’t need to learn each term precisely but it is important that you appreciate the difference between them, for example, ‘explain’ means clarifying an issue or developing a point, whereas ‘state’ means list out the information/ factors or criteria without needing to give further explanation. Generally speaking the requirement to ‘explain’ will earn you 1 mark per point whereas the requirement to ‘state’ carries ½ a mark.. EXPLAIN. For example, here is an extract from Q1 (a) in the Specimen Paper: “(i)Explain the ethical threats which may affect the independence of Remy & Co in respect of the audit of Hazard Co; and (ii) For each threat explain how it might be reduced to an acceptable level.”. There were a number of threats to independence that could have been identified from the scenario but note the level of explanation required to gain full marks.. Rotation of audit partner Remy’s partner has been involved in the audit of Hazard Co for six years.. This would have scored ½ mark for stating your point. Remy’s partner has been involved in the audit of Hazard Co for six years and as such her independence may be impaired. This is because she may have become too close to the directors and staff at the client and may not maintain her professional scepticism and objectivity in relation to the financial statements.. This would have scored 1 mark for explaining your point. Hazard Co is a listed entity and as such the ACCA’s Code of Ethics and Conduct recommends that engagement partners rotate off an audit after five years. Consideration should be given to appointing an alternative audit partner.. This would have scored 1 mark for applying your point to Hazard Co. Taking time to consider the exact wording of the requirement will result in a focused answer which satisfies the question set.. 14.

(15) SKILLS BANK. 2 Identify ALL the question’s requirements in your answer plan The question above also shows how the requirements of a question often contain a number of sub-requirements. You need to make sure that these sub-requirements are clearly identified on the question paper by highlighting or underlining them so that your answer is comprehensive and addresses all parts of the requirement. Failure to answer the whole question is often due to candidates forgetting to address these sub-requirements and is a key reason why people fail this paper.. Skills practice In each question you attempt you should spend a minute identifying the verb and planning what structure your answer should have to ensure you really do “explain”, “discuss”, “recommend” etc.. 15.

(16) SKILLS BANK. Skill 3 – Disciplined time management Although the examining team have reduced the element of time pressure in this paper there is still a lot to do in the three hours! The three hours that you are given to write your answers breaks down to 1.8 minutes for each available mark and you must stick to this closely. Given the format of the exam, you know from the start that your time allocations will be as follows: Marks. Time allocation. Section A. 20. 36 minutes. Section B Question 1. 10. 18 minutes. Section B Question 2. 10. 18 minutes. Section B Question 3. 10. 18 minutes. Section B Question 4. 10. 18 minutes. Section B Question 5. 20. 36 minutes. Section B Question 6. 20. 36 minutes. You may find that the multiple choice questions in Section A do not take the whole 36 minutes however you should be careful not to rush through them in case you misread a requirement or answer a question that is different from the one which was set! In Section B each question will be divided into a number of sub-requirements and it is important to identify how much time you should allocate to each of these. If you over-run by even a few minutes on several requirements on your way through the paper, you risk putting yourself in the position where you don’t have enough time to complete the paper. Make sure you keep a careful check on timings as you plan your approach to each question. Note time allocations and stick to them. If you think you have more to say on a particular part, stop when you run out of time and leave some space in your answer booklet; there’s just a chance you may save time later in the question and will be able to add one or two extra points. In this paper, time management skills overlap with the other key skills, if you   . Make effective use of the reading time Accurately analyse the requirements, and Produce a tailored answer. you should find that it is possible to write good, pass standard answers that are concise, focused and relevant. It really is true in this exam that, in general less (quantity!) is more (marks!). Skills practice When you are practising questions, always work out the time allocations and get into the habit of writing the answers, to time, just as you will have to do in the exam hall.. 16.

(17) SKILLS BANK. Skill 4 – Tackling multiple choice questions Section A is worth 20 marks and comprises 8 two mark and 4 one mark multiple choice questions.. Approaching Questions Logically 1 What to do if you know the answer to the question If you know the answer you should: 1.. Locate the correct answer. 2.. Check the other answers. 3.. Read the question again to ensure you’re answering the correct question. 4.. Confirm that you have the correct answer. This systematic check will ensure that you do not throw away marks when you really do know the answer.. 2 What to do if more than one answer appears plausible Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure you’ve read the requirement carefully, as questions may be phrased in ways that are not what you’re expecting. If you still identify more than one likely option, select the “most correct” answer. The approach adopted above is useful here too but this time you have to think through the alternatives a bit more. For example, Q9 on the Sample Paper states: An emphasis of matter paragraph is used in an audit attention to a matter affecting the financial statements.. report. to. draw. Which TWO of the following are correct in relation to an Emphasis of Matter Paragraph in the Auditor’s Report? (1) It is used where there is significant uncertainty. (2) It constitutes a qualified opinion. (3) The audit report is referred to as an unmodified report. (4) The matter is deemed to be fundamental to the users understanding of the financial statements. A 1 and 2 B 1 and 4 C 1 and 3 D 2 and 4. This is testing your knowledge of audit reports. At first sight, it may be tricky to identify the correct answer as there are so many variations in the options.. 17.

(18) SKILLS BANK. Here are some steps to follow:. STEP 1. Never Firstly, identify any answers that are immediately wrong. In this question, the key thing to think about how and when an emphasis of matter paragraph is used and the different ways in which an audit report can be modified. Remember that an audit opinion is qualified either due to material misstatement or due to insufficient audit evidence when the degree of severity is deemed to be material but not pervasive. This means that statement (2) is not correct and so we can discard options A and D from the answers.. STEP 2. Assess the remaining answers We now need to consider statements (3) and (4) as this will differentiate answers B and C. For statement (3), the inclusion of an emphasis of matter paragraph in the auditor’s report DOES mean that the report is modified because it has been changed in some way. This means that statement (3) is not correct and so answer C cannot be correct. Finally we need to verify that statement (4) IS correct and this true because the emphasis of matter paragraph aims to bring significant issues to users’ attention so that they can fully understand the financial statements. Having discarded answers A, C and D, we have arrived at answer B.. STEP 3. Read the question again… Finally, we should re-read the requirement before writing down our answer to ensure we are answering the correct question. The question could easily have asked: “Which TWO of the following are incorrect” which would have led us to a different answer!. This systematic approach helps you to break a question down and work through to find the correct answer logically.. 3 What to do if you still don’t know the answer… If you have been through the above steps and can’t identify a preferred answer then you have to guess!. . What you SHOULD NOT do. Two main things to avoid: 1.. Waste excessive time – time spent dithering over a single question could leave you with insufficient time for the rest of the paper.. 2.. Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25% chance of success. Your chance of getting the 2 marks if you don’t offer an answer is zero!. . What you SHOULD do. Having used the three step approaches above to narrow down your possible answers, go with the one that feels right and move on. If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.. 18.

(19) SKILLS BANK. Skills practice 1.. Practice keeping track of the questions you have answered when doing questions from the Practice and Revision Kit. 2.. Always check your answers through (if you would have time in the exam) before looking at the solutions in the back of the book. 3.. Practice as many multiple choice questions as possible.. 4.. If you don’t know the answer to a question – don’t just go to the answer at the back or just guess – use the three step approach described above.. 19.

(20) SKILLS BANK. Skill 5 – Producing a tailored answer 1 Tailored points You are expected to apply your theoretical knowledge to the specifics of the question set in the exam. Often tailoring your answer involves keeping calm and trying to look for clues within the scenario and presenting your answer in an appropriate format.. 2 Answer structure – general There are no questions in this exam that require lengthy essay-style answers. The overall principle is to communicate points clearly, but concisely – use headings and write in short paragraphs.. Tabular answers Many styles of question in this paper can be answered most effectively using a tabular layout, and the examiner encourages this approach. Q1 (a), Q5 (a) (ii) and Q6 (a) from the Specimen Paper can all be answered in a tabular format. We looked at Q1 (a) earlier in skill 2 and this answer could be presented in a tabular format as follows: Use of headings helps keep you thinking about the requirements. Safeguards to reduce the threat. Ethical threats Remy’s partner has been involved in the audit of Hazard Co for six years and as such her independence may be impaired. This is because she may have become too close to the directors and staff at the client and may not maintain her professional scepticism and objectivity in relation to the financial statements.. Hazard Co is a listed entity and as such the ACCA’s Code of Ethics and Conduct recommends that engagement partners rotate off an audit after five years. Consideration should be given to appointing an alternative audit partner.. Matching each threat to the safeguard by using this structure means you can cut out all the 'linking' words. 20.

(21) SKILLS BANK. 3 Writing for your audience Frequently in the exam you will be asked as an external auditor to produce a report or letter addressed to the directors of your client. Alternatively you could be asked to write a report to the Board as an internal auditor. It is important that your answer reflects your role and the addressee and that appropriate language is used. For example: Report Format Reports should be headed, name the preparer, and be dated.. Introduction. Deficiency. Implication. Recommendation. INTERNAL AUDIT REPORT Sales system in X Co Prepared By: A N Accountant Date: 10 June 20XX Use subheadings. The 3-part structure used in the external audit report to management works equally well in the context of an internal audit report on system deficiencies. The tone of reports should always be professional and formal. They should be written in the third person. No slang or conversational language should be used. For example 'the implication of this deficiency if you were to sit on it would be….' Ideally you could present the deficiency, implication and recommendation in a tabular format as an appendix to the report/ letter.. 21.

(22) SKILLS BANK. Skills practice When you attempt questions do not starting writing until you have thought out   . an appropriate structure headings, and the number of points you are aiming to cover. Always review your attempted answer and ensure that you have not included any general points without relating them to specific points within the question.. 22.

(23) Knowledge bank. 23.

(24) Contents. Page. 24. 1. The concept of audit and other assurance engagements. 25. 2. Statutory audit and regulation. 27. 3. Corporate governance. 31. 4. Professional ethics. 33. 5. Internal audit. 35. 6. Risk assessment. 37. 7. Audit planning and documentation. 41. 8. Introduction to audit evidence. 43. 9. Internal control. 45. 10. Tests of controls. 49. 11. Audit procedures and sampling. 51. 12. Non-current assets. 55. 13. Inventory. 57. 14. Receivables. 61. 15. Bank and cash. 63. 16. Liabilities, capital and directors’ emoluments. 65. 17. Not–for-profit organisations. 67. 18. Audit review and finalisation. 69. 19. Reports. 73. 20. Appendix A: Relevant articles/study support videos. 83. 21. Appendix B: Verbs used in question requirements. 84. 22. Appendix C: Specimen paper. 85.

(25) The concept of audit and other assurance engagements. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Identify and describe the objective and general principles of external audit engagements Explain the nature and development of audit and other assurance engagements Discuss the concepts of accountability, stewardship and agency Define and provide the objectives of an assurance engagement Explain the five elements of an assurance engagement Describe the types of assurance engagement Explain the level of assurance provided by an external audit and other review engagements and the concept of true and fair presentation. Q7 Section A – pilot paper. Describe the limitations of external audits. 25.

(26) The concept of audit and other assurance engagements. The purpose of external audit . To promote confidence and trust in financial information To give an opinion on whether the financial statements: – Have been prepared in accordance with an acceptable financial reporting framework – Comply with statutory requirements. . Accountability, stewardship and agency Accountability  Directors are required to prepare financial statements for shareholders Stewardship  Directors account for their stewardship of the assets placed under their control Agency  Directors act as agents of shareholders  External audit addresses the agency conflict between shareholders and directors. Types of assurance 'An assurance engagement is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.'     . Annual external audit Half-year review of FS Going concern review Review of effectiveness of IT systems Review of compliance with corporate governance requirements. Levels of assurance. Assurance and reports. Concepts in reporting Materiality. Reasonable assurance Eg statutory audit. Positive expression: 'in our opinion, the financial statements present fairly…..’. Limited assurance Eg review of half year accounts. Negative expression: 'nothing has come to our attention that causes us to believe that the financial statements do not give a true and fair view …….'. . Information is material if its omission or misstatement could influence the economic decisions of users True and fair  The auditor reports in terms of whether the financial statements present fairly in all material respects (or give a true and fair view) Reasonable assurance  100% assurance is not possible  Level of assurance given in statutory. audit. 26. Communication to different stakeholders      . Potential investors Current and potential lenders Employees Customers Suppliers Tax authorities.

(27) Statutory audit and regulation. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Describe the regulatory environment within which external audits take place Discuss the reasons and mechanisms for the regulation of auditors Explain the statutory regulations governing the appointment, rights, removal and resignation of auditors Explain the regulations governing the rights and duties of auditors Explain the development and status of International Standards on Auditing (ISAs) Explain the relationship between International Standards on Auditing (ISAs) and national standards. 27.

(28) Statutory audit and regulation. The regulatory environment. Statutory regulations Appointment  Normally annually  By shareholders resolution  Directors may appoint in particular circumstances: – First auditors – Casual vacancy Removal  By shareholders resolution  Auditors entitled to: – Notice of resolution – Make written representations – Speak at shareholders meetings Resignation  May resign at any time  Written notice to registered office  Statement of circumstances. Note: throughout these notes the abbreviation ISA will be used to refer to the International Standards on Auditing. 28. Mechanisms for regulation of auditors IFAC/ IAASB  IFAC aims to strengthen the global accountancy profession and promote adherence to highquality standards National law and standards  Law establishes: – Rights and duties of auditors – Eligibility to be auditor  National standards increasingly harmonised with ISAs ACCA/ the profession  Education and training  Ethical requirements. Development and status of ISAs  IAASB produces ISAs, ISAEs and ISRSs.  IAASB pronouncements do not overrule local laws or regulations  Where IAASB pronouncements form part of the regulatory framework (eg. in UK) they are mandatory.

(29) Stages of an external audit The following diagram illustrates the main steps in the conduct of an external audit. The following chapters expand each of these steps. Plan the audit Understand the entity (including documenting and confirming the accounting systems and internal control) Assess risk of material misstatement Select audit procedures to respond to risk of material misstatement Risk assessment does not include expectation that controls operate effectively. Where risk assessment includes expectation that controls operate effectively. Tests of controls (to confirm expectation) Unsatisfactory. Report to management. Satisfactory. Restricted substantive tests. Full substantive tests. Overall review of financial statements Report to management. Auditor’s report. 29.

(30) 30.

(31) Corporate governance. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Discuss the objectives, relevance and importance of corporate governance Discuss the provisions of international codes of corporate governance (such OECD) that are most relevant to auditors Describe good corporate governance requirements relating to directors’ responsibilities (e.g. for risk management and internal control) and the reporting responsibilities of auditors Analyse the structure and roles of audit committees and discuss their benefits and limitations. 31.

(32) Corporate governance. Definition . The internal systems by which companies are directed and controlled. The UK Corporate Governance Code Provides guidance to UK companies as to how they should be directed and controlled. 5 headings:  Leadership – Effective Board – Clear division of responsibilities between Chairman and Chief Executive Officer (CEO) – Requirement to have non-executive directors  Effectiveness – Appropriate balance of skills – Procedures for the appointment of new directors (nomination committee) – Directors should have sufficient time to perform their duties – Induction/ training – Annual evaluation – Regular re-election  Accountability – Board responsible for risk management – Board responsible for internal control systems  Remuneration – Sufficient but not excessive – Formal policy for fixing remuneration packages (remuneration committee)  Relations with shareholders – Open dialogue – Use of AGM to communicate with shareholders. 32. Audit committees  . At least 3 members At least one with recent and relevant financial experience  Monitor the integrity of the financial statements: – Recommendations re the appointment, re-appointment and removal of external auditors – Approve remuneration and terms of external auditor – Monitor external auditor’s independence, objectivity and effectiveness of the audit process – Policy on the engagement of the external auditor to supply non-audit services  Review the company’s internal control and risk management systems  Monitor and review the effectiveness of internal audit  Monitor arrangements safeguarding privacy of whistle blowers.

(33) Professional ethics. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Define and apply the fundamental principles of professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Q5 Section A – pilot paper. Define and apply the conceptual framework, including the threats to the fundamental principles of self-interest, self-review, advocacy, familiarity and intimidation. Q1(a) Section B – pilot paper. Discuss the safeguards to offset the threats to the fundamental principles. Q1(a) Section B – pilot paper. Describe the auditor’s responsibility with regard to auditor independence, conflicts of interest and confidentiality Discuss the requirements of professional ethics in relation to the acceptance of new audit engagements Explain the preconditions for an audit Explain the process by which an auditor obtains an audit engagement Justify the importance of engagement letters and their contents.. 33.

(34) Professional ethics. Fundamental principles of professional ethics     . Threats     . Self-interest Self-review Advocacy Familiarity Intimidation. Safeguards   . Created by the profession, regulation or legislation In the work environment Created by the individual. Confidentiality Members must not disclose information obtained in the course of professional work without permission from their clients. Exceptions  Obliged to disclose – By law – By court order – To regulators . 34. Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour. Permitted to disclose – Public interest – Protect member’s interests. Enforcement of the ACCA Code In countries (such as the UK) where regulation and monitoring of audit is delegated to professional bodies such as ACCA, there is an obligation to:  Check that members are qualified and eligible to carry out audits  Monitor members’ conduct and the standard of their work  Take regulatory action against members who do not meet requirements ACCA disciplinary structures:  Monitoring unit  Professional conduct department  Disciplinary committee. Obtaining and accepting new audit engagements Obtaining audit engagements . May use advertising and other forms of promotion  Must not: – Bring ACCA or profession into disrepute – Discredit services offered by others – Be misleading – Care over references to fees Acceptance  Before – Ensure firm is independent, competent and has adequate resources – Obtain references (client) – Establish certain preconditions are present – Assess risk – Communicate with present auditor – Obtain client’s permission – Decline nomination if refused – Otherwise request information that would help decision  Present auditor should – Obtain client’s permission – If refused, inform new auditor (who should decline nomination) – Otherwise, discuss relevant matters  After – Ensure predecessor’s removal/resignation properly conducted – Ensure appointment properly conducted. Engagement letters Document and confirm auditor’s acceptance of the appointment, objective and scope of audit, extent of auditor’s responsibilities to the client and form of any reports. Contents  Objective of the audit  Managements’ responsibility for the FS  Scope of the audit  Form of reports or other communication  Inherent limitations of audit and internal control  risk that some material misstatements may remain  Access to documents records and information  Arrangements for planning and performing audit  Expectation of receiving a letter of representation  Request for acknowledgement of receipt of letter  Basis of fees.

(35) Internal audit. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Discuss the factors to be taken into account when assessing the need for internal audit Discuss the elements of best practice in the structure and operations of internal audit with reference to appropriate international codes of corporate governance Compare and contrast the role of external and internal audit. Q1(b) Section B – pilot paper. Discuss the scope of internal audit and the limitations of the internal audit function Discuss the responsibilities of internal and external auditors for the prevention and detection of fraud and error Explain outsourcing Explain the advantages and disadvantages of outsourcing the internal audit function Discuss the nature and purpose of internal audit assignments including value for money, IT, financial, regulatory compliance, fraud investigations and customer experience. Q3 Section A – pilot paper. Discuss the nature and purpose of operational internal audit assignments. 35.

(36) Assessing the need for internal audit Internal audit and corporate governance codes. . It is seen as good corporate governance to have an internal audit (IA) function to assess and monitor internal control policies and procedures. The Board  Overall responsibility for analysis of risk and implementation of controls The Audit Committee  Monitor and review effectiveness of IA  Approve appointment/termination of appointment of head of IA  Review and assess IA work plan  Monitor management responsiveness to IA reports  Meet head of IA at least once a year without management Internal audit department  Regular report to audit committee  Direct access to board chairman and audit committee  Accountable to audit committee.  . Scope and limitations of internal audit.      . Objective. . Shareholders. Report to. . Management/directors. . Independent. Status. . Employee of company or contracted to company. . Required to have recognised qualification. . No requirement. 36. Advantages  Increased independence  Relevant skills  Increased reliability Disadvantages  Costs  Limited knowledge of specific entity  Independence issues if provided by external audit firm. Independence from activities subject to audit Independent reporting line Objectivity Skills Ongoing training Action taken in response to recommendations. External audit  Opinion on FS in terms of true and fair. Internal audit  Wide ranging up to employers. Trends or factors that have increased risks Organisational restructuring or changes in processes and systems Adverse trends noted in monitoring of internal control systems Unexpected occurrences. Outsourcing internal audit. Limitations could arise from lack of:. Comparison of internal and external audit. Qualification. . Internal audit. Nature and purpose of internal audit assignments . Value for money audit (VFM). – Economy, efficiency and      . effectiveness Information technology audit Financial internal audit Regulatory compliance audits Fraud investigations Customer experience audits Operational audits. Internal audit reports   . Format will vary May include executive summary Findings and recommendations.

(37) Risk assessment. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Identify the overall objectives of the auditor and the need to conduct an audit in accordance with ISAs Explain the need to plan and perform audits with an attitude of professional scepticism, and to exercise professional judgement Explain the components of audit risk. Q10 Section A – pilot paper. Explain the audit risks in the financial statements and explain the auditor’s response to each risk. Q5(a) Section B – pilot paper. Explain how auditors obtain an initial understanding of the entity and its environment Define and explain the concepts of materiality and performance materiality Explain and calculate materiality levels from financial information Discuss the effect of fraud and misstatements on the audit strategy and extent of audit work Explain the auditor’s responsibility to consider laws and regulations Describe and explain the nature and purpose of analytical procedures in planning Compute and interpret key ratios used in analytical procedures. 37.

(38) A ccuracy (trans/disclosure) C ompleteness (trans/bals/disclosure) C ut off (trans) A llocation (bals) C lassification/understandability (trans/disclosure) O ccurence (trans/disclosure) V aluation (bals/disclosure) E xistence (bals) R ights and obligations (bals/disclosure). Professional scepticism. Risk assessment. Risk at the assertion level. . Questioning the validity of evidence. . Alertness to contradictory evidence. . Neither the assumption that management is dishonest nor the assumption of unquestioned honesty. Business risk . Conditions, events and circumstances that could adversely affect the entity’s ability to achieve its objectives (financial risk, operational risk and compliance risk). Professional judgement . Materiality and audit risk. . Nature, timing, extent of procedures. Significant risks . Require special audit consideration. Understanding the entity and its business environment Matters to consider  Industry, regulatory and other external factors  Nature of the entity  Objectives and strategies and related business risks  Measurement and review of entity’s financial performance  Internal control. Materiality and performance materiality Materiality  Information is material if its omission or misstatement could influence the decisions of users based on the financial statements  Amount and nature of the information needs to be considered  Calculation is always judgemental  Firms set criteria for guidance, e.g.: – ½ to 1% of revenue – 1 to 2% of total assets – 5 to 10% of profit before tax  Impact on audit: – Nature, timing and extent of audit procedures – Whether to seek adjustments – Degree of any auditor’s report modifications Performance materiality  Amount set by the auditor at less than the materiality level for a particular class of transactions or account balance.. Audit risk (See below). Effect of fraud on misstatements If risk assessment suggests there may be material misstatements arising from fraud the main effects on the audit strategy will relate to: . Assignment and supervision of personnel. . Consideration of accounting policies. . Unpredictability in nature, timing and extent of audit procedures. Analytical procedures in audit planning   . 38. Analysis of relationships to identify inconsistencies and unexpected relationships Should be applied as risk assessment procedures Include comparisons with; – Prior periods and budgets – Industry information – Predictive estimates – Ratio analysis – Relationships between financial and non-financial information.

(39) THE AUDIT RISK MODEL. AR. =. IR. x. CR. x. Audit risk The 'risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated'. DR. Detection risk Inherent risk The susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there were no related internal controls.. Control risk The risk that a misstatement could occur in an assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.. Sampling risk. The risk that the auditor's procedures will not detect a misstatement that exists in an assertion that could be material either individually or when aggregated with other misstatements. Non-sampling risk. 39.

(40) Common ratios for use in analytical review Profitability (i). Return on Capital Employed (ROCE). =. (ii). Net profit margin =. =. (iii). Asset turnover. =. (iv). Gross margin. =. Profit before interest and tax (PBIT) Share capital  reserves  NC liabilities PBIT Revenue. Revenue Share capital + reserves + NC liabilities Gross profit Revenue. Liquidity (i). Current ratio. =. (ii). Quick ratio (Acid Test). =. (iii). Inventory turnover. = or. (iv). Trade receivables days. =. (v). Trade payables days. =. CA CL CA - Inventories CL Inventories COS COS Inventories.  365 days.  No. of times turnover. Trade receivables Credit sales. Trade payables Credit purchases.  365 days.  365 days. Gearing (i). 40. Debt/equity. =. Interest bearing debt Share capital and reserves.

(41) Audit planning and documentation. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Identify and explain the need for and importance of planning an audit Identify and describe the contents of the overall audit strategy and audit plan Explain and describe the relationship between the overall audit strategy and the audit plan Explain the difference between interim and final audit Describe the purpose of an interim audit, and the procedures likely to be adopted at this stage in the audit. Q6 Section A – pilot paper. Describe the impact of the work performed during the interim audit on the final audit Explain the need for and the importance of audit documentation Describe the form and contents of working papers and supporting documentation Explain the procedures to ensure safe custody and retention of working papers. 41.

(42) Audit planning and documentation. The need for planning Planning is required so that the audit will be carried out in an efficient and effective manner. Objectives:  Appropriate attention is devoted to important areas of the audit  Potential problems are identified  The work is completed expeditiously  Proper assignment of work to assistants  Coordination of work done by other auditors and experts; and  Facilitating review.. Audit documentation. The audit strategy. ISA 230 Audit Documentation states that the auditor shall prepare audit documentation on a timely basis.. and the audit plan. Contents: . Sufficiently complete and detailed to enable an experienced auditor with no previous connection with the audit to ascertain what work was performed and to support the conclusions reached. . Planning, nature, timing and extent of audit procedures and conclusions drawn. . Reasoning on all significant matters of judgement. . Permanent file/current file. Audit strategy sets out:         . Scope Financial reporting framework Locations Reporting objectives Materiality levels Preliminary identification of: – Higher risk areas – Material balances Whether auditor plans to perform tests of controls Resources Management. Audit plan sets out  . Nature, timing and extent of audit procedures For each material class of transactions, account balances or disclosure. Interim and final audit Interim audit procedures (before y/e) . Analytical procedures. . Tests of controls. . Updating risk assessments. . Review of relevant internal audit reports. . Substantive testing (of transactions in the first part of the year) Final audit procedures (post y/e). 42. . Completion of tests of controls and substantive tests of transactions started at interim. . Analytical procedures on financial statements. . Substantive testing of financial statements.

(43) Introduction to audit evidence. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain the assertions contained in the financial statements about classes of transactions and events, account balances at the period end and presentation and disclosure. Q4(a) Section B – pilot paper. Describe audit procedures to obtain audit evidence, including inspection, observation, external confirmation, recalculation, re-performance, analytical procedures and enquiry Discuss the quality and quantity of audit evidence Discuss the relevance and reliability of audit evidence. Q2 Section A – pilot paper. Discuss substantive procedures for obtaining audit evidence Discuss and provide examples of how analytical procedures are used as substantive procedures Discuss the difference between tests of control and substantive procedures. Q2(a) Section B – pilot paper. 43.

(44) Introduction to audit evidence. Quality of evidence ISA 500 Audit Evidence Sufficient Quantity – Sufficient to support the audit opinion Factors to consider are:. Financial statement assertions. Risk assessment. . Nature of accounting and internal control systems. . Materiality of the item. . Experience gained during previous audits. . Results of audit procedures. . Source and reliability of information available. Sources of evidence A nalytical procedures E nquiry and confirmation I nspection O bservation Recalc U lation. Assertions A ccuracy (trans/disclosure) C ompleteness (trans/bals/disclosure) C ut off (trans) A llocation (bals) C lassification/understandability (trans/disclosure) O ccurence (trans/disclosure) V aluation (bals/disclosure) E xistence (bals) R ights and obligations (bals/disclosure). 44. . Appropriate. Relevant The evidence gathered must cover the financial statement assertions.. Reliable . External better than internal. . Internal more reliable when controls effective. . Auditor generated better than client generated. . Documentary better than oral. . Original documents more reliable than copies/faxes.

(45) Internal control. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain why an auditor needs to obtain an understanding of internal control relevant to the audit Describe and explain the five components of an internal control system; the control environment, the entity’s risk assessment process, the information system, control activities relevant to the audit and monitoring of controls. Q12 Section A – pilot paper. Explain how auditors record internal control systems including the use of narrative notes, flowcharts, internal control questionnaires and internal control evaluation questionnaires Evaluate internal control components, including deficiencies and significant deficiencies in internal control Discuss the limitations of internal control components Describe computer system controls including general IT controls and application controls. Q4 Section A – pilot paper. Explain the importance of internal control and risk management. 45.

(46) Internal control. Internal control is the process designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.'. Computer systems controls. Internal control systems Components of an internal control system  The control environment  The entity’s risk assessment process  The information system  Control activities  Monitoring of controls. Examples of internal control     . Segregation of duties Physical controls Information processing Review (performance) Authorisation. Limitations of internal control     . Poor judgement in decision making Human error Processes being deliberately circumvented by employees and others Management overriding controls The occurrence of unforeseen circumstances. Use of internal control systems by auditors. See below. 46. General controls. Application controls. Controls over data centre and network operations  Operating logs  Standby arrangements  Regular backup and secure storage Virus protection/firewalls. Controls over input  Batch controls  Range/limit checks  Existence checks  Check digits  Sequence checks. System software acquisition, change and maintenance  Physical controls  Segregation of duties  The entity’s risk assessment process  The information system  Control activities  Monitoring of controls. Controls over output  Test checks  Approval of computer-generated payments  Reconciliations of report totals to general ledger accounts. Access security  Passwords  Dedicated terminals  Job scheduling. . Passwords restricting access to amend standing data. . Regular printouts produced and reviewed by someone in authority. Application system acquisition, change and maintenance  Testing of new systems  Authorisation, approval and testing of changes  Use of standard packages  Regular review of unauthorised changes  Restricted access to application systems documentation. . Regular lists of amendments, additions and deletions produced and reviewed. Controls over standing data.

(47) Internal control. Use of internal control systems by auditors Document the system - how? . Narrative notes. . Flow charts. . Internal control questionnaires (ICQs). . Internal control evaluation questionnaires (ICEQs). Document the system - why? . Identify potential misstatements. . Consider factors that affect the risk of material misstatements. . Design the nature, timing and extent of further audit procedures. 47.

(48) 48.

(49) Tests of controls. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Describe control objectives, control procedures, activities and tests of control in relation to:. Q6(a) Section B – pilot paper. The sales (revenue) system The purchases system The payroll system The cash system The inventory system Revenue and capital expenditure (non-current assets) Discuss and provide examples of how the reporting of significant deficiencies in internal control and recommendations to overcome those significant deficiencies are provided to management. 49.

(50) .   . Revenue.  . Tests of controls. Test that the control – Is properly designed – Exists, and – Has operated throughout the period Deviations should be recorded and investigated regardless of amounts involved Assess whether deviations are isolated departures or indicate the existence of errors in accounting records If results are unsatisfactory – Preliminary assessment of control risk is not supported – Must modify nature, timing and extent of planned substantive procedures.    . Inventories. Purchases. Enquiry Inspection of documents supporting controls Observation of procedures Re-performance of the application of a control Testing of the control activities performed by a computer, possibly using CAATs Examination of evidence of management review. Payroll. Revenue and capital expenditure. Bank and cash. Communication of deficiencies in internal control. Other communication by the auditor with those charged with governance    . The auditor’s responsibilities in relation to FS audit Planned scope and timing of the audit Significant findings from the audit e.g. views on significant accounting policies Statement of compliance with independence requirements. . No duty to report control deficiencies to shareholders. . ISA 265 Communicating deficiencies in internal control to those charged with governance and management requires significant deficiencies in internal control to be reported to those charged with governance. . Form of communication should be agreed at planning stage. . Should be prompt and before FS finalised. . Contents should first be discussed with management. . Addressed to audit committee (or board, if no audit committee). . Detailed recommendations structured:. . – Deficiency – Implication – Recommendation Caveat – –. 50. Not for external use Not a complete list.

(51) Audit procedures and sampling. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Discuss the problems associated with the audit and review of accounting estimates Describe why smaller entities may have different control environments and describe the types of evidence likely to be available in smaller entities Define audit sampling and explain the need for sampling Identify and discuss the differences between statistical and non-statistical sampling Discuss and provide relevant examples of, the application of the basic principles of statistical sampling and other selective testing procedures. Q1 Section A – pilot paper. Discuss the results of statistical sampling, including consideration of whether additional testing is required Explain the use of computer-assisted audit techniques in the context of an audit Discuss and provide relevant examples of the use of test data and audit software for the transaction cycles and balances included in the syllabus Discuss why auditors rely on the work of others Discuss the extent to which auditors are able to rely on the work of experts, including the work of internal audit. Q8 Section A – pilot paper. Discuss the audit considerations relating to entities using service organisations Explain the extent to which reference to the work of others can be made in audit reports. 51.

(52) Audit procedures and sampling. Sampling. Computer-assisted audit techniques. Audit sampling means the application of audit procedures to less than 100% of the items within a class of transactions or account balance such that all sampling units have an equal chance of selection, in order to assist in forming a conclusion concerning the population from which the sample is drawn [ISA 530]. Sample size . Required confidence level. . Risk of material misstatement. . Tolerable error. . Expected error. . Population size.  Stratification Sample selection . Random. . Systematic. . Haphazard.  Value weighted Evaluation of results . Nature and cause of errors?. . Effect on other areas?. . Anomalous?. . Project monetary errors to the population. . If this indicates material error is likely the auditor may: – Ask management to investigate and make adjustments – Modify nature timing and extent of further audit procedures – Consider effect on auditor’s report. Audit software Computer programs used by the auditor, as part of his auditing procedures, to process data of audit significance from the entity’s accounting system. Data may be down-loaded from the client’s system to the auditor’s in order to perform tests on it. Examples of tests (usually substantive)  Reperformance of calculations  Extraction of samples  Analytical review. 52. Test data Conducting audit procedures by entering data into an entity’s computer system, and comparing the results obtained with pre-determined results. Examples of tests (usually tests of controls)  Testing specific controls in computer programs  Test transactions  Integrated test facilities.

(53) Audit procedures and sampling. Using the work of others. If the external auditor can rely on the work conducted by the internal auditor, the volume of detailed work undertaken by the external auditor may be reduced. When the external auditor intends to use specific internal audit work, the external auditor should evaluate and perform audit procedures to confirm that it is adequate for the external auditor’s purposes. (ISA 610 Using the work of internal auditors) General assessment  Scope of function  Organisational status  Due professional care  Independence  Technical competence Evaluation of internal audit work . Adequacy of technical training and proficiency. . Whether properly supervised, reviewed and documented. . Sufficiency and appropriateness of evidence. . Whether conclusions are appropriate and reports consistent with work performed. . Examples. Examples.  Accounting records  Payroll  Credit control  Data entry/information processing Auditor’s responsibilities. . Valuations of land and buildings. . Determination of inventory quantities/condition. . Legal opinions. . Assess significance of organisation’s activities to the audit. . Assess risk of material misstatement and extent of control risk. . Consider whether information held by client is sufficient. . If necessary, request service organisation’s auditor to perform additional procedures, or visit to perform tests of controls Audit report . Examples Allowances to reduce inventory or receivables to their estimated realisable value.  . . Depreciation. . Provisions. Consider whether to include any weaknesses/irregularities discovered by IA. Audit report . Cannot make reference to work done by IA. . Evaluate objectivity/competence of expert. . Evaluate appropriateness of auditor’s expert’s work as evidence – Data and assumptions – Consistency with other evidence. Unmodified audit report . Should not refer to work of an expert. Auditing smaller entities Audit of accounting estimates . . Auditor’s responsibilities. Consider any implications for the auditor’s report. Whether exceptions/unusual matters resolved Planning, controlling and recording Liaise with IA at all stages Compare own results with those of IA Report to management. Auditor’s Expert. Service organisations. Internal audit.  Accrued revenue 3 approaches . Review and test process used by management. . Use independent estimate for comparison. . Review of subsequent events for evidence of reasonableness of estimate. The problem of control . Many controls relevant to large entities neither practical nor appropriate. . Likely to have poor segregations of duties. . Management override of controls. . Management should instigate additional authorisation, arithmetical, accounting and supervisory controls Audit approach . Unlikely to be able to rely on controls. . Focus will be on substantive procedures. 53.

(54) 54.

(55) Non-current assets. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain the audit objectives and the audit procedures relating to: Tangible and intangible non-current assets: (i). Evidence in relation to non-current assets and. (ii). Depreciation. (iii) Profit/ loss on disposal. Q6(b) Section B – pilot paper Q2(b) Section B – pilot paper. (iv) The related profit or loss section (income statement) entries.. 55.

(56) Non-current assets. Evidence on figures in the statement of financial position. Tangible   . Additions Disposals Revaluations.   . Depreciation Gains/ losses on disposals Impairments. Intangible Development expenditure Remember the IAS 38 criteria that require/permit capitalisation:      . 56. Evidence on entries in the statement of profit or loss. Probable future economic benefits Intention to complete and use/sell asset Resources adequate and available to complete and use/sell asset Ability to use/sell the asset Technical feasibility of completing asset for use/sell Expenditure can be measured reliably.

(57) Inventory. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain the audit objectives and the audit procedures in relation to: Inventory (i). Inventory counting procedures in relation to yearend and continuous inventory systems. (ii). Cut-off. (iii) Auditor's attendance at inventory counting (iv) Direct confirmation of inventory held by third parties (v) Valuation (vi) Other evidence in relation to inventory.. 57.

(58) Inventory. 3rd party confirmations. Quantity x Value. Other evidence. Cut-off Cut-off is usually tested by obtaining a sample of GRNs and GDNs either side of the year end and then matching them to purchase/sales invoices to ensure they have been included in the correct account balances(s) (see below). Year end inventory counting Before . Review working papers for previous year to identify risks and familiarise yourself with the inventories  Determine arrangements with management in advance  Inventories held by/for third parties – what arrangements have been made?  Review client’s inventory count instructions  Investigation of differences (where inventory records exist)  Consider the need for an expert  Determine procedures to cover a representative selection of inventories During  . Ensure staff are following the inventory counting instructions Test counts from – Inventories  inventory sheets and – From the inventory sheets  inventories..   . Note damaged, old or obsolete inventories. Review WIP for stage of completion Inventories held by client for third parties: ensure excluded from count  Record the number of the last GRN and the last GDN  Form an overall impression of inventory levels  Photocopy inventory sheets After       . Check sequence of inventory sheets Check client’s computation of final figure Trace own test count items through to final inventory sheets Check replies from third parties Inform management of any problems Follow up cut-off details Ensure necessary adjustments to book inventories have been made (where records are maintained).. 58. Valuation . Record basis of valuation used. . Test material costs – Check to individual invoices. . Review company's procedures – Independence of counters –. Frequency of counts. –. Ensure all lines covered at least once per year. –. Investigation of discrepancies. –. Updating of records. . Attend at least one of the company's counts (to observe). . Review whole year's results – Extent of counting – Accuracy of records – Reasons for discrepancies. . Perform test counts at the year end. Ensure FIFO or appropriate basis being used. –. Check quantities used in WIP/FG. Test labour costs – Check calculations to supporting documentation –. Continuous inventory . –. . Review costing against actual labour and production. Test application of overheads –. Ensure only production overheads included. –. Ensure based on normal levels of activity.

(59) After. GRN. GRN. Included in? Purchases Payables Inventories. Sales. GDN Included in? Sales Receivables Inventories. Included in? Purchases Payables Inventories. Purchase. Before. GDN Included in? Sales Receivables Inventories. Sales. Purchase. Year end. 59.

(60) 60.

(61) Subject:. Receivables. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain the audit objectives and audit procedures in relation to: Receivables (i). direct confirmation of accounts receivable. (ii). other evidence in relation to receivables and prepayments, and. Q4(b) Section B – pilot paper. (iii) the related profit or loss section (income statement) entries. 61.

(62) Receivables. Statement of financial performance: receivables and prepayments Statement of profit or loss: revenue, irrecoverable debts expense. Direct confirmation  Obtain listing of trade receivables as at the confirmation date  Agree total to nominal ledger  Review for any obvious omissions/misstatements by comparing this year's list with last year's  Select a sample of accounts for confirmation  Select the sample including the following balances: – Old, unpaid amounts – Credit balances – Nil balances – Material balances  Letter should be on the client's paper, signed by the client with a copy of the current statement attached. It should request that the reply be sent direct to the auditor and reply paid envelopes should be sent.  After reasonable period, send 'follow-up' request  Follow up by telephone or fax if there is no reply  No reply: – Confirmation of individual outstanding invoices – Alternative procedures – Agree opening balance on account with last year's closing balance – Test casts – Verify outstanding items to back up documentation – Review cash received after year end – Discuss with responsible company official. 62. Other evidence  GDNs pre/post year end  Analytical procedures.  Correspondence with customers/liquidators.

(63) Bank and cash. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain the audit objectives and the audit procedures in relation to: Bank and cash: (i). Bank confirmation reports used in obtaining evidence in relation to bank and cash. (ii). Other evidence in relation to bank, and. (iii) Other evidence in relation to cash.. 63.

(64) Related entries in the statement of profit or loss. Bank and cash . Bank confirmation letters Authority to disclose Banks require the explicit written authority of their customers to disclose the information requested: –. An ongoing standing authority, or. –. A separate authority each time information is requested.. Bank confirmation process . . A request for a bank confirmation issued on the auditors' own headed paper and sent to the bank branch with which the client has the prime business arrangement. The bank confirmation request should specify: – The names of all entities covered by the request –. Whether the auditor is requesting 'standard information'. – –. Details of 'additional information' if so required The date for which the auditor is requesting confirmation (the audit confirmation date);. –. A statement that the bank's response will not create a contractual relationship between the bank and the auditor. –. A statement requesting the bank to advise the auditor if the Authority is insufficient to allow the bank to provide full disclosure of the information requested; and. –. A contact name and telephone number.. . The bank confirmation request should reach the branch at least two weeks in advance of the audit confirmation date. Standard information requested. 64. . Full title of all bank accounts in all currencies, with account numbers and balances, including nil balances. . Full title and dates of closure of all accounts closed during the period. . Amounts accrued but not yet charged or credited of: – Charges – Interest. . Amount of interest charged during the period if not shown separately on bank statement. . Particulars of any right of set-off. . Details of: – Overdrafts and loans repayable on demand – Other loans, specifying dates of review and repayment – Other facilities. . Customer’s assets held as security. . Customer’s other assets held. . Contingent liabilities. Bank interest. Other evidence . Bank reconciliation. . Attend physical count of cash if material..

(65) Liabilities, capital and directors’ emoluments. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Explain the audit objectives and audit procedures in relation to: Payables and accruals (i). Supplier statement reconciliations and direct confirmation of accounts payable,. (ii). Obtain evidence in relation to payables, accruals and. (iii) Purchases and other expenses. Non-current liabilities, provisions and contingencies (i). Evidence in relation to non-current liabilities. (ii). Provisions and contingencies.. Q2(b) Section B – pilot paper. Share capital, reserves and directors’ emoluments: (i). Evidence in relation to share capital, reserves and directors’ emoluments and. (ii). The related profit or loss section (income statement) entries. 65.

(66) Liabilities, capital and directors’ emoluments.  Payables and accruals – Supplier statement reconciliations – Analytical procedures – Subsequent events review  Purchases and expenses. 66.  Non-current liabilities – Bank letters – Loan agreements – Finance costs  Provisions – IAS 37 criteria – Subsequent events review – Management representations – Recalculation of estimates  Finance costs – Analytical procedures – Recalculation.  Share capital Share issues – Memo and Articles – Board minutes – Cash book receipts  Reserves – Brought forward figures – Profit/ loss for year – Dividends (board minutes, cash book payments)  Directors’ emoluments – Contracts – Board minutes – Cash book payments.

(67) Not-for-profit organisations. How have the syllabus learning outcomes been examined? Syllabus learning outcomes. Example past paper questions. Apply audit techniques to small not-for-profit organisations. 67.

(68) Not-for-profit organisations. Types of not-for-profit organisations  Charities  Clubs  Societies. Comparison with audit of forprofit organisations Risk factors. Audit evidence.  Complexity and extent of regulation.  Mainly substantive procedures.  Significance of cash receipts  Restrictions imposed in the entity's governing documents  Sensitivity of certain key statistics  Need to maintain adequate, but not excessive resources Control risk  Competence, training and qualification of paid staff and volunteers  Segregation of duties  Reliability of accounting systems/computer systems  Controls over compliance with laws and regulations  Power of trustees. 68. Application of audit techniques.

No results found