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ACCA BPP Passcard F8 weacca

Audit and Assurance (Association of Chartered Certified Accountants)

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Fundamentals฀Paper฀F8
Audit฀and฀Assurance

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First฀edition฀2007,฀Tenth฀edition฀February฀2016 All฀rights฀reserved. No฀part฀of฀this฀publication฀may฀be

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A฀catalogue฀record฀for฀this฀book฀is฀available฀from฀the
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BPP฀Learning฀Media฀is฀grateful฀to฀the฀IASB฀for฀permission reprinted฀or฀reproduced฀or฀utilised฀in฀any฀form฀either฀in
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Preface Contents

Welcome฀to฀BPP฀Learning฀Media’s฀ACCA฀Passcards for Paper฀F8฀Audit฀and฀Assurance.

 They฀focus฀on฀your฀exam and฀save฀you฀time.
 They฀incorporate฀diagrams to฀kick฀start฀your฀memory.
 They฀follow฀the฀overall฀structure฀of฀the฀BPP Learning฀Media’s฀Study฀Texts,฀but฀BPP฀Learning฀Media’s฀ACCA
Passcards฀are฀not฀just฀a฀condensed฀book. Each฀card฀has฀been฀separately฀designed฀for฀clear฀presentation.
Topics฀are฀self-contained฀and฀can฀be฀grasped฀visually.
 ACCA Passcards฀are฀still฀just฀the฀right฀size฀for฀pockets,฀briefcases฀and฀bags.
Run฀through฀the฀Passcards as฀often฀as฀you฀can฀during฀your฀final฀revision฀period. The฀day฀before฀the฀exam,฀try
to฀go฀through฀the฀Passcards฀again!฀You฀will฀then฀be฀well฀on฀your฀way฀to฀passing฀your฀exams.
Good฀luck!

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Preface Contents

Page Page
1 Audit฀and฀other฀assurance฀engagements 1 11 Audit฀procedures฀and฀sampling 89
2 Statutory฀audit฀and฀regulation 9 12 Non-current฀assets 101
3 Corporate฀governance 17 13 Inventory 107
4 Professional฀ethics 25 14 Receivables 113
5 Internal฀audit 37 15 Cash฀and฀bank 119
6 Risk฀assessment 47 16 Liabilities,฀capital฀and฀directors’
emoluments 123
7 Audit฀planning฀and฀documentation 57
17 Not-for-profit฀organisations 131
8 Introduction฀to฀audit฀evidence 63
18 Audit฀review฀and฀finalisation 137
9 Internal฀control 67
19 Reports 147
10 Tests฀of฀controls 77

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Notes

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1: Audit฀and฀other฀assurance฀engagements

Topic฀List This฀chapter฀provides฀an฀introduction฀into฀why฀there฀is฀a
need฀for฀assurance฀services,฀such฀as฀external฀audit฀and
review. It฀is฀important฀that฀you฀have฀grasped฀the฀key
The฀purpose฀of฀assurance฀services auditing฀concepts฀outlined฀in฀this฀chapter฀because฀it฀is
the฀foundation฀for฀the฀rest฀of฀your฀studies.
External฀audit
You฀may฀not฀be฀examined฀specifically฀on฀these฀issues,
Assurance฀and฀reports but฀will฀need฀to฀understand฀them฀to฀answer฀other
The฀chronology฀of฀an฀audit questions,฀later฀on.

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The฀purpose฀of External฀audit Assurance฀ The฀chronology฀

assurance฀services and฀reports of฀an฀audit

There฀are฀various฀people฀interested฀in฀the฀financial฀statements฀of฀a฀company. They฀are฀called฀stakeholders.

Shareholders Particularly฀in฀larger
Directors Employees
companies,฀the฀owners฀of฀a
company฀and฀the
STAKEHOLDERS management฀of฀that
company฀are฀distinct.

Payables Tax฀
authorities Directors฀are฀accountable
The฀public
to฀the฀shareholders฀in฀their
role฀as฀stewards and
agents. Accountable฀means
being฀required฀to฀justify
actions฀and฀decisions.

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These฀issues฀are฀often฀discussed฀under฀the฀umbrella
Going฀concern Profits Financial
title฀corporate฀governance.
disclosure warnings statements
Corporate฀governance฀is฀the฀system฀by฀which
Communication companies฀are฀directed฀and฀controlled. Good
corporate฀governance฀ensures฀that฀stakeholders
with฀a฀relevant฀interest฀in฀the฀company’s฀business
Directors’ are฀fully฀taken฀into฀account.
accountability The฀UK฀government฀has฀made฀recommendations฀as
to฀what฀constitutes฀good฀corporate฀governance฀in
various฀codes. These฀have฀been฀adopted฀by฀the
Investment
Listing฀Authority฀for฀the฀Stock฀Exchange฀in฀the฀form
protection
of฀the฀UK฀Corporate฀Governance฀Code. This฀is
discussed฀in฀more฀detail฀in฀Chapter฀3.
A฀key฀consideration฀for฀directors฀is฀management฀of
Internal Risk฀ risk and฀internal฀controls.
controls policies

Audits฀or฀reviews฀can฀give฀stakeholders฀a฀degree฀of฀assurance฀concerning฀these฀issues.

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The฀purpose฀of External฀audit Assurance฀ The฀chronology฀

assurance฀services and฀reports of฀an฀audit

An฀audit฀is฀an฀exercise฀whose฀objective฀is฀to฀enable฀auditors฀to฀express฀an฀opinion
whether฀the฀financial฀statements฀(FS)฀are฀prepared,฀in฀all฀material฀respects,฀in
accordance฀with฀an฀identified฀financial฀reporting฀framework. The฀phrases฀used฀to
express฀the฀auditor’s฀opinion฀are฀‘give฀a฀true฀and฀fair฀view’ or฀‘present฀fairly, in฀all
material฀respects’ which฀are฀equivalent฀terms.

Auditors฀do฀not฀bear฀any฀responsibility฀for฀the
Fair฀presentation requires฀the฀faithful preparation฀and฀presentation of฀the฀financial
representation฀of฀the฀effect฀of฀the฀transactions, statements,฀which฀is฀the฀responsibility฀of฀the
other฀events฀and฀conditions฀in฀accordance฀with฀the directors.
definitions฀and฀recognition฀criteria฀for฀assets,
liabilities,฀income฀and฀expenses฀set฀out฀in฀the
applicable฀Framework.
Exam฀focus
There฀are฀many฀misconceptions฀about฀the฀role฀of฀the
auditors,฀which฀are฀referred฀to฀as฀‘the฀expectations
gap’ (the฀gap฀between฀what฀auditors฀do฀and฀what
people฀think฀they฀(should)฀do).

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Statutory฀audits are฀required฀by External฀v฀internal฀audit฀Larger

law฀for฀most฀companies฀(small entities฀often฀have฀internal฀audit.
and฀dormant฀companies฀may฀be Internal฀auditors฀act฀as฀a฀control.
exempt). Various฀other฀bodies Their฀work฀can฀benefit฀the
require฀an฀audit฀under฀law, external฀auditors.
including: building฀societies,฀trade
unions,฀some฀charities.

The฀objective฀of฀a฀review฀engagement฀is฀to
enable฀an฀auditor฀to฀give฀an฀opinion฀on
whether฀anything฀has฀come฀to฀his฀attention
that฀would฀mean฀the฀FS฀were฀not฀properly
prepared/true฀and฀fair,฀on฀the฀basis฀of
procedures฀which฀would฀not฀constitute฀an
audit.

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The฀purpose฀of External฀audit Assurance฀ The฀chronology฀

assurance฀services and฀reports of฀an฀audit

The฀external฀audit฀can฀be฀distinguished฀from฀review฀engagements฀by฀the฀level฀of฀assurance฀provided.
Engagement Type฀of฀assurance฀provided Examples
External฀audit Reasonable – Statutory฀external฀audit
Review Limited – Review฀of฀interim฀financial฀statements

Elements฀of฀an฀assurance฀engagement

 Criteria
 Report
 Evidence
 Subject฀matter
 Three฀party฀relationship

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Reasonable฀assurance Materiality฀is฀the฀expression฀of฀the฀relative
is฀not฀a฀guarantee฀of significance฀or฀importance฀of฀a฀particular
correctness,฀but฀an matter฀in฀the฀context฀of฀the฀FS฀as฀a฀whole. A
assurance฀of฀truth฀and matter฀is฀material฀if฀its฀omission฀or
fairness฀within฀a misstatement฀would฀reasonably฀influence
reasonable฀margin฀of the฀decisions฀of฀the฀addressee฀of฀the
error. auditor’s฀report. It฀has฀both฀qualitative฀and
quantitative฀aspects.

Limitations฀of฀an฀audit

 Not฀purely฀objective  Chance฀of฀collusion฀in฀fraud
 Not฀all฀items฀in฀FS checked  Time฀lag฀(period฀–฀reporting)
 Limitations฀of฀systems  Limitations฀of฀the฀auditor’s
report

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The฀purpose฀of External฀audit Assurance฀ The฀chronology฀

assurance฀services and฀reports of฀an฀audit

Chronology฀of฀an฀audit
Understand Assess฀risk/
Plan฀the the
audit entity select฀procedures

Controls Deficiencies

Tests฀of
controls

Report฀to Report฀to
Unsatisfactory
management management
Satisfactory

Restricted Full Overall

substantive Report฀to
substantive review฀of
procedures procedures FS members

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2: Statutory฀audit฀and฀regulation

Topic฀List This฀chapter฀contains฀essential฀background฀knowledge
about฀the฀regulation฀of฀auditing. Auditing฀is฀self-regulating
in฀the฀UK,฀the฀government฀having฀devolved฀this฀duty฀to
Statutory฀requirements the฀RSBs (of฀which฀ACCA is฀one). This฀may฀not
necessarily฀be฀the฀case฀in฀other฀countries. It฀also฀looks
Audit฀regulation at฀the฀authority฀of฀ISAs.
Rights฀and฀duties The฀details฀in฀this฀chapter฀could฀be฀examined฀either฀in
International฀Standards฀on฀Auditing isolation฀or฀in฀conjunction฀with฀the฀topics฀contained฀in
Chapter฀4฀on฀professional฀ethics฀and฀appointment.

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Statutory Audit฀ Rights International

requirements regulation and฀duties Standards฀on฀Auditing

Most฀limited฀companies฀are฀required฀to฀have฀a฀statutory฀audit. There฀are฀some฀exemptions, one฀of

which฀is฀‘small฀entities’.

A฀small฀entity฀is฀any฀enterprise฀in฀which:
(a) There฀is฀concentration฀of฀ownership/management฀in฀a฀small฀number฀of฀people,฀and
(b) One฀or฀more฀of฀the฀following฀are฀also฀found:
(i) Few฀sources฀of฀income฀and฀uncomplicated฀activities
(ii) Unsophisticated฀record-keeping
(iii) Limited฀internal฀controls฀and฀potential฀for฀management฀override฀of฀internal฀controls
(iv) Few฀personnel,฀many฀having฀a฀wide฀range฀of฀duties

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The฀statutory฀opinion฀–฀UK฀example
Explicit฀opinions Implicit฀opinions

The฀auditors฀give฀an฀opinion as฀to฀whether฀the  Adequate฀accounting฀records have฀been฀kept฀and

FS฀are฀true฀and฀fair,฀or฀present฀fairly. returns฀adequate฀for฀the฀audit฀have฀been฀received
from฀branches฀not฀visited.
This฀is฀generally฀taken฀to฀mean฀that฀accounts:
 The฀accounts are฀in฀agreement with฀the฀accounting
 Are฀factual records and฀returns.
 Are฀free฀from฀bias  All฀information and฀explanations have฀been
 Reflect฀the฀commercial฀substance฀of฀the received that฀the฀auditors฀think฀necessary.
business’s฀transactions  Details of฀directors’ emoluments and฀other฀benefits
They฀also฀report฀on฀the฀consistency฀of฀the have฀been฀correctly฀disclosed in฀the฀FS.
directors’ report.  Particulars฀of฀loans and฀other฀transactions in฀favour
of฀directors and฀others฀have฀been฀correctly฀disclosed
in฀the฀FS.

Note. In฀the฀UK฀there฀are฀extra฀reporting฀requirements฀for฀auditors฀of฀companies฀appying฀the฀UK฀Corporate
Governance฀Code.
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Statutory Audit฀ Rights International

requirements regulation and฀duties Standards฀on฀Auditing

UK
Various฀associations฀exist,฀such฀as฀ACCA/ICAEW. Stringent฀entry฀requirements/codes฀of฀ethics.

Eligibility
This฀is฀likely฀to฀be฀directed฀by฀national฀law. It฀should฀ensure฀that฀audits฀are฀only฀done฀by฀people฀with฀suitable
qualifications฀and฀experience.

In฀the฀EU,฀people฀carrying฀out฀audits฀must฀have฀the฀permission฀of฀the฀relevant฀authorities. In฀the฀UK,฀the
relevant฀authorities฀are฀the฀RSBs฀(associations฀such฀as฀ACCA).

There฀should฀also฀be฀supervision฀and฀monitoring฀of฀auditors฀by฀the฀national฀regulatory฀body. Inspection฀would
depend฀on฀various฀factors,฀such฀as฀the฀size฀of฀firm฀and฀the฀number฀of฀audits฀carried฀out.
The฀regulatory฀body฀should฀expect฀to฀see฀commitment฀to฀technical฀excellence฀and฀ethics.

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Statutory Audit฀ Rights International

requirements regulation and฀duties Standards฀on฀Auditing

The฀overriding฀duty฀of฀the฀auditors฀is฀to฀report฀on฀the฀truth฀and฀fairness฀of฀the฀FS. This฀is฀a฀duty
owed฀to฀shareholders.

In฀the฀UK,฀the฀Companies฀Act฀2006฀provides฀the฀auditors฀with฀statutory฀rights,฀as฀well:

Statutory฀rights

 A฀right฀of฀access at฀all฀times฀to฀the฀books,฀accounts฀and฀vouchers฀of฀the฀company.
 A฀right฀to฀require from฀the฀company’s฀officers฀such฀information฀and฀explanations as฀they฀think
necessary฀for฀the฀performance฀of฀their฀duties฀as฀auditors.
 A฀right฀to฀attend฀any฀general฀meetings of฀the฀company฀and฀to฀receive฀all฀notices฀of฀and
communications฀relating฀to฀such฀meetings฀which฀any฀member฀of฀the฀company฀is฀entitled฀to฀receive.
 A฀right฀to฀be฀heard฀at฀general฀meetings which฀they฀attend฀on฀any฀part฀of฀the฀business฀that฀concerns
them฀as฀auditors.
 A฀right฀to฀receive a฀copy฀of฀any฀written฀resolution฀proposed.

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Statutory Audit฀ Rights International

requirements regulation and฀duties Standards฀on฀Auditing

IFAC is฀the฀International฀Federation฀of฀Accountants,฀based฀in฀New฀York. IFAC฀co-operates฀with฀member฀bodies

from฀around฀the฀world฀to฀initiate,฀co-ordinate฀and฀guide฀efforts฀to฀achieve฀international฀technical,฀ethical฀and
educational฀pronouncements฀for฀the฀accountancy฀profession.

The฀International฀Auditing฀and฀Assurance IAASB Pronouncements

Standards฀Board฀(elected฀from฀members฀of
the฀IFAC) issues฀International฀Standards฀on
Auditing฀(ISAs). ISAs฀are฀specially฀written฀to  International฀Standards฀on฀Auditing฀(ISAs)
try฀to฀incorporate฀the฀differences฀which฀will  International฀Standards฀on฀Review฀Engagements
exist฀between฀accounting฀under฀various (ISREs)
national฀laws.  International฀Standards฀on฀Assurance฀Engagements
They฀do฀not฀override฀national฀law,฀but฀if (ISAEs)
national฀law฀conflicts฀with฀the฀best฀practice฀in
an฀ISA,฀member฀bodies฀of฀IFAC฀from฀that  International฀Standards฀on฀Related฀Services฀(ISRSs)
country฀are฀required฀to฀encourage฀a฀change  International฀Standards฀on฀Quality฀Control฀(ISQCs)
in฀the฀law฀to฀conform฀to฀the฀ISA.  International฀Auditing฀Practice฀Notes฀(IAPNs)

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Authority฀of฀IAASB฀pronouncements
 ISAs฀are฀applied฀in฀the฀audit of฀financial฀ Exam฀focus
information. Chapter฀2฀of฀your฀Study฀Text฀includes฀a฀list฀of฀ISAs
 ISREs฀are฀applied฀in฀the฀review of฀historical examinable฀in฀F8,฀as฀well฀as฀other฀examinable
financial฀information. documents.
 ISAEs฀are฀applied฀in฀assurance฀engagements
other฀than฀the฀audit฀and฀review฀of฀historical
financial฀information.
 IAPNs฀provide฀practical฀assistance฀to฀auditors.

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Notes

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3: Corporate฀governance

This฀chapter฀discusses฀the฀importance฀of฀good฀corporate
Topic฀List governance฀within฀a฀company฀and฀the฀aims฀and
objectives฀of฀audit฀committees.
Corporate฀governance The฀topic฀of฀corporate฀governance฀could฀be฀examined฀in
conjunction฀with฀internal฀audit฀(Chapter฀5)฀in฀a฀scenario
Codes฀of฀best฀practice
question.
Audit฀committees
Internal฀control฀effectiveness
Communication฀with฀those฀charged
with฀governance

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Corporate Codes฀of฀best Audit Internal฀control Communication฀with฀those

governance practice committees effectiveness charged฀with฀governance

Corporate฀governance฀is฀the฀system฀by฀which฀companies฀are฀directed฀and฀controlled.

The฀problem฀of฀corporate฀governance
The฀problem฀of฀corporate฀governance฀arises฀because฀often฀in Directors Owners
companies฀(particularly฀larger฀ones)฀management฀and฀owners฀are
not฀the฀same฀people. The฀managers฀(stewards)฀of฀the฀company Auditors
report฀to฀the฀owners. Other฀people฀use฀that฀report฀to฀draw
conclusions฀about฀the฀company.
This฀‘report’ (the฀financial฀statements)฀is฀audited฀by฀auditors,฀who Financial฀statements
report฀on฀its฀truth฀and฀fairness.

Exam฀focus Other฀users

An฀audit฀committee฀is฀one฀corporate฀governance฀tool.You฀could฀be
asked฀to฀discuss฀the฀benefits฀of฀having฀an฀audit฀committee Employees Creditors

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Corporate Codes฀of฀best Audit Internal฀control Communication฀with฀those

governance practice committees effectiveness charged฀with฀governance

Codes฀of฀Best฀Practice฀for฀corporate฀governance฀are฀increasingly฀common฀worldwide. One฀example฀is฀the฀UK
guidance,฀the฀UK฀Corporate฀Governance฀Code. This฀looks฀at฀the฀following:

Leadership฀and฀effectiveness
Audit Role฀of฀audit฀committees
of฀the฀Board

Shareholder฀relations Remuneration Voluntary฀codes

The฀UK฀Corporate฀Governance฀Code฀is฀primarily Advantages
relevant฀to฀listed฀companies฀although฀considered ✓ Can฀be฀applied฀flexibly
best฀practice฀for฀all฀companies. It฀is฀voluntary ✓ Smaller฀entities฀can฀pick฀and฀choose
although฀listed฀and฀public฀interest฀entities฀must ✓ Does฀not฀create฀‘burden฀of฀requirement’
report฀on฀non-compliance฀and฀explain฀why฀the฀code
Disadvantages
has฀not฀been฀followed.
✗ Insufficient฀protection
✗ Choice฀of฀non-compliance

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Corporate Codes฀of฀best Audit Internal฀control Communication฀with฀those

governance practice committees effectiveness charged฀with฀governance

The฀Board Internal฀audit
 Meet฀regularly  Consider฀the฀need฀for฀the฀internal฀audit฀function
 Balance฀of฀execs/non-execs annually
 Some฀non-execs฀to฀be฀independent Remuneration
 Rigorous/transparent฀nomination฀process  Formal฀transparent฀process฀for฀setting
 Directors฀to฀submit฀for฀re-election reasonable฀remuneration
Chairman Relations฀with฀shareholders
 Roles฀of฀Chairman/Chief฀Exec฀to฀be฀distinct  Ensure฀satisfactory฀dialogue฀with฀shareholders.
Internal฀controls฀and฀risk฀management Auditors
 Board฀should฀maintain฀sound฀risk฀management  FTSE฀350฀companies฀should฀put฀the฀external
and฀internal฀control฀systems. audit฀contract฀out฀to฀tender฀at฀least฀every฀
Audit฀committee ten฀years.
 Should฀be฀established

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OECD฀Principles฀of฀Corporate฀Governance

 Promote฀transparent฀and฀efficient฀markets,฀and
consistent฀with฀law
 Protect฀shareholders’ rights
 Equitable฀treatment฀of฀all฀shareholders
 Encourage฀co-operation฀between฀corporations฀and
stakeholders
 Timely฀and฀accurate฀disclosure฀on฀all฀material฀matters
 Accountability฀to฀company฀and฀shareholders

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Corporate Codes฀of฀best Audit Internal฀control Communication฀with฀those

governance practice committees effectiveness charged฀with฀governance

Audit฀committees

Advantages Should฀consist฀of:
✓ Increased฀confidence฀in฀credibility฀of฀reporting ✗ Three฀independent฀non-exec฀directors฀(two฀for
✓ Frees฀executive฀directors฀to฀manage smaller฀companies)
✓ Reporting฀lines฀for฀internal฀audit/impartial฀link฀for ✗ At฀least฀one฀member฀with฀relevant฀financial
external฀audit experience
✓ Creates฀culture฀opposed฀to฀fraud

Liaison฀with฀external฀auditors Review฀of฀internal฀audit
 Determine฀scope฀of฀external
audit
 Forum฀to฀link฀directors/auditors
Duties Review฀of฀internal฀controls
 Deal฀with฀auditors’ reservations
 Obtain฀information฀for฀auditors Special฀investigations

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Corporate Codes฀of฀best Audit Internal฀control Communication฀with฀those

governance practice committees effectiveness charged฀with฀governance

Directors Auditors
Internal฀controls฀and฀risk฀management฀are฀very฀important As฀part฀of฀their฀audit:
in฀fulfiling฀directors’ duties฀to฀the฀shareholders,฀which฀are:
 Ascertain฀controls
 To฀safeguard฀the฀assets  Review฀controls
 To฀prevent฀and฀detect฀fraud
 Evaluate฀controls
 Determine฀audit฀approach฀based฀on
controls
Protect฀the฀investment฀of
the฀shareholder Can฀also฀offer฀services:
 To฀review฀controls
Therefore฀they:
 Report฀to฀shareholders
 Set฀up฀a฀system฀of฀internal฀control
as฀a฀function฀separate฀from฀audit฀
 Review฀its฀effectiveness
 Consider฀the฀need฀for฀internal฀audit

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Corporate Codes฀of฀best Audit Internal฀control Communication฀with฀those

governance practice committees effectiveness charged฀with฀governance

ISA฀260฀Communication฀with฀those฀charged฀with฀governance฀provides฀guidance.
The฀objectives฀of฀communicating฀are฀to:

Assist฀in฀understanding฀audit-related Matters฀to฀be฀communicated
1 matters฀and฀develop฀a฀constructive฀working
relationship  The฀auditor’s฀responsibilities฀in฀relation฀to฀the
2 Obtain฀information relevant฀to฀the฀audit audit
 Planned฀scope฀and฀timing฀of฀the฀audit
Assist฀those฀charged฀with฀governance฀to
3 fulfill฀their฀responsibility฀to฀oversee฀the  Significant฀findings฀from฀the฀audit
financial฀reporting฀process  Auditor฀independence฀(listed฀entities)฀

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4: Professional฀ethics

Topic฀List The฀ACCA’s฀Code฀of฀Ethics฀and฀Conduct฀is฀a฀key฀topic
area.
When฀approaching฀questions฀on฀ethics,฀follow฀a฀three-
Code฀of฀Ethics฀and฀Conduct stage฀strategy:
Integrity,฀objectivity฀and฀independence  What฀do฀the฀fundamental฀principles฀say?
Confidentiality  What฀does฀the฀detailed฀guidance฀say?
 What฀does฀my฀common฀sense/practical฀experience
Appointment฀ethics tell฀me?
Engagement฀letters Professional฀ethics฀is฀likely฀to฀be฀examined฀in฀a฀scenario
situation฀so฀you฀will฀have฀to฀apply฀your฀knowledge฀to฀the
particular฀facts฀in฀the฀question.
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Code฀of฀Ethics฀ Integrity,฀objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

Code฀of฀Ethics฀and฀Conduct
This฀lays฀out฀ACCA’s฀rules฀stating฀the฀ethics฀and฀behaviour฀required฀by฀all฀members฀and฀students of฀the฀ACCA.
Guidance฀is฀in฀the฀form฀of฀fundamental฀principles (see฀below),฀specific฀guidance฀and฀explanatory฀notes.
Integrity Members฀shall฀be฀straightforward฀and฀honest฀in฀all฀business฀and฀professional฀relationships.

Objectivity Members฀shall฀not฀allow฀bias,฀conflicts฀of฀interest฀or฀undue฀influence฀of฀others฀to฀override฀professional฀or
business฀judgements.

Professional Members฀have฀a฀continuing฀duty฀to฀maintain฀professional฀knowledge฀and฀skill฀at฀a฀level฀required฀to฀ensure฀that฀a
competence฀and client฀or฀employer฀receives฀competent฀professional฀service฀based฀on฀current฀developments฀in฀practice,฀legislation
due฀care and฀techniques. Members฀shall฀act฀diligently฀and฀in฀accordance฀with฀applicable฀technical฀and฀professional
standards฀when฀providing฀professional฀service.
Confidentiality Members฀shall respect฀the฀confidentiality฀of฀information฀acquired฀as฀a฀result฀of฀professional฀and฀business
relationships฀and฀should฀not฀disclose฀any฀such฀information฀to฀third฀parties฀without฀proper฀or฀specific฀authority฀or
unless฀there฀is฀a฀legal฀or฀professional฀right฀or฀duty฀to฀disclose. Confidential฀information฀acquired฀as฀a฀result฀of
professional฀and฀business฀relationships฀should฀not฀be฀used฀for฀the฀personal฀advantage฀of฀members฀or฀third฀parties.
Professional Members฀shall฀comply฀with฀relevant฀laws฀and฀regulations฀and฀should฀avoid฀any฀action฀that฀discredits฀the
behaviour profession.

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Code฀of฀Ethics฀ Integrity, objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

A member’s฀objectivity฀must฀be฀beyond฀question฀if฀he/she฀is฀to฀report฀as฀an฀auditor. That฀can฀only฀be
assured฀if฀the฀member฀is, and฀is฀seen฀to฀be, independent.

Risks
The฀ACCA฀provides฀specific฀guidance on:
 Undue฀dependence฀on฀an฀audit฀client. If฀total฀fees  Actual/threatened฀litigation
from฀a฀client฀that฀is฀a฀public฀interest฀entity฀exceed  Associate฀firms: influences฀outside฀the฀practice
15%฀of฀the฀firm’s฀total฀fees฀for฀two฀years฀in฀a฀row
the฀firm฀must:  Family฀and฀other฀close฀personal฀relationships
– Disclose฀this฀to฀those฀charged฀with  Beneficial฀interest฀in฀shares฀or฀other฀investments
governance  Voting฀on฀audit฀appointment
– Arrange฀an฀independent฀pre/post-issuance  Loans฀to฀and฀from฀clients
review  Goods,฀services฀and฀hospitality
 Overdue฀fees

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Code฀of฀Ethics฀ Integrity, objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

The฀Code฀of฀Ethics฀and฀Conduct฀identifies฀the฀following฀risks฀to฀independence฀and฀objectivity:
 Self-interest  Advocacy  Intimidation
 Self-review  Familiarity

Example Safeguards฀against฀loss฀of฀objectivity
A฀key฀risk฀to฀independence฀arises฀from฀the฀provision  Quality฀control฀procedures฀
of฀other฀services฀to฀audit฀clients. An฀auditor:  Audit฀committee
 Partner฀rotation
 Must฀not฀assume฀a฀management฀responsibility
The฀benefit฀of฀partner฀rotation฀is฀that฀loss฀of
 May฀not฀prepare฀accounts฀for฀a฀public฀interest independence฀through฀familiarity฀is฀guarded฀against.
entity In฀practice฀it฀is฀not฀popular฀because฀of฀the฀loss฀of
 Must฀not฀review฀his฀own฀work trust฀and฀experience฀built฀up. If฀an฀individual฀is฀a฀key
audit฀partner฀for฀seven฀years฀for฀a฀public฀interest
 Cannot฀be฀an฀employee฀of฀an฀audit฀client client,฀they฀must฀be฀rotated฀off฀the฀audit฀for฀two฀years.

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Code฀of฀Ethics฀ Integrity,฀objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

The฀professional฀duty฀of฀confidentiality Disclosure

Exam฀focus Obligatory Voluntary฀

Information฀gained฀from฀professional฀work฀should  Member฀knows฀or  Disclosure฀is฀reasonably
not฀be฀disclosed฀unless: suspects฀that฀client฀is necessary฀to protect the
involved฀in฀treason, drug member’s฀interests.
 Consent฀obtained฀from฀client trafficking or฀terrorist  Disclosure฀is฀compelled
 It฀is฀required฀by฀law offences. by฀process฀of฀law (say
 A฀professional฀right/duty฀to฀disclose  Under฀ISA฀250 when in฀an฀action฀where
non-compliance฀with฀laws member฀must฀give
 A฀member฀should฀not฀use฀(or and฀regulations฀causes evidence).
material฀misstatements฀in
appear฀to฀use)฀information฀for FS.
 It฀is฀in฀the฀public
his฀own฀or฀some฀other’s฀benefit. interest to฀disclose.
 Some฀government
bodies have฀statutory
Exceptions to฀the฀prohibition฀on฀disclosure: powers฀to฀compel
disclosure.

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Code฀of฀Ethics฀ Integrity,฀objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

Before฀acceptance  Consider฀whether฀disqualified฀on฀legal฀or฀ethical
The฀auditors฀should: grounds
 Ensure฀professionally฀qualified฀to฀act.   Consider฀available฀time,฀staff฀and฀technical฀expertise
 Ensure฀existing฀resources฀adequate.   Make฀independent฀enquiries฀if฀directors฀not
personally฀known
 Obtain฀references. 
 Enquire฀whether฀there฀are฀reasons/circumstances
 Communicate฀with฀present฀auditors.  behind฀the฀change฀which฀the฀new฀auditors฀ought฀to
know,฀also฀courtesy
After฀acceptance
The฀auditors฀should:
 Ensure฀outgoing฀auditors’ removal/resignation฀properly฀conducted.
 Ensure฀the฀new฀auditors’ appointment฀is฀valid.
 Set฀up฀and฀submit฀a฀letter฀of฀engagement.

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Appointment฀decision฀tree

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Code฀of฀Ethics฀ Integrity,฀objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

Advertising, publicity฀and obtaining Audit฀fee

professional฀work The฀audit฀fee฀is฀a฀sensitive฀issue. It฀is฀estimated
according฀to฀charge฀out฀rates฀and฀work฀planned.
Members
Lowballing is฀offering฀audit฀services฀at฀less฀than
 Should฀not฀obtain฀or฀seek฀work฀in฀an the฀market฀rate; undercutting฀others฀in฀a฀tender.
unprofessional฀manner.
 Can฀advertise,฀but฀should฀have฀regard฀to It฀can฀be฀an฀independence฀threat฀as฀such฀a฀fee฀is฀less
relevant฀advertising฀codes/standards. than฀the฀work฀is฀worth. However,฀audit฀does฀have฀a
fluctuating฀market฀price฀and฀firms฀can฀reduce฀fees.
 Should฀not฀make฀disparaging฀references
to/comparisons฀with฀the฀work฀of฀others.
Client฀screening
 Should฀not฀quote฀fees฀without฀great฀care฀not฀to
mislead. As฀part฀of฀the฀tendering฀process,฀audit฀firms฀should
assess฀the฀potential฀client, to฀see฀whether฀they฀want
 Should฀not฀offer฀fees,฀commission฀or฀reward฀to to฀be฀engaged฀by฀them. Some฀firms฀will฀use฀checklists
third฀parties฀for฀introducing฀clients. of฀standard฀questions฀to฀come฀to฀this฀conclusion.

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Factors฀for฀consideration฀in฀client฀screening
 Management฀integrity High฀risk Low฀risk
 Risk
 Relationships  Poor฀performance  Good฀prospects
 Ability฀to฀perform฀the฀work  Lack฀of฀finance  Well-financed
 Engagement฀economics  Odd฀accounting  Strong฀controls
 Lack฀of฀FD  Prudent฀accounting
 Significant฀related฀party/  Competent฀directors
unusual฀transactions  No฀unusual฀transactions

Sources฀of฀information฀about฀new฀clients
1 Enquiries฀of฀other฀sources฀(bankers,฀solicitors)
2 Review฀of฀documents฀(most฀recent฀annual฀accounts,฀listing฀particulars,฀credit฀rating)

3 Previous฀auditors฀(previous฀auditors฀should฀disclose฀fully฀all฀relevant฀information)

4 Review฀of฀rules/standards฀(consider฀specific฀laws/standards฀that฀relate฀to฀industry)

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Code฀of฀Ethics฀ Integrity,฀objectivity Confidentiality Appointment Engagement

and฀Conduct and฀independence ethics letters

The฀audit฀engagement฀letter is฀the฀written฀terms฀of฀an฀engagement฀in฀the฀form฀of฀a฀letter.

Guidance฀on฀engagement฀letters฀is฀given฀in฀ISA 210 The฀audit฀engagement฀letter

Agreeing฀the฀terms฀of฀audit฀engagements. It฀applies฀to
audit฀assignments฀only.
 Objective฀and฀scope฀of฀the฀audit
ISA฀210 

Auditor’s฀responsibilities
Management’s฀responsibilities
The฀auditor฀must฀first฀establish฀whether฀the  Identification฀of฀applicable฀financial
preconditions฀for฀an฀audit฀are฀present. reporting฀framework
The฀auditor฀must฀also฀confirm฀there฀is฀a฀common  Expected฀form฀and฀content฀of฀any฀reports
understanding฀between฀the฀auditor฀and฀the฀client฀on฀the
terms฀of฀the฀engagement.

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Additional฀matters฀that฀can฀be฀included

 Elaboration฀of฀scope  Fees฀and฀billing
 Form฀of฀any฀other฀communication  Request฀to฀acknowledge฀receipt฀of฀letter฀and
 Unavoidable฀risk฀of฀not฀detecting฀some to฀agree฀terms
material฀misstatements  Involvement฀of฀other฀auditors,฀experts
 Planning฀and฀performance฀arrangements  Involvement฀of฀internal฀auditors,฀other฀staff
 Expectation฀of฀provision฀of฀written  Predecessor฀auditor
representations  Restriction฀of฀auditor’s฀liability
 Agreement฀to฀provide฀draft฀financial  Any฀further฀agreements
statements
 Obligations฀to฀provide฀audit฀working฀papers฀to
 Agreement฀to฀inform฀auditor฀of฀facts฀that฀may other฀parties
affect฀financial฀statements

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Notes

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5: Internal฀audit

Internal฀audit฀is฀an฀important฀control฀function฀in฀an
Topic฀List organisation฀and฀an฀example฀of฀good฀corporate
governance. This฀chapter฀looks฀at฀the฀best฀practice
recommendations฀of฀the฀UK฀Corporate฀Governance
Internal฀audit Code฀in฀relation฀to฀the฀internal฀audit฀function,฀as฀well฀as
Internal฀audit฀assignments contrasting฀the฀rules฀of฀internal฀and฀external฀audit.
Reporting We฀also฀look฀at฀the฀types฀of฀assignment฀carried฀out฀by
internal฀audit,฀reporting฀and฀the฀advantages฀and
Outsourcing disadvantages฀of฀outsourcing฀the฀internal฀audit฀function.
Internal฀audit฀is฀likely฀to฀be฀examined฀in฀a฀scenario
question,฀perhaps฀in฀conjunction฀with฀corporate
governance.

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Internal฀audit Internal฀audit Reporting Outsourcing

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Internal฀audit฀is฀an฀appraisal฀or฀monitoring฀activity฀established฀by฀management฀and฀directors,฀for฀the฀review
of฀internal฀control฀as฀a฀service฀to฀the฀entity. It฀examines,฀evaluates฀and฀reports฀to฀management฀and฀the
directors฀on฀the฀adequacy฀and฀effectiveness฀of฀internal฀control. It฀is฀a฀key฀element฀of฀effective฀corporate
governance.

Internal฀audit฀and฀the฀audit฀committee
The฀UK Corporate฀Governance฀Code,฀as฀an฀example฀of฀an฀international฀code฀on฀corporate฀governance,
recommends฀that฀the฀audit฀committee฀of฀a฀company฀should:
 Monitor฀and฀review฀effectiveness฀of฀internal฀audit฀activities.
 If฀there฀is฀no฀internal฀audit฀function,฀consider฀annually฀whether฀there฀is฀need฀for฀one.
 If฀there฀is฀no฀internal฀audit฀function,฀explain฀this฀absence฀in฀the฀annual฀report.

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Distinction฀between฀internal฀and฀external฀audit
Purpose Scope Relationship฀to Reporting Fraud
company
Internal An฀activity Internal฀audit’s Internal฀auditors฀are Internal฀audit Prevention฀and฀detection฀of
audit designed฀to work฀relates฀to often฀employees฀of reports฀to fraud฀is฀management’s
add฀value฀and the฀operations฀of the฀organisation, senior responsibility. But฀internal
improve฀an the฀organisation although฀sometimes management auditors฀should฀be฀alert฀to
organisations the฀internal฀audit and฀audit risks฀and฀exposures฀that
operations function฀is committee could฀allow฀fraud.
outsourced.
External An฀exercise฀to External฀audit’s External฀auditors฀are Auditor’s Prevention฀and฀detection฀of
audit enable฀auditors work฀relates฀to independent฀of฀the report fraud฀is฀management’s
to฀express฀an the฀financial company฀and฀its addressed฀to responsibility.
opinion฀on฀the statements. They management. They shareholders
financial are฀concerned are฀appointed฀by฀the
statements with฀the฀financial shareholders.
records฀that
underlie฀these.

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Value฀for฀money฀audit is฀an฀assignment฀which฀internal฀audit฀can฀undertake฀on
‘Value฀for฀money’ is฀a behalf฀of฀management฀in฀its฀monitoring role.
performance฀measure
summarised฀in฀three฀qualities It฀can฀be฀carried฀out฀on฀any฀area฀of฀the฀business฀at฀the฀request฀of
(which฀a฀product฀or฀activity management฀(eg฀service฀delivery,฀management฀process,฀environment).
possesses):
 Economy Economy: attaining฀the฀appropriate฀quantity฀and฀quality฀of฀physical,฀human
 Efficiency and฀financial฀resources฀(inputs)฀at฀the฀lowest฀cost.
 Effectiveness Efficiency: this฀is฀a฀measure฀of฀the฀relationship฀between฀goods฀and
Management฀should,฀as฀part฀of services฀produced฀(outputs)฀and฀the฀resources฀used฀to฀produce฀them
normal฀business฀process,฀assess (inputs).
economy,฀efficiency฀and Effectiveness: how฀well฀an฀activity฀is฀achieving฀its฀policy฀objectives฀or฀other
effectiveness฀in฀operations (a intended฀effects.
value฀for฀money฀audit).

Financial฀audits are฀more฀the฀traditional฀realm฀of฀the฀internal฀auditors. These฀involve฀reviewing฀the฀company

records฀and฀other฀available฀evidence฀to฀substantiate฀information฀in฀financial฀and฀management฀reporting.

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Internal฀audit฀can฀monitor฀best฀value to฀ensure฀that฀the฀authority฀has฀systems
‘Best฀value’ is฀a in฀place฀to฀achieve฀best฀value. Internal฀audit฀will฀also฀be฀involved฀in฀setting฀up
performance฀framework best฀value because฀a฀good฀understanding฀of฀current฀systems฀is฀needed.
introduced฀in฀local฀authorities
by฀the฀UK฀government, Information฀technology฀audits
whereby฀they฀should Information฀technology฀is฀an฀increasingly฀important฀area฀of฀business. Internal
implement฀the฀4฀‘Cs’: audit฀can monitor฀and฀test฀controls฀in฀the฀following฀areas:
 Challenge (how฀and฀why Database
is฀a฀service฀provided?) E฀business management฀system
 Compare฀(to฀other System฀development
Operational process
authorities/private฀sector) system
 Consult (targets฀set฀in
Access฀control Problem
consultation฀with฀tax IT฀SYSTEMS
management
payers/service฀users) Capacity
management
 Compete (fair
Change
competition) Desktop management
audit Asset Networks
management

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Operational฀audits฀are฀audits฀of฀the฀operational Approaching฀operational฀audit฀assignments
processes฀of฀the฀organisation. They฀are฀also฀known There฀are฀two฀aspects฀of฀an฀operational฀assignment:
as฀management,฀or฀efficiency฀audits. Their฀prime
objective฀is฀monitoring฀of฀management’s  Ensure฀policies฀are฀adequate
performance,฀ensuring฀company฀policy฀is฀adhered฀to.  Ensure฀policies฀work฀effectively

Procurement฀audits Other฀assignments

 Focus฀on฀systems฀in฀the฀purchases฀department  Testing฀controls
 Objectives฀and฀tests฀as฀are฀outlined฀in฀Chapter฀10  Fraud฀investigations
where฀the฀purchases฀system฀will฀be฀discussed  Customer฀service฀reviews
 Review฀of฀compliance฀with฀laws

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Procedures
1 Obtain฀written฀copies฀of฀the฀policies in฀the฀area฀to฀be฀audited.

2 Read them฀and฀assess whether฀they฀are฀adequate฀to฀meet฀objectives.

3 Discuss the฀policies฀with฀members฀of฀the฀department฀to฀ensure฀understanding฀is฀correct.

4 Examine฀the฀effectiveness of฀controls฀by฀observing them฀in฀operation฀and฀testing฀them฀(by฀similar

methods฀to฀those฀considered฀in฀Chapters฀9–10).

5 Report฀to฀management on฀adequacy฀and฀effectiveness,฀giving฀suggestions฀for฀improvement฀in฀both
areas฀where฀required.

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Internal฀audit฀reports Contents฀of฀executive฀summary
There฀are฀two฀types฀of฀internal฀audit฀report:
 Risk-based  Background฀to฀assignment
 Performance฀enhancement  Objectives
Most฀work฀is฀likely฀to฀be฀risk-based฀but฀either฀way,฀a  Major฀outcomes
formal฀report฀will฀be฀the฀result.  Key฀risks฀identified
There฀is฀usually฀no฀formal฀requirement฀for฀internal฀audit  Key฀action฀points
reports,฀however฀the฀generally฀accepted฀report฀format  Summary฀of฀work฀left฀to฀do
for฀business฀includes฀the฀following:
 Terms฀of฀reference
 Executive฀summary Report฀should฀describe฀purpose, scope฀and฀results
 Body฀of฀report of฀the฀engagement.
 Appendices฀for฀additional฀information
Internal฀audit฀reports฀should฀be฀dated,฀marked฀as
Draft฀report฀–฀discussed฀at฀an฀exit฀meeting. ‘draft’ or฀‘final’ and฀include฀a฀distribution฀list.

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Internal฀audit Internal฀audit Reporting Outsourcing

assignments

Outsourcing is฀the฀process฀of฀purchasing฀key฀functions฀from฀an฀outside฀source. Audit฀firms฀(particularly

larger฀ones)฀are฀increasingly฀offering฀internal฀audit฀services฀as฀part฀of฀their฀portfolio.

Outsourcing

Outsourcing Not฀outsourcing
 Service฀provider฀has฀good฀quality฀staff  Cost฀of฀recruiting฀staff฀(to฀the฀service฀provider)
 Ensures฀team฀with฀specialist฀skill/qualifications  Need฀for฀staff฀of฀particular฀skill/qualification
 Provides฀immediate฀team  Difficulty฀of฀managing฀an฀IA฀department฀for
 Can฀be฀appointed฀for฀appropriate฀timescale directors
 Is฀likely฀to฀cost฀less฀than฀setting฀up฀a  Extended฀time฀frame฀between฀set฀up฀and฀results
department  Work฀involved฀may฀not฀justify฀a฀full-time฀team
 Team฀might฀be฀required฀due฀to฀variety฀of฀skills
needed

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Managing฀an฀outsourced฀department
The฀company฀will฀need฀to฀establish฀controls฀to฀manage฀the฀outsourced฀internal฀audit฀function.

Controls฀over฀outsourced฀internal฀audit฀function

 Performance฀measures฀for฀cost฀and฀areas฀reviewed
 Maintenance฀of฀appropriate฀audit฀methodology
 Review฀of฀working฀papers฀on฀a฀sample฀basis
 Agreement฀of฀work฀plans฀in฀advance
 If฀external฀auditor฀from฀same฀firm,฀ensure฀firm฀has฀safeguards฀to฀keep฀the
functions฀separate฀to฀maintain฀independence฀and฀objectivity

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6: Risk฀assessment

Topic฀List This฀chapter฀examines฀audit฀risk,฀materiality฀and฀the฀use
of฀analytical฀procedures฀at฀the฀audit฀planning฀stage.
Risk฀assessment฀is฀a฀key฀topic฀area฀and฀may฀come฀up฀in
Risk a฀scenario-based฀question฀where฀you฀are฀asked฀to
Materiality
identify฀risks฀from฀the฀information฀provided฀to฀you฀in฀the
question฀and฀explain฀why฀they฀are฀risks.
Understanding฀the฀entity
Assessing฀risk
Fraud,฀law฀and฀regulations
Documentation฀of฀risk฀assessment

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RISK
Business฀risk: the฀risk฀inherent฀to฀the฀entity฀in฀its Audit฀risk: the฀risk฀that฀the฀auditors฀give฀an
operations฀(at฀all฀levels฀of฀the฀business). inappropriate฀opinion฀on฀the฀FS.

Financial Operational Compliance Audit฀risk฀model

risk: risks risk: risk risk: risk฀that
arising฀from arising฀with arises฀from Audit฀risk฀=
the฀financial regard฀to non- Risk฀of฀material฀misstatement฀×฀Detection฀risk
activities฀or operations compliance
financial with฀laws฀and
consequences regulations Inherent฀risk × Control฀risk
of฀an
operation

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The฀components฀of฀audit฀risk
Inherent฀risk฀is฀the฀susceptibility฀of฀an฀assertion฀to฀a฀misstatement฀that฀could฀be฀material,฀individually฀or
when฀aggregated฀with฀other฀misstatements,฀assuming฀there฀were฀no฀related฀internal฀controls.

Control฀risk฀is฀the฀risk฀that฀a฀material฀misstatement฀that฀could฀occur฀in฀an฀assertion฀and฀that฀could฀be
material,฀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.

Detection฀risk฀is฀the฀risk฀that฀the฀auditor’s฀procedures฀will฀not฀detect฀a฀misstatement฀that฀exists฀in฀an
assertion฀that฀could฀be฀material,฀individually฀or฀when฀aggregated฀with฀other฀misstatements.

ISA฀200฀Overall฀objectives฀of฀the฀independent฀auditor฀and฀the฀conduct฀of฀an฀audit฀in฀accordance฀with
International฀Standards฀on฀Auditing฀states฀that฀auditors฀must฀plan฀and฀perform฀the฀audit฀with฀an฀attitude฀of
professional฀scepticism.
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Materiality To฀calculate฀a฀level฀of฀materiality฀for฀the
financial฀statements฀as฀a฀whole,฀the
Guidance฀on฀materiality฀for฀the฀financial฀statements฀as฀a฀whole,฀and฀on auditor฀will฀often฀use฀the฀benchmarks
performance฀materiality฀is฀given฀in฀ISA฀320฀ Materiality฀in฀planning฀and below,฀although฀professional฀judgement
performing฀an฀audit. must฀be฀applied:

Information฀is฀material if฀its฀omission฀or฀misstatement฀could฀influence฀the Calculating฀materiality

economic฀decisions฀of฀users฀taken฀on฀the฀basis฀of฀the฀financial฀statements.

 Profit฀before฀tax: 5%
Performance฀materiality is฀the฀amount(s)฀set฀by฀the฀auditor฀at฀less฀than
materiality฀for฀the฀financial฀statements฀as฀a฀whole,฀to฀reduce฀to฀an  Gross฀profit: 0.5฀–฀1%
appropriately฀low฀level฀the฀probability฀that฀the฀aggregate฀of฀uncorrected฀and  Revenue: 0.5฀–฀1%
undetected฀misstatements฀exceeds฀materiality฀for฀the฀financial฀statements฀as
a฀whole.  Total฀assets: 1฀–฀2%
Performance฀materiality฀also฀refers฀to฀the฀amount(s)฀set฀by฀the฀auditor฀at  Net฀assets: 2฀–฀5%
less฀than฀materiality฀for฀particular฀classes฀of฀transactions,฀account฀balances฀or
disclosures.  Profit฀after฀tax: 5฀–฀10%

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ISA฀315฀Identifying฀and฀assessing฀the฀risks฀of฀material฀misstatement฀through฀understanding฀the฀entity฀and฀its
environment฀provides฀guidance.

Risk฀assessment Risk฀assessment฀procedures฀shall฀include:
 Inquiries฀of฀management/internal฀auditors/
The฀auditor฀shall฀perform฀a฀risk฀assessment฀to others฀in฀entity
provide฀a฀basis฀for฀the฀identification฀and
assessment฀of฀risks฀of฀material฀misstatement.  Analytical฀procedures
 Observation฀and฀inspection
The฀engagement฀team฀shall฀discuss฀the The฀auditor฀may฀also฀perform฀other฀procedures
susceptibility฀of฀the฀entity’s฀financial฀statements฀to where฀circumstances฀merit฀it.
material฀misstatements฀and฀the฀application฀of฀the
applicable฀financial฀reporting฀framework฀to฀the
entity’s฀facts฀and฀circumstances.

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Matters฀to฀gain฀understanding฀of฀(from฀ISA฀315)

 Relevant฀industry,฀regulatory฀and฀other฀external  Internal฀control฀relevant฀to฀the฀audit:
factors฀including฀applicable฀reporting฀framework
– Control฀environment฀
 Nature฀of฀the฀entity – Entity’s฀risk฀assessment฀process
 Selection,฀application฀and฀suitability฀of฀accounting – Information฀system฀relevant฀to฀financial
policies reporting
 Entity’s฀objectives฀and฀strategies฀and฀related – Entity’s฀communication฀of฀financial฀reporting
business฀risks฀that฀could฀lead฀to฀material matters
misstatement – Control฀activities฀relevant฀to฀the฀audit
 Measurement฀and฀review฀of฀the฀entity’s฀financial – Activities฀to฀monitor฀internal฀control฀over
performance financial฀reporting

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Assessing฀risk Financial฀statement฀level฀possible฀responses
 Emphasise฀professional฀scepticism฀to฀team
ISA฀330฀The฀auditor’s฀responses฀to฀assessed฀risks
 Assign฀more฀experienced฀staff
requires฀the฀auditor฀to฀obtain฀sufficient฀appropriate
 Provide฀more฀supervision
audit฀evidence฀regarding฀assessed฀risks฀by
 Incorporate฀more฀unpredictability฀into฀testing
designing฀and฀implementing฀appropriate
 Make฀general฀changes฀to฀nature,฀timing฀or฀extent
responses.
of฀audit฀procedures

Reducing฀risk Assertion฀level฀possible฀responses
To฀reduce฀audit฀risk฀to฀an฀acceptably฀low฀level,฀the Design฀and฀perform฀audit฀procedures฀whose฀nature,
auditor฀shall฀determine฀overall฀responses฀to฀the timing฀and฀extent฀are฀responsive฀to฀the฀assessed
assessed฀risks฀at฀the฀financial฀statement฀level฀and risks฀of฀material฀misstatement,฀eg฀tests฀of฀controls
shall฀design฀and฀perform฀further฀audit฀procedures only,฀substantive฀procedures฀only,฀a฀combined
to฀respond฀to฀assessed฀risks฀at฀the฀assertion฀level. approach.

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Risk Materiality Understanding Assessing Fraud, law Documentation฀of฀

the฀entity risk and฀regulations risk฀assessment

Fraud Risk฀assessment฀procedures
This฀includes:  Inquiries฀of฀management/those฀charged฀with
 Fraudulent฀financial฀reporting governance
 Misappropriation฀of฀assets  Consideration฀of฀fraud฀risk฀factors฀(these฀are
listed฀in฀an฀appendix฀to฀ISA฀240)
Responsibilities  Consideration฀of฀results฀of฀analytical฀procedures
Management฀and฀those฀charged฀with฀governance  Consideration฀of฀other฀relevant฀information
are฀responsible฀for฀prevention฀and฀detection.
Auditors must฀be฀aware฀of฀the฀possibility฀of
misstatement฀due฀to฀fraud. Law฀and฀regulations
Under฀ISA฀240 Under฀ISA฀250
The฀auditor฀shall฀identify฀and฀assess฀the฀risks฀of The฀auditor฀shall฀obtain฀a฀general฀understanding฀of
material฀misstatements฀in฀the฀financial฀statements the฀legal฀and฀regulatory฀framework฀applicable฀to฀the
due฀to฀fraud,฀both฀at฀the฀financial฀statement฀level entity฀and฀how฀the฀entity฀is฀complying฀with฀that
and฀at฀the฀assertion฀level. framework.

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Reporting
Fraud Law฀and฀regulations

 To฀the฀appropriate฀level฀of฀management฀if฀auditor  To฀those฀charged฀with฀governance or฀obtain

has฀identified/is฀suspicious฀of฀fraud evidence฀that฀they฀are฀appropriately฀informed
 To฀those฀charged฀with฀governance฀if฀fraud  To฀audit฀committee/supervisory฀board฀if฀senior
involves฀management฀or฀significant฀employees management฀implicated
 To฀regulators฀if฀there฀is฀a฀statutory฀duty  To฀regulators if฀there฀is฀a฀statutory฀duty
 In฀auditor’s฀report if฀necessary  In฀auditor’s฀report: if฀non-compliance฀has฀a
material฀effect฀and฀has฀not฀been฀properly
reflected฀

Auditors฀should฀bear฀in฀mind฀their฀professional฀duty฀of฀confidentiality฀and฀seek฀legal฀advice, if
required.

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Risk Materiality Understanding Assessing Fraud,฀law Documentation฀of฀

the฀entity risk and฀regulations risk฀assessment

ISAs฀315฀and฀330฀require฀documentation฀at฀the฀risk฀assessment฀stage฀of฀the฀audit.

Matters฀to฀be฀documented

 Discussion฀among฀audit฀team
 Understanding฀of฀the฀entity฀and฀its฀controls
 Identified฀and฀assessed฀risks฀of฀material฀misstatement
 Risks฀identified฀and฀related฀controls฀evaluated
 Overall฀responses
 Nature,฀extent฀and฀timing฀of฀further฀audit฀procedures
 Results฀of฀audit฀procedures
 If฀relying฀on฀evidence฀on฀controls฀from฀prior฀audit,฀conclusions฀regarding฀appropriateness
 Demonstration฀that฀the฀financial฀statements฀agree฀or฀reconcile฀with฀underlying฀accounting฀records

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7: Audit฀planning฀and฀documentation

Topic฀List Planning฀is฀a฀vital฀stage฀of฀the฀audit฀process฀and฀is
linked฀to฀risk฀assessment฀which฀was฀introduced฀in฀the
previous฀chapter.
Audit฀planning The฀importance฀of฀maintaining฀and฀retaining฀audit
documentation฀is฀also฀considered฀here.
Audit฀documentation
This฀topic฀could฀come฀up฀in฀a฀scenario฀question฀asking
you฀to฀identify฀audit฀risks฀or฀in฀a฀knowledge-based
question฀on฀the฀audit฀strategy฀or฀audit฀plan.

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Audit Audit
planning documentation

ISA฀300฀Planning฀an฀audit฀of฀financial฀statements฀sets฀out฀the฀objectives฀of฀planning.

1 To฀help฀the฀auditor฀to฀devote฀appropriate
attention฀to฀important฀areas The฀audit฀strategy฀sets฀the฀scope,
To฀help฀identify฀and฀resolve฀potential฀problems timing฀and฀direction฀of฀the฀audit,฀and
2 on฀a฀timely฀basis guides฀the฀development฀of฀the฀detailed
audit฀plan.
3 To฀perform฀the฀audit฀in฀an฀effective฀manner
The฀audit฀plan฀converts฀the฀audit
strategy฀into฀a฀more฀detailed฀plan฀and
To฀assist฀in฀selecting฀appropriate฀team
4 members฀and฀in฀assignment฀of฀work
includes฀the฀nature,฀timing฀and฀extent
of฀audit฀procedures฀in฀order฀to฀obtain
To฀facilitate฀the฀direction,฀supervision฀and฀review sufficient฀appropriate฀audit฀evidence฀to
5 of฀work reduce฀audit฀risk฀to฀an฀acceptably฀low
level.
6 To฀assist฀in฀co-ordination฀of฀work฀done฀by
auditors฀of฀components฀and฀experts

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Audit฀strategy: matters฀to฀consider The฀audit฀plan฀must฀include฀the฀following:

1 Nature,฀timing฀and฀extent฀of฀planned
 Characteristics฀of฀the฀engagement risk฀assessment฀procedures
 Reporting฀objectives,฀timing฀of฀audit฀and฀nature Nature,฀timing฀and฀extent฀of฀further
of฀communications 2 audit฀procedures฀at฀assertion฀level
 Significant฀factors,฀preliminary฀engagement
Any฀other฀planned฀audit฀procedures
activities,฀and฀knowledge฀gained฀on฀other 3 required฀to฀comply฀with฀ISAs
engagements
 Nature,฀timing฀and฀extent฀of฀resources

The฀audit฀strategy฀and฀audit฀plan฀shall฀be฀updated฀and฀changed฀as฀necessary฀during฀the฀course฀of฀the฀audit,
with฀any฀changes,฀and฀reasons฀for฀them,฀documented.
Auditors฀may฀plan฀to฀carry฀out฀the฀audit฀in฀two฀sittings฀–฀an฀interim฀audit and฀a฀final฀audit. The฀interim฀audit
occurs฀during฀the฀period฀of฀review฀and฀focuses฀on฀risk฀assessment/internal฀control฀evaluation. The฀final฀audit
focuses฀on฀the฀financial฀statements.

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Audit Audit
planning documentation

Audit฀documentation฀is฀the฀record฀of฀audit฀procedures฀performed,฀relevant฀audit฀evidence฀obtained฀and
conclusions฀the฀auditor฀reached฀(also฀called฀‘working฀papers’).

Guidance฀is฀given฀in฀ISA฀230 Audit฀documentation.

Objectives฀of฀audit฀documentation

 Provides฀evidence฀of฀auditor’s฀basis฀for฀conclusion
 Provides฀evidence฀that฀audit฀was฀planned฀and฀performed฀in฀accordance฀with฀ISAs
 Assists฀engagement฀team฀to฀plan฀and฀perform฀audit
 Assists฀in฀direction,฀supervision฀and฀review฀of฀audit฀work
 Enables฀team฀to฀be฀accountable
 Allows฀a฀record฀of฀matters฀of฀continuing฀significance฀to฀be฀retained
 Enables฀conduct฀of฀quality฀control฀reviews฀and฀inspections

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Factors฀affecting฀form฀and฀content฀of
documentation Audit฀documentation฀will฀be฀split฀between฀current
audit฀files฀and฀permanent฀audit฀files.
 Size฀and฀complexity฀of฀entity Current฀audit฀files฀contain฀information฀relevant฀to
 Nature฀of฀audit฀procedures current฀year฀(eg฀financial฀statements,฀review
notes,฀audit฀plan,฀management฀letter).
 Identified฀risks
Permanent฀audit฀files฀contain฀information฀of
 Significance฀of฀evidence฀obtained continuing฀importance฀(eg฀engagement฀letter,
 Nature฀and฀extent฀of฀exceptions legal฀documents,฀board฀minutes,฀prior฀years’
financial฀statements).
 Need฀to฀document฀a฀conclusion
 Audit฀methodology฀and฀tools฀used

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Notes

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8: Introduction฀to฀audit฀evidence

Topic฀List The฀auditor฀obtains฀evidence฀in฀order฀to฀form฀the฀audit
opinion. It฀is฀vital฀that฀this฀evidence฀is:
 Sufficient
Audit฀evidence  Appropriate
Financial฀statement฀assertions This฀chapter฀describes฀the฀financial฀statement฀assertions
Audit฀procedures over฀which฀audit฀evidence฀is฀required. These฀are฀very
important฀as฀exam฀questions฀will฀tend฀to฀focus฀on฀audit
procedures฀required฀to฀test฀particular฀assertions.

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Audit Financial฀statement Audit

evidence assertions procedures

Audit฀evidence฀is฀all฀of฀the฀information฀used฀by฀the฀auditor฀in฀arriving฀at฀the฀conclusions฀on฀which฀the฀audit
opinion฀is฀based.
ISA฀500฀Audit฀evidence gives฀guidance:
Under฀ISA฀500
Auditors฀must฀design฀and฀perform฀audit฀procedures฀to฀obtain฀sufficient฀appropriate audit฀evidence.

Sufficiency Appropriateness
Quantity Quality
Influenced฀by:
External฀evidence (more฀reliable฀than฀internal)
 Risk฀assessment
 Nature฀of฀systems Auditor฀evidence (collected฀from฀auditors฀better฀than฀obtained฀from฀entity)
 Materiality฀of฀item Entity฀evidence (more฀reliable฀when฀controls฀effective)
 Experience Written฀evidence (more฀reliable฀than฀oral)
 Source฀and฀reliability
Original฀evidence (original฀better฀than฀photocopies)
 Results฀of฀procedures

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Audit Financial฀statement Audit

evidence assertions procedures

Financial฀statement฀assertions฀are฀the฀representations฀by฀management,฀explicit฀or฀otherwise,฀that฀are
embodied฀in฀the฀financial฀statements,฀as฀used฀by฀the฀auditor฀to฀consider฀the฀different฀types฀of฀potential
misstatements฀that฀may฀occur.

Assertions
 About฀classes฀of฀transactions฀and฀events฀and฀related฀disclosures฀(occurrence,฀completeness,฀accuracy,฀cut-off,
classification฀and฀presentation)
 About฀account฀balances฀and฀related฀disclosures฀at฀the฀period฀end฀(existence,฀rights฀and฀obligations,
accuracy,฀valuation฀and฀allocation,฀classification฀and฀presentation)

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Audit Financial฀statement Audit

evidence assertions procedures

Audit฀procedures Audit฀procedures
These฀are฀carried฀out฀to:
 Inspection฀of฀tangible฀assets
 Obtain฀an฀understanding฀of฀the
entity฀and฀its฀environment฀to฀assess  Inspection฀of฀documentation฀or฀records
risks฀(risk฀assessment  Observation
procedures).
 Inquiry
 Test฀operating฀effectiveness฀of
controls฀(tests฀of฀controls).  Confirmation

 Detect฀misstatements฀(substantive  Recalculation
procedures).  Reperformance
 Analytical฀procedures

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9: Internal฀control

Topic฀List Internal฀controls฀are฀a฀key฀topic฀area฀and฀this฀chapter฀is
essential฀background฀to฀Chapter฀10฀which฀looks฀at
practical฀aspects฀of฀controls฀testing฀in฀the฀context฀of฀the
Internal฀control฀systems key฀transactions฀cycles.

Auditors฀and฀internal฀control
Evaluating฀internal฀control
Internal฀controls฀in฀a฀computerised
environment

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Internal฀control Auditors฀and Evaluating Internal฀controls฀in฀a

systems internal฀control internal฀control computerised฀environment

Internal฀control฀is฀the฀process฀designed,฀implemented฀and฀maintained฀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฀compli-
ance฀with฀applicable฀laws฀and฀regulations.

Components฀of฀internal฀control Relevant฀controls
Not฀all฀controls฀are฀relevant฀to฀the฀auditor’s฀risk
 Control฀environment
assessment. The฀auditor฀is฀primarily฀concerned
 Risk฀assessment฀process
with฀those฀which฀are฀part฀of฀the฀management
 The฀information฀system฀relevant฀to฀financial฀reporting
of฀risk฀that฀may฀give฀rise฀to฀a฀material
 Control฀activities
misstatement฀in฀the฀FS.
 Monitoring฀of฀controls

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Control฀environment Risk฀assessment
process
The฀attitudes,฀awareness฀and฀actions฀of
management. The฀process฀of฀identifying฀and฀responding฀to
business฀risk.
 Communication฀and฀enforcement฀of฀integrity

+
Risk฀can฀arise฀due฀to:
and฀ethical฀values
 Changes฀in฀operating฀environment
 Commitment฀to฀competence
 New฀personnel
 Participation฀by฀those฀charged฀with
governance  New/revamped฀information฀systems
 Rapid฀growth
 Management’s฀philosophy฀and฀operating฀style
 New฀technology
 Organisational฀structure
 New฀business฀models,฀products฀or฀activities
 Assignment฀of฀authority฀and฀responsibility
 Corporate฀restructuring
 Human฀resource฀policies฀and฀practices
 Expanded฀foreign฀operations
 New฀accounting฀pronouncements

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Internal฀control Auditors฀and Evaluating Internal฀controls฀in฀a

systems internal฀control internal฀control computerised฀environment

+
Information฀system Control฀activities

This฀consists฀of: Policies฀and฀procedures฀which฀ensure฀that
 Infrastructure฀(physical/hardware) management฀directives฀are฀carried฀out.
 Software  Performance฀reviews
 People  Information฀processing
 Procedures
 Data  Physical฀controls
The฀IS฀relevant฀to฀FR฀objectives฀initiates, records,  Segregation฀of฀duties
processes฀and฀reports transactions.

Monitoring฀of฀controls

A฀process฀to฀assess฀the฀quality฀of฀internal฀control฀performance฀over฀time
 Operating฀as฀intended/modified฀as฀appropriate
 Internal฀audit฀may฀perform฀part฀of฀this฀function

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Limitations฀of฀internal฀control
Exam฀focus
Internal฀control฀only฀provides฀directors฀with฀reasonable฀assurance that฀objectives฀are฀met
because฀internal฀control฀has฀inherent฀limitations.

 Costs of฀control฀outweigh฀the฀benefit
 Potential฀for human฀error
 Hence฀segregation฀of฀duties฀is฀vital
 Possibility฀of฀collusion in฀fraud
between฀employees
 Controls฀could฀be฀bypassed/
overridden by฀management
 Controls฀are฀designed฀to฀cope฀with
routine฀transactions฀not฀non-routine
ones

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Internal฀control Auditors฀and Evaluating Internal฀controls฀in฀a

systems internal฀control internal฀control computerised฀environment

Auditors฀must฀record฀the฀client’s฀systems. Narrative฀notes,฀flowcharts฀questionnaires฀or฀checklists฀may฀be฀used.
Narrative฀notes Questionnaires

 Advantage: easy฀to฀record Two฀main฀types:

 Disadvantage: difficult฀to฀update฀  Internal฀control฀questionnaire฀(ICQ)
(unless฀computerised)  Internal฀control฀evaluation฀questionnaire฀(ICEQ)
Aim฀to฀describe฀and฀explain฀the฀system. ICQs Try฀to฀answer฀the฀question฀‘are฀the฀desirable
Can฀support฀flowcharts. controls฀present?’
ICEQs Try฀to฀establish฀if฀specific฀frauds/errors฀
are฀possible.
Flowcharts
The฀advantages฀of฀questionnaires฀are฀that฀they฀are
thorough฀and฀quick.
 Advantages: quick฀to฀prepare,฀easy฀to฀follow,
complete฀system,฀eliminate฀extensive฀narrative
Checklists
 Disadvantages: only฀suitable฀for฀standard฀systems,
good฀for฀document฀flow฀not฀controls,฀difficult฀to
amend,฀can฀waste฀time Similar฀to฀internal฀control฀questionnaire.

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Internal฀control Auditors฀and Evaluating Internal฀controls฀in฀a

systems internal฀control internal฀control computerised฀environment

Assessing฀internal฀controls Risk฀assessment฀procedures
Assessment฀of฀systems To฀obtain฀an฀understanding฀of฀the฀entity฀and฀its฀environment:
 Inquiries฀of฀management฀and฀other฀personnel
Auditors:  Analytical฀procedures
 Assess฀the฀adequacy of฀the฀accounting  Observation฀and฀inspection
systems฀as฀the฀basis฀for฀the฀FS ie฀assessment฀of฀controls฀is฀an฀integral฀part฀of฀risk
 Identify the฀types฀of฀potential฀misstatement assessment฀(see฀Chapter฀6)
that฀could฀occur฀in฀the฀FS
 Consider฀factors that฀affect฀the฀risk฀of
misstatements
 Design฀appropriate฀audit฀procedures Assessment฀of฀control฀risk
The฀auditors฀must฀gain฀an฀understanding฀of฀the Auditors฀shall฀carry฀out฀tests฀of฀controls฀if:
information฀system฀so฀that฀they฀can฀understand฀the  Risk฀assessment฀indicated฀that฀controls฀are฀operating
major฀classes฀of฀transaction,฀how transactions฀are effectively.
initiated,฀what฀the฀significant฀records are,฀and฀what  The฀auditor฀has฀determined฀it฀is฀not฀possible/
the฀financial฀reporting฀process is. practicable฀to฀reduce฀risk฀at฀assertion฀level฀to
acceptable฀level฀by฀substantive฀procedures.

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Internal฀control Auditors฀and Evaluating Internal฀controls฀in฀a

systems internal฀control internal฀control computerised฀environment

Tests฀of฀controls If฀risk฀assessment฀has฀shown฀controls฀to฀be
ineffective฀testing฀will฀not฀be฀undertaken. It
Tests฀of฀controls฀are฀performed฀to฀obtain฀audit฀evidence may฀also฀be฀inefficient to฀test฀controls฀if฀the
about฀the฀operating฀effectiveness฀of฀controls฀in฀preventing, population฀consists฀of฀a฀few฀large฀items฀which
or฀detecting and฀correcting material฀misstatements. can฀be฀tested฀quickly฀by฀substantive฀tests.
When฀controls฀testing฀is฀completed,฀auditors
Tests฀of฀controls฀may฀include: make฀a฀final฀assessment฀of฀control฀risk,฀and
revise the฀nature,฀timing฀and extent฀of
substantive procedures accordingly.
 Inquiries about฀and฀observation of฀control
procedures Auditors฀should฀consider: how controls฀were
 Inspection of฀documents฀supporting฀controls applied,฀how฀consistently they฀were฀applied
 Examination฀of฀evidence฀of฀management฀views and฀by฀whom. Controls฀testing฀is฀often
 Reperformance of฀control฀procedures฀to฀ensure completed฀on฀an฀interim฀audit.
they฀were฀correctly฀performed
 Testing on฀controls฀operating฀on฀specific Auditors฀should combine฀inquiry฀with฀another
computer฀applications type฀of฀procedure฀when฀testing฀controls.

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Internal฀control Auditors฀and Evaluating Internal฀controls฀in฀a

system internal฀control internal฀control computerised฀environment

In฀a฀computerised฀environment,฀there฀are฀two฀important฀types฀of฀control.

General฀controls฀are฀controls฀required฀over฀development Application฀controls฀relate฀to฀procedures
(systems฀design฀and฀testing),฀changes฀to฀programs used฀to฀initiate,฀record,฀process฀and฀report
(passwords/records฀of฀changes฀maintained),฀testing฀of฀program transactions.
changes,฀prevention฀of฀incorrect฀use฀(operation฀controls)฀and
controls฀to฀ensure฀continuity฀(back-up฀and฀disaster฀recovery).

It฀is฀important฀that฀management฀have฀an฀IT฀security฀and฀use฀policy฀which฀should฀include฀the฀following:
 Procedures฀including฀passwords,฀data฀protection฀and฀information฀distribution
 Legal฀requirements฀(data฀protection฀legislation)฀and฀licensing฀agreements
 Commitment฀to฀information฀security
 Overall฀supervision฀by฀senior฀management
 Consequence฀of฀disobeying฀the฀rules

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Notes

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10: Tests฀of฀controls

It฀is฀important฀to฀be฀comfortable฀with:
Topic฀List  Examples฀of฀controls฀for฀specific฀transaction฀areas
 What฀the฀control฀is฀trying฀to฀achieve฀(objective)
Sales฀system Some฀examples฀of฀tests฀of฀controls฀have฀been฀given฀in
Purchases฀system the฀shaded฀boxes฀in฀this฀chapter. However,฀they฀are฀not
exhaustive. Remember฀that฀the฀test฀is฀seeking฀to
Inventory฀system establish฀whether฀the฀control฀is฀effective. If฀you฀bear฀that
Cash฀system in฀mind฀you฀should฀be฀able฀to฀tailor฀tests฀of฀controls฀to
the฀specific฀scenario฀in฀the฀question.You฀will฀also฀need฀to
Payroll฀system be฀able฀to฀explain฀why฀you฀would฀carry฀out฀a฀particular
Revenue฀and฀capital฀expenditure test฀of฀controls.

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Sales Purchases Inventory Cash Payroll Revenue฀and

system system system system system capital฀expenditure

Aims฀of฀control

Ordering/granting฀credit Dispatch/invoicing Accounting/recording/credit

control
 Sale฀made฀to฀good฀credit  All฀despatches฀are฀recorded
ratings  Transactions฀are฀recorded
 Invoicing฀is฀correct฀and for
 Who฀are฀encouraged฀to฀pay goods฀supplied  In฀correct฀accounts
promptly
 Credit฀notes฀given฀are฀for  In฀correct฀period
 Orders฀are฀correct valid฀reasons
 Irrecoverable฀debts฀identified
 Orders฀are฀fulfilled

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Controls Tests฀of฀controls
Ordering/granting฀credit
 Segregation฀of฀duties฀(credit฀control/invoice/despatch) Test฀for฀evidence฀of:
 Authorisation฀of฀credit฀terms฀(checks฀obtained฀review)  References
 Sequential฀numbering฀of฀pre-printed฀order฀forms  Authorisation
 Correct฀prices฀quoted฀to฀customers  Credit฀terms/limits
 Match฀orders฀to฀dispatch฀notes฀(o/s฀orders฀queried)  Matching฀orders
 Dealing฀with฀customer฀queries Verify฀matching of฀sales฀invoices฀with฀dispatch฀notes.
Dispatch/invoicing Test฀numerical฀sequences฀of฀records฀(enquire
 Authorisation฀of฀dispatch about฀gaps).
 Examination฀of฀goods฀despatched฀(quality)
Observe฀quality฀inspections฀or฀inspect
 Recording฀of฀goods฀outward
documentary฀evidence฀of฀inspections.
 Match฀dispatch฀notes฀to฀order/invoice฀(o/s฀queried)
 Sequential฀numbering฀of฀pre-printed฀dispatch฀notes Review฀invoices฀for฀evidence฀arithmetical฀checks
 Signature฀of฀customer฀on฀delivery฀notes have฀occurred.
 Authorisation฀of฀price฀on฀invoice฀(price฀list) Review฀entries฀in฀ledger,฀scrutinise฀for฀credit฀limits,
 Arithmetical฀checks฀on฀invoices inspect฀reconciliations.
Accounting/recording/credit฀control
 Segregation฀of฀duties฀(recording฀sales/statements)  Preparation/checking฀of฀receivables’ statements
 Recording฀of฀sequence฀of฀sales฀invoices  Review/chase฀overdue฀accounts/authorised฀write-
 Matching฀cash฀receipts฀with฀invoices off
 Retention฀of฀customer฀remittance฀advices  Reconciliation฀of฀receivables฀ledger฀control฀account

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Sales Purchases Inventory Cash Payroll Revenue฀and

system system system system system capital฀expenditure

Aims฀of฀control

Ordering Receipt/invoice Accounting

 Orders฀are฀authorised฀and  Only฀accepted฀if฀from  Expenditure฀is฀only฀for
for฀the฀company authorised฀order received฀goods
 Made฀from฀authorised  Accurately฀recorded  Authorised
suppliers  Liabilities฀recognised฀for  Properly฀recorded
 At฀good฀prices goods฀received  In฀correct฀account
 Credits฀are฀claimed  In฀correct฀period

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Controls
Ordering Tests฀of฀controls
 Segregation฀of฀duties฀(requisitioning/ordering)
 Central฀policy฀for฀choice฀of฀supplier It฀is฀important฀that฀auditors฀test฀that฀invoices฀are
 Use฀of฀pre-numbered฀purchase฀requisitions supported฀by฀genuine฀purchase฀orders,฀authorised
 Authorised,฀pre-numbered฀(safeguarded)฀order฀forms by฀correct฀individual. Inspect฀invoices฀to฀ensure
 Monitoring฀of฀supplier฀terms฀for฀most฀favourable they฀are฀supported฀by฀GRNs,฀authorised,฀priced
Goods฀received correctly,฀coded฀correctly,฀entered฀in฀inventory,
maths฀correct,฀posted฀to฀ledger.
 Examine฀goods฀inwards฀(quality)฀and฀record฀deliveries
 Compare฀goods฀received฀notes฀(GRNs)฀with฀orders Review฀numerical฀sequences.
 Reference฀suppliers’ invoices Observe฀whether฀the฀purchase฀day฀book฀is
 Check฀suppliers’ invoices฀(maths,฀prices,฀quantities) referenced฀to฀invoices.
 Record฀goods฀returns Review฀a฀sample฀of฀supplier฀statement
 Have฀procedures฀for฀obtaining฀credit฀notes reconciliations.
Accounting Inspect฀control฀account฀reconciliations.
 Segregation฀of฀duties฀(recording/checking)
 Prompt฀recording฀in฀day฀books฀and฀ledgers  Reconciliation฀of฀payables฀ledger฀with฀total฀of
 Comparison฀of฀supplier฀statements฀to฀ledger฀accounts balances
 Authorisation฀of฀payments฀(limits/goods฀received)
 Review฀of฀allocation฀of฀expenditure  Procedures฀for฀cut-off

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Sales Purchases Inventory Cash Payroll Revenue฀and

system system system system system capital฀expenditure

Aims฀of฀controls

Recording Valuation
 All฀inventory฀movements฀recorded/authorised  Costing฀system฀values฀inventories฀correctly
 All฀inventories฀recorded฀are฀owned฀by฀company
 Allowance฀made฀for฀slow฀moving/obsolete
 Inventories฀recorded฀exist inventories
 Inventory฀quantities฀recorded฀are฀correct
 Cut-off฀procedures฀correctly฀applied Inventory฀holding
Protection  Levels฀of฀inventories฀held฀are฀reasonable
 Safeguarded฀against฀loss/theft/damage

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Controls Tests฀of฀controls
Recording Observe฀and฀test฀check฀inventory counts,฀ensure
 Segregation฀of฀duties฀(custody/recording) discrepancies฀are฀investigated,฀authorised฀and
 Goods฀inwards฀met฀and฀checked corrected.
 Inventory฀issues฀supported฀by฀documentation Review฀inventory฀count฀instructions฀and฀ensure฀staff
 Inventory฀records฀maintained have฀been฀provided฀with฀a฀copy.
Protection Inventory counting฀is฀covered฀in฀more฀detail฀in
 Precautions฀against฀theft฀(restriction) Chapter฀13.
 Precautions฀against฀deterioration
Observe฀goods฀inwards฀inspection.
 Security฀over฀inventory฀held฀by฀third฀parties
 Regular฀inventory฀taking Check฀sequence฀of฀inventory records.
Valuation Observe฀security฀arrangements฀for฀inventories.
 Valuation฀agrees฀with฀IAS฀2฀Inventories
 Calculations฀are฀checked Consider฀the฀environment฀in฀which฀inventories are
 Condition฀of฀inventories฀is฀reviewed held.
 Accounting฀for฀waste฀is฀provided฀for
Inventory฀holding
 Provision฀made฀for฀inventory฀levels
 Minimum/maximum฀inventory฀levels฀exist

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Sales Purchases Inventory Cash Payroll Revenue฀and

system system system system system capital฀expenditure

Cash฀system: aims฀of฀controls Bank

 Daily฀bankings,฀banking฀of฀receipts฀intact
 Restrictions฀on฀opening฀new฀bank฀accounts
 All฀monies฀received฀are฀banked,฀recorded฀and
safeguarded฀against฀loss/theft.  Limitations฀on฀cash฀floats
 Surprise฀cash฀counts
 All฀payments฀are฀authorised,฀made฀out฀to฀the
correct฀payees,฀recorded.  Custody฀of฀cash฀and฀cheques
 Restrictions฀on฀issuing฀blank฀cheques
 Payments฀are฀not฀made฀twice฀for฀the฀same฀liability.
 Bank฀reconciliations
Payments
Controls  Cheque฀requisitions฀supported฀by
Receipts documentation/authorised
 Segregation฀of฀duties  Authorised฀signatories
 Post฀stamped฀with฀date฀of฀receipt  Prompt฀dispatch฀of฀signed฀cheques
 Restrictions฀on฀receipt฀of฀cash฀(salespeople฀only)  Payments฀recorded฀promptly
 Agreement฀of฀cash฀collections฀to฀till฀rolls  Cash฀payments฀authorised
 Prompt฀maintenance฀of฀records  Limit฀on฀disbursements
 Giving฀and฀recording฀receipts฀for฀cash  Rules฀of฀cash฀advances฀to฀employees

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Tests฀of฀controls
Observe฀'post฀opening'. Trace฀entries฀on฀listing฀to฀cash฀book,฀paying฀in฀book,฀bank฀statement.
Observe฀whether฀cash฀is฀banked฀daily.
Review฀records฀for฀evidence฀that฀cash฀receipts฀are฀agreed฀to฀till฀rolls฀(eg฀signatures,฀spreadsheet฀entries).
Review฀documentation฀for฀evidence฀of฀agreement฀of฀cash฀receipts฀from฀cash฀book฀to฀paying-in฀slips,฀bank,
posting฀to฀the฀sales฀ledger,฀posting฀to฀the฀general฀ledger.
For฀cash฀payments,฀check฀that฀cheques฀are฀signed฀by฀authorised฀signatories (paid฀cheques฀can฀be
requested฀from฀the฀bank),฀check฀to฀supplier฀invoice,฀verify฀that฀supporting฀documents฀are฀stamped฀‘paid’.
Review฀postings฀to฀the฀ledgers.
Review฀a฀sample฀of฀bank฀reconciliations฀to฀ensure฀properly฀carried฀out.
Observe฀a฀cash฀count.

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Sales Purchases Inventory Cash Payroll Revenue฀and

system system system system system capital฀expenditure

Payroll฀system: aims฀of฀controls

 Employees฀only฀paid฀authorised฀amounts฀for฀work฀done
 Deductions฀are฀recorded฀and฀pay฀agrees฀to฀bank฀records
 Correct฀employees฀are฀paid
 Deductions฀are฀correct฀and฀paid฀over฀to฀the฀correct฀authorities

Controls Tests฀of฀controls
 Segregation฀of฀duties
 Authorisation฀of฀changes฀and฀payments It฀is฀vital฀to฀check฀that฀all฀aspects฀of฀the฀payroll฀(amounts/฀
 Password฀protection฀for฀computerised฀payroll deductions/payments)฀are฀authorised.
 Custody฀of฀cash฀for฀cash฀payouts Attend฀cash฀payouts฀to฀ensure฀controlled.
 Maintenance฀of฀salary฀bank฀account
 Reconciliation฀of฀accounts Test฀password฀protection฀by฀inputting฀test฀data. Review
 Reconciliation฀of฀wages฀costs฀to฀payroll reconciliations฀to฀ensure฀properly฀carried฀out฀and฀that
records discrepancies฀are฀followed฀up.
 Reconciliations฀of฀deductions
 Surprise฀cash฀counts

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Sales Purchases Inventory Cash Payroll Revenue฀and

system system system system system capital฀expenditure

Capital฀and฀revenue฀expenditure: aims฀of Controls

controls
Ordering
 Orders฀for฀capital฀items฀should฀be฀authorised
 Authorisation specifically
All฀expenditure฀is฀authorised  Should฀be฀requisitioned฀on฀different฀documentation
(see฀purchases฀above). Invoices
 Recording  Should฀be฀approved฀by฀authorised฀person
All฀expenditure฀is฀correctly฀classified฀in฀the  Should฀be฀coded฀correctly
FS฀as฀capital฀or฀revenue฀expenditure. Recording
 Capital฀items฀should฀be฀written฀in฀the฀non-current
Tests฀of฀controls asset฀register
 Non-current฀asset฀register฀reconciled฀to฀general
It฀is฀vital฀that฀auditors฀check฀that฀all฀invoices ledger
are฀supported฀by฀genuine฀purchase฀orders,  Segregation฀of฀duties฀(requisitioning/ordering)
authorised฀by฀the฀correct฀individual.  Central฀policy฀for฀choice฀of฀supplier

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Notes

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11: Audit฀procedures฀and฀sampling

Topic฀List In฀this฀chapter,฀we฀look฀at฀substantive฀procedures,
including฀analytical฀procedures.
We฀also฀look฀at฀the฀audit฀of฀accounting฀estimates,฀and
Substantive฀procedures the฀use฀of฀sampling฀and฀CAATs฀when฀carrying฀out฀audit
Accounting฀estimates procedures.

Sampling Auditors฀can฀often฀rely฀on฀the฀work฀of฀others฀such฀as
experts฀and฀internal฀auditors฀during฀the฀audit฀and฀this฀is
CAATs also฀considered฀in฀this฀chapter.
Using฀the฀work฀of฀others The฀topics฀in฀this฀chapter฀are฀likely฀to฀come฀up฀in฀the
exam฀frequently,฀either฀in฀a฀scenario฀or฀a฀knowledge-
based฀question.

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Substantive Accounting Sampling CAATs Using฀the฀

procedures estimates work฀of฀others

Auditors฀need฀to฀obtain฀sufficient฀appropriate฀audit฀evidence฀to฀support฀the฀financial฀statement฀assertions.
This฀is฀done฀through฀substantive฀testing.

Model฀for฀an฀audit฀plan:
Substantive฀procedures฀are฀tests฀to  Agree฀opening฀balances฀to฀last฀year’s฀working฀papers
detect฀material฀misstatements฀in฀the฀FS.  Review฀general฀ledger฀for฀unusual฀records
They฀are฀generally฀of฀two฀types:  Check฀client฀schedule฀to/from฀accounting฀records/FS
 Carry฀out฀analytical฀review฀
 Analytical฀procedures  Test฀transactions฀in฀detail
 Other฀procedures  Test฀balances฀in฀detail
 Review฀presentation฀and฀disclosure฀in฀the฀FS

Directional฀testing  Tests฀to฀discover฀errors start฀in the฀accounting

records.
Substantive฀tests฀fall฀into฀two฀categories
 Tests฀to฀discover฀omissions start฀outside of฀the
(broadly฀speaking). accounting฀records.

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Test฀item Example
Test฀debit฀items (expenditure฀or฀assets)฀for If฀a฀non-current฀asset฀entry฀in฀the฀nominal฀ledger฀of
overstatement฀by฀selecting฀debit฀entries $1,000฀is฀selected,฀it฀would฀be฀overstated฀if฀it฀should
recorded฀in฀the฀nominal฀ledger฀and฀checking have฀been฀recorded฀at฀anything฀less฀than฀$1,000฀or฀if
value,฀existence฀and฀ownership. the฀company฀did฀not฀own฀it,฀or฀indeed฀if฀it฀did฀not
Test฀credit฀items (income฀or฀liabilities)฀for exist.
understatement฀by฀selecting฀items฀from Select฀a฀goods฀despatched฀note฀and฀check฀that฀the
appropriate฀sources฀independent฀of฀the resultant฀sale฀has฀been฀recorded฀in฀the฀nominal
nominal฀ledger฀and฀ensuring฀that฀there฀is฀a ledger฀sales฀account. Sales฀would฀be฀understated฀if
correct฀nominal฀ledger฀entry. the฀nominal฀ledger฀did฀not฀reflect฀the฀transaction฀at฀all
(completeness)฀or฀reflected฀it฀at฀less฀than฀full฀value.

Exam฀focus
A฀test฀for฀the฀overstatement฀of฀an฀asset฀simultaneously฀gives฀comfort฀on฀understatement฀of฀other฀assets,
overstatement฀of฀liabilities,฀overstatement฀of฀income฀and฀understatement฀of฀expenses.

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Substantive Accounting Sampling CAATs Using฀the฀

procedures estimates work฀of฀others

Analytical฀procedures฀are฀the฀evaluations฀of฀financial฀information฀through฀analysis฀of฀plausible
relationships฀among฀both฀financial฀and฀non-financial฀data.
ISA฀520฀Analytical฀procedures gives฀guidance฀on฀use฀of฀analytical฀procedures฀as฀substantive฀tests฀and
overall฀review.
Analytical฀procedures Analytical฀procedures฀as฀substantive
tests
(a) Comparisons฀of฀this฀year’s฀financial฀information
with:
 Determine฀suitability for฀given฀assertions
(i) Similar฀information฀for฀prior฀periods
(ii) Anticipated฀results/budgets  Evaluate฀reliability of฀data
(iii) Industry฀information
(iv) Expectations฀produced฀by฀the฀auditor  Develop฀an฀expectation and฀evaluate
whether฀sufficiently฀precise
(b) Elements฀of฀financial฀information฀which฀are
expected฀to฀conform to฀patterns  Determine฀amount฀of฀acceptable฀difference
(c) Links฀between฀financial/non-financial
information

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Practical฀techniques Auditors฀will฀use฀the฀primary฀accounting฀ratios (you

should฀be฀familiar฀with฀these). There฀are฀also฀a
number฀of฀significant฀relationships฀in฀FS:
 Ratio฀analysis
 Examining฀related฀accounts
 Trend฀analysis Significant฀relationships
 Reasonableness฀tests payables/purchases฀inventories/cost฀of฀sales
non-current฀assets/depreciation/repairs฀expense
Significant฀fluctuations฀and intangible฀assets/amortisation
loans/interest฀expense
unexpected฀relationships investments/investment฀income
When฀these฀are฀identified,฀the฀auditors฀shall: receivables/bad฀debt฀expense/sales
 Make฀inquiries฀of฀directors.
 Consider฀management฀response฀in฀light฀of
knowledge/evidence.
 Carry฀out฀other฀audit฀procedures฀where
necessary.

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Substantive Accounting Sampling CAATs Using฀the฀

procedures estimates work฀of฀others

An฀accounting฀estimate฀is฀an฀approximation฀of฀a฀monetary฀amount฀in฀the฀absence฀of฀a฀precise฀means฀of
measurement,฀for฀example,฀allowances฀to฀reduce฀inventory/receivables฀to฀their฀estimated฀realisable฀value,
depreciation,฀accrued฀revenue,฀provision฀for฀a฀lawsuit,฀construction฀contracts฀or฀warranty฀claims.

Guidance฀is฀given฀in฀ISA 540฀Auditing฀accounting฀estimates,฀including฀fair฀value฀accounting฀estimates,฀and
related฀disclosures.
Audit฀procedures

 Consider฀reasonableness฀of฀assumptions
 Consider฀if฀management฀has฀considered฀alternative฀assumptions
 Evaluate฀whether฀estimates฀are฀reasonable฀or฀misstated
 Obtain฀evidence฀about฀accuracy฀of฀disclosures
 Evaluate฀adequacy฀of฀disclosure฀of฀estimation฀uncertainty฀for฀estimates฀that฀give฀rise฀to฀significant฀risks
 Consider฀if฀any฀management฀bias
 Obtain฀written฀representations฀whether฀management฀believes฀significant฀assumptions฀used฀are
reasonable

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Substantive Accounting Sampling CAATs Using฀the

procedures estimates work฀of฀others

Audit฀sampling฀is the฀application฀of audit฀procedures฀to฀less฀than฀100%฀of฀items฀within฀a฀population฀of฀audit

relevance฀such฀that฀all฀sampling฀units฀have฀a฀chance฀of฀selection. It฀uses฀either฀statistical฀sampling฀or฀non-
statistical฀sampling฀methods.

Testing฀100%฀of฀the฀population,฀and฀testing฀all฀items฀with฀a฀certain฀characteristic,฀are฀not audit฀sampling.
ISA 530฀Audit฀sampling provides฀guidance.

Design฀of฀sample-factors฀to฀consider Designing฀sample฀size
The฀auditor฀must฀design฀a฀sample฀size฀sufficient฀to
 Purpose฀of฀audit฀procedure reduce฀sampling฀risk฀to฀an฀acceptably฀low฀level.
 Characteristics฀of฀population

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Selection Sampling฀risk arises฀from฀the฀possibility฀that฀the

auditor’s฀conclusion,฀based฀on฀a฀sample฀of฀a฀certain
 Random (all฀items฀have฀equal฀chance฀of size,฀may฀be฀different฀from฀the฀conclusion฀that฀would
selection) be฀reached฀if฀the฀entire฀population฀were฀subjected฀to
the฀same฀audit฀procedure.
 Systematic (constant฀interval฀between
items)
 Haphazard (chosen฀at฀will,฀but฀guarding
against฀bias฀in฀the฀selection) Non-sampling฀risk arises฀from฀factors฀that฀cause฀the
auditor฀to฀reach฀an฀erroneous฀conclusion฀for฀any
 Block฀(check฀if฀items฀have฀particular
reason฀not฀related฀to฀the฀size฀of฀the฀population฀(eg
characteristics)
using฀inappropriate฀audit฀procedures).
 Monetary฀unit฀sampling (value-weighted
selection)

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Evaluation Summary
Auditors฀must฀analyse฀any฀deviations฀or฀misstatements
in฀the฀sample฀and฀draw฀inferences฀for฀the฀population฀as  Determine฀objectives฀and฀characteristics
a฀whole. of฀population

Qualitative฀aspects of฀the฀error฀should฀be฀considered  Determine฀sample฀size

(nature฀of฀error/balance). Errors฀may฀be฀projected  Choose฀method฀of฀sample฀selection
against฀the฀whole฀balance฀of฀the฀population.
 Project฀errors฀and฀evaluate฀results

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IT brings฀many฀advantages฀to฀audit,฀particularly฀in฀areas฀such฀as฀analytical฀review.

CAATs฀are฀audit฀procedures฀performed฀using฀computers฀which฀can฀enhance฀the฀detail฀of฀the฀test฀undertaken
and฀the฀result฀of฀the฀test. They฀consist฀of฀audit฀software and฀test฀data.

Audit฀software Test฀data
This฀performs฀checks฀that฀auditors฀would฀otherwise This฀is฀a฀way฀of฀checking฀whether฀systems฀are
have฀had฀to฀do฀by฀hand. operating฀properly: feed฀the฀system฀some฀data฀to
 Interrogation (data฀files) see฀how฀it฀is฀processed.
The฀data฀may฀be฀valid฀or฀invalid,฀depending฀on฀the
 Comparison (comparing฀versions)
objective฀of฀the฀test.
 Interactive (on-line)
 Resident฀code (as฀transactions฀are฀processed)

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Substantive Accounting Sampling CAATs Using฀the

procedures estimates work฀of฀others

ISA฀610฀Using฀the฀work฀of฀internal฀auditors฀provides฀guidance An฀auditor’s฀expert฀is฀an฀individual฀or
in฀this฀area. organisation฀possessing฀expertise฀in฀a฀field
The฀external฀auditor's฀objectives฀are: other฀than฀accounting฀or฀auditing,฀whose฀work
To฀determine฀whether฀the฀work฀of฀internal฀auditors in฀that฀field฀is฀used฀by฀the฀auditor฀to฀assist฀the
1 auditor฀in฀obtaining฀sufficient฀appropriate฀audit
can฀be฀used,฀and฀if฀so,฀in฀which฀areas฀and฀to฀what
extent. evidence.

2 To฀determine฀whether฀the฀work฀is฀adequate฀for฀the ISA 620฀Using฀the฀work฀of฀an฀auditor’s฀expert

audit. requires฀the฀auditor฀to฀agree฀the฀following฀with
If฀the฀auditors฀decide฀to฀make฀use฀of฀the฀work฀of฀internal฀audit, the฀expert.
they฀must฀evaluate that฀work. 1 Nature,฀scope฀and฀objectives฀of฀their฀work
The฀important฀criteria฀when฀determining฀whether฀the฀work฀of
the฀internal฀audit฀function฀can฀be฀used฀are: 2 Respective฀roles฀and฀responsibilities
 Extent฀to฀which฀its฀objectivity is฀supported Nature,฀timing฀and฀extent฀of฀communication,
3 including฀form฀of฀any฀report
 Level฀of฀competence
 Whether฀approach฀is฀systematic and฀disciplined 4 Confidentiality฀requirements

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Substantive Accounting Sampling CAATs Using฀the฀

procedures estimates work฀of฀others

A฀service฀organisation is฀a฀third-party฀organisation฀that฀provides฀services฀to฀user฀entites฀that฀are฀part฀of฀those
entities’ information฀systems฀relevant฀to฀financial฀reporting.

ISA฀402฀Audit considerations฀relating฀to฀entities฀using฀service฀organisations gives฀guidance:

 How฀the฀use฀of฀a฀service฀organisation฀affects฀the฀entity’s฀internal฀control
 Nature฀and฀materiality฀of฀transactions฀processed
 Degree฀of฀interaction
 Nature฀of฀relationship

Under฀ISA฀402
The฀auditor฀must฀obtain฀an฀understanding฀of฀the฀nature฀and฀significance฀of฀the฀services฀provided฀by฀the฀service
organisation฀and฀their฀effect฀on฀the฀entity’s฀internal฀control฀relevant฀to฀the฀audit,฀sufficient฀to฀identify฀and฀assess฀the
risks฀of฀material฀misstatement฀and฀to฀design฀and฀perform฀relevant฀audit฀procedures฀to฀address฀those฀risks.

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12: Non-current฀assets

Topic฀List This฀chapter฀looks฀at฀the฀audit฀of฀non-current฀assets. The

audit฀of฀depreciation฀is฀probably฀the฀most฀complex฀area
in฀practice฀as฀it฀is฀a฀judgemental฀area.
Tangible฀non-current฀assets The฀audit฀of฀non-current฀assets฀could฀be฀examined฀in
Intangible฀assets conjunction฀with฀using฀the฀work฀of฀an฀expert,฀as฀non-
current฀assets฀are฀often฀subject฀to฀revaluations.
The฀audit฀procedures฀in฀this฀chapter฀have฀been
expressed฀in฀terms฀of฀the฀relevant฀financial฀statement
assertions.

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Tangible฀ Intangible฀
non-current฀assets assets

Tangible฀non-current฀assets฀are฀physical฀assets฀held฀for฀continuing฀use in฀the฀business.

The฀following฀box฀outlines฀the฀key฀control฀objectives฀relating฀to฀tangible฀non-current฀assets:
Internal฀control฀considerations

 Acquisitions฀are฀authorised
 Disposals฀are฀authorised
 Proceeds฀are฀accounted฀for
 Security฀over฀non-current฀assets฀sufficient
 Non-current฀assets฀maintained฀properly
 Depreciation฀reviewed฀annually
 Is฀a฀register฀kept?

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Completeness Existence
Obtain฀a฀summary,฀reconcile฀it฀to฀last฀year’s Confirm฀that฀the฀company฀physically฀inspects฀all
schedules. Reconcile the฀list฀of฀assets฀in฀the the฀assets฀in฀the฀register฀annually. Inspect฀assets
general฀ledger with฀those฀in฀the฀non-current (Do฀they฀exist?฀What’s฀their฀condition?฀Are฀they฀in
asset฀register or฀list฀of฀assets. Obtain use?). Reconcile฀opening฀and฀closing฀motor
explanations฀for฀missing฀assets. Test฀some฀physical vehicles฀by฀numbers฀as฀well฀as฀by฀value.
assets฀to฀ensure฀they฀are฀recorded.

Accuracy, allocation฀and฀valuation
Verify฀valuation฀to฀valuation฀certificate (consider฀reasonableness฀of฀valuation). Check฀any฀revaluation
surplus has฀been฀correctly฀calculated. Check฀that฀revaluations฀are฀updated฀regularly. Ensure฀disclosure
correct.

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Tangible฀ Intangible
non-current฀assets assets

Charges฀and฀commitments฀(rights฀and฀obligations)
Review฀statutory฀books฀for฀evidence฀of฀charges,฀examine฀post฀year-end฀invoices฀and฀board฀minutes฀for
evidence฀of฀any฀capital฀commitments.

Ownership฀(rights฀and฀obligations)
Verify฀title฀to฀land by฀checking฀title฀deeds/leases. Obtain฀certificate฀from฀people฀holding฀deeds฀to฀confirm฀why
they฀are฀held. Inspect฀registration฀documents฀for฀vehicles,฀confirm฀that฀they฀are฀used฀for฀the฀business.
Examine฀documents฀of฀title฀for฀other฀assets.

Disposals฀(rights/completeness/occurrence)
Verify฀disposals฀to฀sales฀documentation (invoice)฀and฀verify฀calculation฀of฀profit/loss is฀correct. Verify฀that
disposals฀are฀authorised and฀proceeds฀are฀reasonable. Ensure฀that฀asset฀is฀no฀longer฀used฀as฀security.

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Additions฀(rights/valuation/completeness)
Verify฀additions฀to฀invoices/architect’s฀certificates฀etc. Ensure฀purchases฀properly฀allocated฀to฀asset฀accounts
and฀authorised฀by฀correct฀person฀and฀that฀all฀additions฀have฀been฀recorded฀in฀the฀general฀ledger฀and฀the
asset฀register.

Depreciation฀(valuation)
Review฀depreciation฀rates in฀light฀of: asset฀lives,฀residual฀values,฀replacement฀policy,฀past฀experience
(consistency),฀possible฀obsolescence. Verify that฀depreciation฀has฀been฀charged฀on฀all฀assets฀with฀a฀useful
economic฀life. Review฀calculation. Ensure฀depreciation฀not฀charged฀on฀fully฀depreciated฀assets. Verify฀that
rates฀and฀policies฀are฀disclosed฀in฀the฀FS. Confirm฀that฀depreciation฀on฀revalued฀assets฀is฀based฀on฀the
revalued฀amount.

Insurance฀(valuation)
Review฀insurance฀policies฀in฀force฀for฀all฀assets฀to฀ensure฀cover฀is฀sufficient฀and฀verify฀expiry฀dates.

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Tangible฀ Intangible฀
non-current฀assets assets

Key฀assertions: EXISTENCE Are฀they฀genuinely฀assets?

VALUATION At฀what฀value฀should฀they฀be฀recorded?

Goodwill Intangibles

 Agree฀consideration฀to฀sales฀agreement  Agree฀to฀purchase฀documentation
 Asset฀values฀reasonable?  Review฀any฀specialist฀valuations
 Calculation฀correct?  Amortisation฀correct?
 Amortisation฀correct?
 Any฀impairment? R&D
 Goodwill฀valuation฀reasonable?

 Conforms฀to฀IAS฀38฀criteria?
 Refer฀to฀budgets
 Amortisation฀correct?

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13: Inventory

Topic฀List In฀practice,฀inventory฀is฀a฀very฀important฀audit฀area. For

manufacturing฀businesses,฀it฀is฀often฀the฀largest฀item฀on
the฀statement฀of฀financial฀position,฀and฀is฀usually
The฀inventory฀count material.

Cut-off Inventory฀can฀be฀a฀difficult฀area฀to฀audit. It฀often

comprises฀lots฀of฀small฀items,฀which฀can฀make฀it฀time
Valuation consuming฀to฀audit. There฀are฀three฀key฀areas: the
inventory฀count฀(existence),฀cut-off฀(completeness)฀and
valuation.

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The฀inventory Cut-off Valuation

count

Sources฀of฀rules฀on฀inventories Responsibilities฀in฀relation฀to฀inventories

 IAS฀2฀Inventories฀(lower฀of฀cost฀and฀NRV)  Management: ensure฀inventory฀figure฀in฀FS

represents฀inventories that฀exists/is฀owned,฀keep
 ISA฀501฀Audit฀evidence฀–฀specific inventory฀count฀records.
considerations฀for฀selected฀items
 Auditors: obtain฀sufficient฀audit฀evidence฀about
Methods฀of฀valuation inventories,฀and฀attend฀inventory฀count฀if฀inventory฀is
material.
 First฀in฀first฀out฀(FIFO)
 Weighted฀average฀cost
 Other฀similar฀methods Auditors฀must฀ensure฀that฀all฀inventory lines฀are
counted฀annually, the฀inventory records฀are
 The
The฀inventory฀count auditors’ adequate฀and฀that฀management฀investigates฀all
There฀are฀various฀methods: favourite material฀differences.
 Inventory฀count฀at฀the฀year-end
 Inventory฀count฀prior฀to/after฀the฀year-end
 Continuous฀inventory฀count

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Planning฀inventory฀count During฀inventory฀count
Gain฀knowledge (previous฀year)฀and฀discuss฀major Observe฀whether฀instructions are฀followed.
changes฀with฀management. Make฀test฀counts for฀accuracy.
Assess฀key฀factors (such฀as,฀nature฀of฀inventories,฀high Review฀procedures฀for฀obsolete inventories.
value฀items,฀accounting,฀location,฀controls). Confirm฀third฀party inventories separate.
Plan฀procedures฀(time/location฀of฀attendance,฀high฀value Conclude฀whether฀inventory count฀has฀been
items,฀any฀specialist฀help,฀third฀party฀confirmations properly฀carried฀out.
required?) Gain฀overall฀impression of฀inventories.

Review฀inventory฀count฀instructions After฀inventory฀count
Ensure฀there฀is฀provision฀for: Trace฀test฀count items฀to฀final฀inventory
Organisation฀of฀count (supervision,฀marking฀of sheets.
inventories,฀control฀during฀the฀process,฀identification฀of All count฀records฀included in฀final฀total?
obsolete฀inventories). Confirm฀cut-off using฀final฀goods฀in฀and฀out
Counting (systematic฀counting฀to฀ensure฀all฀inventories records.
are฀counted,฀teams฀of฀two฀counters฀one฀independent฀of Review฀replies฀from฀third฀parties.
inventories usually). Recording (control฀over฀inventory
sheets,฀ink฀used,฀signed฀by฀counters). Confirm฀valuation.

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The฀inventory Cut-off Valuation

count

It฀is฀important฀that฀all฀inventory฀movements฀are฀recorded฀in฀the฀correct฀period.
Cut-off is฀critical฀at฀the฀following฀points฀in
the฀accounting฀cycle: Cut-off฀procedures฀at฀inventory฀count
 Point฀of฀purchase/receipt฀of฀goods Record the฀relevant฀movements฀(last฀and฀first฀goods
 Raw฀materials฀going฀to฀production despatched฀and฀received฀numbers).
 Transfer฀of฀WIP฀to฀finished฀goods Observe whether฀cut-off฀procedures฀are฀being฀followed
 Sale/dispatch฀of฀finished฀goods during฀count.
Purchase฀invoices should฀only฀be Discuss procedures฀with฀management.
recorded฀as฀liabilities฀if฀goods฀were
received฀prior฀to฀the฀inventory฀count.
Invoices฀for฀goods฀despatched after฀the Cut-off฀procedures฀at฀final฀audit
inventory฀count฀should฀not฀appear฀in฀the Match goods฀received฀notes฀with฀purchase฀invoices฀and
statement฀of฀profit฀or฀loss฀for฀the฀year. goods฀despatched฀notes฀with฀sales฀invoices฀and฀ensure฀all
There฀are฀usually฀fewer฀problems฀with in฀the฀correct฀period. Match฀materials฀requisitions฀with฀work
sales฀cut-off฀than฀purchase฀cut-off. in฀progress฀figures฀to฀ensure฀cut-off฀correct.

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The฀inventory Cut-off Valuation

count

Remember: inventories฀should฀be฀valued฀at฀the฀lower฀of฀cost฀and฀net฀realisable฀value.

Original฀cost Production฀cost฀ NRV฀

(All฀types฀of฀inventories)฀ (WIP฀and฀FG) (All฀types฀of฀inventories)
The฀various฀methods฀of฀valuing Cost฀is฀the฀cost฀of฀purchase฀+ Auditors฀should฀compare฀cost/
inventories were฀outlined฀earlier. cost฀of฀conversion NRV. NRV฀is฀likely฀to฀be฀lower
The฀auditors฀must฀ensure฀that The฀auditors฀may฀be฀able฀to฀use than฀cost where:
the฀method is฀allowed under analytical฀procedures to฀assess  Costs฀increasing
law฀and฀standards,฀consistent, the฀costs฀of฀conversion.  Inventories deteriorated
calculated฀correctly.  Inventories obsolete
Material: verify฀to฀invoices฀and
Actual฀costs can฀be฀checked฀by price฀lists.  Marketing฀strategy฀dictates
referring฀to฀supplier฀invoices.  Errors฀made
Labour: verify฀to฀wage
The฀auditor฀should฀bear฀in฀mind records/time฀summaries. The฀auditors฀should฀follow฀up
the฀age of฀inventories when obsolete items and฀review
considering฀cost. Overheads: allocation฀consistent prices and฀strategies.
and฀based฀on฀normal฀production.

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Notes

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14: Receivables

Topic฀List Receivables฀can฀be฀a฀significant฀asset฀on฀the฀statement
of฀financial฀position. Customers฀are฀third฀parties฀to฀the
business,฀so฀represent฀an฀important฀source฀of฀evidence
to฀auditors. The฀circularisation฀of฀receivables฀provides
Introduction good฀evidence฀about฀the฀existence฀of฀year-end
receivables. Other฀audit฀evidence฀comes฀from฀cut-off
Receivables testing,฀analytical฀procedures฀and฀the฀review฀of฀after-date
cash.

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Introduction Receivables

Sales  Confirm฀goods฀in
inventory฀are฀not
Receivables฀will฀often฀be฀tested฀in฀conjunction฀with฀sales.
also฀treated฀as
sales฀in฀the฀year.
Completeness฀and฀ Accuracy
occurrence Check: Sales฀cut-off
 Pricing/additions฀on Review฀goods฀dispatched฀and฀returns
Analytical฀procedures฀are฀likely฀to invoices inward฀around฀the฀year-end฀to฀ensure:
be฀important.  Discounts฀properly  Invoices/credit฀notes฀dated฀in฀the
Consider: calculated same฀period
 Level฀of฀sales,฀year฀on฀year  Sales฀tax฀added฀correctly  Invoices/credit฀notes฀posted฀to฀the
 Effect฀of฀changing฀quantities฀sold  Casts฀in฀sales฀ledger sales฀ledger฀in฀the฀same฀period
 Effect฀of฀changing฀prices  Control฀account Review฀the฀sales฀ledger฀control
 Levels฀of฀goods฀returned/ reconciliation account฀for฀unusual฀items฀near฀the
discounts Also,฀trace฀debits฀in฀sales year-end฀and฀review฀material฀after-
ledger฀to฀credit฀notes. date฀invoices฀and฀credit฀notes฀to฀see
 Efficiency฀of฀labour/sales
if฀in฀correct฀period.

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Introduction Receivables

Receivables’ listing/age฀analysis Circularisation

Much฀of฀the฀detailed฀work฀will฀be฀carried฀out฀on฀a฀sample Verification฀of฀trade฀receivables฀by฀direct
of฀receivables’ balances chosen฀from฀a฀list฀of฀sales circularisation฀is฀the฀normal฀method฀of฀getting฀audit
ledger฀balances. Ideally,฀this฀will฀be฀aged,฀showing evidence฀to฀check฀the฀existence and฀rights฀and
amounts฀owed฀and฀from฀when฀they฀are฀owed. The obligations of฀trade฀receivables. ISA฀505฀External
following฀work฀should฀be฀done฀(completeness/cut-off). confirmations฀provides฀guidance.

Audit฀work฀on฀receivables Positive฀circularisation: customer฀is฀requested

Reconcile฀balances฀from฀sales฀ledger฀to฀list฀of to฀confirm฀the฀accuracy฀of฀the฀balance฀shown฀or
balances฀and฀vice฀versa. state฀in฀what฀respect฀he฀is฀in฀disagreement
Reconcile฀the฀total฀of฀the฀list฀to฀the฀sales฀ledger (preferable฀method).
control฀account. Negative฀circularisation: customer฀is฀requested
Cast฀the฀list฀of฀balances฀to฀ensure฀it฀is฀correct. only฀to฀reply฀if฀the฀amount฀is฀disputed.
Confirm฀whether฀the฀list฀reconciles฀to฀the฀sales
ledger฀control฀account.

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Introduction Receivables

Auditors฀must฀maintain฀control฀over฀the฀preparation฀and฀dispatch฀of฀confirmation฀letters.
Sample฀selection Follow฀up,฀where:
 Customers฀disagree฀with฀the฀balance
Special฀attention฀to:  Customers฀do฀not฀respond฀(positive฀method฀only)
 Old unpaid฀accounts Reasons฀for฀disagreements: disputes,฀cut฀off฀problems,฀receipt฀sent
 Accounts฀written-off in before฀year-end฀but฀received฀afterwards,฀mis-posting,฀customers฀netting
period off฀credits฀and฀debits,฀teeming฀and฀lading฀frauds. The฀auditors฀should
 Accounts฀with฀credit investigate the฀reasons฀for฀disagreement.
balances Alternative฀procedures (where฀no฀response฀arrives):
 Accounts฀settled฀by
Second (and฀third)฀requests฀should฀be฀sent฀to฀the฀customer฀in฀the฀first
round฀sum฀payments
instance. Then฀the฀auditors฀should฀involve฀the฀credit฀controller฀to฀chase
Do฀not฀overlook: the฀debt,฀and฀do฀other฀tests.
 Nil฀balances
Auditor฀may฀check฀the฀receipt฀of฀cash฀after฀date,฀verify฀purchase฀orders,
 Accounts฀paid฀by฀the and฀test฀the฀company’s฀control฀over฀bad฀debts฀(see฀below).
time฀of฀the฀audit฀

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Irrecoverable฀debts Procedures
A฀test฀of฀the฀valuation฀of Confirm฀adequacy฀of฀allowance฀by฀reviewing฀customer correspondence/
trade฀receivables฀in฀the discussion฀with฀the฀credit฀controller.
statement฀of฀financial Examine฀customer฀files฀for฀overdue฀debts฀and฀consider฀whether฀allowance฀is
position. A฀significant sufficient.
test฀is฀reviewing฀all฀the
cash฀received฀after Review฀correspondence฀with฀solicitors in฀case฀legal฀action฀is฀being฀taken฀to
date (which฀gives enforce฀debts.
evidence฀on฀the Examine฀credit฀notes issued฀after฀the฀year-end฀and฀ensure฀those฀relating฀to
collectability of฀debts). invoices฀in฀the฀relevant฀period฀have฀been฀allowed฀for.
Investigate฀all฀unusual฀items in฀the฀sales฀ledger,฀for฀example,฀credit฀balances.

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Notes

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15: Cash฀and฀bank

Topic฀List The฀bank฀reconciliation฀and฀bank฀confirmation฀letter฀are
key฀parts฀of฀audit฀testing฀on฀bank. The฀direct฀confirmation
from฀the฀bank฀represents฀good฀audit฀evidence. Auditors
should฀be฀aware฀of฀the฀practice฀of฀‘window-dressing’ if
Bank clients฀have฀liquidity฀problems.
Cash This฀area฀of฀the฀syllabus฀is฀likely฀to฀appear฀in฀a฀short
knowledge-based฀question,฀perhaps฀on฀the฀bank
confirmation฀letter฀or฀in฀relation฀to฀the฀financial฀statement
assertions.

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Bank Cash

The฀audit฀of฀bank฀and฀cash฀will฀need฀to฀cover Procedures
completeness, existence, rights฀and฀obligations,
accuracy,฀valuation฀and฀allocation฀and฀presentation.
 Obtain฀bank฀confirmations
All฀these฀elements฀can฀be฀audited฀through฀the฀bank
letter (example฀below). This฀is฀a฀standard  Check฀the฀maths฀of฀the฀bank฀reconciliation
document.  Trace฀cheques฀shown฀as฀outstanding฀to฀the
after฀date฀bank฀statements
Banks฀will฀require:
 Trace฀receipts฀shown฀as฀outstanding฀to฀after
 Explicit฀written฀authority฀from฀client date฀bank฀statements
 Auditors’ request฀must฀refer฀to฀it  Review฀previous฀bank฀reconciliation฀to฀ensure
 Request฀must฀reach฀the฀bank฀one฀month฀before all฀amounts฀are฀cleared
the฀year-end  Obtain฀explanations฀for฀items฀in฀bank
Guidance฀is฀provided฀by: statements,฀not฀cash฀book฀and฀vice฀versa
 ISA฀505฀External฀confirmations  Verify฀balances฀on฀reconciliation฀to฀bank฀letter
and฀cash฀book
 Scrutinise฀the฀cash฀book฀for฀unusual฀items

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Bank Cash

If฀cash฀balances฀at฀the฀client฀are฀material,฀then฀the฀auditor฀may฀decide฀to฀attend฀a฀cash฀count.

Planning After฀the฀cash฀count
Document฀on฀file: the฀time฀and฀location฀of฀the฀count, Ensure฀that฀certificates฀of฀cash฀in฀hand฀are
who฀is฀to฀be฀present฀(audit฀and฀client฀staff). Inspect obtained฀as฀appropriate.
the฀cash฀book฀to฀ensure฀it฀is฀written฀up฀to฀date฀and฀in
Ensure฀unbanked฀cheques฀are฀subsequently
ink.
banked/agree฀to฀bank฀reconciliation.

During฀the฀cash฀count Ensure฀IOUs฀have฀been฀reimbursed.

Count฀cash฀balances฀held฀in฀front฀of฀official Ensure฀IOUs/cashed฀cheques฀outstanding฀for
responsible. (The฀auditor฀should฀never฀be฀left฀alone too฀long฀have฀been฀provided฀for.
with฀the฀cash.) Ensure฀all฀balances฀counted฀are฀reflected฀in฀the
Enquire฀into฀any฀IOUs. accounts.
Confirm฀cash฀balances฀agree฀with฀the฀FS.

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Notes

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16: Liabilities, capital฀and฀directors’ emoluments

Topic฀List This฀chapter฀covers฀a฀number฀of฀liabilities฀which฀a
company฀might฀have. The฀auditor฀must฀consider฀the
possibly฀of฀understatement฀of฀liabilities,฀particularly฀if฀the
Trade฀accounts฀payable฀and฀purchases client฀has฀liquidity฀problems,฀or฀is฀seeking฀further฀credit
from฀the฀bank,฀for฀example.
Accruals
Suppliers฀and฀lenders฀are฀a฀good฀source฀of฀external
Long-term฀liabilities evidence. Auditors฀may฀also฀test฀purchases฀by฀analytical
Provisions฀and฀contingencies review.

Capital฀and฀directors’ emoluments Capital฀and฀directors’ emoluments฀are฀also฀covered฀in

this฀chapter.

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Trade฀accounts Accruals Long-term Provisions฀and Capital฀and

payable฀and฀purchases liabilities contingencies directors’ emoluments

Auditors฀should฀be฀aware฀of฀the฀possibility฀of฀understatement฀of฀payables.

There฀are฀two฀detailed฀objectives with฀regard฀to฀trade฀accounts฀payable:
 Is฀cut-off฀correct฀between฀goods฀received฀and฀invoices฀received?
 Do฀trade฀accounts฀payable฀represent฀the฀bona฀fide amounts฀due฀by฀the฀company?

Trade฀accounts฀payable฀listing Completeness, rights฀and฀obligations, existence

The฀key฀test฀is฀a฀comparison฀of฀supplier฀statements฀with฀the฀purchase
 Confirm฀that฀the฀listing฀has฀been ledger฀balances. Supplier฀statements฀are฀third฀party฀evidence.
extracted฀correctly฀from฀the However,฀it฀is฀sometimes฀necessary฀to฀circularise฀suppliers.
purchase฀ledger Examples฀of฀such฀situations฀are:
 Reconcile฀the฀total฀with฀the  Supplier฀statements฀are฀unavailable/incomplete.
purchase฀ledger฀control฀account  Internal฀controls฀are฀weak฀and฀material฀misstatement฀of฀liabilities
is฀feared฀as฀a฀consequence.
 Recast฀the฀list฀of฀balances
 Suspicion฀that฀client฀is฀understating฀deliberately.

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Purchases฀and฀expenses
Occurrence/completeness Cut-off฀(completeness)
Analytical฀procedures are฀important. Consider: Ensure฀goods฀from฀the฀last฀goods฀received฀note
 Level฀of฀purchases/expenses฀month฀by฀month (from฀inventory฀count)฀are฀included฀in฀the฀ledger฀or
list฀of฀accruals.
 Effect฀of฀quantities฀purchased
 Effect฀of฀changing฀prices Review฀the฀schedule฀of฀accruals to฀check฀that
goods฀received฀after฀the฀year-end฀are฀not฀included.
 Ratio฀of฀purchases฀to฀trade฀payables
 Ratio฀of฀trade฀creditors฀to฀inventory Review฀invoices฀and฀credit฀notes after฀the฀year-
end฀to฀ensure฀that฀those฀relating฀to฀prior฀year฀are
Additional฀tests฀include฀tracing฀purchases฀and฀other
included.
expenses฀from฀the฀nominal฀ledger฀to฀the฀purchase
ledger฀and฀invoices. Are฀they฀valid฀for฀the Reconcile฀batch฀postings฀around฀the฀year-end,฀to
company/authorised? ensure฀that฀invoices฀are฀posted฀in฀the฀correct
period.

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Trade฀accounts Accruals Long-term Provisions฀and Capital฀and

payable฀and฀purchases liabilities contingencies directors’ emoluments

As฀a฀general฀rule,฀accruals฀lend฀themselves฀to฀being฀audited฀by฀analytical฀review฀as฀they฀should฀be฀comparable
to฀prior฀years. Other฀substantive฀procedures฀are฀noted฀here.

General฀accruals Tax฀accruals Wages฀and฀salaries

(completeness฀and฀valuation) (completeness฀and฀valuation) (completeness฀and฀valuation)
Recalculate฀accruals฀and฀trace Income฀tax: Agree฀to฀the Analytical฀procedures will฀give
back฀to฀supporting฀documentation. previous฀period’s฀tax some฀assurance฀on฀pay
change/credits,฀the฀current liabilities. However,฀auditors฀may
Review฀ledger฀accounts฀to฀ensure also฀carry฀out฀tests฀such฀as:
period’s฀tax฀change,฀and
all฀accruals฀have฀been฀included. agreeing฀remuneration฀per
amount฀paid฀to฀the฀tax
Scrutinise฀post฀year-end฀payments authority. payroll฀to฀personnel฀records,
to฀see฀if฀any฀should฀have฀been confirm฀existence฀of฀employees
Sales฀tax: Assess by฀meeting฀them,฀re-perform
accrued.
reasonableness฀to฀next฀return. calculations฀on฀the฀payroll,฀agree
Consider฀basis฀for฀round฀sum Verify฀amount฀paid฀in฀year฀to validity฀of฀deductions฀to
accruals฀(comparable฀to฀last฀year?). cashbook. supporting฀documentation,
confirm฀net฀pay฀to฀bank.

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Trade฀accounts Accruals Long-term Provisions฀and Capital฀and

payable฀and฀purchases liabilities contingencies directors’ emoluments

Long-term฀liabilities฀are฀those฀due฀after฀more Audit฀procedures
than฀one฀year. Usually฀they฀are฀debentures,฀loan
stock฀and฀bank฀loans.  Obtain/prepare฀a฀schedule฀of฀loans
 Agree฀opening฀balances฀to฀prior฀year฀and฀recast
The฀key฀financial฀statement฀assertions฀are:  Compare฀the฀balances฀to฀the฀general฀ledger
 Completeness: whether฀all฀long-term฀liabilities  Verify฀lenders฀to฀any฀register฀of฀lenders฀
have฀been฀disclosed (eg฀debenture฀holders)
 Accuracy, valuation฀and฀allocation: whether  Trace฀additions฀and฀repayments฀to฀cash฀book
interest฀payable฀has฀been฀calculated฀correctly  Confirm฀repayment฀conforms฀to฀agreement
and฀included฀in฀the฀right฀period
 Verify฀borrowing฀limits฀per฀the฀articles฀are฀not
 Presentation: whether฀long-term฀loans฀are exceeded
correctly฀disclosed
 Obtain฀direct฀confirmation฀from฀lenders
 Review฀minutes฀and฀cash฀book฀to฀ensure฀that
all฀loans฀have฀been฀included

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Trade฀accounts Accruals Long-term Provisions฀and Capital฀and

payable฀and฀purchases liabilities contingencies directors’ emoluments

Provisions฀and฀contingencies
A฀provision฀is฀a฀liability฀of฀uncertain฀timing฀or฀amount. A฀liability฀is฀a฀present฀obligation฀arising฀from฀past
events,฀resulting฀in฀an฀outflow฀of฀resources.

A฀contingent฀asset/liability฀is฀a฀possible฀asset/liability฀arising฀from฀past฀events฀whose฀existence฀will฀be
confirmed฀only฀by฀the฀occurrence฀of฀one฀of฀more฀uncertain฀future฀events฀not฀wholly฀within฀the฀entity’s฀control,
or฀(liability)฀a฀present฀obligation฀that฀arises฀from฀past฀events฀but฀is฀not฀probable฀that฀a฀transfer฀of฀economic
benefits฀will฀be฀required,฀or฀the฀amount฀cannot฀be฀measured฀with฀reasonable฀certainty.

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Auditing฀provisions/contingencies

 Obtain฀details฀of฀provisions/contingencies
 Review฀correspondence
 Discuss฀with฀directors
 Ascertain฀whether฀payments฀have฀been฀made฀in฀respect฀of฀provisions฀in฀the฀subsequent฀events฀period
 Review฀correspondence฀with฀solicitors฀pre฀and฀post฀year-end
 Consider฀past฀provisions฀–฀were฀they฀subsequently฀required?
 Recalculate฀all฀the฀provisions฀to฀ensure฀correct
 Ensure฀disclosures฀made฀about฀contingencies฀are฀complete฀and฀accurate
 Consider฀the฀nature฀of฀the฀client’s฀business฀(would฀you฀expect฀to฀see฀other฀provisions฀–฀for฀example,฀for
warranties?)

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Trade฀accounts Accruals Long-term Provisions฀and Capital฀and

payable฀and฀purchases liabilities contingencies directors’ emoluments

Share฀(equity)฀capital
Auditors฀should฀ensure฀that฀the฀directors฀have฀observed฀their฀legal฀duties฀in฀regard฀to฀share฀capital฀and
reserves฀(for฀example,฀not฀distributed฀undistributable฀reserves).
 Agree฀authorised฀share฀capital฀to฀the฀memorandum฀
 Verify฀share฀transfer฀details฀and฀cash฀payments฀to฀cash฀book฀
 Agree฀dividends฀paid฀to฀cash฀book฀and฀to฀the฀minutes฀of฀the฀AGM฀where฀the฀dividend฀was฀proposed
 Check฀calculation฀of฀movement฀on฀reserves

Directors’ emoluments
Auditors฀should฀ensure฀the฀disclosure฀of฀directors฀emoluments฀is฀complete,฀accurate฀and฀compliant฀with
applicable฀accounting฀standards฀and฀local฀legislation.
 Agree฀details฀to฀payroll฀records
 Review฀directors’ contracts
 Review฀minutes฀of฀board฀meetings

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17: Not-for-profit฀organisations

Topic฀List External฀and฀internal฀auditors฀might฀both฀have฀to฀carry฀out
work฀in฀not-for-profit฀organisations. This฀chapter฀points฀out
some฀special฀considerations฀when฀auditing฀such฀entities.
Not-for-profit฀organisations The฀auditing฀methods฀you฀have฀learned฀in฀the฀rest฀of฀your
Risk฀areas studies฀are฀still฀relevant฀to฀these฀types฀of฀audits: these฀are
additional considerations.
Audit฀evidence

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Not-for-profit Risk฀areas Audit฀evidence

organisations

Examples฀of฀NFPOs
A฀charity฀is฀a฀common฀form฀of฀not-for-profit฀organisation.
A฀charity฀is฀any฀institution฀established฀for฀charitable฀purposes฀and฀subject฀to฀the฀control฀of฀the฀law฀as฀such.
Charitable฀purposes฀includes:
 Relief฀of฀poverty  Advancement฀of฀religion
 Advancement฀of฀education  Purposes฀to฀benefit฀community
Accounts฀may฀include:
 Statement฀of฀financial฀activities฀(SOFA)฀
 In฀some฀cases฀a฀summary฀income฀and฀expenditure฀account
 Statement฀of฀financial฀position฀showing฀the฀assets,฀liabilities฀and฀funds฀of฀the฀charity
 Statement฀of฀cash฀flows฀(where฀required)฀and฀notes
 Auditors฀report฀on฀the฀truth฀and฀fairness฀of฀the฀FS
 Purposes฀to฀benefit฀community

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Examples฀of฀NFPOs฀(continued)
Other฀NFPOs฀include:
 Tax฀payer฀funded฀organisations฀eg
– Hospitals
– Schools
– Public฀services
– Local฀councils
 Clubs฀and฀associations
 Friendly฀societies
Regulatory฀requirements฀may฀mean฀the฀scope฀of฀the฀auditor’s฀work฀is฀increased฀and฀there฀may฀be฀additional
reporting฀requirements฀(eg฀disclosure฀of฀non-compliance฀with฀entity฀specific฀laws). However฀the฀audit฀is฀still
carried฀out฀in฀accordance฀with฀ISAs.

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Not-for-profit Risk฀areas Audit฀evidence

organisations

Problem฀areas Planning Inherent฀risk

Factors฀include: complexity/extent฀of
 Donations (not฀supported฀by Auditors฀should฀consider: regulation,฀significance฀of฀donations฀and
invoice/equivalent  The฀scope of฀the฀audit cash฀receipts,฀lack฀of฀predictable
documentation) income,฀restricted฀funds,฀restrictions
 Recommendations฀of imposed฀by฀governing฀documents฀or฀the
 Legacies (income฀recognition) regulators
 Government฀funding or government,฀tax฀rules,฀sensitivity฀of฀key
 Accounting฀policies statistics,฀balance฀of฀maintaining
grants (often฀subject฀to
conditions)  Changes฀in฀the฀sector in resources/building฀up฀funds.
which฀the฀NFPO฀operates
 Restricted฀funds (uses฀are
restricted฀as฀per  Past฀experience of฀the
Control฀risk
deed/benefactor) system Factors฀include: time฀committed฀and
Key฀audit฀areas degree฀of฀involvement฀by฀trustees,฀skills
 Grants฀to฀beneficiaries฀(must 
be฀bona฀fide) of฀trustees,฀independence฀of฀trustees
 Detail in฀FS฀on฀which from฀each฀other,฀division฀of฀duties.
 Branches (charities’ SORP auditors฀report
requires฀inclusions฀in฀main Control฀environment: segregation฀of
 Risk duties฀a฀very฀key฀area฀in฀small฀NFPOs.
accounts)

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Internal฀controls Example
Controls฀over฀cash฀donations
Problems฀can฀include:
Source Examples฀of฀controls
 Lack฀of฀segregation฀of฀duties Collecting  Numerical฀control฀over฀boxes฀and฀tins
 Use฀of฀unqualified฀staff boxes฀and  Satisfactory฀sealing฀of฀boxes฀and฀tins฀so฀that
tins any฀opening฀prior฀to฀recording฀cash฀is฀apparent
 Regular฀collecting฀and฀recording฀of฀proceeds
 Dual฀control฀over฀counting฀and฀recording฀of฀proceeds
 Postal฀receipts
Postal  Unopened฀mail฀kept฀securely
receipts  Dual฀control฀over฀the฀opening฀of฀mail
 Immediate฀recording฀of฀donations฀on฀opening฀of฀
mail฀or฀receipt
 Agreement฀of฀bank฀paying-in฀slips฀to฀record฀of฀
receipts฀by฀an฀independent฀person

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Not-for-profit Risk฀areas Audit฀evidence

organisations

Audit฀evidence Reporting
The฀form฀of฀the฀auditor’s฀report฀is฀dictated฀by฀the
 Consider฀understatement/incompleteness in NFPO’s฀applicable฀legislation฀or฀charity’s
income constitution฀but฀it฀should฀conform฀to฀ISA฀700
 Overstatement฀of฀grants฀or฀assets criteria. The฀financial฀statements฀should฀have฀been
 Misanalysis฀or฀misuse฀of฀funds prepared฀in฀accordance฀with฀any฀additional
 Misstatement฀of฀assets฀like฀donated฀properties statutory฀requirements฀or฀specific฀guidance
 Existence฀of฀restricted฀funds฀in฀foreign฀branches applicable฀to฀the฀NFPO. That฀fact฀should฀be
referred฀to฀in฀the฀auditor’s฀report.
Overall฀view Where฀NFPOs฀are฀not฀governed฀by฀statute,฀the
auditor’s฀report฀will฀depend฀upon฀the฀scope฀of฀the
Consider฀if฀accounting฀policies฀are฀appropriate. assignment.
Analytical฀procedures฀might฀be฀restricted฀due฀to
lack฀of฀predictable฀income฀etc,฀but฀NFPOs฀should
have฀budget฀or฀strategy฀information฀available.

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18: Audit฀review฀and฀finalisation

Topic฀List In฀this฀chapter฀we฀discuss฀subsequent฀events฀and฀the
significance฀of฀the฀going฀concern฀concept฀and฀the
importance฀of฀the฀auditor’s฀going฀concern฀review. If฀the
Subsequent฀events going฀concern฀basis฀is฀not฀appropriate,฀the฀financial
statements฀will฀be฀materially฀affected.
Going฀concern
We฀also฀discuss฀the฀need฀for฀written฀representations฀as
Written฀representations audit฀evidence฀and฀the฀importance฀of฀the฀overall฀review
Overall฀review฀of฀financial฀statements of฀the฀financial฀statements.

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Subsequent฀events฀are฀events฀occurring฀between฀the฀date฀of฀the฀financial฀statements฀and฀the฀date฀of฀the
auditor’s฀report,฀and฀facts฀that฀become฀known฀to฀the฀auditor฀after฀the฀date฀of฀the฀auditor’s฀report. There฀are฀two
types,฀those฀that฀provide฀evidence฀of฀conditions฀that฀existed฀at฀the฀period-end฀(adjusting฀events)฀and฀those
that฀are฀indicative฀of฀conditions฀that฀arose฀subsequent฀to฀the฀period-end฀(non-adjusting฀events).

ISA฀560฀Subsequent฀events฀provides฀guidance฀in฀this฀area.

Prior฀to฀the฀auditor’s฀report฀being฀signed Examples: inquiries฀of฀management

Auditors฀shall฀carry฀out฀audit฀procedures฀to฀obtain
evidence฀about฀subsequent฀events,฀including:  Status฀of฀items฀involving฀subjective฀data฀included
in฀the฀FS
Audit฀procedures  New฀commitments,฀borrowings,฀guarantees
 Sales฀or฀destruction฀of฀assets
 Inquiries฀of฀management  Issue฀of฀shares฀or฀debentures
 Reading฀minutes฀of฀meetings฀of฀those  Unusual฀accounting฀adjustments
charged฀with฀governance  Litigations฀or฀claims
 Reviewing฀most฀recent฀financial฀information
 Major฀events
 Written฀representations

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After฀the฀auditor’s฀report฀has฀been฀signed
The฀auditors฀do฀not have฀any฀obligation฀to฀perform฀procedures,฀or฀make฀inquiries฀after the฀date฀of฀their฀report.

Before฀issued฀to฀members After฀issue฀

 Discuss฀with฀management฀and฀those฀charged  Discuss฀with฀management฀and฀those฀charged
with฀governance with฀governance
 Determine฀if฀FS฀need฀amending  Determine฀if฀FS฀need฀amending
 If฀not฀amended฀and฀auditor’s฀report฀not฀issued,  Review฀management’s฀procedures฀to฀inform
modify฀opinion readers
 If฀not฀amended฀and฀auditor’s฀report฀issued,  Issue฀new฀auditor’s฀report฀with฀emphasis฀of
prevent฀reliance฀on฀report matter฀paragraph
 If฀steps฀not฀taken,฀prevent฀reliance฀on฀report

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Going฀concern฀assumption: an฀entity฀is฀ordinarily฀viewed฀as฀continuing฀in฀business฀for฀the฀foreseeable฀future.

ISA฀570฀Going฀concern gives฀guidance.

Auditor฀responsibilities
The฀ auditors฀ are฀ responsible฀ for฀ obtaining฀ sufficient฀ appropriate฀ audit฀ evidence฀ about฀ the฀ appropriateness฀ of
management’s฀ use฀ of฀ the฀ going฀ concern฀ assumption,฀ and฀ for฀ considering฀ whether฀ there฀ is฀ a฀ material
uncertainty฀in฀relation฀to฀going฀concern.
Planning฀and฀risk฀assessment
When฀performing฀risk฀assessment฀procedures,฀the฀auditor฀shall฀consider฀whether฀anything฀casts฀doubt฀on฀the
entity’s฀going฀concern฀status. If฀management฀has฀undertaken฀a฀preliminary฀assessment฀of฀going฀concern,฀the
auditor฀shall฀discuss฀it฀with฀management. If฀no฀assessment฀has฀been฀done฀yet,฀the฀auditor฀shall฀discuss฀with
management฀ the฀ basis฀ for฀ the฀ intended฀ use฀ of฀ the฀ going฀ concern฀ assumption. The฀ auditor฀ shall฀ remain฀ alert
throughout฀the฀audit฀for฀evidence฀of฀conditions฀or฀events฀that฀may฀cast฀doubt฀on฀the฀entity’s฀ability฀to฀continue฀as
a฀going฀concern.

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Examples Evaluation
The฀auditors฀shall฀consider:
Financial  Process used฀by฀directors
 Net฀liabilities  Assumptions used
 Plans for฀future฀action
 Fixed฀term฀borrowing฀approaching฀maturity
without฀realistic฀prospect฀of฀renewal/repayment
 Negative฀operating฀cash฀flows Further฀procedures
 Adverse฀financial฀ratios
 Analyse฀and฀discuss฀cash฀flow/profit/other
 Substantial฀operation฀losses forecasts/interim฀financial฀information฀with
 Inability฀to฀pay฀creditors management
 Inability฀to฀finance฀new฀products
 Review฀the฀terms฀of฀debentures/loan฀
Operating agreements
 Loss฀of฀key฀management/markets/franchise  Read฀minutes฀of฀meetings,฀make฀inquiries฀of
 Labour฀difficulties/supply฀shortage lawyers฀regarding฀legal฀claims
 Confirm฀financial฀support฀from฀third฀parties,
Other
consider฀unfulfilled฀orders
 Major฀legal฀proceedings/non-compliance
 Uninsured฀catastrophes  Review฀events฀after฀the฀period-end

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Reporting
The฀following฀table฀summarises฀the฀possible฀scenarios฀that฀could฀arise฀following฀the฀auditor’s฀review฀of฀going
concern.
Scenario Impact฀on฀auditor’s฀report
Going฀concern฀assumption฀appropriate฀but฀material Unmodified฀opinion฀and฀material฀uncertainty฀related
uncertainty฀which฀is฀adequately฀disclosed to฀going฀concern฀paragraph
Going฀concern฀assumption฀appropriate฀but฀material Qualified฀or฀adverse฀opinion฀(ie฀modified)
uncertainty฀which฀is฀not฀adequately฀disclosed
Use฀of฀going฀concern฀assumption฀inappropriate Adverse฀opinion฀(ie฀modified)

Management฀unwilling฀to฀make฀or฀extend฀its Qualified฀or฀disclaimer฀of฀opinion฀(ie฀modified)
assessment

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Written฀representations฀are฀written฀statements฀by฀management฀provided฀to฀the฀auditor฀to฀confirm฀certain
matters฀or฀to฀support฀other฀audit฀evidence. They฀do฀not฀include฀the฀financial฀statements,฀assertions฀or
supporting฀books฀and฀records.

Auditors฀receive many฀representations from฀management฀during฀the฀course฀of฀an฀audit,฀and฀some฀may฀be

critical to฀obtaining฀sufficient฀appropriate฀audit฀evidence. An฀example,฀which฀the฀auditors฀must฀get,฀is
acknowledgement฀from฀the฀directors฀of฀their฀responsibility฀for฀the฀financial฀statements฀which฀the฀auditors฀have
audited.
Guidance฀is฀given฀in฀ISA฀580฀Written representations.

Written฀representations
 That฀management฀believes฀it฀has฀fulfilled฀the฀fundamental฀responsibilities฀that฀constitute฀the฀premise฀on
which฀an฀audit฀is฀conducted
 That฀management฀has฀provided฀the฀auditor฀with฀all฀relevant฀information฀agreed฀in฀the฀terms฀of฀the
engagement
 That฀supports฀other฀audit฀evidence฀if฀determined฀necessary฀by฀the฀auditor฀or฀if฀required฀by฀other฀ISAs

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Doubt฀about฀reliability Basic฀elements฀of฀a฀representation
letter
If฀representations฀are฀inconsistent฀with฀other
evidence,฀the฀auditor฀shall฀perform฀audit฀procedures
 Addressed฀to฀the฀auditors
to฀resolve฀the฀matter. If฀it฀cannot฀be฀resolved,฀the
auditor฀shall฀reconsider฀the฀assessment฀of฀the  Contains฀specified฀information
competence,฀integrity฀and฀ethical฀values฀of  Appropriately฀dated
management,฀the฀reliability฀of฀representations฀and  Approved฀by฀those฀with฀specific฀knowledge
evidence,฀and฀the฀impact฀on฀the฀auditor’s฀report.
 Signed฀by฀senior฀financial฀officer

Written฀representations฀not฀provided
The฀auditor฀shall฀discuss฀the฀matter฀with฀management,฀re-evaluate฀the฀integrity฀of฀management฀and฀take
appropriate฀action.

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Towards฀the฀end฀of฀their฀audit,฀the฀auditors฀should฀review Compliance฀with฀accounting
the฀financial฀statements฀to฀ensure฀that฀they฀are
reasonable,฀and฀consistent฀with฀evidence฀obtained,฀so
regulations
The฀auditors฀should฀examine฀the฀accounting
that฀they฀can฀draw฀a฀conclusion฀on฀truth฀and฀fairness. policies,฀considering: what฀policies฀are฀usually
adopted฀in฀the฀industry,฀whether฀there฀is
substantial฀authoritative฀support฀for฀the฀policy,
whether฀departures฀are฀necessary฀for฀a฀true฀and
Review฀for฀consistency฀and฀reasonableness fair฀view,฀whether฀the฀FS฀reflect฀the฀substance฀of
the฀underlying฀transactions.
1 Do฀FS฀adequately฀reflect฀explanations received? Some฀accounting฀standards฀allow฀a฀choice฀of
2 methods,฀which฀often฀have฀a฀material฀effect.
Are฀there฀any฀new฀factors in฀presentation?
3 Do฀analytical฀procedures produce฀expected฀results?
4 Has฀the฀presentation been฀unduly฀affected฀by฀directors’ wishes?
5 What฀is฀the฀potential฀impact฀of฀uncorrected฀misstatements?

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Subsequent Going Written Overall฀review฀of

events concern representations financial฀statements

Treatment฀of฀misstatements
A฀misstatement is฀a฀difference฀between฀the฀amount,฀classification,฀presentation฀or฀disclosure฀of฀a฀reported
financial฀statement฀and฀the฀amount,฀classification,฀presentation฀or฀disclosure฀that฀is฀required฀for฀the฀item฀to฀be
in฀accordance฀with฀the฀applicable฀financial฀reporting฀framework.
An฀uncorrected฀misstatement is฀a฀misstatement฀accumulated฀during฀the฀audit฀which฀has฀not฀been฀corrected.

ISA฀450฀Evaluation฀of฀misstatements฀identified฀during฀the฀audit provides฀guidance.
Types฀of฀misstatements ISA฀450
The฀auditor฀must฀communicate฀all฀misstatements฀accumulated
during฀the฀audit฀to฀the฀appropriate฀level฀of฀management฀on฀a
 Factual฀(no฀doubt) timely฀basis฀and฀request฀them฀to฀be฀corrected.
 Judgemental฀(management’s฀judgement The฀auditor฀must฀obtain฀a฀written฀representation฀that
concerning฀accounting฀estimates฀or management฀believes฀the฀effects฀of฀uncorrected
accounting฀policies) misstatements฀are฀immaterial฀to฀the฀financial฀statements฀as
 Projected฀(auditor’s฀best฀estimate) whole.

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19: Reports

Topic฀List In฀the฀exam฀you฀may฀be฀required฀to:
 Identify฀and/or฀describe฀how฀a฀particular฀modification
affects฀the฀auditor’s฀report
Auditor’s฀report  Comment฀on฀extracts฀from฀auditor’s฀reports
Other฀information You฀should฀also฀be฀comfortable฀with฀the฀report฀to
management฀as฀you฀may฀be฀required฀to฀draft฀extracts฀of
The฀report฀to฀management
the฀report฀for฀a฀particular฀scenario฀in฀the฀exam.

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Auditor’s Other The฀report฀to

report information management

Basic฀elements฀of฀auditor’s฀report Basic฀elements฀of฀auditor’s฀report

 Title  Other฀information฀(where฀applicable)
 Addressee  Responsibilities฀for฀the฀financial฀statements
 Opinion฀paragraph  Auditor's฀responsibilities
 Basis฀for฀opinion  Other฀reporting฀responsibilities฀(if฀applicable)
 Going฀concern฀(where฀applicable)  Auditor’s฀signature
 Key฀audit฀matters฀(for฀listed฀companies฀or  Date฀of฀the฀auditor’s฀report
where฀ISA฀701฀is฀adopted)  Auditor’s฀address

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In฀an฀auditor’s฀report฀with฀an฀unmodified opinion,฀the฀auditor฀concludes฀that฀the฀financial฀statements฀are
prepared,฀in฀all฀material฀respects,฀in฀accordance฀with฀the฀applicable฀financial฀reporting฀framework.

In฀our฀opinion,฀the฀financial฀statements฀present฀fairly,฀in฀all฀material฀respects,฀(or฀give฀a฀true฀and฀fair฀view฀of)
the฀financial฀position฀of฀ABC฀Company฀as฀of฀December฀31,฀20X1,฀and฀(of)฀its฀financial฀performance฀and฀its
cash฀flows฀for฀the฀year฀ended฀in฀accordance฀with฀International฀Financial฀Reporting฀Standards.

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Auditor’s Other The฀report฀to

report information management

Modifications฀to฀the฀opinion฀in฀the฀auditor’s฀report
ISA฀705฀Modifications฀to฀the฀opinion฀in฀the฀independent฀auditor’s฀report฀deals฀with฀situations฀where฀the฀auditor
cannot฀issue฀an฀unmodified฀opinion.
There฀are฀two฀circumstances฀under฀which฀the฀auditor’s฀opinion฀will฀be฀modified.
1 The฀auditor฀concludes฀that฀the฀financial฀statements฀as฀a฀whole฀are฀not฀free฀from฀material฀misstatement
(qualified฀opinion฀or฀adverse฀opinion).
2 The฀auditor฀is฀unable฀to฀obtain฀sufficient฀appropriate฀audit฀evidence to฀conclude฀that฀the฀financial
statements฀as฀a฀whole฀are฀free฀from฀material฀misstatement฀(qualified฀opinion฀or฀disclaimer฀of฀opinion).

Exam฀focus
For฀a฀matter฀to฀affect฀the฀auditor’s฀opinion฀it฀must฀be฀material to฀the฀financial฀statements.

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Emphasis฀of฀matter฀paragraphs฀and฀other฀matter฀paragraphs
An฀emphasis฀of฀matter฀paragraph is฀included฀in฀the฀auditor’s฀report฀to฀refer฀to฀a฀matter฀already฀appropriately
presented฀or฀disclosed฀in฀the฀financial฀statements฀which฀is฀of฀such฀importance฀that฀it฀is฀fundamental฀to฀users’
understanding฀of฀the฀financial฀statements.

Emphasis฀of฀matter฀paragraphs฀– An฀other฀matter฀paragraph is฀included฀in฀the฀auditor’s

examples report฀to฀refer฀to฀a฀matter฀other฀than฀those฀presented฀or
disclosed฀which฀is฀relevant฀to฀users’ understanding,฀or
 Uncertainty฀relating฀to฀future฀outcome฀of the฀auditor’s฀responsibilities.
exceptional฀litigation฀or฀regulatory฀action
 Early฀application฀of฀a฀new฀accounting
standard฀that฀has฀a฀pervasive฀effect ISA฀706฀Emphasis฀of฀matter฀paragraphs฀and฀other
 Major฀catastrophe฀that฀has฀a฀significant matter฀paragraphs฀in฀the฀independent฀auditor’s฀report
effect฀on฀financial฀position provides฀guidance.

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Auditor’s Other The฀report฀to

report information management

Other฀information฀is฀financial฀and฀non-financial฀information฀(other฀than฀the฀financial฀statements฀and฀the
auditor's฀report฀thereon)฀included฀in฀an฀entity’s฀annual฀report.

ISA฀720฀The฀auditor’s฀responsibilities฀relating฀to฀other฀information฀in฀documents฀containing฀audited฀financial
statements฀provides฀guidance.
Examples฀of฀other฀information

Other฀information  Report฀by฀management฀on฀operations
Auditors฀shall฀review฀the฀other฀information฀for  Financial฀summaries฀or฀highlights
material inconsistencies. These฀may฀impact฀on  Employment฀data
the฀auditor’s฀opinion฀on฀the฀financial฀statements.  Planned฀capital฀expenditures
 Financial฀ratios
 Names฀of฀officers฀and฀directors
 Selected฀quarterly฀data

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Auditor’s Other The฀report฀to

report information management

ISA฀265฀Communicating฀deficiencies฀in฀internal฀control฀to฀those฀charged฀with฀governance฀and฀management
requires฀communication฀on฀various฀matters฀including฀deficiencies฀in฀control฀systems. This฀should฀be฀sent฀on฀a
timely฀basis฀after฀the฀interim฀and฀final฀audits.

Format฀of฀the฀report฀to฀management
DEFICIENCY IMPLICATION RECOMMENDATION

Exam฀focus
The฀report฀to฀management฀is฀a฀popular฀topic฀to
examine฀in฀a฀scenario฀question. Your฀recommendations
should฀be฀sensible฀and฀relevant,฀and฀you฀must฀always
state฀the฀implications฀of฀the฀deficiencies฀identified.

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Notes

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