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Advantages and Disadvantages of Sampling Methods

ADVANTAGES DISADVANTAGES
Statistical • Minimization of human bias • It requires statistical
Sampling • Gives every item equal chance of knowledge
> being selected • It is more expensive in
• It is scientific and reduces the risk of terms of time and cost.
over or under auditing • It is more difficult

Non- • It is easier to use and more economical • Human bias in high

'Statistical • Increases sampling risk

Judgmental • It does not require any • No quantitative result as it is

sampling • It brings to play auditors judgement and unscientific
experience • No standards: sampling
• It saves time procedure

The selection of the sample size is affected by the level of sampling risk that the auditor is willing
to accept.
Sampling risk is the risk that the auditor's conclusion may be different from is conclusion that
would be reached if the entire population were subjected to the audit procedures rather than the
selected samples. The two types of sampling risk
1. The Risk of Incorrect Acceptance - the risk that a material misstatement is assessed as
unlikely, when in fact the population is materially misstated.
2. The Risk of Incorrect Rejection - the risk that a material misstatement is assess; as likely,
when in fact the population is not materially misstated.
Non-Sampling risk is the risk of inappropriate conclusion by the auditor as a result of factors
other than his use of sampling. Such factors include poor planning of audit v.cr*. use of unskilled
audit staff; poor supervision and lack of professional scepticism.
Evaluation and Documentation of Samples
The performance and evaluation of a sample must address the following issues:
• The effect of not being able to apply a planned procedure to a sample item.
• A projection of the sample results to the population being tested, then comparing those results
with the planned amounts.
• Appropriate consideration to the assessed level of sampling risk must be performed.
• The auditor is required to adequately consider qualitative aspects of misstatements, such as
the nature and cause of the misstatement and the possible relationship of the misstatements to
other phases of the audit.

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• The auditor must document in their working papers the sampling objectives and the sampling
process used. The working papers should include the source of the population, the sampling
method used, sampling parameters, items selected, details of audit tests performed, and
conclusions reached.

Tolerable Error or Misstatement

This is a monetary amount below which if misstated, the audit opinion will not be affected. It is
set by the auditor in order to address the risk that the total of individually immaterial
misstatements may cause the financial statements to be materially misstated. It is simply the
application of the concept of performance materiality to a particular sampling procedure.

Tolerable Rate of Deviation

This is the rate of deviation from prescribed control procedures which the auditor is prepared to
accept and still conclude that the financial statements are materially correct.

2-6 Factors Considered in Determining Sample Size

The size of the samples selected by an auditor would be influenced by the following factors:
1. The result of audit risk assessment - The higher the audit risk level, the larger the sample
size.
2. The expected error rate in the population - The higher the expected error rate, the larger
the sample size selected to detect those errors.
3. The experience of the auditor - An auditor with less experience is likely to start with a
higher sample size
4. The tolerable error level - The lower the tolerable error level set by an auditor, the larger
the sample size.
5. The nature of the transactions - Auditors are likely to select a large sample size when
testing transactions that are new.
6. Materiality and performance materiality.
7. The reporting deadline.
8. Level of confidence in internal control

Circumstances Where 100% Audit Test Is Appropriate

1. Where the number of transactions within a class is very few but of great importance.
2. Where it is specifically requested for by the client.
3. Where the auditor is put on enquiry.
4. High risk areas of the financial statements.
5. Financial statements items with special importance where materiality does not apply.
6. Where the item is an unusual, one-off or extra-ordinary

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AUDIT PROCEDURES, EVIDENCES & ASSERTIONS

These are a series of work / activities / tests carried out by the auditor to obtain evidence that
would support the various conclusions.
There are seven basic Audit procedures (By Nature).
1. Inquiry – seeking audit information from other internal/external experts
2. Observation – watching client processes & procedures while they are performed
3. Inspection – examination of records/does & physical verification of Assets
4. Recalculation – recomputing clients’ numerical data (casting)
5. Re-performance – redoing a procedure already performed by the client
6. Circularization/Confirmation – process of auditor obtaining a written response from a
party outside the client.
7. Analytical procedure
Popular areas circularized are: Accounts receivable
Note: Positive circularization expects a feedback/response that the amount stated in the
circularization is either correct or not correct.
Negative circularization expects a feedback that the debtor disagrees with the amount stated as
his debt. It is useful where the debtors are many in number but is harmful where the auditor
assumes no response means agreement as delays might be the cause of other barriers.
Analytical procedure is the most used procedure. It is a comparison of 2 or more financial
statement items. It is the use of ratios and trend analysis to compare financial and or non-financial
information / data to ascertain any unusual relationship. Any unusual relationship leads to further
enquires and investigation
Analytical Procedures

Preliminary A. P Substantive A.P

Analytical Review
Analytical Procedures are not used during the interim stage because the interim stage deals with
checking/evaluating the internal control procedures of the client.

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3 Broad Categories of AP (By Purpose)

Risk Assessment Procedure Test of Control Procedures Substantive Procedures

SAP Test of Details

While TOCP looks at the accounting system (transactions), the substantive procedures helps you
look at the financial statement (transactions, A/C balances and disclosures) as a whole.
Examples of subsystems and their related FS items:
Sales system …………………………………………………. Revenue amount
Purchase system ………………………………. Cos/payments for stock/PPE etc.
Inventory system …………………………………Raw material/WIP/finished good

Audit Evidence
Audit evidence involves all the information and explanation used by an auditor to support the
various audit conclusions upon which the final opinion is based.
AE

Sufficient Appropriate

Relevance Reliability

Financial Statement Assertions: These are implied representations/claims that are embodied in
each financial statement item.

Question: Your engagement partner has asked you to handle revenue audit of your client due to
the sudden absence of the Audit senior manager. Explain the Assertions that are relevant to your
work and for each assertion, suggest an audit procedure you will perform.

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PRACTICE QUESTION A
You have recently been appointed to audit manager at Gilbert & Co, a medium sized firm of
chartered certified accountants, where you began as a trainee seven years ago. Your first
assignment in your new role is the audit of Moonstone Co, a client of Gilbert & Co for the last
five years, for the year ending 31 December 2015. Moonstone is a specialist in the quarrying of
aggregate materials for use in the building trade. Revenue for the year ended 31 December 2015
is expected to be $31.5m (2014: $37.3m); profit before tax was $2.4m (2014: $3.2m); and total
assets were $25.0m (2014: $22.1m).
(a) You have received the following email from the audit partner for Moonstone:
To : Mr. Anager
From : E. Partner
Subject: Moonstone Co Audit Planning
Hello,
I have just been to a meeting with Trevor Cramphorn and Alfie Moon, the Managing Director
and Finance Director of Moonstone Co. We were discussing recent events which will have a
bearing on our forthcoming audit, and my notes from the meeting are attached to this email. We
need to start planning the audit as soon as possible, and I would like to have the planning meeting
early next week.
In preparation for this, I would like you to prepare briefing notes in which you:
i.Evaluate the audit risks to be addressed at the planning meeting for the final audit of Moonstone
Co for the year ended 31 December 2015.
ii.Recommend the principal audit procedures to be performed in respect of the useful economic life
of the license.

SOLUTION - (Gilbert & Co)

(a)
To : E. Partner
From : M. Anager
Subject: Planning for audit of Moonstone Ltd for the year ended 30th
December 2015 Introduction
To assist with the audit planning for the audit of Moonstone Co for the year ended 30 December
2015 a discussion of the known audit risks is enclosed in this report.
(i) Going concern
There is a risk of inadequate disclosure of material uncertainties regarding the going concern
status of Moonstone.
Moonstone's business supplies the building trade, an industry sensitive to economic change. It is
possible that the fall in revenue and profits experienced by the company is due to a downturn in
the building trade.
• Review the expenses within the profit forecast for evidence of the inclusion of finance
cost relating to the bank loan; repairs of Plant & machineries; Research and Development cost.

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• Compare the results in the latest management and interim accounts to the profit forecast
to identify any unusual differences for further inquiry.
d) Additional Information required.
• Latest Management and Interim Accounts
• Schedule of assumptions used
• Prior years audited financial statement
• Written Representation
• Minutes of Management and Board meetings
• Correspondences with Financiers and Bankers
e) Ethical Issues
• Self Interest Threat - There is a possibility of Adewale & co depending

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INTERNAL CONTROL SYSTEMS

An accountant should be able to recommend / evaluate / make recommendations on maternal.
According to COSO (committee on sponsoring organization), internal control is a process
established by the management and other personal within an entity to provide reasonable
assurance on the achievement of some predetermined objectives.
The objectives are into 3 categories.
- Compliance to laws and regulations
- Effective contact of business operation
- Reliability of financial reporting.

5 components of Internal control

1. Control environment: This is the management philosophy / Operating style for contract
the evaluation of control consciousness and regard to the organization. If the control environment
is proceeding components of internal control cannot be strong.
2. Risk assessment process: Understand the risk assessment / management process.
3. Accounting system: Understand how the accounting system operates / is street
4. Control activities: Check the specific policies and procedures of the firm.
5. Monitoring of Control: evaluate of there is a system used to monitor the validity of the
internal control system.

Limitations of internal Control

- Possibility of Human connivance
- Possibility of Management override / by pass of internal control.
- When the cost of implementing a control outweighs the benefit
- Occurrence of non-routine events may limit the effect/bypass the internal control

COMPUTER ASSISTED AUDIT TECHNIQUES (CAATS)

Examples of Audit procedures that can be performed using CAATS
1. Recalculation of numerical data
2. Analytical procedures (Ratio and trend Analysis)
3. Duplicate checks
4. Sequence / Gap check
5. Data stratification
6. Sample selection
7. Sorting data and searching for data
8. Scanning of files.

Audit software is much more expensive than test Data use of audit software require specialized
skill to operate.

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Audit software helps in making substantive procedures such as validation which test data cannot
achieve.
Corruption of client data can occur when using test data rather than audit software.
Test data gives result at a particular point in time rather than over the financial period.

Benefit of use of CAAT

CAAT helps in evaluating complex transactions and large amount
CAAT is the only way to evaluate application controls
CAAT becomes cost effective in the long term.
CAAT enables continuous auditing.
CAAT enhances the level of Auditors independence

Disadvantages of CAATS
- Initial set up cost is very high
- Need of special skill set to operate
- There is a possibility of corruption of client data file
- CAATs requires more planning time
- Requires the corporation of the client firm to function properly

Preconditions for auditors use of CAAT

a. A partial or complete computerized accounting system of the client
b. Auditor must have the knowledge base to use CAATS
c. Cooperation of the I.T. staff of the client firm.

Audit trial series both the auditor and management it is a step by step development of transactions.

How to recover the loss of the Audit trail

1. Recover the Audit trial from Backup
2. Use of compute print out
3. Use of CAAT (especially EAF)
4. Review other application/program that are interconnected
5. Perform test on total basis other than individual basis
6. Recreate transaction entries from source documents.

Auditing round the computer VS Auditing Through the Computer in auditing round the computer,
the auditor only considers the input data and output data of the computer.
In auditing through the computer, the auditor considers both the input, processing and output of
the computer.

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PRACTICE QUESTION A
The availability of Computer Assisted Audit Techniques (CAATs) should be considered by
auditors when planning the nature, extent and timing of tests in an audit. Auditors must determine
their testing strategies which will depend on their choice of either using a manual testing method
or computer assisted method.
Required:
a. Explain FIVE factors that will determine auditors’ choice of method of testing in the planning
of audit in a computer environment.
b. Identify FIVE solutions to loss of audit trail.

SOLUTION
Computer Assisted Audit Techniques (CAAT)
(a) Auditors’ choice of method of testing during the planning of audit in a computer
environment will be determined by the following factors:
(i) Practicability of performing audit tests manually:
Many computer-based accounting systems perform functions for which no visible evidence is
available. In this regard, it will not be advisable for the auditor to use manual testing method.
(ii) Time availability:
Generally, since the auditor has to report within a short time scale, he may choose to use CAAT
as they are quicker to apply, even though manual methods may be more practical and cheaper.
(iii) Computer facilities availability:
When using CAAT auditors will need to ensure that the re*uired data, computer files and
programs are available;
(iv) Expertise and experience:
Auditors will require at least a basic understanding of the fundamentals of computer processes
because they are using the computer to assist them in performing the audit tests before
contemplating using CAAT.
(v) Reliance on internal audit functions:
Where CAAT is used by a suitably trained internal auditor, it may be of significant assistance.
The extent to which the external auditors are able to reduce the level of tests by taking account of
computer audit techniques performed by the internal auditor will depend on their assessment of
the independence and effectiveness of the internal audit function.
(vi) Volume of clients’ business:
It is not worthwhile to use CAAT where the volume of transactions is small.

(b) Solutions to loss of audit trail include the following:

(i) Use of Computer Assisted Audit Techniques to assess reliability.
(ii) Testing on a total basis and ignoring individual items to access report.
(iii) Closer co-ordination between internal and external auditors to bridge gaps in compliance
tests.

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(iv) Arranging for special print-outs of individual information for the auditors to attempt to re-
create transaction trail.
(v) Clerical re-creation of individual items of data for comparison with computer generated totals.
(vi) Programmed interrogation facilities whereby records held on magnetic files are printed on a
selective basis by means of direct re*uest to those files.

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USING THE WORK OF OTHERS & OTHER ISSUES

ISA 620
USING THE WORK OF AUDITORS' EXPERT
Introduction
An auditor's expert is a person or firm possessing special skill, knowledge and experience in a
particular field other than accounting and audit. Auditors are solely responsible their opinion on
the financial statements but may use the work of an expert in order to obtain sufficient appropriate
audit evidence regarding certain aspects of the financial statements or assertion/An expert may
be from internal (partner or staff of same audit firm) or external sources. Auditor's expert differs
from management's expert who is used by management to assist the entity in preparing their
financial statements.

Likely Areas of Expert's Work

Valuation of special assets & liabilities –
Valuation of some items of PPEs –

An auditor's decision to use an expert would largely be influenced by: The importance of the item
in the financial statements context. The risk of misstatement based on the nature & complexity of
the matter.

The sufficiency and appropriateness of other available evidence on that matter.

Engaging an expert is usually very costly and an auditor would only go for it if there is a genuine
reason to do so especially where sufficient alternative audit evidence cannot be obtained. Once it
is decided by an auditor that an expert is required, he should discuss and approach client's
management to hire the expert. Where client management refuses or delays unduly, the auditor
should re-asses his/her position & if an expert is still needed, he should consider this as a
limitation of scope.
Except where required by local legislation, auditors are not allowed to make reference to the work
of an expert in their final report that is not modified. This is because such reference to the work
of an expert in a clean audit report could be misconstrued to be a modification or a division of
responsibility. Where the audit report is already modified, reference could be made but with the
consent of that expert. If such consent is not given by the expert, the auditor may have to seek
legal advice.

Where the expert appears to have performed poorly, auditor is to take the following steps:
1. Bring it to the knowledge of client's management.
2. Ask the expert to re-perform the job and agree with him on the nature and extent of further
work to be performed.
3. Auditor to perform additional audit procedures.
4. Consider the possibility of hiring another expert.
5. Consider the impact on the audit report where sufficient and appropriate audit evidence is
not obtained.

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To fulfil his responsibility, the auditor must evaluate whether the expert has the necessary
competence, capability and objectivity for the purpose of the audit.

Factors Considered in Choosing an Auditor's Expert

1. Reputation of the expert
2. Experience & qualification of the expert Independence of the expert from the client
3. Membership of a recognized professional association
4. Relevant past experience in related assignments
5. Possession of valid operating/practicing license
6. Any litigation or disputes from previous engagements
7. Integrity of key partners and staff
8. Location & spread - proximity to client's location

Factors Auditors Consider before Placing Reliance on Expert's Work

Once the work of the expert has been completed, the auditor must then evaluate it to ensure it is
appropriate for the purpose of the audit. This requires that the auditor considers the following:
1. Scope of Work - If the expert has covered the required scope of work. Any limitation or
restriction on the expert's work
2. Assumptions and Methods - Ascertain the appropriateness of the assumptions & methods
used by the experts - subject them to reasonableness test.
3. Sources of their data - how reliable?
4. Relationship with the entity - How independent the experts are from the client?
5. Timing - How timely was their work and report?
6. Consistency of the results of expert's work with auditor's knowledge of the entity and the
results of other audit procedures.

Matters Included in the Contract Agreement with Auditor's Expert

1. The nature & scope of work should be clearly stated
2. The objectives of the work
3. The Intended use of his work. This helps to create legal proximity The need for
confidentiality of client's information Extent of access to client's information
4. The report format - what should his report cover?
5. Responsibilities of both parties
6. Period of contract & timing
7. Fess and payment terms

The following sources could be used to obtain information regarding the expert's competence,
capability and objectivity:
1. Discussions with the expert
2. Discussions with other auditors
3. Published papers and books written by the expert
4. Knowledge of the expert's qualifications, memberships of professional bodies

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5. Personal experience of working with the expert

USING THE WORK OF INTERNAL AUDITORS

A major element of an entity's internal control system is the internal audit function. This accounts
for why the external auditors would evaluate the effectiveness of the internal audit unit when
assessing control risk level. The requirement to evaluate an entity's accounting and internal
control system is a major point of similarity between the external and internal auditors.
Consequently, the external auditor could be willing to use the report of internal auditors covering
the following internal control areas:
1. Control environment
2. Risk Assessment
3. Information systems related to financial reporting
4. Control activities
5. Monitoring of controls

Factors Considered bv External Auditors before Placing Reliance on Internal Auditors'

Work
1. Scope and organization of their work.
2. Qualification and experience of internal auditors.
3. Authority and status of internal auditors in the organization.
4. Their level of proficiency and training.
5. Level of management override of their recommendations.
6. The assessed risk of material misstatement in the financial statements.
7. The timing of the report.
8. The appropriateness of conclusions reached and consistency of reports.
9. Level of supervision, review and documentation of their work.
Where the internal auditors lack any of objectivity, competence or a systematic and disciplined
approach to work, none of their work can be relied upon by the external auditors.

ISA 610 envisages three ways by which an external auditor can use the work o' auditors:
a) Using them to obtain information for evaluating risk of material misstatement
b) Using their work as evidence instead of performing procedures
c) Using them to perform audit procedures on behalf of external However, for internal auditors
Please note that ISA 610 prohibits the use of internal auditors to provide direct assistance or
perform procedures on financial statements areas that:
a. Involve significant judgements (subjective areas)
b. Have been assessed to carry higher risk of material misstatement
c. Relate to work with which the internal auditors have been involved
d. Relate to decisions by external auditors regarding the internal audit function

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Before using internal auditors as direct assistants, the external auditor should:
a. Assess the risk that the internal auditors may not be objective and competent.
b. Confirm that the internal auditors comply with similar independence and other ethical
requirements.
c. Obtain written agreements/consent from an authorized representative of the client and
from the internal auditors.
d. Communicate the nature and extent of the planned use of internal auditors as direct
assistants to those charged with governance. It is required of the management to guarantee
that they will not intervene in the work of internal auditors when being used as direct
assistants.
e. Provide direction, supervision and review of the internal auditor's work.

Examples of audit work where the internal auditors can be used by external auditors are:
• Observation of inventory count exercise.
• Testing compliance of the client with regulatory requirements.
• Testing the existence and operating effectiveness of internal controls.
• Tracing transactions through the client's accounting system.
• Review of financial information of subsidiaries/associates of the entity that are not
significant components.
• Performance of limited substantive procedures - those involving less judgement. Any
work involving significant judgement should be used with caution.

The auditor is required to document the following:

a. The written agreement of management and TCWG regarding the use of internal auditors.
b. The results of the evaluation of the internal auditor's objectivity and competence.
c. The basis for the decision regarding the nature and extent of work performed by the
internal auditor.
d. The name of the supervisor/reviewer and the extent of the review carried out on the
internal auditor's work.
e. The working papers produced by the internal auditor.

ISA 550
AUDITOR'S RESPONSIBILITY ON RELATED PARTY TRANSACTIONS
IAS 24 {Related Party Disclosures) defines a related party as a person or firm that has control or
significant influence, directly or indirectly through one or more intermediaries over the reporting
entity. It also includes any entity over which the reporting entity has control or significant
influence and those under common control
The management of an entity is responsible for the identification, approval and disclosure of all
related party relationships and transactions in their financial statements.

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Examples of Related parties

Examples of related parties to a reporting entity include:
1. Subsidiaries and associates of an entity
2. The directors of a company and their key management staff
3. Close family members of directors and key management staff
4. Entities controlled by the directors and their close family members
5. Pension Schemes controlled by directors
Please note that two companies are not necessarily related parties just because the same individual
is a director or shareholder in both - the key issue is whether that individual is in position of
influence in both companies.

ISA 550 requires an auditor to plan and perform procedures to obtain sufficient and appropriate
audit evidence that all material related party relationships and transactions have been properly
identified, accounted for & disclosed in the client's financial statements in accordance with the
applicable financial reporting framework. There is need for the auditor to have a proper
understanding of the control and influence the reporting entity has on other entities and vice versa.

A related-party transaction could be material either in the hands of the reporting entity or the other
party. The standard (IAS 24) requires entities to disclose all material related party transactions
except those cancelled on consolidation. A related party transaction need to be reported if it is
material either to the reporting entity or the other party even if it is not detrimental to either of
them.

In line with the standard, related party disclosures included in the financial statements shall reveal:
1. The names of the related entities.
2. The nature of transaction between the parties
3. A description of the nature of their relationship.
4. The amount/volume of transactions.
5. Any outstanding balance to or from each party at year end.
6. Any allowance made on receivables from a related party.
7. Any other information considered relevant by the directors such as the accounting policy in
relation to the investment in a related party.

Indicators of related party transactions

• Hidden transactions.
• Transactions where substance differ from legal form.
• Unrecorded transactions such as occupying office space without paying rent.
• Transactions that appear not to have a logical business reason.
• Transactions with abnormal terms of trade.
• Transactions that are not processed in the usual way.

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Steps to identify Related Party Transactions (Audit Procedures)

1. Enquiries of client's management and directors on all the related party identities and
transactions that took place during the year.
2. Evaluate the entity's procedures for identifying, authorizing and recording related party
transactions.
3. Review entity's books and records for any exceptional/abnormal/large transactions with any
customer or supplier during the year.
4. Review minutes of board meetings and shareholders’ meetings for evidence of their
discussions and decisions on related parties.
5. Obtain & review current organizational structure and any statutory records (register of
directors' interests, register of interest in shares).
6. Review correspondence between entity & any identified related party and company lawyers.
7. Obtain and review the list of guarantors/sureties for loans & payables.
8. Obtain and review the schedule of investments (JVs, Associates).
9. Contact former auditors and review prior year working papers for names of known related
parties.
10. Review transactions with other parties shortly before and after year end.
In most circumstances, related party transactions are assessed by external auditors as having a
higher risk of material misstatement and therefore need to be approached with enhanced
professional scepticism. It is also necessary that where risk relating to related parties and their
transactions are identified, they should be treated as significant financial statements risk in
accordance with ISA 315.
This is because of the following:
1. Active steps may be taken by entity's management to conceal either the full terms of a
transaction or that a transaction is in substance, with a related party.
2. Directors may be reluctant to disclose the identity of their family members.
3. The corporate structure may be very complex thereby giving rise to complex related party
transactions. The entity's accounting system may not be effective at identifying related
party transactions since they are not separately identified from other transactions.
4. Related party transactions are usually not conducted at arm's length.
5. The management of the client may be ignorant of the requirement of IAS 24.
ISA 540
AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE, ACCOUNTING
ESTIMATES AND RELATED DISCLOSURES
ISA 540 defines an accounting estimate as "an approximation of a monetary amount in the
absence of a precise means of measurement." Estimated figures are very common in most
financial statements which are made by the management using judgement. J

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Examples of Accounting Estimates

Some examples of these estimates are:
1. Provisions for warranty claims
2. Number of useful lives of an asset
3. Outcome of a long-term contract (Profit or loss)
4. Provision for Litigation cost j? Deferred tax asset/liability
The standard requires auditors to obtain sufficient appropriate audit evidence as to whether
accounting estimates are reasonable and that the related disclosures are adequate. The audit risk
is usually very high as it can be very difficult to obtain satisfactory evidences that the estimates
and related assumptions are reasonable. It may be necessary to obtain higher volumes of lower
quality evidences especially where the estimated figure is material or the audit risk is assessed
to be very high.
Where an entity carries some of its account balances at fair value, the following audit risks are
likely to be present:
a. Inherent Risk - Estimates are usually imprecise and involve significant judgement on
assumptions about market conditions and timing of cash flows. There is also the risk of
misapplying the estimation model due to complexity.
b. Control Risk - Estimation of fair values are non-routine (likely to take place once a year)
and may happen outside the entity's internal control system.
c. Detection Risk - It is very likely that an auditor may perform inadequate or ineffective
procedures on accounting estimates where they do not have detailed and sound
understanding of the client's business and their fair value estimation model especially on
complex assets and liabilities.

General Audit Procedures include

1. Discuss with the management of the client to obtain a clear understanding of the nature of
the estimates and the procedures used by them in making estimates.
2. Compare the amount of each estimate to other known facts to determine if they are
reasonable.
3. Review the outcome of estimates included in previous period's financial statements to
assess their reliability and ascertain the degree of uncertainty associated with current
period estimates.
4. Review the methods used for making the estimates to confirm whether they are
appropriate and consistently applied.
5. Review the events that occurred after reporting date for evidences that could confirm the
validity of estimates in current year's financial statements.
6. Test the internal controls over management's procedure for making estimates for adequacy
and relevance.
7. Obtain written representation from client's management stating that the treatment of all
accounting estimates was appropriate.

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PRACTICE QUESTION A
Auditing standards require auditors to carry out procedures designed to obtain sufficient and
appropriate audit evidence. In order to do this, the auditor may require the services of a specialist.
In respect of specialists whose work may be relied upon by the auditor, you are required to:

a. Describe a specialist and give FOUR examples of specialists.

b. State the circumstances under which an auditor may need the work of specialists.
c. How will an auditor determine the competence and objectivity of a specialist?

SOLUTION
(a) A specialist is an expert who is a knowledgeable person or firm that has acquired specialist
knowledge and skills and obtained experience and competence in a discipline and is respected as
one held in public reckoning, whose opinion on issues in their respective disciplines, is held to be
authoritative and reliable as a basis for decisions on consequential matters. Examples of
specialists include:
Legal practitioners, Forensic Accountants, Estate Surveyors, Medical Practitioners, Architects,
Pharmacists, quantity Surveyors, Mechanical, Electrical, Civil, Electronic Engineers, Actuarists,
etc.
(b) The circumstances under which an auditor needs a specialist are:
(i) When he needs to express an opinion on areas that he has no skill or competence to resolve.
(ii) Where it is not convenient or appropriate for him to provide the required service.

The services of specialists could be required in the following circumstances:

· determining the outcome of a litigation
· valuation of assets – e.g. buildings
· determining actuarial value of gratuities
· determining value of work of art and antiquity
· geological determination of mineral resources
· assessment of work done on long-term contracts

(c) The expert is expected to be a member of a recognized professional body or a Trade Group.
He must be certified to render the service by an authoritative body and must have some years of
experience. The auditor would need to consider the following:
* Qualification of the specialist
* Independence and
* Technical competence
To be objective, the specialist should not be employed by the client and must not be related to the
client.

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EVALUATION & REVIEW

ISA 560: Review of Subsequent Events

Subsequent events

Adjusting Events (AE) Non-Adjusting events (NAE)

Scenario: Year end 31/12/2017

1. On the 02/01/2018, a customer owing N250m died – NAE
2. On the 22/01/2018, a customer owing N50m was declared bankrupt by Abuja High Court.
3. On 31/01/2018, the client disposed one of its 3 subsidiaries realizing N800m – NAE
4. On03/01/2018 a fire outbreak destroyed all inventory in the company own warehouse.
Inventory recognized in the financial statement of 2017 was N600m – NAE
5. On 20/02/2018, an Abuja High Court decoded on the case between your client and a
customer. Your client was asked to pay the customer N30m – AE

Active responsibility: Obligation to identify material subsequent events through performance of

Audit procedures.

Practice Question A: Describe 4 features of a financial statement prepared using an alternate

basis.
1. All assets become current
2. All assets will be carried at their net realizable value
3. All liabilities must become current
4. Many provisions must be made e.g. redundancy cost.
5. Huge losses
6. Unusual disclosures (tilling shareholders why you are using break up basis).

S/N Going Concern Scenario Impact on Audit Report

1 Financial statement prepared using Unmodified opinion + EOMP
breakup basis after directors decided to
close down in Nigeria
2 Entity is a going concern but have Unmodified opinion + MURGC
disclosed 2 material uncertainties facing
them in notes

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3 Entity is not a going concern but used Modified opinion + Adverse Opinion
going concern assumption to prepare
their financial statement
4 Entity only provided the Auditor with Limitation of scope disclaimer except for.
going concern assessment covering 9
months from year end.

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AUDIT REPORT

AUDIT REPORT (ISA 700/701/705/706)

Structure and Content of Audit report
1. Title – “Independent Auditor’s Report”
2. Addressee – The shareholders of the Company
3. Opinion section – The auditor’s opinion on the FS - To identify what has been audited (FS)
4. Basis of opinion section
- The rationale for the type of opinion expressed
- Reference to Auditing standard used (ISA)
- Compliance to independence and other ethical requirement
- Draw users’ attention to the Auditors responsibility section below (Number a)
5. Material uncertainty related to Gong concern (if any)
- Reference to the note where the material uncertainty is fully disclosed by management
6. Key Audit Matters (KAM) Section
- Matters which in the Auditors Professional Judgement were of the most significance doing the
audit of an entity’s FS for the current period.

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Indicators of KAM
1. Areas of the FS assessed to carry higher risk of material misstatement eg intangible assets
such as goodwill
2. Areas of the FS involving significant judgement on the part of both Management and
auditors e.g. Accounting estimates (provisions/financial instruments)
3. Effects of significant event that occurred during the year
4. Any matter/issue that caused the auditor to charge/alter the planned auditor approach –
involves significant Audit effort
5. Any matter that caused the auditor to modify the audit report – but should not be included
in the RAM section.

Description of KAM – include the FF

1. Why the Auditor selected the issue as KAM
2. The audit work carried on that matter
3. The result of the audit work
• Audit evidences obtained
• Conclusions
7. Other information section
8. Management Responsibility section
9. Auditors Responsibility section
10. Other Reporting (legal reporting requirement/section – comply with local reporting laws
& regulation)
11. Name and signature of engagement partner
12. Audit Report date and auditors Address
Materiality affects one part of the financial statement but pervasive affects the whole financial
statement. Pervasive is an advanced level of materiality
Opinion in Unmodified Audit Report
“In our opinion, the accompanying financial statement present fairly in all material respect/shows
a true and fair view of the financial position of ABC Ltd as at Dee 31 2007 and of its performance
& cash flow for the year that ended in accordance with IFRS”

Modified AR
a. Modification of AR without modifying the auditors’ opinion on the FS
b. Modified AR with a modified auditor’s opinion.

Emphasis of other matters paragraph Other matters paragraph

Used to highlight an important information that Used to draw the attention of uses to
is already disclosed adequately in the financial material/significant issues not contained in
statement the FS

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Must be material Issues relevant to users understanding of

the audit, auditor’s responsibility and the
audit report
Must be relevant/critical to users understanding
of the financial statement
Must be adequately disclosed by way of notes
Must not be a going concern issue

Opinion in modified AR (EOMP) OR (OMP)

“Without modifying our opinion on the financial statement, we draw your attention to Note 29 on
page 142 of the annual report where the directors have described in detail the occurrence of a free
out break at a third party warehouse destroying inventories worth N2.5billion”.
Qualified opinion “Except for”
“in our opinion, except for the overstatement of inventory by N6million as described in the basis
for opinion section below, the fraternal statement shows the tone and fair view of the financial
position of xyz Ltd as at Dec 31, 2017 and the results of its operation and cash flow for the year
ended with IFRS”.

Limitation of Scope

Material but not pervasive both material & Pervasive

Issue an “expect for” issue a Disclaimer
Or qualified opinion of opinion

Example: “Expect for” opinion from limitation of scope

“In our opinion, except for the possible effect of the adjustment that would have been made to
inventory as detailed in the “Basis of opinion” section below, the Financial Statement shows a
true and fair view of the financial position of XYZ Ltd as at Dec 31, 2017 and of its performance
and cash flow for the year ended in accordance with IFRS”.

Example of Disclaimer of Opinion

“Due to the fundamental effect of the issues described in the “Basis of opinion” section below,
we were unable to obtain sufficient and appropriate audit evidence on the financial statement and
therefore do not express any form of opinion”.

Basis for Opinion section – “Except for” opinion arising from Limitation of Scope
The company (client) carries its inventories in the financial statement at N950m. the inventories
is made up of 20m units of their core products which has been measured at lower of cost and net

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realizable value (N1.86) in line with IAS 2. However, we were not allowed to participate/attend
the end of the year physical count exercise held on Dec 31, 2017 and could not perform alternative
procedures to confirm the quantity of these inventories.

Adverse Opinion
“In our opinion, due to the significance of the issues described in the basis of opinion section
below, the financial statement do not show the true and fair view of the financial position of xyz
Ltd as at 31st Dec, 2017”.

PRACTICE QUESTION A
Your firm have just concluded the field audit work of ABC limited for the year ended 31.12.2016
and now reviewing their financial statement. The draft
Financial statement has Total asset = N860m; PBT = N150m and Revenue =
N500m. As the Audit manager, while you were reviewing the work of the Audit senior, you noted
the following issues:
a) The cost per unit of inventory was N8.00 while the NRV at year end was determined to be
N10.00. Inventory (3,850,000units) for the year was measured at cost which was determined
using standard costing method. Recent sales of items of inventory few days after the year end
were made at N6.50 per unit.
b) On 04.07.2016, the client bought 175,000units of shares of Akatakapic at N150 per unit. This
has been recognized in the draft FS and classified as Ordinary Investment held at fair value
through profit or loss. However, you are aware that a recent negative publication (on
Jan 20, 2017) on Akataka Pic caused their share price to fall to N80 per unit.
c) Two years ago, ABC limited had borrowed the sums of N65m and N40m at a fixed interest
rate of 10% p.a. for a period of 5years for the construction of a new factory and office building
respectively. Interest on these loans have been capitalized on yearly basis. It was reported that
during the year 2016, construction on the factory was disrupted for about eleven (11) months due
to unrest from the host community. On the 2nd loan, you noted that the office building was
completed and ready for use on 30.06.2016.
d) A review of their bank statement revealed several wire transfers between ABC limited and an
unidentified foreign company. The total amount transferred out in bits by ABC ltd amounted to
N370m during the year while the sum of N374m was received from various other unidentified
foreign sources. The Financial Director has so far not given any detailed information on either
the transfers or the identity of the foreign companies involved as he claims that it is only the MD
that can explain the transactions.
Required:
i. Comment on the matters you will consider when carrying out your review of each of the
issues above.
ii. List two (2) additional audit information you will expect to be available in each of the
files

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