Lecture 1

NEW CHAPTER: audit planning and documentation

Audit planning :

Possible questions:

1. When planning starts :

Few weeksbefore start of audit (mandatory)
2. Advantages/importance of audit planning
Important areas timely basis resolve organized audit appropriate team members auditor and
expert ( coordination)
3. 2 parts of audit planning

2 parts of audit planning

1.Overall/ audit strategy 2. detailed audit
(overview) birds eye view Inside view plan worms eye view

4. Contents of audit strategy (learn)

5. Contents of audit plan ( learn)

Audit documentation

Possible questions:

1. What is working paper?

2. Advantages/importance of working papers?
- Proof of legal issues
- partner
3. Content of working paper ?
Firm name date procedure evidence sign
4. Two types of working papers?
- current audit file
- permanent audit file
5. How long to retain working papers?
7 years
6. Standardised and automated working papers?

Auditor if does any work and does not document it is considered as if it was never done.
Document on a piece of paper working paper.

Materiality :

material Immaterial
Any information/ value which effects decision of Any information/value which does not effects
user - material decision of user
How materiality is set : no rule, as per judgement of auditor

Common: 5% of profit

Materiality auditor assess

- Planning
- During audit
- Opinion

Can materiality be revised :

Yes if :

- Change in circumstances
- Change in operations

Performance materiality :

Definition handout learn

Audit start: materiality 5% of profit(1 crore)

Sum of many immaterial items may become material.

 Lecture 2

Fraud and error

Possible questions:

1) What is fraud?
2) Management fraud and employee fraud difference?
3) 2 types of fraud:
1 misappropriation of assets
2 fraudulent financial reporting
4) Responsibility of management and auditor in fraud
5) Obtaining written representation in fraud
6) Communicating fraud to those charged with governance

Auditor fraud :

-management those chared with government regulatory bodies.

Topic #2 non compliance

Possible questions:

1.) Difference between compliance and non compliance

2.) Indicators of non compliance ( learn 4-5)
3.) Audit procedures in case of non compliance (learn 4-5)
- Legal advice
- Written report
- Discuss with management.
4.) Reporting non compliance.

Topic#3 not for profit organisation

Possible question :
1 what is nfpo?
2 inherent and control risk in nfpo?
3 audit report in nfpo?

Topic #4 analytical procedures

Auditor does audit of procedures

Analytical procedure

3.

- comparison with last year

- cossmparison with budgets

-comparison with industry avg

3 stages of procedures

1. Start – risk assessment stage

2. During – performance stage
3. End – opinion formation stage
 Lecture 3

1. Service organisations:
User entity : entity whose financial statements are being audited
User auditor: auditor of user entity
Service organization: any organinsation which provides services to user entity
Service auditor : auditor of service organization.

2. Using the work of expert:

Expert: any person specialization in any field other than auditing and accounting

Management expert: Terms and conditions should be set before.

Audit expert: he isnot responsible auditor Is responsible, this expert is independent and has a
license and is also competent for the final opinion auditor is responsible.

3. Using the work of internal auditors:

External auditor rely on work of internal auditor
Factors:
- Independence
- Competence
- Relevance

External auditor must communicate this to management. For the final audit opinion external auditor is
responsible not internal auditor.

Sometimes external auditors take direct assistance from internal auditiors.

4. Accounting estimates:

Estimate financial statements like provision.

Auditor is coming for audit and knows provision dep expenses and wip is are estimates.

Check
 - Basis of estimate
- Source of estimate
- Past history

Audit procedures:

- Discuss with management

- Written report
- Disclosures.

5. Computer assisted audit techniques

What is caat’s?
Caats refer to the use of computer for audit work

Audit procedures:
1. Cast the total/ recalculate the total to ensure the accuracy.

Advantages of caats

1. Time saved
2. Cost saved
3. Increased sample size

Disadvantaes of caats

- Staff training
- Data lost and corrupted
- Software may be expensive

two types of caats

1. Test data: computer system calls test of control ( test of control)

e.g :
- enter a dummy order for goods not in stock, system should reject
- enter order exceeding order limit system should reject
2. audit procedure
Computer system: substantive procedures
1. Recalculate the total to ensure accuracy
2. Compare with to ensure completeness
H

Handout test data and audit software

 Lecture 4

What is audit risk?

Audit risk is the risk that auditor may express an inappropriate opinion on financial statements.

Financial statements not giving true and fair view but auditor states the give a true and fair view.

There are 3 components of audit risk

1. Inherent risk:
Risk of misstatement in financial statements due to nature of activity or nature of transaction
e.g: new markets, new standards, complex transactions.
2. Control risk :
Risk of misstatement in financial statements due to weak controls. Controls of company are not
able to prevent, detect or correct misstatement.
E.g: deficiencies in internal controls, new management or systems.
3. Detection risk:
Risk of misstatement in financial statements due to audit procedures/ auditor
e.g: new client, lack of staff, lack of time, wrong sample size, wrong procedures.

2 questions
Q1 (4-5 marks)
Describe audit risk and explain 3 components of audit risk.

Q2 (14-16 marks) from the scenario, identify and explain 7-8 audit risks and auditor response to
these risks.

Audit risk Responses

In impact/explain part of question examiner will only give marks if you tell whether it is inherent risk,
control risk or detection risk and you can also tell whether figure is overstating or understating the
financial statements.
 Lecture 5

Questions part

Sunflower stores co.

Audit risk Auditor response

1)company has spent $1.6m on refurbishment of Obtain breakdown of costs and agree to
supermarkets. There is a risk that this expenditure is invoices to assess nature of expenditure, if
incorrectly treated between capital and revenue Capital ensure it is capitalized and included as
hence assets and expenses may be over/understated asset and if revenue ensure it is expensed to
statement of profit and loss
2) a smaller warehouse has been disposed off at a Review non current asset register to ensure
profit. There is a risk that the disposed warehouse is disposed asset has been removed. In addition
not removed from ppe hence ppe may be overstated recalculate the profit on disposal.
3) company has borrowed $1.5m from the bank. The audit team shall ensure that 1.5m loan
There is a risk that this loan is not correctly split was actually recived. In addition split
between current and non current liability hence between current and non current liabilities
current and non current liabilities may be misstated shall be reviewed and it must be ensured that
all disclosures of loan are in accordance with
relevant accounting standards.
4) the company will undertake inventory count at The audit team shall visit those warehouses
central warehouse as well as 25 supermarkets.there where major inventory is held or where there
is a risk that 100% verfications is not possible as it is has been history of inventory count issues.
not possible for the auditor to attend all locations,
therefore inventory figures may be misstated
5) inventory is valued at selling price less profit Detailed cost and nrv testing shall be
margin.there is a risk that inventory is not properly undertaken to ensure goods are correctly
valued at lower of cost or nrv hence inventory may valued
be over/understated
6)At the beginning of the year, each supermarkets Discuss with management the complete
opening balances were transferred to head office process of data transfer and perform sample
accounting records. There is a risk that this data calculations to ensure data transfer is
transfer is not complete and accurate leading to complete and accurate.
increased to control risk or hence opening balance
may be misstated
7)the financial controller left the company close to The audit team shall remain alert throughout
year end.there is a risk of increased errors due to the audit for any errors in finance
workload on other members of finance department. department.
This increased inherent and control risk.

MINTY COLA CO.

Audit risk Auditor response
1) Company has spent $5m on updating, Obtain breakdown of costs and agree to invoices
repairing and replacing machinery. There to assess nature of expenditure. If capital ensure
is a risk that this expenditure is it is capitalized and included as asset and if
incorrectly treated between capital and revenue ensure it is expensed to statement of
revenue hence assets and expens may be profit and loss
over/under stated.
2) Inventory is held at 15 locations and The auditor shall attend only those counts where
there will be inventory counts at all material inventory is held or where there has
locations. There is a risk that 100% been history of inventory count issues.
verification is not possible as it is not
possible for the auditor to attend all
locations, therefore inventory figures
may be misstated.
3) Some warehouses are owned and some For warehouses included in ppe, confirm
are rented. There is a risk that rented ownership by reviewing supporting
warehouses are also shown as owned documentation.
and included in ppe hence ppe may be
overstated
4) A new accounting and general ledger has Discuss with management the complete process
been introduced at the beginning of the of data transfer and perform sample calculations
year. There is a risk that this data transfer to ensure data transfer is complete and accurate.
is not complete and accurate leading to
increased control risk
5) The finance director has released the Do detailed testing of post year end cash receipts
opening allowance of recievables of $1.5 and review aged debtor analysis to assess
million. There is risk that provision is valuation of receivables.
understated and recivable is overstated.
6) Minty has incurred expenditure of$4.5 Obtain breakdown of expenditure and undertake
million on developing a new brand of testing to ensure that all expenditure related to
fizzy drinks. There is a risk that development is capitalized and included as asset.
development expenditure is not
capitalized hence assets may be
understated
7) No adjustment has been made to the Detailed cost and nrv testing shall be undertaken
valuation of damaged inventory which is to ensure inventory is correctly valued.
still held at cost of $1m. there is a risk
that damaged inventory is not dealt as
per ias 2 hence inventory will be
overstated
8) Management will be paid bonus on value The audit team shall remain alert throughout the
of year end total assets. There is a risk audit to the risk. In addition they should also
that assets may be overstated by compare treatment against prior years.
managemnet to earn more bonus.
 Lecture 6

Donald company.

AUDIT RISK AUDITOR RESPONSE.

1) Company has ordered plans but is unsure Physically verify existence of sample of planes to
whether the planes will be received by ensure only those received at year end are
year end.there is risk that planes not included in ppe
received are still included in ppe hence
ppe may be overstated
2) Company has spent $15m on Obtain breakdown of costs and agree to invoices
refurbishment of planes. There is a risk to assess nature of expenditure. If capital ensure
that this expenditure is incorrectly split it is capitalized and included as asset and if
between capital and revenue hence revenue ensure it is expensed to statement of
expenses and assets will be profit and loss
over/understated.
3) The company has applied for a loan but it Discuss with management status of loan whether
is yet to hear form bank whether it will any other banks are approached and perform
lend money. There is risk that bank will detailed going concern review.
not lend money leading to going concern
difficulties. This increased inherent risk.
4) A number of companys recivables are Do detailed testing of post year end cash receipts
struggling to pay. There is a risk that and review aged debtor analysis to assess
recievables are overstated. valuation of receivables.
5) The company has made a large workforce Discuss with management the status of
redundant. There is a risk that redundancy provision and revisew and
redundancy provision is not set as per IAS recalculate the redundancy provision
37 hence provision will be understated.
 Lecture 7

Abrahams co

AUDIT RISK AUDITOR RESPONSE

1. company has borrowed $1.5m from the The audit team shall ensure that 1.5m loan was
bank. There is a risk that this loan is not actually recived. In addition split between current
correctly split between current and non and non current liabilities shall be reviewed and it
current liability hence current and non must be ensured that all disclosures of loan are in
current liabilities may be misstated accordance with relevant accounting standards.
2. Company has raised 1 million via issue of The audit team shall ensure that share issue was
shares. There is a risk that this share actually done, in addition split between share
issue is incorrectly split between share capital and share premium shall be reviewed and
capital and share premium hence capital it must be ensured that all disclosures of share
and premium may be misstated issues are in accordance with relevant accounting
standards
3. Finance director has announced that all Review the reasonblness of revaluation and
land and buildings will be revalued. There recalculate the revaluation surplus/deficit to
is a risk that this revaluation is not In ensure non current assets are correctly valued
accordance with IAS 16 hence non
current assets may be misstated.
4. The reporting timetable of audit Consideration shall be given to performing an
completion is quite short. There is a risk interim audit to reduce pressure on audit team.
that audit team may face pressure
leading to increased detection risk.
5. It is anticipated that there will be Consideration shall be given as to whether an
significant levels of wip. There is a risk independent expert is required to value wip, if so
that quantity and value of work In this will need to be arranged with consent of
progress is not properly assessed hence management.
wip may be misstated.
6. There are covenants/conditions attached The audit team shall remain alert throughout the
to the loan relating to minimum total audit to the risk that assets have been overstated
assets. There is a risk that management to meet loan covenants.
may overstate assets to meet loan
covenant hence assets may be overstated
7. The finance director is planning to Review breakdown of expenditure and do
capitalized $2.2m. there is a risk that this detailed testing to ensure only expenditure that
expenditure does not meet capitalization meets capitalization criteria is included as asset
criteria as per IAS 38 hence assets may be and rest is expensed.
overstated.
Amethyst & co

Audit risk Auditor risk

1. company has borrowed $1.2m from the The audit team shall ensure that 1.2m loan was
bank. There is a risk that this loan is not actually recived. In addition split between current
correctly split between current and non and non current liabilities shall be reviewed and it
current liability hence current and non must be ensured that all disclosures of loan are in
current liabilities may be misstated accordance with relevant accounting standards.
2. It is anticipated that there will be wip of Consideration shall be given as to whether an
$950000. There is a risk that quantity and independent expert is required to value wip, if so
value of work in progress is not properly thiss will need to be arranged with consent of
assessed hence wip may be misstated management
3. Company has ordered plant and Physically verify existence of sample of plant and
machinery worth 720000 but is unsure machinery to ensure only those received at year
whether the two thirds of plant and end are included in ppe
machinery will be received by year end.
There is a risk that plant and machinery
not recived are still included in ppe hence
ppe may be overstated
4. Finance director has announced that all Review the reasonableness of revaluation and
land and buildings will be revalued. There recalculate the revaluation surplus/ decficit to
is a risk that this revaluation is not In ensure non current assets are correctly valued
accordance with Ias 16 hence non
current assets may be misstated
5. The company has made a plan to make Discuss with manangement the status of
65 employee redundant. There is a risk redundancy provision and review and recalculate
that redundnadancy provision in not set the redundancy provision.
as per ias 37.
6. The company has outsourced its payroll Consideration shall be given to contacting the
processing to an external service service organisations auditor to confirm levelof
organistion may have weak control due controls in place there.
to which it may be difficult to obtain
SAAE leading to increased
control/detection risk.
Maple co:

Audit risk Auditor response

1. company has borrowed $2m from the The audit team shall ensure that 2m loan was
bank. There is a risk that this loan is not actually recived. In addition split between current
correctly split between current and non and non current liabilities shall be reviewed and it
current liability hence current and non must be ensured that all disclosures of loan are in
current liabilities may be misstated accordance with relevant accounting standards.
2. There are covenants/conditions attached The audit team shall remain alert throughout the
to the loan relating to minimum total audit to the risk that profits have been overstated
assets. There is a risk that management to meet loan covenants.
may overstate profits to meet loan
covenant hence assets may be overstated
3. Company is planning to capitalized Review breakdown of expenditure and do
$1.8m development expenditure as detailed testing to ensure only expenditure that
intangible asset. there is a risk that this meets capitalization criteria is included as asset
expenditure does not meet capitalization and rest is expensed.
criteria as per IAS 38 hence assets may be
overstated.
4. Surplus plant was sold resulting in profit Review non current asset register to ensure sold
on disposal of $210000. plant is removed from ppe, in addition
recalculate the profit on disposal
5. Goods sold of$0.5m Was returned. There Review a sample of post year end returns and
is a risk that sales returns are not ensure revenue has been reserved
removed from revenue hence revenue
may be overstated.
6. During the count there were movement During the audit, sample of gdn and grn shall be
of goods In and out of the reviewed and it must be ensured that they are
warehouse.there is a risk that some items correctly included in records.
of inventory are missed or counted twice
hence inventory may be
over/understated
 Lecture 8

Rhino and co

2013 2012
Inventory days: 1.9/7*365=99 days Inventory days: 1.4/8*365=64days
Receivable days: 3.1/12.5*365=91days Reciaveable days: 2/15*365=49 days
Payable days:1.6/7*365=83days Payable days:1.2/8*365=55days
Current ratio:5.8/2.6=2.2:1 Current ratio:5.3/1.2=4.4:1
Quick ratio(5.8-1.9)/2.6=1.5:1 Quick ratio(5.3-1.4)/1.2=3.3:1

Audit risk Auditor response

1) Company has borrowed $1million from The audit team shall ensure that $1m loan was
the bank. There is a risk that this loan is actually received. In addition the split between
incorrectly split between current and non current and non current liabilities shall be
current liabilities hence and non current reviewed and It must be ensured that all
liabilities may be over/understated disclosures of loan are in accordance with
relevant accounting standards
2) The directors are being paid bonus on The audit team shall remain alert throughout the
pbit. There is a risk that directors may audit to this risk. In addition they should compare
manipulate profits to earn bonus hence treatment against prior years.
profits may be overstated
3) The recivable days have increased from Do detailed testing of post year end cash
49 days to 91 days. There is a risk of receipts and review aged debtor analysis to asses
recoverability of these receivables may valuation of recivables
be overstated
4) The inventory days have increased from Do detailed testing of cost and nrv and review
64 days to 99 days. There is a risk that aged inventory report to assess valuation of
inventory is overstated inventory
5) The current ratio has fallen from 4.4 to Detailed going concern audit procedures shall be
2.2 and quick ratio has fallen from 3.3 to performed and discussed with directors to ensure
1.5. there is a risk of cash flow and going concern basis is appropriate.
liquidity issues which can lead to going
concern difficulties. This increases
inherent risk.
White and co

2010 2009
Inventory days:.2.1/11*365= 70 days Inventory days: 1.6/10*365=58 days
Recivable days:4.5/23*365=71days Recivable days:3/18*365=61 days
Payable days:1.6/11*365=53 days Payable days:1.2/10*365=44 days
Current ratio:6.6/2.5=1.8:1 Current ratio:6.9/1.2=5.8:1
Quick ratio: (6.6-2.1)/2.5=1.8:1 Quick ratio: (6.9-1.6)/1.2=4.4:1

Audit risk Auditor response

1. The salesman are being paid generous The audit shall remain alert throughout the audit
bonus on sales. There is a risk that they to this risk. In addition they should compare
may manipulate sales to earn bonus treatment against prior years
hence sales may be overstated.
2. The company has reviewed inventory Detailed cost and nrv testing shall be undertaken
valuation policy and has included to ensure goods are correctly Valued
additional overheads in inventory
valuation. There is a risk that inventory is
not properly valued as per IAS 2 hence
inventory may be misstated
3. The recivable days have increased from Do detailed testing of post year end cash receipts
61 days to 71 days. There is a risk of and review aged debtor analysis to assess
recoverability of these recivables hence valuation of receivables
recivables may be overstated
4. The inventory days have increased from Do detailed cost and nrv testing and review aged
58 days to 70 days. There is a risk that inventory report to assess valuation of inventory
inventory is overstated.
5. The current ratio has fallen from 5.8 to Detailed going concern audit procedures shall be
2.6 and quick ratio has fallen from 4.4 to performed and discussed with directors to ensure
1.8. there is a risk of cash flow and going concern basis is appropriate
liquidity issues which can lead to going
concern difficulties.this increases
inherent risk.
 Lecture 9

5 procedures of obtaining evidence(cairo)

1.confirmation: a confirmation represents audit evidence obtained by auditor as direct response from 3 rd
party in paper form, electronic form or any other form.

2. analytical procedures: consists of evaluation of financial information through analysis of plausible

relation b/w financial and non financial date.

3.inquiry : cosisits of seeking information from knowlegable person both within and outside the entity

4.recalculation: consists of checking mathematical accuracy of records both manually or electronically

5.observation: consists of looking at a process performed by others

How to write answer of each procedure?

1.confirmation: obtain confirmation from “ bank “ to verify “ bank balance “

2. analytical procedures: compare” bank balance “ with last yr, investigate difference.

3.inquiry: inquire from management as to whether “ any new a/c have been opened “

4. recalculation: recalculate the total of “ bank balance “ to ensure

5. observation: observe the process of “ receiving cash “ and “ depositing cash “to ensure
segregation of duties.
Qa? Explain 5 procedures of obtaining evidence?

Qb? For each procedure give e.g relevant to audit of ppe.

1. Confirmation: obtain confirmation from valuer to verify ppe balance

2. Analytical procedures: compare ppe balance with last year, investigate difference
3. Inquiry: inquire from management as to whether there have been any disposal
4. Recalculation: recalculate the total of depreciation expense to ensure
5. Observation: observe the process of asset register and payment to ensure segregation of duties.

Qb? For each procedure give e.g relevant to audit of bank loan.

1. Confirmation: obtain confirmation from bank to verify loan amount.

2. Analytical procedures: compare loan amount with last year,investigate difference
3. Inquiry : inquire from management as to whether andu security is provided
4. Recalculation : recalculate the total interest expense to ensure arithmetic accuracy
5. Observation : observe the process of documenrs and interest payment to ensure segregation of
duties.
 Lecture 10

Syllabus changers and tips and tricks.

Core areas :

1. Ethical threats and safeguards

2. Corp. governacne weakness and recommendation
3. Controls and toc
4. Subs procedures
5. Audit risk and responses
6. Audit reports.