48
Step by Step approach_5 ISA 300 AUDIT PLANNING F8 AA INT _ Kashif Kamran _ June 2009
Audit Planning 49
F8 AA INT _ Kashif Kamran _ June 2009
Introduction 50
Auditor should plan the audit so that the
engagement will be performed in an effective manner Audit planning involves, establishing an overall audit
strategy and audit plan to reduce audit risk to an acceptable level.
F8 AA INT _ Kashif Kamran _ June 2009
Introduction 51
Adequate planning helps to ensure that: appropriate attention is devoted to important areas of audit
Potential problems are identified and resolved on a timely basis
Audit engagement is properly organized and managed to be performed in effective manner
F8 AA INT _ Kashif Kamran _ June 2009
Introduction 52
Planning is not a discrete phase of audit , but rather
a continual and iterative process that often begins shortly after completion of the previous audit and continues until the completion of the current audit engagement
F8 AA INT _ Kashif Kamran _ June 2009
Preliminary engagement activities 53
The auditor should perform the following activities
at the beginning of the current audit engagement
Procedures for client continuation Compliance with ethical requirements Establishing terms of engagements (ISA-210)
F8 AA INT _ Kashif Kamran _ June 2009
Purpose of preliminary engagement procedures 54
The auditor maintains the necessary independence
and ability to perform the engagement There are no issues with management integrity There is no misunderstanding with the client as to
terms of audit engagement
F8 AA INT _ Kashif Kamran _ June 2009
Audit Strategy 55
F8 AA INT _ Kashif Kamran _ June 2009
Scope of Audit Strategy 56
It is important to note that the overall strategy for the
audit of the financial statements sets the scope, timing, and direction of the audit and guides the development of the more detailed audit plan. Specific matters to consider in audit strategy includes: The scope of the audit engagement, for example: Industry-specific financial reporting requirements, including the possibility of mandatory reporting to regulators the number of locations to be visited by the audit team the expected use of audit evidence obtained in prior audits F8 AA INT _ Kashif Kamran _ June 2009
Scope of Audit Strategy 57
The
use of information technology by Co. and the expected use of computer-based audit techniques The availability of the relevant employees of Co. to assist audit personnel in their audit enquiries.
F8 AA INT _ Kashif Kamran _ June 2009
Reporting objectives 58
Audit firm timetable Requirement to update management with the status of the audit work Encouraging communications between the audit team including reviews of work performed Requirement or expectation to communicate with third parties.
F8 AA INT _ Kashif Kamran _ June 2009
Reporting objectives 59
Overall direction of audit , including preliminary
assessment of risk areas, and the nature timing and extent of audit procedures.
F8 AA INT _ Kashif Kamran _ June 2009
Conclusion Audit Strategy 60
Once the overall audit strategy has been established
the auditor is able to start with the development of a more detailed audit plan to address the various matter identified in audit strategy in more detail
F8 AA INT _ Kashif Kamran _ June 2009
AUDIT PLAN 61
• Particular operating issues faced by the
company, its management structure, systems and governance procedures, and its customer and supplier profiles. • Ultimately, auditor will have to ascertain the extent of the
audit procedures they need to carry out before arriving at their audit opinion.
F8 AA INT _ Kashif Kamran _ June 2009
Specific issues in Audit planning 62
Continuous updating of audit strategy and audit plan Direction , supervision and review Documentation Communication with those charged with governance
F8 AA INT _ Kashif Kamran _ June 2009
63
Step by Step Approach_7 ISA 315 Risk Assessment F8 AA INT _ Kashif Kamran _ June 2009
ISA 315 RISK ASSESSMENT 64
AUDIT RISK
=
INHERENT
CONTROL
Entity level risk
Sampling risk F8 AA INT _ Kashif Kamran _ June 2009
DETECTION
Risk of audit procedures
Non sampling risk
Internal controls 83 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Internal Controls 84
Internal Controls Design of the internal control system
Operation of the internal control system
Preliminary assessment Beyond preliminary assessment
Test of Controls F8 AA INT _ Kashif Kamran _ June 2009
5 Elements of Internal Controls Preliminary Assessment
The entity’s risk assessment process
The control environment
Control activities
F8 AA INT _ Kashif Kamran _ June 2009
The information system
Monitoring of controls
Beyond preliminary assessment
Slide 85
Control Environment 86
The control environment includes the attitudes,
awareness, and actions of management and concerning the entity's internal control and its importance in the entity. The control environment is the foundation for effective internal control, providing discipline and structure
F8 AA INT _ Kashif Kamran _ June 2009
Entity risk assessment procedure 87
An entity's risk assessment process is its process for
identifying and responding to business risks and the results thereof. For financial reporting purposes, the entity's risk assessment process includes how management identifies risks relevant to the preparation of financial statements that give a true and fair view (or are presented fairly, in all material respects) in accordance with the entity's applicable financial reporting framework, estimates their significance, assesses the likelihood of their occurrence, and decides upon actions to manage them.
F8 AA INT _ Kashif Kamran _ June 2009
Information System 88
An information system consists of infrastructure (physical and
hardware components), software, people, procedures, and data. Infrastructure and software will be absent, or have less significance, in systems that are exclusively or primarily manual. Many information systems make extensive use of information technology (IT). The information system relevant to financial reporting objectives, which includes the financial reporting system, consists of the procedures and records established to initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity. Transactions may be initiated manually or automatically by programmed procedures. F8 AA INT _ Kashif Kamran _ June 2009
Information system and communication 89
Communication involves providing an understanding of
individual roles and responsibilities pertaining to internal control over financial reporting. It includes the extent to which personnel understand how their activities in the financial reporting information system relate to the work of others and the means of reporting exceptions to an appropriate higher level within the entity. Open communication channels help ensure that exceptions are reported and acted on Communication takes such forms as policy manuals, accounting and financial reporting manuals, and memoranda. Communication also can be made electronically, orally, and through the actions of management F8 AA INT _ Kashif Kamran _ June 2009
Control Activities 90
Authorization Comparison Computer controls Arithmetical accuracy Maintaining trial balance Accounting reconciliation Physical security Segregation of Duties
F8 AA INT _ Kashif Kamran _ June 2009
Monitoring of controls 91
Pre-dominant role of the internal audit department Role of the internal audit department Internal audit reporting
F8 AA INT _ Kashif Kamran _ June 2009
Types of Computer Controls 92
General ITcontrols
Application Controls
Policies and procedures Manual or automated that relate to many procedures that operate applications at a business process level F8 AA INT _ Kashif Kamran _ June 2009
Slide 92
General IT-controls 93
Systems acquisition, development & maintenance
Data centre & network operations
General Controls Application system acquisition, development & maintenance F8 AA INT _ Kashif Kamran _ June 2009
Access security
Slide 93
General IT-controls - Examples 94
f o n o i ct i r t s e R access
Op Passwords eratin
Servic maint e & enanc g lo e gs agreement
General controls ls l a w e r i F
Backups
Virus softw are
F8 AA INT _ Kashif Kamran _ June 2009
Disaster recovery plan Slide 94
Application controls 95
Controls over specific application been used in the organization
Controls over input Controls over processing Controls over output Controls over the master data / standing data
F8 AA INT _ Kashif Kamran _ June 2009
Assessment of the control risk 96
Stage 1 -Overview design of the internal control system Assessment of control risk ( preliminary and conclusive)
F8 AA INT _ Kashif Kamran _ June 2009
Documenting the Internal control understanding 97
Having understood the DESIGN of the internal
control system the auditor needs to DOCUMENT the understanding on the design of the internal control system either in the form of: Flow
charts Narrative Notes
F8 AA INT _ Kashif Kamran _ June 2009
Operations of the internal control system 98
Once
the auditor has understood and documented the design of the internal control system, he needs to check its operation to build a reasonable assurance on the control risk Test of control procedures will be performed by the auditor to establish the accuracy of the internal controls operation. Test of controls checks the QUALITATIVE aspect of the financial reporting system
F8 AA INT _ Kashif Kamran _ June 2009
Step by Step flow Test of controls 99 KASHIF KAMRAN F8 AA INT
EXAM IMPORTANT AREA F8 AA INT _ Kashif Kamran _ June 2009
F8 syllabus for Test of Controls 100
Sales cycle Purchase cycle Payroll cycle Cash and Bank cycle
F8 AA INT _ Kashif Kamran _ June 2009
Test of Controls 101
Three things you should know for Control to pass F8
paper Control
objectives Control activities Test of controls
F8 AA INT _ Kashif Kamran _ June 2009
Control Objective 102
The control objective is the purpose for which the
controls are implemented in the organization The basic purpose behind implementing controls , is to mitigate risk of fraud and errors Control objective could only be achieved through proper implementation of Control Activities
F8 AA INT _ Kashif Kamran _ June 2009
Common controls 103
F8 AA INT _ Kashif Kamran _ June 2009
AUDIT TEST 104
x x
F8 AA INT _ Kashif Kamran _ June 2009
PURCHASE CYCLE 105
F8 AA INT _ Kashif Kamran _ June 2009
Control objectives 106
Orders may be forgotten Goods not needed Missing out a bulk discount Wrong good received Poor quality of goods received Goods never arrive Good stolen Wrong invoice received Problems in reconciliation F8 AA INT _ Kashif Kamran _ June 2009
DOCUMENTS 107
Pre-numbered Multiple copies Authorized When ever the auditor test control around documents
he ensure that the document is properly signed , is prenumbered and have multiple copies Multiple copies is a very effective control, for keeping record of transaction and for comparison purpose. To avoid duplication and manipulation of documents , pre-numbering is a very effective control F8 AA INT _ Kashif Kamran _ June 2009
Comparison 108
Purchase requisition Purchase order Goods received note Invoice
Observation Inspection F8 AA INT _ Kashif Kamran _ June 2009
Accounting reconciliation 109
Bank reconciliation Customer reconciliation
Inspection
F8 AA INT_ Kashif Kamran
Supplier reconciliation
109 F8 AA INT _ Kashif Kamran _ June 2009
Segregation of duties 110
Requisition Receiving
Observation
Invoicing All FOUR activities are performed by different
F8 AA INT_ Kashif Kamran
Ordering
departments or individuals ensuring proper segregation of duties 110 F8 AA INT _ Kashif Kamran _ June 2009
Computer controls 111
Observati on
Reperforman ce Inspection Observati on Reperforman ce Observati on Observati on
F8 AA INT _ Kashif Kamran _ June 2009
Physical security 112
Physical safeguard of the assets
Observation
F8 AA INT _ Kashif Kamran _ June 2009
SALES SYSTEM 113 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
SALES SYSTEM 114
F8 AA INT _ Kashif Kamran _ June 2009
Sales system Control Objectives 115
Customer unlikely to pay Goods delivery terms cannot be met Products not available Cheap prices given to friends Wrong item sent Poor quality items Goods are being stolen Wrong invoice Payment is stolen Settlement discount wrongly claimed
F8 AA INT _ Kashif Kamran _ June 2009
Controls activities 116
To check the credit worthiness of the customer To check availability of goods before orders are
acknowledge Agree on the terms of customer before Orders are acknowledge Orders should be approved for prices and goods availability Goods dispatch note should be compared with the customer purchase order and authorized F8 AA INT _ Kashif Kamran _ June 2009
Control Activities 117
Goods should be checked for quality before they are
sent to the customers Proper Physical security of the inventory warehouse Invoices should be compared with the goods dispatch notes and purchase order and authorized Cash handling should have proper physical security, and payment received should be evident by authorized receipt vouchers Payment received is authorized and approved before acceptance
F8 AA INT _ Kashif Kamran _ June 2009
118 F8 AA INT KASHIF KAMRAN
WAGE SYSTEM F8 AA INT _ Kashif Kamran _ June 2009
Wage System Control Objectives
Control Activities
Test of Control
Staff punch clock cards for other employees
Clock card machine should be open faced and supervised
OBSERVATION
Timesheet claim false hours
Timesheet should be approved by departmental head
INSPECTION
Overtime details should be approved in advance and reviewed when claimed
INSPECTION
Overtime is claimed that never worked
F8 AA INT _ Kashif Kamran _ June 2009
119
Wage System Control Objectives
Control Activities
Starting / leaving dates wrong
Payroll data should be regularly checked to personnel files
Inspection
Leaver form should be properly authorized at time the employee leave the organization
Inspection
Staff who leave continue to get paid
Payroll details changed
F8 AA INT _ Kashif Kamran _ June 2009
Personnel records manually should be kept secured and computer records should have restricted access 120
Test of Control
Observation
Wage System Control Objectives Inaccurate calculation Failure to update tax changes Incomplete set of pay slips
Where staff paid in cash, it is stolen
F8 AA INT _ Kashif Kamran _ June 2009
Control Activities
Test of Control
Random check of calculation by managers
RECALCULATION
Any amendments to tax data authorized by managers
INSPECTION
Pay slips numbered
INSPECTION
Where cash wages exist, use sealed envelopes Employees counts wages, and signed for them
OBSERVATION
121
Reporting Control Weaknesses 122 KASHIF KAMRAN F8 AA INT
F8 AA INT _ Kashif Kamran _ June 2009
Management Letter 123
Management Letter is also known as Letter of
Weaknesses It is governed by ISA 260 It is written by the Auditor to the management As soon as the auditor conclude the test of control procedures It includes:
Observation Recommendation Management Response
F8 AA INT _ Kashif Kamran _ June 2009
TESTS OF CONTROLS 124
Procedures address questions such as How are controls applied? Are controls applied consistently? By whom are controls applied?
F8 AA INT _ Kashif Kamran _ June 2009
TESTS OF CONTROLS & CONTROL RISK 125
Tests of controls are procedures to assess control risk Assessed level control risk helps determine
acceptable level detection risk
F8 AA INT _ Kashif Kamran _ June 2009
Filling the Assurance Bucket 126
F8 AA INT _ Kashif Kamran _ June 2009
Types of Audit Tests 127
F8 AA INT _ Kashif Kamran _ June 2009
Tests of Controls 128
Inquiry
Inspection Observation
Reperformance F8 AA INT _ Kashif Kamran _ June 2009
ISA 300
Plan the audit Understand entity
Assess risk of material misstatement
ISA 315
Respond to risk
ISA 330
Expect effective controls Tests of controls
Expect ineffective controls Unsatisfactory Report to management
Satisfactory Restricted substantive tests
Full substantive tests Overall review of F/S
Slide 129
Stage_3 Substantive Procedures 130 KASHIF KAMRAN F8 AA INT
EXAM IMPORTANT AREA F8 AA INT _ Kashif Kamran _ June 2009
ANALYTICAL PROCEDURES 131 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Substantive Procedures 132
F8 AA INT _ Kashif Kamran _ June 2009
AP 133
"Analytical
procedures" means evaluations of financial information made by a study of plausible relationships. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts
F8 AA INT _ Kashif Kamran _ June 2009
AP _ Planning stage 134
Analytical
Procedures are performed as RISK ASSESSMENT PROCEDURES at the planning stage of audit
ISA 300 Planning the audit ISA 315 Risk Assessment When performing INHERENT RISK assessment at the planning stage at account balance level , the auditor should, perform ANALYTICAL PROCEDURES, to determine any unusual relationship, by conducting an analysis of the current financial statement with the prior financial statements and industry trends
F8 AA INT _ Kashif Kamran _ June 2009
AP_Planning Stage 135 June 30,08 Estimated
June 30,07 Actual
Sales Payables Receivables
F8 AA INT _ Kashif Kamran _ June 2009
Increase/ Increase / decrease Decrease in Amount in %
Industry
Reason/ Remarks
Preliminary Analytical Procedures 136
To understand the client’s business and transactions
To identify financial statement accounts likely to contain errors
By understanding the client’s business and identifying where errors are likely to occur, the auditor can allocate more resources to investigate necessary accounts.
Analytical Procedures _ Performance 137
AP- are low assurance gathering procedures
effectiveness of internal control system, the auditor can rely on AP at the performance stage to build reasonable assurance on the account balance
If the auditor concludes on the
F8 AA INT _ Kashif Kamran _ June 2009
AP as SP 138
When designing and performing analytical procedures as substantive procedures, the auditor will need to consider a number of factors such as the following: The suitability of using substantive analytical procedures The reliability of the data, whether internal or external, from which the expectation of recorded amounts or ratios is developed Whether the expectation is sufficiently precise to identify a material misstatement at the desired level of assurance The amount of any difference of recorded amounts from expected values that is acceptable
F8 AA INT _ Kashif Kamran _ June 2009
Suitability of using AP 139
Substantive
analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. The presence of these relationships provides audit evidence as to the completeness, accuracy and occurrence of transactions captured in the information produced by the entity's information system. However, reliance on the results of substantive analytical procedures will depend on the auditor's assessment of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists. F8 AA INT _ Kashif Kamran _ June 2009
4 Steps to AP 140
Develop an expectation Compare the expected amount with the actual
amount Calculate difference Investigate difference with management
F8 AA INT _ Kashif Kamran _ June 2009
TYPES OF ANALYTICAL PROCEDURES 141
Trend analysis Ratio analysis Profitability ratios Liquidity ratios Modeling Statistical tests, i.e., regression
GBW 8th ed., Ch. 6
F8 AA INT _ Kashif Kamran _ June 2009
142
TEST OF DETAILS OF TRANSACTION 143 F8 AA INT KASHIF KAMRAN
EXAM IMPORTANT AREA
F8 AA INT _ Kashif Kamran _ June 2009
Recap to Substantive procedures 144
Under, the system based methodology to audit, the
auditor FIRST perform the TEST OF CONTROL procedures, and on the outcome of the results of Test of Control procedures, plan the extent of SUBSTANTIVE PROCEDURES
F8 AA INT _ Jun 2009_ Kashif Kamran
Purpose of Test of Control 145
TOC
procedures are performed, to check the DESIGN and OPERATION of the internal control system. If the result of the TOC procedures, is effective (i.e. the controls in place are effective for design and operations ) the auditor will lower the extent of his SUBSTANTIVE procedures. (Analytical procedures) However if the result of TOC procedures, is ineffective the auditor will increase the extent of his SUBSTANTIVE procedures.( Test of details ) F8 AA INT _ Jun 2009_ Kashif Kamran
What are substantive procedures? 146
Substantive
procedures, are evidence gathering
procedures. The word substantive, has been derived from the word SUBSTANTIAL , meaning that these are detailed procedures performed by auditor to check the accuracy of the balance within the FINANCIAL STATEMENTS. Therefore the PURPOSE of SP is to evaluate the accuracy of the NUMBERS or to evaluate the risk of material misstatements at the account balance level F8 AA INT _ Jun 2009_ Kashif Kamran
TEST OF DETAIL OF TRANSACTIONS 147
TOD
are procedures design around verification
of transaction within an
validity assertions confirm
F8 AA INT _ Jun 2009_ Kashif Kamran
account balance
to
of all Financial statement
What are Financial Statement assertions 148
FS assertions are underlying principles governing
the recording of transaction in an account balance, the responsibility of which rest with the management. FS assertions is the responsibility of the management and the auditor verifies the proper application of these assertions through his TOD.
F8 AA INT _ Jun 2009_ Kashif Kamran
ASSERTIONS 149
Completeness
All Transaction have been recorded Occurrence All transaction which have occurred have been recorded Disclosure and presentation All financial information has been presented and disclosed in the financial statements Rights and Obligations All assets and liabilities recorded are supported by rights and obligations
F8 AA INT _ Kashif Kamran _ June 2009
ASSERTIONS 150
Accurate valuations All
items which required valuation have been properly valued Cut-off All transaction pertaining to the accounting year has been recorded Existence All assets recorded should have a physical existence F8 AA INT _ Kashif Kamran _ June 2009
ISA-500 specific considerations 158
ISA-501 Physical presence at Inventory count ISA-505 External confirmations
F8 AA INT _ Jun 2009_ Kashif Kamran
ISA 501 INVENTORY COUNT 159 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Inventory count 160
Before
Planning
F8 AA INT _ Jun 2009_ Kashif Kamran
During
After
Performance
Valuation
Planning an inventory count 161
Identifying risk of material mis-statement Nature of internal controls relating to inventory Existence of adequate procedures established and proper instruction given to personal involved in stock count at client end Timing of count Location of inventory count Need for an expert
F8 AA INT _ Jun 2009_ Kashif Kamran
Performing an inventory count 162
Auditor would
out test counts
observe
Observe whether
stock count and would carry
stock count instructions are
been properly followed by the stock counters.
In performing test counts the auditor would follow a two-way test approach to ensure Records to Floor testing Floor to Record testing
completeness
Retention
procedures
of any stock documents for further
Cut-off procedures F8 AA INT _ Jun 2009_ Kashif Kamran
Performing an inventory count 163
Where any inventory is in the third party control,
the auditor should sent confirmation to verify inventory balances. However if the auditor consider that the inventory items are material he could. Test
the integrity of management Observe the third party counts by himself Obtaining the other auditor report on stock counts Inspecting document of inventories held by third parties. F8 AA INT _ Jun 2009_ Kashif Kamran
Valuing Inventory 164
Ensure that, inventory has been
properly valued based
on stock counts sheets available with the auditor. Ensure proper rate for inventory valuation has been picked up on the basis of FIFO or Weighted average cost method Ensure that all stock variance has been closed out Ensure that all work papers pertaining to inventory has been properly signed by auditor and client personal available at stock Ensure all adjustments identified by the auditors is reflected in the financial statements where agreed. Ensure proper inventory control sheet and inventory physical observation report has been filed in audit work papers
F8 AA INT _ Jun 2009_ Kashif Kamran
165
F8 AA INT _ Kashif Kamran _ June 2009
ISA 505 External confirmations 166 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
External confirmations 167
Remember ISA-500 factors for Reliability
From sources outside entity Documentary Original
Confirmation = outside + documentary +original = most reliable evidence available to auditor
F8 AA INT _ Jun 2009_ Kashif Kamran
External confirmations 168
Examples of external confirmation commonly used
by auditors for evidence gathering: Bank confirmations- deposit / loans Account receivable confirmation Stock held by third party Legal advisors Investment in stock market Accounts payable confirmations Valuers / actuarial valuations
F8 AA INT _ Jun 2009_ Kashif Kamran
Process of external confirmations
F8 AA INT _ Jun 2009_ Kashif Kamran
169
Management Refusal 175
Seek explanation for refusal Valid grounds Perform alternative procedures
F8 AA INT _ Kashif Kamran _ June 2009
No response to confirmation 176
Send reminders
Still no response
Perform alternative procedures Obtain a breakup schedule F8 AA INT _ Jun 2009_ Kashif Kamran
Verifications
Approaching TOD in an exam question 177 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Test of details Fixed Assets 178
ASSERTIONS
Existence Completeness Rights Valuation
Occurrence / cut-off Presentation & disclosures F8 AA INT _ Jun 2009_ Kashif Kamran
AUDIT TEST Physical inspection Physical inspection Inspection of records Inspection /
recalculation/ observation Inspection of documents Inspection of financial statements
Tricks – Assertions vs. AEIOU Assertions
Evidence
Fixed assets
Existence
Inspection
I will select a sample of fixed assets from the fixed asset register and will physically inspect the assets selected to confirm Existence
Completeness
Inspection
I will select a random sample of fixed assets on the premises and will inspect / trace the selection to the fixed asset register to confirm Completeness
Rights / obligations
Inspection
I will select a sample of fixed assets from the fixed asset register and trace / inspect the selection to property documents, Title deeds, insurance policies etc. to confirm Rights
F8 AA INT _ Jun 2009_ Kashif Kamran
179
Tricks – Assertions vs. AEIOU 180
Assertions Occurrence / cut-off
Evidence
Fixed assets
Inspection
I will make a sample selection of some additions during the year, and will trace/ inspect these additions for Goods received notes/ invoices/ purchase orders to confirm occurrence. I will obtain the last Good receiving note and inspect/ trace it to ledger to ensure that it has been incorporated as the last occurrence for the year to confirm Cut-off
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks – Assertions vs. AEIOU 181
Assertions Valuation
Evidence
Fixed assets
Inspection , recalculation
I will select a sample of fixed assets from the fixed asset register and will Recalculate the depreciation as per the management policy and inspect it to the ledgers to ensure proper Valuation I will select a sample of fixed asset from the fixed asset register and inspect them for their condition to evaluate the appropriateness of management useful life for valuation purpose
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks – Assertions vs. AEIOU 182
Presentation and disclosure
Inspection
will inspect the financial statements, to ensure that proper presentation and disclosure has been given by the management with regard to Fixed assets as required by the IAS-16 or other relevant legislations. I will inspect the financial statements to ensure that the fixed assets has been properly presented on the face of the balance sheet and in the notes to accounts ( with proper breakup in owned and leased assets) as required by the relevant legislations I
F8 AA INT _ Jun 2009_ Kashif Kamran
Test over assets and liabilities Examination tips and tricks 183
Assets Overstatement
From ledgers to source documents
F8 AA INT _ Jun 2009_ Kashif Kamran
Liabilities
Understatement From source documents to ledgers
Trade receivables- TOD 184
ASSERTIONS
AUDIT TEST
Existence
Confirmation
Completeness
Tracing / vouching
Valuation
Age analysis / provisions
Rights and obligations
Confirmation
Occurrence / Cut-off Presentation and
disclosures
F8 AA INT _ Jun 2009_ Kashif Kamran
Confirmations Inspection of financial
statements
Cash and Bank -TOD 185
Existence
Bank confirmation / Petty
completeness
cash – perform a physical cash count Tracing vouchers to ledgers / bank reconciliation statement
Valuation
Foreign currency account
Rights and obligations Occurrence / Cut-off Presentation and disclosures
F8 AA INT _ Jun 2009_ Kashif Kamran
restated to local currency
Bank confirmation Bank confirmation / last
payment and receipt vouchers Inspection of financial statements
TOD- Bank loan 186
Existence Completeness Occurrence/cutoff Obligation
Evidence gathering procedures Bank confirmation Bank statements Bank correspondence
Valuation Presentation and disclosures
F8 AA INT _ Jun 2009_ Kashif Kamran
Provisions 187
Correspondence with
Company's legal advisor How much to provide/ basis of provision Contingencies/ provisionsproper disclosures and presentations Management representation letter
F8 AA INT _ Jun 2009_ Kashif Kamran
For provision
completeness, occurrence/cut-off ,valuation ,obligations and presentations/ disclosures will be important assertions
Payable -TODs 188
Existence Completeness Occurrence / cut-off Obligations Valuation Presentation and disclosures
F8 AA INT _ Jun 2009_ Kashif Kamran
Confirmations
Drafting TODs in an exam question 189
DEBTORS
Obtain a breakup schedule of receivable balance Agree the receivable breakup schedule total to receivable ledgers, trial balance and financial statements Agree the opening balance of receivable ledger to last year working paper / financial statements For the sales made during the year, make a sample selection , and agree the sample selected , to sales invoices and goods dispatch notes. For the payments made during the year, make a sample selection, and agree the sample selected, to receipt vouchers and bank statements
F8 AA INT _ Jun 2009_ Kashif Kamran
Drafting TODs in an exam question 190
Select a
sample
of customer balances from the breakup schedule of debtors , for debtor circulization. When selecting sample ensure a representative sample of the debtor population is obtained i.e. selection has been made for small and material balances. For sample selected, prepare blank confirmation request for material balances and negative confirmation request for immaterial balance selected. Circulate debtors confirmations. For responses received, agree the responses to breakup schedule. For responses , which dis-agree with the balance on breakup schedule , Inquire management and prepare a reconciliation
F8 AA INT _ Jun 2009_ Kashif Kamran
Drafting TODs in an exam question 191
Valuation
Inquire the management about the provision for doubtful
debts policy and inspect the policy documents Ensure that policy for general provision is in line with industry practices and the economic environment .
Recalculate the amount of general provision as per the
policy statements and agree the provision recalculated to the general ledger
For any specific provision provided, inquire management has to reason and assumption used. Recalculate the specific provision by using the assumption provided by management
F8 AA INT _ Jun 2009_ Kashif Kamran
Drafting TODs in an exam question 192
Sales
a breakup schedule of sales balance Agree the sales breakup schedule total to sales ledgers, trial balance and financial statements For the sales made during the year, make a sample selection , and agree the sample selected , to purchase orders, sales invoices and goods dispatch notes. Obtain
Note : Sales can often be audited by analytical procedures by verifying quantity sold on a sampling basis. F8 AA INT _ Jun 2009_ Kashif Kamran
Drafting TODs in an exam question 193
Sales Analytical procedures Develop an expectation of Sales balance by : Inspecting price list obtained by management Enquiring
prices where necessary for changes made during the period Making a sample selection of quantity sold during the period from the breakup provided by the management and trace the quantity sold to GDN, Purchase orders and Invoices. Recalculating the amount of sales by multiplying the sales quantity with the respective selling prices prices. F8 AA INT _ Jun 2009_ Kashif Kamran
Drafting TODs in an exam question 194
Compare the expected Sales amount developed to
the actual amount appearing in the ledger For any differences, inquire management as to the reason for variation
F8 AA INT _ Jun 2009_ Kashif Kamran
Other procedures 195
Inquire management about the discount policy and
ensure that it has been properly applied during the year Make a sample selection of invoices and trace selling prices on invoices to relevant price list
F8 AA INT _ Jun 2009_ Kashif Kamran
Tips and Tricks of TOD 196
Existence completeness Valuation Rights and obligations Occurrence / Cut-off Presentation and disclosures
F8 AA INT _ Jun 2009_ Kashif Kamran
Inspection , observation ,
confirmation AP, Inspection, confirmation Inspection , recalculation Confirmations , inspection Inspection, confirmation Inspection / inquiry/
confirmation
Tricks of using AEIOU in TOD Q/s 197
Which of the following evidence gathering procedures will be used for sales verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 198
Which of the following evidence gathering procedures will be used for cash and bank verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 199
Which of the following evidence gathering procedures will be used for bank loans verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 200
Which of the following evidence gathering procedures will be used for fixed asset verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 201
Which of the following evidence gathering procedures will be used for provision verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 202
Which of the following evidence gathering procedures will be used for payables verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 203
Which of the following evidence gathering procedures will be used for purchases verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
Tricks of using AEIOU in TOD Q/s 204
Which of the following evidence gathering procedures will be used for Inventory verification
Analytical procedures Inquiry Confirmation Inspection Observation Recalculation
F8 AA INT _ Jun 2009_ Kashif Kamran
TEST YOUR KNOWLEDGE 205
What are the two types of Substantive procedures? What is the level of assurance provided by both the
types of substantive procedures? Analytical procedures, are performed at THREE stages, what is the purpose of AP at planning and performance stage? AP at performance stage confirms the assertions of ________________
F8 AA INT _ Jun 2009_ Kashif Kamran
TEST YOUR KNOWLEDGE 206
What are the SIX evidence gathering procedures? What are financial statements assertion and list the
financial statement assertions? ISA-501 Inventory observation, explain the procedures of dealing with inventory count.
List the inventory procedures at Planning stage List the inventory procedures at performance stage List the inventory procedures at post performance stage.
F8 AA INT _ Jun 2009_ Kashif Kamran
TEST YOUR KNOWLEDGE 207
CONFIRMATIONS Debtors
Creditors
Legal advisor
Bank ( loan /deposit)
F8 AA INT _ Jun 2009_ Kashif Kamran
ASSERTIONS Existence, occurrence / cut-off, Rights, completeness Completeness, Existence, obligations, occurrence/ cut-off Existence, completeness, valuation, presentation and disclosure, obligations, occurrence/ cut-off Existence, completeness, rights and obligations,
TEST YOUR KNOWLEDGE 208
Debtor Confirmation will NEVER test valuation assertion Can confirmation be used in Fixed Assets verification ? Can confirmation be used for Stock verification? What is the PROCEDURE for circulizing confirmation
F8 AA INT _ Jun 2009_ Kashif Kamran
Evidence gathering Other procedures 209 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
m a S
Analytical procedures
g n i l p
Test of detail of transactions
Cash count Confirmations Inventory count Fixed asset inspection
LAST RESORT
Design Operations
Internal auditor Expert Service organization
F8 AA INT _ Kashif Kamran _ June 2009
210
Other sources of evidence helpful for auditor 211
Using the work of an internal auditor Using the work of an expert Using the work of the service organization
F8 AA INT _ Kashif Kamran _ June 2009
ISA 610 Using the work of internal auditor 212
F8 AA INT _ Kashif Kamran _ June 2009
Definition 213
"Internal
auditing" means an appraisal activity established within an entity as a service to the entity. Its functions include, amongst other things, monitoring internal control.
F8 AA INT _ Kashif Kamran _ June 2009
Work of Internal Auditor 214
The scope and objectives of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal auditing activities include one or more of the following: Monitoring of internal control. Examination of financial and operating information. Review of the economy, efficiency and effectiveness of operations Review of compliance with laws and regulations F8 AA INT _ Kashif Kamran _ June 2009
Co-ordination 215
The external auditor should obtain a sufficient
understanding of internal audit activities to identify and assess the risks of material misstatement of the financial statements and to design and perform further audit procedures.
F8 AA INT _ Kashif Kamran _ June 2009
Placing Reliance 216
The evaluation of internal auditing involves: Persons having adequate technical training and proficiency Sufficient and appropriate audit evidence is available Action initiated against internal auditor findings
F8 AA INT _ Kashif Kamran _ June 2009
ISA 620 Using the work of an expert 217 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Who is an expert? 218
"Expert" means a person or firm possessing special
skill, knowledge and experience in a particular field other than accounting and auditing.
F8 AA INT _ Jun 2009_ Kashif Kamran
Experts 219
An expert may be: Contracted by the entity; Contracted by the auditor; Employed by the entity; or Employed by the auditor.
F8 AA INT _ Jun 2009_ Kashif Kamran
Involvement of Expert 220
Examples include the following:
Valuations of certain types of assets, for example, land and buildings, plant and machinery, works of art, and precious stones. Determination of quantities or physical condition of assets, for example, minerals stored in stockpiles, underground mineral and petroleum reserves, and the remaining useful life of plant and machinery. Determination of amounts using specialized techniques or methods, for example, an actuarial valuation. The measurement of work completed and to be completed on contracts in progress. Legal opinions concerning interpretations of agreements, statutes and regulations
F8 AA INT _ Kashif Kamran _ June 2009
Determining the work of an expert 221
When determining the need to use the work of an
expert, the auditor would consider: The engagement team's knowledge and previous experience of the matter being considered; The risk of material misstatement based on the nature, complexity, and materiality of the matter being considered; and The quantity and quality of other audit evidence expected to be obtained
F8 AA INT _ Kashif Kamran _ June 2009
Competence and objectivity of the expert 222
When planning to use the work of an expert,
the auditor should evaluate the professional competence of the expert. This will involve considering the expert's: Professional certification or licensing by, or membership in, an appropriate professional body; and Experience
and reputation in the field in which the auditor is seeking audit evidence.
F8 AA INT _ Kashif Kamran _ June 2009
Objectivity 223
The auditor should evaluate the objectivity of
the expert. The risk that an expert's objectivity will be impaired increases when the expert is:
Employed by the entity; or Related in some other manner to the entity, for example, by being financially dependent upon or having an investment in the entity.
F8 AA INT _ Kashif Kamran _ June 2009
Evaluating the work of the expert 224
The auditor should evaluate the appropriateness
of the expert's work as audit evidence regarding the assertion being considered. This will involve evaluation of whether the substance of the expert's findings is properly reflected in the financial statements or supports the assertions, and consideration of:
Source data used; Assumptions and methods used and their consistency with prior periods; and Results of the expert's work in the light of the auditor's overall knowledge of the business and of the results of other audit procedures.
F8 AA INT _ Jun 2009_ Kashif Kamran
Reference to an expert in the auditor's report 225
When issuing an
unmodified auditor's report,
the auditor should not refer to the work of an expert. Such a reference might be misunderstood to be a qualification of the auditor's opinion or a division of responsibility, neither of which is intended.
F8 AA INT _ Kashif Kamran _ June 2009
Reference to an expert in the auditor's report 226
Modified audit report as a result of the work of an expert
Seek expert permission Permission given Issue a modified report , given explanation of the work of an expert F8 AA INT _ Kashif Kamran _ June 2009
Refuse permission Seek legal advice
ISA 320
AUDIT MATERIALITY 227
F8 AA INT _ Kashif Kamran _ June 2009
Brought forward Knowledge 228
ISA 200 The objective of audit of financial statements is to enable an auditor to express an opinion whether financial statements give a true and fair view in
all
material respect in with identified financial reporting framework accordance
ISA 320 Audit Materiality
F8 AA INT _ Kashif Kamran _ June 2009
Brought forward knowledge 229
In designing the audit plan, the auditor establishes
an acceptable materiality level so as to detect quantitatively material misstatements. ISA 320 Audit Materiality
F8 AA INT _ Kashif Kamran _ June 2009
What is materiality ? 230
Information
is material if its omission or misstatement could influence the economic decisions of users taken on the basis of financial statements.
Materiality provides a threshold or cut-off points
rather than being a primary qualitative characteristics which information must have if it is to be useful
F8 AA INT _ Kashif Kamran _ June 2009
ISA 320 – Audit Materiality 231
Nature, timing & extent of procedures
Degree of AR modification Impact on the audit
Whether to seek adjustments F8 AA INT _ Kashif Kamran _ June 2009
Types of Materiality 232
F8 AA INT _ Kashif Kamran _ June 2009
ISA 320 – Audit Materiality 233
Q - What is materiality based on?
Professional Judgement!
Quantitative materiality ½-1% Revenue Total assets 1-2%
Profit before tax
F8 AA INT _ Kashif Kamran _ June 2009
5 - 10 %
What is materiality ? 234
Misstatement need to be considered both for the
amount (quantity) and nature (quality) Examples of qualitative misstatements would be: the inadequate or improper description of an accounting policy when it is likely that a user of the financial statements would be misled by the description, and failure to disclose the breach of regulatory requirements when it is likely that the consequent imposition of regulatory restrictions will significantly impair operating capability F8 AA INT _ Kashif Kamran _ June 2009
Dimensions 235
The auditor needs to consider the possibility of
misstatements of relatively small amounts that, cumulatively, could have a material effect on the financial statements. For example, an error in a month end procedure could be an indication of a potential material misstatement if that error is repeated each month.
F8 AA INT _ Kashif Kamran _ June 2009
Dimensions 236
The auditor considers materiality at
both the overall financial statement level and in relation to classes of transactions / account balances
F8 AA INT _ Kashif Kamran _ June 2009
Materiality and Risk relationship 237
Inverse relationship between risk
and materiality
F8 AA INT _ Kashif Kamran _ June 2009
Materiality assessment 238
The auditor's assessment of materiality and audit
risk may be different at the time of initially planning the engagement from at the time of evaluating the results of audit procedures. This could be because of a change in circumstances
or because of a change in the auditor's knowledge as a result of performing audit procedures.
F8 AA INT _ Kashif Kamran _ June 2009
ISA 530 SAMPLING 239 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
SAMPLING 240
Sampling refers to the application of audit procedures
to less than a 100pc of account balance . Sampling procedures has TWO risk
Sampling risk Non-sampling risk
Extent of sampling depends upon lots of factors,
primary of those are:
Risk Materiality Experience with the entity
F8 AA INT _ Kashif Kamran _ June 2009
Types of sampling procedures 241
Haphazard/ random sampling Block selection Systematic selection
F8 AA INT _ Kashif Kamran _ June 2009
REVIEW & REPORTING STAGE OF AUDIT 242 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Exam relevance 243
Review and reporting stage of Audit, is the second
most important stage from the examination view point, followed by the evidence stage of audit. In the past numerous exam questions has come on the review stage more in the 20 marks segment December 2007 paper – 20 marks question on Going concern December 2008 paper- 20 marks question on Subsequent event F8 AA INT _ Kashif Kamran _ June 2009
Past attempts 244
Review
Reporting
June 05
ISA 580
Yes
December 2005
ISA 560
No
June 2006
No
No
December 2006
No
No
June 2007
ISA 570
Yes
December 2007
No
Yes
June 2008
ISA-570/ISA-520
No
December 2008
ISA 560
No
F8 AA INT _ Kashif Kamran _ June 2009
Overview Review stage 245
Going concern _ ISA 570 Subsequent events_ ISA 560 Analytical procedures_ ISA 520 Management representation letter ISA 580
F8 AA INT _ Kashif Kamran _ June 2009
Build up to review stage to audit 246
Stage 1: Can we do this audit Stage 2: Audit engagement letter Stage 3: Planning Stage 4: Audit evidence Stage 5/ 6 : Test of controls/ substantive
procedures Stage 7: Review stage of audit
F8 AA INT _ Kashif Kamran _ June 2009
ISA 520 AP at conclusion stage 247
F8 AA INT _ Kashif Kamran _ June 2009
ISA 520 AP at conclusion stage 248
[ISA 520] “
the auditor should apply AP at or near the end of audit when per forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor understanding of the entity.” [ISA 520] the conclusion drawn form AP are intended to corroborate conclusion formed during the audit of individual components or elements of the financial statements and assists in arriving at the overall conclusion as to the reasonableness of financial statements. F8 AA INT _ Kashif Kamran _ June 2009
ISA 520 AP at conclusion stage 249
[ISA 520] however , AP may also identify a
previously unrecognized risk of material misstatements . In such circumstances , the auditor may need to reevaluate the planned audit procedures, based upon revised consideration of assessed risk for all or some of the assertion of the account balances.
F8 AA INT _ Kashif Kamran _ June 2009
ISA 520 AP at conclusion stage 250
INVESTIGATING UNUSUAL ITEMS [ISA-520] “ When AP identify significant fluctuations
that are inconsistent with the other relevant information obtained, or that deviate from the predicted amount, the auditor should investigate and obtain adequate explanations and appropriate corroborative audit evidence. The investigation begins with Inquiry of management followed by :
Corroboration of management responses, by comparing them to evidence obtained or document available Consideration to apply further audit procedures if the management inquiry or explanation is inadequate.
F8 AA INT _ Kashif Kamran _ June 2009
ISA 560 Subsequent Events 251 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
What are subsequent events 252
IAS-10”
Events after the balance sheet date, identifies TWO types of events: Those that provide evidence of the condition that existed at the date of financial statements (adjusting events) Those that are indicative if the conditions that arise after the balance sheet date (non-adjusting events)
F8 AA INT _ Kashif Kamran _ June 2009
IAS -10 Events after the balance sheet date 253
F8 AA INT _ Kashif Kamran _ June 2009
ISA-560 SUBSEQUENT EVENTS
Date of FS
Date of approval of FS
Date of audit report
Facts after the FS are issued
F8 AA INT _ Kashif Kamran _ June 2009
Facts after the AR but before FS are issued
Event up to the date of audit report Auditor active involvement
Date the FS are issued
Event up to the date of AR 255
The auditor will
perform procedures to
obtain sufficient appropriate audit evidence about all subsequent events that may require adjustment of or disclosure in financial statements The auditor has an active responsibility to ensure that all subsequent identified/ inquired or informed by management has been properly disclose or presented as required by IAS-10. F8 AA INT _ Kashif Kamran _ June 2009
Event up to the date of AR 256
Reviewing management procedures Read minutes of the meetings of board of
directors Inquiring of entity's lawyers for litigations and claims Inquiring management for possible areas of subsequent event to reduce risk of material misstatements and of presentation and disclosure in financial statements F8 AA INT _ Kashif Kamran _ June 2009
Facts discovered after the date of AR but before the FS are issued 257
The auditor does not have any responsibility to perform
procedures regarding subsequent events after the date of AR. The responsibility to inform auditor of any fact discovered after the date of AR , is of the management However, if the auditor do come to know of a fact after the date of his report, the auditor should discuss with management regarding adjustments / disclosure in financial statements F8 AA INT _ Kashif Kamran _ June 2009
Facts discovered after the date of AR but before the FS are issued 258
Management Management agrees agrees to toamend amend
Management Management disagree disagree to toamend amend
AR ARhas hasbeen been issued issued totomanagement management
The Theauditor auditorwill willinspect inspect the the amendment amendmentand and issue issue aarevised revised report reportwith with new newdate date F8 AA INT _ Kashif Kamran _ June 2009
Notify Notify shareholders shareholders or or legal legaladvice advice
AR ARhas hasnot notbeen been issued issuedtoto management management
The Theauditor auditorwill will modify modify the theaudit auditreport report
Facts discovered after the FS have been issued 259
After the FS have been issued the auditor has NO
obligations to make any inquiry regarding such financial statements
When after the FS has been issued the auditor
become aware of the fact which if existed at the date of AR would have caused adjustment or disclosure in FS, the auditor will discuss it with management. The responsibility to disclose such events after the FS has been issued is of the management
F8 AA INT _ Kashif Kamran _ June 2009
Facts discovered after the FS have been issued Management Management agrees agrees to toamend amend
Management Management disagree disagree to toamend amend
The Themanagement managementwill will notify notify shareholders shareholders and andwill willissue issueaarevised revised AR AR
Notify Notifyshareholders shareholders or or legal legaladvice advice
The Theauditor auditorwill willissue issueaa revise revise audit auditreport report with withan an emphasis emphasisof ofaa matter matterparagraph paragraph F8 AA INT _ Kashif Kamran _ June 2009
ISA 570 Going Concern 261 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
ISA-570 GOING CONCERN 262
Financial statements are prepared on going
concern assumption Going concern assumption states that the company will be able to continue its operation within the next 12 months after the balance sheet date ( foreseeable future) The auditor should evaluate the appropriateness of the going concern assumption used by the management and should review the entity ability to continue as a going concern F8 AA INT _ Kashif Kamran _ June 2009
ISA-570 GOING CONCERN 263
Review (Inspect) post year end management accounts for
performance after year end
Inquiry with management about future plans and intentions Review (Inspect) major correspondences with major customers,
suppliers and bank
Compare results with loan covenants Assess the state of client industry Obtain management representation and read minutes of the
BOD meeting
F8 AA INT _ Kashif Kamran _ June 2009
ISA-570 GOING CONCERN 264
Management should disclose the fact in the financial
statements, that they are prepared on the going concern basis If the financial statements are not prepared on the going concern basis, then the management should also disclose the same as well. If
financial statements are not prepared on the going concern basis, and the management has disclosed the fact in the financial statements , the auditor will modify his audit report , by adding an emphasis of a matter paragraph, to highlight the disclosure on the face of the audit report .
F8 AA INT _ Kashif Kamran _ June 2009
Going concern indicators 265
F8 AA INT _ Kashif Kamran _ June 2009
ISA-570 GOING CONCERN 266
Going concern indicators
Financial indicators
Indication of withdrawal of financial support by lenders / creditors Negative operating cash flows from historical and prospective financial statements Adverse key financial ratios Substantial operating losses Discontinuance of dividends Inability to pay creditors on due date Inability to comply with term of loan agreements Change from credit to cash terms
Operating
Loss of key management without replacement Loss of a major market , franchise, license or principal suppliers Labor difficulties or shortages of important supplies Over reliance on few customers
F8 AA INT _ Kashif Kamran _ June 2009
ISA-570 GOING CONCERN 267
Going concern indicators Others Non-compliance
with statutory requirements Pending legal or regulatory proceedings against entity Changes in governmental laws which could adversely affect the industry.
F8 AA INT _ Kashif Kamran _ June 2009
ISA 580 Management Representation Letter 268 F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
ISA-580 Management representation letter 269
Management representation letter (MRL) is
obtained by the auditor , where he believes , the evidence is inconclusive and in areas of management responsibilities. Therefore TWO major areas of MRL will be: Management responsibilities Inconclusive audit evidence
F8 AA INT _ Kashif Kamran _ June 2009
ISA-580 Management representation letter 270
Management responsibilities Recall ISA-210 Audit engagement letter ? To
prepare and present financial statements To select/ apply accounting policies To make reliable accounting estimates To implement a sound system of internal controls to prevent and detect fraud and errors Supply of all information and explanation required for audit purpose Why
the auditor obtain MRL for management responsibilities?
F8 AA INT _ Kashif Kamran _ June 2009
ISA-580 Management representation letter 271
Inconclusive audit evidence
Examples: Provision
( arising from litigation / contingencies) Related party transaction (ISA-550) Going concern assumption (ISA-570) Events after the balance sheet date (ISA-560) Any other areas where the audit believe he has inconclusive evidence to conclude on the true and fair view of an account balance F8 AA INT _ Kashif Kamran _ June 2009
Forms of Management Representation letter 272
F8 AA INT _ Kashif Kamran _ June 2009
ISA-580 Forms of MRL 273
The MRL can take any of the following
forms: Standard MRL- Written by the management and sent to the auditor Non-standard MRL- written by the auditor and approved by the management Signed copy of the Minutes of BOD.
F8 AA INT _ Kashif Kamran _ June 2009
ISA-580 MRL 274
Action if management refuses to provide
representation If
there is no evidence available and directors refuse to confirm certain matter, the auditor may have to MODIFY auditor report due to scope limitation
F8 AA INT _ Kashif Kamran _ June 2009
ISA-700 AUDIT REPORT F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
AUDITOR REPORT Modified report
Unmodified report / un qualified report
Matters that do affect the auditor opinion
Disagreement with management
Limitation on scope
Matters that do not affect the auditor opinion Emphasis of a matter paragraph
Material
Material and pervasive
Material
Material and pervasive
Qualified opinion
Adverse opinion
Qualified opinion
Disclaimer of opinion
F8 AA INT _ Kashif Kamran _ June 2009
F8 AA INT _ Kashif Kamran _ June 2009
277
Unqualified /Unmodified audit report 278
OPINION In our opinion, the financial statements give a true
and fair view of (or "present fairly, in all material respects,") the financial position of ABC Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards
F8 AA INT _ Kashif Kamran _ June 2009
F8 AA INT _ Kashif Kamran _ June 2009
279
Emphasis of a matter paragraph 280
Will be included: If there is a significant event disclosed in the notes to the financial statements, which could have an impact on the decision of the user of the financial statements.
Possible areas: Litigations Going
concern
F8 AA INT _ Kashif Kamran _ June 2009
Emphasis of a matter paragraph 281
"Without qualifying our opinion we draw attention to
Note X to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements." F8 AA INT _ Kashif Kamran _ June 2009
Disagreement with Management 282
F8 AA INT _ Kashif Kamran _ June 2009
Disagreement with Management 283
F8 AA INT _ Kashif Kamran _ June 2009
Qualified opinion 284
F8 AA INT _ Kashif Kamran _ June 2009
Adverse opinion 285
F8 AA INT _ Kashif Kamran _ June 2009
LIMITATION ON SCOPE 286
F8 AA INT _ Kashif Kamran _ June 2009
LIMITATION ON SCOPE 287
F8 AA INT _ Kashif Kamran _ June 2009
Un-qualified Audit Report 288
UN-MODIFIED/ UN-QUALIFIED AUDIT REPORT - STANDARD INDEPENDENT AUDITOR'S REPORT [Appropriate Addressee]
Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. F8 AA INT _ Kashif Kamran _ June 2009
Management's Responsibility for the Financial Statements 289
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
F8 AA INT _ Kashif Kamran _ June 2009
Auditor’s Responsibility 290
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. F8 AA INT _ Kashif Kamran _ June 2009
Other explanations 291
In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. F8 AA INT _ Kashif Kamran _ June 2009
Opinion paragraph 292
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of (or "present fairly, in all material respects,") the financial position of ABC Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards
F8 AA INT _ Kashif Kamran _ June 2009
ISRE 2410 REVIEW OF FINANCIAL STATEMENTS 293
F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
ISRE 2410 294
ISRE-2410 is applicable to all financial statements
prepared for the period, which is less than the full financial year of the company.
Legal
provision: IAS-34 Interim financial reporting-encourages public traded companies to provide interim financial reports at least as of the first half of their financial year and to make interim report s available. The objective, scope, procedures, communication with managements and the auditor report of the review is governed by the ISRE-2410
F8 AA INT _ Kashif Kamran _ June 2009
Important Points 295
Engagement letter Understanding the organizational controls
and business , if review is performed for the first time Review procedures are limited to inquiry of persons responsible for financial and accounting matters and analytical procedures A review does not require test of the accounting records through inspection, observation or confirmation. F8 AA INT _ Kashif Kamran _ June 2009
Important Points 296
Auditor should agree the review information with
general ledger or trial balances The auditor should inquire that the management has identified all events up to the date of review report that require adjustment to or disclosure in the interim financial information. Auditor should obtain management representation on standards and other matters.
F8 AA INT _ Kashif Kamran _ June 2009
Review statement 297
Based upon our review nothing has
come to our attention that causes us to believe that the financial statements do not give a true and fair view of the position of ABC Co. as on December 31,2008
F8 AA INT _ Kashif Kamran _ June 2009
Judge the right opinion 298
F8 AA INT KASHIF KAMRAN
F8 AA INT _ Kashif Kamran _ June 2009
Audit report 299
Effect on the auditor’s report What will be the impact on the auditor’s report in each of the following situations? (a) The auditor believes that the company is not a going concern but the directors believe that it is. The directors refuse to amend the financial statements. (b) The auditor has a significant level of concern regarding the going concern basis but they do not disagree with its use. Appropriate disclosures have been made in the financial statements F8 AA INT _ Kashif Kamran _ June 2009
Audit report 300
During the audit of XYZ Co it comes to your attention that the company has valued a certain inventory line at its total cost price of $7,000. These inventory items have not been sold for a number of years and it is unlikely that they can be sold in the future unless the price is reduced to $3,000. If the write-down was charged it would have a material effect on the financial statements. How will this affect the auditor’s report?
F8 AA INT _ Kashif Kamran _ June 2009
Audit report 301
During the audit of Godfather Co, you discover that the company has not kept any records relating to their cash sales. The company has pre-tax profits of $500,000 and cash sales total $100,000. The company has total sales of $1m. What effect will the above have on the auditor’s report?
F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2005 302
An extract from the draft audit report produced by an audit junior is given below: Basis of Opinion
‘We conducted our audit in accordance with Auditing Standards. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of all the estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed.
F8 AA INT _ Kashif Kamran _ June 2009
303
‘We planned and performed our audit so as to obtain as much information and explanation as possible given the time available for the audit. We confirm that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. The directors however are wholly responsible for the accuracy of the financial statements and no liability for errors can be accepted by the auditor. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the company’s annual report.’ Required: Identify and explain the errors in the above extract. F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2007 304
You are the audit manager in charge of the audit of MSV Co for the year ended 28 February 2007. MSV Co is based in a seaside town and hires motor boats and yachts to individuals for amounts of time between one day and one week. The majority of receipts are in cash, with a few customers paying by debit card. Consequently, there are no trade receivables on the balance sheet. The main non-current assets are the motor boats and yachts. The company is run by four directors who are also the major shareholders. Total income for the year was about$10 million. The following issues have been identified during the audit: . F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2007 305
Issue 1 Audit tests on sales indicate a weakness in the internal control system, with a potential understatement of income in the region of $500,000. The weakness occurred because sales invoices are not sequentially numbered, allowing one of the directors to remove cash sales prior to recording in the sales day book. This was identified during analytical procedures of sales, when the audit senior noted that on the days when this director was working, sales were always lower than on the days when the director was not working. (8 marks)
F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2007 306
Issue 2 During testing of non-current assets, one yacht was found to be located at the property of one of the directors. This yacht has not been hired out during the year and enquiries indicate that the director makes personal use of it. The yacht is included in the non-current assets balance in the financial statements. (6 marks)
F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2007 307
Required: For each of the issues above: (i) List the audit procedures you should conduct to reach a conclusion on these issues; (ii) Assuming that you have performed all the audit procedures that you can, but the issues are still unresolved, explain the potential effect (if any) on the audit report.
F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2005 308
You are the manager in charge of the audit of Crighton-Ward, a public limited liability company which manufactures specialist cars and other motor vehicles for use in films. Audited turnover is $140 million with profit before tax of $7·5 million. All audit work up to, but not including, the obtaining of management representations has been completed. Review of the audit file has disclosed the following outstanding points: Lion’s Roar The company is facing a potential legal claim from the Lion’s Roar company in respect of a defective vehicle that was supplied for one of their films. Lion’s Roar maintains that the vehicle was not built strongly enough while the directors of Crighton-Ward argue that the specification was not sufficiently detailed. Dropping a vehicle 50 meters into a river and expecting it to continue to remain in working condition would be unusual, but this is what Lion’s Roar expected. Solicitors are unable to determine liability at the present time. A claim for $4 million being the cost of a replacement vehicle and lost production time has been received by Crighton-Ward from Lion’s Roar. The director’s opinion is that the claim is not justified. F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2005 309
Depreciation Depreciation of specialist production equipment has been included in the financial statements at the amount of10% pa based on reducing balance. However the treatment is consistent with prior accounting periods (which received an unmodified auditor’s report) and other companies in the same industry and sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to the audit, feels that depreciation is being undercharged in the financial statements. Required: For each of the above, whether a paragraph is required in the representation letter; and if appropriate, draft the paragraph for inclusion in the representation letter. (10 marks)
F8 AA INT _ Kashif Kamran _ June 2009
JUNE 2005 310
A suggested format for the letter of representation has been sent by the auditors to the directors of Crighton-Ward.The directors have stated that they will not sign the letter of representation this year on the grounds that they believe the additional evidence that it provides is not required by the auditor. Required: Discuss the actions the auditor may take as a result of the decision made by the directors not to sign the letter of representation. F8 AA INT _ Kashif Kamran _ June 2009
DECEMBER 2007 311
You are the audit manager in JonArc & Co. One of your new clients this year is Galartha Co, a company having net assets of $15 million. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Accounting Standards suggest that depreciation should be provided. Required: State the additional audit procedures and actions you should now take in respect of the above matter. (6 marks)
F8 AA INT _ Kashif Kamran _ June 2009
DECEMBER 2007 312
State the effect on your audit report of the following alternative situations: (i) Depreciation had not been provided on any noncurrent asset for a number of years, the effect of which if corrected would be to turn an accumulated profit into a significant accumulated loss. (ii) JonArc & Co were appointed auditors after the end of the financial year of Galartha Co. Consequently, the auditors could not attend the year end inventory count. Inventory is material to the financial statements. Note: you are not required to draft any audit reports. F8 AA INT _ Kashif Kamran _ June 2009