Audit And Assurance Flashcards

Question

Customers have agreement that they can return items within 60 days without penalty

Answer 1

RISK - revenue and COS should only be accounted for to the extent the company doesn’t foresee the goods being returned. For those which may be returned it a refund liability should be recognised and after 60 days if no return then the liability is reversed out and the revenue is recognised

Answer 2

RISK - Intangible assets should be amortised over useful life Response - 1. Agree useful life of patent with supporting documentation 2. There should be an amortised charge which needs to be calculated to ensure correct accounting treatment

Answer 3

They are same apart from the fact depreciation is for hard assets such as building and amortisation is more for intangible or intellectual properties like patents or licenses

Answer 4

RISK - significant profit or loss on disposal indicates that depreciation may not be appropriate. Therefore depreciation understated and P&L overstated Response - 1. Discuss depreciation policy with finance director to assess reasonableness 2. Review for other gains/losses to assess reasonableness

Answer 5

RISK - areas where fraud took place have not been written off. Also are there any other areas where fraud occurred ? Response - 1. Additional substantive testing should be conducted over the affected areas 2. Team should maintain professional skepticism

Answer 6

RISK - potential need for a provision or at least note to the financial statements Response - 1. Audit team should request confirmation from companies lawyers the existence and likelihood of a claim being successful

Answer 7

RISK - along with payment days already increasing there is a possibility receivables could be overvalued due to unrecoverable amounts Response - 1. Review and test controls around how management identify old and potentially irrecoverable receivables 2. Discuss with management the rationale for leaving unrecoverable amount as same as last year dispute a payment break for a large customer 3. Extended post year cash receipt testing and review of aged receivables should be performed to assess valuation and need to increase allowance for receivables

Answer 8

RISK - controls over purchases and payables could be weak leading to control risk of deficiencies have not been rectified. COS expenses and payables may not be accurate Response - 1. Discuss with management whether the correct implementations have taken place and if so undertake tests of controls to ensure these are performing efficiently 2. If controls are not in place, adopt a full sustantivé approach for confirming the completeness and accuracy of COS, expenses and payables

Answer 9

1. Discuss with financial director the rationale for not increasing allowance of trade receivables despite payment holiday for one of its largest customers 2. Obtain breakdown of opening allowance and consider if prior year receivables have been recovered to access reasonableness of prior year allowance 3. Review aged trade receivables to identify any slow moving or aged balances and discuss with management to access the likelihood of them being received 4. Review customer correspondence with significant customers and identify any balances that are in dispute and unlikely to be paid 5. Review board minutes to identify whether there are sígnica t concerns in relation to payments by customers 6. Calculate potential level of receivables which are not recoverable and access whether this is material or not and discuss with management

Answer 10

1. Obtain a breakdown of disposals cast list and review the non-current asset register to confirm that all assets have been removed 2. Select a sample of disposals And agree sale proceeds to supporting documentation sundry sales invoices 3. Re-calculate a depreciation charge for sample disposals to confirm the calculations are correctly applied as per the companies policy of a pro rata basis or a full year in the year of acquisition and non-in the year of disposal 4. Review the disclosure of the disposals in the draft financial statements and ensure it is in line with IAS 16

Answer 11

What is letter ? 1. Minimise risk of misunderstanding between auditor and firm 2. Confirm acceptance of engagement 3. Forms the basis of the contract by outlining the terms and conditions of the engagement Items to be included The objective and scope of Audit The responsibilities of the auditor Responsibilities of management Identification of the financial reporting framework used in the preparation of the financial statements The basis on which the audit firm will calculate its fees Arrangements concerning the planning and performance of the audits including composition of the audit team The expectation management will provide written representations Request for management to agree to the terms of the order engagement and acknowledge receipt of the letter of engagement Arrangements to make available draft financial statements in any other information

Answer 12

Management will use an acceptable financial reporting framework on the which they will prepare the financial statements Managements acknowledges and understands it’s responsibility for: Preparing financial statements in accordance with applicable financial reporting framework Internal control necessary for the preparation of the financial statements to be free from Material misstatements Providing the auditor with access to information relevant to the audit and Access to staff within the answer to obtain all the evidence If he’s preconditions and presents the order so I cannot accept the order engagement

Answer 13

RISK - increased risk of error as may not be familiar with companies activities Response - 1. Discuss with management the competency and experience of new manager 2. Increased substantive procedures are undertaken on material areas of financial statements to reduce audit risk, especially those requiring judgement

Answer 14

RISK - inventory should be recorded when products are sent so risk of inventory being understated at year end if goods are in transit but hasn’t been recorded Response - 1. Discuss with management the point at which inventory is recorded and review contract to verify this requirement 2. Review controls the company has in place to ensure inventory is recorded from point of dispatch 3. Extend cut off testing by reviewing pre and post GRNs and supplier batch notes to verify that inventory is recorded at the correct point

Answer 15

1. Review board minutes for evidence that the decision to discontinue the chemical product prior to year end 2. Obtain details of redundancy calculated by employee and agree to trial balance 3. Recalculate the redundancy provision to confirm completeness and agree components of cost to supporting documentation such as contracts 4. Agree actual payment made in cash book and compare against provision in financial statements 5. Obtain written representation from management confirming completeness of costs 6. Review disclosure included to verify they are compliant with requirements of IAS 37

Answer 16

In order to accept the audit the clients acknowledges and understands its responsibilities for the following 1. Preparation of financial statements in accordance with the applicable financial reporting framework 2. For such internal control management determines its necessary to enable the preparation of financial statements which are free for material statements 3. To provide the auditor with access all relevant information for the preparation of the financial statements any additional information which the auditor may Request from management And unrestricted access to personnel within the clients from whom the auditor determines is necessary to obtain audit evidence

Answer 17

Helping the auditor to devote appropriate attention to important areas of the audit Helping the auditor to identify and resolve potential problems on a timely basis Helping the auditor to properly organise and manage the audit engagement so that it is performed in an affective and a officiant manner Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risk and proper assignments of work to them Facilitating the direction and supervision of engagement team members and the review of the work Assisting where applicable in coordination of work done by experts

Answer 18

Obtain a schedule of the directors bonus and cast schedule to ensure its accuracy agree the amounts to that disclose in financial statements Review the schedule Of current liabilities and confirm the bonus accrual is included as a year and liability Agree the individual bonus payments to the post year payroll records We calculate the bonus payments and agree the criteria for supporting documentation and the percentage rates to be paid to the directors service contracts Confirm the amount of each bones paid by green supposed year and cashbook and bank statements Compare the profit before tax use and bonus calculation to the final profit before tax figure to confirm whether any adjustment is required to the bill is paid and discuss any difference with management Agree the amount paid each directed to 4 minutes and contract with Charlie mounts included in the county of financial statements are fully accrued undisclosed Review the board minutes to identify whether any additional payments relating to this year has been agreed for any directors Obtain a written representation from management confirming the completeness of directors remuneration including the bonus Review the disclosures made regarding the bonus pay to directors and assess whether these are in compliance with local legislation

Answer 19

Both clients should be notified that the auditor will be acting for each company and consents should be obtained from management of each company Auditor should consider advising one or both clients to seek additional independent advice The auditor must ensure it’s appoint separate engagement teams with different engagement partners and team members to each clients. Once a employee has worked on one audits they should be prevented from working on the orders of the competitor for a period of time Adequate procedures should be in place within the firm to prevent access to information for example strict physical separation of both teams confidential and securing date of filing The auditor must set out clear guidelines for members of each engagement team on issues of security and confidentiality these guidelines should be included within the audit engagement letter sent out to each client The auditor should consider the use of confidentiality agreements signed by all members of the engagement team Work performed should be reviewed by an appropriate reviewer who is not involved in the audit to assess with a key judgemental and inclusions are appropriate Regular monitoring of the application of the above safeguards should be undertaken by senior member of the audit who is not involved in either audit

Answer 20

The audit strategy sets out the scope of timing and direction of the audit and helps the development of the audit plan The audit strategy should consider the main characteristics of the engagement which define its SCOPE e.g 1. Whether the financial information to be audited has been prepared in accordance with the relevant financial reporting framework 2. Where the computerised assisted audit techniques will be used and effective IT on audit procedures 3. The availability of key personnel at the client It should also ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. For example 1. The audit timetable for reporting including the TIMING of interim and final stage audits 2. Organising of meetings with clients management to discuss any audit issues arising 3. Any discussions with management regarding the reports to be issued 4. The timing of the audit team meetings and review of work performed Finally, Strategy should consider the factors which in the auditors professional judgements or significance in directing clients audit teams efforts, For example 1. Determination of materiality for the audit 2. I need to maintain a questioning mind and exercise professional scepticism in gathering and evaluating all the evidence

Answer 21

Analytical procedures can be used during any stage of an audit however I mainly use 1. Planning stage. Analytical procedures must be used as Risk assessment procedures in order to help the auditor to obtain an understanding of the entity and assessed of material statements risk 2. Final audit. Analytical procedures can be used to obtain sufficient appropriate evidence substantive procedures can either be test of detail or substantive analytical procedures Final review stage. The Awesomest design and perform analytical procedures which assistant when forming an overall conclusion as to whether the financial statements are consistent with the auditors understanding of the entity

Answer 22

Obtain a breakdown of the damaged goods held in inventory and returned from customers and cast to confirm its accuracy From the breakdown agreed the damaged goods quantities manufactured since June 2 production records and agree to sales records the quantity sold Agree on a sample basis to returns from customers as per the breakdown back to sales return documentation to confirm the existence of the returns quantities Discuss with management the current status of their plans for the product line and whether they are able to rectify the damage and then resell the goods on if so agree the cost of rectification to supporting documentation If the damage inventory has been rectified and sold Poesía and agreed to the sales invoice to assess net realisable value in line with a new cost of the product Agree the cost of damage cost of supporting documentation to confirm the raw material cost labour costs and any overhead attributed to the cost Discuss with management of the goods have been written down if so follow through the right down to the inventory valuation to confirm Inspect monthly board meetings minutes from June onwards to obtain further information regarding the faulty paints and it’s possible resale value

Answer 23

Compare the overall level of revenue against prior years and budget for the year and investigate any significant fluctuations Perform approved in total calculation for revenue creating an expectation of the average price for the main product multiplied by the increased sales volume for the year this expectation should be compare to actual revenue and any significant fluctuations should be investigated I’ve taken a schedule of sales for the broken down into the main product categories and compare this to prior breakdown and for any unusual movements discussing management Calculate gross profit margin for the company and compare this to prior and investigate any significant fluctuations Select the sample of sales invoices for customers and agree the sales price back to the price list of custom master data information to ensure the accuracy of invoices For a sample of invoices we calculate invoice totals including discounts and sales tax Select a sample of credit x-rays traced to Steve H and invoices show the invoice has been correctly removed from sales Select a sample of customer orders and agree these to the dispatch note and sales invoice through to inclusion in the sales ledger and revenue ledger accounts to ensure completeness of revenue Select a sample dispatch notes both pre-and post year and ensure these follow-through to sales invoices in the correct accounting period to shortcut off has been correctly applied For sale is made under the price promise compared level of claims made to date with the refund liability recognise and assess whether it is reasonable

Answer 24

DEFICIENCY - This means that staff may ask colleagues o’clock in when they are in the actual presence resulting in payroll cost in excess of that expected for the extra hours worked Recommendation - clocking in and out should be monitored by a supervisor on appropriate level or by CCTV cameras to employees from clocking in for one another. Furthermore employee should be automatically clocked out at the end of the shift and should be required to clock back in if they are Completing prearranged over time

Answer 25

Deficiency-by not being reviewed this means that any errors made may not be discovered this may lead to overpayments or underpayments and may results and lead to losses or disgruntled employees Recommendation- Payroll supervisor should periodically recalculate the net pay based on the gross pay and expected deductions then compare the results with a computer generated figure for a sample of employees the review should be Evidenced by signature and wages not be paid until the signed review is complete

Answer 26

Deficiency- The factory supervisor is trusted with substantial cash sums which may lead to loss or Theft well not with employees or securely stored Recommendation- Parole officers should be available for certain hours during the night shift to distribute wages The Night Shift workers should be required to produce identification before they are given their pay packets Alternatively Chuck the owner may decide to pay the nightshift via bank transfer

Answer 27

Deficiency-there is a risk of loss of theft because the supervisor should have returned the absence wages to payroll recommendation Any amount not paid out on Friday should be kept my payroll in a Safe or secure means until Monday when the employees can collect

Answer 28

Deficiency- Staff holidays in the HR department have mentioned that payroll information relating to new joiners was not communicated on a timely basis which in turn means that joiners we’re not paid On time leading to disgruntled employees and inaccurate payroll records Recommendation- HR staff duties and responsibilities should be re-allocated when staff are ill or on holiday including the responsibility of immediate communication of new joiners or leavers to payroll New joiner forms showing start date should be completed and authorise and then pass to payroll so that they are aware of the need to update the payroll records

Answer 29

Compare the total payroll expense to the previous year and investigate any significant variances Review monthly payroll charges and compare this to the prior monthly charge and two budgets discuss significant variances with management Reconcile the total wages and salaries expense per payroll records to the costs in the financial statements and investigate any differences Agree amounts owed to the tax authorities to the payroll records and with the amount subsequently paid and clearing the bank statement post year to ensure completeness Cast a sample of payroll records to confirm completeness and accuracy of the payroll expense Recalculate the gross and net pay for a sample of employees and agree to the payroll to confirm accuracy Perform a proof in total of total factory workforce wages by taking last year’s expense dividing by last year‘s average employee number to arrive an average wage and multiplying by current year average number of employees compare this estimate of currency are charged with the actual wage cost in the financial statements and investigate any significant differences Agree the start or leaving date to supporting documentation for a sample of the joiners and leavers and we calculate the first or last pay packet to ensure it is accurately calculated and properly recorded Agreed the total net salaries paid on the payroll records to the bank transfer listing of payments for salaries and administrative staff and to the cashbook for weekly paid employees Agree total cash withdrawn for wage payments equates to the weekly wages paid plus any leftover cash subsequently bank to confirm completeness and accuracy Agree individual wages and salaries per the payroll to the personnel records and records of hours worked per the swipe card system

Answer 30

It is the responsibility of the clients management to ensure that the Entity complies with the relevant laws and regulations it’s not the auditors responsibility to prevent or detect non-compliance with laws and regulations The auditors responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement and in this respect the auditor must take into account the legal and regulatory framework within the entities operates ISA 250 distinguishes the auditors responsibility In relation to compliance with two different categories of law and regulation One. Those that have a direct effect on the determination of material Amounts and disclosures in the financial statements. Here the auditors responsibility is to obtain sufficient appropriate evidence about compliance with the laws and regulations Two. Those that do not have a direct effect on the determination of material amounts and disclosures in the financial statements but where compliance may be fundamental to operating aspects and the ability to continue in business. Here the auditors responsibility is to undertake specified audit procedures to help identify non-compliance with laws and regulations that may have a material effect on the financial statements The auditor must also maintain professional scepticism and be alert to the possibility of the order passages may bring instances of identified or suspected non-compliance with laws and regulations

Answer 31

1. External audit must Determine the objectivity of the internal audits for example whom the audit report to any conflicting responsibilities or any Restrictions on there Work 2. External audit must Consider whether internal auditors are members of relevant professional bodies and whether they have adequate training and proficiency and whether they are established policies for hiring and training 3. External audit must also consider whether internal audit activities are systematically improperly planned supervise reviewed and documented and whether suitable audit manuals work programs and internal audit documentation exists

Answer 32

Narrative notes consist of a written description of the system and the detail what occurs in the system at each stage and include any controls which operate at each stage The advantage is that they are simple to record after discussion with staff members these discussions are easily written up as notes And they can facilitate understanding by all team members especially more junior members who may find other methods more complex

Answer 33

Internal control questionnaires and channel control evaluation questionnaires contain a list of questions for each major transaction cycle. Internal control questionnaires are used to assess whether controls exist and internal control evaluation questionnaires assess the effectiveness of the controls in place The advantages are that questionnaires are quick to prepare which means they are a timely method For recording the system. They ensure that all controls present within the system are considered and recorded hence missing controls or deficiencies are clearly highlighted to the audit team

Answer 34

Deficiency - sales ledger clerks Are not sufficiently senior and so may set limits too high leading to irrecoverable debts or too low leading to loss of sales Control recommendation-credit limit should be set by senior members of the sales department and not by sales ledger clerks these limits should be regularly Reviewed by responsible official Test of controls-for a sample of new customers accepted in the year review the authorisation of the credit limit and ensure that this was performed by a responsible official. Enquire of sales ledger clerks as to who can set credit limits

Answer 35

Deficiency-these numbers are not sequential without sequential numbers it is difficult for the clients to identify missing orders and to monitor if all orders are being dispatched in a timely manner If they are not this could lead to a loss of customer goodwill Control recommendation-sales orders should be sequentially numbered on a regular basis a sequence check of orders should be undertaken to identify any missing orders Test of controls-re-perform the control by undertaking a sequence check of sales orders and discuss any gaps in the sequence with sales ordering staff

Answer 36

Deficiency-the finance Klerk is responsible for several elements of the cash receipting system as she posts the bank transfer receipt from the bank statements to the cashbook updating the sales ledger and perform the bank reconciliation. There is a lack of segregation of duties and errors will not be identified on a timely basis there is also an increased risk of fraud. Control recommendation – the key roles of posting bank receipts updating the Sales ledger and forming bank reconciliations should be split between different individuals. If this is not practical then at a minimum the bank reconciliation should be undertaken by another member of the financial team Test of controls – review the file of completed bank reconciliations to identify who prepared them. Reviewed the log of IDs of individuals who have posted the bank receipts and updated the sales ledger to assess whether these are different individuals. Finally discussed with financial controller which members of staff on the take the controls of processing bank reconciliations and the bank receipts

Answer 37

Deficiency-failing to send a copy to the purchase order in Department means it is not possible to monitor the level of unfulfilled orders this could result in a significant level of unfulfilled orders leading to stock out and a consequence of loss of sales In addition if the goods receive note is lost then it will not be possible for the finance department to match the invoice to proof of goods being received this could result in a delay in invoice being paid and a loss of supplier goodwill Control recommendation-good receipt note should be created in three parts with one copy of the good to receive notes being sent to the ordering department the second copy should be held at the warehouse and third sent to the finance department. A purchase order in Clarke should agree their copy of goods receive note to the purchase order and change the order status to complete on a regular basis a review should be undertaken for all unfulfilled orders and they should be followed up with the relevant supplier. Test of controls-review the file of copy goods receive notes held by the purchase ordering departments and review for evidence that these are matched to orders and flagged as complete. Review the file of unfulfilled purchase orders for any overdue items and discuss the status with the ordering Clarke

Answer 38

Deficiency-if the standard costs were reviewed 18 months ago there is a risk that the costs are mistreated as changes in raw materials and wage inflation may not have been adjusted for this could result in inventory being under or over valued and profits being mistreated. In addition for year-end reporting IAS2 allows standard cost to be used for valuation purposes but only if they are a close approximation to actual costs which is unlikely if the standard costs remain unchanged for a long period of time therefore the valuation may not be in line with IAS2 Control recommendation-a review of all standard costs currently in use should be undertaken by a senior manager in the production department actual costs for raw materials labour and overheads should be ascertained and compared to the proposed standard cost to ensure they are a close approximation. The revised costs should be reviewed by the production director who should evidence this review at least annually a review of the standard costs should be undertaken to ensure they are up to date. Test of controls – obtain a copy of standard costs used for inventory valuation and assess when the review was last on the ticket and inspect evidence of review by the production director

Answer 39

Compare the accrual for employment tax payable to prior investigate any significant differences Agree the year ends employment tax payable accrual to the payroll records to confirm accuracy Re-perform the calculation of the accrual for a sample of employees to confirm the accuracy Undertake a proof in total test for the employment tax accrual Agreed the subsequent payments to the post year and cashbook and bank statements to confirm completeness Review any correspondence with tax authorities to assess whether they are any additional outstanding payments due and if so confirm they are included in the year end accrual Review any disclosures made of the employment tax cruel and assess whether these are in compliance with accounting standards and legislation

Answer 40

Remuneration should motivates the directors to focus on long-term growth of the business however annual targets can encourage short-term strategies rather than maximising shareholder wealth. The remuneration of executives should be restructured to include a significant proportion based on long-term company performance for example executives could be transit option shares as this would encourage focus on the long-term position

Answer 41

Circularise trade receivables for a representative sample of the year and balances if authorised by Tinkerbell‘s management send an email or remind a letter to follow up non-responses Review cash receipts after the end in respect of pre-year and receivable balances to establish if anything is still outstanding. Where amounts are unpaid investigate where an allowance is needed Review the reconciliation of receivables ledger control account to the list of receivables balances and investigate any unusual reconciling items Review the aged receivable report to identify any old balances and discuss the probability of recovery with credit control to assess the need for an allowance Calculate average receivables collection period and compare this to prior and expectations investigating any significant differences Select the sample of goods dispatch notes just before and just after the end to ensure the related invoices are recorded in the correct accounting period Review a sample of credit notes raised after the end to identify any that’s related to pre-year-end transactions and confirm that they have not been included in receivables Review the aged receivables ledger for any credit balances and enquire of management whether they should be classified as payables For slow moving or age balances review customer correspondence files to assess whether there are any invoices in dispute which require an allowance Review board minutes to assess whether there are any material disputed receivables Select a sample of year and receivables balances and agree back to a valid goods delivery notes and sales order to ensure existence

Answer 42

Deficiency-the lack of checking increases the risk that errors are being Accumulated without being protected which could lead to wages being overall understated Additionally wages may be paid as a result statutory deductions may be over or understated given rise to compliance issues there will also likely be a loss of employee goodwill Recommended controls – a senior member of the payroll department should we perform a sample of the gross and net pay calculations any discrepancies should be investigated the automated gross and net pay calculations must be reviewed and approved before payments are made Test of controls-obtain the recalculations performed by the senior payroll reviewer for the evidence that the automated calculations have been reviewed and review a sample of the gross and net pay calculation is generated by the payroll system for evidence that they have been approved and signed off

Answer 43

The apparent lack of authorisation to changes in standing data increases the risk of errors leading to the over or under statements of wages and the incorrect payments of wages this also increases the risk of fraud as the clerks have the ability to make an authorise changes to standing data Recommended controls-payroll clerks should not be allowed to make standing data changes changes to standing data to reflect the annual wage increase should be made by a senior member of the payroll department these changes should be checked by another responsible official to identify any errors or inconsistencies Test of control-observe a payroll clerk attempting to make a change to payroll standing data to determine whether the system object to changes. Also review the log of changes made to the standing data for evidence that they were made by a senior member of the payroll department and finally reviewed the log of changes made to the standard data for evidence that they have been reviewed by another responsible official

Answer 44

Interim The purpose of the interim audit is to carry out procedures that would be difficult to perform at year-end because of time constraints No statutory requirements to perform interim audits line The procedures performed are; inherent risk assessments and gaining an understanding of the entity Documenting and evaluating the entity system of internal controls Carrying out test of controls on the companies internal controls to ensure they are operating as expected Performing substantive testing of profit or loss transactions and balances to gain evidence that the books and records are a reliable basis for the preparation of the financial statements Identification of issues that may have an impact on work to take place at the final audit Final audit It occurs after the year end and the purpose is to express an audit opinion on the financial statements covering the entire period being audited. The final audit is a statutory requirements The procedures performed are; Substantive procedures involving verification of statement of financial position balances and amounts in the statement of profit or loss Obtaining third-party confirmation Analytical procedures relating to figures in the financial statements Subsequent events review Agreeing the financial statements to the accounting records Examining adjustments made during the process of preparing the financial statements Consideration of the going concern status of the entity Performing test to ensure that the conclusions formed at the interim audit is still valid Obtaining written representations

Answer 45

Agreed a total wages and salaries expense per the payroll systems to the trial balance and investigate any differences Cast the sample of payroll records to confirm completeness and accuracy of the payroll expense For a sample of employees we calculate the gross and net pay and agree to the payroll records to confirm accuracy Re-perform calculations of statutory deductions to confirm whether corrected auctions for this year have been made in the payroll Compare the total payroll expense to prior-year and investigate any significant differences Review monthly payroll charges compare this to prior year and budgets and discuss with management for any significant variations Perform a prove in total of total wages and salaries incorporating joiners and levers on the annual pay increase compared this to the actual wages and salaries in the financial statements and investigate any significant differences Select a sample of joiners and leavers agree that start and leaving date to supporting documentation we calculate that the first and last pay packet to accurately calculate and recorded Agree the total net pay per the payroll records to the bank transfer listing of payments and to the cashbook Agree the individual wages and salaries per the payroll to the personnel records for example Select a sample of weekly overtime sheets and trace to overtime payments in payroll records to confirm completeness of overtime paid

Answer 46

Agree the end is income tax payable accrual to the payroll records to confirm accuracy Re-perform the calculation of the accrual to confirm accuracy Agreed the subsequent payments to the post year end cashbook and bank statements to confirm completeness Review any correspondence with tax authority To assess whether there are any additional outstanding payments due and if so agree that they are included in the year accrual Review any disclosure is made of the income tax a crawl and assess whether they are in compliance with accounting standards and legislation

Answer 47

The recent representative letter is provided by the CFO or CEO and provides the below within the letter. The letter needs to be provided as close to the sign off of the audit as possible and if the written representative letter is not provided then this is grounds for disclaimer of opinion because there is not sufficient appropriate evidence and this would be classed as versive To be included within the letter We have fulfilled our responsibilities as set out in the terms of the audit agreements Significant assumptions used by us in making accounting estimates including those measured as fair value are reasonable Related party relationships and transactions have been appropriately accounted for and disclosed Subsequent events have been disclosed That management have provided audits with access to all information of which they are aware of and additional information that has been requested from the auditor for the purpose of the audit engagement. And finally unrestricted access to persons within the entity from whom you determine that necessary to obtain all the evidence Finally all transactions have been recorded in the accounting records are reflected in the financial reports

Answer 48

Narrative notes consist of a written description of the internal control system to detail what occurs in the system at each stage including related controls which operate at each stage The disadvantage is Amy may prove to be time-consuming and cumbersome if the internal control system is complex and it may be more difficult to identify if any internal controls are missing in the narrative notes Internal control questionnaires contain a list of questions for each major transaction cycle these questions design to assess whether internal controls exist Internal controls may be overstated if the client is aware that the audit is looking for a particular answer and unusual controls may not be included on the standard questionnaire hence may not be identified

Answer 49

Buy for money focuses on the best combination of services for the lowest level of resources the purpose of the value for money audit is to examine the economy efficiency and effectiveness of the activity or process in question Economy-attaining the appropriate quality and quantity of physical human and financial resources at the lowest cost Efficiency-the relationship between goods or services produced and the resources used to produce them Effectiveness-concerned with how well and activity is achieving its policy objectives or are there in tended effects

Answer 50

Valuation- Review depreciation rates applied in relation to asset lives past experience of profit and losses on disposal consistency with prior years of disclosure accounting policies If acid has been revalued consider the experience and independence and value of the scope of the values work the methods and assumptions used and where the valuation bases are in line with IFRS Completeness-compare non-current assets in the general ledger with non-current asset register and obtain explanations for differences For a sample of assets which physically exist agreed that they recorded in the non-current asset register Rights and obligations – verified title to land and building by inspecting the title deeds land registry certificates and leases Examine documents of title for other assets including purchase invoices contracts high purchases or Lease agreements

Answer 51

The likelihood of the deficiency leading to material misstatement in the financial statements in the future The susceptibility of loss of fraud of the related assets or liability The subjectivity and complex cavity of determining estimated amounts Financial statement amounts exposed to the deficiencies The volume of activity that has occurred occurred occurred in the balance or class of transactions exposed to the deficiency The importance of the controls to the financial reporting process The cause and frequency of the exception detected as a result of the deficiency in the controls The interaction of the deficiency with other deficiencies in internal control

Answer 52

Deficiency-maintaining and internal audit departments is an important control as it enables senior management to test whether controls are operating effectively within the company. If the team has staff shortages this reduces the effectiveness of the monitoring control Control recommendation – Senior management should consider recruiting additional employees to join the internal audit departments or outsourcing the internal audit function In the interim employees from other departments such as finance could be seconded to internal audits to assist them with audits it must be to ensure that these reviews do not cover controls operating in the departments in which the employees normally work

Answer 53

Deficiency-it appears that purchase orders for capital expenditure I’ve been placed without being agreed back to annual capital budgets resulting in overspends The increased expenditure may be due to increased levels of service has been provided or it could be due to lack of controls over the capital expenditure process resulting in increased costs and reduced profits Control recommendation – Companies monthly management accounts should include an analysis of capital expenditure against budget and prior-year per departments Each department head should include narrative which explains the significant variances to date Capital purchase orders should be compared to the annual department budget as part of the authorisation process any spend in excess of the budget should be referred for authorisation to the financial director

Answer 54

Deficiency – as all members of payroll can amend standing data this may result in errors or unauthorised changes being made leading to incorrect payments of wages and increased risk of fraud Recommendation The password to amend standing data should be changed And only communicated to senior members of the payroll departments If all members of payroll need the ability to amend standing data the system should be changed to require authorisation of changes by senior members of payroll Edit report should be generated for or standing data changes with clear reference to who made the change and who authorised it

Answer 55

If credit limits are not reviewed regularly they could be out of date resulting in limits being too high and sales being made to poor credit risks or low and the clients losing potential revenue Recommendation – Credit limit should continue to be set by the sales director however this limit should be reviewed and amended as appropriate on regular basis by responsible official

Answer 56

Narrative notes Narrative notes consist of written descriptions of the system the detail what occurs in the system at each stage and includes details of any controls which operate at each stage The advantage is that the simple to record after discussion with staff members these discussions are easily written up as notes. They can facilitate understanding by all members of the audit team especially more junior members who might find alternative methods to complex Flowcharts- Flowcharts are a diagrammatic illustration of the internal controls systems Lines usually demonstrate the sequence of events and standard symbols are used to signify controls or documents The advantage with flow charts is it is easy to view the system in its entirety as it is all presented together in one diagram. Due to the use of standard symbols for controls it can be effective in identifying missing controls Questionnaires- Questionnaires internal control questionnaires or internal control evaluation questionnaires contain a list of questions for each major transaction cycle. Internal control questionnaires are used to assess whether controls exist whereas internal control evaluation questionnaires assess the effectiveness of the controls in place The advantages of questionnaires are quick to prepare which means they are tiny method for recording the system. If drafted thoroughly Lane sure that all controls presence within the systems are considered and recorded hence missing controls or deficiencies are clearly highlighted by the audit team

Answer 57

Address Dear sirs Audit of clients for the year ended 30th of April 2015 Please find enclosed the report to management on deficiencies in internal controls during the orders for the year ending 30th of April 2015. The appendix to this report considers deficiencies in the sales and dispatch system and recommends to address those deficiencies. Please note that this report only address is the deficiencies identified during the audit and if further tests have been performed more deficiencies may have been reported. This report is solely for the use of management and if you have any further questions then please do not hesitate to contact us Yours faithfully Auditors

Answer 58

Deficiencies-There is a risk that customers could be set up incorrectly resulting in a loss of customer goodwill and sales revenue In addition to receive a selected clerks I’m not senior enough to give access to making changes to master file data as this could increase the risk of fraud Recommendation – Receivable ledger clerks should not be able to access the master data file to add new customers or make amendments any such additions to master file data should be restricted so that’s only supervisors and above can make changes. An exemption report of changes made should be generated and reviewed by a responsible official

Answer 59

Deficiencies-as the extra staff will not be as experienced as a sales clerk there is an increased risk of mistakes made in the sales invoices this could result in customers being under or overcharged leading to misstatements revenue or dissatisfied customers Recommendation – only the sales clerks should be able to raise sales invoices as the client is expanding consideration should be given to recruiting and training more permanent sales clerks who can produce sales invoices if this is not currently possible Temporary staff should be adequately trained an additional input clicks on invoices should be introduced

Answer 60

This could result in on authorise sales discounts being given as there does not seem to be any authorisation required in addition to click forget to manually enter the discount or enter an incorrect level of discounts for a customer leading to the sale invoice being overstated and a loss of customer goodwill. Unauthorised discounts in excess of 10% would result in a lot of revenue either due to error or fraud. Recommendation – During the period of any special offers such as the 10% off weekend the authorised sales price file should be updated by a responsible official these changes should be reviewed for any input errors this review should be evidence the invoicing system should confirm the old is replaced during the weekend hence the sales invoice for these periods should be automatically contain the reduced price The invoicing system should be amended to prevent sales clerks from being able to manually enter sales discounts on two invoices

Answer 61

Deficiency-statements are no longer sense rightly this increases the likelihood of errors and any disputed invoices not being quickly identified and resolved by the clients this could lead to cash flow issues Recommendation- The client should produce monthly cost of statements for all customers and send them out promptly

Answer 62

Deficiency-if the receivable ledger is only reconciled annually there is a risk that areas will not be spotted properly and receivables may be misstated Recommendation – The receivables ledger control account should be reconciled on a monthly basis to identify any areas which should be investigated and corrected. The reconciliation should be reviewed by a responsible official and there should be evidence the review by way of signature

Answer 63

Obtain system notes from last years orders and ensure that the documentation on the purchases and payrolls covers all expected stages and it’s complete Review the audit file for indications of weakness in the system and knows this for investigation this year Review the prior reports to management to identify any recommendations which were made over controls in this area as this may highlight potential changes which have been made in the current year Obtain system documentation from the client potentially in the form of procedure manual review this to identify any changes made in the last 12 months Interview client staff to ascertain where the systems and controls have changed including the stores and warehouse to ensure that the flowchart for notes produced last year is correct Form walk-through test by tracing a sample of transactions through the Purchases and payable system to ensure that the flowchart and system notes containing all the fire or accurate During the walk-through test confirm the system notes and flow chart accurately reflect the control process is which are in place and can be used to identify controls for testing

Answer 64

Deficiency-as the customers are told to contact the other store or use the company website customers are less likely to contact individual stores themselves and this could result in a loss of sales. Also goods may be slow moving in one store however sold out in another therefore if they could be transferred between stores the overall sales will be maximised. Control recommendations – an interbranch transfer system should be established between stores within the branch inventory forms being completed for store transfers. This should help stores whose inventory levels are low but are awaiting their deliveries from the supplier Test of control-during the interim audit arrange To visit a number of the stores discussed with a store manager the process for ordering our inventory items in particular whether it is possible to order from other branches. At each store inspect sample of completed interbranch inventory forms for confirmation the control is operating

Answer 65

Deficiency-this could result in delays in supplies being paid as the purchase invoices could not be agreed to the court receive notes and also recorded liabilities being understated. Additionally any prompt payment discounts offered by suppliers maybe missed due to delays in payment Recommendation-a copy of the girls receive note should be sent to the accounts department on a regular basis such as daily the accounts department should undertake a sequence check of the GRNs To ensure not a missing for processing Test of controls-enquire of the accounts clerk as to the frequency of goods receive notes All received and assess if they are sent promptly Undertake a sequence check of could receive notes held by the accounts department discuss any missing items with the accounts click

Answer 66

Calculate the operating profit and gross profit margins and comparing to last year and budget to investigate any significant differences Review monthly purchases and other expenses to identify any significant fluctuations in discussion management Discuss with management whether there have been any changes in the key suppliers used to compare this to the purchase ledger to assess completeness and accuracy of purchases Re-calculate the accuracy of a sample of purchase invoice totals and related taxes and short expenses have been included in the correct nominal code We calculate the pre-payments and accrual is charged at the year ends to ensure the accuracy of the expense charged included in the statement of profit and loss Select a sample of postage and expense invoices ensure they are expense relating to current year have been included Set the sample of payments from the cashbook and trace to expense accounts to ensure the expense has been included and classify properly Select the sample of goods receive notes from throughout the year agreed them to purchase invoices and the purchase day book to show the completeness of purchases Select the sample of goods received notice just before and after year and agreed to purchase day book to ensure the expenses recorded in the correct accounting period

Answer 67

1. Compare accrual for income tax payable to the prior year, investigate differences 2. Agree the year end income tax payable accrual to the general ledger and payroll records to confirm accuracy 3. Re perform the calculation of the accrual to confirm accuracy and discuss any variances with management 4. Agree the subsequent payment to the post year cash book and bank statements to confirm completeness 5. Review any correspondence with tax authorities to access whether there are any additional outstanding payments due and if so agree they are also included in the accrual 6. Review any disclosures made of the income tax accrual and access whether these are in compliance with accounting standards and legislation

Answer 68

It assists the auditor and those charge of governance in understanding matters relating to the audit and in Developing a constructive working relationship the relationship is developed while maintaining auditors independence and objectivity It helps the auditor in obtaining from those charged with governance information relevant to the audits for example those charge with governance may assist the auditor in understanding the entity and its environment and identifying appropriate sources of audit evidence and in providing information about specific transactions or events It helps those charged with governance in fulfilling their responsibilities to oversee the financial reporting process thereby reducing the risk of material statements of the financial statements Promote effective two-way communication between those charged with governance and the auditor

Answer 69

The auditors responsibilities with regards to providing an opinion on the financial statements and that they have carried out their work in accordance with international standing of auditing The auditor should explain the planned approach to the audit as well as Audit timetable Any key audit risks identified during the planning stage should be communicated In addition any significant difficulties encountered during the audit should be communicated Also significant matters arising during the audit as well as significant accounting adjustments During the audit any significant deficiencies in the internal control system identified should be communicated in writing of verbally How the external auditor and internal auditor may work together and any planned use of the work of the internal audit function Those charged with governments should be notified of any written representation required by the auditor

Answer 70

Deficiency-as it is not independence as he has overall responsibility for inventory he therefore has an incentive to conceal or fail to report any issues that could reflect badly upon him An independent supervisor should be assigned such as a manager from the internal audit department

Answer 71

Deficiency – this could result in items being double counted or not counted at all Recommendation- Once areas have been counted they should be flagged at the end of the count the supervisor should check all areas have been flagged and therefore counted

Answer 72

Deficiency – this makes it more difficult for finance to assess the level of damage to the gods and establish the level of write down needed also if not moved damaged goods could be sold by mistake Recommendation-damage goods should be clearly marked as such during accounts and at the end of the count they should be moved to a centre location manager from the finance team ship inspectors damage caused to assess the level of allowance or write down needed

Answer 73

Deficiency-increasing the risk of double counting or failing to count inventory fiscal mean inventory in the financial statements is under or over stated Recommendation – although it is not practical to disrupt the continuous production process raw materials required for the 31st of July should be estimated and separated from the remainder of the inventory these materials should be included this part of the work in progress Goods manufactured on the 31st of July should be stored separately and at the end of the count should be counted once and included as finished goods Goods received from supply should also be stored separately counted once at the end and included in raw materials goods dispatch to customers should be kept to a minimum during accounts

Answer 74

Deficiency – the warehouse manager is unlikely to have the necessary experience estimate to work in progress levels which is something the factory manager would be more familiar with. Alternatively a specialist may be needed to make the estimates this could ultimately result in an inaccurate work in progress balance in the financial statements Recommendation – a specialist should be used to assess the work in progress

Answer 75

Deficiency-although he is familiar with the raw materials and on the basis that a specialist has been acquired in the past the warehouse manager may not have the necessary skill and experience to carry out the measurements. This could results in an inaccurate raw material balance in the financial statements

Answer 76

Deficiency the sheets are not sequentially numbered and the supervisor will be unable to ensure the completeness of all inventory sheets Recommendation – every team should be given a blank sheet on which they can enter an inventory counted which is not on their sheets the blank sheet should be sequentially numbered with any unused sheets returns at the end of the count. The supervisor should then check the sequence of all sheets

Answer 77

Deficiency-it does not appear that one has been told to count and the other to check therefore errors in Counting may not be picked up For each area one team member should be asked to count on the second member ask to check that the inventory has been counted correctly the roles of each can be reversed for the next area

Answer 78

For a sample of inventory items carry out test counts from Aisle to inventory sheets to test completeness and from inventory sheets to aisle to test existence Obtain and record details of the last goods receive notes and goods dispatch notes from July 31 to form the basis for cut-off procedures at the audit Observe where the team is carrying out the counter adequately following the inventory count instructions For a sample of items marked as damage on the inventory sheet inspect the windows to verify that the level of damage has been correctly recorded Observe the procedures for movements of inventory during accounts and assess the rest of raw material of Finnish goods have been missed or double counted Photocopy the inventory sheets for follow-up and use when performing procedures at the final Audit Ascertain how the warehouse manager is Asesina level of work in progress by observing the assessments and by reviewing his assumptions and consider how consistent his estimate is with abserved levels Ask the warehouse manager how he has estimated informative quantities and review his calculation and any assumptions for reasonableness re-perform a sample of the measurements of height and width form in the basis of the calculation to see if they are accurate Confirm any third-party inventory observed has been excluded from accounts Confirm that the procedures for identifying and separating storing damaged goods are operating effectively

Answer 79

Software can be used to cast the inventory listing to confirm the total is complete and accurate Audit software could be used to extract a statistical sample of inventory items in order to verify the cost or net realisable value Calculations of the inventory holding period or inventory turnover could be carried out by audit software before being used to compare Against the same ratios for the prior year of competitors this will help to assess the risk of inventory being overstated Order software could be used to help extract an aged inventory analysis this intern could be used to identify any obsolete or slow moving items which may be required to be written down or an allowance Audit software can be used to perform calculations during testing of inventory such as recorded costs Automated tours can be used to confirm whether inventory adjustments recorded during attendance at the count have been correctly recorded in the final inventory records forming the basis of inventory in the financial statements Automated tours can be used to verify cut off by testing whether the dates of the last goods receive notes and goods delivery notes recorded relate to pre-year ends and that they are with a date after the year ends have been excluded from the inventory records

Answer 80

Automated tours allow the order team to test a large volume of inventory data and more accurately and more quickly and if tested manually Automated tools decrease the scope for human error during testing and can provide evidence of high quality By using automated tools auditors can test actual inventory transactions within the system Rather than working on printouts from Spall or previewed files which are dependent on other software and therefore could contain errors or could have been tampered with following exports Assuming the inventory system remains unchanged automated tools use in the audit of the clients year-on-year should bring time and therefore cost saving in the long-term which should more than compensate for any set up costs Auditors can utilise automated tools to test program controls as well as general internal controls associated with computers Results from automated tours can be compared with results from traditional testing if the results correlate overall confidence is increased The use of automated tools allows audit team members more time to focus on areas of higher risk and issues requiring judgements rather than performing routine calculations that can be carried out by audit software

Answer 81

Setting up the software needed for automated tours in the first year is likely to be Time consuming and expensive All the staff working on the clients will need to be trained so that they have sufficient level of IT knowledge to apply automated tools when auditing the inventory system If testing is performed on date in the live inventory system there is a risk that live client data may be corrupted or lost If the inventory system at the client changed then it may be expensive and time-consuming to redesign the automated tools If the inventory systems at the client is not compatible with the audit automate tool software then they would need to be tailored to the clients system which may be costly If testing is performed on data from copies of the live files rather than the live data self there is a risk that these files have been affected by the copying process Or have been tampered with If there is not adequate systems documentation available it will be difficult to design appropriate techniques due to lack of understanding of the inventory system at the clients

Answer 82

COMPLETENESS 1. Perform analytical procedures on purchases e.g. comparisons to the prior year on a month by month basis Ratio of purchases to payables gross profit percentage and investigate any significant fluctuations The purpose is to provide assurance on the completeness of amounts recorded in the accounts and to highlight any areas of concern for future investigation 2. For a sample of supplier invoices trace amounts to cut receive Notes order and payables Ledger The purpose is to confirm completeness of recording of purchases 3. Inspect the unmatched could receive note file and seek explanations for any old unmatched items and trace this to the year and accruals listing The purpose is to provide assurance on completeness as these should be included in the year end accrual 4. For a sample of amounts on the ledger agree to the computerised payments list to verify the amount and supplier To provide assurance that the payment list is complete and accurate OCCURANCE 1. For a sample of amounts in the papers ledger trace these two invoices another supporting documentation such as goods receive notes To provide assurance of the occurrence assertion 2. For a sample of good to receive notes agree back to the original order details To provide assurance on occurrence 3. For a sample of pays on the computerised payments list agree amounts back to the supporting documentation such as invoices and could receive notes. To provide assurance that payments have been made for a Bon fide liability of the company For a sample of payments made after the year and traced back to the computerised payments list for a sample of pays on the computerised payment list trace payments to post year and bank statements CUT OFF for a sample of course receive notes dated shortly before an after year and agreed that the amount on invoices are posted in the correct financial year Review the schedule of accruals and agreed to goods receive notes inspecting the date of receipt of goods to ensure that goods received after the year and are not included Inspect outstanding orders on the orders placed file for any orders completed but not yet invoiced

Answer 83

Cast list of payables balances from the legend of the year end to provide assurance that the list is complete and accurate Reconcile the pebbles list from the pebbles ledger to the general ledger and accounts to provide assurance that the figures are complete and accurate and correctly reflected in the financial statements Perform analytical procedures on trade payables comparing balance is the prior year and investigate any significant fluctuations to provide assurance on completeness and accuracy and to highlight areas of concern For a sample of balances trace amounts to supporting supplier statements to confirm existence and accuracy of the amount outstanding at the year end Test cut off by taking a sample of God receive notes either side of the year and verifying that amounts are included on the pebbles ledger for goods receipt for the year end to ensure that amounts are included in the correct financial period Review disclosure of payables in the draft financial statements to ensure that payables have been disclosed appropriately in the statement of financial position and notes is either current or long-term liabilities

Answer 84

Access to the trade payables master file as limit to only authorise staff Amendments to standing data can only be made by authorise staff and all amendments must be authorised prior to input Access to the file is controlled by logins and passwords and passwords must be prompted to be changed regularly for example every 90 days Computer log is reviewed regularly by IT departments to detect any unauthorised access or attempts to access the trade payables must file List of supply should be reviewed regularly by senior manager and there is no longer you should be removed from the system

Answer 85

Obtain and cast the inventory listing of the clients and agree to the cost of inventory recorded Agreed the quantity of the clients products shown as held that year end to the year and eventually counts Request a breakdown of the cost calculated of each unit of this product and discuss with management how the standard cost was derived We calculate the cost calculation to confirm that the quantity multiplied by the standard cost is the total cost of inventory For a sample of finished good items obtain standard cost cards and agree the raw material costs to recent purchase orders labour cost to timesheets all wage records and overhead allocated to invoices and that they are of a production nature. Compare sales prices over time to establish if the price has been reduced because of fall in demand to determine whether an allowance is required Compare actual sales units per month to budgeted sales per month from before an after the year end to establish how much lower actual sales are expected and discuss with management Select a sample of items included in inventory of the client and review post year and sales invoices to ascertain if net realisable value is above cost or if an adjustment is required

Answer 86

Review correspondence with the clients to establish if there was a discussion about payment difficulties and whether the clients intends to fully settle the outstanding amounts Review the age of the outstanding debts with the clients and discuss the circumstances with the credit controller to establish if it has been exceeded the credit limit terms and consider if an allowance is required Review post year-end receipts from the clients to establish how much of the debt was recovered by the orders completion date and to assess how much of the year and balance remains outstanding Spec four minutes to identify whether there are any significant concerns in relation to paying Discuss with management why no allowance has been made in respect of the stats and assess this justification

Answer 87

Review customer correspondence to establish the details of the claim on the amounts being claimed Review correspondence with the clients lawyers and with the clients permission contact the lawyers to establish the likely outcome the customers claim made to date Discuss with the lawyers the likelihood and amount of potential future claims Inspect board minutes to establish details of the circumstances of the contamination and to ascertain management view as to the likelihood that the existing claims will be successful and extensive possible future claims Compare levels of returns and claims to a date against sales volumes of the product to assess the potential level of future claims Review post year and payments for damage settlements and compare with any amounts provided at the year-end to assess the reasonable list of the provision Obtain written representation from management that there has been no other contamination incidents and no other product liability claims of which management are aware Review the financial draft statements to establish that the legal claim has been appropriately provided for or disclosed in accordance with accounting standards and local legislation

Answer 88

Verify the announcement to shareholders is Ashley made before year ends by inspecting documentation evidence of the announcements Order it should also be with you to confirm that the decision to reorganise the business was taking pre-year ends Obtain an analysis of the reorganisation provision and confirm that only expenditure attributed to the restructuring is included Cast a breakdown of the reorganisation provision to ensure it’s been correctly calculated online Review the expenditure and confirm the training costs are not included Agree costs included within the provision to supporting documentation to confirm the appropriateness and accuracy of items included Review the related disclosures in the financial statements to assess whether they comply with the required accounting standards Obtain a written representation confirming management discussions in relation to the announcements of the reorganisation

Answer 89

The audit team can use all the software to calculate payables payments period for the year to date to compare against prior to identify whether the paper payment period has changed in line with trading levels and expectations. If the payables payment period has decreased this may be an indication that pebbles are understated All software can be used to cast the pebbles and across listing to confirm the completeness and accuracy of trade payables and accruals Audit software can be used to select a representative sample of items further testing of payables balances Or a software can be utilised to re-calculate the accruals for goods received not invoice at your end

Answer 90

Obtain and cast the schedule of intangible assets detailing opening balances amounts capitalise in the amortise and closing balances Agreed a closing balance to the general ledger trial balance and draft financial statements Discuss with the financial director the rationale for the useful life and consider its reasonableness Re-calculate the amortisation charge for a sample of intangible assets which have commenced production I confirm it is in line with the amortisation policy For those expenses research agreed the costs incurred to invoices and supporting documentation and to inclusion in profit or loss For those capitalise as development Agree costs in Kurt invoices and confirm technically feasible by discussion with development managers or review of feasibility reports Review market research reports to confirm the clients has the ability to sell the product once completed and the probable future economic benefits will arise Review the disclosures for intangible assets in the financial statements to verify there in accordance with financial standards

Answer 91

Obtain the company‘s cash flow forecast and review the cash in an outflows assess assumptions for reasonable this and discuss the findings with management to understand if the company has sufficient cash flows Perform sensitivity analysis on the cash flows to understand the margin of safety the company has in terms of net cash in an outflows Evaluate management plans for future actions including their contingency plans in relation to ongoing financial and planning for generating revenue and considered the feasibility of his plans Review the companies policy and sales and order books to assess if the levels of trade are likely to increase and if the revenue figures in the cash flow forecast are reasonable Review any agreements with the bank to determine whether any covenants have been breached especially in relation to the overdraft Review poster and correspondence with suppliers to identify if they had threatened legal action or if any have refused to supply goods Enquire of the lawyers of the client as existence of any litigation Review the post UM board minutes to identify any other issues which may indicate future problems for the company Consider whether any additional disclosures regarding going concern should be made in the financial statements Consider whether the going concern basis is appropriate for the preparation of the financial statements Written representation confirming the directors view that the client is going concern

Answer 92

A three party relationship-the intended use of the responsible party and the practitioner Subject matter-this is the data to be evaluated that has been prepared by the responsible party it can take many forms including financial performance non-financial performance processing and behaviour Suitable criteria-the subject matter is evaluated on measure against criteria in order to reach an opinion Evidence – suitable appropriate evidence needs to be gathered to support the required level of assurance- Assurance report-a report containing the practitioners opinion is issued to the attended user

Answer 93

By using assertions

Answer 94

Transaction assertions - relate to the P&l (eg rev, expenses, dividend payments) Balance assertions - relate to the balance sheet / SFP

Answer 95

Remember with acronym “ A CCCOP” Accuracy - have we used correct price & quantity. Is the $ amount recorded correct in essence & do they add up correctly Completeness - have we recorded all the transactions Cut off - correct financial period (especially true for online business with online sales etc) Classification - correct journal entries Occurrence - did the transaction actually occur Presentation - how does it look in the financial statements ? Is everything prepared by IFRS

Answer 96

Remember this acronym “RECCAP” like recap with 2 Cs Rights and obligations - rights apply to our assets and equity and obligations apply to liabilities. Do I own the asset to have the right to record it ? Existence - is it real (is inventory there) Completeness - are all our assets recorded ? Is anything missing or omitted Classification - are they sitting in the right category on the balance sheet. Is it a current or non current liability ? Accuracy, valuation and allocation - relates to the calculation used on the balance sheet Presentation - do our disclosures meet IFRS

Answer 97

Lower of cost (material,labour, overheads and costs of bring asset in) vs NPV (selling price less costs to complete and sell)

Answer 98

These can be done at different stages Planning stage - ration analysis,% change year on year It’s kind of like radar it helps us identify where something looks wrong. We use it to help us identify potential misstatements After planning we look at SUBSTANTIVE analytical procedures . Still looking for trends but more specific eg on a specific amount. Helps narrow down where to look We can use analytical procedures to gather evidence on a particular assertion. It’s interlinked with data analytics

Answer 99

1. Inquiry - interview the client - obtain written representation Problem here is that the client may be hiding something, is there fraud happening ? Errmmm no Better that 1. Is 2. 2. Confirmation - obtain representation from 3rd party For example receive confirmation from the bank account the clients closing balance or perhaps the lessor regarding the lease agreement or the customer about a receivable balance 3. Inspection (of records or documents) Within this you have tracing and vouching which work in opposite ways. Let’s take a purchase order and invoice, tracing is looking at the PO and looking forward to trace the invoice for COMPLETENESS whereas vouching is looking at the invoice and looking back to find the PO for EXISTENCE/OCCURRENCE 4. Inspection (of tangible assets) - verify the existence of PPE or inventory for example 5. Observation - watch the client count inventory - watch the client apply and internal control 6. Recalculation - check mathematical accuracy of depreciation, bad debt etc by recalculation, we either get same number or not 7. Re performance - broader than recalculation - Reperform any client procedure for example reperforming aged receivables 8. Analytical procedures - calculate the plausibility of financial info - eg compare GP % this year to last and if materially different why ? 9. Scanning - search for unusual items to investigate eg normally we dr expense so if there is a large cr in there why ??

Answer 100

1. Client acceptance of continuation - if first time need approval from client to speak with prior auditor as confidential - send an engagement letter 2. Planning - audit wants to understand the business - what it might have issues with - set materiality threshold 3. Risk assessment - extend to which you want to rely on the companies internal control - if expect effective controls then do test of controls then reduced substantive procedures (point 4) - if expect ineffective controls then report deficiencies to TCWG and do step 4 fully 4. Substantive procedures 5. Report

Answer 101

Reasonable assurance engagement Limited assurance engagement

Answer 102

1. Should promote transparent and fair markets 2. It should protect shareholders rights ensuring fair treatment to all (eg same info for everyone) 3. It should provide for stock markets to function in a way that contributes to good corporate governance (insider trading is prohibited) 4. It should ensure timely and accurate disclosures on material matters such as financial statements 5. Recognise the rights of all stakeholders and not just shareholders 6. Ensure strategic guidance of entity, effective monitoring of management by board (eg objectives set)

Answer 103

No it’s set on comply or explain.

Answer 104

1. Board leadership 2. Division of responsibility 3. Composition, succession and evaluation 4. Audit risk and internal controls 5. Remuneration

Answer 105

His company should be headed by an affective board All directors must act with integrity lead by example and promote their desired culture The board showed -established companies purpose – ensure the company has the necessary resources to meet objectives – establish effective controls to assess manage risk – ensure effective engagement with stakeholders -I’m sure that workforce policies are consistent with company values

Answer 106

CEO and chair should not be performed by one person The chair should be independent on appointment (not employee within last five years At least half the board should be non-exec directors

Answer 107

Post the chairman should not be held beyond 9 years All directors should be submitted for re election annually Appointments to board should be rigorous as well as their performances

Answer 108

Board should establish policies and procedures Financial statements should state whether the board consider the appropriateness of the going concern basis of accounting for at least 12 months from the date of the approved financial statements To me above principles orders committee should be established with at least three non-executive directors with one having recent and relevant financial experience

Answer 109

If auditing a plc fees should not exceed 15% for 2 consecutive years

Answer 110

The code sets out certain fundamental principles on how its members (auditors) should behave ethically It recognises that there are Fundamental principles to be followed These are subject to threats Threats must be addressed

Answer 111

The ACCA Fundamental principles are as followed CCOBI Confidentiality Competence (professional) Objectivity Behaviour (professional) Integrity

Answer 112

Eliminate the circumstances that create the threats Apply safeguards where available to reduce the threat to an acceptable level Decline and specific professional activity

Answer 113

Concealing disguising or transferring money that is from the proceeds of crime Entering into agreements to launder the proceeds or having suspicion that money laundering is taking place and not reporting it Acquisition use or possession of criminal property

Answer 114

The auditor knew or should have known that the person with the lie on the auditors work The third-party has sufficient proximity It must be fair just unreasonable to impose a liability on the auditor

Answer 115

Fraudulent financial reporting e.g. overstating profits Misappropriation of assets e.g. theft of cash inventory et cetera

Answer 116

Lack of segregation Significant deficiencies in internal controls Management failing to remedy known deficiencies Complex transactions Significant estimates Easy to steal assets Complex group structures so that Interco transactions are difficult to discover Excessive pressure on management to meet targets

Answer 117

Or misstatements accumulated during the audit should be communicated with appropriate management Management to correct them or explain why not. Mistake in this can be categorised as; 1. Factual (definitely incorrect like a genuine error) 2. Judgemental (auditor and client have different opinions) 3. Projected. Auditors best estimate of misstatement The categorisation is affect how much negotiation or compromise is acceptable when amending financial statements No room for compromise with factual statements Discussion of judgemental errors may reach a compromise Extend a test thing to find a jewel errors rather than just make adjustments for projected errors Obtain written representation from management that they believe uncorrected misstatements are not material or explain the reasons why they are not misstatements Assess materiality upon correct misstatements individually and in aggregate

Answer 118

Remember acronym ARM GRIEF Acceptance and continuance of client relationships and specific engagements Relevant ethical requirements Monitoring and remediation process Governance and leadership Resources Information and communication Engagement performance Firms risk assessment process

Answer 119

The firm must have a risk assessment process to Establish quality objectives Identify and assess quality risks Design and implement responses to address quality risks

Answer 120

The firm must establish policies and procedures designed to promote an internal culture that recognises that quality is essential in performing engagements

Answer 121

Throughout the audit engagements the engagement partner shall remain alert through observation and making enquiries as necessary

Answer 122

The firm must ensure that decisions are appropriate based on The nature and circumstance of the engagements and ethical values of the clients The firms ability to perform the engagement in accordance with professional standards

Answer 123

Overall responsibility for quality rests with the engagement partner who must have sufficient and appropriate involvement throughout the engagements

Answer 124

Three categories of resources are needed to operate the system of quality management and perform engagements Human Technological Intellectual

Answer 125

A firm should have an information system that support system of quality. Communication channels need to facilitate the exchange of information within the firm and with the external parties including those charged with the governance

Answer 126

Monitoring activities must provide a basis for the identification of deficiencies. Remedial actions to address identified deficiencies needs to be responsive to the results of the root cause analysis

Answer 127

Public interest audits such as PLCs should undergo an EQ review Here is an independent reviewer (normally another partner) will be appointed to perform 1. Objective evaluation of the significant judgements made 2. Conclusions reached

Answer 128

Presumes that the firm meets the requirements demanded by ISQM one. There must also be reasonable assurance that The auditor complies with the Fessional standards and legal requirements The auditors report issued is appropriate in the circumstances

Answer 129

Leadership and the overall quality of the audit Compliance with relevant ethical requirements Acceptance/continuance of the audit engagement Assigning a competent and capable engagement team Engagement performance -directions supervision and performance of the audit in accordance with ISA -review of audit documentation -Appropriate consultation -discussion of significant matters with the EQ reviewer

Answer 130

To better understand the business e.g. how many branches factory members does the company have do you have valuable inventory et cetera To give appropriate attention to important areas eg do they have high receivables ? To identify potential problems eg has the company changed its computerised systems recently To be able to carry work out reasonably quick and effectively To ensure the right number of staff are in the order team with the right skills To accommodate all the parties for example internal audit To facilitate the direction and supervision of the audit team and the review of work

Answer 131

Set out the scope timing and direction of the audit and develop an audit plan

Answer 132

The financial statement level The assertion level

Answer 133

0.5 - 1% revenue 1% - 2% of total assets 5-10% of profit before tax

Answer 134

Business risk Audit risk Risk of material misstatement

Answer 135

There are four main characteristics of business risk Strategic risk - eg competition financial risk - eg increase interest rates on high borrowings operational risk - day to day activity, products made incorrectly and worsened reputation compliance risk - failure to comply with regulations And auditor does not have a responsibility To identify or assess all business risks but an understanding of business risks that may result in a risk of material misstatement is essential

Answer 136

Because business risk will often influence inherent risk

Answer 137

Audit risk is the risk at the financial statements containing material misstatement that the auditors have not discovered and therefore give an inappropriate opinion It has 3 components Inherent risk Control risk Detection risk

Answer 138

The risk of an error occurring in the first place without any controls being present

Answer 139

The risk that the entities control procedures do not prevent detect or correct the error

Answer 140

The risk that order procedures do not discover the error

Answer 141

The amount is materially incorrect The amount is materially correct or incorrectly classified presented or disclosed

Answer 142

Sampling risk - This arises when audit procedures are applying to samples rather than entire populations Non sampling risks - This arises from reasons other than sample size. For example if all the staff were inappropriately qualified Good quality control procedures should minimise nonsampling risk

Answer 143

Remember AEIOU Analytical procedures Enquiry Inspection Observation RecalcUlation & reperformance

Answer 144

Audit program is Test data Embedded test facilities

Answer 145

Audit programs are used to examine and interrogate client accounting data. The auditor will have a program which can be the clients files and can be used for To select this sample of transaction to investigate a line The samples could be automatically satisfied The program might be set to identify all transactions or balances It could also re-perform calculations

Answer 146

Test data is used to investigate the operation of client programs. The order to design dummy data at a time process by the client programs. This can obviously help to ensure that the systems are working correctly but also that the controls are working as expected

Answer 147

Integrated test facilities or assistant control and review file (scarf) Or permanent audit modules within the accounting system. During the accounting period certain transactions are also recorded in these files for later examination by the auditor

Answer 148

The experts: Has appropriate qualifications Has the proper experience Independence of the clients Is professional

Answer 149

Is it consistent with other evidence. E.g. the house market is increasing but the experts believe the value has decreased Significant assumptions made-for example about the rate of inflation or rates of return The use of accuracy of source data-survive properties the volume a start with an up-to-date list of properties the company owns. If the right properties are not listed the valuation will certainly be incorrect When the work was carried out to assess if it’s still current and up-to-date

Answer 150

Access to specialist expertise Reduction in cost with efficiency gains Flexibility in responding to uneven demand Greater costs in see through fix fee arrangements Transfer a risk

Answer 151

Loss of control Damage to reputation if outsourced company does not perform well Difficulty to reverse Lack of responsiveness to new requirements Different aims of the saucer can lead to lack of goal congruence Confidentiality

Answer 152

As you can imagine if a section of finance is been outsourced like receivables we can’t just assume that the information the outsource company provides is correct therefore The order to contain the required understanding and order evidence through: A contract or service agreement between the orders client and service organisation User manuals or technical manuals Reports by the service organisation e.g. internal audit reports Report by the service auditor e.g. such as letter highlighting internal control weakness Knowledge derived from previous dealings with the service organisation Comparing data submitted to the service company to information and data received back

Answer 153

The auditor may further sample Obtain and assess a type one or type two report Ask the service organisation for information Visit (with permission) the service organisation and carry out audit procedures there Use (with permission) another order to carry out audit the procedures at the service organisation

Answer 154

A description prepared by the management of the service organisation about the service companies control objectives and related controls that have been implemented Report prepared by the service Auditor giving reasonable assurance on the suitability of the service company systems and control objectives

Answer 155

The same as a type one report however it also includes sometimes a description of the operating effectiveness or If prepared by the auditor the effectiveness of the controls and a description of the service order says test of the controls and the results of those tests Therefore only a type 2 report provides assurance on the effectiveness of the service organisations controls

Answer 156

They are a requirements and the objectives are Management/those charged with governance acknowledge the responsibility for the preparation of the financial statements and half provided all relevant information to the auditor All transactions have been recorded An auditor may request them to support other evidence relevant to one or more specific financial statement assertions

Answer 157

The written representation should be treated as near as possible to but not after the date of the auditors report

Answer 158

Enquire from management about related party transactions. Auditors would have to explain the concept and give examples of help management Review last years working papers Review the board minutes Review the accounting records for unusual transactions (CAAT would help here) Review bank certificates (one company might have given guarantees on behalf of another) Review principle shareholders of companies with whom the client traits Ask the directors about the other directors and share ownership Review correspondence with lawyers Review investment activities Enquire into the names of the pension trustees Obtain written representation from management

Answer 159

What is the proper way to deal with a companies investment in another company The general name for a part of a group is a component What happens if the auditor of the group is not the audience of all components Intra group and unrealised profits must be eliminated on consolidation The process of consolidation has to be checked carefully the amounts add up properly to keep the group totals The goodwill figure has been verified and checked for possible impairments If a company has been acquired partway through the year that the value of profit is apportioned Uniform accounting policies must be applied for the consolidation of the financial statements If financial statements of group companies would be expected to have the same reporting date if consolidated

Answer 160

If a subsidiary has going concern issues and is unable to take a loan out then the board will provide the group auditor with a letter of confidence which sets out their intention of loaning the subsidiary is the parents group capital required. The auditor cannot just take this as sufficient evidence as it is weak form and instead must Ensure that the group has the cash resources available to support the subsidiary Inspect board minutes for evidence that support has been agreed Inspect correspondence between the parents and the subsidiary or the parents and the relevant bankers Inspect cash flow budgets to see if the transfer of funds has been incorporated

Answer 161

Key audit matters

Answer 162

Insufficient evidence Financial statements contain a material misstatement

Answer 163

Remember the acyomn The other bastard knows Oscar robbed Sarah Title & addressee Opinion Basis of opinion Key audit matters Other information Responsibilities Sign off

Answer 164

1. Material uncertainty relating to going concern 2. Emphasis of matter paragraph - like BP spill in Mexico, doesn’t affect going concern but drawing users attention to it 3. Other matter - something not in financial statements but needs communicating such as the auditors weren’t the auditors last year NB very important ! These paragraphs only go in when the opinion is unmodified!!!

Answer 165

Remember this enhanced acronym The other bastard Mike knew earlier Oscar robbed only Sarah Title & addressee Opinion Basis of opinion Material uncertainty relating to GC Key audit matters Emphasis of matter Other Responsibilities Other matter Sign off

Answer 166

Is there a material misstatement or lack of appropriate evidence ? Yes - do we need to modify the audit opinion No - 1. Do we need to put an additional paragraph into the audit report - uncertainty re GC - emphasis of matter - other matter 2. Is there an inconsistency in the other information published along side the FS - other information 3. Is this an issue that was particularly significant to us during the audit - key audit matter

Answer 167

Negative operating cash flow Inability to pay suppliers when due Operating losses If the borrowing facilities are coming up to an end and not a new one has been agreed The loss of key staff or key customers Technological changes come when the companies purpose and main product attendance Lists of changes Non-compliance with regulations

Answer 168

Due diligence is typically required when one company is proposing to take over another Eight do diligence assignments could either be: A review engagement to provide limited assurance (negative opinion) to the effect that nothing worrying has been found And agreed upon procedures engagement to report fact findings

Answer 169

Extensive work Type of reports Timescale A clause saying that any takeover is the decision of the client not the auditor A clause stating that Miss statement made by the target company might not be discovered that all irregularities might not be found. A clause stating that the auditor is dependent on the cooperation of the target The fee

Answer 170

Remember Kashif Kamran acronym CASP Case specific Action - review Source - board minutes Purpose - to confirm XYZ

Answer 171

The auditor should obtain an understanding of the nature and significance of the services provided. The following matters should be considered – The nature of the services provided and the significance of those services to the user entity (effects on internal controls) The nature and materiality of the transaction is processed by the service organisation The degree of interaction between the user and the service organisation The nature of the relationship including relevance contractual terms All of firms should conduct procedures at the planning stage to develop understanding including- Review the contract Review reports issued by the service company Documents how the system of controls operates.

Answer 172

Obtain a type one or type two reports if available Contact the service organisation to obtain specific information Visiting the service organisation and performing procedures which will provide the necessary information Using another auditor to perform procedures which will provide necessary information about the relevant controls

Answer 173

Customer due diligence understand the identity and business reputation of the companies business owners key management and those charged with covenants. Obtain documents to prove identities such as passports to ensure that they are not involved in money laundering or other criminal activities Different auditors ? Why has the clients decided to hire another audit firm that answer their usual auditors for example if it was an assurance report especially when the existing auditors will have good knowledge of company, are they hoping you won’t spot something. You should be able to reach out to existing auditors, if decline, decline audit Timescale for audit? Are they being rushed Are there familiarity threats between auditor and client ? Who will use the report ? That it will be limited and client is aware of this

Answer 174

Self review Self interest Advocacy Familiarity Intimidation

Answer 175

Well it is management responsibility to show that the entities operations are conducted in accordance with the provisions of laws and regulations, the auditor does have some responsibility in relation to compliance with the law to make relations, especially when a non-compliance has impacted on the financial statements

Answer 176

The auditor is required to gain an understanding of the legal and regulatory framework in which the audited entity operates Procedures should be performed to obtain evidence about the suspected non-compliance for example discuss the breach of management to understand how it happened whether it was deliberate or unintentional and he was responsible. Discuss with the companies legal advisors to understand the legal consequences of the Beech Consider the implications to the financial statements e.g. potential fines Whether the auditor needs to report non-compliance to parties outside the entity

Answer 177

It is the management responsibility to ensure the entities operations are conducted in accordance with the provisions of laws and regulations, the auditor is responsible for obtaining sufficient and appropriate audit evidence regarding compliance laws and regulations Auditors need to assess the evidence especially where non-compliance has an impact on the financial statements or where any non-compliance will affect the entities ability to continue its operations Gain an understanding of the legal and regulatory framework in which the audited entity operates. This will help the auditor to identify non-compliance When non-compliance is identified the auditor shall obtain an understanding of the nature of the act and the circumstances in which occurred. The audit team should be Perform further procedures for example liaise with legal advisers to understand the legal and operational consequences of the breach Auditors also need to determine whether they have a responsibility to report the identified or suspected non-compliance to parties outside the entity E.g. whether they have a legal duty or it is considered to be in the public interest to do so Auditors should comply with fundamental principles of confidentiality However in exceptional circumstances if the auditor believes there may be an imminent breach of law they may need to Disclose the matter immediately to appropriate authority and this will not constitute a breach of duty of confidentiality

Answer 178

There are two options Option one Land is measured at cost and is not depreciated Option two It is measured at fair value (revaluation model) with changes being posted to the comprehensive income. Again no depreciation is required

Answer 179

Initial at cost which includes - purchase price - costs to bring asset to location and condition - dismantle costs @ fair value Then either revaluation or cost model for subsequent years. In real life land and building is measured using revaluation model as they tend to appreciate whereas machinery is under cost model as doesn’t Revaluation model - carried at revalued amount less depreciate and impairment losses - gains go to OCI - must be reviewed periodically and kept up to date - consistent policy for each class of assets - depreciate revalued asset less residual value over useful life Cost model - carried at cost less accumulated depreciate and impairment lossses

Answer 180

First has it been sold if not then we keep the assets in the books as it is and record the amount received as a liability and that is it it is like a loan against an asset If it has been sold then considered the scenario We have an asset for 8.4 million we have received 10 million for the assets the liability is over 10 years and is the cost of capital is 5%. First we account for the £10m in the bank (dr) and derecognise the asset at £8.4m Next work out the PV of the liability £7.7m Now regarding the asset we had it in the books at 8.4 and only need to pay 7.7m for this so doesn’t seem right and that is because some of the ownership is with the lessor. To work out the assets value take the % of PV to the amount received and that’s how much we keep Therefore 8.4m x 77% is 6.5m which is what we recognise the asset at Difference goes through pl Bank 10m Derecognise -8.4 Liability -7.7 New asset 6.5 Pl (b) 0.4 debit

Answer 181

Perform customer due diligence i.e. procedure is designed to acquire knowledge about the firms clients and prospective clients and to verify their identity as well as monitor business relationships and transactions Create channels for internal reporting within the audit firm including appointment of a money laundering reporting officer to receive the money laundering reports to which personal report suspicions or knowledge of money laundering activities Keep records including details of customer due diligence and supporting evidence for business relationships which needs to be kept for five years after the end of the relationship. Take measures to make relevant employees aware of the law relating to money laundering and terrorist finance and to train those employees in how to recognise and deal with transactions which may be related to money laundering Put in place ongoing monitoring procedures to ensure policies are up-to-date and being followed

Answer 182

It’s the frame work for quality management that the firm has to uphold. It has 8 components

Answer 183

It ensures there is a review of each audit by the audit firm

Answer 184

Auditor must obtain an understanding of how the audited entity uses the service of the service organisation in order to evaluate the risk of material misstatement Understand the service organisations internal controls

Answer 185

Whereby 2 or more parties have joint control and to which the parties are bound by a contractual arrangement They also have the rights to the asset and obligations to its liabilities

Answer 186

No, PPE are defined as tangible items which are held for use in the production or supply of goods and services which is not the case here as it is a display item. It can be held as an asset but as it is gifted a specialist would need to value as it is a unique item So the DR goes to asset but the CR would go to equity as it was a capital contribution from a shareholder

Answer 187

Review the working papers for the previous auditor to highlight potential issues. It will also help with opening balances. Whether the previous years or its reports were modified and if so why Clare should be taking and planning the audit procedures necessary to obtain sufficient appropriate or evidence regarding opening balances It’s important to develop an understanding of the business including specific legal and regulatory framework.

Answer 188

1. If new client there is detection risk - do rigorous audit planning - get an understanding of business - review old firms working papers - review opening balances - see why the old firm left 2. Management bias - look out for why there may be incentive to alter the numbers, do they want a bank loan or looking to sell company ? 3. Aggressive earning management - do analytical procedures on the P&l and see the % vs last year and look for anything suspicious and explain why 4.

Answer 189

Imagine we are a construction company and the completion of a house is likely to be after the reporting date so we need to record revenue in this reporting date and next. There are two ways depending on whether the company has adopted the output or input method Output method Work certified to date / total contract revenue Input method Costs to date / total estimated costs This then gives a % which needs to be applied to the profit and this is what is recognised this year

Answer 190

If parent subsid or owner sells or buys from own company this needs to be disclosed within the financial statements even if it was for free Helps stop window dressing

Answer 191

Conflict of interest One points to highest price the other one is the lowest price so there may be favourability from the auditor Confidentiality within the financial statements that may be disclosed to the other to get a reduced price et cetera

Answer 192

The firm must consider Whether the relevant ethical requirements can be complied with The integrity of the client Whether the firm has appropriate competence and resources Each of these three requirements should have their own subheading and expanded upon including the risks and safeguards. It is also important who will be using the report and will it be relied upon for legal reasons

Answer 193

1. Identifiable (can see separately) 2. Control 3. Recognition - Frameworks - probable economic benefit - measure reliably (this is where brands fall down as though we get probable economic benefit, how do we measure reliably )

Answer 194

Component appreciation is a procedure in which the cost of a large item of PPE is allocated to different components of the assets at each component is the appreciated separately

Answer 195

Related party relationship exists when a person has control, joint control, significant influence, or is a member of the key management personnel to reporting entities

Answer 196

Nature of the relationship Information about the transaction Outstanding balances

Answer 197

If the borrowing costs is taken in regards to an assets then we can capitalise the interest as part of the assets and add it onto the value However this is only on construction and we stop capitalising once asset is ready for use

Answer 198

Providing additional nonaudit services to an audit clients can create several threats of objectivity and independence of the auditor If listed company, greater public interest, stricter rules on accepting non audit engagements. Management threat - new regulations, management might lack expertise Self review threats could arise Which could result in a lack of professional scepticism applied Also the auditors are required during the audit to read the other information included in the annual report and consider whether there is material inconsistencies between that and the financial statements so again could cause a self review threat. Eg donations If the client wants a quick turnaround this could be viewed as intimidation. The auditor Will have additional pressure which will impact the quality of the work and the risk of engagement What is fee does it exceed 15% for 2 years ? Most importantly it would be considered that the auditor are taking on management responsibilities which is prohibited by the code Professional competence - quick turn around, less time to gather evidence

Answer 199

The process of inspecting, extracting, filtering and selecting information and usually involves presenting the results in a dashboard using charts, diagrams and other data visualisation techniques to communicate the results in an effective manner. It can be used to discover and analyse patterns trends inconsistencies and anomalies

Answer 200

It’s good at obtaining an understanding of the group if you are a new client Obtain a deep insight into the groups formants as well as how it is doing against competitors and industry trends Much larger group can be analysed very quickly Larger sample can be tested which reduces or eliminate something risk Using dashboards and other visual presentations can assist the clients in seeing information in a different perspective Could be used to determine the extent of cyber attacks

Answer 201

Seven years

Answer 202

You can capitalise upgrading assets But you can’t capitalise maintaining the assets

Answer 203

The low of cost and net realisable value

Answer 204

Fair value less cost to sell until harvested Because for example the sheep cane from parents not from raw materials so couldn’t use cost model.

Answer 205

Initially at cost plus costs Subsequently at fair value or cost model Don’t appreciate properties Gains and losses on the revaluation go to the profit and loss unlike PPE as part of reason for taking property is to see benefit

Answer 206

Firstly there needs to be a formal detail plan and that plan needs to be announced Only include costs which are necessary to be incurred and not associated with continuing activities for example if you can’t include retraining as that is part of continuing activities

Answer 207

Must be available for immediate sale or highly probable Valued at lower of carrying value and fair value less cost to sell No longer depreciated

Answer 208

Identification of contracts Identification of performance application Determination of transaction price Allocation of the price to performance obligation Recognition of revenue when as performance obligations are satisfied

Answer 209

Component is 10+ percent of either revenue assets or profits and the component generates revenue and incurs expenses and results on monitored regularly by management and there is financial information available

Answer 210

Efficiency Test 100% of transactions rather than a sample. For example revenue is made up over many individual bookings it’s not practical to manually check every booking so we can use data analytics to ensure revenue is recognised on the correct date every single sale Effectiveness Test companies systems for example identify if the data protection weakness impacted customers accounts more widely and if the weakness was more widespread. Assess evidence more effectively for example if within the costs there are upgrade and maintenance costs we can use data analytics to review all invoices and identify those that may need to be capitalised Quality New audit clients we can use data visualisation e.g. sales by month and also include external market data so we can get a better understanding of the business and identify unusual movements more easily Improve the quality of reporting to management and those charges of confidence so that we can enhance their confidence in the audit include visualisation summaries of the audit work performed

Answer 211

Sufficient to cover the risks of the engagement The amount of work involved

Answer 212

Explain disclosures and adjustments that need to be made to management Report to TCWG the misstatements that need to be corrected and inform them off the audit opinion if they don’t so they can put pressure on the management Obtain written representation from management that they are aware of the current breaches and the changes that need to be made - protects auditors if someone dies is for false info we have this as evidence

Answer 213

No but as long as you have a good reason not to. You must disclose the changes though so users can have full info

Answer 214

At the engagement the auditors follows ISAs The firm follows ISQM1 & 2 8 conponents Governance and leadership - the right people at the top Risk assessment - Ethics Acceptance and continuance - process to decide if we can accept and continue Performance of audit - are we doing audit appropriately Resources Information - gather / store info Monitor - like how we monitor IC Isqm2 - have processes in place to review engagements. Monitors to ensure we are on track nothing ethical wrong and the reviewer is qualified etc