Audit And Assurance

Question 1

What are the 4 types of opinion

Answer 1

Unqualified - clean report

Qualified - presents fairly apart from either material misstatement or lack of appropriate evidence which is not pervasive

Adverse - material misstatement that is pervasive

Disclaimer - unable to give an opinion could be because lack of appropriate evidence that is pervasive or lack of independence from the auditor

Question 2

What are the responsibilities of the auditors at the inventory count (5)

Answer 2

1. Attend physical inventory count to prove existence and condition when inventory is material
2. At count, evaluate managements instructions and procedures for recording and controlling the results of the count
3. Observe count procedures to ensure they are properly carried out
4. Inspect inventory to verify it exists and look for evidence of damages or obsolete inventory
5. To perform audit procedures over the final inventory count record to determine if they accurately reflect the count results

Question 3

What is materiality and performance materiality

Answer 3

1. Auditors need to determine the materiality levels over the financial statements as a whole as well as access the performance materiality which is lower
2. Materiality is when a misstatement whether individually or as an aggregate could reasonable be expected to influence the economic decisions of users
3. Misstatements can be considered due to its size (quantitive) or due to its nature (qualitative)
4. It is calculated using benchmarks such as 1% of revenue or 5% of gross profit
5. Though benchmark is just that, material risk is ultimately based on auditors judgment
6. Performance materiality looks at the transactional level and is set at a lower level e.g 70% to consider the aggregate materiality

Question 4

Examples of professional judgement when planing an audit

Answer 4

1. Determination of materiality as a whole
2. Deciding the timing, nature and extent of audit procedures

Question 5

What evidence should auditor carry out to provide evidence over the value of the revalued property

Answer 5

1. Obtain copy of valuers report and consider reliability of valuation taking into account
   A. Basis of valuation
   B. Independence
   C. Qualifications
   D. Experience
   E. Reputation of valuer
2. Compare value against similar properties
3. Re performance calculation and ensure correct accounting treatment has been applied
4. Inspect notes on financial statements to ensure appropriate disclosures have been made

Question 6

RISK - auditor has recently been appointed therefore lack of knowledge of business. Therefore there may be failings in identifying events and opening balances could be misstated

Answer 6

1. Adopt procedures to ensure opening balances are correctly brought forward
2. Review previous auditors work papers and consider performing substantive procedures on opening balances

Question 7

Directors only work part time

Answer 7

Risk - may promote weak control environment resulting in undetected errors and fraud

Response

1. Controls will need to be documented and evaluated and if these are deficient that more substantive procedures will need to be performed

Question 8

Customer paying 40% on ordering and the remainder on delivery

Answer 8

RISK - revenue could be recorded before it should be as the deposit could be recorded as a sale and not deferred until delivery this would overstate revenue

Response

1. Enquire management the point at which revenue is actually recognised
2. Review system for deposits to ensure they are not included as revenue
3. For a sample period after year end, ensure revenue is only recorded for beds that are delivered and signed for

Question 9

Two year guarantee on beds

Answer 9

RISK - high risk due to judgement on provision

Response -

1. Establish the basis for amount provided
2. Reperform calculation and company against last years provision
3. Review repair levels post year to access the reasonableness of provision

Question 10

Contractors should invoice end of month but often forget until next month

Answer 10

RISK - company will not accrue for these resulting in incomplete liabilities and understatement of expense

Response - review after year end payments to contractors and see if they were included within the accrual

Question 11

Material costs used last years prices

Answer 11

RISK - should be based on actual cost or reasonable average cost. Inventory could be under/over valued if not accurate

Response

1. Compare sample material included to invoice for actual price and investigate any significant differences and it’s potential impact on inventory

Question 12

Property is going through refurbishment

Answer 12

RISK - items could be posted to P&L instead of capitalised and similarly repair costs could be capitalised. This would impact the COS and therefore the GP

Response

1. Obtain breakdown of costs and determine if correct treatment has been applied

Question 13

Loan was taken out

Answer 13

RISK - incorrect classification within current and non current liabilities

Response

1. Reperform calculation for the splits to determine if they are disclosed correctly

Question 14

Loan comes with covenents

Answer 14

RISK - going concern risk as company may fail to comply with the loan covenants. Also a risk of manipulation of profits in order to meet covenant conditions

Response -

1. Identify any breaches by reviewing the covenant. If any breaches, access likelihood of immediate repayment.
2. Professional skepticism will need to be maintained as high risk of manipulation due to covenant

Question 15

External audit reliance on internal audit

Answer 15

RISK - reliance could be placed on poorly performed testing from internal audit and therefore insufficient substantive testing may be performed

Response -

1. Audit should meet up with internal audit, read reports reviewing files to ascertain the nature of work undertaken
2. Reperform some tests by internal audit to access its adequacy

Question 16

Items that are obsolete but aren’t fully depreciated

Answer 16

RISK - Depreciated policy may not be appreciate as depreciation has been understated. Obsolete assets should be written off to the P&L however it would mean that the P&L is overstated

Response -

1. Discussion depreciation policy with finance director and access its reasonableness
2. Enquire if items have been written off and review for completeness

Question 17

Outsourcing payroll function

Answer 17

RISK - whether sufficient and appropriate evidence is available to confirm the completeness of controls over the payroll cycle and liabilities for the year

Response -

1. Discuss with management the extent of any monitoring of controls over payroll by management
2. Consider contacting the payroll organisations auditor to confirm the level of controls in place

Question 18

Plan to make staff redundant

Answer 18

RISK - depends on whether confirmed before year end. If confirmed a provision needs to be in place and failure could result in understatements of provisions

Response -

1. Discuss with management status of redundancy, review supporting documentation to confirm timing
2. Recalculate provision to confirm accuracy

Question 19

Management were disappointed with last years results

Answer 19

RISK - greater incentive to manipulate the results by adopting a more aggressive accounting approach

Response -

1. Maintain professional skepticism and evaluate accounting assumptions made by management.
2. Current year balances to be compared against prior year and highlight any unusual trends

Question 20

Generous sales related bonus

Answer 20

RISK - risk of misstatement arising from sales cut off as sales seek to maximise profits

Response - increase sales cut off testing, post year sales to be reviewed as can provide evidence of incorrect cut off

Question 21

Increase in inventory holding

Answer 21

RISK - risk that inventory is overvalued and this overstated

Question 22

Increase in receivables days

Answer 22

RISK - increased risk of unrecoverable receivables

Response - extended post year cash receipts testing and review of the aged receivables ledger should perform to assess the new for any write offs

Question 23

Auditors Fraud responsibilities

Answer 23

1. Auditors are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement whether caused by fraud or error
2. Auditors are required to identify and assess the risks of material misstatements due to fraud
3. Auditor must respond appropriately to fraud of suspected fraud identified during the audit
4. Maintain professional skepticism through audit and recognise that fact that though controls are effective in detecting errors they may be less so in detecting fraud
5. To ensure how team is aware of the risks of fraud, discussions should be held within the team

Question 24

Reduction in forecasted returned sales from 10% to 5%

Answer 24

RISK - undervaluing the returns amount

Response

1. Discuss basis for 5% with finance director
2. Review period of 60 days to quantify how many returns and compare any significant differences of different to 5%

Question 25

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

Answer 25

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

Question 26

A company purchases patent last year over 4 years and in narrative it states 800k (however current year within the financial statement is also 800k)

Answer 26

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

Question 27

Difference between depreciation and amortisation

Answer 27

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

Question 28

Loss on disposal

Answer 28

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

Question 29

Fraudulent financial controller

Answer 29

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

Question 30

Financial controller has been dismissed and threatens to sue

Answer 30

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

Question 31

Payment break has been granted to customer

Answer 31

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

Question 32

Management issues a report highlighting deficiencies relating to the purchasing cycle

Answer 32

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

Question 33

What substantive procedures should be undertaken to obtain appropriate audit evidence in relation to the valuation of trade receivables

Answer 33

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

Question 34

What are the substantive procedures in relation to the disposal of the plant in the current year

Answer 34

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

Question 35

What is an engagement letter and what is to be included ?

Answer 35

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

Question 36

What are the preconditions of an audit ?

Answer 36

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

Question 37

Financial account taken Ill and replacement out in place

Answer 37

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

Question 38

Raw materials that are sent from overseas but can take a month to arrive but is clients responsibility as soon at it leaves their warehouse

Answer 38

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

Question 39

Substantive procedures for redundancy that has been confirmed pre year end due to discontinuation of chemical product

Answer 39

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

Question 40

What are preconditions of audit

Answer 40

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

Question 41

Why is audit planning important

Answer 41

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

Question 42

Substantive procedures for director bonuses

Answer 42

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

Question 43

What are the safeguards the auditor should implement when asked to audit a rival competitor to N existing clients

Answer 43

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

Question 44

What areas should be included within an audit strategy

Answer 44

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



Question 45

Explain why analytical procedures are used during three stages of an audit

Answer 45

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

Question 46

In June 2015 it was detected at a paint products has been faulty and the company has requested a recall. What substantive procedures could the audit firm do?

Answer 46

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

Question 47

What substantive procedures should be performed in relation to revenue

Answer 47

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

Question 48

There are no monitoring procedures relating to the clocking in and clocking out of employees

Answer 48

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

Question 49

Pero calculations are 100% relying on the payroll system

Answer 49

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

Question 50

Cash is given to the factory supervisor to hand out to employees For night shift workers

Answer 50

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

Question 51

Factory supervisor keeps absence employees wages over the weekend

Answer 51

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

Question 52

Staff holidays means that new joiners we’re not paid due to absence in payroll

Answer 52

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

Question 53

Substantive tests regarding payroll chargers

Answer 53

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

Question 54

Responsibilities of orator and clients in relation to compliance with the law and regulations

Answer 54

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

Question 55

Things to consider when relying on the work of internal audit

Answer 55

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

Question 56

What are narrative notes

Answer 56

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

Question 57

What are questionnaires

Answer 57

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

Question 58

Customer credit limits are set by the sales ledger Klerk

Answer 58

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

Question 59

Customer orders are given A number based on the sales persons own identification number

Answer 59

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

Question 60

Finance Klerk responsible for receipting and Bank reconciliation

Answer 60

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

Question 61

Goods receive notes are only sent to the finance department

Answer 61

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

Question 62

Valuing inventory using standard costs which are not kept up to date

Answer 62

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

Question 63

Substantive procedures for the accrual for employment tax payable

Answer 63

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

Question 64

What is wrong with directors remuneration being based mainly on bonuses

Answer 64

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

Question 65

Substantive procedures for year-end receivables balance

Answer 65

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

Question 66

The gross and net pay automatically calculated by the payroll package are not check that all

Answer 66

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

Question 67

The Klerk updates the standing data to reflect the increase of wages for the year based on inflation

Answer 67

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

Question 68

Difference between interim and final audit

Answer 68

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

Question 69

Substantive procedures for payroll expense

Answer 69

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

Question 70

What are the audit procedures required in respect of the year and a cruel for tax payable on employment income

Answer 70

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

Question 71

What is the written representative letter and what does it include

Answer 71

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

Question 72

The difference between narrative notes and internal control questionnaires and a disadvantage for each

Answer 72

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

Question 73

What is the purpose of the value for money audit

Answer 73

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

Question 74

Describe two substantive procedures pixel auditor should adapt to verify each of the following assertions in relation to the entities property planting and equipment.

Valuation, completeness, writing obligations

Answer 74

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

Question 75

What matters May the auditor consider in determining whether a deficiency in internal controls is significant

Answer 75

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

Question 76

The clients has experienced significant staff shortages within the internal audit

Answer 76

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

Question 77

Some departments have already significantly exceeded the annual capital expenditure budget

Answer 77

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

Question 78

All members of the payroll departments can amend employees standing data in the payroll system as they have access to the password

Answer 78

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

Question 79

After passing a credit check a credit limit is set for all new customers by the sales director but these credit limits are not reviewed after this unless a review is requested by the customer

Answer 79

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

Question 80

Describe the method for documenting systems of internal controls and explain advantage for each

Answer 80

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

Question 81

What would be included in a covering letter regarding deficiencies within a clients sales and dispatch system

Answer 81

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

Question 82

Receivable ledger clerks record new customer details and credit limits in the customer master data file and these changes are not reviewed

Answer 82

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

Question 83

Additional staff have been drafted in to help the sales clerk produce the sales invoices

Answer 83

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

Question 84

Discounts given to customers who purchase goods during the 10% off weekend on manually entered onto the sales invoices by sales clerks

Answer 84

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

Question 85

Customer statements are no longer being generated and sent to customers

Answer 85

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

Question 86

The receivable ledger control account is only reconcile at the end of April in order to verify the balance

Answer 86

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

Question 87

Explain the steps the auditor should take to confirm the accuracy of the purchases and pebbles flowchart and system that is currently held on file

Answer 87

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

Question 88


It’s not possible for a store to order goods from another local store for customers who request them

Answer 88

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

Question 89

Goods received notes are sent to the accounts department every two weeks

Answer 89

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

Question 90

Describe a substance of passage is the auditor should perform to obtain sufficient evidence in relation to purchases and other expenses

Answer 90

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

Question 91

Substantive procedure to confirm year end accrual for tax payable on employment income

Answer 91

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

Question 92

Why is it important for auditors to communicate through out the audit with those charged with governance

Answer 92

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

Question 93

What matters may the order to communicate with those charged with governance

Answer 93

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

Question 94

The warehouse manager will supervise the inventory counts

Answer 94

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

Question 95

Isles or areas council will not be flagged

Answer 95

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

Question 96

Damaged goods are being left in that location rather than being stored separately

Answer 96

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

Question 97

Due to the continuous production process there will be movement of goods in and out of the warehouse during the inventory count

Answer 97

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

Question 98

The warehouse manager is going to estimate work in progress levels

Answer 98

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

Question 99

The warehouse manager is going to approximate raw material quantities

Answer 99

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

Question 100

There is no indication that inventory sheets are signed or initiated by the accounting team

Answer 100

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

Question 101

The responsibilities of each of the two staff members within the counting team is unclear

Answer 101

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

Question 102

What procedures should the order to take during the inventory count to gain sufficient appropriate evidence

Answer 102

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

Question 103

Regarding inventory cycle and you’re an inventory describe for audit procedures that could be carried out using automated tools and techniques

Answer 103

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

Question 104

What are the advantages of using automated tools and techniques

Answer 104

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

Question 105

What are the disadvantages of using Automated tools and techniques

Answer 105

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

Question 106

Describe the substantive audit procedure performed to confirm the assertions of completeness occurrence and cut-off for purchases in the financial statements and explain the purposes of that procedure

Answer 106

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

Question 107

Describe the order procedures used to perform on the trade payables balance in financial statements for each procedure explain the purpose of the Procedure

Answer 107

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

Question 108

Describe the internal controls should be in place of the standing data on the trade payables master file

Answer 108

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

Question 109

Describe substantive procedures for inventory valuation

Answer 109

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

Question 110

Describe substantive procedures in relation to receivables balance Due to difficulties in paying

Answer 110

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

Question 111

Describe substantive procedures in regards to the legal claim following a contamination

Answer 111

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

Question 112

Describe substantive procedures in relation to a proposed reorganisation

Answer 112

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

Question 113

Describe audit software procedures which could be carried out during the audit of the trade payables and accruals

Answer 113

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

Question 114

Describe substances procedures for research and development expenditure

Answer 114

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

Question 115

What procedures should be done to assess for a going concern

Answer 115

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

Question 116

Explain the five elements of an insurance engagements

Answer 116

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

Question 117

How to determine whether financial statements are true and fair ?

Answer 117

By using assertions

Question 118

What are the two types of assertions ?

Answer 118

Transaction assertions - relate to the P&l (eg rev, expenses, dividend payments)

Balance assertions - relate to the balance sheet / SFP

Question 119

What are the transaction assertions

Answer 119

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

Question 120

What are the balance assertions ?

Answer 120

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

Question 121

How to value inventory ?

Answer 121

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

Question 122

What are the analytical procedures

Answer 122

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

Question 123

What are the 9 types of audit procedures and evidence

Answer 123

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 ??

Question 124

What is the audit process ?

Answer 124

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

Question 125

What are the two assurance reports

Answer 125

Reasonable assurance engagement

Limited assurance engagement

Question 126

What are the 6 principals of corporate governance

Answer 126

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)

Question 127

Does UK corporate governance code have legal enforcements ?

Answer 127

No it’s set on comply or explain.

Question 128

What are the main principles of the UK corporate governance code ?

Answer 128

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

Question 129

Elaborate on Board leadership and Company purpose (UK code of governance)

Answer 129

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

Question 130

Elaborate on Division of responsibilities (UK code of governance)

Answer 130

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

Question 131

Elaborate on composition succession and evaluation (UK code of governance)

Answer 131

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

Question 132

Elaborate on audit risk and internal control (UK code of governance)

Answer 132

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

Question 133

What is the maximum fee for an auditor

Answer 133

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

Question 134

What does the ACCA code of ethics and conduct recognise ?

Answer 134

 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

Question 135

Elaborate on the fundamental principles (ACCA code of ethics and conduct)

Answer 135

The ACCA Fundamental principles are as followed

CCOBI

Confidentiality
Competence (professional)
Objectivity
 Behaviour (professional)
Integrity

Question 136

What must the auditor to do where such threats exist

Answer 136

Eliminate the circumstances that create the threats

Apply safeguards where available to reduce the threat to an acceptable level

Decline and specific professional activity

Question 137

What are the three types of offences that can be committed by any person regarding money laundering

Answer 137

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

Question 138

On the tort law, for a duty of care to be owed by the auditor to a third-party a three fold test must be satisfied

Answer 138

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

Question 139

What are the two types of fraud

Answer 139

Fraudulent financial reporting e.g. overstating profits

Misappropriation of assets e.g. theft of cash inventory et cetera

Question 140

What are risk factors that indicates an increased risk of fraud

Answer 140

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

Question 141

How should the auditors deal with misstatements identified

Answer 141

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

Question 142

What are the eight components of ISQM1 quality management

Answer 142

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

Question 143

Elaborate on firms risk assessment process (quality management)

Answer 143

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

Question 144

Elaborate on governance and leadership (quality management)

Answer 144

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

Question 145

Elaborate on relevance ethical requirements (quality management)

Answer 145

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

Question 146

Elaborate on acceptance and continuance of client relationships and specific engagements (quality management)

Answer 146

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

Question 147

Elaborate on engagement performance (quality management)

Answer 147

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

Question 148

Elaborate on resources (quality management)

Answer 148

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

Human
Technological
Intellectual

Question 149

Elaborate on information and communication (quality management)

Answer 149

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

Question 150

Elaborate on monitoring and remediation process (Quality management)

Answer 150

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

Question 151

What is an engagement quality review

Answer 151

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

Question 152

 What does the quality management procedures at the engagement level presume

Answer 152

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

Question 153

What is the engagement partner responsible for

Answer 153

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

Question 154

What are the objectives of planning

Answer 154

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

Question 155

What are the key elements of the overall audit strategy

Answer 155

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

Question 156

How is the risk of material misstatement assessed

Answer 156

The financial statement level

The assertion level

Question 157

What are the rules of thumb for materiality

Answer 157

0.5 - 1% revenue

1% - 2% of total assets

5-10% of profit before tax

Question 158

What are the three types of risk

Answer 158

Business risk
Audit risk
Risk of material misstatement

Question 159

Elaborate on business risk

Answer 159

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

Question 160

Why is business risk important to auditors

Answer 160

Because business risk will often influence inherent risk

Question 161

Elaborate on audit risk

Answer 161

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

Question 162

What is inherent risk

Answer 162

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

Question 163

What is control risk

Answer 163

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

Question 164

What is the detection risk

Answer 164

The risk that order procedures do not discover the error

Question 165

What are the two ways that material misstatement can occur

Answer 165

The amount is materially incorrect

The amount is materially correct or incorrectly classified presented or disclosed

Question 166

What are the two components of detection risk

Answer 166

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

Question 167

What are the procedures for obtaining audit evidence

Answer 167

Remember AEIOU

Analytical procedures
Enquiry
Inspection
Observation
RecalcUlation & reperformance

Question 168

What are the three types of computer assisted audit techniques (CAAT)

Answer 168

Audit program is
Test data
Embedded test facilities

Question 169

Elaborate on audit programmes

Answer 169

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

Question 170

Elaborate on test data

Answer 170

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

Question 171

Elaborate on embedded audit facilities

Answer 171

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

Question 172

Regarding experts what must the auditor do to be satisfied

Answer 172

The experts:

Has appropriate qualifications
Has the proper experience
Independence of the clients
Is professional

Question 173

How should the auditor evaluates the work of experts

Answer 173

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

Question 174

What are the advantages of outsourcing

Answer 174

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

Question 175

What are the disadvantages of outsourcing

Answer 175

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

Question 176

How does outsourcing affect an audit

Answer 176

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

Question 177

What happens if the information provided by the outsourced company is not sufficient

Answer 177

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

Question 178

What is a type one report

Answer 178

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

Question 179

What Is a type 2 report

Answer 179

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

Question 180

What are the objectives for written representations

Answer 180

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

Question 181

When should the written representations be dated

Answer 181

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

Question 182

What are audit procedures regarding Related parties (subs, parents, ass)

Answer 182

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

Question 183

What are the additional steps auditors must do regarding a group audit

Answer 183

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

Question 184

What are the letters of support (comfort letters)

Answer 184

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

Question 185

What section of the audit report is listed in a list of the company but is not included in a non listed company

Answer 185

Key audit matters

Question 186

What 2 circumstances would you not give a unmodified opinion

Answer 186

Insufficient evidence

Financial statements contain a material misstatement

Question 187

What goes into an audit report

Answer 187

Remember the acyomn

The other bastard knows Oscar robbed Sarah

Title & addressee
Opinion
Basis of opinion
Key audit matters
Other information
Responsibilities
Sign off

Question 188

What can sometimes go into an audit report

Answer 188

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!!!

Question 189

What is a full audit report with addition sections

Answer 189

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

Question 190

How to address an audit report question

Answer 190

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

Question 191

What are indicators of going concern uncertainty

Answer 191

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

Question 192

What are the two types of diligence assignments

Answer 192

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

Question 193

During a due diligence assignments what will the engagement letter typically cover

Answer 193

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

Question 194

What four things to write about inviting audit procedures

Answer 194

Remember Kashif Kamran acronym CASP

Case specific
Action - review
Source - board minutes
Purpose - to confirm XYZ

Question 195

What are the impacts of outsourcing the credit control function on audit planning

Answer 195

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.

Question 196

What activities can the audit firm do to get a better understanding of the risk of material misstatement in relation to a service organisation

Answer 196

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

Question 197

What are some things to consider before taking up and a assurance

Answer 197

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

Question 198

What are the principal threats

Answer 198

Self review

Self interest

Advocacy

Familiarity

Intimidation

Question 199

What is an auditors responsibility regarding laws and regulations

Answer 199

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

Question 200

What is the order to do if it’s notices a breach in compliance

Answer 200

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

Question 201

What are the auditors responsibility in regards to laws and regulations

Answer 201

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



Question 202

Should land be depreciated

Answer 202

 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

Question 203

How to measure PPE

Answer 203

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

Question 204

What is value to record an asset at if it has been sold and is leased back

Answer 204

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

Question 205

What are auditors responsibility in relation to money laundering

Answer 205

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

Question 206

What is ISQM1

Answer 206

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

Question 207

What is ISQM 2

Answer 207

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

Question 208

What should auditors do if the client uses a service organisation (like to manage there SL)

Answer 208

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

Question 209

What is a joint arrangement

Answer 209

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

Question 210

Can a £50,000 gifted display car in headquarters be classified as PPE ?

Answer 210

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

Question 211

Discuss the matters specific to the planning of an internal audit engagement for a new clients

Answer 211

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.

Question 212

Give examples of potential audit risks

Answer 212

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.

Question 213

How to recognise revenue when the obligation is over time (output versus inputs)

Answer 213

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

Question 214

What is related party transactions

Answer 214

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

Question 215

What are the issues in regards to all the team to cos I want to buy one another

Answer 215

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



Question 216

What’s to consider before accepting a client for none assurance work

Answer 216

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

Question 217

What are the three factors to consider regarding intangible assets

Answer 217

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 )

Question 218

What is component depreciation

Answer 218

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

Question 219

What is the definition of a related party transactions

Answer 219

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

Question 220

What needs to be disclosed for a related party transaction

Answer 220

Nature of the relationship

Information about the transaction

Outstanding balances

Question 221

How to deal with interest with borrowing costs

Answer 221

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

Question 222

Should the auditors accept additional engagements to assist the clients in measuring certain social and environmental information to be published on the group’s website

Answer 222

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



Question 223

What is data analytics

Answer 223

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

Question 224

What are the positives of audit data analytics

Answer 224

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

Question 225

How long should an audit partner be in place for

Answer 225

Seven years

Question 226

How does capitalisation work regarding upgrading and maintenance

Answer 226

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

Question 227

How is inventory measured

Answer 227

The low of cost and net realisable value

Question 228

How is inventory calculated regarding biological assets or agricultural produce

Answer 228

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.

Question 229

How to measure investment properties

Answer 229

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

Question 230

What restructuring costs can you include in a provision

Answer 230

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

Question 231

How to account for held for sale

Answer 231

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

Question 232

What are the five steps to follow regarding revenue recognition

Answer 232

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

Question 233

What is the rules for operating segments

Answer 233

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

Question 234

How to use audit data analytics to enhance orders efficiency effectiveness and quality

Answer 234

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

Question 235

What should the audit fee be ?

Answer 235

Sufficient to cover the risks of the engagement

The amount of work involved

Question 236

What actions must auditor do before auditors report can be signed off

Answer 236

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

Question 237

Must be change comparatives if accounting policy changes

Answer 237

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

Question 238

Audit quality

Answer 238

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