Audit And Assurance Flashcards
What are the 4 types of opinion
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
What are the responsibilities of the auditors at the inventory count (5)
- Attend physical inventory count to prove existence and condition when inventory is material
- At count, evaluate managements instructions and procedures for recording and controlling the results of the count
- Observe count procedures to ensure they are properly carried out
- Inspect inventory to verify it exists and look for evidence of damages or obsolete inventory
- To perform audit procedures over the final inventory count record to determine if they accurately reflect the count results
What is materiality and performance materiality
- Auditors need to determine the materiality levels over the financial statements as a whole as well as access the performance materiality which is lower
- Materiality is when a misstatement whether individually or as an aggregate could reasonable be expected to influence the economic decisions of users
- Misstatements can be considered due to its size (quantitive) or due to its nature (qualitative)
- It is calculated using benchmarks such as 1% of revenue or 5% of gross profit
- Though benchmark is just that, material risk is ultimately based on auditors judgment
- Performance materiality looks at the transactional level and is set at a lower level e.g 70% to consider the aggregate materiality
Examples of professional judgement when planing an audit
- Determination of materiality as a whole
- Deciding the timing, nature and extent of audit procedures
What evidence should auditor carry out to provide evidence over the value of the revalued property
- 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 - Compare value against similar properties
- Re performance calculation and ensure correct accounting treatment has been applied
- Inspect notes on financial statements to ensure appropriate disclosures have been made
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
- Adopt procedures to ensure opening balances are correctly brought forward
- Review previous auditors work papers and consider performing substantive procedures on opening balances
Directors only work part time
Risk - may promote weak control environment resulting in undetected errors and fraud
Response
- Controls will need to be documented and evaluated and if these are deficient that more substantive procedures will need to be performed
Customer paying 40% on ordering and the remainder on delivery
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
- Enquire management the point at which revenue is actually recognised
- Review system for deposits to ensure they are not included as revenue
- For a sample period after year end, ensure revenue is only recorded for beds that are delivered and signed for
Two year guarantee on beds
RISK - high risk due to judgement on provision
Response -
- Establish the basis for amount provided
- Reperform calculation and company against last years provision
- Review repair levels post year to access the reasonableness of provision
Contractors should invoice end of month but often forget until next month
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
Material costs used last years prices
RISK - should be based on actual cost or reasonable average cost. Inventory could be under/over valued if not accurate
Response
- Compare sample material included to invoice for actual price and investigate any significant differences and it’s potential impact on inventory
Property is going through refurbishment
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
- Obtain breakdown of costs and determine if correct treatment has been applied
Loan was taken out
RISK - incorrect classification within current and non current liabilities
Response
- Reperform calculation for the splits to determine if they are disclosed correctly
Loan comes with covenents
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 -
- Identify any breaches by reviewing the covenant. If any breaches, access likelihood of immediate repayment.
- Professional skepticism will need to be maintained as high risk of manipulation due to covenant
External audit reliance on internal audit
RISK - reliance could be placed on poorly performed testing from internal audit and therefore insufficient substantive testing may be performed
Response -
- Audit should meet up with internal audit, read reports reviewing files to ascertain the nature of work undertaken
- Reperform some tests by internal audit to access its adequacy
Items that are obsolete but aren’t fully depreciated
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 -
- Discussion depreciation policy with finance director and access its reasonableness
- Enquire if items have been written off and review for completeness
Outsourcing payroll function
RISK - whether sufficient and appropriate evidence is available to confirm the completeness of controls over the payroll cycle and liabilities for the year
Response -
- Discuss with management the extent of any monitoring of controls over payroll by management
- Consider contacting the payroll organisations auditor to confirm the level of controls in place
Plan to make staff redundant
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 -
- Discuss with management status of redundancy, review supporting documentation to confirm timing
- Recalculate provision to confirm accuracy
Management were disappointed with last years results
RISK - greater incentive to manipulate the results by adopting a more aggressive accounting approach
Response -
- Maintain professional skepticism and evaluate accounting assumptions made by management.
- Current year balances to be compared against prior year and highlight any unusual trends
Generous sales related bonus
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
Increase in inventory holding
RISK - risk that inventory is overvalued and this overstated
Increase in receivables days
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
Auditors Fraud responsibilities
- 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
- Auditors are required to identify and assess the risks of material misstatements due to fraud
- Auditor must respond appropriately to fraud of suspected fraud identified during the audit
- 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
- To ensure how team is aware of the risks of fraud, discussions should be held within the team
Reduction in forecasted returned sales from 10% to 5%
RISK - undervaluing the returns amount
Response
- Discuss basis for 5% with finance director
- Review period of 60 days to quantify how many returns and compare any significant differences of different to 5%
Customers have agreement that they can return items within 60 days without penalty
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
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)
RISK - Intangible assets should be amortised over useful life
Response -
- Agree useful life of patent with supporting documentation
- There should be an amortised charge which needs to be calculated to ensure correct accounting treatment
Difference between depreciation and amortisation
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
Loss on disposal
RISK - significant profit or loss on disposal indicates that depreciation may not be appropriate. Therefore depreciation understated and P&L overstated
Response -
- Discuss depreciation policy with finance director to assess reasonableness
- Review for other gains/losses to assess reasonableness
Fraudulent financial controller
RISK - areas where fraud took place have not been written off. Also are there any other areas where fraud occurred ?
Response -
- Additional substantive testing should be conducted over the affected areas
- Team should maintain professional skepticism
Financial controller has been dismissed and threatens to sue
RISK - potential need for a provision or at least note to the financial statements
Response -
- Audit team should request confirmation from companies lawyers the existence and likelihood of a claim being successful
Payment break has been granted to customer
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
- Discuss with management the rationale for leaving unrecoverable amount as same as last year dispute a payment break for a large customer
- Extended post year cash receipt testing and review of aged receivables should be performed to assess valuation and need to increase allowance for receivables
Management issues a report highlighting deficiencies relating to the purchasing cycle
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 -
- Discuss with management whether the correct implementations have taken place and if so undertake tests of controls to ensure these are performing efficiently
- If controls are not in place, adopt a full sustantivé approach for confirming the completeness and accuracy of COS, expenses and payables
What substantive procedures should be undertaken to obtain appropriate audit evidence in relation to the valuation of trade receivables
- Discuss with financial director the rationale for not increasing allowance of trade receivables despite payment holiday for one of its largest customers
- Obtain breakdown of opening allowance and consider if prior year receivables have been recovered to access reasonableness of prior year allowance
- Review aged trade receivables to identify any slow moving or aged balances and discuss with management to access the likelihood of them being received
- Review customer correspondence with significant customers and identify any balances that are in dispute and unlikely to be paid
- Review board minutes to identify whether there are sígnica t concerns in relation to payments by customers
- Calculate potential level of receivables which are not recoverable and access whether this is material or not and discuss with management
What are the substantive procedures in relation to the disposal of the plant in the current year
- Obtain a breakdown of disposals cast list and review the non-current asset register to confirm that all assets have been removed
- Select a sample of disposals And agree sale proceeds to supporting documentation sundry sales invoices
- 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
- Review the disclosure of the disposals in the draft financial statements and ensure it is in line with IAS 16
What is an engagement letter and what is to be included ?
What is letter ?
- Minimise risk of misunderstanding between auditor and firm
- Confirm acceptance of engagement
- 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
What are the preconditions of an audit ?
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
Financial account taken Ill and replacement out in place
RISK - increased risk of error as may not be familiar with companies activities
Response -
- Discuss with management the competency and experience of new manager
- Increased substantive procedures are undertaken on material areas of financial statements to reduce audit risk, especially those requiring judgement
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
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 -
- Discuss with management the point at which inventory is recorded and review contract to verify this requirement
- Review controls the company has in place to ensure inventory is recorded from point of dispatch
- Extend cut off testing by reviewing pre and post GRNs and supplier batch notes to verify that inventory is recorded at the correct point
Substantive procedures for redundancy that has been confirmed pre year end due to discontinuation of chemical product
- Review board minutes for evidence that the decision to discontinue the chemical product prior to year end
- Obtain details of redundancy calculated by employee and agree to trial balance
- Recalculate the redundancy provision to confirm completeness and agree components of cost to supporting documentation such as contracts
- Agree actual payment made in cash book and compare against provision in financial statements
- Obtain written representation from management confirming completeness of costs
- Review disclosure included to verify they are compliant with requirements of IAS 37
What are preconditions of audit
In order to accept the audit the clients acknowledges and understands its responsibilities for the following
- Preparation of financial statements in accordance with the applicable financial reporting framework
- For such internal control management determines its necessary to enable the preparation of financial statements which are free for material statements
- 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
Why is audit planning important
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
Substantive procedures for director bonuses
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
What are the safeguards the auditor should implement when asked to audit a rival competitor to N existing clients
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
What areas should be included within an audit strategy
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
- Whether the financial information to be audited has been prepared in accordance with the relevant financial reporting framework
- Where the computerised assisted audit techniques will be used and effective IT on audit procedures
- 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
- 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
- Any discussions with management regarding the reports to be issued
- 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
- Determination of materiality for the audit
- I need to maintain a questioning mind and exercise professional scepticism in gathering and evaluating all the evidence

Explain why analytical procedures are used during three stages of an audit
Analytical procedures can be used during any stage of an audit however I mainly use
- 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
- 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
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?
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
What substantive procedures should be performed in relation to revenue
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
There are no monitoring procedures relating to the clocking in and clocking out of employees
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
Pero calculations are 100% relying on the payroll system
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
Cash is given to the factory supervisor to hand out to employees For night shift workers
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
Factory supervisor keeps absence employees wages over the weekend
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
Staff holidays means that new joiners we’re not paid due to absence in payroll
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
Substantive tests regarding payroll chargers
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
Responsibilities of orator and clients in relation to compliance with the law and regulations
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
Things to consider when relying on the work of internal audit
- 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
- 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
- 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
What are narrative notes
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
What are questionnaires
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
Customer credit limits are set by the sales ledger Klerk
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
Customer orders are given A number based on the sales persons own identification number
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
Finance Klerk responsible for receipting and Bank reconciliation
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
Goods receive notes are only sent to the finance department
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
Valuing inventory using standard costs which are not kept up to date
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
Substantive procedures for the accrual for employment tax payable
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
What is wrong with directors remuneration being based mainly on bonuses
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
Substantive procedures for year-end receivables balance
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
The gross and net pay automatically calculated by the payroll package are not check that all
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
The Klerk updates the standing data to reflect the increase of wages for the year based on inflation
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
Difference between interim and final audit
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
Substantive procedures for payroll expense
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
What are the audit procedures required in respect of the year and a cruel for tax payable on employment income
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
What is the written representative letter and what does it include
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
The difference between narrative notes and internal control questionnaires and a disadvantage for each
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
What is the purpose of the value for money audit
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
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
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
What matters May the auditor consider in determining whether a deficiency in internal controls is significant
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
The clients has experienced significant staff shortages within the internal audit
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
Some departments have already significantly exceeded the annual capital expenditure budget
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
All members of the payroll departments can amend employees standing data in the payroll system as they have access to the password
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
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
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
Describe the method for documenting systems of internal controls and explain advantage for each
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
What would be included in a covering letter regarding deficiencies within a clients sales and dispatch system
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
Receivable ledger clerks record new customer details and credit limits in the customer master data file and these changes are not reviewed
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
Additional staff have been drafted in to help the sales clerk produce the sales invoices
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
Discounts given to customers who purchase goods during the 10% off weekend on manually entered onto the sales invoices by sales clerks
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
Customer statements are no longer being generated and sent to customers
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
The receivable ledger control account is only reconcile at the end of April in order to verify the balance
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
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
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

It’s not possible for a store to order goods from another local store for customers who request them
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
Goods received notes are sent to the accounts department every two weeks
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
Describe a substance of passage is the auditor should perform to obtain sufficient evidence in relation to purchases and other expenses
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
Substantive procedure to confirm year end accrual for tax payable on employment income
- Compare accrual for income tax payable to the prior year, investigate differences
- Agree the year end income tax payable accrual to the general ledger and payroll records to confirm accuracy
- Re perform the calculation of the accrual to confirm accuracy and discuss any variances with management
- Agree the subsequent payment to the post year cash book and bank statements to confirm completeness
- 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
- Review any disclosures made of the income tax accrual and access whether these are in compliance with accounting standards and legislation
Why is it important for auditors to communicate through out the audit with those charged with governance
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
What matters may the order to communicate with those charged with governance
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
The warehouse manager will supervise the inventory counts
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
Isles or areas council will not be flagged
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
