Audit Approach Flashcards
General principles for audit approach
- Consider inherent risk of fraud in revenue as per ISA 240
- What could cause significant risk? (Difficulties)
- Risk Assessment
- Significant risk based on various risks identified in the cycle, including weak management integrity, complexity of calculations - Nature
- Timing
- Extent
- Procedures
Audit or Review?
- Private Company does not need a review
- Company not listed, audit not required
- MOI does not require an audit
- MOI should be inspected, company can be reviewed if it meets CO. Act requirements
- The company does not hold any assets in fiduciary capacity and therefore does not require an audit
- PI SCORE calculation
- Need an audit if FS are internally complied (100-350) if independently compiled, do a review
- FS are prepared in terms of IFRS which is acceptable asked on PI score
- FS prepared by CA(SA) in good standing with IRBA
- He does not have financial interest
- He is not involved in the day to day running of the business
- The agreement is a compilation agreement
- Therefore FS are independently compiled
- Therefore review not an audit
Consider RI if they forced an audit and apply all the way only if told in the required to consider RI
Effect that the information will have on your audit
- Impact on risk assessment
- Matters not raise question integrity
- Mngt override controls
- This will increase risk assessment of entity
- Increased risk of fraud (too familiar therefore increases detection risk)
- (Include any bad things they are doing)
Strategy
- Increased professional skepticism due to integrity of mngt
- More experienced staff allocated to deal with..
- EQRP might need to be included in reviewing significant risks
- More resources dispatched at year end rather than interim
- Focus more on risks identified (list them as per scenario)
- More time should be allocated to going through and addressing concerns of group audit
Plan/Approach
Nature
- Controls based approach might not be applicable due to breakdown of controls and mngt integrity
- Substantive approach followed with emphasis on details
- Analytics are not sufficient substantive evidence wrt significant risks
- Substantive analytical procedures are not sufficient when it comes to addressing significant risks
Timing
- At year end instead of interim
- Preparation by mngt on impairment can only be done at YE
EXTENT
- Increase risk, reduce materiality
- Decrease in materiality increase in extent of testing
- Testing will focus on:
- Inter-company confirmations will be obtained
- Business rationale of transactions will be assessed
- IAS 24
- Tax effect on related parties
- s75 Companies Act
Assess if assets bought at arms length
Assess impairment assessment performed by mngt
Assess no maintenance costs have been capitalized
- Consider RI
- Consider impact on audit report
- Reassess independence of partner as too familiar
Audit Approach FI
Nature:
Necessary:
-The entity entered into 2 financial instruments which is not considered to be a high volume of transactions.
-These instruments have been entered into two years ago and the assumption is that the CFO would have resolved some of the issues within this period of time.
-However, no mention has been made of any controls within the scenario and as the CFO enters into these transactions at this own discretion there is no segregation of duties.
-Therefore the risk relating to financial instruments can be considered high and therefore test of controls will not be necessary.
Possible:
-It does not seem possible to test controls as no mention other than the CFO entering and evaluating all investments have been noted.
Desirable:
-As there is only 2 transactions it would not lead to a more efficient and effective audit, it would be more efficient to test the two transactions substantively.
Conclusion: A substantive approach should be followed.
-The financial instruments could be considered a significant risk and therefore tests of detail should be performed.
-Analytical procedures not considered appropriate due to the nature of the balance/transactions.
Timing:
-Since the transactions were entered in 2019 one can perform a combination of interim and final procedures to gain sufficient and appropriate audit evidence.
-Income statement impacts can be tested during interim, such as the calculation of interest, however the balance sheet items, valuation, ECLA, and final interest etc will be tested at year end
-Confirmation of financial instruments should be performed at year end.
Extent:
-No sampling is necessary as the entity only has 2 transactions, the sample will consist of the entire population.
-The high risk of this item is already addressed by it’s materiality and the entire population to be tested and no adjustment to samples or materiality is required.
*Procedures:
Specific attention will have to be given to the following:
-Classification: By inspection of the bond agreement assess the “business model” in terms of IFRS9 to confirm that it is appropriately classified as held at Amortised cost.
-Presentation: Inspect the disclosure in the annual financial statements to confirm it is appropriate in terms of IFRS7.
-Existence: Inspect the bank statements to confirm that payment for the debentures occurred. Inspect the bond agreement for signature from both parties to confirm validity of the agreement.
-Valuation: Assess the reasonability of the expected credit loss allowance at either the 12-month allowance (if credit risk not significantly increased) or at the life time expected loss (if credit risk increased significantly).
-Make use of an expert to assess the fair value of the instrument as this is a complex section. Evaluate the auditors experts competence, capabilities and assumptions for reasonability.
-Recalculate the fair values of the instruments in terms of IFRS 13 and the amortised cost.
-Completeness: Inspect the interest expense account to identify whether all the financial instruments in relation to the expenses have been capitalized. debentures.
-Inspect the bank statements for any coupon payments being made not relating to Texcom and Cassia
Revenue of Audit plan
NATURE
Possible
-There appears to be weaknesses in the internal controls relating to validity and completeness specifically.
-However there appears to be good controls in place over the maintenance service.
-Management is implementing King IV which indicates a strong overall control environment
-It appears as if the company has strong IT general controls in place - Backups, continuity planning, access controls.
Necessary
-There has been an increase in the volume of transactions due to the COVID vaccine therefore it might be necessary to test controls if substantive testing alone will not be sufficient.
-Controls are not taken into account in assessing significant risk - therefore would not require controls testing.
Desirable
Controls testing will be more efficient in testing revenue, based on the high volume of transactions.
-More audit evidence will be obtained considering the electronic nature of the system, audit trail is not available
-Therefore a combined approach should be used to some degree (maintenance), however substantive testing should be performed on all areas where appropriate controls are not implemented.
-Substantive tests of detail should be performed as there is a significant risk in revenue (and in some instances controls cannot be relied upon)
-Analytical procedures can be performed due to the predictable nature of revenue and the large volume of transactions
TIMING
-Due to the significant risk of manipulation to meet listing requirements, testing should be performed at year end
-However due to the volume of transactions and tight audit deadline all testing cannot be completed at year-end alone
-Therefore testing should commence during interim and be topped-up at year end
-Focus on cut-off transactions due to high risk of fraud and reversals after year-end
EXTENT
-Due to the significant risk extended samples of revenue should be tested - including contracts with customers, receipts from customers
-Considerations should be given as to whether a specific materiality level should be calculated for revenue, however the current materiality level is on the conservative side therefore this does not appear to be necessary.
-CAATS can be used as the system is IT intensive. More testing will therefore be accomplished in less time
Procedures
-For areas where controls are in place (maintenance) test data (system CAATS) can be used to test controls.
-Substantive testing will need to focus on the following:
The existence of debtors, possibility of fictitious transactions
-The accuracy of transactions, specifically calculations
-Fraud responses in terms of ISA 240, including:
-Increase in professional scepticism
-Increase in unpredictability as to the type of testing, samples selected
-Adjustments made / non-sensical journal entries
-Bank statements to confirm the receipt of revenue
-Analytics over receivables including Ratios - To identify unusual trends, patterns
