audit risk and related substantive procedures page 169 Flashcards
Foreign Currency Transactions & Receivable/Payables:
1 Goods in transit may not be appropriately recorded.
2 Appropriate exchange rates may not be used in recording foreign currency sales and purchases.
3 Changes in rates of foreign currency at year end may not be recorded (for foreign currency receivables/payables), or
4 may be wrongly recorded in Purchases/Sales Instead of charging as Income/expense in P & L
information given in question
imports and/or Exports
key audit procedures (How)?
1 If there are goods in transit at year end, inspect their respective purchase orders and ensure that rights and rewards have been transferred in respect of inventory.
2 Perform tests of controls to ensure that appropriate exchange rates are used in translation of foreign currency.
3* Ensure that any gain/loss on closing balances of foreign currency are correctly recognized as per IFRS.
information given in question
Acquisition ( purchase/construction /repair)
or disposal of fixed assets.
Risk (what ) and Explanation (why)?
Capitalization/Disposal of Fixed Assets:
1 There may be misclassification between revenue
and capital expenditure. -
2 Profit or loss on disposal may not be appropriately recorded..
-3 Fixed Asset Register may not be appropriately updated.
information given in question
Acquisition ( purchase/construction /repair)
Key audit procedures (how)
Capitalization of Fixed Assets:
Substantive Procedures If there are Additions (i.e. purchased assets)
1. Obtain list of all fixed asset purchased during the period and agree with fixed assets’ schedule.
- Select a sample of additions and:
i. Inspect authorization to purchase fixed assets.
ii. Inspect supplier’s invoice to confirm cost. Also ensure that allocation of total expenditure between capital and revenue expenditure are correct.
iii. Inspect sale deed and legal documents as evidence of transfer of ownership in the name of company.
iv. Physically inspect fixed assets acquired during the year to verify existence.
v. Assess reasonableness of useful life of fixed asset. vi. Ensure that depreciation starts when asset is ready for use.
vii. Test calculation of depreciation expense.
information given in question
or disposal of fixed assets.
Key audit procedures (how)
Disposal of Fixed Assets:
Substantive Procedures If there are Disposals
1 Obtain list of all fixed asset disposed during the period and agree with fixed assets’ schedule.
2 Select a sample of disposals and:
a) inspect authorization to dispose fixed assets.
b) agree Sale Price with Invoice, and cash book.
c) verify that cost and accumulated depreciation has been removed from books of accounts, and
fixed assets register.
d) recalculate profit or loss recognized on disposal of assets.
e) Discuss with management possibility of unrecorded disposal of assets.
information given in question
1 New accounting or legal regulations/guidelines
2 Change in accounting policies
Risk (what ) and Explanation (why)?
Risk of Non-compliance and related implications:
Changes in reporting and legal requirements may not be appropriately met. Further, non- compliance may result in misstatement or penalties.
information given in question
1 New accounting or legal regulations/guidelines
2 Change in accounting policies
key audit procedures (How)?
1 Review the accounting and reporting requirements according to new/changed accounting policy or regulatory requirements.
2 obtain relevant underlying supporting document and assess their appropriateness;
3 ensure appropriateness of accounting treatment and disclosures made
information given in question
Income is received (or expense is paid) in advance
Risk (what ) and Explanation (why)?
Risk of overstatement /understatement of income or expense:
Income and expense may be recorded when cash is received or paid, instead of when risk and rewards are transferred.
information given in question
Income is received (or expense is paid) in advance
key audit procedures (How)?
1 Perform tests of controls to ensure that sales/purchases are recorded when risks and rewards are transferred.
2 Test the system for recording advance cash received/paid and subsequent transfer to revenue/expense.
3 At year end, perform cut-off tests on sales/purchases.
information given in question Revaluation
Risk (what ) and Explanation (why)?
Revaluation of fixed assets:
Revaluation may be incorrectly calculated and recorded because it involves Subjectivity (e.g. determination of useful life) and Complexity (e.g. deferred tax implication).
information given in question Revaluation
key audit procedures (How)?
1 **Ensure Competence, Capabilities and Objectivity of expert: (if a valuer is engaged) **
Substantive Procedures if PPE is Revalued
**Ensure Competence, Capabilities and Objectivity of expert: (if a valuer is engaged) **
Evaluate Competence, Capabilities and Objectivity of Expert.
When assessing competence , capability and objectivity of expert, auditor shall consider.
- Expert’s professional qualification e.g. whether he is a member of relevant professional body or have a necessary license.
- Expert’s experience and reputation in the area in which auditor is seeking evidence
- Independence of expert from client company e.g. whether expert has any interest or relationship with client (e.g. financial interest, business and personal relationships, provision of other services).
This knowledge can be obtained through different sources e.g.
i. Personal experience with previous work of that expert.
ii. Discussions with that expert.
iii. Discussions with other auditors or others who are familiar with that expert’s work.
iv. Information regarding expert’s qualifications, membership of professional body or industry association, license to practice, or other external recognition.
v. Published papers or books written by that expert.
information given in question Revaluation
key audit procedures (How)?
2 Evaluate adequacy of work of expert
Substantive Procedures if PPE is Revalued
Evaluate Appropriateness/Adequacy of Expert’s Work:
Auditor shall determine adequacy of work of expert by evaluating:
- Accuracy, Completeness, and Relevance of significant source data.
- Relevance and reasonableness of significant assumptions and methods.
- Reasonableness of expert’s findings and conclusions, & consistency of these conclusions with other audit evidence.
information given in question Revaluation
key audit procedures (How)?
3 Ensure that revaluation is properly accounted for and disclosed in financial statements:?
Substantive Procedures if PPE is Revalued
Ensure that revaluation is properly accounted for and disclosed in financial statements:
- Verify amounts in financial statements with the valuer’s report.
- Ensure that valuation is up-to-date.
- Ensure that entire class of asset has been revalued.
- Ensure that method used to measure Fair Value is consistent.
- Recalculate “revaluation surplus (or loss)”, and “depreciation expenses” and ensure these have been correctly accounted for in books.
- Inspect the property physically to ensure their condition is the same as described in valuation report.
- Ensure that appropriate disclosures have been made in accordance with IAS - 16.
information given in question
*1 Unusual growth of sales.
*2 Bonus on achievement of sales target
Risk (what ) and Explanation (why)?
Occurrence of Sales:
Sales may be overstated due to recording of fake sales or next year’s sales recorded in current year to achieve sales target.
information given in question
*1 Unusual growth of sales.
*2 Bonus on achievement of sales target
key audit procedures (How)?
(Occurrence)**
Select a sample of significant sales recorded in Sales Journal and vouch back to Sales invoices, GDN and Sales order. Also check any returns after the year end. (Occurrence)
