Chapter 10 - Procedures Flashcards
Audit procedures must be designed to respond to what?
to specific risks of material misstatement identified for each individual client
What questions should we ask ourselves when designing audit procedures?
- What type of procedures can I use from ISA 500?
- What sources of evidence are available for this balance?
- Which financial statement assertion am I being asked to test?
An audit procedure should have what 3 things when writing it?
- Action
- Source
- Objective
What is an example of action?
- Inquire
- observe
- inspect
- recalculate
- reperform
- confirm to an external source
What is an example of source?
- Asset
- Document
- Entity
- Person
What is an example of objective?
financial statement assertions
What does directional testing reduce?
duplication and therefore over-auditing, so allows for a more efficient audit
The concept of directional testing derives from what?
the principle of double-entry bookkeeping i.e., for every debit there should be a corresponding credit
Directional testing allows what?
us to pick appropriate samples
When would overstatement occur?
- transactions or balances appear in the financial statements that should not be included
- a transaction or balance is recorded at an amount higher than it should be
Testing for overstatement tests what?
the assertions of accuracy and valuation, existence, rights and obligations, and occurrence
To test for overstatement, the auditor must what?
select a sample of items from the FS and accounting records and trace them through to the source of the transaction
Understatement will occur if what?
- Transactions or balances that should be included are not included
- A transaction or balance is recorded at an amount lower than it should be
To test for understatement the auditor must what?
select a sample of items from outside of the accounting records and trace them through to the accounting records into the financial statements
What are the key assertions to be tested with the bank and cash?
existence and accuracy, valuation and allocation
The main sources of evidence with the audit of bank and cash will be from where?
the bank confirmation letter, the bank rec, the cash book/bank ledger account and the bank statements
What are the key areas to consider with audit of the bank and cash?
- obtaining a bank confirmation
- testing the bank rec
- reviewing the bank ledger account/cash book
What is the procedure when doing the audit for bank and cash?
- obtain bank rec and cash
- obtain bank confirmation letter
- agree the balance per bank ledger to y/e ledger and FS
- agree the balance per the bank statemnet and to confirmation letter
- trace all the outstanding lodgements
- trace all unpresented cheques
- examine any old unpresented cheques
- inspect bank confirmation letter
- review the bank ledger account and bank statements
- count petty cash
What are the key assertions with the non-current liabilities audit?
- completeness
- accuracy, valuation and allocation
- classification and presentation
what are the sources of evidence for non-current liabilities audit?
- bank confirmation letter
- loan agreement
- loan statement
- bank ledger account/cash book
What are the key areas to consider with non-current liabilities audit?
- obtaining a bank confirmation
- reviewing the loan agreement
- reviewing the financial statement disclosure
In regards to completeness, what procedure will the auditor go through for the non-current liabilities audit?
- review the bank ledger and bank statements for the year to identify any large receipts or repayments which could be a loan
- obtain a breakdown of the loans from client and agree the total to FS
In regards to accuracy, valuation and allocation what procedure will the auditor go through for the non-current liabilities audit?
- agree balance outstanding to loan statement and bank confirmation letter
- inspect the bank ledger for loan repayments during the year
In regards to classification and presenation, what procedure will the auditor go through for the non-current liabilities audit?
- inspect the bank confirmation letter for details of any security over assets and agree the details to the disclosure
- inspect FS for disclosures of interest rates and split of loan between non-current and current
- recalculate the split between current and non-current
- inspect loan agree
In regards to existence and rights & obligations, what procedure will the auditor go through for the non-current liabilities audit?
- agree the loan to the bank confirmation latter, loan agreement and loan statement
- inspect the bank ledger account/cash book for receipt of new loans during the year and and loan repayments
What are the key assertions with non-current assets audit?
- existence
- accuracy, valuation and allocation
- completeness
- rights and obligations
What are the sources of evidence with non-current asset audit?
- non-current asset register
- purchase invoices (additions)
- sales invoices/asset disposal forms (disposals)
- physical assets
- ownership docs
- revaluation report from an independent expert
- depn policy and rates
What are the key areas to consider with non-current asset audit?
- existing assets
- additions
- disposals
- revaluations
- depreciation
- reviewing FS disclosure
What is one of the main risks with non-current assets?
clients may want to overstate figures
What are the components of the balance we need to test?
- balance brought forward
- cost
- depreciation
- revaluations
For additions of non-current assets the auditor should inspect what on the invoices?
inspect relevant costs, making sure the invoice was addressed to the company, within the accounting year.
Make sure description relates to assets not expenses
In regards to the tax treatment of NCA audit what should be reviewed?
sales tax is normally excluded
What procedure should be done for existence of non-current assets audit?
a sample of additions should be physically verified to confirm they exist
in regards to depreciation what should the auditor review?
the depreciation policy and make sure reasonable.
How can the reasonableness of a clients depreciation policy be reviewed?
Can be done by looking at the policy of similar companies for similar assets. Can also look at the P&L on disposals, as this would suggest the useful life of the asset is too short or too long
If the auditor is happy with the depreciation rate what should then be done?
recalculate the depreciation charge for a sample of assets for the period being audited
What is a proof-in-total test on depreciation?
take last year’s charge and adjusting it for depreciation on additions and disposals to estimate what this year’s charge should be
What procedures would the auditor do in regards to revaluations of NCA?
- review and revaluations that have been recognised during the period to confirm that the relevant accounting standard has been complied with.
What procedures would the auditor do in regards to disposals (assets sold) of NCA?
- review the sales invoices to agree disposal proceeds, as well as agree the proceeds to bank statements and bank ledger
- review NCA register
What procedures would the auditor do in regards to disposals (assets scrapped) of NCA?
- review the disposal form which should contain the details of the asset being scrapped.
- review NCA register
what other procedures should be performed for NCA?
- obtain NCA register
- select sample of assets
- inspect the assets for signs of damage and implications
- review the maintenance and repairs account
- review the draft FS
What are the key assertions for intangible non-current assets audit?
Existence
Accuracy, valuation and allocation
What are the sources of evidence for intangible NCA?
- Breakdown of expenditure during the year
- invoices
- timesheets
- project plan
- project test/trial results
- cash flow forecast
- licence agreement
- third-party valuation report
What are the key areas to consider with intangible NCA?
- capitalisation criteria
- supporting documentation for costs incurred
- amortisation
What are the development costs procedures?
- obtain a breakdown of costs, add it up and agree to draft FS
- agree items to invoice, timesheets or other documentary evidence
- review board minutes and project documentation for compliance with relevant criteria
What are the 2 things to consider with amortisation?
Appropriate life
Accurate calculations
How does the auditor review the appropriate life of the intangible NCA?
- review specific documentation
- review budgets / forecasts / market research
What are the procedures for development costs in regards to completeness?
- obtain a breakdown of costs capitalised,
What are the procedures for development costs in regards to existence?
- sample of costs on the breakdown, agree to timesheets or invoices
- inspect board minutes
- discuss details of project with management
- inspect cash flow forecasts
- inspect project plans and other docs
What are the procedures for development costs in regards to valuation?
- sample of costs on the breakdown agree to invoices or timesheets
- inspect the budgets/forecasts for the next few years
- recalculate amortisation
- review board minutes/press reports/management accs
What are the procedures for development costs in regards to presentation?
- review the FS disclosure in the draft FS to ensure compliance with IAS 38
What are the key assertions for inventory audit?
- Existence
- Accuracy, valuation and allocation
- completeness
- rights and obligations
What sources of evidence would be used for an inventory audit?
- aged inventory listing
- inventory
- inventory count sheets
- purchase invoices and sales invoices
- GRN and GDN
- client calculations of overhead allocation, absorption and apportionment, percentage and completion
What are the key areas to consider for inventory audit?
- quantity of inventory - determined by inventory count
- WIP
- Valuation rules/obsolescence
- y/e cut-off issued
- multiple locations
Why can inventory be a risk area to audit?
- it directly affects both the SPL and SFP
- specialist inventory can be difficult to count/value
- movements during the count can cause omission or double counting
- items may be held at a third-party location
- WIP is subjectively estimated
- there can be a high risk of theft
What are the 2 approaches for a inventory count that a client can take?
- full year-end count
- perpetual inventory system
How is a full year-end count performed?
- all inventory is counted
- performed on the Y/E date or as close as possible
- when the count not performed at Y/E, adjustments must be made to determine the quantity at that date
- more time consuming
- auditor must attend the count to obtain audit evidence over inventory
How is a perpetual inventory system performed?
- updates as good are received and despatched, meaning inventory quantities known at any time
what are some characteristics of a perpetual inventory system?
- quantities may contain errors
- counts more frequent
- all inventory should be counted at least once in the year
How many times should the auditor attend if a perpetual system used?
at least once
What are some advantages of a perpetual count?
- reduces time constraints for the auditor
- slow moving and damaged inventory is identifies on a more regular basis: more appropriate valuation
What are some disadvantages of a perpetual system?
- sufficient and appropriate evidence is required over whether the system operates effectively at all time
- additional procedures will still be necessary to ensure the Y/E inventory balance is reliable
What adequate controls should be in place when doing inventory count?
- segregation of duties
- no movement of inventory whilst count taking place
- a system for allocating inventory to counting teams to ensure all inventory not duplicated
- system for identifying which should not be valued at cost
- system to ensure any belonging to third parties not included
- system to ensure that any inventory stored elsewhere is counted
What are some test of control examples with inventory?
- review warehouse to count records for completeness and from count records to the warehouse for existence
- enquire of the people performing the count which department they work in within the company and confirm with HR
- review any movements of inventory during the counting process
What are some examples of substantive procedures when counting inventory?
- perform test counts from the warehouse to count records
- inspect inventory for old or damage
- obtain last GDN and GRN prior to the count taking place to enable cut-off
- at end of count obtain a copy of count records
How would the auditor obtain evidence of inventory stored at a third-party?
- visit third-party
- obtain external confirmation from third-party of quantity and condition
- obtain a report from the third-party auditors confirming the reliability of internal controls there
Procedures at the final audit of inventory include?
- agreeing a sample of quantities from the count to the final listing
- agree cost to pre year end invoices / labour records / overhead rates
- recalculate the cost of WIP based on % of completion
- agree NRV to post year end sales invoices
- discuss write downs with management
- perform analytical procedures such as inventory days
- perform cut off testing
WIP comprises of what?
materials, labour and overheads
To assess the completeness of WIP what is done?
a sample of customer orders should be traced through to WIP breakdown
How should the auditor inspect materials?
inspect purchase invoices to confirm the cost of the materials included in WIP
How should the auditor inspect labour?
inspect the job card to see how much time has been spent on the project and then look at the payroll records to assess the cost of labour
How should overheads be inspected?
should be absorbed into WIP on an appropriate basis. This method used by the client should be discussed with management and a sample of costs agreed to invoices
How are standard costs assessed?
- obtain breakdown of the standard cost calculation and agree sample of costs to invoices
- enquire of management the basis for the standard costs and how often they are updated
- inspect the variance account and assess the level of variance for resaonableness
What are the key assertions for receivable audit?
- existence
- accuracy, valuation and allocation
- rights and obligations
What are the sources of evidence for a receivables audit?
- aged list of individual customer balances
- sales invoices
- GDN
- Receivables circularisations
- bank ledger account/cash book and bank statements
What are the key areas to consider with receivables audit?
- recoverability of debts
- policy for allowance for credit losses
- external confirmation of balances
- credit balances on the list of individual customers
- post Y/E returns/credit notes
- prepayments
What is the balance that needs testing in the receivables audit?
- total from the detailed list of customer balances
- allowance for receivables/credit losses
- prepayments
What is a receivable circularisation?
where the auditor contacts a sample of customers to ask them to confirm the balance owed to the client at the Y/E
What is positive circularisation?
requires customers to respond to the auditor’s request for information.
What would the auditor request with a positive circularisation?
- include the balance per the client’s ledger and ask for it to be confirmed
- ask the customer to provide the balance as per the ledger
What is negative circularisation?
only requires the customer to respond to the request if they disagree with the balance provided by the auditor
what must the auditor provide for a negative circularisation?
the balance per the client’s ledger for the customer to check
What are the steps to obtain a positive receivables circularisation?
- obtain consent from the client to perform the circularisation
- obtain a list of trade receivables at Y/E
- select a sample from the list of individual customer balances
- prepare the wording for the circularisation
- ask client to send request under auditor supervision
- when replies received reconcile balances
- when no response follow up
- if no response from follow up, perform alternative procedures
What are some alternative procedures when auditing receivables?
- review cash received
- review aged receivables
- review board minutes
- review credit notes
- review draft FS
What is the key assertion with payables and accruals audit?
completeness
What are the sources of evidence with payables and accruals audit?
- aged list of individual supplier balances
- purchase invoices
- GRN
- Supplier statements
- supplier circularisations
- bank ledger account/cash book and bank statement
What are the key areas to consider to payables and accruals audit?
- completeness
- supplier statement reconciliations
- debit balances on the list of individual suppliers
- accruals
What are some procedures used for payables audit?
- obtain list of individual suppliers balances and accruals
- reconcile the total of the list
- obtain supplier statements
- inspect after-date payments
- inspect invoices received after year end
- enquire about process to management
What are some typical procedures of accruals audit?
- compare this year’s list of accruals with the prior and investigate significant differences
- review post-year-end invoices received
- for significant accruals, where the invoice has been received by the time of audit recalculate the accrual
What are provisions and contingencies?
relate to potential future events, arising from past events
What are the key assertions of provisions and contingencies?
Completeness
Rights and obligations
When would a provision be required in the accounts for the current y/e?
if the outcome is probable
If the outcome is only possible then what would be included in the y/e accounts?
a contingent liability disclosure
What are the sources of evidence for provision and contingencies?
- board minutes
- enquiry with management
- written representation
- bank ledger account/cash book and bank statements
What are contingent assets?
- potential assets whose existence depends on an uncertain future event
What are the audit procedures for provisions and contingencies?
- asking directors for a list of known provisions/contingencies
- review board minutes
- review correspondence with solicitor
- contact solicitor directly
- review post year end cash book
- obtain management representations
What are the key areas to consider with provisions and contingencies?
- existence of obligation at y/e
- probability of payment
- basis of provision
- scope for manipulation
- certainty of receipt for contingent assets
What are some examples of contingent assets?
- insurance claims
- compensation due to the client
- amounts due from an insolvency practitioner in respect of an investment or customer who has been declared bankrupt
Why are accounting estimates risky?
because they are about future costs, management judgement is used to determine them
What are the key assertions for accounting estimates audit?
- completeness
- accuracy, valuation and allocation
- cut-off
What are the sources of evidence with accounting estimates?
- board minutes
- enquiry with management
- written representation
- bank ledger account/cash book and bank statements
- purchase invoices
What are the key areas to consider for accounting estimates?
- basis of estimate
- scope for manipulation
How would an auditor review share capital?
- agree authorised share capital and face value disclosures to underlying shareholding agreements
- inspect bank ledger account/cash book for evidence of cash receipts
- inspect board minutes
- for a bonus issue recalculate the amount of share capital
How would an auditor review dividends?
- inspect board minutes
- inspect bank statements
- inspect dividends
How would an auditor review reserves?
- agree opening reserves to prior year closing reserves and reconcile
- agree movements in reserves to supporting docs
What are the key assertions for the SPL audit?
- completeness
- accuracy
- cut-off
- occurence
- classfication
What are the sources of evidence for SPL audit?
- GDN/ GRN
- sales invoices and purchase invoices
- timesheets/contracts of employment
- detailed sales listing/detailed purchase list
- payroll bak transfer listing
- bank ledger account/cash book and bank statements
What are the key areas to consider with SPL audit?
- risk of manipulation for profit related bonuses
- appropriateness of revenue recognition policy
