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AA - Audit and Assurance > Chapter 10 - Procedures > Flashcards

Chapter 10 - Procedures Flashcards

1
Q

Audit procedures must be designed to respond to what?

A

to specific risks of material misstatement identified for each individual client

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2
Q

What questions should we ask ourselves when designing audit procedures?

A
  • 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?
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3
Q

An audit procedure should have what 3 things when writing it?

A
  • Action
  • Source
  • Objective
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4
Q

What is an example of action?

A
  • Inquire
  • observe
  • inspect
  • recalculate
  • reperform
  • confirm to an external source
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5
Q

What is an example of source?

A
  • Asset
  • Document
  • Entity
  • Person
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6
Q

What is an example of objective?

A

financial statement assertions

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7
Q

What does directional testing reduce?

A

duplication and therefore over-auditing, so allows for a more efficient audit

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8
Q

The concept of directional testing derives from what?

A

the principle of double-entry bookkeeping i.e., for every debit there should be a corresponding credit

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9
Q

Directional testing allows what?

A

us to pick appropriate samples

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10
Q

When would overstatement occur?

A
  • 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
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11
Q

Testing for overstatement tests what?

A

the assertions of accuracy and valuation, existence, rights and obligations, and occurrence

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12
Q

To test for overstatement, the auditor must what?

A

select a sample of items from the FS and accounting records and trace them through to the source of the transaction

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13
Q

Understatement will occur if what?

A
  • Transactions or balances that should be included are not included
  • A transaction or balance is recorded at an amount lower than it should be
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14
Q

To test for understatement the auditor must what?

A

select a sample of items from outside of the accounting records and trace them through to the accounting records into the financial statements

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15
Q

What are the key assertions to be tested with the bank and cash?

A

existence and accuracy, valuation and allocation

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16
Q

The main sources of evidence with the audit of bank and cash will be from where?

A

the bank confirmation letter, the bank rec, the cash book/bank ledger account and the bank statements

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17
Q

What are the key areas to consider with audit of the bank and cash?

A
  • obtaining a bank confirmation
  • testing the bank rec
  • reviewing the bank ledger account/cash book
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18
Q

What is the procedure when doing the audit for bank and cash?

A
  • 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
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19
Q

What are the key assertions with the non-current liabilities audit?

A
  • completeness
  • accuracy, valuation and allocation
  • classification and presentation
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20
Q

what are the sources of evidence for non-current liabilities audit?

A
  • bank confirmation letter
  • loan agreement
  • loan statement
  • bank ledger account/cash book
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21
Q

What are the key areas to consider with non-current liabilities audit?

A
  • obtaining a bank confirmation
  • reviewing the loan agreement
  • reviewing the financial statement disclosure
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22
Q

In regards to completeness, what procedure will the auditor go through for the non-current liabilities audit?

A
  • 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
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23
Q

In regards to accuracy, valuation and allocation what procedure will the auditor go through for the non-current liabilities audit?

A
  • agree balance outstanding to loan statement and bank confirmation letter
  • inspect the bank ledger for loan repayments during the year
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24
Q

In regards to classification and presenation, what procedure will the auditor go through for the non-current liabilities audit?

A
  • 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
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25
Q

In regards to existence and rights & obligations, what procedure will the auditor go through for the non-current liabilities audit?

A
  • 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
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26
Q

What are the key assertions with non-current assets audit?

A
  • existence
  • accuracy, valuation and allocation
  • completeness
  • rights and obligations
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27
Q

What are the sources of evidence with non-current asset audit?

A
  • 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
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28
Q

What are the key areas to consider with non-current asset audit?

A
  • existing assets
  • additions
  • disposals
  • revaluations
  • depreciation
  • reviewing FS disclosure
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29
Q

What is one of the main risks with non-current assets?

A

clients may want to overstate figures

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30
Q

What are the components of the balance we need to test?

A
  • balance brought forward
  • cost
  • depreciation
  • revaluations
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31
Q

For additions of non-current assets the auditor should inspect what on the invoices?

A

inspect relevant costs, making sure the invoice was addressed to the company, within the accounting year.
Make sure description relates to assets not expenses

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32
Q

In regards to the tax treatment of NCA audit what should be reviewed?

A

sales tax is normally excluded

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33
Q

What procedure should be done for existence of non-current assets audit?

A

a sample of additions should be physically verified to confirm they exist

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34
Q

in regards to depreciation what should the auditor review?

A

the depreciation policy and make sure reasonable.

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35
Q

How can the reasonableness of a clients depreciation policy be reviewed?

A

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

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36
Q

If the auditor is happy with the depreciation rate what should then be done?

A

recalculate the depreciation charge for a sample of assets for the period being audited

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37
Q

What is a proof-in-total test on depreciation?

A

take last year’s charge and adjusting it for depreciation on additions and disposals to estimate what this year’s charge should be

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38
Q

What procedures would the auditor do in regards to revaluations of NCA?

A
  • review and revaluations that have been recognised during the period to confirm that the relevant accounting standard has been complied with.
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39
Q

What procedures would the auditor do in regards to disposals (assets sold) of NCA?

A
  • review the sales invoices to agree disposal proceeds, as well as agree the proceeds to bank statements and bank ledger
  • review NCA register
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40
Q

What procedures would the auditor do in regards to disposals (assets scrapped) of NCA?

A
  • review the disposal form which should contain the details of the asset being scrapped.
  • review NCA register
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41
Q

what other procedures should be performed for NCA?

A
  • 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
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42
Q

What are the key assertions for intangible non-current assets audit?

A

Existence
Accuracy, valuation and allocation

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43
Q

What are the sources of evidence for intangible NCA?

A
  • Breakdown of expenditure during the year
  • invoices
  • timesheets
  • project plan
  • project test/trial results
  • cash flow forecast
  • licence agreement
  • third-party valuation report
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44
Q

What are the key areas to consider with intangible NCA?

A
  • capitalisation criteria
  • supporting documentation for costs incurred
  • amortisation
45
Q

What are the development costs procedures?

A
  • 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
46
Q

What are the 2 things to consider with amortisation?

A

Appropriate life
Accurate calculations

47
Q

How does the auditor review the appropriate life of the intangible NCA?

A
  • review specific documentation
  • review budgets / forecasts / market research
48
Q

What are the procedures for development costs in regards to completeness?

A
  • obtain a breakdown of costs capitalised,
49
Q

What are the procedures for development costs in regards to existence?

A
  • 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
50
Q

What are the procedures for development costs in regards to valuation?

A
  • 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
51
Q

What are the procedures for development costs in regards to presentation?

A
  • review the FS disclosure in the draft FS to ensure compliance with IAS 38
52
Q

What are the key assertions for inventory audit?

A
  • Existence
  • Accuracy, valuation and allocation
  • completeness
  • rights and obligations
53
Q

What sources of evidence would be used for an inventory audit?

A
  • 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
54
Q

What are the key areas to consider for inventory audit?

A
  • quantity of inventory - determined by inventory count
  • WIP
  • Valuation rules/obsolescence
  • y/e cut-off issued
  • multiple locations
55
Q

Why can inventory be a risk area to audit?

A
  • 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
56
Q

What are the 2 approaches for a inventory count that a client can take?

A
  • full year-end count
  • perpetual inventory system
57
Q

How is a full year-end count performed?

A
  • 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
58
Q

How is a perpetual inventory system performed?

A
  • updates as good are received and despatched, meaning inventory quantities known at any time
59
Q

what are some characteristics of a perpetual inventory system?

A
  • quantities may contain errors
  • counts more frequent
  • all inventory should be counted at least once in the year
60
Q

How many times should the auditor attend if a perpetual system used?

A

at least once

61
Q

What are some advantages of a perpetual count?

A
  • reduces time constraints for the auditor
  • slow moving and damaged inventory is identifies on a more regular basis: more appropriate valuation
62
Q

What are some disadvantages of a perpetual system?

A
  • 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
63
Q

What adequate controls should be in place when doing inventory count?

A
  • 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
64
Q

What are some test of control examples with inventory?

A
  • 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
65
Q

What are some examples of substantive procedures when counting inventory?

A
  • 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
66
Q

How would the auditor obtain evidence of inventory stored at a third-party?

A
  • 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
67
Q

Procedures at the final audit of inventory include?

A
  • 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
68
Q

WIP comprises of what?

A

materials, labour and overheads

69
Q

To assess the completeness of WIP what is done?

A

a sample of customer orders should be traced through to WIP breakdown

70
Q

How should the auditor inspect materials?

A

inspect purchase invoices to confirm the cost of the materials included in WIP

71
Q

How should the auditor inspect labour?

A

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

72
Q

How should overheads be inspected?

A

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

73
Q

How are standard costs assessed?

A
  • 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
74
Q

What are the key assertions for receivable audit?

A
  • existence
  • accuracy, valuation and allocation
  • rights and obligations
75
Q

What are the sources of evidence for a receivables audit?

A
  • aged list of individual customer balances
  • sales invoices
  • GDN
  • Receivables circularisations
  • bank ledger account/cash book and bank statements
76
Q

What are the key areas to consider with receivables audit?

A
  • 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
77
Q

What is the balance that needs testing in the receivables audit?

A
  • total from the detailed list of customer balances
  • allowance for receivables/credit losses
  • prepayments
78
Q

What is a receivable circularisation?

A

where the auditor contacts a sample of customers to ask them to confirm the balance owed to the client at the Y/E

79
Q

What is positive circularisation?

A

requires customers to respond to the auditor’s request for information.

80
Q

What would the auditor request with a positive circularisation?

A
  • 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
81
Q

What is negative circularisation?

A

only requires the customer to respond to the request if they disagree with the balance provided by the auditor

82
Q

what must the auditor provide for a negative circularisation?

A

the balance per the client’s ledger for the customer to check

83
Q

What are the steps to obtain a positive receivables circularisation?

A
  • 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
84
Q

What are some alternative procedures when auditing receivables?

A
  • review cash received
  • review aged receivables
  • review board minutes
  • review credit notes
  • review draft FS
85
Q

What is the key assertion with payables and accruals audit?

A

completeness

86
Q

What are the sources of evidence with payables and accruals audit?

A
  • aged list of individual supplier balances
  • purchase invoices
  • GRN
  • Supplier statements
  • supplier circularisations
  • bank ledger account/cash book and bank statement
87
Q

What are the key areas to consider to payables and accruals audit?

A
  • completeness
  • supplier statement reconciliations
  • debit balances on the list of individual suppliers
  • accruals
88
Q

What are some procedures used for payables audit?

A
  • 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
89
Q

What are some typical procedures of accruals audit?

A
  • 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
90
Q

What are provisions and contingencies?

A

relate to potential future events, arising from past events

91
Q

What are the key assertions of provisions and contingencies?

A

Completeness
Rights and obligations

92
Q

When would a provision be required in the accounts for the current y/e?

A

if the outcome is probable

93
Q

If the outcome is only possible then what would be included in the y/e accounts?

A

a contingent liability disclosure

94
Q

What are the sources of evidence for provision and contingencies?

A
  • board minutes
  • enquiry with management
  • written representation
  • bank ledger account/cash book and bank statements
95
Q

What are contingent assets?

A
  • potential assets whose existence depends on an uncertain future event
95
Q

What are the audit procedures for provisions and contingencies?

A
  • 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
96
Q

What are the key areas to consider with provisions and contingencies?

A
  • existence of obligation at y/e
  • probability of payment
  • basis of provision
  • scope for manipulation
  • certainty of receipt for contingent assets
97
Q

What are some examples of contingent assets?

A
  • 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
97
Q

Why are accounting estimates risky?

A

because they are about future costs, management judgement is used to determine them

98
Q

What are the key assertions for accounting estimates audit?

A
  • completeness
  • accuracy, valuation and allocation
  • cut-off
99
Q

What are the sources of evidence with accounting estimates?

A
  • board minutes
  • enquiry with management
  • written representation
  • bank ledger account/cash book and bank statements
  • purchase invoices
100
Q

What are the key areas to consider for accounting estimates?

A
  • basis of estimate
  • scope for manipulation
101
Q

How would an auditor review share capital?

A
  • 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
102
Q

How would an auditor review dividends?

A
  • inspect board minutes
  • inspect bank statements
  • inspect dividends
103
Q

How would an auditor review reserves?

A
  • agree opening reserves to prior year closing reserves and reconcile
  • agree movements in reserves to supporting docs
104
Q

What are the key assertions for the SPL audit?

A
  • completeness
  • accuracy
  • cut-off
  • occurence
  • classfication
105
Q

What are the sources of evidence for SPL audit?

A
  • 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
106
Q

What are the key areas to consider with SPL audit?

A
  • risk of manipulation for profit related bonuses
  • appropriateness of revenue recognition policy

AA - Audit and Assurance (12 decks)

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