Chapter 5 Flashcards
Planning: Audit Procedures
What is audit risk analysis for a given situation?
Assessment of how factors affect the risk of misstatement in financial statements
What are the relevant assertions for non-current assets?
FYI: 5
- Existence (not overstated)
- Completeness (not understated)
- Rights and obligations
- Valuation
- Disclosure
What is a lease?
A legal agreement where one party rents an asset from another for a set period in exchange for payments.
Who is the lessee in a lease agreement?
The entity that has the right to use the asset.
Leases must be recognised in financial statements unless?
- They are short-term leases (12 months or less)
- Low value
What are the 3 audit risks associated with leases?
- Incorrect recognition/ Classification of what asset it is
- Non-recognition of leases that do qualify
- Material misstatement of financial statements
What are the 3 classifications of inventory?
- Raw materials
- Work in progress
- Finished goods
What are the 3 classifications of types of inventory and their risks?
- Raw materials
- Risk of overstatement (e.g. including unusable materials) - Work-in-progress (WIP)
- Risk of incorrect valuation (e.g. misallocating costs) - Finished goods
- Risk of misstating net realisable value (NRV)
What are the 3 main elements of inventory to ensure accuracy?
FYI: QVD
- Quantity
- Year end count is the most common method - Valuation
- This means that inventory should be recorded in the accounts at either cost or NRV - Disclosure
What are the three methods to count inventory?
- Year-end count
- Interim count
- Company checks its inventory before the year-end rather than waiting for the final stocktake - Continuous inventory records
- Automated system that maintains ongoing balances at any time
What is the purpose of cut-off procedures in auditing inventory?
To ensure transactions (purchases and revenue) are recorded in the correct accounting period
Auditors 4 step procedure for inventory cut off
- Review goods dispatch notes (GDNs) before year-end
– Check if sales were correctly recorded in the right period - Inspect goods received notes (GRNs) before year-end
– Ensure purchases were recorded correctly - Check supplier and customer invoices
– Verify dates match recorded transactions - Trace transactions to financial statements
– Ensure amounts are correctly reported
How does inventory cut-off affect revenues, purchases, GDN, and GRN before & after year-end?
Revenues - RRI
Purchases - PPI
Before Year end
Revenues → GDN
- Recorded as Revenue, Receivables but not Inventory
Purchases → GRN
- Recorded as Purchases, Payables and Inventory
After Year end
Revenues → GDN
- Only recorded as inventory
Purchases → GRN
- Recorded as none
What are trade receivables?
The amount owed by customers in respect of sales
What technique is used to assess receivables?
Circularisation
What is the objective of circularisation?
To confirm account balances directly with customers
What key audit tests are performed for Trade Receivables?
- List some examples
- Obtain list of receivables and reconcile to ledger
- Check sales invoices have been raised for all despatches during the year
- Trace a sample of receivables to cash received post year end
- Review consistency of policy and its appropriateness
- Ensure all debts written off were authorised
- Ensure receivables are correctly categorised with assets
- Ensure classification of items is correct as per companies act 2006
What is Cash and Bank?
All bank accounts held by the entity, in addition to any cash amounts held on site (petty cash, till floats).
What key audit test is performed for cash and bank?
- List some examples
Reconciliation
Examples:
- Agree the cash book balance
- Agree the bank statement balance
- Are there any other accounts that are missed out/ not related?
- Find out what potential bank errors there are (finding evidence)
- Arithmetic testing (make sure everything does add up correctly)
- Reconciling balances to the ledger
- Counting petty cash
- Validate accounts held
What are practice notes?
Letters written to the banks to provide guidance for the audit
What assertions are relevant for borrowings (non-current liabilities) and what are some examples?
- Completeness
- Obtain/prepare a schedule of loans outstanding
- Compare opening balances to previous years workings
- Check clerical accuracy (calculations)
- Compare balances to the ledger
- Review minutes and cash books to ensure all loans have been recorded - Valuation
- Trace repayments to entries in the cashbook
- Examine receipts
- Obtain direct confirmation from lenders
- Verify interest rates charged for the period - Disclosure
- Review the disclosures made in the financial statements and ensure they meet legal requirements
- Current vs non current
What are Payables
Amounts companies owe to suppliers.
What are provisions in accounting?
Estimates for future costs (money set aside) when the exact amount is unknown
What are the 3 main criteria for recognising provisions?
- Present obligation exists
- Future payment is likely
- Amount can be estimated reasonably
What are analytical procedures used for in auditing revenue and what are some examples?
- Completeness
- Review revenue for the year, with a MoM and prior year breakdown
- Consider any price changes such as price sold or amount sold or supply costs
- Consider level of goods returned
- Traces sales order, goods despatched note and goods received note - Accuracy
- Ensure VAT has been accounted for properly
- Checking discounts being applied correctly
- Check invoices to cash ledger
What are occurrence examples in payroll auditing?
- Check individual remuneration against personnel records.
- Confirm existence of employees.
What are Accuracy examples payroll auditing?
- Recalculate benefits
- Check for deductions of tax and national insurance
- Check other deductions such as pensions
What are Completeness examples payroll auditing?
- Check a sample of employees
- Check whether joiners have been paid in the correct month
- Check whether leavers have been removed from payroll
- Confirm payment to bank transfer records
What are accruals?
Liabilities for services received but not yet paid for
What are 3 testing procedures for accruals?
- Subsequent Payments Review
- Check payments made after the year-end to see if they relate to the current period but were not recorded as payables - Supplier Statement Reconciliation
- Compare supplier statements with the accounts payable ledger to detect missing liabilities - Goods Received Note Invoiced (GRNI) Testing
- Verify that expenses for received goods/services without invoices are properly accrued
What is a prepayment?
When a company pays for an expense in advance of receiving the item.
