ISA 315 - Procedures on the risks identified Flashcards
Part (ii) of the risk question
Risk: Change in Accounting Policy may not provide relevant and reliable information [5]
- Inquire with the management the reason for change in accounting policy
- Assess whether change in accounting policy result in the financial statement will provide more reliable and more relevant information
- Check if the revaluation model has been applied for all classes of assets i.e., property, plant, and equipment
- Ensure change in accounting policy has been appropriately authorized and approved by the Board of Directors
- Review the disclosure to ensure its adequacy
Risk: Revaluation surplus may not be calculated and accounted for correctly [6+3]
- Ensure the change in accounting policy has been properly accounted for, presented, and disclosed in the financial statement
- Inspect the valuation report of professional valuers
- Evaluate the competency, capability, and independence of management expert
- Inspect the agreement with the management expert to evaluate the scope of work
- Evaluate the adequacy of the expert work:
- Relevance and reasonableness of the expert findings
- Relevance and reasonableness of the assumptions and methodologies used
- The relevance, completeness, and accuracy of source data
- Consider using the auditor expert
Risk: Change in accounting estimates may not be appropriate (there is no change in circumstances) and may not have been accounted for and disclosed as per IAS 8 [4]
- Inquire with the management the reason for change in depreciation method and whether there is a change in the expected pattern of consumption of economic benefit
- Ask how management has calculated the expected units to be produced by the plant. Also, ask if the change in the depreciation method applied prospectively
- Discuss with the management that any depreciation method once adopted needs to be consistently applied unless there is a change in the expected pattern
- Remind management that as per IAS 8, they need to provide disclosure in the financial statement with respect to change in accounting estimates
Risk: There is a risk that all the events after the reporting period which may not have identified, accounted for, and disclosed by the management as per IAS 10 [6]
- Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.
- Inquiring of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements.
- Reading minutes, if any, of the meetings of the entity’s owners, management and those charged with governance that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available.
- Reading the entity’s latest subsequent interim financial statements, if any.
- The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report.
- The auditor shall request management and, where appropriate, those charged with governance, to provide a written representation in accordance with ISA 5803 that all events occurring subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.
Risk: Deferred tax may not be calculated accurately and correctly [6]
- Obtain Deferred tax working from management.
- Ensure that tax bases are determined based on income tax ordinance and IAS 12.
- Trace the Carrying value to Financial statement.
- Check that rates used to calculate deferred tax are as per Income tax ordinance, 2001.
- Check that charges for the year are appropriately recognized in P&L and OCI as per the requirement of IAS 12.
Risk: Company may have recognized deferred tax asset but sufficient taxable profit may not be available to the entity [8]
- Understand the management process to recognize deferred tax asset and evaluate whether it is consistent with IAS 12.
- Perform procedures to test the operating effectiveness of controls over recognition of deferred tax asset.
- Obtain the projections for taxable profit for the next 5 years.
- Ensure that assumptions used by the management are reasonable such as forecast sales, purchases, accounting profit, etc.
- Check that taxable profit is projected based on Income Tax Ordinance, 2001.
- Inspect the latest tax return of the Company to ensure that projections are made based on the updated returns and decisions.
- Inspect the correspondence file between regulatory authority and the Company to ensure that projected taxable profit is calculated based on the updated decisions.
- Inspect subsequent interim financial statements to compare the projected results with the actual results.
IAS 16 PPE
Completeness [5]
- Obtain Fixed asset register / schedule of tangible non-current assets and match the opening balance with the last year audited Financial statement.
- Match the balances appearing in the fixed asset register with the General Ledger and if not matching obtain the reconciliation.
- Select a sample from physical assets and trace it to fixed asset register.
- Select a sample from revenue expenditure account and inspect the supporting documents such as invoices to identify any such expenditure which pertains to capital nature and therefore should be capitalized.
- Select a sample of disposal and inspect the relevant documentation such as invoices, authorization, and approval to ensure that disposal has not been recorded in error.
IAS 16 PPE
Existence [1]
- Select a sample from the fixed asset register and physically observe the asset to determine whether the asset exists.
IAS 16 PPE
Rights and Obligation [1]
- Select a sample from addition during the year and for the sample selected inspect supporting documents such as invoices, title deeds, etc.
IAS 16 PPE
Valuation [12]
- Ensure that all costs include only those costs that are necessary to get the asset to its intended use.
- Select a sample from fixed asset register and inspect the relevant documentation (agreement, invoice, etc.) to evaluate whether the fixed asset has been accurately recorded in the fixed asset register.
- Select a sample of addition of fixed assets from the fixed asset register and inspect relevant documents such as invoices to evaluate whether the additions pertain to capitalized nature.
- Obtain an understanding of the entity’s depreciation policy.
- Review depreciation rates for reasonableness.
- Perform substantive analytical procedures to test depreciation expense to evaluate whether the fixed assets have been depreciated at the appropriate rate and using the depreciation methodology in accordance with the entity’s accounting policy.
- Recalculate the depreciation.
- Obtain an understanding of management process related to identifying, estimating, and recording impairment for fixed assets to determine whether it is consistent with the requirement of IAS 36.
- Obtain management’s calculation to write down fixed asset to their recoverable value and check that whether management methods and assumptions (discount rate, future cash flow, etc.) are reasonable.
- Test the operating effectiveness of control over recording of impairment.
- Recalculate the impairment working.
- Ensure that disclosures are adequate as per the requirement of IAS 16 and IAS 36.
IAS 16 PPE
For revaluation [10]
- Obtain the revaluation report.
- Match the balance appearing in revaluation report with the Financial statement / GL.
- Ensure that all the assets for similar class are revalued.
- Evaluate the competence, capabilities, and objectivity of management expert.
- Obtain an understanding of the work of that expert.
- Evaluate the adequacy of the expert work by ensuring that:
- Findings and conclusions are relevant and reasonable.
- Assumptions are reasonable.
- Source of data is complete and accurate.
- Consider the need to use the auditor expert.
PV of DBO may not be calculated, accounted for, and disclosed as per IAS 19 [9+4+3]
- Obtain the management expert report.
- Evaluate the competence, capabilities, and objectivity of management expert.
- Obtain an understanding of the work of that expert.
- Evaluate the adequacy of the expert work by ensuring that:
- Findings and conclusions are relevant and reasonable.
- Assumptions are reasonable:
- Discount rate by comparing with the market yields on high-quality corporate bonds.
- Salary increase rate are consistent with the prior years.
- Mortality rate.
- Return on plan asset.
- Source of data is complete and accurate:
- Number of employees.
- Salaries of each employee.
- Remaining years of service.
- Consider the need to use the auditor expert.
- Ensure that the disclosure is consistent as per the requirement of IAS 19.
There is a risk that Govt grant may not have been recognized as per IAS 20 [4]
- Inspect the agreement with Government to confirm the amount of grant and conditions attached thereto.
- Inspect bank statement to confirm that the amount has been received.
- Obtain the management forecast and check the reasonableness of the management assumption and judgment to ensure that whether it can comply with the Government grant – We can also mention ISA 540 procedures.
- Ensure that Government grant is recognized over the useful life of the asset or as the case may be (to match them with the related cost).
IAS 21 – The effect of changes in foreign exchange rates
Risk: There is a risk that monetary assets and monetary liabilities may not have been translated or translated with inaccurate rate. [4]
- Obtain the foreign currency working from the management.
- Ensure that monetary assets and liabilities have been revalued.
- Ensure that monetary assets and monetary liabilities are translated using appropriate rates by verifying them from independent sources.
- Ensure that non-monetary assets and liabilities are not revalued at the year-end.
IAS 23 – Borrowing Cost
Risk: There is a risk that borrowing costs may not have been capitalized or may have been capitalized using an inappropriate rate. [7]
- Inspect the bank agreement to ensure that:
- The loan is directly attributable to the acquisition or construction of a qualifying asset.
- The rate that is used is accurate.
- The amount of loan obtained/utilized for the project.
- Recalculate management’s working to calculate the total borrowing cost for the period.
- For general borrowing, ensure that the weighted average rate has been used.
- Recalculate management’s working to ensure that borrowing cost allocated is accurate.
IAS 28 – Investment in Associates and Joint ventures – equity method
Risk: There is a risk that the equity method may not be accounted for accurately. [9]
- Inspect the Investment register to verify the number of shares held by the investor.
- Inspect the audited financial statement / form A to determine the percentage of holding.
- Check how many directors are on the investee board to determine the significant influence.
- Inspect the investment agreement to verify the cost of investment.
- Inspect the audited financial statement to calculate the share of profit from associates.
- Check whether any dividends have been received during the year.
- Ensure that accounting policies are consistent and determine whether any adjustments are required.
- Ensure that all adjustments have been made accurately.
- Consider the need to use component auditor.
IAS 40 – Investment Property
Risk: There is a risk that the property is an investment property but may not have been classified as investment property. [7]
- Inquire with the management whether there is any land or building which is held for undetermined use or for rental purposes.
- Inspect the rental agreements to identify any land or building that has been rented.
- Inspect the Minutes of the meeting of those charged with Governance.
- Obtain the breakup of land and building and inquire with the management about the purpose for which it is used.
- If any land or building has been used for both purposes, ensure whether it can be separable.
- If separable, ensure that the amount allocated to Investment Property (IP) and Owner-Occupied Property (OOP) is accurate.
- Ensure the adequacy of disclosure.
IFRS 02 - Shared-based Payment
Risk: There is a risk that share-based payment transactions may not be accounted for and disclosed as per IFRS 02. [3+5]
- Inspect the Minutes of the Meeting of Those Charged with Governance (TCWG).
- Inspect the Shared-based payment agreement to determine:
- Number of shares
- Eligible employees
- Vesting conditions
- Vesting period
- Grant date
- If performance conditions are present, evaluate the management expert’s work.
Hedge Accounting
Risk: There is a risk that hedge accounting may not have been accounted for accurately. [6]
- Ensure that the hedging relationship is clearly designated and documented, measurable, and effective by inspecting the risk committee minutes and minutes of the meeting of those charged with Governance.
- Inspect the purchase agreement to verify the amount and timing of payment.
- Inspect the future to verify the amount and timing of payment.
- Verify the fair value of the future contract.
- Ensure that hedge accounting is effective.
- Ensure that relevant gains and losses have been appropriately recorded in P&L or OCI as the case may be.
Sales
Assertion: General procedures [1]
- Obtain the schedule of sales ledger / register.
Sales
Assertion: Occurrence [2]
- Understand the impact of significant accounting policies for sales balances and compliance with the applicable financial reporting framework. Consider whether the accounting policies and methods for revenue recognition are appropriate and are applied consistently.
- Select a sample from the sales register and inspect goods delivery note.
Sales
Assertion: Cutoff [2]
- Select a few samples before and after the last goods delivery note and check whether it has been recorded in the correct accounting period.
- Test whether the date of goods delivery note supports the recognition of the revenue in the correct period or not.
Sales
Assertion: Accuracy [5]
- Select a sample from the sales register. For each selection, perform the following:
- Inspect goods delivery note.
- Inspect sales invoice.
- Agree the sales invoice prices to approved price list.
- Perform recalculation based on GDN and sales invoice.
Sales
Assertion: Completeness [2]
Procedures:
- Select a sample from GDN and trace it to sales register.
- Match the balance with the GL.
Sales
Assertion: Classification [1]
- Select a sample from the sales register and inspect JV to ensure that the transaction has been recorded in the sales account.
Purchases
Assertion: General procedures [1]
- Obtain the schedule of purchase register.
Purchases
Assertion: Occurrence [1]
- Select a sample from the purchase register and inspect Goods Received Note (GRN).
Purchases
Assertion: Cutoff [2]
- Select a few samples before and after the last Goods Received Note (GRN) and check whether it has been recorded in the correct accounting period.
- Test whether the date of Goods Received Note supports the recognition of the revenue in the correct period or not.
Purchases
Assertion: Accuracy [4]
- Select a sample from the purchase register. For each selection, perform the following:
- Inspect Goods Received Note.
- Inspect Purchase Invoice.
- Perform recalculation based on GRN and purchase invoice.
Purchases
Assertion: Completeness [2]
- Select a sample from Goods Received Note (GRN) and trace it to purchase register.
- Match the balance with the GL.
Purchases
Assertion: Classification [1]
- Select a sample from the purchase register and inspect JV to ensure that the transaction has been recorded in the purchase account.
Trade Payables
Assertion: Existence [4]
- Obtain the list of trade creditors as at year end.
- Match the amount with the General ledger.
- For the sample selected (selection of nil balances and low balances is important), send confirmation.
- For the responses received, assess the reliability of confirmation received.
Trade Payables
Assertion: Completeness [6]
- Match the creditor list with the General Ledger.
- Obtain the list of Goods Received Notes (GRN).
- Select a sample from GRN and trace it to payable account.
- Review the list of account balances who are not in the listing of trade payables but who could be expected to be in the listing.
- Compare the list of trade payables balances with the listing that was prepared for the previous year audit.
- Perform test of unrecorded liability.
Trade Payables
Assertion: Rights and obligation & Valuation
- After assessing the reliability, match the amount of confirmation with the list of creditors.
- In case of differences/exceptions, obtain the reconciliation from the management.
- Perform procedures on reconciling items such as Invoice, GRN, and bank statement.
- In case confirmation not received, perform alternative testing (subsequent disbursement and invoices).
Trade Receivable
Assertion: General Procedures [1]
Procedures:
- Obtain the list of receivables as at year end.
Trade Receivable
Assertion: Existence [2]
Procedures:
- For the sample selected from the list of receivable balances, send confirmation.
- For the confirmations received, assess the reliability of the confirmation received.
Trade Receivable
Assertion: Completeness [3]
Procedures:
- Match the receivable listing with the General Ledger.
- Obtain the list of Goods Delivery Note which must be sequentially numbered.
- For the sample selected from the list of Goods Delivery Note, trace it to the receivable listing.
Trade Receivable
Assertion: Rights and Obligation [4]
Procedures:
- After assessing reliability, match the balance with the receivable listing.
- In case of differences, obtain the reconciliation from the management.
- Inspect supporting documents such as invoice, credit note, and bank statement to test reconciling items.
- In case confirmation not received, perform alternative testing such as subsequent receipt and invoices/GDN issued during the year.
Trade Receivable
Assertion: Valuation Procedures for irrecoverable receivables [9]
Procedures:
- Obtain an understanding of management process to record provision and ensure that it is consistent with the AFRF.
- Perform test of controls on provision recorded by the management.
- Review any correspondence of the Company with the customers and lawyers that deals with unpaid or disputed debts.
- Obtain the aging of receivables.
- Match the balance with the GL and receivable listing.
- Recalculate the aging of receivables.
- Obtain management working for provision for doubtful debt.
- Check whether assumptions, estimates, and judgments used by the management are reasonable.
- Inspect subsequent receipts to assess the recoverability of balance.
Cash and Bank Balances
Assertion: General Procedures [3]
Procedures:
- Obtain a listing of all bank accounts which were open at any point during the period being audited.
- Match the balance with the General Ledger.
- Inspect the appropriate approval for opening and closing of bank accounts such as minutes of the meeting of the Board of Directors.
Cash and Bank Balances
Assertion: Existence [2]
Procedures:
- Send bank confirmation to the balance selected.
- If the confirmation is received, assess the reliability.
Cash and Bank Balances
Assertion: Completeness [2]
Procedures:
- Make inquiries of management/those charged with governance and search for any evidence of additional bank accounts such as review minutes of the meeting of the Board of Directors.
- For the confirmation received, review the replies received to evaluate whether the outstanding balance as per the confirmation agrees to the accounting records/GL.
Cash and Bank Balances
Assertion: Rights and Obligation & Valuation [3]
Procedures:
- Match the amount of GL with the Confirmation.
- In case of difference, obtain the reconciliation from the management.
- Perform procedure on reconciling items such as subsequent clearance and cheque.
Cash and Bank Balances
Assertion: Valuation [1]
Procedures:
- Same procedures as above – confirmation procedures.
Accruals
Assertion: General Procedures [2]
Procedures:
- Obtain the listing of accruals as at year end.
- Match the balance with the General Ledger.
Accruals
Assertion: Existence, Rights and Obligation, Valuation [1]
Procedures:
- Inspect the subsequent invoice to trace the amount, date, and client name to ensure the existence, obligation, and valuation of accruals.
Provision – not pertaining to legal cases such as warranty
Assertion: Existence and Rights and Obligation [1]
Procedures:
- Inspect the supporting documents such as agreements, etc.
Accruals
Assertion: Completeness [2]
Procedures:
- Compare the list of accruals with the list obtained in the last year and inquire if any accruals appearing in the last year but not appearing in the current year listing.
- Review the list of accruals based on the auditor’s knowledge of the business.
Provision – not pertaining to legal cases such as warranty
Assertion: General Procedures [2]
Procedures:
- Obtain the listing of provisions as at year end.
- Match the balance with the General Ledger.
Provision – not pertaining to legal cases such as warranty
Assertion: Completeness [1]
Procedures:
- Compare the list of provisions with the list obtained in the last year and inquire if any provisions appearing in the last year but not appearing in the current year listing.
Provision – not pertaining to legal cases such as warranty
Assertion: Valuation [4]
- Ensure that management’s process for provisions is consistent with IAS 37.
- Test the operating effectiveness of controls.
- Ensure that assumptions are reasonable.
- Perform subsequent event procedures.
Provision pertaining to legal cases
Assertion: General Procedures [2]
Procedures:
- Obtain the listing of provisions as at year end.
- Match the balance with the General Ledger.
Provision pertaining to legal cases
Assertion: Existence, Obligation, and Valuation [4]
Procedures:
- Inquire of management, including in-house legal counsel, to obtain an understanding of the legal cases.
- Inspect correspondence between the entity and its external legal counsel.
- Send direct confirmation to the external legal counsel to know the outcome of the case.
- Ensure that any provision has been appropriately recorded as per IAS 37.
Provision pertaining to legal cases
Assertion: Completeness [3]
Procedures:
- Compare the list of provisions with the list obtained in the last year and inquire if any provisions appearing in the last year but not appearing in the current year listing.
- Reviewing legal expense account to identify any other litigation and claims.
- Inspect minutes of the meeting of those charged with governance.
Contingent liabilities
Assertion: General Procedure [1]
Procedures:
- Obtain the listing of contingent liabilities as at year end.
Contingent liabilities
Assertion: Existence, Obligation, and Valuation [4]
Procedures:
- Inquiry of management, including in-house legal counsel, to obtain an understanding of the legal cases.
- Inspect correspondence between the entity and its external legal counsel.
- Send direct confirmation to the external legal counsel to know the outcome of the case.
- Ensure that any contingent liability has been appropriately recorded as per IAS 37.
Contingent liabilities
Assertion: Completeness [3]
Procedures:
- Compare the list of contingencies with the list obtained in the last year and inquire if any contingencies appearing in the last year but not appearing in the current year listing.
- Review legal expense account to identify any other litigation and claims.
- Inspect minutes of the meeting of those charged with governance.
Company has launched a customer loyalty program in which customers are awarded loyalty points on each purchase. [4]
- Obtain an understanding of CLP from management
- Inspect document to assess the terms and condition and evaluate the transaction price and performance obligation
- Evaluate reasonableness of management assumption regarding the expectation of point redemptions.
- Ensure that revenue has been recorded as per IFRS 15.
Impairment of Receivables
A shopping mall located in Multan has been witnessing low turnout of Customer and vacating the shops. Therefore there is a risk of overstatement of Receivable because Receivable may have been impaired and no impairment or adequate impairment may have been recorded by the management as per IAS 36. [4]
- Understand and evaluate the management process to identify long outstanding receivable and to estimate the allowance for doubtful debt to determine whether it is appropriate in the circumstances and in accordance with the applicable financial reporting framework.i.e. IFRS 09
- Obtain management working on allowance for doubtful debt and check whether assumption such as model used, PD and LGD used by the management is reasonable
- Obtain debtors aging analysis and change in debtor days to identify long outstanding receivable
- Check subsequent receipts to obtain evidence regarding the recoverability
Revenue Recognition as per IFRS 15
The customer has accepted management offer and agreed to pay 50% of the rent and the remaining amount after 2 years if conditions improve. Therefore there is a risk of overstatement of revenue Because as per contract there is variable consideration and management may not have estimate the variable consideration accurately as per IFRS 15 [3]
- Inspect sales agreement to understand the terms and condition with respect recoverability
- Assess the reasonableness of assumptions used and estimates made by the management to recognize revenue considering variable consideration
- Evaluate the accounting policy and ensure that it is consistent with the requirement of IFRS 15
Valuation of Receivable
The customer has accepted management offer and agreed to pay 50% of the rent and the remaining amount after 2 years if conditions improve. Therefore there is a risk of valuation of receivable Because it includes significant financing component and shall be discounted using an appropriate discount rate as per IFRS 15 and management may not have discount. [2]
- Inspect the agreement to assess the timing and amount of cash flows
- Evaluate the assumption used by the management to such as discount rate and timing and amount of cash flows·
Related Party Disclosure
Two floors has been rented out to the Company who have common director Therefore there is a risk that RP transaction may have not been adequately disclosed in FS as per IAS 24
- Confirming or discussing specific aspects of the transactions with intermediaries such as banks, law firms, guarantors, or agents,
- Confirming the purposes, specific terms or amounts of the transactions with the related parties.
- Where applicable, reading the financial statements or other relevant financial information, if available, of the related parties for evidence of the accounting of the transactions in the related parties’ accounting records.
The Company offers different terms to its customers depending upon which option they choose for the sale of residential projects. Therefore there is a risk of misstatement of revenue Because each contract may have different performance obligation and consequently may have different revenue recognition criteria (Point of time of Over the Time) and management may not have recorded the revenue as per IFRS 15. [4+3]
- Inspect the sale agreement to identify terms and condition to evaluate performance obligation
- Obtain an understanding of management process to recognized revenue and ensure that it is consistent with the requirement of IFRS 15
- Evaluate the accounting policy such point of time or over the time and ensure that it is consistent with the requirement of IFRS 15
- Evaluate the adequacy of expert engaged to determine the amount of revenue recognition by
1. Relevance and reasonableness of the expert finding
2. Relevance and reasonableness of the assumption and methodology used
3. The relevance, completeness and accuracy of source data
PROCEDURES
Initial Audit Engagement [4]
- Obtain Last year audited financial statements.
- Inspect whether previous year audited balances are appropriately carried forward.
- Verify whether accounting policy applied on opening balances are appropriate.
- Review working paper of predecessor auditor.
PROCEDURES
Management over ride of control [3+2]
- Review accounting estimates for biases and evaluate whether the circumstances producing the bias represents risk of material misstatement due to fraud
- Test the appropriateness of JE by
a. Making inquiries of individual involved in the financial reporting process
b. Select JE at the end of the reporting period or consider it throughout the period - Evaluate whether the business rationale for significant transaction outside the course of business suggest FFR or MOA
PROCEDURES
Operating Segments [3]
- Inquire the total assets and revenues of each regularly reviewed segment of the company and verify the quantitative thresholds of being reported as a separate segment.
- Ensure that any segment meeting the criteria specified by IFRS is separately disclosed.
- Review the reconciliations between segment information and consolidated information to assess whether significant items are properly disclosed.
PROCEDURES
Onerous Contract [7]
- Inspect the Purchase agreement to identify the purchase cost. Also assess whether all cost has been included that are part of inventory as per IAS 02.
- Inspect sales agreement to assess the sales price.
- Check whether the landed cost exceeds the agreed sale price.
- If yes then review the assumptions made by the management for the calculation of expected future sales.
- Ensure onerous contracts are appropriately recorded and disclosed in the financial statements.
- Review the agreement and assess, whether MEL has a right to cancel the current or future orders and any cancellation clause or penal provision for exiting the agreement.
- Ensure that penalties if any and other legal costs etc. and duly considered in determining the amount of provision required.
