ISA 315 - Procedures on the risks identified Flashcards
Part (ii) of the risk question
1
Q
Risk: Change in Accounting Policy may not provide relevant and reliable information [5]
A
- 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
2
Q
Risk: Revaluation surplus may not be calculated and accounted for correctly [6+3]
A
- 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
3
Q
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]
A
- 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
4
Q
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]
A
- 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.
5
Q
Risk: Deferred tax may not be calculated accurately and correctly [6]
A
- 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.
6
Q
Risk: Company may have recognized deferred tax asset but sufficient taxable profit may not be available to the entity [8]
A
- 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.
7
Q
IAS 16 PPE
Completeness [5]
A
- 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.
8
Q
IAS 16 PPE
Existence [1]
A
- Select a sample from the fixed asset register and physically observe the asset to determine whether the asset exists.
9
Q
IAS 16 PPE
Rights and Obligation [1]
A
- Select a sample from addition during the year and for the sample selected inspect supporting documents such as invoices, title deeds, etc.
10
Q
IAS 16 PPE
Valuation [12]
A
- 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.
11
Q
IAS 16 PPE
For revaluation [10]
A
- 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.
12
Q
PV of DBO may not be calculated, accounted for, and disclosed as per IAS 19 [9+4+3]
A
- 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.
13
Q
There is a risk that Govt grant may not have been recognized as per IAS 20 [4]
A
- 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).
14
Q
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]
A
- 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.
15
Q
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]
A
- 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.
16
Q
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]
A
- 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.
17
Q
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]
A
- 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.
18
Q
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]
A
- 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.
19
Q
Hedge Accounting
Risk: There is a risk that hedge accounting may not have been accounted for accurately. [6]
A
- 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.
20
Q
Sales
Assertion: General procedures [1]
A
- Obtain the schedule of sales ledger / register.
21
Q
Sales
Assertion: Occurrence [2]
A
- 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.
22
Q
Sales
Assertion: Cutoff [2]
A
- 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.
23
Q
Sales
Assertion: Accuracy [5]
A
- 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.
24
Q
Sales
Assertion: Completeness [2]
A
Procedures:
- Select a sample from GDN and trace it to sales register.
- Match the balance with the GL.
25
Q
Sales
Assertion: Classification [1]
A
- Select a sample from the sales register and inspect JV to ensure that the transaction has been recorded in the sales account.
26
Q
Purchases
Assertion: General procedures [1]
A
- Obtain the schedule of purchase register.
27
Q
Purchases
Assertion: Occurrence [1]
A
- Select a sample from the purchase register and inspect Goods Received Note (GRN).
