Lecture 9 Flashcards
What are the risks with tangible assets
Company not owning assets (rights and obligations)
Assets not existing (existence)
Omission of assets (completeness)
Over or undervaluation of assets (valuation)
Assets incorrectly presented in FS (presentation)
What are the sources of information for tangible assets
Sources of information
Cumulative cost / depreciation b/f
Additions / disposals
Purchase / sales Invoices
Registration documents / title deeds
Valuations carried out by third parties
Leases or Hire Purchase documentation
Physical inspection of assets
Depreciation records and calculations
Fixed asset register – also reconciliation with G/L
What are the assertions about the classes of transactions and events and related disclosures?
- Occurrence: transactions and events that have been recorded or disclosed have occurred and such transactions and events pertain to the entity
- Completeness: all transactions and events that should have been recorded and all related disclosures that should have been included in the financial statements have been included
- Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described
- Cut off: transactions and events have been recorded in the correct accounting period
- Classification: transactions and events have been recorded in the proper accounts
- Presentation: transactions and events are appropriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the financial reporting framework
What are the assertions about account balances and related disclosures
- Existence: assets, liabilities and equity interests exist
- Rights and obligations: the entity holds or controls the rights to assets and liabilities are the obligations of the entity
- Completeness: all assets, liabilities and equity interests that should have been recorded are recorded and all related disclosures that should have been included in the financial statement have been included
- Accuracy,valuation and allocation: assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded and related disclosures been appropriately measured and described
- Classification: assets, liability and equity interests have been recorded in the proper accounts
- Presentation: assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the financial reporting framework
What are the risks and sources of information for intangible non current assets
e.g. (Licences, development costs, purchased brands)
Risks:
Expenses being capitalised as non-current assets (classification)
Intangibles being shown at wrong cost or valuation (accuracy/valuation)
Sources of information:
Time sheets and cost allocation models
Purchase invoices
Clients and/or specialist valuation/impairment assessment (remember ISA 540 – estimates)
Accounting standards – this is a complex area
What are inventory risks
Fictitious inventory being included (existence)
Inventory that exists being omitted (completeness)
Inventory being wrongly valued (valuation)
Inventory held for, or at, third parties being wrongly included /excluded (accuracy)
Damaged or obsolete stock not adequately identified (valuation)
Deliveries and dispatches at year end incorrectly recorded (Cut off)
What are the sources of information for inventory quantities
Stock records
Stock count – attendance by auditor
Perpetual inventory records
Work in progress – stage of completion
Quantities of stock held by or for third parties
Cut off procedures
What are the sources of information for inventory values
Trial balance
Purchase invoices/manufacturing records
Work in progress – costing system
Analytical procedures
NRV – after date sales/records slow moving stock/representations
What is a good stock count?
Educated work force – understand the product
Clear instructions
Movements stopped
Dual checking
Cut off information noted
Last goods received note number
Last despatch note number
Controls over for altering stock records minim
Inventory Valuation
Valuation-lower of cost and Net Realisable Value (NRV)
“Cost” is cost of getting goods to present location and condition – allocating production overheads based on normal level of activity
FIFO and average cost not LIFO
Test stock movements to check calculation – control systems –CAATs?
NRV is less than cost?
Identify
Assess NRV – economic conditions and subsequent events and transactions
What are the risks associated with receivables
Debts becoming uncollectable – “bad” – (valuation)
- single main reason as to why SMEs fail
Debts being contested by customers-wrong/faulty goods etc. (existence, rights and obligations)
External confirmations ISA 505
Audit evidence is more reliable when it’s obtained independent sources outside the entity
Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference
Audit evidence is more reliable when it exists in documentary form whether is paper, electronic or other medium
External comfirmation reasons for disagreements
- there’s a dispute between the client and the customer, the reasons for the dispute would have to be identified and specific allowances for receivables
- cut off problems exists because the client’s records the following year’s sales in the current year or because goods returned by the customer in the current year are not recorded in the current year
- the customer may have sent the monies before the year end but the monies were not recorded by the client as receipts under after the year end
- monies received may have been posted to the wrong account or cash in transit account
- customers who are also suppliers may net off balances owed and owing
- teeming and lading( stealing monies and incorrectly posting other receipts so that no particular customer is in serious debt) is fraud that can arise on this area
External confirmations – professional scepticism
The auditor should demonstrate using professional scepticism when reviewing confirmation responses:
Challenging responses not received in expected format
Making sure the responses were received from the expected, authorised party.
Validating the email was sent from bona-fide corporate email address
Challenging responses where the reply not received as instructed (e.g. should be direct to the auditor not to the audited entity)
Challenging unexpected responses providing information not requested
Considering whether non-responses might be for particular reasons, or have a particular pattern
What are the sources of information for the provision of bad debts for receivables
Aged sales ledger to identify overdue accounts
Discuss collection issues
Review correspondence
Discuss impairment provisions
Auditor’s own analysis of customer and credit
Specific provisions
Formulaic provisions
