OT Flashcards
non-compliance
going concern if banned from further trade and reputation
nonclar
commission or ommission; intentional or unintetnial; not about personal misconduct
auditor should report
AUDITor is not expected to prevent non-compliance nor detect
laws with direct effect on fs (tax and pension)
when no direct effect on FS - but fundamental to operations - going concern or avoidance of material penalties.
procedures to assess compalliance
- understand regulatory environment and how client complies!!
- understand which laws have direct effect on FS
- inquire +correspondence with licencing and other authorities
- remain alert during
5.rep letter
identified non compliance
- understand nature and assess effect on FS
- discuss with tcwg
- think whether to add it in opinion
- effect on risk assessment and reliability of written rep letter
if it gives rmm of if further investigation is prevented then modify an opinion (qualified or adverse)
if tcwg is complicit, legal advice
assess tcwg response and decide if further action is required for public interest
fraud
is intentional act, involving deception, to obtain an unjust or illegal advantage
1. fraudulent fin reporting - overtate profits
2. misappropriation of assets. theft of cash or inventory
mng’s responsibility to prevent nad detect - there is effective system of internal control
- how fraud occurred
- is it isolated or part of pattern
- look for similar patterns
- estimate fin effect
3 conditions usually present when fraud exists
1. incentive or pressure to commit the fraud
2. opportunity to commit the fraud
3. attitude to go through with the fraud
Poor CF
misstatement
can be
incorrect amount
incorrect classification or presentation
incorrect disclosure
Change in accounting policy
Retrospective treatment of change - last years inventory and opening values
Last year comparatives and opening balance
Change in estimate = prospective treatment
examples of fr factors
- estimates that are hard to corroborate
- management not addressing control inefficiencies
- lack of controls system
- complex transaction that pose difficult ‘substance over form’ questions
- lack of segregation of duties
- compact, bt high value items - easy to steal assets
- complex group structures - so that RP transaction can’t be traced
- excessive pressure on mngt
when auditor stops audit if fraud is in place
- if fraud is performed by management or tcwg
- there is significant risk of material and pervasive fraud
- failure to take appropriate action raises significant concern about management’s integrity
mngt bias
- perform targets - bonuses dependent on hitting a profit target
- business is targeted for takeover
- job is dependent on level of performance
significance of deficiency
influence
1. likelihood that deficiencies will lead to MM
2. susceptibility to loss or fraud of related asset or liability
3. subjectivity and complexity of determining estimated amounts
4. the volume of activity
Quality mngt
risk assessment process
-> establish quality objectives
-> identify and assess quality risks
-> design and implement responses to address quality risks
how to address quality risks
- gov and leadership
- relev ethical req-s - partner stay alert for evidence of ET non-compliance
- acceptance and continuance: integrity and ethical value of client; nature and circ of client
ability to perform the engagement - EPerformance
- resources (human, tech, intellectual)
EQ
objective evaluation of the significant judgements made by the engagement team, and the conclusions reached in formulating auditor’s report
RoMM
must be assessed at 2 levels
1. FS (eg. risk of management override of internal control)
2. assertion level ( relating to classes of transactions, account balances, and disclosures) - determine nature, timing and extent of further audit proc - inherent risk and control risk
Inherent risk factors
exist before controls are even considered - characteristics of events or conditions that affect the susceptibility of an assertion to misstatement
significant risk - high inherent risk - revenue
control risk
misstatements are not prevented or detected and corrected by internal controls
oper: batch of products is poorly manufactured ( sale returns (revenue overstated), goods scrapped (overstated inventory), compensation to be paid (understated liability)
when SR arises bc of high inherent risk (Likelihood and magnitude)
- transactions that involve subjectivity (there is alternative acc treatment)
- accounting estimates with high estimation uncertainty or using complex model
- acc balances or disclosures that require complex calculation
- changes in business that involve change in accounting (acquisitions or change in business model
detection risk
- sampling risk - procedures applied to samples rather than whole populations
- non-sampling risk - inappropriately qualified staff
scepticism
you don’t know
corp govern
direction and control of company
- promote transparent and fair markets
- protect shareholder rights
- contribute to stock markets to function in a way that is good copr market
- ensure strategic guidance of the entity, effective monitoring of the manegement by the board
Principles
- every company is governed by effective board
- establish controls to assess and manage risks
- ensure effective engagement with stakeholders
- workforce policies are consistent
chair must be independ - not employed by company for at least 5 years
BoD
at least half NED who are independent (no signif shareholding, no close family ties with executive directors)
NEDs must give constructive challenge and strategic guidance and hold mngt to account
chairman can’t be for more than 9 years
annual performance review annually and rigorous of its committees and director
annual re-election
How to evaluate adequacy of expert’s work
Must examine the experts work in respect to
1. Consistency with other audit evidence
2. Significant assumptions made - rate of inflation or rate of returns
3. Use and accuracy of source data. Up to date list of property the company owns
4. When the work was carried out to assess whether it is up to date
Internal auditor
Assess DI of internal controls
Investigate special cases - fraud
Assess security and operation of IT system
Use their work only when limited judgement is needed!!!!
How to decide whether to involve IA
- Assess org status of IA department. Whom they report? Are they objective? Size? - OBJECTIVE?
- Assess competence of IA department: members of professional body? Do they have regular trainings? Do they have time and resources to carry out their work adequately - COMPETENT
- Assess of the IA carry out the work systematically and in disciplined way. Are there quality control? Is there standard documentation? Is the work planned and reviewed? - SYSTEMATIC APPROACH
When not involve IA
Even if independent, cannot involve in matters
- involving significant judgement
- relating to higher assessed risks
- relate to internal auditors own work
written representation
not after the reporting date!!
evidence about the completeness assertion
required represen
- any knowledge or suspicion of fraud has been disclosed to auditor
- all known or actual possible litigations has been disclosed
Belief that significant assumptions made in estimates are reasonable - all known RPs, relationships and transactions have been disclosed and accounted
- all events subsequent to reporting date are adjusted
- plans for future actions relating to management’s going concern assessment
RP
to draw attention to the possibility that its SFP and PL may have been affected by existence of RPs
- close ppl of those who are key managmnt team, has control, joint control or significant influence
- entity is RP if it is a parent, subsidiary, fellow subsidiary, associate or joint venture of the reporting entity
risk of RP transactions: entered to defraud other parties or to evade tax
if not identified, there is risk
- fraud
- unfair presentation
- non-compliance with law
how to identify RP
- enquire management about RO transactions
- board minutes review
- review for unusual transactions
- bank certificates - we could give guarantees to others
- review shareholders with whom company trades
- review investment activities - purchase of shares that might indicate purchase of significant shares
- enquire into the names of pension trustees
- get the rep letter
minimum RP disclosures
- amount
- balance and terms (state that arm’s length only if auditor can substantiate it)
- allowance for doubtful accounts
- expense recognized in the period in respect of irrecoverable or doubtful debts due from RP
Partner has been on position for 9 years
FAMILIARITY THREAT, esp if it is listed company
audit asssitant doing HR area is not correct
is hte partner says its ok bc he is too close to client - 9 years or does not have enough time to review
Whenever large customer base for revenue
compare per customer revenue change across the years!!! total rev is increasing, but per customer is falling! contradict! trends to be investigated to ensure correct revenue recognition - point in time. PO is satisfied by transferring promised good or service to customer
License amortisation
amortisation for a class of assets as a whole is not always accurate. undervalue intanglis and over/under state profits. The auditor should also consider whether this issue has arisen in previous years’ audits.
IAS 10 disclosure requirement
- non disclosure would affect the ability of users to make proper evaluations and decisions
- required disclosure incl the nature of the event and an estimate of its fin effect or statement that reasonable estimate cannot be made
IFRS 3 requires disclosure of information about a business combination
whose acquisition date is after the end of the reporting period but before the financial
statements are authorised for issue.
therefore there is an audit risk that the disclosure is not complete or accurate
when qualified, adverse or EOM
qualified - material - except for statement
Adverse - material and pervasive - accounts are not true and fair! they are materially misstated
EOM = correctly disclosed, but so big as to draw attention to it
after opinion - place Basis of qualified or adverse opinion paragraph - explaining why the opinion has been modified
implication on auditor’s report
the auditor will issue a qualified opinion with ‘except for’ qualification. A BASIS FOR QUALIFIED OPINION WILL FOLLOW THE QUALIFIED OPINION WHICH WILL PRESENT THE MATTERS AND WILLL QUANTIFY THE FINANCIAL EFFECT OF THE MISSTATEMENT
Don’s say ‘the matter will be discussed with management’ - SAY WHAT SPECIFIC will be discussed - e.g impact on audit opinion if they don’t make the adjustment
NO SCORES for ‘IFs’ - its speculation
keep the PHASE of audit in mind!
whenever you say material - write % of revenue of PBT
Asset held for sale
FV-cost to sell = FV = comparing similar asset if there is one traded
ViU = discounted future value of cash flows from continuous use of the asset
state why you are getting tothat conclusion
have a section: “ actoins of the auditor”
partner reviewed the file on the last day
demonstrates lack of competence and due care!!!
even if he found review notes, there would be insufficient time to gather evidence - for example revenue - not having enouph time would have contributed to not making significant review points
no further reviews were performed
no further audit review was performed despite the audit partner was on position for 9 years with a potential familiarity threat, who may be assuming that no issues to be founds evidenced by visiting on final day - indicating lack of safeguards - since it is high risk audit there should have been ind part
asset held for sale
- management is committed to sell
- the asset is available for immediate sale
- active program to locate a buyer is initiated
- the sale is highly probable, within 12 months of classification as held for sale
- the asset is being actively marketed for sale at a sales price reasonable in relation to FV
- actions required to complete the plan indicate that it is unlikely to be changed or withdrawn
should be reclassed as held for sale and measured at Lower of Carrying amount and FV - cost to sell
** not depreciated
** immediately before classifying as held for sale - IMPAIRMENT is measured and recognised in accor with PPE and IAS 36
Risk #1 = assets not treated as disposal group and continued to be depreciated
assets are overvalued if impairment review is not performed - since Burger’s revenue is to fall it is an impairment indicator!!!
Risk #2 = disclosure = assets and liabilities held for sale should be recognised separately from others!
producst are separate line of business = discontinued operation
POST TAX profit or loss of discontinued operation and post tax gain or loss on FV-cost to sell SHOUDL BE PRESENTED as a single amount on the face of OCI!
In addition, detailed disclosure of revenue, expenses, pre‐tax profit or loss and related
income taxes is required either in the notes or in the statement of comprehensive
income in a section distinct from continuing operations.
How could they manipulate
- shift costs to other group companies
JV definition
joint arrangement whereby the parties who have joint control of the arrangement have rights to the net assets of the arrangement
IFRS 11 requires that a joint venturer recognises its interest in a joint venture as an
investment and shall account for that investment using the equity method
all the revenue increase is from new service
see what that increase is (here 45m), which is 14% of total revenue!
an operating segment is component of the entity:
- engages in business activities from which it may earn revenues and incur expenses!
- whose operating results are reviewed regularly by chief decision makers! to make decisions about resource allocation and assess its performance
- for which discrete fin information is available
reported revenue is >10% of total
Audit risk is that disclosure is not provided in relation to this reportanble segment or it is incompelte
GRANTS
IAS 20 - requires grants to be recognises systematically over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate
amount relating to asset = SFP, it should be recognised in PL over the periods in which depreciation expense on the assets to which it relates are recognised!
if funds are not used in the manner intended by the government, then some of the grants are repayable.
additional information required on disposal
the individual FS, to ascertain the details of the amounts recognised - assist in planning compliance with measurement and disclosure req-s of ifrs
- copy of due dilligence - ascertain key findings
- understand mngts rationale for disposal, group board minutes - and how disposal fits in with Group restrcuturing
-info re potential buyers - to develop expectation as to whether the disposal is likely to take place
- any prelim determination of profit or loss and expectation of any impairment
principal procedures on classification of the investment
- obtain legal docs /9the date, amount, number of shares purchased, voting rights, nature of profit sharing arrangement, nature of access to the assets of JV, CONFRIM that there is no restriction of control)
- BoD mins and board rationale
mins with the other JV - to understand nature and decision making process - org sturcutre - to confirm equal power
procedures on grant
all docs to confirm term and requirements; the date by which it must be used, clauses on repayment
- agree amounts received through bank statement
- is amount planned to be spent on the grant purpose - forecast and budget
- discuss the grant fund for marketing - is it to pormote the purpose - recycling features
- Confirm, through agreement to marketing plans, whether any funds will be spent during this financial year.
- rep letter that grant will be used for he specific purpose
referral fee
- self interest! - result - may 2. recommend wo proper consideration of their competence
- significance of threat should be evaluates and safeguards applied:
Disclosing to the group in writing the arrangement fee received
obtain advance agreeemnt from the Group that arrangement is acceptable
Internal Audit
providing IA service might create self-review threat to objectivity
may overrely on the internal controls designed and evaluated by audit team
not apply appr level of skepticism
Threat of management responsibility, whereby the audit firm is making decisions and using judgement which is properly the responsibility of management
spec-ly for PIE, IA shall not be provided in relation to signif part of controls over fin reporting,
why estimate are high risk
isa 540 - simplest depreciation calc-n to the most complex of derivative fin instruments
many measurements based on estimate, including FV measurements and impairment in relation to fin instruments - imprecise and subjective in nature! -> high Inherent risk
RMM in estimated impacted by 3 factors: complexity, the application of mngt judgement and estimation uncertainty
FV or impairment in relation to fin instruments = judgements: re market condition, the timing of cash flows and intentions of the entity => valuation involve complex models built on significant assumptions: predicted timing of CF, most appropriate DF and about probability weighted averages
mngt maynot have sufficient experience and knowledge, may have deliberate attempt to manipulate the value of estimate in order to window dress the FS
In overall assessment of audit risk - auditor assess the risk that internal systems and controls prevent and detect valuation errors
manage detection risk at an acceptable level through effective planning and execution of audit procedures!
However, the audit
team may lack knowledge and experience in dealing with the estimation technique in
question and therefore may be unlikely to detect errors in the valuation and modelling
techniques applied by the client. Any resulting over‐reliance on an external specialist
could also lead to errors not being identified.
share based payments
cash settled share based payments - entity must measure the services acquired and the liability incurred at FV of the liability;
- remeasure FV of liability each reporting period until the date of settlement - any changes recognised in PL
def of share-based payment
agreement that entitles the other party to receive cash/other assets based on the price/value of equity instruments - the amount of cash to be paid to supplier is determined with respect to share price - CASH settled
other ways it to pay with share options - EQUITY SETTLED
VESTING CONDITIONS - PERFORMANCE conditions that the other party should fulfill before being entitled to share-based payment
when recognize
as services are provided or goods are delivered
HOW
Cash settled:
Dt assets or Expenses in PL
Cr Liability
Equity settled
Dt assets or Expenses in PL
Cr Equity
Measurement
at FV of goods/services received at the date!
-> if not possible (employee service) => FV of equity instruments granted at the GRANT date
VESTING conditions
not vested = granted immediately = no period before entitlement - FULL Recognition at grant dat
If vested = must complete a service period (employee gets 100 shares after 3 years of service) = recognised over vesting period!
IFRS 2 prohibits subsequent adjustment to total equity after vesting date
CASH settled share based payment transaction
Measurement :
Liability at FV by applying option pricing model
FV must be remeasured at each reporting date until settled
No vesting full recognised
yes to vesting = recognised over vesting period
role of NED
- scrutinize management performance
- consider integrity of FS
- determine director remuneration
- participate in appointment and removal of directors
audit firm must remain sceptical of the motivations of the family, particularly leading up to a listing.
there will be incentive to overstate performance and inflate the value of the company; ET must be alert particualrly in matters involving mngt judgement
role of Audit committee
- monitor integrity of the FS
- review internal financial controls
- monitor independence of external auditor
committee should have a member with
relevant financial expertise and this will become of even more importance once the company is listed.
when no audit committee
ET to communicate how the auditor maintained independence in
Without an audit committee, matters of significance to the audit
may not be given sufficient prominence by the board.
listed = increased pressure and scrutiny to achieve performance levels
This increases the level of audit risk and is likely to have a
significant impact on the firm’s assessment of the risk of fraud and management
override.
listed = more detailed FS in a shorter time frame; the lack
of financial expertise and lack of objective scrutiny by an audit committee may result in errors or omissions.
once listed, the auditor’s report issued for Gull Co will be available to a
much wider audience and will require additional disclosures in line with ISA 701
Communicating Key Audit Matters in the Independent Auditor’s Report
challenges in cash settled share-based payment
FV of price is based on options pricing model = complex valuation model
Procedures
write actions!!
1. Obtain copy of contractual docs for share-based payment to CONFIRM
- number of ppl; number of shares; gant and vesting date; conditions
2. Assess appropriateness of the model used to value the share appreciation rights by considering prof certification, experience, reputation and objectivity.
3. REVIEW the valuation by assessment of the assumptions used in order to determine the fair value of the share appreciation rights.
4. Obtain details of historic turnover rates! + ACTUAL DATA for the first year of VESTING PERIOD!!!
5. Discuss basis of staff retention assumptions and CHALLENGE their appropriateness
6. PERFORM SENSITIVITY analysis both the valuation model and the staffing forecasts.
Provision PV
where effect of time value of money is material, the amount of provision should be PV of expenditures - Discount rate should be pre-tax rate which reflects current market assessments of the time value of money and the risks specific to the liability.
requires mngt to predict the payment dates and identify appr-te pre-tax
rate. (which reflects current market assessments of the time value of money and the risks specific to the liability.)
Professional scepticism should also be applied to the comment that the
assumptions are the same as in previous years. New factors impacting on impairment may have arisen during this year, affecting the determination of the
impairment loss and up‐to‐date evidence on the assumptions used in this year’s
calculation should be sought
professional scepticism
- questioning mind
- being alert to conditions which may indicate possible miss-t due to error or fraud and is critical assessment of audit evidence
- can reduce the risk of fraud going undetected
- be alert to existence of contradictory audit evidence
- assess assumptions and judgements critically
- reliability = not if prepped by mngt!
- GC and RP - judgement in determining accounting treatment, potential for management bias is high
- PS = maintaining objectivity
whenever there is loos be sceptical - it could be higher than reported (corroborative evidence) - anytime said that X is same as last year - profe-l scepticism - new factors affecting impairment may have arisen this year
impairment of goodwill
- check assumptions against our understanding of business based on risk assessment procedures - reasonabless
- check that it includes goodwill on all business combs
- going concern -> growth rate and impairment
- CONTROLs - TOE of review and approval by mngt or tcWG
- reconcile data used via supporting docs - Disc rates, etc
- develop independent estimate of impr loss and compare
- Confirm that it excl CF due to tax or finance items
- sensitivity analysis - how alternative assumptions are considered
- ariphmetics
IFRS 16
at inception, LL is measured at PV of lease payments not paid at inception date, discounted at the rate implicit in the lease
ROUA = LL+ any lease payments made at or before the commencement date (less any lease incentives)+ estimate of restoration costs + direct costs. ROUA must deprec-ed over the term of lease. depreciation should be charged as the entity has the use of the asset, even
if no lease payments have been yet been made.
it represents a material
misstatement unless management adjusts the amount.
Audit evidence for lEase
- contract to confirm $, period, any restoration costs = support for amounts to be incl in FS
- Evidence on physical inspection = existence
- Manegement’s WP on calculatio on PV
- copy of FA register to confirm amounts capitalised and breakdown of liabilities to confirm LL
- copy of policy on acc treatment re depreciation is consis
- discuss of mng on the use of the asset and cf arising from it - indicators of impar
- proposed disclosures
Inventory consignment
an arrangement in which goods are left with a third party to sell. No control over the inventory as the supplier can require unsold inventory to be returned and Marlos Co has the right to return the inventory.
In accordance with IFRS 15 Revenue from Contracts with Customers, the inventory
remains the property of the supplier until Marlos Co has sold the inventory to a third
party. This means that the inventory should only be recognised as a purchase and
corresponding inventory amount = only inventory on which no longer has a right to return the
assets, i.e. when they are sold to a customer
As such, $8.1 million of inventory should not be recognised in the financial statements. This is receivable! due from the new supplier
“payment is not required until Marlos Co has
sold the inventory to a third party. It is not determined from the scenario that this inventory
has been paid for, and some consignment inventory only falls due for payment once the goods
have passed to the third party”
AE on inventory consignment
- contract to understand and confirm terms and conditions of the sale or return arrangement and amounts involved
- confirm total value of inventory which was unsold at year end
- confirmation from supplier
- post y/e amounts refunded to supplier and bank statement
- calc of how much inventory held was eligible for return
- Discussion with management about the misclassification of the inventory which
can be returned and their reasoning for classifying this as inventory
Impact on auditor’s report
lease - material, but not pervasive. THus qualified opinion shoudl be given on the basis of MM. This will be followed by ‘basis of qualified opinion’
Assumption underlying CFS
Order as per the CFS
1. if smth is sold, then CF from it will spot too!!
2. online poublishing is there, but what about the digital portfolio - key assumptions
3. recent event - no indication from the information
provided by management as to how a full digital offering will be created by
August 20X5, which is only one month away.
assumption that 250K each 6m should be challenged for the following reasons:
- It may also be overly optimistic to assume that Chandler Muriel will be able to deliver the books for publication in quick succession, in time to meet the publication deadlines set by Geller Co.
- round 250K should be challenged
- additional books in series- CFS not static
2% was not applied consistently - check accuracy!! last year is 5%! it could be a genuine mistake, or it could be a deliberate
manipulation. Without a 5% increase in the final six‐month period, the cash position is
negative, a motive for management bias in the calculations.
New sale of Happy travels
decision to sell is recent - given declining demand for printed - optimistic to assume the sale will actually go ahead!
Amount should be challgened! Just because other ranges of books have successfully sold in the past, with a sale price based on a multiple of annual sales, it does not mean that the same model can be used for this particular range of books. Mngt has an incentive to incl an estimated sales receipt which covers loan repayment!
Oper expenses
overly simplistic to take 1%=infl rate. attempt to understate operating expenses
and improve the appearance of the cash flow forecast. Some exp mb missing, any specific operating expenses required to
create the digital range of books and magazines, and marketing expenses related to
promoting sales using online retailers.
If sales are to increase by2% royalties should also increase by this rate - this doesn’t appear to be factored in.
No cash outflow on recently acquired digital publishing division, but signif costs mb incurred to merge it with existing business and preping the digital books and magazines to be launched nxt month
in CFS make sure tax is there. if listed then?
- There does not appear to be any cash flows relating to tax payments included in the forecast. If management is claiming that there will be no tax payments during the
period covered by the forecast, this assertion needs to be approached with professional scepticism - check - However, the omission of dividend payments could be a way formanagement to improve the cash flow forecast.
Evidence on expected cash receipts
- 2% growth - discussion with sales director and editors; given decline; plans on closer relations with online retailers
- Corroborate!!! copies of any signed customer contracts (online or physical). general and specific in nature to the range of books to be published to justify forecasts
- copy of contract with Muriel on dates of and amounts on advances and royalties due
- Relating to the plans to launch a full range of digital books and magazines: readiness of platform - what has been done? confirm author agreement are obtained? digital platform is ready?
sample of authors - agreements on consent - Notes of a discussion with management regarding the plans to sell the Happy Travels range, specifically to confirm: buyers expressed interest? stage of nego-ns? rationale for using multiple of annual sales model to estimate potential sales.
- boD minutes - confirm approval of sales
- assumptions on cash reeipts are consistent with ET knoweldge of business
- Sensitivity - consistent with ET knowledge
- Rep letter - reason-ss of assumptions and that all relevant info was provided
- A review of the bank ledger account/cash book from 1 April 20X5 to the date of
the auditor’s report, identifying any significant cash receipts which do not
appear to have been included in the forecasts.
Auditor’s report
AA is correct that there is signi going concern due to uncertainty over sale of the Travels and repayment of loan. If sufficient evidence available to support the use of going concern basis of acc in FS = unmodified + Material Uncertainty related to going concern section to highlight issue
But lack of evidence for assumptions used in CFF esp-ly on Happy Travels = modify opinion.
Disclaim an opinion when unable to get sufficient, appr audit evidence on which to base the opinion +conclusion that possible effects on FS of undetected miss-ts, if any, could be material and pervasive!
Here - both material and pervasive - impacts survival of the company
When opinion is disclaimed requireements
disclaim due to inability to obtain sufficient, appropriate AE
- STATE that auditor does not express opinion on FS
- instead of stating ‘FS have been audited’ state ‘ auditor was engaged to audit the FSs’
- State that, because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient,
appropriate audit evidence to provide a basis for an audit opinion on the
financial statements.
when dev costs are cap-ed
- only after technical and commercial feasibility of the asset for sale or use have been established.
- demonstrate an intention and
ability to complete the development and that it will generate future economic benefits. - must demonstrate the existence of a market, which given the product design director’s comments appears uncertain.
risk that research costs have been inappropriately classified as
development costs and then capitalised, overstating assets and understating expenses.
Evidence expected to be on file:
1. BoD minutes on discussion of Com feas
2. discussion with mngt - confirm that research costs are written off
3. confirm individual costs capitalised to date in production to ensure no research elements
4. review results of tests performed to demonstrate prototype is operational
5. budget vs actual costs - to determine if the product costs have
deviated significantly from original budgets.
6. research on whether 2k is viable
7. Details of discussions with the product design director of any difficulties in the development of this product which have caused it to run over budget.
8. written rep letter - detail of intention to complete the project, including a commitment of resources and the ability to fund the future cash requirements to bring the product to market.
Warranty provision
- test estimates made
- data on which these estimates are based
- TOE of any controls
- develop own expectation point or range to ev-te mngt’s estimate
- must fully
understand the reasons for the reduction in the warranty provision. There could
be valid reasons, for example, the sales mix between products could be different
which failed to trigger a similar level of warranty provision, but the change in
value should be fully investigated by the team.
CEO estimates instead of CFO
increased risk of
management bias in the estimation techniques. The audit team should approach this issue with professional scepticism and consider the motivation of the CEO
in involving himself in accounting issues which had previously been left to the finance director.
evidence expected on cedrease of warranty provision
- copy of calc
- notes discussion wiht mngt - reasons, source of assumptions
- analysis of sales - product mix against PY - explain diffs and effects
- Any quality control reports, disaggregated by product, reviewed for any indications that certain product lines have fewer warranty claims than in previous years.
- Notes of the meeting with the customer services manager where the levels of customer complaints and product faults were discussed.
- PY compare provision vs actual warranties
- evaluate key assumptions vs mngt estimates - discuss sign variances
- movement of provisions in acc period, ariph accuracy
- approp-ss of JE
Impact on AR of prov
Assuming that the provision should have increased consistently with the increase in revenue of 11%, it would be expected that
the year‐end warranty provision should be around $4.8 million. The actual provision recorded in Byres Co’s financial statements is only $2.1 million; therefore, the liability
appears to be understated by $2.7 million. At 8.5% of total assets, the likely error in the provision is highly material to the statement of financial position
Miss-t is immaterial, if management fails to amend the FSs, the opinion should be modified due to material, but not pervasive, miss-t.
miss-t is confined to specific acc in FS and not subs proportion of FS.
AR should incl a qualified opinion paragraph at the start of repr,
When EOMP is added
- highlight a correctly given disclosure that is fundamental for users’ understanding of FSs
- IT CAnnot be used if there is a misstatement
- EOMP cannot be used for immaterial items
EOMP may be appropriate for the subsequent disposal of subsidiary
needs to use judgement - can;t determine wehther the given information is of fundamental importance to users of f/s
- need to see if material by amount or by nature (if the activities of the subsidiary were fundamental to the functioning of the rest of the group)
EOMP - shoudl contain references to the item in te FS: AR would have references to disclosures in the FS re the issue to which it relates
auditor characteristic (POPCI)
Professional behavior;
Objectivity
Professional competence
Confidentiality
Integrity
SAFIS - threats
Self review
Advocacy
Familiarity
Intimidation
Self interest
which component to visit
- relative size of the component in the group
- rmm
- significant changes
espite its percentage contribution to the Group this year being less than the
prior year, the reduction in the value of its assets of 27.1% is unusual and significant.
Additionally, the operations of Yew Co are in the agricultural industry. This is a specialised
industry and different from the main operations of the Group. Therefore, in accordance with
ISA 600 Revised, it is likely that Yew Co should have been visited for audit work to be
performed.
QM requirement to involve DPP
A lack of input and insight from the
consultant could mean that audit risks specific to Yew Co have not been identified and that
inappropriate and insufficient audit evidence has been obtained, with implications for both
the individual financial statements of the company and the consolidated Group financial
statements.
Group
at min - form understanding of each component of the group and review their FS
where component is material or significant contributor to inherent risk at the group level - further work on each component is required - TO BE SATISFIED THAT the FS of each COMPonent is UNLIKELY TO INTRODUCE ERRORS that could be material at group level
his work might include:
discussing with the component auditor, and/or the management of the component, the business activities that are significant to the group
reviewing the more significant parts of the component auditor’s working papers
discussing with the component auditor the susceptibility of the company’s financial statements to material error or deliberate misstatement
reviewing the component auditor’s documentation of identified significant risks, and the conclusions reached on these risks
observing final clearance meetings between the component auditor and the management of the company.
when opinion is modified
matterial misstatement disclosure or FS
Qualified if not pervasive
ANALYISS of pervasiveness of the issue - wrong to say that is it only 1 subs, therfore not pervasive - it touches almost all accounts on FS
“Stronger answers
were able to demonstrate that due to the nature of the issue, it was likely that the impact was pervasive as it would affect nearly every area of the financial statements, and therefore an adverse opinion would be appropriate.’
rofessional
skills marks where detailed analysis supported conclusions provided
considerations when determining which
components Group audit work should be performed on.
- components
at which to perform audit work is a matter of significant auditor judgement. - certain activities, such as the acquisition of a subsidiary or significant related party transactions, would form part of
the Group auditor’s consideration in this regard. !!much of these considerations would be as a direct result of the assessment of the risk of material misstatement present within the
component, driven by issues such as previous control issues or
inconsistencies within analytical procedures.
