Procedures

Question 1

Directional testing

Answer 1

The concept of directional testing derives from the principle of double-entry
bookkeeping, i.e. for every debit there should be a corresponding credit.
Directional testing reduces duplication and therefore over-auditing and allows
for a more efficient audit. Applying this concept, any misstatement of a debit
entry will also result in a misstatement of a credit entry, e.g. directly testing
payables for understatement also indirectly tests expenses/cost of sales for
understatement

Question 2

Writing good audit procedures

Answer 2

An audit procedure should be a clear instruction of how the audit evidence is to
be gathered.
It should contain an ACTION applied to a SOURCE to achieve an OBJECTIVE.
In other words, it should describe what needs to be done, how it should be done
and why it should be done

Question 3

Full year-end count - inventory

Answer 3

A full year-end count is performed by the client to determine the quantity of
inventory for inclusion in the financial statements. The count should take place
on the last day of the financial year if possible. If not, it should take place as
close to the year end as possible, and adjustments, referred to as a roll-back or
roll-forward, will be made for goods received and despatched on the days
between the year end and the date of the count. Where the count does not take
place at the year end, these adjustments increase the risk of misstatement of
inventory and the auditor must carefully test them

Question 4

Perpetual inventory system

Answer 4

A perpetual, or continuous inventory system, is one which keeps a real time
track of inventory. As a sale is made, the inventory system is updated to reflect
the reduction in quantity. As purchases are received, the system is updated to
reflect the increase in quantity. This enables the business to know its inventory
balance at any point in time

Question 5

Standard costs

Answer 5

Standard costs are often used by manufacturing companies where it would be
too time-consuming to collect actual cost information for each individual unit
produced. The company establishes an expected cost of producing one item
based on a normal level of activity. This is used to value the inventory

Question 6

ISA 505 External Confirmations requires the auditor to

Answer 6

maintain control
over external confirmation requests when using external confirmations
as a source of audit evidence

Question 7

IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires
an entity to recognise a provision if:

Answer 7

 a present obligation has arisen as a result of a past event
 payment is probable (‘more likely than not’), and
 the amount can be estimated reliably.

Question 8

If payment is only possible, a

Answer 8

contingent liability must be disclosed in the
notes to the financial statements.

Question 9

A contingent asset can only be recognised if it is X. If it is probable that an inflow of economic benefits will result, a
X. If it is only
possible, it should be X.

Answer 9

virtually certain to be
received

disclosure should be made in the financial statements

ignored

Question 10

Quite often, the scope of the external audit of a NFP is much larger than that for
a company.
In addition to the financial statement audit, the following may also be required:

Answer 10

 Value for money audit – assessing whether the organisation is getting the
most from the money spent. These are discussed in more detail in the
chapter ‘Internal audit’.
 Regularity audit – ensuring the expenditure of the organisation is in
accordance with the regulations/legislation governing it.
 Audit of performance indicators – auditing the targets of the organisation
that have to be reported to stakeholders such as waiting times in a
hospital accident and emergency department.