Procedures Flashcards

Question

How would an auditor test share capital?

Answer 1

Agree authorised share capital to shareholding agreements such as company memorandum, articles of association and lists of registered members Inspect cash book for receipts from share issues Inspect terms of share certificates and reconcile to cash receipts and new share capital totals Inspect board minutes to identify any dividends declared prior to year end

Answer 2

Reconcile reported directors’ salaries to payroll records Inspect board minutes for bonus announcements Reconcile directors’ bonuses to cash payments in cash book Inspect board minutes for approval of related party transactions Obtain written representation from directors that they have disclosed all related party transactions and director remunerations to the auditor

Answer 3

Reconcile closing profit reserves to: opening reserves, profit for the year and dividend paid and proposed during the year Compare opening reserves to closing reserves reported in the prior year’s financial statements Reconcile movements in revaluation reserves to the non-current asset register Corroborate revaluations by comparing to independently produced reports

Answer 4

May be effective and efficient to do so where the auditor lacks technical knowledge and skills to gather evidence about transactions, balances and disclosures: Property valuation Construction work in progress Assessment of oil reserves Specialist inventory – livestock, food and drink in the restaurant trade, jewellery Actuarial valuations of pension schemes

Answer 5

ISA 620 Using the Work of an Auditor’s Expert – auditor should obtain sufficient and appropriate evidence that the work of the expert is adequate for the purpose of the audit. Auditor must assess the expert’s independence, objectivity and competence (qualifications, memberships of professional bodies and experience). Before work undertaken, auditor should agree in writing: - Nature, scope and objectives of expert’s work - Roles and responsibilities of auditor and expert - Nature, timing and extent of communication - Need for expert to observe confidentiality Once the work has been completed, auditor must assess it to ensure appropriate for purposes of audit. Involves consideration of: The consistency of the findings with other evidence The significant assumptions made The use and accuracy of source data

Answer 6

Internal audit part of client’s system of internal control. If effective may reduce control risk (and reduce need for detailed substantive testing). Additionally, auditors may co-operate with IA and place reliance on their procedures in place of performing their own. ISA 610 Using the Work of Internal Auditors – auditor must determine whether work is adequate. Evaluate: - Objectivity - Technical competence - IA function carried out with due professional care - Whether effective communication likely Auditor needs to plan adequate time to review work of IA to evaluate: -Work performed by people with adequate technical training and proficiency - Work properly supervised, reviewed and documented - Sufficient and appropriate evidence has been obtained to draw reasonable conclusions - Conclusions reached are appropriate in circumstances - Any usual matters properly resolved

Answer 7

Client may outsource certain functions to another company – a service organisation: - Payroll - Receivables collection - Entire finance function - Internal audit

Answer 8

- Independence may increase reliability - Specialist skills – more reliable at processing information - Auditor may be able to place high degree of reliance on their reports as a result

Answer 9

- Auditor may not be able to obtain information - Auditor may not be allowed to test controls - Leads to difficulties in assessing accuracy and reliability - Could lead to a lack of sufficient appropriate evidence and modified audit report

Answer 10

Auditor’s responsibility to obtain sufficient and appropriate audit evidence in order to arrive at audit opinion. NO reference should be made in audit report regarding the use of others during the audit. It may be seen as some form of modifying statement, deflecting responsibility from auditor to a third party.

Answer 11

May not be any physical evidence to support them Prone to inaccuracy Subjective, prone to management bias – manipulation of accounts. ISA 540 Auditing Accounting Estimates – auditors need understanding of: - How management identifies transactions, events and conditions that give rise to need for estimates. - How management actually make estimates, including control procedures to minimise misstatement risk. Auditors should perform further procedures: - Review of outcome of estimates made in prior period - Consider events after reporting date that provide additional evidence about estimates made at year-end - Test basis and data upon which management made estimate (eg review mathematical methods) - Test operating effectiveness of controls over how estimates are made - Develop independent estimate to use as a point of comparison - Consider whether specialist skills/knowledge are required (eg lawyer)

Answer 12

Computer assisted audit techniques

Answer 13

Used to interrogate client’s system. Packaged (off-the-shelf) or purpose written to work on a client’s system. Main advantage – used to scrutinise large volumes of data (inefficient manually) Programs can then present the results to be investigated Specific procedures: - Extracting samples according to a specific criteria - Calculating ratios and benchmarking - Check arithmetical accuracy - Preparing reports - Stratification of data - Tracing transactions

Answer 14

‘Dummy’ data into client’s system to ensure that system correctly processes it and prevents/detects and corrects misstatements. Objective – test operation of application controls within the system. To be successful test data should include both data with errors built into it and data without errors. Examples of errors include: - Codes that do not exist (customer, supplier, employee) - Transactions above pre-determined amounts - Invoices with arithmetical errors - Submitting data with incorrect batch control

Answer 15

Data processed during a normal operational cycle Could interfere with operation of system or corrupt master files/standing data

Answer 16

Data processed at a point in time outside normal operational cycle. Only gives assurance that system works when not operating live. May not be reflective of strains system put under in normal conditions.

Answer 17

Creation of dummy ledgers and records to which test data is sent. Enables more frequent and efficient test data procedures to be performed live and the information can simply be ignored by client when printing out internal records

Answer 18

Requires purpose written audit programme to be embedded into client’s accounting system. Programme designed to perform certain tasks, advantage that it can be turned on and off at auditor’s wish throughout year. Can identify peculiarities for final audit.

Answer 19

Planning and Risk Assessment Efficient but limited in terms of cost and availability of resources. Software has to be purchased or designed. Accountancy firm needs individuals with IT expertise to perform tests. Client permission. Use must be considered at planning phase Primary function – test IT application controls. Results of this – assess control risk and design further audit procedures. Further Audit Procedures (1) Selecting sample selections. For example, identification of: Receivable, payable or inventory balances over certain age Individually material assets and liabilities Transactions over agreed limits Changes to standing data Credit balances within receivables and debit balances in payables Non-current asset purchases over certain amount Further Audit Procedures (2) CAAT’s can also be used to perform certain substantive procedures: Ratio calculations Re-calculation of depreciation Recalculation of employee payroll data Confirmation of batch totals to individual records Casting of ledger balances.