SFQs Flashcards
Ethical issue - confidentiality + procedures
Confidentiality
• Conflict of interest for audit firm
• Data and Lodge may perceive threat of disclosure/use of information
• Difficult to act in best interests of both clients
Procedures
- Ensure staff are aware of confidentiality issues
- Staff to certify they are aware of procedures
- Obtain informed consent of both clients/inform both clients
- Use different partners and teams
- Independent review of arrangements for ensuring confidentiality maintained
- Chinese walls
Request for branch accounts
- Jason is a shareholder only, not a director
- Has no right to information other than annual report
- Should be referred back to company
- Seek permission from directors to release
- Has right to raise question at AGM
Mangement threat + Self Review
¥ Management threat
¥ Self review threat
¥ Firm may be susceptible to pressure for fear of losing work
¥ Lack objectivity when checking VAT
¥ Different staff should be used for VAT work and audit
Conflict of interest + advocacy
¥ Conflict of interest
¥ Advocacy threat
¥ Either company may be uncomfortable with arrangement and exert pressure
¥ Beta could exert pressure re your knowledge of customer
¥ Separate audit partners
¥ Separate audit teams
Ethical issues - overdue fees
o Overdue fees constitute a self interest threat
o Issue of unqualified report this year may increase chance of collecting overdue fees
o If not settled and fees are significant or in dispute then consider resigning
o If do not resign apply appropriate safeguards such as review by independent partner
o Notify ethics partner
o Consider whether it is appropriate to invite clients to as many corporate events to ensure independence maintained – hospitality
Partner is a trustee of previous client
- Document considerations in continuing to act/annual reappointment consideration
- Apply safeguards to mitigate familiarity threat and self interest threat
- Former trustee should not be individual responsible for the audit
- Second partner review
- Ensure fees do not exceed recommended threshold
Limitations of IC
Cost - The cost of an internal control may exceed the benefit that the IC would yield.
Collusion - Controls could be overridden by two or more people working/colluding together to perpetrate fraud.
Human element - Most controls are only as good as the people who implement them. If a human makes a mistake implementing a control (e.g. keeping a password secure), the control may be rendered ineffective.
Unusual transaction - Controls are there to deal with the usual transactions of a business. An unusual transaction may not fit into the normal routines and hence may not be detected or prevented.
Documentation from the company for Audit plan to understand the company
- Minutes of meetings
- Statutory material filed at Companies House, etc
- Prior years’ accounts
- Budgets and forecasts
- Management accounts and reports
- Policy and strategy documents
- Accounting, procedures and controls manuals
- Internal audit reports
- Organisation charts/job descriptions
- Marketing and sales literature
Five elements
- Three parties (Responsible party e.g. the directors; practitioner e.g. the external auditor; user (e.g. an audited company’s members)
- Subject matter (e.g. the Financial Statements)
- Suitable criteria (e.g. International Financial Reporting Standards)
- Sufficient and appropriate evidence (any audit evidence provided)
- Written report (e.g. the audit report)
Helping audit client to design controls
The ethical threat would be one of self-review (Ethical Standard 1) as we will be auditing the subsidiary after being involved in the design of the controls.
- a company with a 30 November 2011 year end, you have discovered that one purchase invoice is dated 1 December 2011, but gives a delivery date of 30 November 2011. What additional work would you carry out in relation to this matter?
- Examine GRNs to determine date of delivery
- If pre-year end ensure that included in purchase ledger pre-year end
- If post-year end ensure that included in purchase ledger post-year end
- If pre-year end ensure that it is in closing stock, or was used pre-year end
Only 22 of the sample of 30 circularised have replied. What alternative audit procedures could you carry out for those debtors who did not reply?
- Check after date cash received
- Agree this to the bankings/bank statement
- Agree to the goods despatched note/contract
- Telephone/fax the debtors who have not replied
- Inspect correspondence for evidence of disputed amounts
Identify FOUR documents that would be included within an audit firm’s Permanent audit file for a client and set out the requirements for custody and retention of documentation.
Answers could include:
• Original engagement letters
• Memorandum and articles of association (both must be identified)
• Previous years’ signed financial statements
• History of the client
• Legal documents that may include prospectuses, sales agreements
• Process notes
Answers could include:
• ICAEW requires that firms have a document retention policy
• Registered Auditors required to keep all working papers required by auditing standards for at least six years from end of accounting period to which they relate
• Confidentiality of assurance work must be maintained and hence a firm must have good security procedures over working papers (paper documents to be secured in locked premises; electronic working should be protected by electronic controls)
- Identify and explain TWO assertions that relate to the testing of trade and other payables.
Completeness- Ensuring that all liabilities are included
Rights and obligations - Confirming that all liabilities are bona fide owed by the company.
- Gonzo Ltd provides a warranty at the point of sale to its customers. Under the terms of sale, the company undertakes to repair or replace resulting from manufacturing defects that become apparent within five years from date of sale. Accordingly, a warranty provision is recognised in the accounts based upon past experience of warranty claims to date. List the audit procedures you would perform in order to form a view on the amount of the provision.
- Review terms of warranty agreement
- Ascertain basis of calculation and check calculation
- Ascertain warranty costs incurred in year
- Ascertain costs incurred in post year end period
- Compare previous experience of costs incurred and provisions made
- Enquire and confirm any significant changes in product sales mix
- Enquire whether any significant quality problems with particular products
- Analytical review of year on year figure
- Management representation in respect of adequacy of provision
Why never Absolute assurance
• Audit work is permeated by the exercise of judgement
- Nature, timing and extent of audit procedures
- Drawing conclusions based on evidence
- Materiality/risk assessment
• Inherent limitations of any audit
- Impracticality of examining all items
- Inherent limitations of any accounting and control system
- Possibility of collusion or misrepresentation
- Most audit evidence is persuasive rather than conclusive
Identifying audit risk
New client - therefore lack of CAKE
First time being audited - cannot rely on opening balances, no comfort
If takeover target - increased inherent risk - incentive to inflate or window dress the accounts - more work over cut off balances
Reduced time for reporting - reduced time for sufficient audit work
Objectives of the sales cycle
Sell to credit worth target
Susbtantive procedure question
Start with a a,e,i,o,u
Outstanding fee
Self interest threat there
Audit procedures - stock count
Floor to sheet - completeness
Sheet to floor - existence
Count instructions - ensuring that stock which is obsolete or slow moving/ damaged is being segregated. Movement of stock is stopped while counting etc.
Audit procedures - stock count
Floor to sheet - completeness
Sheet to floor - existence
Count instructions - ensuring that stock which is obsolete or slow moving/ damaged is being segregated. Movement of stock is stopped while counting etc. to ensure cut off is appropriately upheld.
Contingent fee - self interest
contingent fee not allowed
management decision required if there is judgement which is not allowed.
- Twigg is a family-owned garden centre which has become increasingly popular over several years. Inventory is counted annually. When items are sold, the cashier only has to enter the price into the cash till and not an item’s description.
Set out TWO resulting control weaknesses and their resulting consequences.
- Twigg has no record of what has been sold
- There is no information on what is popular
- Profitability per stock-line cannot be monitored
- There is heightened risk of stock-loss which will only be identified at the annual count involved in the use of accounting policies and estimates
a) Explain the benefits to both the bank and Royale Limited of obtaining the working capital report.
To the bank
• Reduces uncertainty as to reliability of the information/increases credibility
• Reduces the risk of management bias/independent
• Enables bank to determine risk in advancing more money to Royale
To Royale
• Enables them to obtain the overdraft which may not be possible without the report
Limitations
To the bank
• Not all receivable and inventory balances will be looked at by your firm
• Possibility of collusion or misrepresentation of the balances being reported
• Evidence likely to be persuasive rather than conclusive/assurance not absolute – reasonable or limited level of assurance depending on scope of work
• Report may not highlight full extent of problem/lack of sufficient information
• Inherent limitations of accounting system/integrity of data
Control objectives of sales cycle
¥ Client only deals with credit-worthy customers/with good credit ratings ¥ Credit limits/terms of customers are authorised and reviewed ¥ Good despatches Ð valid Ð accurately recorded ¥ Invoices are raised Ð for all despatches Ð are accurate
GP Q = Revenue - COGS/ Revenue
1) Closing inventory understated - Would reduce gross profit % • Yes – could explain fall
(2) Revenue decline irrelevant • No – maintained prices = same gross profit %
(3) Increased purchases matched by
closing inventory increase • No – no effect on gross profit %
High inherent risk
• Areas of estimate or judgement
• Company is seeking to raise finance providing an incentive to misrepresent the financial statements
• Company is a potential takeover target (incentive as above)
• Directors are motivated to reach profit targets due to bonus or analyst expectations
• Areas of complexity and number of unusual transactions within financial statements
• Industry in which entity operates (e.g. Accounting practices)
• Management integrity, experience, competence
• Susceptibility of entity to economic changes/Government policy
• Reporting pressures
o Timelines, existence of loan covenants dependent upon Financial Statements
Purpose of analytical procedures at planning stage
- Obtain an understanding of the entity and its environment
- Identify any aspects of the entity of which auditor was not aware
- Assist in risk assessment
- Identify material aspects of the financial statements
- Assist in determining the nature, extent and timing of audit procedures
- Identify unexpected changes on the prior year
- Assist in preparing budgets and allocation of staff resources
Oral authority
- Increased risk of fraud/collusion
- Payables ledger clerks could add false suppliers leading to loss to company
- Clerks could add unauthorised suppliers leading to substandard goods/bribes
- And goods being purchased at sub-optimal prices
- Written authority of financial controller for new suppliers
- Company should maintain a list of authorised suppliers
- Access to computerised master file should be protected by password
No printout
• Incorrect details may be input and as no review of amendments could result in:
– Payments not being received by suppliers
– Loss of supplier goodwill
• Printout to be taken of all amendments
• Financial controller should check a printout of amendments to written authority
• Printout should be signed as evidence of review
Inherent limitations of Internal control risk
Human element – deliberate error with intention/mistake by accident/integrity of personnel responsible to implement
Collusion – two or more people working together to override a system of internal control. The more people involved in a transaction from start to finish the lower the level of collusion.
Cost – cost of control needs to be less than the benefit saved from the control being in place
Unusual transactions – controls are generally for routine transactions which are unlikely to capture every eventuality
Inherent limitations of Audit risk
Audit does not test everything – done on a sample basis
Reliance is placed on controls which they themselves have (inherent) limitations
Evidence is persuasive rather than conclusive
Auditors not (necessarily) present in accounts production from start to finish
Audit staff may collude/misrepresent matters
Company documentation re background information
Minutes of meetings Statutory material filed at Companies House, etc Prior years’ accounts Budgets and forecasts Management accounts and reports Policy and strategy documents Accounting, procedures and controls manuals Internal audit reports Organisation charts/job descriptions Marketing and sales literature
Work you would perform in determining whether or not you could rely on the controls
¥ Whether the controls have operated throughout the year.
¥ Whether the control has been evidenced and tested
¥ Whether reliance on the control is relevant to the validity of an assertion
¥ Whether it is cost effective to test the control
¥ Whether the results of tests of controls are satisfactory
Cut off assertion
- Cut-off is a financial statement assertion and is a term which confirms that transactions are accounted for in the (accounting) period to which they relate.
Potential examples
• Sales:
o An invoice may be raised and a sale recognised but the goods may not have been despatched.
o Goods may have been despatched but an invoice not raised.
o Credit notes raised in new year relating to previous year without sufficient and valid reason.
• Alternatively, accounts receivable:
o Cash received by a receivable may not have been posted to a receivables account, thereby overstating receivables.
Invoice raised but posted to receivables ledger in incorrect period
