topic 6 audit approach - procedures Flashcards
auditors need to collect sufficient and appropriate evidence
sample sizes will need to be will need to be increased if there is a greater ROMM or expected error
Appropriate evidence should be both reliable (see evidence collection techniques table next card) and relevant /relate to FS (assertions next card)
analytical procedures- evaluation of financial info through the study of plausible relationships among both financial and non financial data
Evidence collection techniques
Analytical procedures :
+can perform even if documents no yet available
+Efficient as doesn’t require detailed tests of lots of items
- limited by any weakness in the underlying
Enquire:
+may be the only way to audit judgemental issues (should be backed up with written evidence)
-Weakest form of evidence
Inspect:
+third party documents are a strong form of evidence
-weakest form of evidence
Observe:
+good for inventory counts
-Only gives evidence that the procedure is being performed correctly when the auditor is watching
Recalculate/reperform:
+Auditor created evidence is a strong form of evidence
-can be time consuming
how to write procedure question
1) start with verb (e.g. compare, inspect, verify, trace , enquire, recalculate , obtain, review)
2) state piece of evidence you want to look at e.g.:
A- Assets, aged analysis
B- Bank statements, board minutes, budget comparisons
C- Correspondence, contracts, cut off tests, credit notes
D-Documents for the scenario, direct confirmations
E- Events after the reporting date, experts
Other-invoices, written representations
3) state why you want to see the piece of evidence (can use the phrase ‘to ensure that’ and the assertions listed on the next page) or a follow up action (e.g. investigate any variances).
assertions - reasons why
Balances (SOFP)
Completeness Rights and obligations Accuracy/allocation Valuation Existence
Transactions (P/L)
Completeness Occurence Classification Cut off Accuracy
types of audit procedure
Audit procedures can be ‘Tests of control’ or ‘substantive tests’
substantive has 2 sub categories:
Tests of detail
Tests of control
e.g. audit payroll-objective tom establish whether any fraud (due to fictitious employees) has occurred
Test of control: inspect a sample of joiners forms and confirm form has been completed and signed by a member of HR and not someone from payroll
substantive procedures: calculate an expectation for payroll by taking last years figure and adjusting for an increase in staff numbers and pay rises. compare to actual and investigate any variances
test of detail: select a sample of employees from the payroll and obtain copies of their passport and employment contract to confirm they are a genuine employee.
good v bad procedures
good
Inspect a sample of invoices and agree the cost of inventory purchased.
Or
Agree cost of inventory to supporting documentation e.g. purchase invoice.
bad
Enquire how stock is valued - obtain invoices and recalculate stock value ensure it is complying
with accounting policies i.e. FIFO. Enquire how staff at retail stores are suitably qualified to undertake a stock take - have they been through training?
good
Review post year-end sales of inventory and identify items which have been sold at a loss.
Or
Review aged inventory report and investigate any old or slow moving items.
Or
Compare inventory days year on year and investigate any unusual variances.
BAD
Testing the accuracy and reasonableness of the inventory figures, checking if goods that are perishable are valued accordingly and correctly, and not at their cost of NRV if they are unable to be sold.
GOOD
Observe the inventory count and ensure that instructions are being followed and any damaged items are identified.
BAD
Testing over the inventory figures and recalculation of how inventory is valued and if this is appropriate and reasonable.
GOOD
Trace a sample of inventory from stock listing to the shelves in the warehouse to ensure it exists.
Trace a sample of inventory from the shelves in the warehouse to the stock listing to ensure its complete.
BAD
Generic statements such as: • Discuss with management • Inspect the asset • Check the invoice • Get written representation
procedures when relying on the work of someone else
matter-key issue-example of a procedure
STRIP
Scope-has the work been performed in accordance with IFRS- inspect engagement letter/instructions to of the expert to confirm an appropriate measurement bases have been used
Technical competence - is the expert qualified/up to date? - review the expert’s qualifications and training to ensure they are able to perform work.
Resources- has the work been performed properly- inspect the report produced by the expert to ascertain if the work performed was appropriate and detailed
I- is the expert independent (they may have incentive to overstate results if they’re not)- obtain list of shareholders and confirm that the expert is not a shareholder
Professionalism- is the expert taken seriously/do they have the power to change things- review board minutes to identify what actions have implemented following thr experts suggestions
group audits - definition + component auditor + component materiality
Group audit- audit of FS of the group. Group auditor has sole responsibility for the group opinion
Component auditor- auditor who performs work on the financial information of the component for the group audit
component materiality- materiality for the component determined by the group auditor
note- the component auditor may also carry out the statutory audit of the component, but through a separate engagement
group audit classifications
classification- reason for classification- scope of work- ISA 600 ref
Significant - Individually large - full audit using component materiality- Para 26
Significant - Significant ROMM - full audit using component materiality or audit the risky accounts - para 27
Non-significant - Individually financially less significant with no significant risks- analytical review procedures at group level-para 28-9
additional risks to be considered for a group audit ISA 600 appendices 2&3 -> matters to be communicated by component auditor to group auditor ISA 600 para 41+ appendix 4-> matters to be communicated by group auditor to component auditor ISA 600 para 40 & appendix 5
completeness of intragroup transactions - confirm compliance with instructions - timetable and dates of planned visits
timeliness, accuracy and completeness of financial info from components- understand instructions - work to be performed
common (or not) IT systems-will cooperate- ethical requirements
consistent policies/group wide programmes-allow group auditor to be involved in work - component materiality
risk of incomplete consolidation adjustments (e.g. goodwill , nci , impairments, FV adjustments)
group structure - understand ethical requirements - significant risks
complex transactions- understand ISAs-timely communications
