Week 9 Part 2 Flashcards
what is an internal audit?
an independent, objective assurance activity to evaluate a company’s controls to ensure they’re working effectively
how are internal audits independent?
because internal auditors have no operational input
they ONLY perform checks
are internal audit teams compulsory?
no
however, they’re expected in larger entities
what are the objectives of internal/external auditors?
internal auditors objective is to help management improve operations
external auditors’ objective is to provide an opinion on the truth/fairness of the FSs
who do internal/external auditors report to?
external auditors report to the shareholders and it’s publicly available
internal auditors report to management & those charged with corporate governance
who appoints the internal/external auditors?
shareholders appoint external auditors (independent)
management appoint internal auditors (can be employees or outsourced)
what is the scope of the work for internal/external auditors?
external auditors only verify truth/fairness of FSs
internal auditors’ work is wide in scope and do whatever management need
what does the role of an internal auditor consist of?
- risk identification
- help with corporate governance (decision making)
- advise on effectiveness of controls
- prevention/detection of fraud
- value for money (checking money’s spent in the right places)
- check compliance with laws & regulations
- no limitation on scope of work
limitations of internal audit?
internal auditors are often employees, and may censor their opinions to avoid upsetting management
risk of familiarity
can internal audit duties be outsourced?
yes
advantages of outsourcing internal audit responsibilities to 3rd parties?
- complete independence
- broader range of expertise
- legally responsible for their actions
- more focus on cost efficiency
- better market software/resources
- can employ on flexible basis
disadvantages of outsourcing internal audit responsibilities to 3rd parties?
- lack intimate knowledge of the system
- potentially high fees
- conflict of interest if internal auditor is also external auditor
- loss of flexible availability as they’re not employees
- lack of control over work quality
- pressure on independence
what various sections of the accounting system require audit testing?
- receivables
- payables & provisions
- inventory
- bank & cash
- share capital & reserves
- NCAs
- estimates
what must an audit procedure contain?
an ACTION
applied to a SOURCE
to achieve an OBJECTIVE
must every audit test meet at least one FS assertion?
yes
6 P&L FS Assertions
- occurrence
- completeness
- cut off
- presentation
- accuracy
- classification
6 SOFP FS Assertions
- completeness
- presentation
- classification
- rights & obligations
- accuracy & valuation
- existence
what do auditors test for overstatement?
assets and income
what do auditors test for understatement?
liabilities and expenses
directional testing?
knowing whether you’re performing audit tests to check for over/understatement
what FS assertion does testing for understatement involve?
completeness
if FSs show the complete, full picture, not missing anything
what FS assertions do testing for overstatement involve?
existence, valuation & accuracy, occurrence, rights & obligations
understatement =
overstatement =
understatement = occurs if a transaction occurs but isn’t recorded
overstatement = occurs if a transaction is recorded, but didn’t occur
how does an auditor test for overstatement and understatement?
overstatement - select sample from FS and trace to source documents
understatement - select sample from source documents and trace to FS
what is the purpose of auditing bank & cash?
to check how much cash the company has at the bank
testing to verify existence and valuation
what are the sources of evidence when auditing bank & cash?
- bank confirmation letter
- bank statement
- cash book
- bank reconciliation
what does a bank reconciliation consist of?
it matches figures in cash book/FS to figure in bank statement
- date
- balance per cash book/FS
- ADD unpresented cheques
- LESS outstanding lodgements
- difference
- balance per bank statement
unpresented cheques and outstanding lodgements?
cash paid out or cash received in cash book that hasn’t yet been processed due to time required for procession
5 Steps of the audit procedures for bank & cash?
1) obtain bank reconciliation
2) ensure bank reconciliation adds up
3) match ‘cash book’ balance to cash book
4) match ‘bank statement’ to bank statement
5) prove unpresented cheques & outstanding lodgements were due to genuine time differences by showing post/pre-year end bank statement
why should an auditor review cash book and bank statement for unusually large transactions around the year end?
sign of window dressing
window dressing = manipulation of FSs
what does auditing non-current liabilities (NCL) consist of?
usually only long term bank loans
what FS assertion does auditing NCLs relate to?
verifies completeness
testing for understatement
what are the sources of evidence when auditing NCL?
- bank confirmation letter
- loan statement
- bank agreement
- cash book
8 Steps of audit procedures for NCLs?
1) obtain summary of outstanding loans & match it to FSs
2) agree outstanding loans to bank confirmation letter
3) reassess split between NCL and CL
4) inspect bank confirmation letter for loans not included in FSs
5) inspect bank confirmation letter for details over security
6) inspect cash book for loan repayments made
7) inspect loan agreement for restrictive covenants
8) recalculate interest charge and interest accrual
restrictive covenant?
security?
restrictive covenant = rules as part of the loan which restricts the activities of the borrower
security = if a loan isn’t repaid/defaulted, lender has the right to own an asset belonging to the borrower
paid in arrears?
paid in advance?
in arrears = paid afterwards
in advance = paid beforehand
