Professional Documents
Culture Documents
Paper AAA
The book contains definitions and explanations from multiple sources including
both online and offline resources. This is a summarised presentation of the subject
content from various publishers and this note must be used only for revision
purpose and is not a substitute for complete textbook.
In order to get in-depth idea and more elaborated explanations on each of the
topics, a student is advised to attend the lecturing sessions too.
alanbiju31@gmail.com
Facebook / Alan Biju Palak
ACCA AAA
Draft
ACCA AAA
Section A (50 Marks)
- Planning
- Risk assessment
- Gathering evidence
- Ethical and professional considerations
Kindly note that, this note doesn’t contain an index page as the order of
the areas and topics will be on the basis of the relevant lecturing
sessions.
Money laundering
Money laundering is the process by which criminals attempt to conceal the true origin and
ownership of the proceeds generated by illegal means, allowing them to maintain control
over the proceeds and, ultimately, providing a legitimate cover for their sources of
income.
(1) Placement
(2) Layering
(3) Integration
'Tipping off' means to carry out any action that may make suspected money launderers
aware that they are under investigation, or prejudicing the outcome of an investigation.
• Enhanced record keeping and data protection systems, policies and procedures
Firms must appoint a Money Laundering Compliance Principal (MLCP) and Money
Laundering Reporting Officer (MLRO), to receive internal suspicious activity reports and
assess whether a suspicious activity report should be made to the appropriate regulatory
body.
Enhanced due diligence procedures include examining the background and purpose of
the transaction and increased monitoring of the business relationship.
And for the clients presenting a lower risk for money laundering, simplified due diligence
may be carried out.
Reporting
• A person in the organisation is nominated to receive disclosures (usually an
• Where a disclosure is made to the MLRO, they must consider it in the light of any
relevant information which is available to the organisation and determine whether
it gives rise to suspicion.
(2) the duty to report suspicions of money laundering to the appropriate authorities is
required by law.
Disclosure in bad faith or without reasonable grounds would possibly lead to the
accountant being sued.
The Financial Action Task Force (FATF) is an international body that promotes policies
globally to combat money laundering and terrorist financing.
• Professional competence and due care: Members have a continuing duty to maintain
professional knowledge and skill at a level required to ensure that a client or employer
receives competent professional service based on current developments in practice,
legislation and techniques. Members should act diligently and in accordance with
applicable technical and professional standards when providing professional services.
• Professional behaviour: Members should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
1. Self-interest threat
5. Intimidation threat
Cool-off period
If the individual has served the audit client as a key audit partner for period of five
cumulative years or less when the client becomes a public interest entity, the number of
years the individual may continue to serve the client in that capacity before rotating off
And incase if the partner served a period of six or more cumulative years, maximum of
two additional years before rotating off the engagement.
Audit Planning
ISA 330 The auditor's responses to assessed risks states that the objective of the auditor is
Overall responses include emphasising to the audit team the need for professional
scepticism, assigning additional/alternative staff to the audit, using experts, providing
more supervision on the audit and incorporating more unpredictability into the audit (ISA
330: para. A1).
The evaluation of the control environment that will have taken place as part of the
assessment of the client's internal control systems will help the auditor determine whether
they are going to take a substantive approach (focusing mainly on substantive
procedures) or a combined approach (tests of control and substantive procedures) (ISA
330: para. A3).
Risk assessment
ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment requires auditors to perform the following
(minimum) risk assessment procedures:
• Observation
• Inspection
For any queries - alanbiju31@gmail.com Page 13
ACCA AAA
Draft
Types of risk
Audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.
Audit risk is a function of the risk of material misstatement and detection risk.
Control risk is the risk that a misstatement that could occur in an assertion about a class
of transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, or
detected and corrected, on a timely basis by the entity's internal control.
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk
to an acceptably low level will not detect a misstatement that exists and that could be
material, either individually or when aggregated with other misstatements.
The only way in which an auditor can reduce the overall audit risk is by adjusting the
detection risk.
Business Risk
• Financial risks
• Operational risks
• Compliance risk
Risk of material misstatement is the risk the financial statements are materially misstated
Tendering
Tendering is the process of quoting a fee for work before the work carried out.
Firm has stopped offering audit Dissatisfied with Auditors work Audit firm ceases trading
services
• These descriptions may not be used in the registered names of companies. For
example you may not set up a company called John Smith Certified Accountant
Ltd.
Practicing description
• An accountancy firm may describe itself as a ‘firm of Chartered Certified
Accountants’, or a ‘firm of Certified Accountants’, or an ‘ACCA practice’ provided
that:
• – at least half of the partners (or directors) are ACCA members, and
• – these partners (or directors) control at least 51% of the voting rights under
the firm’s partnership agreement (or constitution).
• A firm in which all partners are ACCA members may use the description ‘Members
of the Association of Chartered Certified Accountants’ on its professional
stationery .
• a practice name should not run the risk of being confused with the name of another
firm.
• a sole practitioner should not add ‘and partners’ to the name under which he
practices.
Fees
• Members are entitled to charge a fair and reasonable fee for their services.
• The fee charged should include the recovery of any expenses properly incurred by
the audit staff in the course of the engagement.
Factors to consider
Members are entitled to charge a fair and reasonable fee for their services. This
The ACCA’s position is that fees should not be charged on a percentage, contingency or
similar basis, low balling and referral fees are also not encouraged.
Alternatively, the accountancy firm can set an hourly rate for each grade of staff and
invoice the client for the number of hours involved in the assignment.
A firm may quote whatever fee is deemed appropriate however, the firm must always
ensure that the work is performed in accordance with professional standards and that the
audit team have the appropriate expertise and experience taking into consideration the
nature, size and complexity of the audit engagement. There for the the quality of the
engagement should not be reduced.
If the audit firm sends one letter relating to the group as a whole, it is
recommended that the firm should identify in the letter the components of the group for
which the firm is being appointed as auditor.
Transfer of information
- Once a new accountant has been appointed, or on otherwise ceasing to hold, Office, the
outgoing firm should return all books and papers belonging to the former client which
are in the former accountant's possession, whether the new accountant or the client has
requested them or not, except where the former accountant claims to exercise a lien or
other security over them in respect of unpaid fees.
- In order to ensure continuity of treatment of a client's affairs, the outgoing firm should
provide the new accountant with all reasonable transfer information (last set of
approved accounts and detailed trial balance) that the new accountant requests, free of
charge.
• Ethics: Firms comply with ethical requirements such as the Code of Ethics.
• Acceptance and continuance: Only suitable clients and engagements are accepted
and retained.
• Human resources: A firm must have policies and procedures in place to ensure an
appropriate engagement partner is assigned to an engagement.
The engagement partner should then ensure the right people are
allocated to the engagement team.
• Monitoring: Evaluating the quality control procedures to ensure they are effective.
Therefore proper monitoring should be performed to ensure -
- Quality control procedures and practices are adequate
- Quality control procedures and practices are relevant
- Quality control procedures and practices operating effectively
The engagement quality control reviewer should have the technical qualifications to
perform the role, including the necessary experience and authority, and should be
objective.
Liability to the client arises from contract law. The company has a contract with the
auditor, the engagement letter, and hence can sue the auditor for breach of contract if the
auditor delivers a negligently prepared auditor's report.
• – When carrying out their duties the auditor must exercise due care and skill.
• – Generally, if auditors can show that they have complied with generally accepted
auditing standards, they will not have been negligent.
In the tort of negligence, the plaintiff (i.e. the third party) must prove that:
The auditor will have exercised due professional care if they are
adequately trained, complied with the terms and conditions of the engagement and
complied with the most upto date professional standards and ethical requirements.
- Insurance
Professional indemnity insurance (PII) is insurance taken out by an accountant
against claims made by clients and third parties arising from work that the
The related subsidiaries, associates, joint ventures and branches etc of the group are referred
to as components.
The audit firms responsible for the audits of the components are referred to as the
component auditors.
The group auditor is responsible for establishing an overall group audit strategy and plan
(in accordance with ISA 300 Planning an Audit of Financial Statements). The group
engagement partner is ultimately responsible for reviewing and approving this.
• Where component auditors are involved, the engagement partner shall evaluate
whether the group engagement team will be able to be involved in the work of the
component auditors.
(ISA 600,12)
Significant components
A significant component is a component identified by the group engagement team that is
either: of individual significance to the group, or likely to include significant risks of
material misstatement to the group financial statements. [ISA 600, 9m]
The benchmark is a matter of auditor judgment. [ISA 600, A5] ISA 600 gives an example
that an auditor may consider a component to significant if it exceeds 15% of the chosen
benchmark, however a different auditor may use a higher or lower amount.
• Discussing with the component auditor the susceptibility of the component to material
misstatement. [ISA 600, 30b]
• Reviewing the component auditor's documentation of identified risks of material
misstatement. [ISA 600, 30c]
• Performing risk assessment procedures themselves. [ISA 600, 31]
- Completion
The group auditor must review the work of the component auditor to ensure it is sufficient
and appropriate to rely on for the purpose of the group auditor's report.
Subsequent events, going concern and final analytical procedures will need to
be considered for the group in the same way as they are considered for single entity audits.
Reporting
Deficiencies in the controls identified by either the group audit team or component auditors should
be reported to the management of the group.
Letter of support
If a subsidiary has going concern issues the parent company may offer
financial support to enable it to continue trading for the foreseeable future. If
this is the case the directors must give the component auditor a letter of
support which confirms their intention to support the subsidiary. This is also
known as a comfort letter.
The group auditor must consider the impact of the going concern
issues for the group as a whole. The parent company must disclose this
guarantee of assistance in their financial statements.
Joint Audits
This is when two audit firms are appointed to provide an opinion on a set of financial
statements. They will work together planning the audit, gathering evidence, reviewing the
work and providing the opinion.
Before accepting a joint audit, the firm must consider the level of risk associated with
issuing a report alongside the other firm.
The auditor's report will be signed by both firms and they will be jointly responsible if the
report is wrong.
The firm should consider the experience and quality of the other firm to ensure they are
If accepted, an engagement letter should be signed and the planning can commence which
will involve agreeing an acceptable and fair division of the workload.
Transnational Audits
Transnational audit means an audit of financial statements which may be relied upon
outside the audited entity's home jurisdiction.
The differences between a 'normal' audit, conducted within the boundaries of one set of
legal and regulatory requirements, and a transnational audit are largely due to variations
in:
• Auditing standards
• Regulation and oversight of auditors
• Financial reporting standards
• Corporate governance requirements.
Related Services
Assurance engagements
• Review of interim financial statements
• Examination of prospective financial information
• Social and environmental information review
• Due diligence review
Assurance engagements
An assurance engagement is one in which:
• (a) A three party relationship. The three parties are the intended user, the
responsible party and the practitioner.
• (b) A subject matter. This is the data to be evaluated that has been prepared by
the responsible party. It can take many forms, including financial performance.
• (e) An assurance report. A written report containing the practitioner's opinion is
issued to the intended user, in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.
• A direct engagement
This is where the underlying subject matter has been measured and evaluated
by the practitioner, and the practitioner then presents conclusions on the reported outcome
in the assurance report (ISAE 3000: para.12).
Levels of Assurance
Reasonable assurance
The objective of a ‘reasonable assurance engagement’ is to
obtain sufficient appropriate evidence to conclude that the subject matter conforms in all
material respects with identified suitable criteria. The accountant expresses their
conclusion in a positive form, giving an opinion on whether the subject matter is free
from material misstatement.
Negative/limited Assurance
The objective of a ‘limited assurance engagement’ is
to obtain sufficient appropriate evidence to be satisfied that the subject matter 'appears
plausible' in the circumstances. The accountant expresses their conclusion in a negative
Procedures
Procedures
• Analytical procedures
• Enquiry
• Inspection
• Written Representation
• Identify the goals of the organisation in relation to social and environmental matters
• Measure the performance
• Assess whether the goal has been achieved
Impact in audit
A company's social and environmental obligations may lead to liabilities that must be
recognised in the financial statements.
Possible areas that might lead to the risk of material misstatements include the following:
• Provisions
• Contingent liabilities, Impairment of asset values
• Accounting for capital or revenue expenditure on cleaning up the production process or
to meet legal or other standards.
• Product redesign costs.
Planning an engagement
• Understanding and agreeing the scope of the engagement,
• Obtaining an understanding of the entity.
• Considering the appropriateness of the KPIs chosen in the light of this
understanding, ensuring the KPIs chosen represent the priorities of the company.
• Evaluating the KPIs to ensure that each measure is quantifiable and to ensure that
evidence will be readily available to support the stated KPI.
Procedures
The same principles for gathering evidence apply for any type of assignment. The
assurance provider should obtain sufficient appropriate evidence to be able to form a
conclusion on the subject matter. Procedures will include:
Performance information
Performance information is information published by public sector bodies regarding their
objectives and the achievement of those objectives.
The external auditor may have a responsibility to report on
this information to the users of such information.
Due diligence
Due diligence is a fact finding exercise and is usually conducted to reduce the risk of poor
investment decisions.
Levels of assurance
Procedures
• Enquiries of relevant parties
• Analytical procedures
• Inspection of documents and records.
Forensic audits
Forensic audit refers to the specific procedures within a forensic investigation in order
to obtain evidence, by performing analytical procedures and substantive procedures.
Since the forensic audit is an agreed upon procedure, no assurance is provided for the
engagement and the practitioner will perform the procedures agreed with the client.
• Due diligence
- Why the company is not using their existing firm of accountants .
- whether the target company's employees know about the acquisition.
- The intended use of the information, such as internal management or external users.
- Whether the information will be for general or limited distribution.
- The nature of the assumptions.
-
• Forensic Audit
- Acceptance level of risk by the practitioner
- The practitioner must ensure that they can comply with the ethical requirements.
Reporting
Assurance engagements
• Title – clearly indicating the report is an independent assurance report.
• Addressee – identifies the intended user.
• Identification and description of the subject matter including period of the
information, name of the entity to which the subject matter relates.
• Identification of the criteria.
• Description of any significant, inherent limitations.
• Restriction on the use of the report to specific users.
Audit engagement(Specific)
• Title
• Addressee
• Auditor's opinion
• Basis for opinion
• Key audit matters
• Explanatory paragraph
• Other information
• Responsibilities of management
• Auditors responsibilities
• Other reporting responsibilities
• Name of the engagement partner
• Signature
• Auditor's address
Forensic Audit
• a summary of the procedures performed
• a summary of the results of procedures
• any limitations in the scope of the engagement
International
Standards
Objectives of an audit.
ISA 200: para. 11
In conducting an audit of financial statements, the overall objectives of the auditor are:
• To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby enabling
In other words,
Professional Judgement
Professional judgement is the application of relevant training,Knowledge
and experience in making informed decision about the appropriate
course of action in the circumstance of the audit engagement.
The objective of the auditor is to accept or continue an audit engagement only when the
basis on which it is to be performed has been agreed, through:
• Establishing whether the preconditions for an audit are present, and
- For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation;
- For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error;
- To provide the auditor with:
• Access to all information of which management is aware that is relevant to the
preparation of the financial statements;
• Additional information that the auditor may request from management for the
purpose of the audit; and
• Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
If any of these conditions does not exist, the auditor shall not accept the audit unless
legally required to so do (ISA 210: para. 3).
In addition, the auditor should not accept the engagement if those charged with
Performance materiality
The amount or amounts set by the auditor at less than the materiality level or
levels for particular classes of transactions, account balances or disclosures’.
The sufficiency means the quantity of the evidence and the appropriateness means the
• Enquiry
• Inspection
• Observation
• External confirmations
Audit Procedures
Tests of controls are designed to check that the audit client's internal control systems
operate effectively.
• Objectivity/Scope
The work of an internal auditor should not be mentioned in the auditors report.
• Direct assistance cannot be provided where laws and regulations prohibit such
assistance.
• The external auditor must not assign work to the internal auditor which
involves significant judgment, a high risk of material misstatement or with
which the internal auditor has been involved.
Factor to consider:
• The reasonableness of the findings and their consistency with other evidence.
User entity. An entity that uses a service organisation and whose financial statements are
being audited.
User auditor. An auditor who audits and reports on the financial statements of a user
entity.
Service auditor. An auditor who, at the request of the service organisation, provides an
assurance report on the controls of a service organisation.
Alternative options
• Obtaining a type 1 report or type 2 report from a service auditor, if available
Type 2 report : A report on the description, design and operating effectiveness of controls
at a service organisation.
Fraud is an intentional act, to deceive others and to obtain illegal or unjust advantage.
• (b) To obtain sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing
appropriate responses; and
• (c) To respond appropriately to fraud or suspected fraud identified during the audit.
Types of fraud:
• Fraudulent Financial reporting
• Misappropriation of Assets
• Dishonesty
• Need/Motivation
• Opportunity
Fraud should not be disclosed to any governing body unless it overrides the principle of
confidentiality by any legal or professional duty.
• Title
• Date prepared
• Preparer name and signature
• References to other schedules
• Purpose of the audit tests being performed
• Precise details of work performed
• Conclusion from the work performed
• Reviewers signatures and date of review
• Incase of any further modification, name of person who made the changes and the
reviewers name with reasons for modification.
An audit firm should retain the working papers for at least 5 years from the period of
preparation.
- Conclude on whether a material uncertainty exists about the entity's ability to continue as a
going concern.
Factors to consider
• Must be in clients letter head
• The date of the written representation must be as near as practicable to, but not after,
the date of the auditor's report on the financial statements and must be for all the
financial statements and period(s) referred to in the auditor's report
If the matter cannot be resolved, the auditor shall reconsider the assessment of the
competence, integrity and ethical values of management, and the effect this may have on
the reliability of representations and audit evidence in general.
• Re-evaluate the integrity of management and evaluate the effect this may have on the
reliability of representations and audit evidence in general
• Take appropriate actions, including determining the impact on the auditor's report
The person(s) or organisation(s) with responsibility for overseeing the strategic direction
of the entity and obligations related to the accountability of the entity.
The person(s) with executive responsibility for the conduct of the entity's operations.
. (i) A statement that the engagement team and others in the firm, the firm, and
network firms have complied with relevant ethical requirements regarding
independence
. (ii) All relationships between the firm and entity that may reasonably be
thought to bear on independence
. (iii) Related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level
• Implication in the FS
• Recommendations
Key audit matters. 'Those matters that, in the auditor's professional judgment, were of
most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with
governance' (ISA 701: para. 8).
An other matter paragraph is a paragraph included in the auditor's report that refers to a
matter other than those presented or disclosed in the financial statements that, in the
auditor's judgement, is relevant to users' understanding of the audit, the auditor's
responsibilities or the auditor's report (ISA 706: para. 7(b)).
• Those that provide evidence of conditions that existed at the year- end date (adjusting
events)
• Those that are indicative of conditions that arose after the year-end date (non-adjusting
The auditor shall perform procedures designed to obtain sufficient appropriate audit
evidence for all the events up to the date of the auditor's report that may require
adjustment of, or disclosure in, the financial statements have been identified .
The auditor does not have any obligation to perform procedures, or make enquiries
regarding the financial statements, after the date of the report
However, if the auditor becomes aware of a fact that, had it been known to the auditor at
the date of the auditor's report, may have caused the auditor to amend the auditor's report,
the auditor shall:
! Discuss the matter with management and those charged with governance.
! If the auditor's report has not yet been provided to the entity, the auditor shall
modify the opinion and then provide the auditor's report.
! If the auditor's report has already been provided to the entity, the auditor shall
notify management and those charged with governance not to issue the financial
statements before the amendments are made; but if the financial statements are
issued anyway, the auditor shall take action to seek to prevent reliance on the
auditor's report.
However, if the auditor becomes aware of a fact that, had it been known to the
auditor at the date of the auditor's report, may have caused the auditor to amend the
auditor's report, the auditor shall follow same steps as above.
The auditor shall also evaluate the degree of estimation uncertainty associated with an
accounting estimate. Where estimation uncertainty is assessed as high, the auditor shall
determine whether this gives rise to significant risks (ISA 540: para. 10–11).
• Trend analysis.
• Reasonableness test. This involves calculating the expected value of an item and comparing it
with its actual value.
(b) Evaluate the reliability of data from which the auditor's expectation of recorded amounts or
ratios is developed.
(c) Develop an expectation of recorded amounts or ratios and evaluate whether this is sufficiently
precise to identify a misstatement that may cause the financial statements to be material
misstated.
(d) Determine the amount of any difference that is acceptable without further investigation.
. (2) The auditor cannot obtain sufficient appropriate audit evidence on which to
base the opinion but concludes that the possible effects of undetected
misstatements, if any, could be material but not pervasive (ISA 705: para. 7(b)).
Adverse opinions
Disclaimers of opinion
An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate
audit evidence on which to base the opinion and concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material and
pervasive (ISA 705: para.10).
ISA 705 (para. 30) states that when the auditor expects to express a modified opinion,
the auditor must communicate with those charged with governance the circumstances
leading to the expected modification and the proposed wording of the modification in the
auditor's report.
For any queries - alanbiju31@gmail.com Page 69
ACCA AAA
Draft
Pervasiveness
Pervasiveness is a term used to describe the effects or possible effects on the financial
statements of misstatements or undetected misstatements (due to an inability to obtain
sufficient appropriate audit evidence). There are three types of pervasive effect:
. (a) Those that are not confined to specific elements, accounts or items in the
financial statements
. (b) Those that are confined to specific elements, accounts or items in the financial
statements and represent or could represent a substantial portion of the financial
statements
ISA 250 (para. 6) distinguishes the auditor's responsibilities in relation to compliance with
two different categories of laws and regulations:
. (a) Those that have a direct effect on the determination of material amounts and
disclosures in the financial statements
. (b) Those that do not have a direct effect on the determination of material amounts
and disclosures in the financial statements but where compliance may be
fundamental to the operating aspects, ability to continue in business, or to avoid
material penalties
For the second category, the auditor's responsibility is to undertake specified audit
procedures to help identify non-compliance with laws and regulations that may have a
material effect on the financial statements.
ISA 720 (para. 14) states that the auditor shall read the other information to identity
material inconsistencies with the audited financial statements. If a material inconsistency
is identified, the auditor shall determine whether the audited financial statements or other
information is misstated.
If the financial statements are materially misstated but management refuses to correct the
misstatement, the auditor shall modify the audit opinion (ISA 720: para. 20).
If the other information is materially misstated and needs to be revised but management
refuses, the auditor shall communicate this matter to those charged with governance and:
. The auditor's report will always include a separate Other Information section when
the auditor has obtained some or all of the other information as of the date of the
auditor's report
If the auditor concludes that there is a material misstatement of the other information, the
'Other Information' section is placed immediately after the basis of opinion section.
ISA 450 Evaluation of misstatements identified during the audit (para. 5) requires the auditor to
accumulate misstatements identified during the audit, other than those that are clearly trivial.
As part of their completion procedures, auditors shall consider whether the aggregate of
uncorrected misstatements in the financial statements is material and requires the auditor
to communicate uncorrected misstatements and their effect to those charged with
governance, with material uncorrected misstatements being identified individually.
The auditor shall request a written representation from management and those charged
with governance whether they believe the effects of uncorrected misstatements are
immaterial (individually and in aggregate) to the financial statements as a whole.
Documentation
ISA 450 (para. 15) requires the auditor to document the following information:
• The auditor's conclusion as to whether uncorrected misstatements are material and the
basis for that conclusion
The auditor need to obtain sufficient and appropriate evidence about whether comparative
information included in the financial statements has been presented in accordance with
the financial reporting framework.
Corresponding figures: where preceding period figures are included as integral part of the
current period financial statements (i.e. figures shown to the right of the current year figures). [ISA
710, 6b]
- If the prior period's auditor's report was modified and the a matter which gave rise to the
modification is unresolved, the current auditor's opinion will also have to be modified
either because of the effects on the current period or because of the effects of the
unresolved matter on the comparability of the current and corresponding figures.
- If a prior year adjustment has been put through to correct material misstatements arising
in the prior year, an unmodified opinion can be issued. An emphasis of matter paragraph
will be needed to draw attention to the disclosure note explaining the reason for the
restatement of the opening balances.
- If the prior period financial statements were audited by a different auditor, or were not
audited, the auditor may refer to this in an Other Matter paragraph.
2. Ordered plant and machinery, but half of the 2. Discuss with management as to whether the
remaining plant and machinery ordered have arrived; if
order have not yet been delivered.
so, physically verify a sample of these assets to ensure
Only assets which physically exist at the year-end should
existence and ensure only appropriate assets are
be included in property, plant and equipment. If items
recorded in the non-current asset register at the year
not yet delivered have been capitalised, PPE will be
end.
overstated.
Determine if the asset received is in
Consideration will also need to be
use at the year-end by physical observation and if so, if
given to depreciation and when this should commence.
depreciation has commenced at an appropriate point.
If depreciation is not appropriately charged when the
asset is available for use, this may result in assets and
profit being over or understated.
4. Company has taken a new loan. 4. During the audit, the team would need to confirm
The loan needs to be correctly split between current and that the loan finance was received. In addition, the split
non-current liabilities in order to ensure correct between current and non-current liabilities and the
disclosure. disclosures for this loan should be reviewed in detail to
Also, as the level of debt has increased, ensure compliance with relevant accounting standards.
there should be additional finance costs. There is a risk
that this has been omitted from the statement of profit The finance costs should be recalculated
or loss leading to understated finance costs and and any increase agreed to the loan documentation for
overstated profit. confirmation of interest rates. Interest payments should
be agreed to the cash book and bank statements to
confirm the amount was paid and is not therefore a
year-end payable.
5. Company outsources the payroll work. 5. Discuss with management the extent of records
A detection risk arises as to whether sufficient and maintained by the service entity and any monitoring of
appropriate evidence is available at Company to confirm controls undertaken by management over the payroll
the completeness and accuracy of controls over payroll. charge.
If not, another auditor may be required to undertake Consideration should be given to contacting
testing at the service organisation. the service organisation’s auditor to confirm the level of
controls in place.
The payroll processing had transferred to Discuss with management the transfer process
service entity. If any errors occurred during the transfer undertaken and any controls put in place to ensure the
process, these could result in the payroll charge and completeness and accuracy of the data.
related employment tax liabilities being
under/overstated.
Where possible, undertake tests of controls to confirm
the effectiveness of the transfer controls.
6. Land and buildings will be revalued at the year 6. Discuss with management the process adopted for
end. undertaking the valuation, including whether the whole
The land and buildings are to be revalued at the year- class of assets was revalued and if the valuation was
end; it is likely that the revaluation surplus/deficit will be undertaken by an expert. This process should be
material. reviewed for compliance with IAS 16.
The revaluation needs to be carried out and
recorded in accordance with IAS 16 Property, Plant and
Equipment, otherwise non-current assets may be
incorrectly valued.
7. Receivables for the year to date are considerably 7. Discuss with management the reasons for the
higher than the prior year. increase in receivables and management’s process for
If this continues to the year end, there is a risk that identifying potential irrecoverable debt. Test controls
some receivables may be overvalued as they are not surrounding management’s credit control processes.
recoverable. Extended post year-end cash
receipts testing and a review of the aged receivables
ledger to be performed to assess valuation. Also
consider the adequacy of any allowance for receivables.
8. Company is planning to make some employees
8. Discuss with management the status of the
redundant after the year end.
redundancy announcement; if before the year end,
Once the timing of this announcement has been
review supporting documentation to confirm the timing.
confirmed and if it is announced to the staff before the
In addition, review the basis of and recalculate the
year end, then under IAS 37 Provisions, Contingent
redundancy provision.
Liabilities and Contingent Assets a redundancy provision
will be required at the year end. Failure to provide will
result in an understatement of provisions and expenses.
9. Goods in transit.
9. The audit team should undertake detailed cut-off
At the year end, there is a risk that the cut-off of
testing of purchases of goods at the year end and the
inventory, purchases and payables may not be accurate
sample of GRNs from before and after the year end
and may be under/overstated.
relating to goods from suppliers should be increased to
ensure that cut-off is complete and accurate.
13. A number of reconciliations, including the bank 13. Discuss this issue with the finance director and
reconciliation, were not performed at the year end, request that control account reconciliations are
Control account reconciliations provide comfort that undertaken.
Accounting records are being maintained completely
and accurate.
At the year end, it is important to All reconciling items should be tested in
confirm that balances including bank balances are not detail and agreed to supporting documentation.
under or overstated. This is an example of a control
procedure being overridden by management and raises
concerns over the overall emphasis placed on internal
control.
14. Company’s previous finance director left after it 14. Discuss with the new finance director what
was discovered that he had been committing fraud procedures they have adopted to identify any further
with regards to expenses claimed. frauds by the previous finance director.
There is a risk that he may have undertaken other
fraudulent transactions; these would need to be written In addition, the team should maintain their
off in the statement of profit or loss. If these have not professional scepticism and be alert to the risk of further
been uncovered, the financial statements could include fraud and errors.
errors.
15. There have been a significant number of sales 15. Review a sample of the post year-end sales returns
returns made subsequent to the year end. and confirm if they relate to pre year-end sales, that the
As these relate to pre year-end sales, they should be revenue has been reversed and the inventory included
removed from revenue in the draft financial statements in the year-end ledgers.
and the inventory reinstated.
In addition, the reason for the increased
If the sales returns have not been correctly recorded, level of returns should be discussed with management.
then revenue will be overstated and inventory This will help to assess if there are underlying issues with
understated. the net realisable value of inventory.
16. During year-end inventory count there were 16. During the final audit, the goods received notes and
movements of goods in and out. goods despatched notes received during the inventory
If these goods in transit were not carefully controlled, count should be reviewed and followed through into the
then goods could have been omitted or counted twice. inventory count records as correctly included or not.
This would result in inventory being under or
overstated.
17. The audit client is a new client for the auditors. 17. Audit Company should ensure they have a suitably
As the audit team is working with the client for the first experienced team. Also, adequate time should be
time they may not be familiar with the Accounting allocated for team members to obtain an understanding
policies, transactions and balances, there will be an of the company and the risks of material misstatement.
increased detection risk on the audit.
18. The company undertakes continuous (perpetual) 18. The completeness of the continuous (perpetual)
inventory counts. inventory counts should be reviewed. In addition, the
Under such a system all inventory must be counted at level of adjustments made to inventory should be
least once a year with adjustments made to the considered to assess whether reliance on the inventory
inventory records. records at the year-end will be acceptable.
19. A sales-related bonus scheme has been introduced 19. Increased sales cut-off testing will be performed
in the year; this may lead to sales cut-off errors with along with a review of any post year-end cancellations
employees aiming to maximise their current year bonus. of contracts as they may indicate cut-off errors.
20. Out of the customers who bought goods on credit 20. A review of the aged receivables ledger to be
there are concerns about the creditworthiness of some performed to assess valuation. Also consider the
customers. There is a risk that some receivables may be adequacy of any allowance for receivables.
overvalued as they are not recoverable.
21. Company has incurred expenditure on updating, 21. The auditor should review a breakdown of these
repairing and replacing a significant amount of the costs to ascertain the split of capital and revenue
production process machinery. expenditure, and further testing should be undertaken
If this expenditure is of a capital nature, it should be to ensure that the classification in the financial
capitalised as part of property, plant and equipment statements is correct.
(PPE) in line with IAS 16 Property, Plant and Equipment.
However, if it relates more to repairs, then it should be
Expensed to the statement of profit or loss (income
Statement). If the expenditure is not correctly classified,
Profit and PPE could be under or overstated.
22. Inventory held at different warehouses. 22. The auditor should assess which of the inventory
At the year-end there will be inventory counts sites they will attend the counts for. This will be any with
undertaken in all warehouses. It is unlikely that the material inventory or which have a history of significant
auditor will be able to attend at all inventory counts and errors.
therefore they need to ensure that they obtain sufficient For those not visited, the auditor will
evidence over the inventory counting controls, and need to review the level of exceptions noted during the
completeness and existence of inventory for any count and discuss with management any issues which
warehouses not visited. arose during the count.
Inventory is stored within all warehouses; if some are The auditor should review supporting documentation
owned by company and some rented from third parties. for all warehouses included within PPE to confirm
Only warehouses owned by company should be included ownership by company and to ensure non-current
within PPE. There is a risk of overstatement of PPE and assets are not overstated.
understatement of rental expenses if company has
capitalised all warehouses.
23. During the year an asset has been disposed of at a 23. Review the non-current asset register to ensure that
profit. the asset has been removed. Also confirm the disposal
The asset needs to have been correctly removed from proceeds as well as recalculating the profit on disposal.
property plant and equipment to ensure the non-
current asset register is not overstated, and the profit Consideration should be given as to whether
on disposal should be included within the income the profit on disposal is significant enough to warrant
statement. separate disclosure within the income statement.
24. The company values inventory as selling price less 24. Testing should be undertaken to confirm cost and
average profit margin (any other methods). NRV of inventory and that on a line-by-line basis the
Inventory should be valued at the lower of cost and net goods are valued correctly.
realisable value (NRV) and if this is not the case, then In addition, valuation testing
inventory could be under or overvalued. should focus on comparing the cost of inventory to the
selling price less margin to confirm whether this method
IAS 2 Inventories allows this as an inventory valuation is actually a close approximation to cost.
method as long as it is a close approximation to cost. If
this is not the case, then inventory could be under or
overvalued.
25. Branches maintained their own financial 25. Discuss with management the process undertaken to
records and submitted returns monthly to transfer the data and the testing performed to confirm
head office. the transfer was complete and accurate.
The opening balances for each branch have been
transferred into the head office’s accounting. There is a Computer-assisted audit techniques
risk that if this transfer has not been performed could be utilised by the team to sample test the transfer
completely and accurately, the opening balances may of data from each supermarket to head office to identify
not be correct. any errors.