Auditing

Auditing

The independent examination of FinStats by a qualified /duly appointed auditor to

express an opinion

Independence

Status of Mind / Concept of Independence

 State of status of mind

o Objective, unbiased, uninfluenced, impartial, undisturbed,
 Position in society / commerce
o Keeps distance away from clients
o Not using clients resources
o Stand alone

Concept of Examination

Examine the subject that he did not prepare, have no link to

Reviewing, Access, evaluate, verify, check

aeiou

a Analysis

e enquire

i. inspect

o observe

u recalculate or re-perform

Financial Statements

Which financial statements do we examine

 Statement of financial position

 Statement of profit or loss and other comprehensive income
 Notes to the financial statement – they give more detail to the financial
statements
 Statement of changes in equity to show the movements- in and out
 Statement of cashflow
Chairman’s report needs to be in line with the audited – why, scrupulous, they do not
usually say what’s inn the financial statements, they should be in line with what’s in
the financial statements

Sustainability reports – what are they?

 Where is the market going?

 Environmental impact
 Three Ps
o People
o Profit
o Planet
 How do we audit sustainability report?
 Going concern

Who are the users of Accounts?

 Shareholders

Qualified Auditor

Appointed by the shareholders of the company, managers can appoint the auditor and ratified by the
shareholders. The Board appoints.

The auditor has to express an opinion – what is to express an opinion?

Expectation Gap

Public Auditors

 Identify and report on fraud ISA 240 misstatements of fraud

 Detection errors Engagement letter – its mgt’s duty ISA 240
 Assurance – going concern
 Unbiased opinion
 Compliance

Assignment

Download audit summarized audit standards (ISA) and print the copy and attach to your note books

Download summarized IAS and IFRS and print and attach to your note books

Who is superior the Auditor and the Accountant?

Auditors uses two variables – IAS – IFRS and ISA whilst the Accountant uses IAS – IFRS

Fair True
 A report for all stakeholders Free from material misstatements its not absolute
Need or Purpose of Auditing?

Are they solving problems and to what extent are they solving the problems

Audit background

Solomon – errors punishable by death

- Steward – looking after

-

Audire latin word – to listen to question. Auditing was verbal report.

Industrial revolution - Emperors – individuals pulled resources to form a company

Shareholders provide funds to the company

Company provides resources to management

Management provides services to the company – brought about agency problems

Agency Problems

 Conflict of interest
 Misuse of resources
 Misrepresentation of resources
 Undeclared profits
 Falsification of books – fraud

Agency problems brought about Auditing

Auditing brought about litigation on auditors which the also brought about the true and fair view
statement and the discovery of audit being brought back to management

Forensic auditing

Forensic – Masters Module

This is now brought about Forensic auditing

How the Company, Industry and Nations reacted on major collapses

 WorldCom
 Enron
o Fraud impact – more pronounced and involved an auditor and management, Arthur Anderson
was one of the big five auditors
o Auditing was self independent but now there was need to supervise the auditor
o Commission of Enquiry – USA - Soxles & Sarbanies came up with a law – Sarbanies Oxley
Act
 Liability if the auditor fails to check with certain checks and balance
o UK came up with a principle – Combined Code which guides how auditors should go about
their report
o SA – King Report – Principle based report King I -IV
 o Zimbabwe – ZimCode - 2015
o

Reaction of the Profession

Accountants came together and formed IFA international Federation of Accountants (IFA)

 Transnational Audit Committee – looks at the auditing of companies cross national

 Compliance Committee – Assist the auditors to comply with the standards
 International Audits and Assurance Standard Body IAASB very active on issuing new
standards that guides the auditor
 Ethics Committee – The Code of Auditor and affiliation
 Public Sector Committee – How the public funds should be audited
 Education Committee – to train the new
 Financial and Management Committee – Assist in the financials and accounting

New Board

Public Company Accounting Oversight Body

An oversight body formed through the Sox Act – All the auditors who must audit any USA company
should affiliated to the body and supervised by SEC

What the benefits of Auditing

 Gives reasonable assurance to user of accounts and not absolute as we are outsiders and
due to sampling and also we are also not given all the information
 Enhances credibility of financial information
 Reduces risk of management bias
 Provides confidence to the users
 The relevant of information is also enhanced


Ethics
Ethical Environment of the Auditor

Ethics committee that provides with the code of ethics. We have five fundamentals codes of ethics

P Professionalism

I Integrity

C Competency

C Confidentiality

O Objectivity

Auditors must be PICCO

Professionalism

Must behave and conduct himself in the manner that is favourable to the profession. Certified
in a certain area. Affiliation and hours of training.

Integrity –

Being honesty, trustworthy, in the performance of our body and (Disclose).

Competency –

Must exercise skillful and exercise due diligence in all your assignment, knowledgeable of
standards, interpret and apply them

Confidentially –

the general rule is – all information acquired from the client must not be disclosed to a third party
without the consent of the client

There are exceptions to the rule

 When the company is not compliant

 When the company is involved in illegal acts like money laundering, corruption; you have
a duty to disclose to relevant authorities
 Disclose to the public – duty to the public
 Litigation – when defending yourself under litigation

Objectivity

Took the place of independence, status of mind when approaching audit

The codes provides guidelines to approach auditing

 Self interest threat environment- the threat that a financial or other interest will in appropriately
influence the auditors judgement or behavior.
It can arise from a number issues, e.g.
 receiving gifts and hospitality from the client – never accept if you think they will affect the
manner you will present your opinion
 Reaction – look
 Motive behind the gift.
 Timing of the gift
 Why me? Who else has been given before?
 Will my objectivity be affected?
 Declare the gift
 Seek advice from your audit company
 Seek protection from seniors
 Disclose to the Audit Committee firm
 Implication on your report
 Appear to be
 Conclusion-
o Reject and reasons why it will affect my independent
o
 Giving or receiving loans from the client company
 Declare conflict of interest
 Recluse yourself
  Having a close business relationship with client company
 Independency
 Recluse
 Low balling
 Giving a low quote to the client with the anticipation of getting more issues,
Accounting services, taxation, it affects or compromise your quality of interest
 If you cannot then not perform the required services, then
 Language of advertising
 Lies,
 Promote yourself what you offer
 Self review threat
 This were you participate in the preparation of the subject and come back to
examine the subject
o You have prepared the records and financial statements of that client a
o Provided valuation services
o Provided Tax services
o Internal audit services
 Send a different team to do the audit work.
 Contingent fees
 Over due fees
 Be independent from the preparer to check the errors of the preparer

 Familiarity Threat
o Having the same client for a period of time
o Having a relationship with staff from the client

o Intimidation threat
Where a member of the audit team may e deterred from acting objectively by threats
actual or perceived threats
Safeguards
 Remove the affected person from the team
 Withdraw from the auditing services

How to answer case study questions

 Look at the issue

 Discuss it
 Look at the mitigational issues
 Conclusion / Recommendation

 This is relationship with

 Cannot be free from relationship
 Can also suffer from
 Therefore I might decide if it affects me
 Excuse myself from the team
 If it is the Audit Manager it’s the firm as it affects the company therefore we withdraw our
services

Do a triangle for below

 1 Audit Partner
2 Audit Manager
3 Senior Auditor
4 Junior Auditor

Legal Environment of an Auditor

An auditor is regulated from both the external and internal environment

External Environment
 Government policies can affect how we operate
 There are number of
 Stock Exchange Act, it does us, its disclosures requirements
 Company law
 The Companies Act 24:03 - Section of Accounting and Auditing which provides our rights and
obligations
 Industry regulators – Banks – Reserve Bank of Zimbabwe Act
 Parastatals SMES

Internal Environment

Understand the governance of the entity: -

 how it is run and governed –

 is it a partnership –
 Public entity –
 the set up and
 who is the custodian of the papers
 Audit Committee- Link up with the Committee – you have more power if the is this Committee
– issues of threats and independence
 Internal Audit Unit – does a lot of work for external auditors – understand their challenges and
how they operate
 Operating Units – the units you are going to audit – finance HR, Procurement etc., understand
how they operate, their cycles
 Role of the Non Executives – The Board of Directors
 PFMA Act
 IPSAS
 Public Sector Act

Audit Process
A process which has a start and an end but is an ongoing process. We follow a process and at stage
we are guided IAS

Stage 1 Auditor re-election

 Auditor re-election / election at the AGM

 Guided by the company’s Act 150 – 154
Stage 2 Engagement

 Guided by ISA 210

Stage 3 Planning Financial Audit

 ISA 300 –

Stage 4 Ascertaining of Systems

 Needs to understand the system



Stage 5 Compliance Tests

 Test the controls

 Compliance tests
 Are they strong , weak – what are the issues

Stage 6 Verify the elements of Financial Statements

 Assets, Liabilities, Debtors, Income and

 ISA 500

Stage 7 Review Financial Statements

 Review of financial statements

 Carry out finasation


Stage 8 Report

 ISA 700
 Report on the audit


Stage 1 Auditor Election / Appointment

 An auditor of a public company is appointed by shareholders at the AGM or any other meeting
where annual accounts are presented
 He is appointed by an ordinary resolutions.
 An auditor can be appointed by directors to fill up a vacancy post where an auditor has resigned,
or an auditor has died, or if it is a new company
 The Auditor can also be appointed by the Minister, if at the conclusion of the AGM, and no auditor
is appointed.

Duties of an Auditor

The primary duty of an auditor is to report to company members, on the truth and fair view of the
financial statements.

The auditor has a right under the Companys Act,

 the right to receive all returns form all the branches,

  right of access to all books and information,
 right to explanation and information
 right access the director’s report for consistence
 right to receive notice of and to attend and general meeting of members
 right to speak at any general meeting on business which concerns him as the auditors

Who should be the Auditor?

Company’s Act Section

Prohibits the following: -

 Company officers and anyone related to the company officers – Directors, owners

Engagement of an Auditor –

 Ethical Clearance of a new Auditor - Must undergo a process of engagement

Retiring Auditor Client Appointed Auditor

It is the client’s that approaches the Auditor through a letter which should be responded to and
must also approach retiring audit before accepting.

Professionalism requires us that we approach the retired to safeguard our reputation

Seek permission from the client to disclose and discuss the clients business

Discuss professional and ethical issues

Write a letter of engagement to the client. A response letter. Ethical

Pre Consideration to Audit Engagement

Before I say yes what should I consider?

 Pre-audit yourself as an auditor

 Preaudit the client before accepting

Pre-audit yourself as an auditor

 Resources in terms of time and staff are you going to able to finish the assignment

Preaudit the client before accepting

 Do you have knowledge

 Check on their deadlines
 Logistics – of branches
  Location – locally or international
 The fees and the capability of the client to pay
 Does the client have an internal audit department?
 Integrity of the board and management

ISA 315 – talks about the understanding the entity and its environment and guides the auditor in
making pre considerations

The auditor must understand the business if the client

He must obtain information on the following issues:

 Key stakeholders – who are the shareholders – directors, key management, customers,
suppliers,
 Financial performance of the client
 Operations of the client – nature of products – services
 The industry in which it operates
 Future financing plans

How does the Audit to obtain this information

 Visit and have meetings with the client

 Make use of the clients brochures
 Visit the clients website
 Read through the industry publications
 Carry out a web search
 Read through newspaper articles
 Analysis previous financial statements

A point to take note

 The Auditor should assess on the professional risks amd ethical risks of pertaining
acceptance of this client
 The auditor must check that the outgoing auditor has been correctly removed.
 He must check that he has undergone a process of ethical clearance

Scenario

You are a partner of Felistas Certified Accountants, you are approached by Chitengu Shorai the
Managing Director of Motsi Limited, who asks your firm, to become an auditor of this firm. In return to
giving you this appointment, the MD says, he will expect your firm to reduce your fees by 50 %. The
existing auditors have not resigned but MD informs you that they will not be reappointed in the future.

Required

1. What are the ethical and professional issues that you should consider before you accept the
offer
2. State any safeguards that you should also consider
3. Come up with a conclusion to the offer

 Contingent fees – what threat 50% subject audit to intimidation

 o Fees charged are based on market rates and mainly only skill and time taken
 Appointment of an auditor is made by an MD is a threat, under the Companies Act, the
auditor is appointed by shareholders at the AGM or by directors if it is a new company or by
the Minister if no one is appointed at the AGM
 The need to clear with the old auditor

 Measures going to take

o Contingent fees
We do not accept -
o Appointment by MD
Accept of it’s a new board
o Current Auditor
Wait to be cleared

o Integrity
Access the degree
 Conclusion
If the above mitigational are put in place, I accept otherwise will not accept

Engagement Letter

After being ethically cleared and you are happy with conditions of appointment, the auditor need to
write an engagement letter

Engagement Letter

A letter written to management, by the auditor, accepting appointment or engagement

Purpose of the engagement letter

 Clearly defines the auditors responsibilities

 Defines the clients responsibilities
 Minimises misunderstandings between the auditor and the client – being of the same of mind
 Confirms acceptance of the contract by the auditor
 It informs and educate the client with regard to the work to be done
 It communicates the way the audit will be conducted.
 It explains the basis on which fees will be calculated

When do we send the engagement letter

 To all new clients before any professional work is done

 To all existing clients who had not received such a letter
 On recurring audits whenever there is a change
 When there is a need to remind the client on the existing terms

Principle Contents of an engagement letter

 The objective of the audit of the financial statement

o To express an opinion on the true of fair view of the finstats
 Management responsibility of financial statement
o To prepare finstats that are true and fair
 o To ensure a strong internal control system that should prevent, detect fraud
o They should have good finstats that free from errors and misstatement
 Scope of the audit covering the following
o Compliance with audit standards
o Review of accounting systems
o Collection of audit evidence
o Test on the reliance of internal controls
o The auditors statutory duties
 Access to information
 To issue an opinion
 To receive return

 The form of reports and other communication as a result of the engagement

 Request for the client to confirm the terms of engagement through a signature
 The basis on which fees are computed and any billing arrangement
 Arrangements concerning the involvement of other auditors and other experts in some
aspects of the audit
 An arrangement concerning the involvement of internal auditors and other client staff
 That if the client require other services such as taxation services accounting services a
different engagement letter should be written

Planning

People

Timing

Focus

Problem areas

Amount of work

Nature of work

Question Bank

Group 1 Question 18

Group 2 17

Group 3 23

Group 4 1

Group 5 2

Group 6 3

Group 7 4

Group 8 5
Individual assignment Question 6

All present

No reading

Test of knowledge

Evaluate, examine,

Purpose of audit planning

Staff Timing

Planning

ISA 220. Quality control

ISA 230 Audit documentation – the types documents and files to be used

ISA 250 Considerations of Laws and

ISA 300 Planning and Audit

What is planning

ISA 310 Knowledge of the business

ISA 315 Understand the entity at planning stage

ISA 320 Materiality

ISA 330

ISA 400

ISA 510

ISA 520

ISA 710

ISA 300 Planning and Audit

The nature of planning depends on

 the size of the entity, and complexity of the audit –

 Auditors experience of the business
 Knowledge of the business

Method of processing of transactions – some are complex

Reporting requirements
For the auditor to plan he needs to understand the client, in this regard ISA 315 will guide us

At planning your also need to come up with an audit plan, which sets the scope the nature and timing
of the audit work.in your audit plan look at the terms of engagement, clients background, important
figures and ratios for your client, look at the deadline for completion, timing of feedback

Within that plan you need to come up with staffing budget and experience, placement, qualification,

Come up with a time budget

Timing of the audit risk, we have two types of audits, interim and final

Interim – compliance testing and are done before the end the clients financial year end,

1st interim October Understand

2nd interim November Test the system

Final 31 Dec

31 Jan Finalization of journal posting – closure of final year

1 Feb audit start on substantive testing

ISA 220 Quality Control for an Audit of Financial Statements

Planning – Finalization

Working papers

Supervision and management

Review of working papers

 Hot reviews – done during the audit – manager or supervisor reviewing the
 Cold reviews – When not in the field – probably and independent review on how we are doing
our work

ISA 230 Audit Documentation

Exam Material

We need to document our work from start to the end –

 To defend our self –

 Future references
 Training junior staff
 To follow a systematic way to our audit

Working papers must be retained for at least 7 years in case of litigation

Nature of working paper

Depend of size and type of entity, but essential all working papers, should have the following,
  The name of the person who prepared it
 Date of prepare
 Name of person who reviewed it
 Date of reviewed
 Name of client
 Account year under review
 File reference for cross referencing annex b, c,

There are two types of working papers: -

 Permanent file
 Current file

Permanent working paper / File

We put documents of a permanent nature. Examples

 Acts
 Certificate of incorporation
 Standard operating manuals
 Strategic plan
 Copies of importance , letter of engagement
 Minutes of important board meeting
 Mortgages and charges contract
 Title deeds
 Trade agreements
 Description and nature of the client
 Organizational chart
 Copies of previous finstats
 insurance covers
 Bankers
 Ratio tables
 Accounting manuals policy and procedures
 Etc.


Current File

Information of current nature, information at planning execution and finalization stage

 Current financial statements plus their comparatives

 Checklist concerning your compliance test
 Letters of representation obtained from management
 Any answers schedules obtained from staff
 Current audit checklist
 Evidence of work performed
 Etc. anything of current nature of the current audit
 All the stages done from start to end queries etc.

ISA 250 Considerations of Laws and Regulations

Guides us on how we are going to deal with compliance issues relating to laws and regulations.
If an entity is not compliant with the laws?

 First point of call - Advise those in authority – if the board is aware then take necessary action
and whistle blow
 Be persuasive and qualify the audit

Look at it in detail

Inherent risk – associated with the company

Liquidation, what happens, trying to reduce loss increase assets, expenses capitalized

ISA 330 The Risk Audit Model

The Auditors Response to

ISA 320 M

Exam Material

Talks about audits consideration of materiality and its relationship with audit risk

The objectives of an audit is to enable an auditor to express an opinion whether the finstats are
prepared in all material respects with an identified financial reporting framework

Materiality

Information is material if its omission or misstatement could influence the economic decisions of users
on the basis of the financial statements.

The auditor must therefore concern herself with identified material errors, omissions and
misstatements.

Materiality depends on the decision maker doing the audit – what’s their core business – how does it
affect their business

Materiality is measured in two parts – Quantitative which is by size and the quality – nature of the
omission

Materiality by quantitative is given by

Sales revenues Receivables - levels between 0.5 and 1% of sales revenue. This level is
tolerable else above not tolerable

Total Assets - Between 1-2% of total assets

Profit before tax - Between 5 -10% of profit before tax

Quality

Talks about the nature of omission, there are other areas by nature which need not quantified
  Fraud
 Directors
 Fiduciary duties – missing a vehicle in the parking bay, report

These you need to highlight, they do not need to quantified.

ISA 510 Initial Audit Engagements – Opening Balances

New client – Planning must be exhaustive –

 Take on balances maybe misstated – audit the previous figures

 Speak with the predecessor auditor
 Obtain the previous working papers from past audit and
 Examine the underlying records that brought up the figures
 Be cautious of the opening balances

ISA 400 Risk Assessments and Internal Control

Interpretation

ISA 400 Risk Assessments and Internal Control is one of the International Standards on Audit
ing. It serves torequire the auditor is to understand the client's accounting system and internal co
ntrol system and to assess controlrisk and inherent risk. The objective is to determine the nature, 
timing and extent of substantive procedures in order toreduce audit risk to an acceptable low leve
l.

ISA 520 Analytical Procedure

We need to perform analytical procedures at planning stage – Analysis

Analyze your client through

 Ratio analysis
 Trend analysis
 Modeling

Ratios – be knowledge -able and implication of them

Current ratio Current assets / Current Liabilities 2:1

Every liability is covered twice by the asset it could higher and we are more happier

2.1 3.1 0.1 1.1 0.5.1

The company is in a liquidity problems and might have challenges covering its liabilities
Gearing Ration Debt / Debt + Equity

Standard =

Examination area

What should you put in your audit plan

Gross Profit = Gross profit growing and expenses are increasing what’s the link

Planning and finalization

ISA 710 Comparative Information

Guides us to make some comparisons of the current figures and the previous figures

Provides you with more knowledge of the company where it is going

Audit Risk

The auditor needs to understand audit risk at planning stage. The risk of issuing an inappropriate
opinion where you quality the finstat when they are not supposed to be qualify

Audit risk = Inherent Risk x Control Risk x detection Risk

Inherent Risk

 The risk of material errors in the financial statements due to the nature of business and its
transactions, eg, a company I high technological industry is very risk, for instance,
 New client – high inherent risk
 A client with tight reporting deadline

Following are some the factors that affect the inherent risk

 Doubt on the integrity and competence of management

 Too much competition in the industry
 Possibility of management bias
 Cash based business
 Too many litigation
 Frequent changes in auditors

Nature of risk and what will come out in the financial statements.
Control Risk
The risk that material misstatements could occur or could not be prevented or could not be detected
as a result of system failure

 No segregation of duties
 Lack of supervision
 Employment of incompetent staff
 Size of enterprise
 Accounting systems – why manual – lot of errors
 Absence of internal auditors – who checks your system who can appraise them


The absence of internal auditing

Detection Risk

The risk that the auditor substantive test on the transaction and balances fails to uncover detect errors
in the transaction balances

Sampling increases detection risk, you will have picked the wrong sample.

Model planning – if IR and CR is high reduce detection risk is high the more staff computer auditing
reduce it

System Evaluation

Evaluation and Internal Testing Internal Controls

After planning the first port of call is the Evaluation and Testing of Internal Controls

What is so particular why we should do this?

The system is the life blood of the transactions – the system drives the transactions, you need to
understand the system before reliance on the financial statements

According to ISA 400 – (330) subject to confirmation – an internal control system comprises of the
internal control environment an the control procedures

It includes all the internal procedure adopted by the directors and management of an entity in
achieving their objectives as far as practical, the orderly and efficient conduct of the business
including the adherence of the internal polices, the safeguarding of assets, the prevention and
detection fraud, and errors. The accuracy and completeness of the accounting records and the
timely preparation of reliable information

Use of internal controls

COSSO

Defines the internal controls as “it is a process effected by entity’s board of director , management
and personnel, regarding the achievements of objectives in the following categories

1. Effectiveness and efficiency of operations

2. Reliability of financial reporting
3. Compliance with applicable laws and regulations

Components of a good – effective control system

Both ISA 400 and COSSO provide five (5) components of a good – effective internal control system

 Control environment – means the overall attitude awareness and actions of directors and
management regarding internal controls and their importance in the entity. It encompasses
the management style corporate culture, and values, shared by all employees. It provides the
background against which other controls are operating.
First thing when you approach a company is to look at internal controls and ZERO Tolerance
to fraud.
o The CEO statement on the first interview should guide you on the culture of company
organization. The control environment
o Entrance interviews
o Statements made by staff
 Control procedures – these are those policies and procedures in addition to the control
environment, which are established to achieve the entity’s specific objectives.
o Acronym

S Segregation of duties
P Personnel controls
A Authorization
M Management or monitoring controls
S Supervision
O Organization Chart
A Accounting – Arithmetic controls
P Physical

So that the system checks itself , no one person should complete the transaction

Human resources cycle so that we comply and prepare reliable financial statements,
recruiting the personal, train and motivate them promoting, paying and hiring,

It the human resources to train

We need someone to give credit to a transaction, someone who can justify transaction

We are worried about our managers, they should paly they roles, Plan Control, so we do not
have the risk associated with theses roles. They need to meet regularly
 S

We need someone who can direct and make sure things are in order

Chain of command, responsibilities. Fayol Management Concept

Accounting and Ar

Controls within the accounting department. There are there to ensure that the accounts are
reliable and accurate

 C Computer controls – application – hardware’s used, integrated systems

 A Authorization
 R Reconciliations
 C Comparisons - every doc with talk with another speak -
 A Arithmetic controls
 P Physical controls – serialized and safe and lock – security

application – hardware’s used, integrated systems

3 Entity’s Risk Assessment Process

This is the way the entity identify the risk and put out the controls. An effective control system is
measured by the manner it prevents risks

 Enterprise wide risk management System

You can not do it alone but as collective
o Identify the risk,
 Is this organization ready or alert to risk associated?
o Measure the risk
o Manage the risk TARA - Transfer Accept Reduce Avoid
o Control the risk

4 Accounting Information System – Information System

 If computerized auditors are happy, the information is readily available for

5 Monitoring Controls

Touches on the management ; the existence of the internal audit function and the power they are
given

ISA 620 Using the work of an auditors expert

Planning stage, we need to review the internal auditor’s work and the reliance on his work.
Evaluation of internal Controls
1 Find out the system that the client has
Visit the client
Interviews
AEIOU
2 Document their system
 Through pen and paper documentation
 Flow charts
 Circle meaning starts
 Arrow flow
 Rectangle user requisition
 mm record
 n End

 Check list – do you raise a purchase requisition yes or no

3 System walk through – Walk through the system
 Take a sample and trace it through – check all the stages and
recording missing stages
O ordering
D Delivering
I Invoice
A Accounting
C cash
O overall control

4 Evaluate
5 Management letter

Purchase cycle
O Ordering
D Delivering
I involve
A Accounting
C cash
O overall control

SPAMSOAP

Unit Document
 Ordering

User department Internal request or user

request
Purchase department/supplier user Quotations
Selection
Ordering

Delivery

Stores/Supplier/User D-Note

GRV / Goods

Invoicing

Procurement / User / Finance/ Invoice plus all above papers

Accounting Purchase journal

Purchases returns journal

Cash book

Purchase ledger

Cash
Accounting RTGS / CASH/ Cheques

overall Controls Segregation of Duties

Tender committee

Database suppliers

From above

Revenue Cycle

O Ordering
D Delivering
I Invoice
A Accounting
C cash
O overall control

SPAMSOAP
 Unit Document

Ordering

User department Internal request or user

request
Purchase department/supplier user Quotations
Selection
Ordering

Delivery

Stores/Supplier/User DNote

GRV / Goods

Invoicing

Procurement / User / Finance/ Invoice plus all above papers

Accounting Purchase journal

Purchases returns journal

Cash book

Purchase ledger

Revenue Cycle

Unit Document

O Ordering
D Delivering
I Invoice
A Accounting
C cash
O overall control

Letter to management
A letter written by the auditor to management. The purpose is to highlight
weaknesses identified in the system with some possible recommendations

Thee letter has two parts

Cover Letter

Appendix or attachment

Cover Letter

A brief note to highlight why manager are receiving that letter. It indicates the
weaknesses or deficiencies their consequences or impact and suggested
recommendations

The letter is a professional advise to management and it must be used for internal
purposes only

Appendix or Attachment

Risk / Weakness Impact / Suggested Management

Consequences recommendation response
1 Actual risk Workable solutions
Lack of segregation of System should
duties have checks and
balance
Fraud and errors
will not be found in
these system

Scenario

You are auditing a school, the clerk sources for quotations and buys the goods and
receives the goods. The departments collects the goods from the clerk and uses
them in their relative departments. The headmaster authorizes for payment.

Required

Appraise the above system and proffer advise

Risk / Weakness Impact / Suggested Management

Consequences recommendation response
Actual risk Workable
solutions
The clerk buys, No in built system / Establishment of
receive and pays checks and balances Procurement
within the system committee to
No segregation of consist of
duty on important This allows errors /
function of misstatements, to go The user, finance,
procurement, undetected / Deputy Head plus
payment and storage unchecked one SDC member

On payment two
signatories, the
Headmaster and
one SDC member
with Finance Skills
Delivery

Verification of elements of financial statements / Final audits / Substantive Tests

Conducting the final audit, detailed audit

We will be guided bu ISA 500 series

ISA 500 requires that the auditor should gather sufficient and appropriate evidence

Evidence is the base upon which the auditor basis his opinion. The evidence is
gather through testing of process, transactions, account balances and events

ISA500 provides 3 characteristics of audit evidence

 Reliability
 Sufficient
 Relevance

Reliability

Reliability of evidence relies on the source, we normally say external source is better
than internal source. In that manner, bank statement is more reliable than a cash
book

Evidence gathered by the auditor is more reliable than one obtained from the client

Primary document are more reliable secondary documents

Invoices vis photocopies

Sufficient
Deals with quantity of evidence gathered and the quantity gathered depends on a
number of factors

 Risk assessments results

 Nature of the accounting and internal controls that we have done previously
 Materiality of the item
 Experienced gained during previous audits
 Results of preliminary audit procedures
 Source and reliability of the information

Relevance

Information must be relevant. Relevant of depends o =n the item being audited and
financial assertion being tested

We have different financial assertions for the different elements of financial

statements

When auditing transactions and events (income statements)

 Income
 Expenditure
 Journals

Assertions ACCCO

 Accuracy
 Correctness
 Classifications
 Cut-off
 Occurrence

Is correctly classified, and the transactions have occurred in the 12 months period
Jan – Dec – take acre of accruals, prepayments, and that transaction really
occurred.

Substantive

Account Balance - Statement of Financial Position

Asset Liability Equity

Cost

Authorization
Valuation

Existence

Beneficiary ownership

Presentation - where is it, disclosure the manner

A Accuracy

C Completeness

C cLASSIFICATIO

A Allocation

C Cutoff

O Occvuramnc=ce

V Valuation

E Existence

R Rights and Obligations

ISA 500 provides with the audit procedures, the auditors tool kit. Summarized as

AEIOU

 Analysis
 Enquiry
 Inspection
 Observation
 Recalculation

Use the tool kit efficiently and have enough substantive evidence

Procedures in carrying out an audit

1 Identify Accounting standard at play

2 Identify your audit objectives according to your financial assertions
3 Identify the audit procedures that you would carry out
4 Show the audit evidence in you working papers – show evidence of
worked performed
 PPE Standards Concepts Legislation

 IAS 16 initial measurement at cost

o Elements of costs
 Invoice priced
 Transport
 Duty excluding customs VAT you can claim it
 Installation
 Dismantling costs – conditions legal obligation to dismantle,
return the ground to its original place
 Testing costs
 Subsequent Costs : Fair Value – IFRS
o Fair value at arms -length vale – no favoritism, tested at the end of
each year
o Revalue assets at the end of each year
o Downwards – via other comprehensive income as a negative
 Repairs and maintenance expense or capitalize
 Overhaul cost – capitalize
 Depreciation same policy if there are changes - ….
o Airlines
 Engines
 Wings


IAS 23 Borrowing Costs

Journal entries

IAS 36 Impairments of Assets

IAS 20 Accounting for Government Grants and Disclosure of Government assistance

IAS 17 Lease

Operating and Finance Lease

IFRS 5 Discontinued Operations

IFRS 15

Auditing of PPE continued

State your assetions State

Objectives Audit Procedures Evidence

Cost Verify the cost against the invoice Invoice number verified and
Confirm the price with the supplier put on file
Confirm transport, installation,
dismantling, professional cost are Supplier confirmed the
capitalized where necessary invoice price

A Verify, enquire
E
I
O
U