Auditing and investigations

Ac414
Course outline
1. Introduction to Audit Evidence
2. Audit of Non-current assets
3. Audit of Inventory
4. Audit of Receivables
5. Audit of Cash and bank
6. Audit of Liabilities, capital and directors salary
7. Auditing Not-for-profits organisations
8. Audit review and finalization
9. Reports
Audit evidence recap
• ISA 500 – 599
• ISA 315
• Procedures for audit evidence collection
• Inspect, analytical review, computation, enquiry, reperformance,
observance
• CAVEBOP
• Management assertions and audit objectives
• Working papers
Audit evidence recap
• Sufficiency and appropriateness of audit evidence
• Substantive procedures and tests of controls
• Audit procedures should comprise:
• How
• What
• When
Audit evidence recap
• Words to AVOID
• VERIFY
• SEE/LOOK
• CONFIRM
• CONSIDER
• DETERMINE
• ENSURE
• ASSESS
Audit of non current assets
• Understanding of IFRS, IAS and IPSAS relating to non current assets
• The following are the standards relating to non current assets
• IAS 16 PPE
• IAS 36 Impairment
• IAS 38 Intangible assets
• IAS 40 Investment Property
• IAS 41 Agriculture
• IFRS 5 Assets held for sale and discontinued operations
• IFRS 16 Leases
Audit of non current assets
• Key issues to look for
• Treatment by audit client of transactions involving assets.
• Are the assets correctly valued?
• Having a grasp of key concepts of the various standards as well as the
complexities
• Remember the auditor is EXPECTED to identify incorrect classifications and
recording of ASSETS.
• Recoverable amounts vs book value vs fair value
• Computation of costs included in assets
• Computation of assets depreciation, amortisation, fair value and net
realisable value.
Audit of non current assets
• Key issues to look for …..
• Ability to identify impairment
• Measurement of assets and classification of assets
• Leased assets
• of costs included in assets
• Computation of assets depreciation, amortisation, fair value and net
realisable value.
Audit of non current assets
• Key procedures .
• Inspection of the physical assets
• Enquiry with management – ( a lot of issues ) impairment, additiions,
accounting treatment etc
• Inspection of documentation of ownership
• Computation of assets values
• Inspection of any other relevant information
• Re perfromance of calculations
• Inspection of minutes of boards and directors
• Inspection of loan agreements etc .
IAS 16 Example
• Objectives of IAS 16 para 1 :
• Recognition of assets – HOW?
• Determination of their carrying amounts – HOW?
• Depreciation and impairment losses

• What assertions to address

• Existence (Assets in the FS don't actually exist)
• Rights and obligations (Assets in the FS not actually controlled by entity)
• Ownerships
• Valuation (Incorrect recording, valuations, or depreciation calculations)
• Completeness (Assets owned but not included in the FS)
• Presentation and disclosure (Incomplete disclosures)
IAS 16 example
• Para 7 (a) probable that future economic benefits will flow –Enquire
Observe
• Para 7 (b) cost measured reliably – Inspect. Enquire, Recompute
• Para 9 & 11 refers to judgement – Enquire from management
• Para 10 Components within assets – Recompute, enquiry, inspection
• Para 14 major inspections – inspect, recompute
• Para 16 – costs attributable to assets (c ) highlights costs of
dismantling – enquire, inspect , recompute
IAS 16 example
• Para 21 incidental operations – tricky area of IAS 16
• Para 31 Revaluation model and the regularity of the revaluations,
• Audit issues includes Relying on the work of an expert procedures
according to ISA 620
• Treatment of : depreciation, gain or loss Through Other
comprehensive income
• Para 73 – Disclosure
IAS 16 example
• Critical documents include:
• Asset register
• Invoices (supplier and service providers)
• Valuation report
• Asset ownership books
• Insurance contracts
• Constructions contracys
• ZIMRA invoices (duty etc)
Inventory
• Have a sound knowledge of IAS 2 – Inventories
• ISA 501 para 4 -8
• Inventories form a significant part of any business and therefore
should be audited diligently.
• The value of inventory is material in other industries than in others.
• Manufacturing and mining entities vs advertising agencies
Inventory
• KEY FOCUS AREAS
• Slow moving stock (valuation)
• Cost vs net realisable value(Valuation)
• Obsolete stock (valuation)
• Stock count attendance (existence and valuation)
• Relying on the work of an expert (valuation)
• Roll over procedures

• The key assertion for inventory is valuation

Inventory
• PROCEDURES
• Inspect the stock count instruction
• Inspect selected items of stock
• Inspect documentation eg invoices, GRV
• Computations of value
• Enquire form management valuation method
• Observe stock counting teams
• Select items and reperform the countSlow moving stock (valuation)
• Cost vs net realisable value(Valuation)
• Obsolete stock (valuation)
• Stock count attendance (existence and valuation)
• Relying on the work of an expert (valuation)

• The key assertion for inventory is valuation

Receivables & cash and bank
• Debit balances and the risk is overstatement
• Most common and effective method is a confirmation because:
• Written
• External
• For Receivables recompute Bad Debts Provision
• Enquire from management reason and criteria for provision of bad
debts
• Inspect petty cash certificates
• Repeform surprise cash counts
How to audit an accounting standard
1. List the basic requirements of the Standard (IAS,IFRS)
2. Identify whether transactions result in Asset, liability, equity,
income or expense
3. Measure treatment of transaction to requirements in 1
4. Audit the following
1. Accounting treatment
2. Presentation and disclosure
Liabilities and Directors capital
• IAS 10, 19, 37
• Ensure the transaction is correctly classified,
• Common transactions involve Provisions, contingent liabilities,
contingent assets.
• At times it involves compound instruments as well as equity
are very complex and need to be understood as
outlined in IAS 37.
IAS 19 results in the recognition of liability
Share Capital and reserves
• These include but are not limited to
• Ordinary Share Capital
• Preference Share Capital
• Retained Earnings
• Reserves etc
General substantive Procedures
• Management representation letter
• Inspect Board, shareholders, management minutes
• Analytical procedures (be specific)
• Bank confirmation
• Attorneys letter
• Agree listings to general ledger
Audit report s
• True and fair view
• Report to shareholders
• ISA 700 ISA 705

Unmodified
Modified
Audit reports- ISA 700

Material
misstatements
ISA 450

Sufficiency and Financial

Appropriate reporting
ness ISA330 framework

Disclosures Mgt estimates

Audit reports – unmodified
• Para 16 -19 unmodified audit opinon issued when:
• Finstats are prepared in accordance to financial reporting Framework
• Absence of material misstatements
• Fair presentation
• Sufficient appropriate audit evidence
Audit report – Content ISA 700
• Title
• Addresee
• Auditors opinion
• Basis of opinion
• Going concern (optional , but now expected in Zim)
• Key audit matters (KAM)
• Other information’
• Responsibilities for the preparation of finstats
• Auditors responsibilities
• Name of engagement partner
• Signature
• Auditors address
• Date
K.A.M’s ISA 701
• Para 9:
• Matters communicated to management / directors
• Areas that require significant auditors attention A9 –A18
• Higher assessed risk of misstatements/risk ISA 315
• Areas that have significant auditors judgements and managements estimates
• Impact of events and transactions on the audit
• Current period issues ONLY are included as KAMS
K.A.M’s ISA 701
• Para 12: K.A.Ms not a substitute of modified opinion
• Para 13: auditor to indicate why matter was considered important
• Para13 : how was the matter addressed
• Para 15: going concern and factors causing modifications are
inherently KAM’ s but are not included in KAMS
K.A.M’s ISA 701
• Guiding terms in deciding K.A.Ms
• Para A9: smaller number of matters
• Para A10: most significance
• Para A11: current period KAMS only but previous years KAMs can be
continued
Modified Opinions ISA 705 para 2
Audit
Opinions

Unmodified Modified
ISA 700 ISA 705

Qualified
(Except for)

Adverse
Opinion

Disclaimer
Modified ISA 705
• Two key cornerstones to audit opinions para 2

Pervasiveness

Material
misstatements
Modified Opinions 705
• Defining pervasiveness para 5 (a)
• IMPACT on financial statements as a whole of an error or
misstatements. That is over and above its class
• Pervasive related to when DISCLOSURES provided or not provided
have a huge impact on users understanding of financial statements
Modified Opinions 705
• Example of pervasiveness

• Receivables ZWL 20 million

• Inventory ZWL 25 million
• Prepayments ZWL 55 million
• PPE ZWL 200 million
• Cash and Cash Equivalents ZWL 150 million

Discuss pervasiveness when

a) An error is discovered in the Receivables account’
b) An misstatement is discovered in PPE
Modified Opinions 705
• When modification is required para 6:
• Lack of sufficient and appropriate audit evidence
• Presence of material misstatements
Modified Opinions 705
OPINION CRITERIA
Qualified Para 7 (a)
• Obtains sufficient appropriate audit evidence
(para 7) • Identifies material misstatements
• Judged: NOT pervasive
Para 7(b)
• Obtains insufficient audit evidence
• Identifies material misstatements
• Judged: NOT pervasive

Adverse • Obtains sufficient appropriate audit evidence

• Identifies material misstatements
(para 8) • Judged: Pervasive

Disclaimer Para 9
• Unable to obtain sufficient appropriate audit evidence
(para 9 & 10) • Identifies material misstatement
• Judged: Pervasive
Para 10
• Obtains sufficient appropriate audit evidence
• Multiple uncertainties
• Judged:
Modified Opinions 705

OPINION CRITERIA
Qualified Para 7 (a)
• Obtains sufficient appropriate audit evidence
(para 7)
• Identifies material misstatements
• Judged: NOT pervasive
Para 7(b)
• Obtains insufficient audit evidence
• Identifies material misstatements
• Judged: NOT pervasive.
Modified Opinions 705
• Adverse
•OPINION
(para 8) CRITERIA
• Obtains sufficient appropriate audit evidence
Adverse • Obtains sufficient
• Identifies material misstatements
appropriate audit evidence.
• Identifies material misstatements.
•(para 8)
Judged: Pervasive • Judged: Pervasive
Modified Opinions 705

OPINION CRITERIA
Disclaimer Para 9
(para 9 & 10) audit evidence
• Identifies misstatement
• Judged: Pervasive
Para 10
• Obtains sufficient appropriate audit evidence
• Multiple uncertainties
• Judged:
Decision table – ISA 705
ISA 706 – Emphasis of matter
• Paragraph included in the auditors report which the auditor deems
fundamental to the users of financial statements
• It’s a matter which if not addressed will not allow the users of
financial information to fully understand the financial statement s
• It is not a modification or a KAM
• There are ISA’s that prescribe the use of ISA’s 210, 560, 800
Going Concern
• ISA 570 – Going Concern
• What the going concern assumption entails :
• Management influence over the way business is run
• Customers still interested in products and services of the entity
• Suppliers still willing to supply to the company
• Have adequate cash to fund operations
• Material uncertainty – likelihood and impact
• Foreseeable future – 12 months period
• Directors responsibility
Going concern indicators

Para A3 Financial

Operating Other
Going concern
• Directors responsibility
• Consideration of inherent risks of the business
• Review of operations and validity of assumptions
• Review of financing of the business

• Stress testing the business, scenario planning

Going concern 570
• Audit procedures
• Risk assessment and identification
• Evaluation of management estimates
• Addittional procedures
• Inspection of business plans
• Inspection of cash flow forecasts
Audit finalisation

Audit Partner Audit Manager

• ULTIMATE review • Suitably Qualified FINAL AUDIT
• Responsibility of REVIEW
audit opinion
Audit Finalisations
• Opening balances and Comparative figures

ISA 510 ISA 710

Audit Finalisation
• Accuracy of prior year figures
• Consistency in the application of accounting policy
• Consider if prior year financials were modified
• Audit procedures as continuing auditor vs predecessor auditor
• Clear distinctions on procedures to be taken
Audit finalisation
• Uncorrected errors and misstatements:
• Planning vs performance materiality
• KEY QUESTIONS
• Do misstatements affect compliance, contracts or debt covenants
• Do they affect ratios that assess company performance
• Do they affect mgt compensation
• Mask performance
Audit finalisation
• Finstats should be in adherence to IFRS and statutory requirements
• Accounting policy consistency
• Perform analytical procedures on the final financial statement and
compare with audit evidence collected
• Assess materiality of errors discovered
• Compare financial information with other information in annual
reports eg Chairman’s statement for consistency
• Assess information obtained to compatibilitywith industry trends and
norms and prior periods
Audit finalisation
• Procedures
• Ensure final audit covers issues raised in the audit plan’
• Review working papers whether they have sufficient appropriate audit
evidence to support conclusions drawn
• Review if points noted during audit have been dealth with satisfactorily
• Ensure all information requested form third parties has been received eg bank
confirmations etc
• Condusct a subsequents events review
• Ensure all management representations are on file
• Hot vs cold review
• Ensure all disclosures are adequate and will not mislaead users
Comparative figures ISA 710
• Read paragraph 7 – 9 especially