D11

Principles of
Auditing
By Mr. Joseph Ngandalo
 D11 Module Topic Overview
1 Purpose and Context of Audit 5%
2 Corporate Governance and Codes Of Ethics 10%
3 Internal Audit 5%
4 Audit Planning, Risk and Documentation 15%
5 Internal Control 20%
6 Audit Evidence – Techniques 15%
7 Audit Evidence – Specific Areas 20%
8 Review And Reporting 10%
Total 100%
Session 1 Contents
• Explain the nature and objectives
Introduction of audit and assurance
• Explain the concepts of
to Audit accountability, stewardship,
agency, true and fair and
reasonable assurance
• Explain the five elements of an
assurance engagement
 Introductory Thoughts

• The word audit is a derived from the latin word “audire” which
means simply, to hear!
• The divorce (separation) of ownership and control is the primary
reason for an audit exercise because trust is a control!
• An independent check by an expert on behalf of the principle in
order to confirm that the FS prepared by the agent, present fairly
the affairs of an entity for a specific period.
 Nature and objectives of audit and
assurance engagements
An assurance engagement is:
'An engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of evaluation or
measurement of a subject matter against criteria.‘
(International Audit and Assurance Standards Board Handbook)
 Statutory and Non-statutory audit

• Statutory audits are audits required by Law (For firms with a

turnover of K20 million or more in Zambia)
• Non-statutory audits are not required by Law (optional)
 Benefits of a Non-statutory audit

• Settling accounts between partners

• Tax computation purposes
• Business valuation
• Bank overdraft negotiations
 Nature and objectives of audit and
assurance
The objective of an external audit engagement is to enable the
auditor to express an opinion on whether the financial statements:
• Give a true and fair view (or present fairly in all material respects).
• Are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
Five Elements of an assurance engagement
The three parties involved:
a) The practitioner
b) Intended users
c) The responsible party
An appropriate subject matter
 Elements of an assurance engagement Cont’d

Suitable criteria, against which the subject matter is

evaluated/measured
Sufficient appropriate evidence
Assurance report in an appropriate form.
 The Agency Theory

• Accountability is the quality or state of being answerable;

• Stewardship refers to the duties and obligations of a person who
manages another person's property.
• Agents are people employed or used to provide a particular
service.
 Benefits of an audit

• Improves the quality and reliability of financial information

• Need for Independent scrutiny and verification of financial
information
• Minimizes risk of management bias, fraud and error by acting as a
deterrent.
• May detect bias, fraud and error
• Deficiencies in the internal control system may be highlighted by
the auditor
 Limitations of audit

• An audit is not purely objective (Involves judgment)

• Not all items in FS checked (audit sampling)
• Limitations of systems
• Chance of collusion in fraud
• Time lag (period – reporting)
• Management representation Bias
• Limitations of the auditor’s report
 Limitations of audit

In light of the above Auditors can never certify that the accounts
are correct. They can only express an opinion (the expectation
gap)

• An audit is not a witch hunt!

• Management, not auditors are ultimately responsible for the
detection and prevention of error and fraud in the FS.
 Types of assurance services

1. Reasonable assurance
A Good example of a reasonable assurance engagement is external
audit
2. Review Engagement
A review engagement provide a lower level of assurance compared
to a an external audit an may include:
• An attestation (e.g. review of interim financial information)
• A direct reporting engagement (due diligence exercise in a sale of
an entity)
 Session 2
Rules and
Regulations
 Focus

• The need for regulation

• Mechanisms by which auditors are regulated
• Development and status of International Standards on Auditing
• Assurance engagements other than the statutory external audit
• SME audit
• Appointment, removal and resignation of the auditors
• Auditor rights and duties
 Introductory Thought

Common question!
Who audits the auditor?
 The Need for Regulation
Regulation helps the accounting profession in many ways
including;
• Focus on audit quality
• Adherence to a strict ethical code of conduct
• Harmonization of auditing procedures
 The Need for Regulation (Cont’d)
The above is tenable if auditors comply with:
• Code of ethics
• International standards on Auditing (ISA’s)
• National Company Law
 International Federation of Accountants
• IFAC is global organization for the accountancy profession
• IFAC promotes international regulation of the accountancy
profession (the three E’s)
 International Federation of Accountants Cont’d

• IFAC Supervises the international audit and assurance standards

board (IAASB)
• The IAASB’s responsibility is to develop and promote International
Standards on Auditing (ISAs)
• There are currently 36 ISAs and one International Standard of
Quality Control, although not all are examinable for this syllabus
 International Standards on Auditing ISAs
• For an ISA's to be issued, a lengthy process of discussion and
debate occurs to ensure the members affected by the guidance
have had an input.
• An exposure draft (ED) is issued for public comment and these
comments may result in revisions to the ED.
• Approval of two thirds of IAASB members is required for the ISA
to come into force.
 Local and International Auditing Standards
IFAC is simply a grouping of accountancy bodies ,it has no legal
standing in individual countries. Countries therefore need to have
arrangements in place for:
• National standard setters
• Implementing auditing Standards
 Local & International Auditing Standards Cont’d

• In the event of a conflict between the two sets of guidance, local

regulations will apply.
• The Zambia Institute of Chartered Accountants (ZiCA) regulates
the work of Accountants/Auditors in Zambia
 Zambia Institute of Chartered Accountants

With regards to auditing practice ZiCA has the authority to:

• Enforce the implementation of auditing standards

• Inspect audit files to monitor audit quality
• Enforce quality of audit work
 SME Audit

Discuss,
• In Zambia Small firms are not exempt from an audit exercise
contrary to many countries in the world.
• Small firms can however decide whether to have an audit or not
considering of course the benefits or demerits of either choice.
 Legal Requirements of Auditing
Which companies are required to have an audit?
• In most countries, large limited liability companies are required by
law to have an audit.
• Companies owned and managed by different persons are likely to
benefit from an audit compared to owner managed firms.
 Legal Requirements of Auditing
Who is qualified to be an auditor?
• A member of a Recognized Supervisory Body (RSB), e.g. ZiCA
allowed by the rules of that body to be an auditor or
• someone directly authorized by the state
 Legal Requirements of Auditing Cont’d
Individuals who are authorized to conduct audit work may be:
• sole practitioners
• partners in a partnership
• members of a LLP
• directors of an audit company
 Legal Requirements of Auditing Cont’d
Who may NOT act as an auditor:
• Excluded by law: The law excludes those involved with
managing the company and those who have business or personal
connections with them from auditing that company.
• Excluded by the Code of Ethics: Auditors must also comply
with a Code of Ethics.
 Appointment & Removal of Auditors
In Zambia appointment can be done by:
• Members (shareholders)
• Directors can appoint the first auditor or to fill a ‘casual vacancy‘.
• Registrar of companies if no auditors are appointed by the
members or directors.
(1994 Companies Act)
Auditors of private companies are appointed until the are removed!
 Appointment & Removal of Auditors
Removal of auditors
• Can be Achieved by a simple majority at a general meeting of
the company.
• Auditors can circulate representations stating why they should
not be removed if applicable.
 Appointment & Removal of Auditors Cont’d
• A statement of circumstances must be sent to the company and
the regulatory authority to set out issues surrounding the
cessation of office.
• In practice, if the auditors and management find it difficult to
work together, the auditors will usually resign.
 Auditors rights
The auditor has the rights TO:
• Access the company’s books and records
• Receive information and explanations necessary for the audit
• Receive notice of and attend any general meetings
 Auditors rights Cont’d
• Be heard at such meetings
• Receive copies of any written resolutions of the company.
• Request a General Meeting of the company to explain the
circumstances of the resignation.
• To require the company to circulate the notice of circumstances
relating to the resignation.
 Auditors Duties
The auditor has a duty to consider the following:
• Whether the financial statement have been prepared in
Compliance with legislation (Company Law)
• The truth and Fairview of the Accounts
 Auditors Duties Cont’d
• Adequate accounting records and returns
• Agreement of records with the underlying records
• Consistence of other reports such as the directors report with the
audited accounts
• Whether disclosure of directors benefits has been made
Session 3
Corporate Governance
 Focus
Contents
• Codes of Corporate governance
• Audit Committee
• Internal control effectiveness
• Communication with those charged with governance
 Introductory Thought
• The problem of corporate governance is primarily centered on the
concept of divorce of corporate ownership and control………
• There need to protect shareholders and other stakeholders
interests in a corporate entity.
• The collapse of Company’s such as Enron a US based energy
company, raised concerns among stakeholders particularly the
shareholders on the need to protect their interest.
 What is Corporate Governance?
Corporate governance is the system by which companies are directed
and controlled.
The aim of corporate governance initiatives is to ensure that
companies are run well in the interests of their shareholders and the
wider community.
 Principles of Corporate Governance
• Risk management/Reduction
• Compliance with organization strategy
• Fulfilling stakeholder expectations and reducing conflict of interest
• Establishment of clear accountability at senior level
• Independence of NEDs & Auditors
• Encourage relevant/reliable financial reporting
• Enhancement of stakeholders involvement (Mostly through
dialogue)
• Promotion of integrity/disclosure
 Corporate Governance Code
Generally corporate governance codes are based on the following
points:
• Corporate leadership
• Effectiveness of the board
• The need for accountability
• Remuneration of the board members
• Relationship/dialogue with shareholders
 Corporate Leadership

Corporate leadership entails there should be:

• The board takes collective responsibility over the firms affairs and
success
• Separation of the roles of chair and CEO
• No one should have unfettered powers of decision
• The chairman should lead the board and ensure it is effective
• Non-executive directors (NED’s) should constructively challenge
and help develop strategy.
 Effectiveness of the Board

Board effectiveness is made tenable where you have:

• Appropriate skills, experience, independence and knowledge
• Formal, transparent and rigorous process of appointing
directors.
• Sufficient time to discharge their responsibilities.
• Timely supply of information appropriate form and quality to
the board.
• Regular performance evaluations of the Board and its
committees
• All directors should be submitted for reelection at regular
intervals subject to satisfactory performance
 Accountability
Board Accountability is made tenable where you have;
• A balanced and understandable assessment of the company's
position and prospects.
• The pursuance of Strategic objectives being met at acceptable
levels of risk
• Formal and transparent arrangements for applying principles for
maintaining an appropriate relationship with the company's
auditor.
 Remuneration of the Board Members

Board members Rewards must reflect the quality and quantity of

effort put in by a board member.

• Levels of remuneration should be sufficient to attract, retain and

motivate
• Remuneration must be performance related at board and
individual levels
• Sound policy for executive directors remuneration
• No director should be involved in setting his own pay (!)
 Relationship with Shareholders
Deliberate meetings must be scheduled for shareholders and the
board discuss matters pertaining to company past , present and
future affairs.

• Dialogue with shareholders based on a mutual understanding of

objectives.
• The board ensures that there is satisfactory dialogue with
shareholders.
• The board should use the AGM to communicate with investors
and encourage their participation.
 Board Composition & Committees
• Separate the roles of CEO and Chairperson
• The chairman should preferably a NEDs to enhance effectiveness.
• Balance the number NEDs and executive directors
• ED’s run the company on a day to day basis.
• NEDs monitor the executive directors and contribute to the overall
strategy and direction of the organization.
 Board composition and Committees
• Audit committee: Responsible for financial reporting and internal
control matters.
• Remuneration committee Sets the remuneration packages for the
executive directors
• Nomination committee: : Decide on appointments of executive
directors
• Risk committee: responsible for assessing the risks of the company
and deciding on the appropriate risk management approach
 Non-Executive Directors

Advantages
• Participation at board meetings.
• Provision of experience, insight and contacts to assist the
board.
• Membership of subcommittees as independent, knowledgeable
parties.
• Provide oversight supervision on the whole board.
• Often act as a ‘corporate conscience’.
 Non-Executive Directors
Disadvantages
• NED’s May not be sufficiently well informed or have time to fulfil
the role competently.
• NED’s May fail to report significant problems and approve
unjustified pay rises.
 The Audit committee
The AC:
• Consists of non-executive directors
• Is Composed of at least three NED’s
• Improves public confidence in the credibility and objectivity of
published financial information,
• Assists directors in meeting their obligations
• Acts as a point of contact with the board for both internal and
external auditors.
 Functions of the Audit Committee

• Monitoring the integrity of the financial statements.

• Reviewing the company’s internal financial controls.
• Monitoring and reviewing the effectiveness of the internal audit
function.
• Consider annually whether there is a need for internal audit
function
• Ad-hoc Investigation of possible improprieties
(‘whistleblowing’).
 The Audit Committee
Benefits of the AC
• Increased confidence in credibility of financial reporting
• Frees executive directors to manage
• Reporting lines for internal audit/impartial link for external audit
• Creates culture opposed to fraud
 The audit committee
Potential difficulties
• Difficulties recruiting the right nonexecutive directors
• Nonexecutive directors are normally remunerated, and their fees
can be quite expensive.
 Risk management
Risks can arise from many sources and be of various natures, e.g.
operational, financial, legal
Risk management can involve:
• Transferring the risk to another party e.g. by taking out insurance
or outsourcing
• Avoiding the risk by ceasing the risky activity
• Reducing the risk by implementing effective controls
• Accepting the risk and bearing the cost and consequence if the
risk happens.
 Risk Management

Internal control
One way of minimizing risk is to incorporate internal controls into
a company’s systems and procedures.
 Risk Management and Directors

It is the director's responsibility to implement internal controls and

monitor their application and effectiveness.
 Risk Management and Auditors
Auditors are not responsible for the design and implementation of
their clients' control systems.
Auditors have to assess the effectiveness of controls for reducing the
risk of material misstatement of the financial statements. They
incorporate this into their overall audit risk assessment, which allows
them to design their further audit procedures.
 Communication with those Charged with
Governance
ISA 260 (Communication with those charged with governance) sets
out the guidance on the matters which auditors should
communicate with those charged with governance.
Those charged with governance include management or persons
with executive responsibility for the conduct of an entity’s operations
 Communication with those charged with
Governance
Reasons for communicating with those charged with governance;
• Mutual understanding of the audit
• Development of a constructive working relationship
• Access to information
• Enhances accountability of management over the financial
reporting system
 Communication with those Charged with
Governance
Matters to be communicated include:
• Auditors responsibility in relation to the F/S
• The Plan scope and timing of the audit
• Significant findings from the audit
• Auditors independence

ISA 260 places emphasis the documentation of communication

with those charged with governance where appropriate.
Professional Ethics &
Acceptance
 Focus
Contents
• Fundamental principles of professional l ethics
• Accepting Audit Assignments
• Agreeing the terms of the engagement
 Introductory Question
What is ethics?????????
 Introductory thoughts

• The relative word Ethic can be defined as the science of wrong

and right.
• Ethics bridge the gap between what the Law requires and what
society expects.
• Ethics can also be defined as A system of accepted beliefs,
which controls behavior , especially such a system which
controls behavior (Cambridge advanced dictionary)
 The Need for ethics
A code of ethics for purposes of our study is needed because:
• Accountants by nature of their work occupy positions of public
interest
• Ethics promote/secures substantial professional independence
of the assurance provider
 Recognized Supervisory Bodies and ethics
A recognized supervisory body like ZiCA uses ethics to regulate the
behavior/conduct of their members
Any investigated/proven report that brings the name of ZiCA for
instance into disrepute will be followed by correctional measures
including;
• Fines
• Suspension of membership
• Withdrawal of membership
 Fundamental Principles
Integrity Members shall be straightforward and honest in all
business and professional relationships
Objectivity Members shall not allow bias, conflicts of interest or
undue influence of others to override professional or business
judgements
Professional competence and due care : Members have a continuing
duty to maintain professional knowledge and skill
 Fundamental Principles (Cont’d)
Confidentiality: Members shall respect the confidentiality of
information acquired as a result of professional and business
relationships
Professional behavior :Members shall comply with relevant laws and
regulations and should avoid any action that discredits the
profession.
 Independence and Objectivity
Independence can be defined as having ‘freedom from situations
and relationships where objectivity would be perceived to be
impaired by a reasonable and informed third party

A member’s objectivity must be beyond question if he/she is to

report as an auditor. That can only be assured if the member is, and
is seen to be, independent.
 Threats to Objectivity
Five classes of threats to objectivity
• Self interest
• Self review
• Familiarity
• Intimidation threat
• Advocacy threat
 Self Interest Threat
• Ownership of shares
• Fee dependency
• Gift and hospitality
• Employment with client
• Overdue fees
• Contingency fees
• Litigation with client
 Advocacy Threats

• Representing the client

• Promoting the client’s business
• Negotiating (trade deals) on behalf of the client
 Intimidation Threat

• Fee dependency
• Audit partner joins client
• Litigation with client
• Close relationship with client
 Familiarity Threat

• Long association with client

• Gifts and hospitality
• Movement of staff between client and audit firm
• Personal relationships
 Self Review Threat
• Preparation of clients accounts
• Internal audit
• Tax computation
• Valuation services
• Clients staff becomes an employment with the audit team
 Appointment Ethics
Before accepting appointment auditors should:
• Ensure professionally qualified to act on legal and ethical grounds
• Ensure existing resources adequate
• Obtain references (check your client ethical standing)
• Communicate with present auditors
 Appointment Ethics (Cont’d)
After acceptance the auditors should:
• Ensure outgoing auditors’ removal/resignation was properly
conducted.
• Ensure the new auditors’ appointment is valid (Obtain
Shareholders
resolution of the appointment)
• Set up (Write!) and submit a letter of engagement.
 Advertising, Publicity and Obtaining
Professional work
The auditor:
• Should not obtain or seek work in an unprofessional manner
(What can possibly constitute unprofessional manners?).
• Can advertise, but should have regard to relevant advertising
codes/standards.
 Advertising, Publicity and Obtaining
Professional work
• Should not make disparaging references to/comparisons with the
work of others.
• Should not quote fees without great care not to mislead.
• Should not offer fees, commission or reward to third parties for
introducing clients.
 Audit Fee
Audit fee
Estimated according to charge out rates and work planned.
Lowballing is offering audit services at less than the market rate;
undercutting others in a tender. It can be an independence threat as
such a fee is less than the work is worth. However, audit does have a
fluctuating market price and firms can reduce fees
 Client Screening
In his/her initial risk assessment, the auditor should Consider the
following:
• Management integrity Risk
• Relationships
• Ability to perform the work
• Engagement economics
 Engagement Letters
The audit engagement letter is the written terms of an engagement
in the form of a letter.
ISA 210 The auditor must first establish whether the preconditions
for an audit are present. The auditor must also confirm there is a
common understanding between the auditor and the client on the
terms of the engagement.
 Engagement Letters
Contents
• Objective and scope of the audit
• Auditor’s responsibilities
• Management’s responsibilities
• Identification of applicable financial reporting framework
• Expected form and content of any reports
Internal Topic List
• Internal audit and Corporate
governance
Audit • Internal audit and external
audit
• Scope of internal audit function
• Internal audit assignement
• Internal audit reports
• Outsourcing IA
• Using the work of internal
auditors
 Internal Audit Defined
Internal Audit defined
An independent internal appraisal established by management as
service to management.
Internal audit is an appraisal or monitoring activity established by
management and directors, for the review of internal control as a
service to the entity.
 Internal audit and corporate govenance
IA function plays a key role in assessing and monitoring internal
controls policies and procedures and assist the board by:

• Auditors for board reports not audited by external auditors

• Assisting the board in implementing new standards
• Liasing with the external auditor
 Differences Between External & Internal Audit
In discussing the above we can argue along five points
• Objective
• Report
• Availability of reporting
• Scope of work
• Appointment and removal
• Relationship with the company
 Determinants of Internal Audit
• Cost/benefit considerations
• Scale and diversity of activities
• Complexity of operations
• Senior management concern for the the need of water tight
controls
• Number of employees
 Role of Internal Audit
• Risk identification and management
• Prevention and detection of fraud
• Fraud investigations
• Value for money audits (Economy, efficiency and effectiveness of
operating activities.
• Reliability of financial and operating information.
• Assessing compliance with laws and regulations.
• Providing direct assistance to the external auditor
 Effective Audit Function
• Independence and objectivity
• Organization and supervision
• Adequate Resources
• Exclusion from operational tasks
• Access to every part of the organization (Unlimited Scope/Audit
Universe)
• Work Plan agreed by the audit committee
 Limitation of Internal Audit
• IA officers are employed by the company
• High risk of self review threat where internal audit officers are part
of the finance department for instance
• High risk of familiarity threat
 Improving Internal Audit Independence
• Separate reporting line
• Outsourcing of the IA function
• Review of IA work by managers independent of the function under
scrutiny
 Outsourcing Internal Audit Services
Advantages of outsourcing IA
• Service provider has good quality staff
• Ensures team with specialist skill/qualifications
• Provides immediate team
• Team Can be appointed for appropriate timescale
• Can be Economical
 Outsourcing Internal Audit Services
Demerits of outsourcing the internal audit dep’t
• Cost of recruiting staff (to the service provider)
• Need for staff of particular skill/qualification
• Difficulty of managing an IA department for directors
• Extended time frame between set up and results
• Work involved may not justify a full-time team
• Team might be required due to variety of skills needed
 Internal Audit Assignments
Value for money’ is a performance measure summarized in three
qualities (which a product or activity possesses) :
• Economy (affordability)
• Efficiency ( Doing more with less)
• Effectiveness (Achieving results)
Management should, as part of normal business process, assess
economy, efficiency and effectiveness in operations (a value for
money audit).
 Internal Audit Assignments
Financial audits
involve reviewing the company records and other available evidence
to substantiate information in financial and management reporting
 Internal audit Assignments
Best value’ is a performance framework introduced in local
authorities government, whereby they should implement the 4 ‘Cs’:
• Challenge (how and why is a service provided?)
• Compare (to other authorities/private sector)
• Consult (targets set in consultation with tax payers/service users)
• Compete (fair competition)
 Internal Audit Assignments
Information technology audits
Information technology is an increasingly important area of business
management need to know whether;
• the company is getting value for money from their IT system.
• the procurement process for the IT system was effective.
• the ongoing management/maintenance of the system is
appropriate.
 Internal Audit Assignments
Operational audits are audits of the operational processes of the
organization. They are also known as management, or efficiency
audits. Their prime objective is monitoring of management’s
performance, ensuring company policy is adhered to.
There are two aspects of an operational assignment:
• Ensure policies are adequate
• Ensure policies work effectively
 Internal Audit Reporting
There are two types of internal audit report:
• Risk-based
• Performance enhancement
Most work is likely to be risk-based but either way, a formal report
will be the result.
 Internal Audit Reporting
There is usually no formal requirement for internal audit reports,
however the generally accepted report format for business includes
the following:
• Terms of reference
• Executive summary
• Body of report
• Appendices for additional information
• Draft report – discussed at an exit meeting.
 IA Procedures
• Obtain written copies of the policies in the area to be audited.
• Read them and assess whether they are adequate to meet
objectives.
• Discuss the policies with members of the department to ensure
understanding is correct
• Examine the effectiveness of controls by observing them in
operation and testing them (by similar
• Report to management on adequacy and effectiveness, giving
suggestions for improvement in both areas where required
Risk Topic list
• Introduction to risk

Assessment • Materiality
• Audit risk and business risk
• Understanding the entity and its
environment
• Assessing risk of material
misstatements
• Responding to risk assessment
• Fraud, law and regulation
• Documentation of risk assessment
 Introductory Thoughts
• Audit risk assessments reduce the probability of issuing a wrong
audit opinion!
• The auditor must consider how and where misstatements can
arise!
• A preliminary analysis is therefore critical for an audit to be
effective
• Audit risk is a reality and if not managed can result in regrettable
consequences including loss of customers trust and adverse
publicity!
 Need for Risk Assessment
To obtain reasonable assurance, the auditor shall obtain sufficient
appropriate evidence to reduce audit risk to an acceptably low
 Minimum Audit Risk Mitigation Measure
• Full Compliance with ISAs (non compliance with ISA increases
audit risk)
• Plan and perform audit work
• Compliance with ISA improves the credibility and comparability of
audited financial statements
 Reasons for Risk assessment
• Identify areas of the financial statements where misstatements
are likely to occur early in the audit.
• Plan procedures that address the significant risk areas identified.
• Carry out an efficient, focused and effective audit.
• Minimize the risk of issuing an inappropriate audit opinion to an
acceptable level.
• Reduce the risk of reputational and punitive damage.
 Professional scepticism

An attitude that includes a questioning mind, being alert to

conditions which may indicate possible misstatements due to
fraud or error and a critical assessment of audit evidence.
Indicators of misstatements include:
• Contradicting evidence
• Responses Contrary to evidence obtained
• Conditions that indicate/allow for possible fraud
• Circumstances that require additional audit evidence
 Professional judgment
The application of relevant, knowledge and experience in arriving at
decisions in context.
Areas where Professional judgment is used include:
• Materiality and audit risk
• Nature timing and extent of audit procedures
• Sufficiency appropriateness of audit evidence
• Management estimates/judgment
 What is a Misstatement?
Difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount,
classification, presentation, or disclosure that is required for the item
to be in accordance with the applicable financial reporting
framework.

Misstatements can arise from error or fraud.' (ISA 450 Evaluation of

Misstatements Identified during the Audit)
 Types of Misstatements
• Factual misstatements: a misstatement about which there is no
doubt.
• Judgmental misstatements: a difference in an accounting
estimate that the auditor considers unreasonable, or the selection
or application of accounting policies that the auditor considers
inappropriate.
• Projected misstatements: a projected misstatement is the
auditor’s best estimate of the total misstatement in a population
through the projection of misstatements identified in a sample.
 How to Determine Materiality
ISA 320 states that the determination of materiality is a matter of
professional judgment and that the auditor must consider:
• Whether the misstatement would affect the economic decision of
the users
• both the size and nature of misstatements
• the information needs of the users as a group.
 Misstatements and Materiality
• 'Misstatements, including omissions, are considered to be
material if they, individually or in the aggregate, could
reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements‘
• If financial statements contain material misstatement they cannot
be deemed to show a true and fair view.
 Misstatements and Materiality (Contin’d)
The Need for appropriate Response to Risk assessments

As a result, the focus of an audit is identifying the significant risks of

material misstatement in the financial statements and then
designing procedures aimed at identifying and quantifying material
misstatement.
 Levels of Materiality
• Financial statements materiality threshold
• Performance materiality ( Set below the Financial statement
materiality threshold)
 Audit risk
Audit risk is the risk that the auditor expresses an inappropriate
audit opinion, i.e. that they give an unmodified audit opinion when
the financial statements contain a material misstatement.
 Audit risk Cont’d
• Audit risk is made up of two components: risk of material
misstatement and detection risk
• Risk of material misstatement is the risk that the financial
statements are materially misstated prior to audit and consists of
two components, inherent risk and control risk
 Components of Audit Risk
• Inherent risk; is the susceptibility of an assertion to a misstatement that
could be material, individually or when aggregated with other misstatements,
assuming there were no related internal controls.
• Control risk: is the risk that a material misstatement that could occur in an
assertion and that could be material, 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 auditor’s procedures will not detect a
misstatement that exists in an assertion that could be material, individually or
when aggregated with other misstatements.
 Business Risk
Business risk: the risk inherent to the entity in its operations (at all
levels of the business)
• Financial risk: risks arising from the financial activities or
financial consequences of an operation
• Operational risk: risk arising with regard to operations
• Compliance risk: risk that arises from noncompliance with laws
and regulations
 The Audit risk Model

Audit risk =Inherent risk x Control Risk x Detection

Risk
 Auditor’s Response to Risk Assessment
The auditor must amend the audit approach in response to risk
assessment. They can achieve this by:
• Assigning more experienced staff to risk areas
• Increasing supervision levels
• Increasing the element of unpredictability in sample selection
• Changing the nature, timing and extent of procedures
• Increasing the emphasis on substantive tests of detail
• Emphasizing the need for professional skepticism.
 Risk Assessment Procedures
Include:
• Inquiries
• Analytical procedures
• observations
 Understanding The Entity & its
environment
The objective of the auditor is to identify and assess the risk of
material misstatement, whether due to fraud or error, at the
financial statement and assertion levels, through understanding the
entity and its environment, including the entity's internal control,
thereby providing a basis for designing and implementing responses
to the assessed risks of material misstatement.'
 Understanding the Entity and its
Environment
This generally includes the entity’s:
• The nature of operations
• Application of accounting policies
• Objectives, strategies and related business risks
• Measurement and review of financial performance
• Internal controls relevant to the audit
 Analytical Procedures
Evaluations of financial information through analysis of plausible
relationships among both financial and nonfinancial data' and
investigation of identified fluctuations, inconsistent relationships or
amounts that differ from expected values ISA 520
 Fraud Law and Regulation
Fraud includes:
• Fraudulent financial reporting
• Misappropriation of assets
Responsibilities
• Management and those charged with governance are
responsible for prevention and detection.
• Auditors must be aware of the possibility of misstatement due to
fraud.
 Fraud Law and Regulation Cont’d
Risk assessment procedures
• Inquiries of management/those charged with governance
• Consideration of fraud risk factors (these are listed in an
appendix to ISA 240)
• Consideration of results of analytical procedures
• Consideration of other relevant information
 Law
ISA 250 states that:
The auditor shall obtain a general understanding of the legal and
regulatory framework applicable to the entity and how the entity is
complying with that framework.
 Documentation
Matters to be documented include:
• Discussion among audit team
• Understanding of the entity and its controls
• Identified and assessed risks of material misstatement
• Risks identified and related controls evaluated
• Overall responses
 Documentation Cont’d
• Nature, extent and timing of further audit procedures
• Results of audit procedures
• If relying on evidence on controls from prior audit, conclusions
regarding appropriateness
• Demonstration that the financial statements agree or reconcile
with underlying accounting records
Audit
planning
 Why plan for your next audit Assignment?

The objective of the auditor is to plan the audit so that it will be

performed in an effective manner.' (ISA 300 Planning an Audit of
Financial Statement)
 Compliance with ISA’s and Planning
• Ensures that the auditor is fulfilling all of their responsibilities.
• Allows a user of audited FS to have Reasonable confidence in
one auditor's opinion
• Ensures that the quality of audits internationally, is maintained to a
high standard
• Provides a measure to assess the standard of an auditor's work
 The Planning Process
Preliminary engagement activities:
• evaluating compliance with ethical requirements
• establishing the terms of the engagement
Planning activities:
• developing the audit strategy
• developing an audit plan
 Audit Strategy and Audit Plan

The audit strategy sets the scope, timing and direction of the audit,
and guides the development of the detailed audit plan.

The audit plan converts the audit strategy into a more detailed plan
and includes the nature, timing and extent of audit procedures in
order to obtain sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level.
 Reasons for Planning (EF)
• Devotes appropriate attention to important areas of the audit
• Identifies and resolves potential problems on a timely basis
• Organizes and manages the audit so that it is performed in an
effective and efficient manner
 Reasons for Planning (EF) Cont’d
• Selects team members with appropriate capabilities and
competencies
• Directs and supervises the team and reviews their work
• Effectively coordinates the work of others, such as experts and
internal audit.
 Analytical Procedures
• Obtain an understanding of the entity and its environment
• Assist in assessing the risks of material misstatement
• help identify the existence of unusual transactions
• Assist the auditor in identifying risks of material misstatement due
to fraud.
 Interim Audit
• The auditor must consider the timing of audit procedures: whether
to carry out an interim audit and a final audit, or just a final audit.
• Interim audits can be completed part way through a client's
accounting year (i.e. before the year end). This allows the auditor
to spread out their procedures and enables more effective
planning for the final stage of the audit.
 Impact of Fraud
• ISA 240 the Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements recognizes that misstatement in the
financial Statements can arise from either fraud or error.
• The distinguishing factor is whether the underlying action that
resulted in the misstatement was intentional or unintentional
 Audit Plan Documentation
• ISA 230 Audit Documentation, requires auditors to prepare and
retain written documentation that:
• Records of the auditor’s basis for the audit report.
• Provides evidence that the audit was planned and performed
• Assists the engagement team to plan and perform the audit.
 Audit Documentation
• Assists members of the engagement team responsible for
supervision to direct, supervise and review the audit work.
• Enables the engagement team to be accountable for its work.
• Retains a record of matters of continuing significance to future
audits.
 Learning Outcome
• Differences between external audit and internal audit (I)
• Distinguish between the roles of external and internal audit regarding audit planning and the collection of audit evidence
• Explain the importance of the independence of the internal audit function

• B Internal audit: scope, limitations, assignments and reporting (I)

• Identify the factors to take into account when assessing the need for internal audit
• Describe best practice in internal audit with reference to appropriate international codes of corporate governance
• Identify the scope and limitations of internal audit
• State the advantages and disadvantages of outsourcing the internal audit function
• Explain the respective responsibilities of internal and external auditors in relation to fraud and error
• Explain the process of producing an internal audit report
• Describe the format and content of internal audit reports

• C Using the work of internal audit (I)

• Explain the nature and purpose of internal audit assignments (such as value for money audits, management audits, IT
and procurement audits etc.)
• Explain the extent to which external auditors may rely on work done by internal auditors
Audit Planning, Risk And
Documentation
The need for audit planning
• Audit planning (I)
• Explain the need for audit planning
• Distinguish between the overall audit strategy and the detailed audit plan
• Distinguish between an interim and a final audit

• B Introduction to risk (I)

• Define audit risk
• Define business risk
• Explain the importance of audit risk and business risk
• Explain the risk of material misstatement

• C Audit documentation (I)

• Explain why audit documentation is kept
• Describe the contents of audit documentation
• Describe the procedures necessary to ensure safe custody and retention of audit documentation
Internal Control
 Introductory Thoughts

Internal controls are essentially set to safeguard business resources

and to provide a reasonable assurance that objectives will be met!

Internal controls are meant to preserve shareholders investments!

 What are Internal Controls?

Internal control is the process designed, implemented and

maintained by those charged with governance, management and
other personnel, to provide reasonable assurance about the
achievement of the entity’s objectives with regard to reliability of
financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations.
 Internal Control and Audit Strategy

If tests of controls provide evidence that an effective control system

is in place, this may allow the auditor to place more reliance on
internal controls and evidence generated internally within the entity
 Internal Control and Audit Strategy cont’d

Where there is no effective internal control system the Auditor

should respond by!

• Increasing procedures conducted at and after the year-end.

• Increasing substantive procedures, in particular, tests of detail.
• Increasing the locations included in the audit scope.
• Placing less reliance on analytical procedures as the information
produced by the client's systems is not reliable.
 Internal Control and Audit Strategy cont’d

• Placing less reliance on written representations from management

if the control environment generally is considered to be weak.
• Obtaining more evidence from external sources e.g. external
Confirmations from customers and suppliers.
• Updating the audit strategy and plan to reflect the additional
testing required at the final audit stage.
 Limitations of internal controls

• Human error in the use of judgement.

• Simple processing errors and mistakes.
• Collusion of staff in circumventing controls.
 Limitations of internal controls Cont’d

• Systems are designed for routine/Usual business transactions

• The abuse of power by those with ultimate controlling
responsibility (i.e. management override).

(!) As a result, the auditor must always perform substantive testing

on material balances in the financial statements.
 Components of Internal Controls

 Control environment
 Risk assessment process
 The information system relevant to financial reporting
 Control activities
 Monitoring of controls
 The Control Environment

The framework within which controls operate!

Focuses largely on the attitude, awareness and actions of those

responsible for designing, implementing and monitoring internal
controls
 The Control Environment

• Communication and enforcement of integrity and ethical values.

• Commitment to competence/Training.
• Participation by those charged with governance.
 The Control Environment
• Management’s philosophy and operating style.
• Organizational structure.
• Assignment of authority and responsibility.
• Human resource policies and practices.
 Risk Assessment

The risk assessment process forms the basis for how management
determines the business risks to be managed, i.e. threats to the
achievement of ongoing business objectives. These processes will
vary hugely depending upon the nature, size and complexity of the
organization.
 Information System
The information system is all of the business processes relevant to
financial reporting and communication.
 Information System
The information system includes the procedures within both
information technology and manual systems including

• Initiate, record, process and report transactions.

• Maintain accountability for assets, liabilities and equity.
 Information System
• Resolve incorrect processing of transactions.
• Process and account for system overrides.
• Transfer information to the general/nominal ledger.
 Control activities

• Authorization.
• Performance review.
• Information processing.
• Physical controls.
• Segregation of duties.
 Understanding systems

Can be done through:

• Enquiries of relevant personnel.

• Observing the application of controls.
• Tracing a transaction through the system to understand what
happens (a walkthrough test).
• Inspecting documents, such as internal procedure manuals.
 Documenting internal controls

Types of internal control documentation include.

• Narrative notes a written description of a system

• Flowchart diagrammatical representation of the system
• Organization chart diagram showing reporting lines, roles and
Responsibilities
 Documenting internal controls

• Internal Control Questionnaire (ICQ) a list of controls given to the

client to say whether or not those controls are in place.

• Infernal Control Evaluation Questionnaire (ICE) the client is asked

what controls they have in place for a given control objective.
 Narrative notes

Advantage
• Easy to record
• Facilitate understanding by all audit staff
Disadvantage
• Difficult to update (unless computerized)
• Aim to describe and explain the system.
• Can support flowcharts.
 Flow charts
Advantages:
• quick to prepare
• easy to follow,
• complete system,
• eliminate extensive narrative
 Flow charts

Disadvantages:
• Only suitable for standard systems,
• Good for document flow not controls,
• Difficult to amend,
• Can waste time
 Internal Control Questionnaires
Advantages
• Quick to prepare
• Can ensure all controls are present
 Internal Control Questionnaires

disadvantages
• Controls may be overstated as the client knows the answer the
auditor is looking for is 'yes'
• Unusual controls are unlikely to be included on a standard
questionnaire and may not be identified
• May contain a number of irrelevant controls
Internal Control Evaluations Questionnaires

• The client has to respond with the control they have in place
rather than a yes/no answer which should mean controls are less
likely to be overstated.
• Quick to prepare as a list of control objectives can be compiled
and the client is asked what controls they have in place to
address.
Internal Control Evaluations Questionnaires

• Client may still overstate controls as they may say a control is in

place for the control objectives even if it is not.
• The checklist may contain control objectives not relevant to the
client.
• Where you have Unusual risks ,objectives may not be identified.
 Testing the system
• Typical methods of controls testing include:
• Observation of control activities, e.g. observing the inventory
count to ensure it is conducted effectively and in accordance with
the instructions.
 Testing the System

• Inspection of documents recording performance of the control, e.g

inspecting an order for evidence of authorisation.
• Computer assisted audit techniques (such as test data to ensure
the programmed controls are working effectively.
 Common Systems
• Sales system
• Purchases system
• Payroll system
• Inventory system
• Cash cycle
• Internal control: control environment and activities (M)
• Define internal control
• Explain control objectives
• State why internal control is relevant to the external audit
• Explain the components of an internal control system
• Distinguish between tests of controls and substantive procedures
• Identify the limitations of internal controls in relation to fraud and error
• Testing of internal control by external auditors (M)
• Describe how auditors record internal control systems
• Identify deficiencies in internal control systems (sales, purchases, inventory, payroll, bank and cash and capital expenditure) and how they
limit the reliance that can be placed on those systems by external auditors
• Suggest appropriate recommendations to deficiencies in internal control systems
• Illustrate computer controls with examples
• Explain how the reporting of deficiencies in internal control and recommendations to mitigate them are provided to management
• State why smaller entities may have different levels of internal control compared to larger entities and state the effect this may have on the
audit evidence required for the audit of a smaller entity

• C Tests of controls over specific accounting systems – sales, purchases, inventory, wages and cash (M)
• For each system:
• Describe control objectives, control activities and control procedures
• Describe tests of controls
Tests of Content
• Sales System
• Purchases System
Controls • Inventory System
• The Cash system
• The Payroll System
• Capital
Expendtiure
 Introduction Thoughts
It is important to be comfortable with:
• What a control is trying to achieve (objective/Aim)
• Examples of controls for specific transaction areas
A test of control involves the auditor obtaining evidence that the
client has implemented the controls they say they have and that
they have worked effectively during the period.
Sales Basic Cycle

Order
Received

Dispatch
Receipt
Goods

Transaction
Invoice
Recorded in
Sent
Books
 Sales-Internal Control Objectives

Ordering/Granting Credit
• Sale made to good credit ratings
• Who are encouraged to pay promptly
• Orders are correct
• Orders are fulfilled
 Sales-Internal Control Objectives Cont’d
Dispatch/Invoicing
• All dispatches are recorded
• Invoicing is correct and for goods supplied
• Credit notes given are for valid reasons
Accounting/Recording/Credit Control
• Transactions are recorded in correct accounts
• In correct period
• Irrecoverable debts identified
 Controls (Sales)
Ordering/granting credit
• Segregation of duties (credit control/invoice/despatch)
• Authorisation of credit terms (checks obtained review)
• Sequential numbering of pre-printed order forms
• Correct prices quoted to customers
• Match orders to dispatch notes (o/s orders queried)
• Dealing with customer queries
 Controls (Sales)
Dispatch/invoicing
• Authorisation of dispatch
• Examination of goods despatched (quality)
• Recording of goods outward
• Match dispatch notes to order/invoice (o/s queried)
• Sequential numbering of pre-printed dispatch notes
• Signature of customer on delivery notes
• Authorisation of price on invoice (price list)
• Arithmetical checks on invoices
 Controls (Sales)
Accounting/recording/credit control
• Segregation of duties (recording sales/statements)
• Recording of sequence of sales invoices
• Matching cash receipts with invoices
• Retention of customer remittance advices
 Tests of controls
• Test for evidence of:
• References
• Authorisation
• Credit terms/limits
• Matching orders
• Verify matching of sales
invoices with dispatch notes.
• Test numerical sequences of
records (enquire about gaps).
 Tests of controls Cont’d
• Observe quality inspections or inspect documentary evidence of
inspections.
• Review invoices for evidence arithmetical checks have occurred.
• Review entries in ledger, scrutinise for credit limits,
• inspect reconciliations.
Purchases Basic Cycle
Orders are
placed

Cash Goods
Payment Received

Transactions
Invoiced
are recorded
Received
in Books
 Purchases-Internal Control objectives
Ordering
• Orders are authorised and for the company
• Made from authorised suppliers
• At good prices
 Purchases-Internal Control objectives Cont’d

Receipt/invoice
• Only accepted if from authorised order
• Accurately recorded
• Liabilities recognised for goods received
• Credits are claimed
 Purchases-Internal Control objectives Cont’d

Accounting
• Expenditure is only for received goods
• Authorised
• Properly recorded in correct account in correct period
 Purchases Controls
Ordering
• Segregation of duties (requisitioning/ordering)
• Central policy for choice of supplier
• Use of pre-numbered purchase requisitions
• Authorised, pre-numbered (safeguarded) order forms
• Monitoring of supplier terms for most favourable
 Purchases Internal Controls Cont’d
Goods received
• Examine goods inwards (quality) and record deliveries
• Compare goods received notes (GRNs) with orders
• Reference suppliers’ invoices
• Check suppliers’ invoices (maths, prices, quantities)
• Record goods returns
• Have procedures for obtaining credit notes
 Purchases Internal Controls Cont’d
Accounting
• Segregation of duties (recording/checking)
• Prompt recording in day books and ledgers
• Comparison of supplier statements to ledger accounts
• Authorisation of payments (limits/goods received)
• Review of allocation of expenditure
• Reconciliation of payables ledger with total of
• balances Procedures for cut-off
 Tests of controls (Purchases)
Tests of controls
• It is important that auditors test that invoices are supported by
genuine purchase orders, authorised by correct individual.
• Inspect invoices to ensure they are supported by GRNs,
authorised, priced correctly, coded correctly, entered in inventory
records, Comfirm that the maths correct, posted to ledger
 Tests of controls (Purchases)

• Review numerical sequences.

• Observe whether the purchase day book is referenced to
invoices.
• Review a sample of supplier statement reconciliations.
• Inspect control account reconciliations.
 Inventory Internal Control Objectives
Recording
• All inventory movements recorded/authorised
• All inventories recorded are owned by company
• Inventories recorded exist
• Inventory quantities recorded are correct
• Cut-off procedures correctly applied
Inventory Internal Control Objectives Cont’d
Protection
• Safeguarded against loss/theft/damage
Valuation
• Costing system values inventories correctly
• Allowance made for slow moving/obsolete inventories
Inventory holding
• Levels of inventories held are reasonable
 Inventory Internal Controls
Recording
• Segregation of duties (custody/recording)
• Goods inwards met and checked
• Inventory issues supported by documentation
• Inventory records maintained
Protection
• Precautions against theft (restriction)
• Precautions against deterioration
• Security over inventory held by third parties
• Regular inventory taking
 Inventory Internal Controls Cont’d
Valuation
• Valuation agrees with IAS 2 Inventories
• Calculations are checked
• Condition of inventories is reviewed
• Accounting for waste is provided for
Inventory holding
• Provision made for inventory levels
• Minimum/maximum inventory levels exist
 Inventory tests of Control
• Observe and test check inventory counts, ensure discrepancies
are investigated, authorised and corrected.
• Review inventory count instructions and ensure staff have been
provided with a copy.
• Observe goods inwards inspection.
• Check sequence of inventory records.
• Observe security arrangements for inventories.
• Consider the environment in which inventories are held.
 Cash Internal Control Objectives

• All monies received are banked, recorded and safeguarded

against loss/theft.
• All payments are authorised, made out to the correct payees,
recorded.
• Payments are not made twice for the same liability.
 Internal Controls Over Reciepts
• Segregation of duties
• Post stamped with date of receipt
• Restrictions on receipt of cash (salespeople only)
• Agreement of cash collections to till rolls
• Prompt maintenance of records
• Giving and recording receipts for cash
 Banking-Internal Controls
• Daily bankings, banking of receipts intact
• Restrictions on opening new bank accounts
• Limitations on cash floats
• Surprise cash counts
• Custody of cash and cheques
• Restrictions on issuing blank cheques
• Bank reconciliations
 Internal Controls over Payments
• Cheque requisitions supported by
• documentation/authorised
• Authorised signatories
• Prompt dispatch of signed cheques
• Payments recorded promptly
• Cash payments authorised
• Limit on disbursements
• Rules of cash advances to employee
 Tests of controls (Cash)

• Observe post opening. Trace entries on listing to cash book,

paying in book, bank statement.
• Observe whether cash is banked daily.
• Review records for evidence that cash receipts are agreed to till
rolls (eg signatures, spreadsheet entries).
• Review documentation for evidence of agreement of cash receipts
from cash book to paying-in slips, bank,
 Tests of controls (Cash) Cont’d
• posting to the sales ledger, posting to the general ledger.
• For cash payments, check that cheques are signed by authorised
signatories (paid cheques can be requested from the bank), check
to supplier invoice, verify that supporting documents are stamped
‘paid’.
• Review postings to the ledgers.
• Review a sample of bank reconciliations to ensure properly
carried out.
• Observe a cash count.
 Payroll-Internal control objectives
• Employees only paid authorised amounts for work done.
• Deductions are recorded and pay agrees to bank records.
• Correct employees are paid.
• Deductions are correct and paid over to the correct authorities.
 Internal Controls
• Segregation of duties
• Authorisation of changes and payments
• Password protection for computerised payroll
• Custody of cash for cash payouts
• Maintenance of salary bank account
• Reconciliation of accounts
• Reconciliation of wages costs to payroll records
• Reconciliations of deductions
• Surprise cash counts
 Tests of Controls
• It is vital to check that all aspects of the payroll (amounts/
• deductions/payments) are authorised.
• Attend cash payouts to ensure controlled.
• Test password protection by inputting test data. Review
• reconciliations to ensure properly carried out and that
• discrepancies are followed up.
 Capital Expenditure Internal Control Objectives

Authorisation
• All expenditure is authorised
Recording
• All expenditure is correctly classified in the FS as capital or
revenue expenditure.
 Internal Controls over CAPEX
Ordering
• Orders for capital items should be authorised specifically
• Should be requisitioned on different documentation
Invoices
• Should be approved by authorised person
• Should be coded correctly
 Internal Controls over CAPEX Cont’d
Recording
• Capital items should be written in the non-current asset register
• Non-current asset register reconciled to general ledger
• Segregation of duties (requisitioning/ordering)
• Central policy for choice of supplier
 Tests of Controls-CAPEX
It is vital that auditors check that all invoices are supported by
genuine purchase orders, authorised by the correct individual
Audit Evidence –
Techniques
 What is audit evidence?
Audit evidence is all of the information used by the auditor in
arriving at the conclusions on which the audit opinion is based.
 What is audit evidence? Cont’d
ISA 500 states that Auditors must design and perform audit
procedures to obtain sufficient appropriate audit evidence.
• Sufficiency relates to the quantity of evidence.
• Appropriateness relates to the quality or relevance and reliability
of evidence.
 Audit quality

Audit quality is influenced by:

• External evidence (more reliable than internal)

• Auditor evidence (collected from auditors better than obtained
from entity)
• Entity evidence (more reliable when controls effective)
• Written evidence (more reliable than oral)
• Original evidence (original better than photocopies)
 Audit Evidence sufficiency
Factors that affect the sufficiency of audit include:
• Risk assessment
• Nature of systems
• Materiality of item
• Experience of the Auditor
• Source and reliability of information obtained
• Results of procedures
 Appropriateness of audit evidence
Appropriateness of evidence breaks down into two important
concepts namely reliability and relevance
Reliability is enhanced if information is:
• Obtained from an independent external source
• Generated internally but subject to effective control
 Appropriateness of audit evidence Cont’d
• Obtained directly by the auditor
• In documentary form
• In original form.

To be relevant audit evidence has to address the objective/purpose

of a procedure.
 Financial statements assertions
Financial statement assertions are the representations by
management, explicit or otherwise, that are embodied in the
financial statements, as used by the auditor to consider the different
types of potential misstatements that may occur.
• About classes of transactions and events and related disclosures
(occurrence, completeness, accuracy, cut-off, classification and
presentation)
 Financial statements assertions Cont’d
• About account balances and related disclosures at the period end
(existence, rights and obligations, accuracy, valuation and
allocation, classification and presentation)
 Financial statements assertions
Auditors perform a range of tests on the significant:
• Classes of transaction and events (Occurrence, completeness,
accuracy, cut off and classification)
• Account balances (Existence, rights and Obligation, Valuation and
completeness)
• Disclosures (Occurrence Rights and Obligation, Completeness,
Classification and Understandability, Accuracy and Valuation)
 Financial Statements Assertions
• Occurrence – the transactions and events recorded actually
occurred and pertain to the entity.
• Completeness – all transactions, assets, liabilities and equity
interests have been recorded that should have been recorded.
• Accuracy – amounts, data and other information have been
recorded and disclosed appropriately.
• Cutoff – transactions and events have been recorded in the correct
accounting period.
 Financial statements assertions
• Classification and understandability – transactions and events
have been recorded in the proper accounts, and described and
disclosed clearly.
• Existence – assets, liabilities and equity interests exist.
• Rights and obligations – the entity holds or controls the rights to
assets and liabilities are the obligations of the entity.
• Valuation and allocation – assets, liabilities and equity interests
are included in the financial statements at appropriate values.
 Sources of Audit evidence
a) Tests of controls
b) Substantive audit procedures
• Test of detail
• Analytical procedures
 Audit procedures
• Physical Inspection of tangible assets
• Inspection of documentation or records
• Observation
• Inquiry
• Confirmation
• Recalculation
• Performance
• Analytical procedures
 Audit Sampling
Audit sampling is essential because Its prohibitively expensive to
examine every transaction or event of the client.
ISA 530 defines Audit Sampling as;
 Audit Sampling Cont’d
Audit sampling is:
'The application of audit procedures to less than 100% of items
within a population of audit relevance such that all sampling units
have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire
population.'
 Audit Sampling Cont’d
• When sampling, the auditor must choose a representative
sample.
• If a sample is representative, the same conclusion will be drawn
from that sample as would have been drawn had the whole
population been tested.
• For a sample to representative, it must have the same
characteristics as the other items in the population it was chosen
from.
 Statistical or non-statistical
sampling
• Statistical sampling means any approach to sampling that uses:
• Any approach that does not have both these characteristics is
considered tobe non-statistical sampling.
• The approach taken is a matter of auditor judgement.
• random selection of samples; and probability theory to evaluate
sample results
 Sample design
• When designing a sample the auditor has to consider:
• the purpose of the procedure
• the combination of procedures being performed
• the nature of evidence sought
• possible misstatement conditions
 Sampling methods
• Random selection – this can be achieved through the use of
random
• number generators or tables.
• Systematic selection – where a constant sampling interval is
used (e.g. every 50th balance) and the first item is selected
randomly.
• Monetary unit selection – selecting items based upon monetary
• values (usually focusing on higher value items)
 Sampling methods
• Haphazard selection – auditor does not follow a structured
technique but avoids bias or predictability.
• Block selection – this involves selecting a block of contiguous
(i.e. next to each other) items from the population. This technique
is used for cutoff
 Sampling Risk and stratification
Sampling risk arises from the possibility that the auditors’
conclusion, based on a sample, may be different from the
that would be reached if the entire population were subjected to the
same audit procedure.
• Stratification is the process of breaking down a population into
smaller subpopulations.
• Each subpopulation
• is a group of items (sampling units) which
• have similar characteristics
 Computer assisted audit techniques (CAATs)

Two broad Categories of CAAT

• (1) Test data
• (2) Audit software
 Test Data
Test data involves the auditor submitting 'dummy' data into the
client's
• system to ensure that the system correctly processes it and that it
prevents or detects and corrects misstatements
 Pros and Cons
Merits
• Enables the auditor to test programmed controls which wouldn't
otherwise be able to be tested.
• Once designed, costs incurred will be minimal unless the
programmed controls are changed requiring the test data to be
redesigned.
Demerits
• Risk of corrupting the client's systems.
• Requires time to be spent on the client's system if used in a live
• environment which may not be convenient for the client.
 Accounting Estimates
An accounting estimate is an approximation of a monetary amount
in the absence of a precise means of measurement, for example,
allowances to reduce inventory/receivables to their estimated
realisable value, depreciation, accrued revenue, provision for a
lawsuit, construction contracts or warranty claims.
 Audit Procedures/Response

• Consider reasonableness of assumptions

• Consider if management has considered alternative assumptions
• Evaluate whether estimates are reasonable or misstated
• Obtain evidence about accuracy of disclosures
 Audit Procedures/Response
• Evaluate adequacy of disclosure of estimation uncertainty for
estimates that give rise to significant risks
• Consider if there any management bias
• Obtain written representations whether management believes
significant assumptions used are reasonable
 Using the Work of Others
ISA 610 Using the work of internal auditors provides guidance in this
area. The external auditor's objectives are:
• To determine whether the work of internal auditors can be used,
and if so, in which areas and to what extent.
• To determine whether the work is adequate for the audit
 Using the Work of Others
If the auditors decide to make use of the work of internal audit, they
must evaluate that work. The important criteria when determining
whether the work of the internal audit function can be used are:
• Extent to which its objectivity is supported
• Level of competence
• Whether approach is systematic and disciplined
 Use of an expert
An auditor’s expert is an individual or organization possessing
expertise in a field other than accounting or auditing, whose work in
that field is used by the auditor to assist the auditor in obtaining
sufficient appropriate audit evidence.
 Use of an expert (Cont’d)

ISA 620 Using the work of an auditor’s expert requires the auditor to
agree the following with the expert on the following.
• Nature, scope and objectives of their work
• Respective roles and responsibilities
• Nature, timing and extent of communication,
• including form of any report
• Confidentiality requirements
 Service Organisation
A service organization is a third-party organisation that provides
services to user entites that are part of those entities’ information
systems relevant to financial reporting.
 Service Organisation Cont’d
ISA 402 Audit considerations relating to entities using service
organisations gives guidance:
• How the use of a service organisation affects the entity’s internal
control
• Nature and materiality of transactions processed
• Degree of interaction
• Nature of relationship
• Audit evidence and sampling (I)
• Define audit evidence
• Define audit sampling
• Distinguish between statistical and non-statistical sampling
• Explain statistical sampling and other selective testing procedures

• B Audit evidence and financial statement assertions (M)

• Explain the financial statement assertions
• Explain techniques for gathering audit evidence
• Identify audit evidence in terms of its quantity and quality
• Identify audit evidence in terms of its relevance and reliability
• Explain the relationship between financial statement assertions and audit evidence

• C Audit procedures (I)

• Explain substantive procedures in obtaining audit evidence
• Explain how substantive analytical procedures can be used to obtain audit evidence
• Illustrate the use of substantive procedures including analytical procedures in obtaining audit evidence
• Accounting estimates (I)
• Define accounting estimates
• Provide examples of accounting estimates
• 68

• Explain the risks associated with auditing accounting estimates

E Computer Assisted Audit Techniques (CAATs) (I)

Audit
Contents
Evidence – • Non current Assets
• Inventory

Specific • Receivables

areas One
 Non Current Assets
i. Defined Tangible non-current assets?
ii. Define Non Current Intangible assets?
 control objectives relating TNCA
• Acquisitions are authorised
• Disposals are authorised
• Proceeds are accounted for
• Security over non-current assets sufficient
• Non-current assets maintained properly
• Depreciation reviewed annually
• Is a asset register kept?
 Completeness of NCA
• Obtain a summary, reconcile it to last year’s schedules.
• Reconcile the list of assets in the general ledger with those in the
non-current asset register or list of assets.
• Obtain explanations for missing assets.
• Test some physical assets to ensure they are recorded.
 Existence NCA
• Confirm that the company physically inspects all the assets in the
register annually.
• Inspect assets (Do they exist? What’s their condition? Are they in
use?).
• Reconcile opening and closing motor vehicles by numbers as well
as by value.
 Accuracy, allocation and valuation
• Verify valuation to valuation certificate (consider reasonableness
of valuation).
• Check any revaluation surplus has been correctly calculated.
Check that revaluations are updated regularly.
• Ensure disclosure correct.
 Charges and commitments
(rights and obligations)
• Review statutory books for evidence of charges, examine post
year-end invoices and board minutes for
• evidence of any capital commitments.
 Ownership (rights and obligations)
• Verify title to land by checking title deeds/leases.
• Obtain certificate from people holding deeds to confirm why they
are held. Inspect registration documents for vehicles, confirm
that they are used for the business.
• Examine documents of title for other assets.
 Disposals (rights/completeness/occurrence)
• Verify disposals to sales documentation (invoice) and verify
calculation of profit/loss is correct.
• Verify that disposals are authorised and proceeds are
reasonable. Ensure that asset is no longer used as security
 Additions (rights/valuation/completeness)
• Verify additions to invoices/architect’s certificates etc.
• Ensure purchases properly allocated to asset accounts and
authorised by correct person and that all additions have been
recorded in the general ledger and the asset register
 Depreciation (valuation)
• Review depreciation rates in light of: asset lives, residual
values, replacement policy, past experience (consistency),
possible obsolescence.
• Verify that depreciation has been charged on all assets with a
useful economic life. Review calculation.
• Ensure depreciation not charged on fully depreciated assets.
Verify that rates and policies are disclosed in the FS.
• Confirm that depreciation on revalued assets is based on the
revalued amount.
 Insurance (valuation)
Review insurance policies in force for all assets to ensure cover is
sufficient and verify expiry dates.
 Intangible Non Current Assets
Key assertions:
• EXISTENCE Are they genuinely assets?
• VALUATION At what value should they be recorded?
 Goodwill
• Agree consideration to sales agreement
• Asset values reasonable?
• Calculation correct?
• Amortisation correct?
• Any impairment?
• Goodwill valuation reasonable?
 Intangibles
• Agree to purchase documentation
• Review any specialist valuations
• Amortisation correct?
 R&D
• Conforms to IAS 38 criteria?
• Refer to budgets
• Amortisation correct?
 Inventory Asset
Sources of Rules!
• IAS 2 Inventories (lower of cost and NRV)
• ISA 501 Audit evidence – specific considerations for selected
items
 Methods of valuation
• First in first out (FIFO)
• Weighted average cost
• Other similar methods
 The inventory count
• Inventory count at the year-end
• Inventory count prior to/after the year-end
• Continuous inventory count (Retail industry)
 Responsibilities in relation to inventories
• Management: ensure inventory figure in FS represents
inventories that exists/is owned, keep inventory count records.
• Auditors: obtain sufficient audit evidence about inventories, and
attend inventory count if inventory is material

(!) Auditors must ensure that all inventory lines are counted annually,
the inventory records are adequate and that management
investigates all material differences.
 Planning inventory count
• Gain knowledge (previous year) and discuss major changes with
management.
• Assess key factors (such as, nature of inventories, high value
items, accounting, location, controls).
• Plan procedures (time/location of attendance, high value items,
any specialist help, third party confirmations required?)
 Review inventory count instructions
Ensure there is provision for:
• Organisation of count (supervision, marking of inventories,
control during the process, identification of obsolete inventories).
• Counting (systematic counting to ensure all inventories are
counted, teams of two counters one independent of inventories
usually).
• Recording (control over inventory sheets, ink used, signed by
counters).
 During inventory count
• Observe whether instructions are followed.
• Make test counts for accuracy.
• Review procedures for obsolete inventories.
• Confirm third party inventories separate.
• Conclude whether inventory count has been properly carried
out.
• Gain overall impression of inventories.
 After inventory count
• Trace test count items to final inventory sheets.
• All count records included in final total?
• Confirm cut-off using final goods in and out records.
• Review replies from third parties.
• Confirm valuation.
 Cut-off
(!) It is important that all inventory movements are recorded in
the correct period.
• Point of purchase/receipt of goods
• Raw materials going to production
• Transfer of WIP to finished goods
• Sale/dispatch of finished goods
 Cut-off procedures at inventory count
• Record the relevant movements (last and first goods dispatched
and received numbers).
• Observe whether cut-off procedures are being followed during
count.
• Discuss procedures with management
 Cut-off procedures at final audit
Match goods received notes with purchase invoices and goods
despatched notes with sales invoices and ensure all in the correct
period. Match materials requisitions with work in progress figures to
ensure cut-off correct.
 Inventory Valuation
• Original cost (All types of inventories)
• Production cost (WIP and FG)
• NRV (All types of inventories)
 Receivables
Receivables will often be tested in conjunction with sales (!)
 Completeness and occurrence
Analytical procedures are likely to be important.
Consider:
• Level of sales, year on year
• Effect of changing quantities sold
• Effect of changing prices
• Levels of goods returned/ discounts
• Efficiency of labour/sales
 Accuracy
Check:
• Pricing/additions on
• invoices
• Discounts properly calculated
• Sales tax added correctly
• Casts in sales ledger
• Control account reconciliation
• Also, trace debits in sales ledger to credit notes.
 Cut Off
Review goods dispatched and returns inward around the year-end
to ensure:
• Invoices/credit notes dated in the same period
• Invoices/credit notes posted to the sales ledger in the same
period
Review the sales ledger control account for unusual items near the
year-end and review material after date invoices and credit notes to
see if in correct period.
 Receivables’ listing/age analysis
Much of the detailed work will be carried out on a sample of
receivables’ balances chosen from a list of sales ledger
balances. Ideally, this will be aged, showing amounts owed and
from when they are owed.
 Audit work on receivables
• Reconcile balances from sales ledger to list of balances(Obtained
from the system) and vice versa.
• Reconcile the total of the list to the sales ledger control account.
• Cast (Total up) the list of balances to ensure it is correct.
• Confirm whether the list reconciles to the sales ledger control
account.
 Circularisation
Verification of trade receivables by direct circularisation is the
normal method of getting audit evidence to check the existence and
rights and obligations of trade receivables. ISA 505 External
confirmations provides guidance.
 Circularisation Cont’d
• Positive circularisation: customer is requested to confirm the
accuracy of the balance shown or state in what respect he is in
disagreement (preferable method).
• Negative circularisation: customer is requested only to reply if
the amount is disputed.
 Sample selection
Devote Special attention to: • Accounts paid by time the of
• Old unpaid accounts the audit
• Accounts written-off in period
• Accounts with credit balances
• Accounts settled by round sum
payments
• Do not overlook:
• Nil balances
 Need for Follow up
where:
• Customers disagree with the balance
• Customers do not respond (positive method only)
 Irrecoverable debts
• A test of the valuation of trade receivables in the statement of
financial position.
• A significant test is reviewing all the cash received after date
(which gives evidence on the collectability of debts).
 Procedures
• Confirm adequacy of allowance by reviewing customer
correspondence/
• Hold a discussion with the credit controller.
• Examine customer files for overdue debts and consider whether
allowance is sufficient.
 Procedures Cont’d
• Review correspondence with solicitors/Lawyer in case legal
action is being taken to enforce debts.
• Examine credit notes issued after the year-end and ensure those
relating to invoices in the relevant period have been allowed for.
• Investigate all unusual items in the sales ledger, for example,
credit balances.
Audit
Contents
Evidence – • Cash and Bank
• Liabilities Capital and

Specific Directors Emoluments

areas Two
 Standard Bank Letter
• The audit of bank and cash will need to cover completeness,
existence, rights and obligations, accuracy, valuation and
allocation and presentation.
• All these elements can be audited through the bank letter
(example below). This is a standard document.
 Standard Bank Letter Cont’d
Banks will require:
• Explicit written authority from client
• Auditors’ request must refer to it
• Request must reach the bank one month before the year-end
 Audit Procedures
• Obtain bank confirmations
• Check the maths of the bank reconciliation
• Trace cheques shown as outstanding to the after date bank
statements
• Trace receipts shown as outstanding to after date bank
statements
 Audit Procedures Cont’d
• Review previous bank reconciliation to ensure all amounts are
cleared
• Obtain explanations for items in bank statements, not cash book
and vice versa
• Verify balances on reconciliation to bank letter and cash book
• Scrutinise the cash book for unusual items
 Cash in Hand
If cash balances held by client are material, then the auditor may
decide to attend a cash count.
 Planning
Document on file:
• the time and location of the count,
• who is to be present (audit and client staff).
• Inspect the cash book to ensure it is written up to date and in ink.
 During the cash count
• Count cash balances held in front of official responsible. (The
auditor should never be left alone with the cash.)
• Enquire into any IOUs.
• Confirm cash balances agree with the FS.
 After the cash count
• Ensure that certificates of cash in hand are obtained as
appropriate.
• Ensure unbanked cheques are subsequently banked/agree to
bank reconciliation.
• Ensure IOUs have been reimbursed.
• Ensure IOUs/cashed cheques outstanding for too long have been
provided for.
• Ensure all balances counted are reflected in the accounts.
Liabilities, capital and
directors’ emoluments
 Accounts Payables
Auditors should be aware of the possibility of understatement of
payables.
There are two detailed objectives with regard to trade accounts
payable:
• Is cut-off correct between goods received and invoices received?
• Do trade accounts payable represent the bona fide amounts due
by the company?
 Trade accounts payable listing
• Confirm that the listing has been extracted correctly from the
purchase ledger
• Reconcile the total with the purchase ledger control account
• Recast the list of balances
 Completeness, Rights and Obligations,
Existence
The key test is a comparison of supplier statements with the
purchase ledger balances. Supplier statements are third party
evidence.
However, it is sometimes necessary to circularise suppliers.
Examples of such situations are:
• Supplier statements are unavailable/incomplete.
• Internal controls are weak and material misstatement of liabilities
is feared as a consequence.
• Suspicion that client is understating deliberately.
 Purchases and expenses
Occurrence/Completeness
Analytical procedures are important. Consider:
• Level of purchases/expenses month by month
• Effect of quantities purchased
• Effect of changing prices
• Ratio of purchases to trade payables
• Ratio of trade creditors to inventory
 Purchases and expenses Cont’d
Cut-off (completeness)
• Ensure goods from the last goods received note (from inventory
count) are included in the ledger or list of accruals.
• Review the schedule of accruals to check that goods received
after the year-end are not included.
• Review invoices and credit notes after the year end to ensure
that those relating to prior year are included.
• Reconcile batch postings around the year-end, to ensure that
invoices are posted in the correct period.
 Accruals
As a general rule, accruals lend themselves to being audited by
analytical review as they should be comparable to prior years. Other
substantive procedures are noted here.
 General accruals
(completeness and valuation)
• Recalculate accruals and trace back to supporting documentation.
• Review ledger accounts to ensure all accruals have been
included.
• Scrutinise post year-end payments to see if any should have been
• accrued.
• Consider basis for round sum accruals (comparable to last year?).
 Tax accruals
(completeness and valuation)
• Income tax: Agree to the previous period’s tax charge/credits, the
current period’s tax change, and amount paid to the tax authority.
• Sales tax: Assess reasonableness to next return. Verify amount
paid in year to cashbook.
 Wages and salaries
(completeness and valuation)
• Analytical procedures will give some assurance on pay
liabilities.

However, auditors may also carry out tests such as: agreeing
remuneration per payroll to personnel records, confirm existence of
employees by meeting them, re-perform calculations on the payroll,
agree validity of deductions to supporting documentation, confirm
net pay to bank.
 Long-term liabilities
• Completeness: whether all long-term liabilities have been
disclosed
• Accuracy, valuation and allocation: whether interest payable
has been calculated correctly and included in the right period
• Presentation: whether long-term loans are correctly disclosed
 Audit Procedures
• Obtain/prepare a schedule of loans
• Agree opening balances to prior year and recast
• Compare the balances to the general ledger
• Verify lenders to any register of lenders (eg debenture holders)
 Audit Procedures Cont’d
• Trace additions and repayments to cash book
• Confirm repayment conforms to agreement
• Verify borrowing limits per the articles are not exceeded
• Obtain direct confirmation from lenders
• Review minutes and cash book to ensure that all loans have been
included
 Provisions and Contingencies
A provision is a liability of uncertain timing or amount. A liability is a
present obligation arising from past events, resulting in an outflow of
resources.
A contingent asset/liability is a possible asset/liability arising from
past events whose existence will be confirmed only by the
occurrence of one of more uncertain future events not wholly within
the entity’s control, or (liability) a present obligation that arises from
past events but is not probable that a transfer of economic benefits
will be required, or the amount cannot be measured with reasonable
certainty.
 Procedures-Provisions/Contingencies
• Obtain details of provisions/contingencies
• Review correspondence
• Discuss with directors
• Ascertain whether payments have been made in respect of
provisions in the subsequent events period
• Review correspondence with solicitors pre and post year-end
 Procedures-
Provisions/Contingencies Cont’d
• Consider past provisions – were they subsequently required?
• Recalculate all the provisions to ensure correct
• Ensure disclosures made about contingencies are complete and
accurate
• Consider the nature of the client’s business (would you expect to
see other provisions – for example, for warranties?)
 Share (equity) Capital
• Auditors should ensure that the directors have observed their
legal duties in regard to share capital and reserves (for example,
not distributed undistributable reserves).
• Agree authorised share capital to the memorandum
• Verify share transfer details and cash payments to cash book
• Agree dividends paid to cash book and to the minutes of the AGM
where the dividend was proposed
• Check calculation of movement on reserve
 Directors’ Emoluments
• Auditors should ensure the disclosure of directors emoluments is
complete, accurate and compliant with applicable accounting
standards and local legislation.
• Agree details to payroll records
• Review directors’ contracts
• Review minutes of board meetings
Not-for-profit
Organisations
 Introductory Thoughts
A charity is a common form of not-for-profit organisation. A charity is
any institution established for charitable purposes and subject to the
control of the law as such
• Relief of poverty
• Advancement of religion
• Advancement of education
• Community service
 NFPO Financial Statements
• Statement of financial activities (SOFA)
• In some cases a summary income and expenditure account
• Statement of financial position showing the assets, liabilities and
funds of the charity
• Statement of cash flows (where required) and notes
 Other NFPOs
Tax payer funded organisations eg
 Hospitals
 Schools
 Public services
 Local councils
• Clubs and associations
• Friendly societies
 Problem Areas
• Donations (May not be supported by invoice/equivalent
documentation)
• Legacies (income recognition)
• Government funding or grants (often subject to conditions)
• Restricted funds (uses are restricted as per deed/benefactor)
• Grants to beneficiaries (must be bona fide)
• Branches (charities’ SORP requires inclusions in main accounts)
 Audit Planning
Auditors should consider:
• The scope of the audit
• Recommendations of regulators
• Accounting policies
• Changes in the sector in which the NFPO operates
• Past experience of the system
• Key audit areas
• Detail in FS on which auditors report
• Risk
 Inherent risk
Factors include:
complexity/extent of regulation, significance of donations and cash
receipts, lack of predictable income, restricted funds, restrictions
imposed by governing documents or the government, tax rules,
sensitivity of key statistics, balance of maintaining
resources/building up funds
 Control Risk
• Factors include: time committed and degree of involvement by
trustees, skills of trustees, independence of trustees from each
other, division of duties.
• Control environment: segregation of duties a very key area in
small NFPOs.
 Internal control Deficiency
• Lack of segregation of duties
• Use of unqualified staff
 Controls over cash donations
• Numerical control over boxes and tins boxes
• Satisfactory sealing of boxes so that any opening prior to
recording cash is apparent
• Regular collecting and recording of proceeds
 Controls over cash donations Cont’d
• Dual control over counting and recording of proceeds
• Unopened mail kept securely
• Dual control over the opening of mail
• Immediate recording of donations on opening of mail or receipt
• Agreement of bank paying-in slips to record of receipts by an
independent person
 Audit evidence
• Consider understatement/incompleteness in income
• Overstatement of grants or assets
• Misanalysis or misuse of funds
• Misstatement of assets like donated properties
• Existence of restricted funds in foreign branches
 Overall view
• Consider if accounting policies are appropriate.
• Analytical procedures might be restricted due to lack of
predictable income etc, but NFPOs should have budget or
strategy information available.
 Reporting
• The form of the auditor’s report is dictated by the NFPO’s
applicable legislation or charity’s constitution but it should conform
to ISA 700 criteria.
• The financial statements should have been prepared in
accordance with any additional statutory requirements or specific
guidance applicable to the NFPO.
• That fact should be referred to in the auditor’s report.
• Where NFPOs are not governed by statute, the auditor’s report
will depend upon the scope of the assignment.
Review and reporting
 Subsequent Events
Subsequent events are events occurring between the date of the
financial statements and the date of the auditor’s report, and facts
that become known to the auditor after the date of the auditor’s
report. There are two types, those that provide evidence of
conditions that existed at the period-end (adjusting events) and
those that are indicative of conditions that arose subsequent to the
period-end (non-adjusting events).
 Subsequent Events
• Inquiries of management
• Reading minutes of meetings of those charged with governance
• Reviewing most recent financial information
• Written representations
 Examples of Subsequent Events
• Status of items involving subjective data included in the FS
• New commitments, borrowings, guarantees
• Sales or destruction of assets
• Issue of shares or debentures
• Unusual accounting adjustments
• Litigations or claims
• Major events
The auditors do not have any obligation to perform procedures, or
make inquiries after the date of their report.
 Before Signing Report
• Discuss with management and those charged with governance
• Determine if FS need amending
• If not amended and auditor’s report not issued, modify opinion
• If not amended and auditor’s report issued, prevent reliance on
report
 After Signing Report
• Discuss with management and those charged with governance
• Determine if FS need amending
• Review management’s procedures to inform readers
• Issue new auditor’s report with emphasis of matter paragraph
• If steps not taken, prevent reliance on report
 Going Concern
Going Concern Assumption:
an entity is ordinarily viewed as continuing in business for the
foreseeable future
 Auditor Responsibilities-Going Concern
The auditors are responsible for obtaining sufficient appropriate
audit evidence about the appropriateness of management’s use of
the going concern assumption, and for considering whether there is
a material uncertainty in relation to going concern.
 Planning and risk assessment
When performing risk assessment procedures, the auditor shall
consider whether anything casts doubt on the entity’s going concern
status. If management has undertaken a preliminary assessment of
going concern, the auditor shall discuss it with management. If no
assessment has been done yet, the auditor shall discuss with
management the basis for the intended use of the going concern
assumption. The auditor shall remain alert throughout the audit for
evidence of conditions or events that may cast doubt on the entity’s
ability to continue as a going concern.
 Indicators of Going Concern Problems
Financial Risk
• Net liabilities
• Fixed term borrowing approaching maturity without realistic
prospect of renewal/repayment
• Negative operating cash flows
• Adverse financial ratios
• Substantial operation losses
• Inability to pay creditors
• Inability to finance new products
Indicators of Going Concern Problems
Cont’d
Operational Risk
• Loss of key management/markets/franchise
• Labour difficulties/supply shortage
Compliance Risk
• Major legal proceedings/non-compliance
• Uninsured catastrophes
 Evaluation
The auditors shall consider:
• Process used by directors
• Assumptions used
• Plans for future action
 Further Procedures
• Analyse and discuss cash flow/profit/other forecasts/interim
financial information with management
• Review the terms of debentures/loan agreements
• Read minutes of meetings, make inquiries of lawyers regarding
legal claims
• Confirm financial support from third parties, consider unfulfilled
orders
• Review events after the period-end
 Written Representation
Representations are written statements by management provided
to the auditor to confirm certain matters or to support other audit
evidence. They do not include the financial statements, assertions
or supporting books and records.
Auditors receive many representations from management during
the course of an audit, and some may be critical to obtaining
sufficient appropriate audit evidence. An example, which the
auditors must get, is acknowledgement from the directors of their
responsibility for the financial statements which the auditors have
audited.
 ISA 580 Written Representations
• That management believes it has fulfilled the fundamental
responsibilities that constitute the premise on which an audit is
conducted
• That management has provided the auditor with all relevant
information agreed in the terms of the engagement
• That supports other audit evidence if determined necessary by
the auditor or if required by other ISAs
 Reliability and Doubt
If representations are inconsistent with other evidence, the auditor
shall perform audit procedures to resolve the matter.
If it cannot be resolved, the auditor shall reconsider the assessment
of the competence, integrity and ethical values of management, the
reliability of representations and evidence, and the impact on the
auditor’s repor
 Basic elements of a representation
letter
• Addressed to the auditors
• Contains specified information
• Appropriately dated
• Approved by those with specific knowledge
• Signed by senior financial officer
 Overall review of FS
Review for consistency and reasonableness
• Do FS adequately reflect explanations received?
• Are there any new factors in presentation?
• Do analytical procedures produce expected results?
• Has the presentation been unduly affected by directors’ wishes?
• What is the potential impact of uncorrected misstateme
 Compliance with accounting
regulations
• The auditors should examine the accounting policies,
considering: what policies are usually adopted in the industry,
whether there substantial authoritative support for the policy,
whether departures are necessary for a true and fair view,
whether the FS reflect the substance of the underlying
transactions.
• Some accounting standards allow a choice of methods, which
often have a material effect.
 Treatment of misstatements
• A misstatement is a difference between the amount,
classification, presentation or disclosure of a reported financial
statement and the amount, classification, presentation or
disclosure that is required for the item to be in accordance with
the applicable financial reporting framework.
• An uncorrected misstatement is a misstatement accumulated
during the audit which has not been corrected
 Types of misstatements (Reminder)
• Factual (no doubt)
• Judgemental (management’s judgement concerning accounting
estimates or accounting policies)
• Projected (auditor’s best estimate)
 Types of misstatements ISA 450
The auditor must communicate all misstatements accumulated
during the audit to the appropriate level of management on a timely
basis and request them to be corrected. The auditor must obtain a
written representation that management believes the effects of
uncorrected misstatements are immaterial to the financial
statements as whole.
Reports
 Basic elements of auditor’s report
• Title
• Addressee
• Opinion paragraph
• Basis for opinion
• Going concern (where applicable)
• Key audit matters (for listed companies or where ISA 701 is
adopted)
 Basic elements of auditor’s report Cont’d
• Other information (where applicable)
• Responsibilities for the financial statements
• Auditor's responsibilities
• Other reporting responsibilities (if applicable)
• Auditor’s signature
• Date of the auditor’s report
• Auditor’s address
 Unmodified Opinion
In an auditor’s report with an unmodified opinion, the auditor
concludes that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting
framework.

In our opinion, the financial statements present fairly, in all material

respects, (or give a true and fair view of) the financial position of
ABC Company as of December 31, 20X1, and (of) its financial
performance and its cash flows for the year ended in accordance
with International Financial Reporting Standards.
 Modified Audit Opinion
Two major Circumstances leading to a modified Opinion:
1. The auditor concludes that the financial statements as a whole
are not free from material misstatement (qualified opinion or
adverse opinion).
2. The auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole
are free from material misstatement (qualified opinion or
disclaimer of opinion
 Emphasis of matter paragraphs
• An emphasis of matter paragraph is included in the auditor’s
report to refer to a matter already appropriately presented or
disclosed in the financial statements which is of such importance
that it is fundamental to users’ understanding of the financial
statements.
 Emphasis of matter paragraphs Cont’d
Situation where you may have emphasis of matter include:
• Uncertainty relating to future outcome of exceptional litigation or
regulatory action
• Early application of a new accounting standard that has a
pervasive effect
• Major catastrophe that has a significant effect on financial
position
 Other Information
Other information is financial and non-financial information (other
than the financial statements and the auditor's report thereon)
included in an entity’s annual report.
 Other Information
• Auditors shall review the other information for material
inconsistencies.
• These may impact on the auditor’s opinion on the financial
statements.
 Examples of Other Information
• Report by management on operations
• Financial summaries or highlights
• Employment data
• Planned capital expenditures
• Financial ratios
• Names of officers and directors
• Selected quarterly data
 The Report to Management
ISA 265 Communicating deficiencies in internal control to those
charged with governance and management requires communication
on various matters including deficiencies in control systems. This
should be sent on a timely basis after the interim and final audits.
 The Report to Management Format

• STANDARD/BENCHMARK (Standard)
• DEFICIENCY (What you went wrong)
• IMPLICATION (Risk)
• RECOMMENDATION ( Proposed Solution)
 Thank you!
End Of Syllabus
• Subsequent events (I)
• Explain the purpose of, and procedures for, a subsequent events review
• Distinguish between the responsibilities of auditors and management regarding subsequent events

• B Going concern (I)

• Explain the importance of the concept of going concern, and the need for going concern reviews
• Distinguish between the responsibilities of auditors and management regarding going concern

• C Written representations (I)

• Explain the purpose of and procedures for obtaining written representations
• Explain the reliability of written representations as evidence
• Identify matters on which written representations are necessary and are obtained
• Overall review of financial statements (I)
• Explain the importance of the overall audit review
• Define uncorrected misstatements
• Explain the significance of uncorrected misstatements

• E The auditor's report on financial statements (I)

• Explain the importance of audit reports
• Describe the format and content of the unmodified auditor’s report
• Describe the format and content of modified auditors’ reports
• Define and explain the use of emphasis of matter paragraphs and other matters paragraphs in the auditor’s report

• F Reports to management (I)

• Explain reports to management
• Describe the format and content of reports to management