Audit and Assurance: SBL TX

ACCA
AUDIT AND ASSURANCE

BISC TRAINING CENTER
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

training@bisc.edu.vn
ACCA - OUTLINE
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1
Audit and Assurance
INTRODUCE
MAIN CAPABILITIES
Audit framework and regulation (A)
Planning and risk assessment (B)
Internal Control (C) Audit Evidence (D)
Review and reporting (E)
2
EXAMINATION CONCEPT
Computer-based exams
Time: 3 hours + 10 mins extra to read the exam instructions.
Section A
Section A of the exam comprises three 10 mark case-based questions.
Each case has five objective test questions worth 2 marks each.
Section B
Section B of the exam comprises one 30 mark question and two 20 mark
questions.
Section B of the exam will predominantly examine one or more aspects of
audit and
assurance from planning and risk assessment, internal control or audit
evidence, although topics from other syllabus areas may also be included.
Total 100 marks
GLOBAL PASSRATE
3
Chapter 1
AUDIT AND OTHER

ASSURANCE ENGAGEMENT
ACCOUNTABILITY, STEWARDSHIP,
AND ACENCY
AGENCY
PRINCIPAL AGENT
RELATIONSHIP Employs
<Owns property> <Manage>
Owner/ Directors
Shareholder
To delivers assurance to the principal

DEMAND FOR (shareholder) that the report (financial
ASSURANCE statements) provided by the primary
SERVICE agent (director) is what it appears to be
(shows a true and fair view).
4
AND ACENCY
Directors are accountable to shareholders. Directors act as stewards

of the shareholders' investments. They are agents of the shareholders.
Appoint
Independent
Auditor
Adds Credibility
Measure
performance Financial
Statement Prepare
Appoint
Shareholders Directors
Own Manage
Company
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AND ACENCY
KEY TERM
Accountability: is the quality or state of being accountable; that

is, being required or expected to justify actions and decisions. It
suggests an obligation or willingness to accept responsibility for
one's actions
Stewardship: refers to the duties and obligations of a person who

manages another person's property. z
Agents: are people employed or used to provide a particular
service. In the case of a company, the people being used to
provide the service of managing the business also have the second
role of trying to maximise their personal wealth in their own right
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5
AUDIT AND ASSURANCE
AUDIT ASSURANCE
PROCESS PRODUCT
The objective of an audit of financial statements is to enable the

auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified
financial reporting framework”
<ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with International Standards on Auditing>
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AUDIT AND ASSURANCE
STATUTORY AUDIT NON - STATUTORY AUDIT
Required under national Be performed by independent

statute auditors because the company's
owners, proprietors, members,
trustees, professional and
governing bodies or other
interested parties want them,
rather than because the law
requires them
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6
AUDIT AND ASSURANCE
ASSURANCE ENGAGEMENT
An assurance engagement is one in which: A practitioner aims to obtain

sufficient appropriate evidence in order to express a conclusion designed
to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the measurement or evaluation of
an underlying subject matter against criteria.
Criteria
Report
Evidence
Subject matter
Three party relationship
13
AUDIT AND ASSURANCE
A Three party relationship. The three parties are the intended user,
the responsible party and the practitioner.
A Subject matter. This is the data to be evaluated that has been
prepared by the responsible party. It can take many forms, including
financial performance, nonfinancial performance (eg key performance
indicators), processes (eg internal control) and behaviour (eg
compliance with laws and regulations).
Suitable Criteria. The subject matter is evaluated or measured against
criteria in order to reach an opinion
Evidence: Sufficient appropriate evidence needs to be gathered to
support the required level of assurance.
An assurance report. A written Report containing the practitioner's
opinion is issued to the intended user, in the form appropriate to a
reasonable assurance engagement or a limited assurance engagement.
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7
AND ACENCY
Type of Assurance Service
An audit of financial statements

A review of financial statements
Risk assessment reports
Performance measurement reports
Systems reliability reports
Reports on social and environmental issues (e.g. to validate an
employer’s claims about being an equal opportunities employer
or a company’s claims about how ‘green’ it is)
Reviews of internal control
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AUDIT AND ASSURANCE

It is NOT possible to give an
LEVEL OF ASSURANCE
absolute level of assurance
Reasonable assurance
Limited assurance
engagements
In a reasonable assurance The practitioner:
engagement, the practitioner  Gathers sufficient appropriate
 Gathers sufficient appropriate evidence to be satisfied that
evidence the subject matter is plausible
 Concludes that the subject in the circumstances
matter conforms in all material  Negative assurance.
respects with identified (Nothing has come to our attention
suitable criteria that causes us to believe that the
 Gives his report in the form of financial statements are not
positive assurance. (Give prepared, in all material respects, in
Opinion on True & Fair view) accordance with an applicable
financial reporting framework‘).
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AUDIT AND ASSURANCE
AUDIT REPORT AUDITOR Communicate SHAREHOLDERS
Give opinion on the Truth and Fairness of FS.
True and fair: does True:

NOT mean  Information is factual and conforms with reality, not
absolutely correct. false.
 Information conforms with required standards and law
 The accounts have been correctly extracted from the
books and records.
Fair:
 Information is free from discrimination and bias
 Compliance with expected standards and rules
 The accounts should reflect the commercial substance of
the Company’s underlying transactions
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AUDIT AND ASSURANCE

MATERIAL?
 A matter is material if its omission or misstatement

would reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
 Materiality depends on the size of the item or error
judged in the particular circumstances of its omission or
misstatement.
(ISA 200: para. 6)
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9
AUDIT AND ASSURANCE
AUDIT LIMITATION
Reasons for
REASONABLE
ASSURANCE
instead of
ABSOLUTE/ TOTALLY
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ROUND UP
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ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 2
STATUTORY AUDITS AND
REGULATION
1
1. OBJECTIVE OF STATUTORY
AUDITS AND THE AUDIT OPINION
The auditor to express an OPINION on

AUDIT
the financial statements
The audit opinion may also imply certain things are true,
because otherwise the auditor's report would have
mentioned them.
For examples: Adequate accounting records have been
kept….
Enhance the Highlight other issues i.e.

creditability of the Deficiencies of Internal
financial statements Control
The conduct of audits is governed by three sets of rules:
Auditing
Codes of ethics Standards Company Law
(ISAs)
2
Small companies do not need an audit

EXEMPT
(basic rules – revenue up to £5.6m, gross assets up to £2.8m).
The following must be audited regardless of size:

 Banks or other FSA regulated companies.
 Insurance companies.
REQUIRED
 PLCs.
 Subsidiaries of groups containing the above.
 Charities.
2. AUDITOR
 Has to be a member of a Recognized Supervisory Board (RSB)

WHO can be an
auditor?  Allowed by the rules to be an auditor
 Or someone authorized by the state
Excluded even if three conditions met above (law):-

 An officer (director or secretary) of the company
EXCLUDED
 An employee of the company
 A business partner or employee of the above
Ethically – we need to review independence, if this is lacking

INDEPENDENCE
then we should not accept.
3
2. AUDITOR
RIGHTS DUTIES
 Access to books and The auditors must consider:
records.  Compliance with legislation
 Information and  Truth and fairness of accounts
explanations.  Adequate accounting records and
 Receive notice of and return
attend general meetings.  Agreement of accounts to records
 Speak at general meetings  Consistency of other information
on relevant matters.  Directors' benefits
 Special rights attaching to
resignation.
2. AUDITOR
AUDITOR’S RESPONSIBILITIES
Statutory audit Other assurance engagements

Determined by laws and regulations
Form an opinion (T&F, and where applicable
disclosure notes, Directors’ report)
(e.g. environmental audit)
As defined in the Terms of
Plan the audit
Engagement for that assignment
Gather sufficient, appropriate
Ethical and professional standards
audit evidence
Review the work Quality control standards
Draw valid conclusions, supported
by the evidence gathered
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2. AUDITOR
DIRECTOR’S RESPONSIBILITIES
Directors’ responsibilities
 Manage the business;
 Assess business risks;
 Safeguard assets;
 Implement a system of internal controls to prevent and detect fraud
and error;
 Maintain books and records;
 Preparation and delivery of financial statements –suitable policies,
judgements and estimates;
 Compliance with laws and regulations – relevant disclosures in
accounts;
 Stewardship of the business – fiduciary relationship – Agent;
 Accountability;
 Ensure the business is a going concern and can continue to be.
3. SETTING AUDITING STANDARDS
The International Federation of Accountants (IFAC) is the global organisation for the
accountancy profession.
The function of IFAC is to initiate, co-ordinate and guide efforts to achieve
international technical, ethical and educational pronouncements for the accountancy
profession
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 Set by: International Auditing and Assurance Standards
International Board (IAASB).
standards on  IAASB is a subsidiary of the International Federation of
auditing (ISAs) Accountants (IFAC).
 There are more than 30 ISAs
 Enforce the implementation of auditing standards

 Have disciplinary powers to enforce quality of audit
work.
National  Have rights to inspect audit files to monitor audit quality.
Regulatory  There are two possible schemes for regulation at the
bodies national level:
 Self regulation by the audit/accountancy profession.
 Regulation by government or by some independent
body set up by government for the purpose.
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4. APPOINTMENT AND REMOVAL
OF AUDITORS
 The members (shareholders) of the company
Who can  Directors can appoint the first auditor and fill a
appoint? ‘casual vacancy’, but needs members’ approval at
next Annual General Meeting (AGM).
Arrangements for removing the auditor have to be

structured in such a way that:
 the auditor has sufficiently secure tenure of office
Remove or (i.e. after consecutive 5 years bank audit), to maintain
Resignation independence of management
 auditors can be removed if there are doubts about
their continuing abilities to carry out their duties
effectively.
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4. APPOINTMENT AND REMOVAL

OF AUDITORS
The auditor’s responsibilities on appointment and removal
On appointment:
 Obtain clearance from the client to write to the existing auditor (if
denied, appointment should be declined).
 Write to the existing auditor asking if there are any reasons why the
appointment should not be accepted
On removal/resignation:
 Deposit at the company’s registered office a statement of the
circumstances connected with the removal/resignation or a statement
that there are no such circumstances exists.
 deal promptly with requests for clearance from new auditors.
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ROUND UP
 Most companies are required to have an audit by law, but some small companies
are exempt. The outcome of the audit is the auditor's report, which sets out the
auditor's opinion on the financial statements.
 The law gives auditors both rights and duties. This allows auditors to have
sufficient power to carry out an independent and effective audit.
 There are various legal and professional requirements on appointment,

resignation and removal of auditors which must be followed.
 Requirements for the eligibility, registration and training of auditors are

extremely important, as they are designed to maintain standards in the auditing
profession.
 International Standards on Auditing are set by the International Auditing and

Assurance Standards Board
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ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 3
CORPORATE
GOVERNANCE
1
CODE OF CORPORATE GOVERNANCE
Corporate Governance
System by which a company is directed and controlled.
It concerns such matters as:

 the responsibilities of directors
 the appropriate composition of the board of directors
 the necessity for good internal control
 the necessity for an audit committee
 relationships with the external auditors.
Ensuring that companies are run well in the interests of their

shareholder and the wider community

Responsibility for Corporate Governance
Those operating a company – its management and those appointed for

the purpose of ensuring that it is well managed
 External auditors do not have responsibility for standards of corporate

governance at audit clients.
 Auditors responsibility for reporting on corporate governance
 The auditors are not required to ‘audit’ this statement but must
review it for inconsistencies with other information contained within
the annual report.
2
The OECD Principles of Corporate Governance

To assist Members or Non Members of Government to improve rule,
framework... Related to Corporate Governance
to provide guidance and suggestions for stock exchanges, investors,
corporations…
6 Principles
i. To promote transparency, fair markets and efficient allocation of resources.
ii. To protect shareholders' rights and ensure all shareholders are treated fairly.
iii. To provide incentives relating to investment and to allow stock markets to
function in a way that supports corporate governance.
iv. To recognise the rights of stakeholders and to encourage active co-operation
between corporations and stakeholders in creating wealth, jobs and the
sustainability of enterprises.
v. To allow timely and accurate disclosure of material matters.
vi. To ensure companies are effectively guided and monitored

Principles of the UK Corporate Governance Code
REMUNURATION RELATION WITH

SHAREHOLDERS
Identify corporate governance deficiencies and make
recommendations to improve corporate governance
3
 Every company should be headed by an effective board,

which is collectively responsible for the long- term
success of the company.
 There should be a clear division of responsibilities at
the head of the company between the running of the
board and the executive responsibility for the running
of the company's business. No one individual should
have unfettered powers of decision.
 The chairman is responsible for leadership of the board
and ensuring its effectiveness on all aspects of its role.
 Non-executive directors should constructively
challenge and help develop proposals on strategy.

 The board should present a balanced and

understandable assessment of the company's position
and prospects.
 The board is responsible for determining the nature
and extent of the principal risks it is willing to take in
achieving its strategic objectives. The board should
maintain sound risk management and internal control
systems.
 The board should establish formal and transparent
arrangements for considering how it should apply the
corporate reporting, risk management and internal
control principles and for maintaining an appropriate
relationship with the company's auditor
4
 The board and its committees should have the

appropriate balance of skills, experience, independence
and knowledge of the company.
 There should be a formal, rigorous and transparent
procedure for the appointment of new directors to the
board.
 All directors should be able to allocate sufficient time to
the company to discharge their responsibilities effectively.
 All directors should receive induction on joining the board
and should regularly update and refresh their skills and
knowledge.

 The board should be supplied in a timely manner with

information in a form and of a quality appropriate to
enable it to discharge its duties.
 The board should undertake a formal and rigorous annual
evaluation of its own performance and that of its
committees and individual directors.
 All directors should be submitted for re-election at
regular intervals, subject to continued satisfactory
performance'.
5
 Executive directors' remuneration should be designed to

promote the long-term success of the company.
Performance-related elements should be transparent,
stretching and rigorously applied.
• There should be a formal and transparent procedure for
REMUNURATION developing policy on executive remuneration and for
fixing the remuneration packages of individual directors.
• No director should be involved in deciding their own
remuneration

 There should be a dialogue with shareholders based on

the mutual understanding of objectives.
 The board as a whole has responsibility for ensuring that
a satisfactory dialogue with shareholders takes place.
 The board should use the AGM to communicate with
investors and to encourage their participation'
RELATION WITH
SHAREHOLDERS
6
CORPORATE GOVERNANCE IN ACTION
Boards of directors
The directors of a company should set company

policy, including risk policy, and are responsible
for the company's systems and controls

Boards of directors
The directors of a company should set company

policy, including risk policy, and are responsible
for the company's systems and controls
 The board should comprise a balance of executive

Board Composition? directors (headed up by the chief executive) and non-
executive directors (headed up by the chairman).
 Having a balanced board will mean that board decisions

are not influenced by one group of directors.
 The roles of the chairman and chief executive officer

(CEO) should be held by two separate people to avoid
concentration of power
7
SEGREGATION OF ROLES
The chairman’s role The Chief executive’s role

 Head of the Non-executive directors.  Head of the Executive Directors
 Ensures the effective operational
 Ensures full information and full functioning (day to day business)
discussion at board meetings. of the company.
 Ensures satisfactory channels of

communication with the external
auditors.
 Runs the board of directors
 Ensures the effective operation of
subcommittees of the board.
Non - executive directors are usually employed

Non – Executive Directors
on a part-time basis and do not take part in the
(NEDs)
routine executive management of the company.
 Oversight of the whole board.

Advantages  Often act as a ‘corporate conscience’.
 They bring external expertise to the company.
 May not be sufficiently well informed or

technically competent.
 They are subject to the accusation that they are
Disadvantages
staffed by an ‘old boy’ network and may fail to
report significant problems and approve
unjustified pay rises.
8
AUDIT COMMITTEES AND OTHER
COMMITTEES
Audit An audit committee is a committee consisting of non -
Committee executive directors which is able to view a company’s
affairs in a detached and independent way and liaise
effectively between the main board of directors and the
external auditors.
17

COMMITTEES
Audit
Committee
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9
COMMITTEES
external auditors.
 Increasing public confidence in the credibility and objectivity

Objective of published financial information (including unaudited interim
statements).
 Assisting directors (particularly executive directors) in meeting
their responsibilities in respect of financial reporting.
 Strengthening the independent position of a company’s
external auditor by providing an additional channel of
communication.
19

COMMITTEES
external auditors.
 Monitoring the integrity of the financial statements.

Objective  Reviewing the company’s internal financial controls.
 Monitoring and reviewing the effectiveness of the internal
audit function.
 Making recommendations in relation to the appointment and
removal of the external auditor and their remuneration.
 Reviewing and monitoring the external auditor’s independence
and objectivity and the effectiveness of the audit process.
 Reviewing arrangements for confidential reporting by
employees and investigation of possible improprieties
(‘Whistleblowing’).
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10
COMMITTEES
The nomination committee The remuneration committee
The function of the nomination The function of the remuneration

committee is to suggest suitable committee is to determine fair rates
candidates for appointment to the of pay and other compensation –
board and other senior posts. pension rights, share options etc –
for management and other senior
employees.
21

COMMITTEES
Internal audit has an important role to play in assisting the
Internal board fulfil their corporate governance responsibilities.
Audit Internal audit will work closely with the audit committee.
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11
INTERNAL CONTROL EFFECTIVENESS
The directors of a company are responsible for ensuring that a company's

risk management and internal controls systems are effective
 Safeguarding the company's assets

 Helping to prevent and detect fraud
 Safeguarding the shareholders' investment
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INTERNAL CONTROL EFFECTIVENESS

RESPONSIBLE FOR
INTERNAL CONTROL?
Auditor Directors
The auditors should Board has considered all significant aspects of internal
review the statements control. In particular the assessment should cover:
made concerning (a)The changes since the last assessment in risks faced, and
internal control in the
the company's ability to respond to changes in its
annual report to ensure
business environment
that they appear true
and are not in conflict (b)The scope and quality of management's monitoring of
with the audited risk and internal control, and of the work of internal
financial statements audit, or consideration of the need for an internal audit
function if the company does not have one
(c) Extent and frequency of reports to the board
(d)Significant controls, failings and weaknesses
(deficiencies) which have or might have material impacts
on the accounts
(e) The effectiveness of the public reporting processes
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COMMUNICATING WITH THOSE
CHARGE WITH GOVERNANCE (ISA 260)
 It assists the auditor and those charged with governance

to understand audit-related matters in context and
allows them to develop a constructive working
relationship.
PURPOSE?  It allows the auditor to obtain information relevant to the
audit.
 It assists those charged with governance to fulfil their
responsibility to oversee the financial reporting process
 The auditor's responsibilities in relation to the financial

statement audit
MATTERS TO BE
 Planned scope and timing of the audit
COMMUNICATED  Significant findings from the audit
 Auditor independence
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COMMUNICATING WITH THOSE

CHARGE WITH GOVERNANCE (ISA 260)
Communication process
Stage of audit Communication required
Planning  Practical matters concerning forthcoming
audit
 Independence of auditor
 Expected fees
 Nature and scope of audit work
 Ensure letter of engagement is up to date
During the audit If any situation occurs and it would not be
appropriate to delay communication until the
audit is concluded
Conclusion of audit  Major findings from audit work
Uncorrected misstatement  Qualitative aspects of accounting/ reporting
practices
 Final draft of letter of representation
 Expected modifications to audit report
 Major internal control weakness
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ROUND UP
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14
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 04
CODE OF ETHICS
1
IFAC AND ACCA CODES AND THE
CONCEPTUAL FRAMEWORK
THE FUNDAMENTAL PRINCIPLES
2
INTEGRITY
Member should be straightforward and honest in all professional

respect and business relationships
Example
You find out that one of your listed audit clients is shortly to be taken
over, or has access to technological advances which will give it a
fantastic competitive advantage. You might be tempted to buy some
shares or encourage your friends to do so.

OBJECTIVITY
Members should not allow bias, conflicts of interest or undue influence

of others to override professional or business judgements.
Example
The owners of a private company have the opportunity to sell their
shareholdings to a large listed company and have asked for your advice.
It looks like an excellent deal, but which will almost certainly mean that
your firm will lose the audit to a larger competitor. Your advice might not
be impartial you may be tempted to advise against the deal in order to
keep the client.
3
PROFESSIONAL COMPETENCE AND DUE CARE
Members have a continuing duty to maintain professional knowledge and

skill at a level required to ensure that a client or employer receives
competent professional service based on current developments in practice,
legislation and techniques. Members should act diligently and in accordance
with applicable technical and professional standards when providing
professional services.
Example
A client is starting to expand into areas where there are complex tax
issues. You have no direct experience of this area, but you know that a
larger firm in the town does have a number of specialists in this field.
You might be tempted to think that you can ‘get yourself up to speed ‘
quite quickly.

CONFIDENTIALITY
Members should respect the confidentiality of information acquired as a

result of professional and business relationships and should not disclose
any such information to third parties without proper and specific
authority or unless there is a legal or professional right or duty to
disclose.
Example
You are tempted to share your knowledge of the takeover or technical
advances mentioned above, or even of the level of directors’ salaries,
with your friends on a night out on the town
4
PROFESSIONAL BEHAVIOR
Members should comply with relevant laws and regulations and should
avoid any action that discredits the profession.
Example
This is possibly the most difficult principle to illustrate. Clearly you, as a
professional, would not indulge in illegal behaviour. But does it matter
what you do in the evenings or on your lunch break?
THREAT AND SAFEGUARDS
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THREATS SAFEGUARDS
<Possibilities may cause
<To Prevent>
violation on code of ethics>
The ACCA Code of Ethics divides safeguards into two

broad categories:
 Safeguards created by the profession, legislation or
 Self interest regulation, these include: requirements for entry
 Self review into the profession, continuing professional
development, corporate governance, professional
 Advocacy
standards, monitoring and disciplinary procedures,
 Familiarity etc.
 Intimidation
 Safeguards created by the work environment, these
include: rotation/removal of relevant staff from the
engagement team, independent quality control
reviews, using separate teams, etc.
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6
SELF – INTEREST THREAT
Threat Safeguards
Fee dependency Non-listed clients
Over-dependence on an audit If fees from an audit client represent large proportion
client could lead the auditor to of the firm's total fees, the firm should implement
ignore adjustments required in safeguards such as:
the financial statements for • Reducing dependency on the client
fear of losing the client • Consulting with a third party on key audit judgments
• Having an external quality control review.
[Section 290.215]
Listed clients
A firm's independence is threatened, and should be
reviewed if total fees from a listed audit client exceed
15% of the firm's total fees for two consecutive years.
• The firm should disclose the issue to those charged
with governance at the client.
• An independent engagement quality control review
should be performed by a person not a member of the
audit firm expressing the opinion or by the professional
regulatory body.
[Section 290.217] 13

Threat Safeguards
Gifts and hospitality Gifts may be accepted if:
Acceptance of goods, services • Trivial and inconsequential.
or hospitality from an audit • Offered in the normal course of
client can create self-interest business without intention to
and familiarity threats as the influence decision-making.
auditor may feel indebted to • Approved by a partner.
the client.
[Section 290.225]
The offer of gifts and hospitality must be documented
in the audit file even if refused.
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Threat Safeguards
Owning shares/financial Any member of the audit team or their immediate
interests family must not have a financial interest in the audit
The auditor will want to client therefore they must dispose of the
maximize return from the shares immediately or be removed from the team.
investment and overlook audit [Section 290.104]
adjustments which would
affect the value of their Any member of the audit team who has a close family
investment member who owns shares should be removed from the
audit team or the family member should dispose of
their shares.
[Section 290.105]
A partner of the firm in the office connected with the

audit engagement, or any partner providing non-audit
services to the audit client should not have a financial
interest in the client.
[Section 290.110]
15

Threat Safeguards
Loans and guarantees Loans and guarantees between audit clients and audit
A loan or guarantee from (or team members and their immediate family that are not
deposit with) an assurance in the normal course of business or not on commercial
client will not create a threat to terms are not permitted.
independence provided that: [Section 290.117]
• it is on commercial terms,
and If the loan is made to the firm (rather than a member
• made in the normal course of of the audit team), it must be immaterial to both the
business. firm and the client. If it is material, a self interest threat
may arise and appropriate safeguards should be put
into place, e.g. an external review of the work
performed.
[Section 290.118]
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Threat Safeguards
Business relationships
In the case of audit firms, or partners of those
If audit firms (or members) enter into
firms, unless immaterial, no safeguard can
business relationships with clients
reduce this threat to an acceptable level.
(e.g. joint ventures, marketing
In the case of audit team members, the ndividual
arrangements), this leads to self
with the connection to the audit client should be
interest because the auditor would
removed from the audit team.
have an interest in the successful
[Section 290.123]
operation of the client.
If the purchase of goods and services by an audit
The purchase of goods and services
team member represents a material amount,
from an assurance client would not
that person should be removed from the audit
normally give rise to a threat to
team or they should reduce the magnitude of the
independence, provided the
transactions.
transaction is in the normal course of
[Section 290.125]
business and on commercial terms
17

Threat Safeguards
Potential employment with an audit - The policies and procedures of the firm should
client require such individuals to notify the firm of the
If a member of the engagement team possibility of employment with the client.
has reason to believe they may - Remove the individual from the assurance
become an employee of the client engagement.
they will not wish to do anything to - Perform an independent review of any
affect their potential future significant judgments made by that individual.
employment. [Section 290.136]
Overdue fees - Do not perform any further work for, or issue
The overdue fees may be regarded as any reports to, the client until the outstanding
a loan (loans are not permitted to an fees are paid or arrangements have been agreed
audit client) with the client for payment.
- An independent review of the work should be
performed.
[Section 290.218]
18
9
Threat Safeguards
Contingent fees Fees based on a particular outcome, e.g.
The auditor would have incentive to level of profits of the company, are not
ensure a particular outcome is achieved in permitted for assurance services.
order to maximise the audit fee. E.g. [Section 290.220]
overlook audit adjustments that would
reduce profit if the fee is a percentage of
the profit.
19

Threat Safeguards
Compensation and evaluation policies A key audit partner shall not be evaluated
A self-interest threat is created when a on or compensated based on that partner’s
member of the audit team is evaluated on success in selling non-assurance services to
or compensated for selling non assurance the partner’s audit client.
services to that audit client. [Section 290.224]
The significance of the threat will depend For other staff the firm shall either revise
on: the compensation plan or evaluation
• The proportion of the individual’s process for that individual or apply
compensation or performance evaluation safeguards such as:
that is based on the sale of such services. • Removing such members from the audit
• The role of the individual on the audit team.
team. • Having a professional accountant review
• Whether promotion decisions are the work of the member of the audit team.
influenced by the sale of such services. [Section 290.223]
[Section 290.223]
20
10
Threat Safeguards
Actual or threatened litigation A key audit partner shall not be evaluated
- Litigation could represent a breakdown of on or compensated based on that partner’s
trust in the relationship between auditor success in selling non-assurance services to
and client. This may affect the impartiality the partner’s audit client.
of the auditor, and lead to a reluctance of [Section 290.224]
management to disclose relevant For other staff the firm shall either revise
information to the auditor. the compensation plan or evaluation
- The significance of the threat depends on process for that individual or apply
the materiality of the litigation and safeguards such as:
whether the litigation relates to a prior • Removing such members from the audit
assurance engagement team.
• Having a professional accountant review
the work of the member of the audit team.
[Section 290.223]
21

FAMILIARITY
Threat Safeguards
Long association of senior personnel Non-listed clients
Using the same senior personnel in an • Rotate senior personnel.
engagement team over a long period • Independent partner/quality control
may cause the auditor to become too reviews.
trusting/ less skeptical of the client [Section 290.148]
resulting in material misstatements
going undetected. Listed clients
The firm should consider: • Key audit partners must be rotated after no
• The length of time on the audit team. more than seven years with a minimum break
• The structure of the firm. of two years. If the client becomes listed, the
• Whether the client's management length of time the partner has served before
team has changed. becoming listed is taken into account.
• Whether the complexity of the subject [Section 290.149]
matter has changed. In exceptional circumstances, a maximum
[Section 290.148] one year extension is permitted where
necessary to maintain audit quality.
[Section 290.150]
22
11
FAMILIARITY
Threat Safeguards
Family and other personal relationships - Remove the individual from the
- A familiarity threat (and self-interest threat engagement team.
or intimidation threat) may occur when a - Structure the engagement team so
member of the engagement team has a family that the individual does not deal with
or personal relationship with someone at the matters that are the responsibility of the
client who is able to exert significant influence close family member.
over the financial statements (or subject [Section 290.128]
matter of another assurance engagement).
- Consideration should be given to the
possibility that such a threat may also
arise when a partner (or employee) of the firm
has a family or personal relationship with
someone at the client who is able to exert
significant influence over the subject matter,
even when the individual is not a member of
the engagement team.
[Section 290.130]
23

FAMILIARITY
Threat Safeguards
Recruitment services Listed clients
- Familiarity, self-interest and intimidation The firm cannot provide recruitment
threats may occur if the firm is involved in services in respect of directors or senior
recruiting senior personnel for the client. management who would be in a position to
- The firm may also be considered to be exert significant influence over the financial
assuming management responsibilities. statements.
- Reviewing qualifications and interviewing [Section 290.210]
applicants to advise on financial
competence is allowed.
[Section 290.209]
24
12
FAMILIARITY
Threat Safeguards
Audit staff leave the firm to join the client Assign individuals to the audit tea who
A self-interest, familiarity or intimidation threat have sufficient experience in relation to
may arise where an employee of the firm becomes the individual who has joined the client.
a director or employee of an assurance client (in a Perform a quality control review of the
position to exert significant influence over the engagement.
financial statements or subject matter of another [Section 290.134]
assurance engagement). The threat is significant if For partners joining public interest
significant connection remains between the entities, independence would be deemed
employee and the firm such as entitlement to to be compromised unless, subsequent to
benefits or payments from the firm, or the partner ceasing to be a key audit
participation in the firm's business and partner or senior partner, the public
professional activities. interest entity had
[Section 290.133] issued audited financial statements
The firm should consider: covering a period of not less than twelve
• The position taken at the client. months and the partner was not a
• The involvement the person is likely to have with member of the audit team with respect
the audit team. to the audit of those financial
• The length of time since the individual was a statements.
member of the audit team. [Section 290.137]
[Section 290.134] 25

SELF- REVIEW THREAT
Threat Safeguards
Accounting and Non-listed clients
bookkeeping services • A firm can provide a non-listed audit client with
accounting and bookkeeping services, including payroll
services, of a routine or mechanical nature.
• Separate teams must be used
• Managerial decisions must not be made by the firm, and
the source data, underlying assumptions, and subsequent
adjustments must be originated or approved by the client.
[Section 290.168]
Listed clients
• A firm cannot provide a listed audit client with
accounting and bookkeeping services.
[Section 290.169]
• A firm can provide accounting services for divisions or
related entities of a listed client if separate teams are used
and the service relates to matters immaterial to the
division/ related entity.
[Section 290.170]
26
13
SELF- REVIEW THREAT
Threat Safeguards
Internal audit services A firm cannot provide internal audit services for a listed
In addition to the self-review audit client, where the service relates to internal
threat, the auditor needs to be controls over financial reporting, financial
careful not to assume accounting systems, or in relation to amounts or
management responsibilities. disclosures that are material to the financial
statements.
[Section 290.195]
Where services are provided, separate teams must be
used.
[Section 290.194]
27

SELF- REVIEW THREAT
Threat Safeguards
Taxation services Non-listed clients
Tax calculations for inclusion in • Advice should be obtained from an external tax
the financial statements and professional.
tax planning advice create a • Where an audit team member performs the tax
self-review threat. calculation the work should be reviewed by a senior
Completion of tax returns is person with appropriate expertise that has not been
not deemed to create a self- involved with the audit.
review threat.
[Section 290.179] [Section 290.180]
Listed clients
• A firm cannot prepare tax calculations for a listed
audit
client.
[Section 290.181]
28
14
SELF- REVIEW THREAT
Threat Safeguards
Tax advice The firm should not provide tax advice that depends on a
particular accounting treatment and is material to the
financial statements.
[Section 290.185]
Other tax advice is allowable with safeguards.
[Section 290.184]
IT services The firm can only provide IT services which involve:
IT services may create a • Design or implementation of IT systems unrelated to
self-review threat and also internal controls or financial reporting.
be considered to be • Implementation of off-the-shelf accounting software.
assuming management • Evaluating and making recommendations on a system
responsibilities. designed or operated by another service provider or by the
entity.
[Section 290.197]
29

SELF- REVIEW THREAT
Threat Safeguards
Non-listed clients
• Valuation of matters that are material to the financial
statements and involve a significant degree of subjectivity
should not be provided.
• Where the threat is not deemed significant, different
personnel should be used.
[Section 290.172]
• A professional should review the valuation work
Valuation services
performed.
[Section 290.175]
Listed clients
• Valuation services that are material to the financial
statements (regardless of subjectivity) should not be
provided to listed audit clients.
[Section 290.176]
30
15
SELF- REVIEW THREAT
Threat Safeguards
Temporary staff assignments Staff may be loaned to the client provided:
A self-review threat will be • The loan period is short.
created if staff are loaned from • The person does not assume management
the audit firm to the client. responsibilities.
If the person was assigned to • The client is responsible for directing and supervising
the audit they would be the person.
evaluating work for which they • The loaned staff member is not a
had been responsible during the member of the audit team.
temporary assignment and may [Section 290.140]
not detect errors in their work.
31

SELF- REVIEW THREAT
Threat Safeguards
Corporate finance services If there is doubt over the accounting
Self-review and advocacy threats may be treatment or if the outcome will
created if a firm: materially affect the financial statements,
• Assists an audit client in developing the service should not be provided.
corporate strategies [Section 290.213]
• Identifies possible targets for the audit Where services can be provided, the firm
client to acquire should:
• Advises on disposal transactions • Use professionals who are not members
• Assists finance raising transactions of the audit team to perform the service,
• Provides structuring advice. or
Consideration should be given to: • Have a professional who was not
• The degree of subjectivity involved. involved in providing the corporate
• Whether the outcome will have a material finance service to the client advise the
impact on the financial statements. audit team on the service and review the
• Whether the effectiveness of the accounting treatment and any financial
corporate finance advice depends on a statement treatment.
particular accounting treatment. [Section 290.212]
32
16
SELF- REVIEW THREAT
Threat Safeguards
Client staff joins audit firm Such individuals should not be assigned to the audit
A self-interest, self-review, or if that person would be evaluating elements of the
familiarity threat may arise where financial statements for which they had prepared
a director or employee of an accounting records.
assurance client (in a position to [Section 290.141]
exert significant influence over
the financial statements An employee or partner of a firm cannot also be an
or subject matter of another employee or director of an assurance client, as the
assurance engagement) becomes self-interest and self-review threats created would
an employee of the firm. be so significant that no safeguard could reduce the
threats to an acceptable level.
[Section 290.142]
33

ADVOCACY
Promoting the position of a client or representing them in some way

would mean the audit firm is seen to be 'taking sides' with the client.
Examples :
• Representing the client in court or in any dispute where the matter is
material to the financial statements.
• Negotiating on the client's behalf for finance
34
17
ADVOCACY
Where the amounts are material the audit firm must not act for the audit client
in this way. Any request for such services must be politely declined.
[Section 290.206]
Where the matter is not material to the financial statements the firm should:
• Use professionals who are not members of the audit team to perform the
service, or
• Have a professional who was not involved in providing the legal services
advise the audit team on the service and review any financial statement
treatment.
[Section 290.207]
Providing services involving promoting, dealing in, or underwriting an audit

client’s shares would create an advocacy or self-review threat so significant that
no safeguards could reduce the threat to an acceptable level. Accordingly, a
firm shall not provide such services to an audit client.
[Section 290.214]
35

INTIMIDATION
Actual or perceived pressures from the client, or attempts to exercise undue

influence over the assurance provider create an intimidation threat, e.g.
actualor threatened litigation between the auditor and audit client (in which
case it may be necessary to resign from the engagement).
Examples :
 Threat of dismissal (as an employee) or replacement (as an auditor) over, for
example, a disagreement about the application of an accounting principle or the
way in which financial and performance information is to be reported;
 A dominant personality attempting to influence the decision- marking process
(e.g. in awarding contracts or presenting financial information) or controlling
relations with auditors or other oversight bodies;
 Being threatened with litigation; and
 Being pressurized to reduce necessary work to reduce costs or fees.
36
18
Family and Other Personal relationships
Suggest a safeguard appropriate to each of the following situations:

1. A trainee’s uncle is a director of an assurance client
2. A Trainee’s girlfriends is the credit controller of an audit client.
3. An audit senior’s girlfriend is the credit controller of an audit client
4. A partner’s sister is a director of a company.
37
Undue Dependence
Comment and conclude on the following FOUR situations

1. Peter, a recently qualified member of ACCA, has decided to go into
practice as a sole practitioner. He already has a small private portfolio off
$450,000 gross fee income nut has now been approached by his cousin to
take over the audit of her company. The company’s last audit fee was
$250,000 and this will be by far Peter’s largest audit in his client portfolio.
 Comment:
 Conclusion
38
19
Undue Dependence

2. Paine & Co, a firm with two partners, has been requested by a long –
standing client to do a special investigation into a foreign group of
companies. The target group is based in Turkey where Paine & Co has no
representation. The client is very keen use to pay not only for the cost of the
investigation, but also the additional costs of the firm having to use
temporary staff to service other existing client is normally $800,000. The
extra service is expected to cost the client $1,600,000
 Comment:
 Conclusion
39
Undue Dependence

3. Ambit Ltd is preparing to apply for listing (admission) to a recognized stock
market, at the same time offering a proportion of its share to the public. The
directors have asked Schilling & Co, as their auditors, to set up and maintain
the company’s share register on a computer database.
 Comment:
 Conclusion
40
20
Undue Dependence

4. Sean & Co are the auditors of Starck a.s. During the current year Starck has
expanded rapidly, taken over three other companies and is currently
preparing to float a proportion of its shares on a recognized stock exchange.
As a result of several special assignments connected with these events, total
fee from Starck amount to 19% of the total fee income of Sean & Co for the
year.
In addition, Sean & Co’s senior tax manager owns a small number of shares
in Starck acquired several years ago when the company issued share under a
business expansion scheme.
 Comment:
 Conclusion
41
OTHER ISSUE
Opinion Shopping
Whilst shareholders appoint auditors, the Directors typically seek out a
potential firm for the shareholders to vote on. The Board might be
tempted to interview several firms until it found one that accepted its
accounting methods.
Any firm of auditors aware that a potential client is engaged in this
process should not accept nomination.
42
21
OTHER ISSUE
Confidentiality
Member of an audit team should not disclose any information to those
outside of the audit team, whether or not they work for the same company
Information should only be disclosed under certain circumstances.
 If the client has given their consent.
 If there is an obligation to disclose, e.g. if the client is suspected of
money laundering, terrorism, drug trafficking.
 If it is required by a regulatory body, e.g. financial services legislation.
 If a court order has been obtained.
 If a member has to defend himself in court or at a disciplinary hearing.
 If it is in the public interest.
Where an auditor feels the need to disclose information, they should
consider disclosing to the company’s Audit Committee (or Board of
Directors, if there is no Audit Committee).
In certain circumstances auditors may be required by law to disclose
information. For example, where money laundering is suspected
43
CONFLICT OF INTEREST
Members should place their client’s interest before their own and should
not accept or continue engagements which threaten to give rise to conflict
of interest between the firm and the client.
Once a conflict is noted, you should advise both clients of the situation
 Reassure the client that adequate safeguards will be implemented, e.g.
separate engagement leaders for each, separate teams, ‘Chinese walls’ to
prevent the transfer of client information between teams and a second
partner review
 Suggest they seek additional independent advice
 If adequate safeguards can’t be implemented, the auditor should resign
44
22
CONFLICT OF INTEREST
Client vs Client
The firm’s working should be managed to avoid the interests of one client
adversely affecting those of another
Where the acceptance or continuance of an engagement would, even with
safeguards, materially prejudice the interest of any client, the appointment
should not be accepted or continued.
Safeguards
Safeguards include:
 Using different partners ad team of staff for different engagements
 Adopting a code of practice to prevent leakage of confidential information
among different team and sections within the firm
 Using confidentiality agreements signed by employees and partners of the firm.
 Having a senior partner or compliance officer or not personally involved with
either client regularly review the situation
 Advising one or all off client to seek additional independent advice
45
Ethical issue
Comment and conclude on the following situations
1. The audit senior of Neutron, a limited liability company, is having an affair
with the credit controller and is staying with her during the week and leaving
the audit files in the boot of his car overnight. There are no other audit staff
available that the client considers capable of replacing him on the
assignment
 Comment:
 Conclusion
46
23
Ethical issue
2. A part- time partner in Spoils & Co is also a councillor in the local
authority. She has been acting for Radnor, a limited liability company, whose
business venture now requires planning permission from the local authority.
The partners sits on the planning committee and recently vigorously
opposed a similar application.
 Comment:
 Conclusion
47
Ethical issue
3. In an effort to reduce audit fees, one of your corporate client, Finders, has
employed an accountant on a temporary basis to assist you with your audit
work. The client feels that it will be cheaper for the temporary accountant to
perform some of the audit testing, replacing one member of your staff.
 Comment:
 Conclusion
48
24
ACCEPTING NEW AUDIT ENGAGEMENT

Auditors must ensure that there are no independence or
other ethical problems
Approach by new audit client
Yes
No need to follow professional results
Is this the client’s first audit?
– The auditor can make own decision
No
Does client give permission to
contact old auditor?
Yes
Write for all information pertinent Prospective auditor should decline
to the appointment section appointment
Does client give old auditor No

permission to reply?
Yes
Does old audit provide information No Give old auditor due notice then
decide on the basic of knowledge
relevant to new appointment?
obtained otherwise
Yes
Accept/ reject appointment
decision? 50
25
Procedures after accepting nomination
Ensure that the outgoing auditors' removal or resignation has been

properly conducted in accordance with national legislation
Ensure that the new auditors' appointment is valid.
Set up and submit a letter of engagement to the directors of the

company
51
Client ISA 310 Knowledge of the business requires the auditor to

Screening obtain knowledge of the client’s business, sufficient to
enable them to identify and understand those issues that
may have a significant impact on the financial statements
and the audit
The firm may wish to concentrate on particular types

Other possible of client( e.g., a certain size or within a certain
industry)
reasons for
declining an Specialized staff (e.g., audit of insurance business)
audit may not be available.
engagement The level of audit fee may be insufficient, especially
if other firms are competing for the appointment
52
26
Engagement
Contract
Letter
 The engagement letter will be sent before the audit.

 It specifies the nature of the contract between the audit firm and the
client.
 It minimises the risk of any misunderstanding of the auditor’s role.
 It should be reviewed every year to ensure that it is up to date but does not
need to be reissued every year unless there are changes to the terms of the
engagement.
 The auditor must issue a new engagement letter if the scope or context of
the assignment changes after initial appointment.
 Many firms of auditors choose to send a new letter every year, to
emphasise its importance to clients.
 Clarifies methods of charging fees, and fees of any charging and amounts
on account
53

Engagement
Contract
Letter
The auditor shall assess whether the terms of the engagement

need to be revised and whether there is a need to remind the
Recurring
entity of the existing terms
audits Examples: A significant change in ownership; change in legal
requirements; Limitation of Scope…
54
27
Engagement Letter Example
55

56
28
57

58
29
59
QUALITY CONTROL AT FIRM LEVEL

 Firm and leadership responsibilities for quality within the firm: promoting a
culture where quality is regarded as essential, and providing training to
ensure all staff understand quality objectives and procedures
 Human resources: recruiting and retaining staff with the right capabilities,
competence, and commitment to ethical principles to perform engagements
in accordance with professional standards and regulatory requirements
 Engagement performance: implementing policies and procedures to ensure
quality control at the individual engagement level
 Monitoring: evaluating quality control procedures to ensure that they
remain relevant, adequate and effective and are complied with
60
30
QUALITY CONTROL AT FIRM LEVEL
The objective of the auditor is to implement quality control procedures at
the engagement level that provide the auditor with reasonable assurance
that:
 The audit complies with professional standards and applicable legal
and regulatory requirements; and
 The auditor's report issued is appropriate in the circumstances
 Leadership responsibilities
 Ethical requirements
 Acceptance/continuance of client relationships and specific audit
engagements
 Assignment of engagement teams
 Engagement performance
61
ROUND UP
31
2
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 05
INTERNAL AUDIT
1
2
DEFINITION
Internal Audit Function
A function of an entity that performs assurance and consulting

activities designed to evaluate and improve the effectiveness of the
entity's governance, risk management and internal control processes
INTERNAL AUDIT AND CORPORATE

GOVERNANCE
INTERNAL AUDIT CORPORATE GOVERNANCE
The internal audit can play key role in Part of achieving this principle requires
assessing and monitoring internal the audit committee to
control policies and procedures. It can  Monitor and review the effectiveness
assist the board in other ways as well, of internal audit activities
by:  Where there is no internal audit
 Acting as auditors for board reports function, to consider annually
not audited by the external auditors whether there is a need for this
 Being the experts in fields such as function and make a recommendation
auditing and accounting standards to the board
in the company and assisting in  Where there is no internal audit
implementation of new standards function, to explain in the annual
 Liaising with external auditors, report the absence of such a function
particularly where external auditors
can use internal audit work and
reduce the time and therefore cost
of the external audit
2
2
ASSESSING THE NEED FOR INTERNAL

AUDIT
Factors an entity might consider when assessing the need for an internal
audit function include:
The cost of setting up an internal audit benefit
Predicted savings in external fees where work carried out department
versus the predicted by consultants will be carried out by the new internalc
audit department
The complexity and scale of the organisation's activities and the systems
supporting those activities
The ability of existing managers and employees to carry out assignments
that internal audit may be asked to carry out
Management's perceived need for assessing risk and internal control
Whether it is more cost effective or desirable to outsource the work

The pressure from external stakeholders to establish an internal audit
department
SCOPE AND LIMITATIONS OF INTERNAL

AUDIT WORK
Role of Internal Audit
Examination and evaluation of financial and operating information

within the organization. In certain organization this can form type of
continuous auditing and may involve sophisticated information systems
that capture monitoring of risks and evidencing of controls.
Review of the economy, efficiency and effectiveness of operations (3Es)
Review of compliance with external laws and regulations and internal

policy and procedures.
Review and advice on the development of key organizational systems

and on the implementation of major change.
3
2

AUDIT WORK
Scope of Internal Audit
Evaluating and commenting on the effectiveness of risk

management, control and corporate governance processes.
Management is ultimately responsible for ensuring appropriate
procedures are in place.
An approved „internal audit charter‟ should be in place setting out

scope, authority and function of internal audit.
Internal audit should have unlimited access.

Internal audit should, as far as possible be independent within the
organization.

AUDIT WORK
Risk based internal audit involves the following activities
Working with line management to understand the risks within the

activity or organization.
Identifying in a systematic way types of risk and the significance and
likelihood of risks materializing
Assessing controls to manage risk, including those expected against

those in place
Testing controls to ensure that they operate and that they provide
effective management risk
Making recommendations to line management for improving the
operation, indicating the type and level of risk exposure
4
2

AUDIT WORK
Limitations of Internal Audit
 Independence may be limited

 Relationship between internal and external audit may be ineffective
 Operational standards may vary
 Relative newness of the internal audit profession
 Expectations gap
 Misunderstanding of function within the organization.

AUDIT WORK
Internal audit External audit
Determined by management, Financial focus as determined

Scope
both operational and financial by legislation
Increasingly risk based; assess Increasingly risk based. Testing

Approach to risk. Evaluate and test systems underlying records and
work and recommend improvements to transactions that form the
management basis of financial statements
To advise management on To report to shareholders on

Responsibility internal control and corporate the truth and fairness of
governance financial statements
5
2

AUDIT WORK
Using the work of internal audit
External auditors also use the work done by internal auditors. The extent
to which auditors can leverage output of internal auditors depending on
criteria that the internal auditor is being accessed:
 Qualified
 Experienced
 Independent, and
 Professional.
The work done by internal auditors, which is being used by external auditors
should be clearly examined in terms of:
 Nature, scopes and objectives of the internal audit work,
 Nature, scopes and timing of communications,
 Consistency with evidence,
 Use and accuracy of source data.
INTERNAL AUDIT ASSIGNMENT
Three Es audit: examine the economy,

Value for money (VFM) efficiency and effectiveness of activities
and processes within a business
Economy: Attaining the appropriate quantity and quality of physical, human and
financial resources (inputs) at lowest cost. An activity would not be economical if,
for example, there was overstaffing or failure to purchase materials of requisite
quality at the lowest available price.
Efficiency: This is the relationship between goods or services produced (outputs)

and the resources used to produce them. An efficient operation produces the
maximum output for any given set of resource inputs, or it has minimum inputs
for any given quantity and quality of product or service provided.
Effectiveness: This is concerned with how well an activity is achieving its policy
objectives or other intended effects.
12
6
2
The purpose of the best value audit is to measure the

Best value organisations performance against the established criteria.
Challenge - Review internally the different options for providing

services and questions the status
Compare - Compare with other service providers to review options

for improving performance.
Consult - Consult all users of services and those affected by services.
Compete - demonstrate through performance management and

continuous improvement that the most efficient and effective
service is provided.
13

Audit of information technology
Definition: “Information technology is a specialist type of internal

auditing reviewing and reporting on all aspects of systems, including
hardware, applications, IT environment with It and reporting all input,
output and processing controls”
14
7
2

Project Auditing
Definition: “Project auditing is a specialist type of internal audit review,

examining and evaluating the way that change is managed within an
organization”
Internal audit involvement includes reviewing the risks and controls of the
project and monitoring its overall management to ensure that issues
arising are properly addressed.
15

Financial Internal Audit
Definition: “Financial auditing was traditionally the main area of work for
the internal audit department. It embraces the conventional tasks of
examining records and evidence to support financial and management
reporting in order to detect errors and prevent fraud.
It would include analyzing information, identifying trends and potential
significant variations from the norm”
16
8
2

Operational internal audit
Definition: “Operational auditing covers examination and review of a

business operation, including the control procedures and whether they
are being adhered to. The audit would also identify areas for
improvement in efficiency and performance including improving
operational economy, efficiency and effectiveness- the three Es of value
for money auditing”
Operational internal audit include:

 Procurement
 Marketing
 Treasury
 Human resources
17
INTERNAL AUDITOR’S REPORT

NATURE OF REPORT WILL DEPEND ON NATURE OF WORK AND THE TYPE OF ORGANIZATION.
 Report ratings will be used to assign levels of risk and controls (E.g. Star ratings, colors or
numbers, etc.)
 FORMAL REPORTS should include ‘an executive summary ‘containing scope approach and
objectives, and should summaries the key findings and the conclusions. Formal reports should
include the detailed findings and time scaled recommendations for actions with assigned
responsibility. Additional information and analysis should be included in an appendix.
 Discussion papers and discussion reports are less formal and structured.
 Project reports include project management review reports, business case review reports, review
implementation, post implementation reports and due diligence reports.
 Verbal presentations can be effective means of reporting
 Memorandum reports may be appropriate for small reviews
 Compliance reports may be used to summarize results of surveys and questionnaires.
 Follow up reporting is used to ensure recommendations are implemented.
 Risk reports deal with risk analysis within the organization and may result from specific reviews,
risk and control workshop-s and those assessments carried out on a regular scheduled basis (E.g.
Monthly, annually)
18
9
2
OUTSOURCING OF INTERNAL AUDIT
ADVANTAGES DISADVANTAGES
 Greater focus on cost and efficiency of

the internal audit
 Internal audit staff used from a broader  Conflict of interest if the
source of expertise, e.g. professional outsourced internal audit service
firms that may specialize in their is being provided by the external
particular type of organization. auditors.
 Less subject to high turnover or loss of  Pressure on independence arising
staff from the internal audit from the cost associated with the
department. provision of internal audit.
 Useful for providing specialist,  Lack of knowledge or awareness
expensive skills such as IT or treasury of the organizational objectives,
that an in house department may find culture or business.
difficult to recruit or retain.  Increased cost of an outsourced
 Skills required for only a short time service, with less time spent on
each year can be provided without internal audit.
incurring excessive costs of maintaining
an in house expertise.
19
OUTSOURCING OF INTERNAL AUDIT
Managing an outsourced department
A company will need to establish controls over the outsourced internal audit
department. These would include:
 Setting performance measures in terms of cost and areas of the business

reviewed and investigating any variances
 Ensuring appropriate audit methodology (working papers/reviews) is
maintained
 Reviewing working papers on a sample basis to ensure they meet
internal standards/guidelines
 Agreeing internal audit work plans in advance of work being performed
 If an external auditor is used, ensuring the firm has suitable controls to
keep the two functions separate so that independence and objectivity is
not impaired
20
10
2
ROUND UP
21
11
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 6
PLANNING THE AUDIT
1
WHY PLAN?
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 Statements, 4]
WHY PLAN?
 an expensive process
An audit  a potentially complex project which needs to be
managed effectively.
 Ensuring the right team is selected for the assignment.

 Ensuring that staff is employed effectively rather than simply ‘given
something to do’.
 Ensuring the work is properly focused on material areas of risk.
 Identifying potential problem areas.
 Ensuring that the nature and quantity of the work done addresses the risks
and problem areas.
 Ensuring the work can be fully completed in time for the review process.
 Enabling deadlines to be met so that there is time for due consideration of
the important issues.
 The purpose of all this is to ensure that the risk that the financial statements
may be misstated is reduced to an acceptable level.
2
THE PLANNING PROCESS
Preliminary
engagement Planning activities
activities
 Perform procedures regarding the

 Assessing risk
continuance of the client
 Developing the audit strategy
engagement.
 Developing an audit plan
 Evaluating compliance with ethical
 Assessing materiality
requirements.
 Selecting appropriate audit
 Ensuring there are no
procedures.
misunderstandings with the client as
to the terms of the engagement
ASSESSING RISK
It’s all about risk
It is the assessment of risk which determines:

 the audit strategy
 who should be on the audit team
 the potential impact of fraud
 the nature of the procedures to be carried out
 how much evidence needs to be gathered
3
ASSESSING RISK
How do you assess risk?
There are two sources of information from which it is possible to assess risk:
 Knowledge of the business (KOB) which we will consider later in this
chapter.
 Analytical procedures which we will consider in the chapter on evidence.
ASSESSING RISK
Risk and materiality
It follows that there is a relationship between risk and materiality in that:
 the greater the risk of material misstatement
 the lower the level of materiality.
4
THE AUDIT STRATEGY
Matters to consider:
THE AUDIT STRATEGY
The audit strategy sets the overall approach of the audit and
covers:
 the scope
 the timing
 the direction of the audit.
10
5
THE AUDIT STRATEGY
SCOPE
What is the financial reporting framework for the financial

statements? International Accounting standards?
Are there industry specific or other special reporting requirements?

 National GAAP?
 Listed companies.
 Charities.
 Other regulated businesses such as banks and insurance companies.
Are there other factors which influence the overall approach to the
audit?
 Multiple locations
 Group audits
11
THE AUDIT STRATEGY

TIMING
Deadline for:
Final reporting
Any interim report
Report to management
Reports to those charged with governance
The timing of:

Interim audit
Final audit visits to enable these deadlines to be met.
12
6
THE AUDIT STRATEGY
INTERIM FINAL AUDITS
The interim audit will normally The final audit can then focus on:
focus on:  balance sheet areas
 documenting systems  finalization of the financial
 evaluating controls statements and the audit
 some tests of details – usually report.
tests of income and
expenditure and, perhaps,
purchases and disposals of
fixed assets.
13
THE AUDIT STRATEGY

DIRECTION
The ‘direction’ of the audit covers the overall approach and concerns such
issues as:
 preliminary assessment of materiality
 preliminary identification of high risk areas
 preliminary identification of material components and account balances.
Examples:
• Component – A division, branch, subsidiary, joint venture, associated
company or other entity whose financial information is included in financial
statements audited by the principal auditor.
• Decisions about whether assurance is expected to be derived from reliance
on controls or a fully substantive approach.
• The need for site visits and other logistical issues.
• The impact of recent developments at the client, in its industry, in regulatory
or financial reporting requirements.
14
7
THE AUDIT STRATEGY
Possible different strategies could be:
 Final audit only.

 Interim and final.
 Reliance on controls with reduced reliance on substantive procedures.
 Reliance on substantive procedures rather than on internal controls.
 Heavy reliance on analytical procedures rather than tests of details
15
THE AUDIT STRATEGY

Possible different strategies could be:
 The need to use experts, e.g.

• specialist inventory checkers in the restaurant and pub trade or for
livestock
• surveyors and valuers for property companies
• actuaries for pension schemes.
16
8
THE AUDIT PLAN
17
THE AUDIT PLAN

The audit plan should include specific descriptions of:
• The nature, timing and extent of risk assessment procedures.

• The nature, timing and extent of further audit procedures, including:
 what audit procedures are to be carried out
 who should do them
 how much work should be done (sample sizes, etc)
 when the work should be done
18
9
MATERIALITY
Definition
Information is material if its omission or misstatement could influence

the economic decisions of users taken on the basis of the financial
statements‟
 A big amount of money (material by size).

 An amount which although not big:
 triggers a threshold
 Indicates future developments or other significant events
 whose disclosure is compulsory (material by nature)
19
MATERIALITY
Calculating materiality
Firms typically have a standard method for calculating a baseline

materiality figure as part of the planning process.
Common measures are:

 1⁄2 – 1% of turnover
 5 – 10% of results
 1–2% of assets
But these are up to the judgment of the auditor. As a result,

different firms use different measures.
Any calculation done is very flexible, and may have to be

reassessed during the audit (if for example many large errors are
found).
20
10
MATERIALITY
Performance materiality is the amount or amounts set by the auditor at less than
materiality for the financial statements as a whole to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a whole.
Performance materiality also refers to “the amount or amounts set by the auditor at
less than the materiality levels or level for particular classes of transaction, account
balance or disclosures
The indicates that the auditor sets a level or levels of materiality lower than overall
materiality for the purposes of performing procedures in the general (for example
on a low risk area) and this iss just to account for aggregation. However, an even
lower level is set for certain balances, transactions or disclosures where there is an
increased risk or if qualitative considerations (discussed below) necessitate it
21
MATERIALITY
Revision of materiality
The level of materiality must be revised for the financial statements as a whole
if the auditor becomes aware of information during the audit that would have
caused the auditor to have determined as a different amount during planning
(ISA 320: para. A12)
If the auditor concludes that a lower amount of materiality for the financial
statement as a whole is appropriate, the auditor must determine whether
performance materiality also needs to be revised, and whether the nature,
timing and extent of futher audit procedures are still appropriate
(ISA 320: para.13)
A revision to materiality might be required for example if during the audit it
appear that actual results are going to be significantly different from the
expected results, which were used to calculate materiality for the financial
statement as a whole during planning
22
11
TOLERABLE ERROR
What is tolerable error?
 The maximum error in a population that the auditor is willing to

accept.
 This means that in the case of tests of control, the auditors will
accept a certain number of instances of a failure to apply a control
procedure and will still conclude that the procedure is operating
properly.
 Tolerable error is considered during the planning stage, and for
substantive procedures, is related to the auditor's judgement about
materiality.
23
TOLERABLE ERROR
The difference between materiality and tolerable error
 Materiality concerns the financial statements as a whole.

 Tolerable error only concerns the population being tested
24
12
AUDIT DOCUMENTATION
Purposes of audit documentation
ISA 230 Audit Documentation, requires auditors to prepare and retain written
documentation that:
• Provides a sufficient appropriate record of the auditor’s basis for the auditor's report.
• Provides evidence that the audit was planned and performed in accordance with ISAs
and applicable legal and regulatory requirements.
[ISA 230, 2]
In addition, audit documentation:

• Assists the engagement team to plan and perform the audit.
• 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.
• Enables the quality control reviews to be performed.
• Enables the external quality inspections to be performed.
[ISA 230, 3]
25
AUDIT DOCUMENTATION
Form and content of audit documentation
Documentation should be sufficient to enable an experienced auditor, with no previous

connection to the audit, to understand:
• The nature, timing and extent of audit procedures performed;
• The results of the procedures performed and the evidence obtained;
• The significant matters arising during the course of the audit and the conclusions
reached thereon, and significant professional judgments made in reaching those
conclusions.
[ISA 230, 8]
26
13
AUDIT DOCUMENTATION
Retention of working papers
Documentation is retained in an audit file, which should be completed in a timely

fashion after the date of the auditor's report (normally not more than 60 days after)
and retained for the period required by national regulatory requirements (this is
normally five years from the date of the auditor's report).
[ISA 230, A21, A23]
27
AUDIT DOCUMENTATION
Types of audit documentation
Planning documentation
 Overall audit strategy;
 Audit plan;
 Risk analysis
Audit programmes
Summary of significant matters
Written representation from management
Correspondence
Checklists
Copies of client records
28
14
AUDIT DOCUMENTATION
Permanent audit file
For large audits much of the knowledge of the business information may be kept
on a permanent file and the audit plan may contain a summary or simply cross
refer to the permanent file. Typical information on a permanent file includes:
 Names of management, those charged with governance, shareholders;
 Systems information;
 Background to the industry and the client’s business;
 Title deeds;
 Directors’ service agreements;
 Copies of contract and agreements.
29
AUDIT DOCUMENTATION
Example contents of a current audit file
The audit work for a specific period is kept on a current file. Typically,
there are at least three sections:
Planning
Performance
Completion
30
15
AUDIT DOCUMENTATION
Planning
The main element of this section is likely to be the Audit Planning Memorandum.
This document is the written audit plan and will be read by all members of the
audit team before work starts. Its contents are likely to include:
 Background information about the client, including recent performance
 Changes since last year’s audit (for recurring clients)
 Key accounting policies
 Important laws and regulations affecting the company
 Client’s trial balance (or draft financial statements)
 Preliminary analytical procedures
 Key audit risks
 Overall audit strategy
 Materiality assessment
 Timetable of procedures
 Deadlines
 Staffing and a budget (hours to be worked x charge out rates)
 Locations to be visited
31
AUDIT DOCUMENTATION
Planning
Performance
Working papers are likely to consist of:

 Lead schedule – showing total figures, which agree to the financial
statements.
 Back-up schedules – breakdowns of totals into relevant sub-totals.
 Audit work programme detailing:
 The objectives being tested
 Work completed
 How samples were selected
 Conclusions drawn
 Who did the work
 Date the work was completed
 Who reviewed it.
32
16
AUDIT DOCUMENTATION
Planning
Performance
Completion
The completion (also known as review) stage of an audit has a number of

standard components:
 Going concern review
 Subsequent events review
 Final analytical procedures
 Accounting standards (disclosure) checklist
 Written representation from management
 Summary of adjustments made since trial balance produced
 Summary of unadjusted misstatements
 Draft final financial statements
 Draft report to those charged with governance and management
letter.
33
AUDIT DOCUMENTATION
34
17
ROUND UP
35
18
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 7
RISK ASSESSMENT
1
1. APPROACH TO AUDITING
Two Basic Approach
Procedural Risk-based
- The auditor plans the audit around the

risks that the client’s financial statements
may contain misstatements, whether as a
result of fraud or not. As such, each audit
The auditor carries out a set
will involve different priorities, different
of standard procedures and
tests, and will take different lengths of
tests regardless of the
time.
particular nature of the
 As this should minimise the chance of
client.
the auditor giving the wrong opinion. It
also helps to ensure that audit work is
carried out as efficiently as possible, as
assurance is obtained using the most
effective tests.
1. APPROACH TO AUDITING
What could go wrong?
Professional skepticism – An attitude that includes a questioning mind and a

critical assessment of evidence
2
THE IMPORTANCE OF RISK ANALYSIS
Risk analysis is the most important stage of the audit. If auditors assess risk
properly, they will:
 Identify main areas where errors or misstatements are likely early in the
audit.
 Plan audit work that addresses these possible mistakes
 Discover errors as early as possible in the audit process
 Carry out the most efficient (and hence profitable) audit possible
 Minimise the chance of issuing an incorrect audit opinion
 Reduce the chance of getting sued (and losing!).
 Have a good understanding of the risks of fraud, money laundering etc
 Be in the best position to assess whether the client is a going concern
IMPACT ISA 315 - Identifying and assessing the risks of material

misstatement through understanding the entity and its environment
2. AUDIT RISK
“The risk of that the auditor expresses an

inappropriate audit opinion when the
financial statements are materially
misstated.‟ (typically, stating that the
financial statements are true and fair, when in
fact they are not).
3
2. AUDIT RISK
Audit risk is further defined by way of a formula
AUDIT RISK
ENTITY RISK DETECTION RISK
INHERENT RISK CONTROL RISK
2. AUDIT RISK
Inherent Risk
The risk of errors or misstatements due to the nature of the

company and its transactions.
Clearly this requires the audit team to have a good knowledge of

how the client’s activities are likely to affect its financial statements,
and the audit team should discuss these matters in a planning
meeting before deciding on the detailed approach and audit work
to be used.
Such a meeting is compulsory under ISA 315 and must be

documented.
4
2. AUDIT RISK
Inherent Risk
At the account balance and assertion level
 As well as considering the entity as a whole,
the auditor needs to assess whether individual headings in the financial
statements or assertions about those items, carry increased levels of
inherent risk.
 Management makes a number of assertions about items in the financial
statements – whether they exist, their value, whether all are included,
whether they are recognised in the correct accounting period etc. which we
will consider in detail in the chapter on audit evidence.
Assertions are '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' (ISA 315 (Revised))
2. AUDIT RISK
Control Risk
Control risk is the risk of errors or misstatements because the

company’s internal controls are not strong enough to prevent,
detect and correct them.
Control risk increases due to the lack of suitable procedures

implemented by the client. The implementation of such procedures
will have a cost, e.g.:
- The installation of new equipment
- The employment of extra staff
- The time taken by additional administrative procedures.
The client therefore needs to make a judgement about whether the

benefits of the control outweigh the costs of implementing it.
10
5
2. AUDIT RISK
Detection Risk
How much “shrinkage” (jargon for theft of goods from a retail

store) would there need to be to make it worth while
employing a store detective or installing electronic tags and
detectors?
 This is the risk that the auditor’s procedures do not pick up material
misstatements.
11
2. AUDIT RISK
Sampling Risk
The risk which ‘arises from the possibility that the auditor’s conclusion,
based on a sample may be different from the conclusion reached if the
entire population were subjected to the same audit procedure’.
In other words it is the risk that the sample may not be representative.
Any other risks that the auditor may come to the wrong conclusion,
e.g.:
 by misinterpreting the results of a test
 by using inappropriate procedures
 by failing to investigate a particular balance or transaction
 because a member of the client’s staff misleads the auditor
Is classified as non-sampling risk. Non-sampling risk is defined as

arising from factors that cause the auditor to reach an erroneous
conclusion for any reason not related to the size of the sample
12
6
3. UNDERSTANDING THE ENTITY
AND ITS ENVIRONMENT
Purpose: The Auditor is required to understand the entity and its

environment to able to assess the risk of material misstatement.
What?
 what the client does

 the environment in which it does it
 its management, systems and governance
 Internal control
 who it interacts with (key customers, suppliers, etc).
 Financial Performance
 Industry, regulatory
13

AND ITS ENVIRONMENT
Purpose: The Auditor is required to understand the entity and its

environment to able to assess the risk of material misstatement.
How
 Refer to Permanent Audit Files & other sources of KOB

 Enquiries of management, internal auditors..
 Analytical procedures
 Observations & inspection
14
7
AND ITS ENVIRONMENT
Sources of KOB
Information from external sources Information from your firm

 Industry surveys  Partner
 Companies House  Manager
 The internet  Industry experts
 Trade Press  Last year team
 Credit reference agencies  Last year audit working paper
Information from the client Information from you

 Discussion  Past experience
 Observation
 Website
 Brochures
15

AND ITS ENVIRONMENT
Source of KOB
Discussion among the engagement team

 ‘The members of the engagement team should discuss the susceptibility
of the entity’s financial statements to material misstatements.‟
 This discussion – effectively a planning meeting – is required by ISA 315
In order to demonstrate that it has taken place and that the standard has
been complied with, there will need to be evidence, usually in the form of
minutes of the discussion meeting
16
8
AND ITS ENVIRONMENT
Analytical Procedure
Analytical Procedure are usually carried out at three stages of the

audit process. They are mandatory at the planning and final review
stages. At the substantive testing stage, they are one of several
methods for obtaining evidence, so may not be appropriate in some
circumstances.
Analytical Procedure comprise the evaluation of financial

information by studying the relationship between this information
and other financial and non-financial data. They include comparison
of financial information with prior periods, budgets and forecasts
and similar industries
17

AND ITS ENVIRONMENT
Analytical Procedure
At the planning stage, analytical procedures are used for two main reasons:
 to help understand the client's financial statements
 to help spot possible errors.
If errors look possible, the audit work will be directed towards those errors.
How this is done?
Basic analytical procedures could involve simply looking at the client's trial
balance or draft financial statements to see if they appear in line with the
auditor's expectations.
However, auditors will typically go further than this:
 monitoring statistical trends in key figures and ratios
 asking the client why certain balances appear out of line with
expectations.
Computer programs are often used to select those balances that appear
furthest from expectations.
18
9
4. ASSESSING THE RISK
Constant Depend on
Audit Team
(Acceptable level) the entity
HOW TO RESPONSE?
19
Must be acceptable
If HIGH LOW level
 Increase sample size

AUDIT  Involve more experienced staff
RESPONSE  Design additional audit procedures
 Collect more reliable audit evidences
20
10
IAS 330: RESPONDING TO RISK ASSESSMENT
Responses to risk assessments

 Emphasizing to audit staff the need to maintain professional skepticism
 Using experts
 Providing more supervision on the audit
 Incorporating more unpredictability in the audit procedure
 Assigning additional or more experienced staff to the audit team
Substantive approach Combined approach

(Focusing on Substantive (Test of Control & Substantive
procedures) procedures)
Detail
21
Test of Control Substantive procedure

Substantive procedures are audit
Tests of controls are audit
procedures designed to detect
procedures 'designed to evaluate
material misstatements at the
the operating effectiveness of
assertion level.
controls in preventing, or
They consist of tests of details
detecting and correcting,
and
material misstatements at the
substantive analytical
assertion level'
procedures
22
11
Significant risks are complex or unusual transactions Require special audit

that may indicate fraud, or other special risks. procedures
Fraud is an 'intentional act by one or more  perpetrated by an

individuals among management, those charged with individual, or colluded
governance, employees, or third parties, involving in, with people
the use of deception to obtain an unjust or illegal internal or external to
advantage (ISA 240: para. 11(a)). the business.
PRESSURE or INCENTIVE OPPORTUNITY
23
Fraudulent financial reporting Misappropriation of assets
Misappropriation of assets
Fraudulent financial reporting 'involves the theft of an entity's
'involves intentional assets and is often perpetrated by
misstatements, including employees in relatively small and
omissions of amounts or immaterial amounts. However, it
disclosures in financial statements, can also involve management who
to deceive financial statement are usually more able to disguise
users or conceal misappropriations in
ways that are difficult to detect
24
12
Risk assessment procedures to obtain information in identifying the risks of

material misstatement due to fraud
a. Enquires of management regarding:

 Management’s assessment of the risk that the financial statement may be
misstated due to fraud;
 Management’s process for identifying and responding to the risk of
fraud;
 Management‘s communication to those charged with governance in
respect of its process for identifying and responding to the risk of fraud
 Management‘s communication to employees regarding its views on
business practices and ethics behavior
 Knowledge of any actual, suspected or allege fraud;
b. Enquiries of internal audit for knowledge of any actual, suspected or

allege fraud and its view on the risk fraud
25

c. Obtaining an understanding of how those charged with governance

oversee management’s process for identifying and responding to the risk
of fraud and internal control established to mitigate these risk;
d. Enquiries of those charged with governance to knowledge of any
actual, suspected or alleged fraud;
e. Evaluating where any unusual relationships have been identified in
performing analytical procedures that many indicate risk material
misstatement due to fraud;
f. Considering where any other information may indicate risk of material
misstatement due to fraud;
g. Evaluating whether any fraud risk factors are present
26
13

Obtain Written representation letter from management and those charge

with governance that:
 They acknowledge their responsibility for the design, implementation
and maintenance the internal control to prevent and detect fraud;
 They have disclosed to the auditor management’s assessment to the risk
of fraud in the financial statement
 They have disclosed to the auditor their knowledge of fraud/ suspected
fraud involving management, employees with significant roles of internal
control, and other where fraud could have a material effect to the financial
statement
 They have disclosed to the auditor their knowledge of any
allegations of fraud/suspected fraud communicated by employees,
former employee, analysts, regulator or others.
27
Communication to management and those charge with governance

 If the auditor identifies a fraud they must communicate the matter on a timely
basis to the appropriate level of management (i.e. those with the primary
responsibility for prevention and detection of fraud). [ISA 240, 40]
 If the suspected fraud involves management the auditor must communicate the
matter to those charged with governance.
 If the auditor has doubts about the integrity of those charged with governance
they should seek legal advice regarding an appropriate course of action. [ISA 240,
41]
 In addition to these responsibilities the auditor must also consider whether they
have a responsibility to report the occurrence of a suspicion to a party outside
the entity. Whilst the auditor does have an ethical duty to maintain
confidentiality, it is likely that any legal responsibility will take precedence. In
these circumstances it is advisable to seek legal advice. [ISA 240, 43]
 If the fraud has a material impact on the financial statements the auditor's
report will be modified. When the auditor's report is modified, the auditor
will explain why it has been modified and this will make the shareholders
aware of the fraud.
28
14
ISA250 Consideration of Laws and Regulations in an Audit of FSs.
The objectives of the auditor are:

a) To obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those law and regulations that have a direct effect on the
determination off material amounts and disclosures in the FS.
b) To perform specified audit procedures to help identify non-compliance
with other laws and regulations that many have material effect on the FS
c) To respond appropriately to identified or suspected non- compliance with
laws and regulations identified during the audit
29
Responsibilities of management
Ensure that the entity's operations are conducted in accordance

with relevant laws and regulations, including those that determine the reported
amounts and disclosures in the financial statements
30
15
Responsibilities of Auditors
 The auditor must perform audit procedures to help identify non-compliance with laws
and regulations that may have a material impact on the financial statements.
 The auditor must obtain sufficient, appropriate evidence regarding compliance with
laws and regulations generally recognised to have a direct effect on the determination
of material amounts and disclosures in the financial statements (e.g. completeness of a
tax provision in accordance with tax law, or the presentation of the financial statements
in accordance with the applicable financial reporting framework). [ISA 250, 11a]
 The auditor must perform audit procedures to help identify non-compliance with other
laws and regulations that may have a material impact on the financial statements (e.g.
data protection, environmental legislation, public health and safety). Non-compliance in
respect of such matters could affect the company’s ability to continue as a going concern
or could result in the need for material liabilities to be recognised or disclosed. [ISA 250,
11b]’
31

Audit procedures to identify instances of non-compliance
• Obtaining a general understanding of the legal and regulatory
framework applicable to the entity and the industry, and of how the entity
is complying with that framework. [ISA 250, 13]
• Enquiring of the management and those charged with governance as
to whether the entity is in compliance with such laws and regulations.
[ISA 250, 15a]
• Inspecting correspondence with relevant licensing or regulatory
authorities. [ISA 250, 15b]
• Remaining alert to the possibility that other audit procedures applied
may
bring instances of non-compliance to the auditor's attention. [ISA 250, 16]
• Obtaining written representation from the directors that they have
disclosed to the auditors all those events of which they are aware which
involve possible non-compliance, together with the actual or contingent
consequences which may arise from such non-compliance. [ISA 250, 17]
32
16
Investigations of possible non-compliance
When the auditor becomes aware of information concerning a possible
instance
of non-compliance with laws or regulations, they should:
• Understand the nature of the act and circumstances in which it has
occurred.
• Obtain further information to evaluate the possible effect on the
[ISA 250, 19]
33

Audit procedures when non-compliance is identified
• Enquire of management of the penalties to be imposed.
• Inspect correspondence with the regulatory authority to identify the
consequences.
• Inspect board minutes for management's discussion on actions to be
taken regarding the non-compliance.
• Enquire of the company's legal department as to the possible impact of
the non-compliance.
34
17
Reporting non-compliance
• The auditor should report non-compliance to management and those
charged with governance, unless prohibited by law or regulation.
[ISA 250, 23]
• If the auditor believes the non-compliance is intentional and material the
matter should be reported to those charged with governance. [ISA 250, 24]
• If the auditor suspects management or those charged with governance
are involved in the non-compliance, the matter should be reported to the
audit committee or supervisory board. [ISA 250, 25]
• If the non-compliance has a material effect on the financial statements, a
qualified or adverse opinion should be issued. [ISA 250, 26]
• The auditor should also consider whether they have any legal or ethical
responsibility to report non-compliance to third parties e.g. to a regulatory
authority. [ISA 250, 29]
35
ROUND UP
36
18
PRACTICE
Fact Audit Risk Type of Risk Response
 Employees are
 Lack of physical
more likely to steal  Physical
controls
assets from the checks of the
 Valuable assets not
company or not look assets required to
being lock away.
after them therefore determine
 No restricted
get damaged and completeness and
access to sensitive
become impaired.  Control risk value.
areas.
 Incorrect  Analytical
 No CCTV or other
statement on review to see any
security measures
Financial statements unusual trends
for access to
the asset position over excess
premises.
potentially over ordering etc.....
statement.
37
PRACTICE
Lack of IT based
controls: no
passwords or lack or
password
Lack of authorisation
controls.
Lack of segregation of
duties.
38
19
PRACTICE
Bank is relying on the

financial statements
or Directors are paid a
bonus based on
profits
It is cash based
business
The company trades

overseas
39
PRACTICE
New computer system

in the year
New audit client
Tight audit deadline

imposed by client
40
20
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 8
AUDIT EVIDENCE
1
1. WHY DOES THE AUDITOR NEED
EVIDENCE?
Evidence Audit opinion
Sufficient (quantity)
 Need to base their
Appropriate (quality) opinion on valid evidence.
THE QUANTITY OF EVIDENCE

Sufficient
Auditors need to consider:

 The risk of material misstatement
 The materiality of the item
 The nature of accounting and internal control systems
 The results of controls tests
 The auditor's knowledge and experience of the business
 The size of a population being tested
 The size of the sample selected to test
 The reliability of the evidence obtained
2
Sufficient?
Example :
For the client’s bank balance, one confirmation letter from the
bank (if the client has only one bank account) will be enough, and
indeed is all there is available.
The bank letter will not, however, give the auditor all the
information required. There will need to be consideration of the
bank reconciliation as well.
So, 2 sources of evidence combining to be sufficient.

Appropriate
Appropriateness of evidence breaks down into two important concepts:

 Reliability
 Relevance.
3
Reliable
This is better This is worse
Independent external evidence Internally generated evidence
Internal evidence subject to Internal evidence not subject to

effective controls such controls
Evidence obtained directly by Evidence obtained indirectly or
the auditor. by inference.
Documentary Oral
Original documents Photocopies or facsimiles

Relevant
As we have seen above the nature of the evidence the auditor

wants depends on:
• The nature of the transaction or balance being tested
• The assertion being tested
4
RELATIONSHIP
Sufficient Reliable
 Broadly speaking, the more reliable the evidence the less of it

the auditor will need.
 If the evidence is found to be unreliable, looking at a greater
quantity of such evidence will never be sufficient.
2. FINANCIAL STATEMENT ASSERTIONS

MANAGEMENTS’
ASSERTIONS COMMITMENTS
 Financial statements are a  For each item in the financial

summary of management’s statements, management is
assertions making assertions. Assertions like:
 Management is responsible • This factory is owned by the
for the preparation of company;
financial statements that • The receivables really do owe
give a true and fair view, but us this money and will pay
what does this really mean? fairly soon;
• The payroll expense was for
the company’s genuine
employees working on the
company’s business.
10
5
2. FINANCIAL STATEMENT ASSERTIONS
The auditors therefore need evidence

that these assertions are valid.
Transactions and events and Account Balances and

related disclosures related disclosures
 Occurrence  Existence
 Completeness  Right & Obligation
 Accuracy  Completeness
 Cut-off  Accuracy/Valuation &
 Classification Allocation
 Presentation  Presentation
11
ACCOUNT BALANCES AND RELATED

DISCLOSURES
Existence  Did the transaction actually take place?
 Are all transactions or balances that should

Completeness be included in the financial statements,
actually included?
Valuation/
 Are the amounts correct?
Allocation
 Clear described? Related disclosures are

Presentation relevant & understandable?
12
6
TRANSACTIONS AND EVENTS AND
RELATED DISCLOSURES
 Are transactions accounted for in the

Cut-off correct period?
 Are transactions recorded in the proper

Classification accounts?
 Clear described? Related disclosures are

Presentation relevant & understandable?
13
FINANCIAL STATEMENT ASSERTIONS
The assertions are important because they have an impact on

how the auditor gathers evidence
Remember that the audit evidence required depends on both:

 the nature of item being tested;
 the assertion being tested.
14
7
WHY ASSERTIONS MATTER TO
AUDITORS?
Assertions matter to
auditors ???
The auditor chooses suitable procedures based on the

nature of the item in the financial statements being audited
The procedures will be refined further depending on which
assertion about the item the auditor is testing
15
WHY ASSERTIONS MATTER TO

AUDITORS?
Different items
Different Assertion
Different approach
16
8
EXAMPLES
Item Audit Tests
 Carry out third party confirmation.

Accounts  Review correspondence and aged
receivable analysis for evidence of delinquent receivables.
 Test subsequent receipt of cash from customers.
 Inspect timesheets
 Inspect authorised pay rates.
Payroll  Verify employees are genuine through contracts of
employment.
 Check tax and other deductions.
17
EXAMPLES
Item Audit Tests
Existence  Inspect the property concerned
 Agree cost to purchase contract or subsequent

Valuation revaluation to valuer’s report.
 Re-perform depreciation calculation
Rights and
 Inspect title deeds
obligations
18
9
EXAMPLES
Item Audit Tests
Cut-off  Inspect purchase contract to verify date of purchase
 Review repairs account, correspondence with

Completeness lawyers and property consultants for evidence that
there are no additional properties
19
3. SOURCES OF AUDIT EVIDENCE
20
10
3. SOURCES OF AUDIT EVIDENCE
Auditors can obtain assurance from :

Tests of control are designed to evaluate the
Tests of control operating effectiveness of controls in preventing
or detecting and correcting material misstatement.
Substantive procedures are designed to detect

material misstatement at the assertion level .
Substantive
Including:
procedures • Test of details
• Substantive analytical procedures
21
HOW DOES THE AUDITOR TEST THINGS?
Audit procedures
ISA 500 identifies eight types of procedures that the auditor can
adopt to obtain audit evidence:
 Inspection of records or documents
 Inspection of tangible assets
 Observation
 Enquiry
 Confirmation
 Recalculation
 Reperformance
 Analytical procedures
22
11
Inspection of records or documents
Check source documents i.e. invoices, orders,

HOM…
Inspection of tangible assets
 Will usually give pretty conclusive evidence of

existence
 May give evidence of valuation, e.g. obvious
evidence of impairment of inventory or non-
current assets.
23
Observation
 Involves looking at a process or procedure;
 May well provide evidence that a control is being operated, e.g.
double staffing or a cheque signatory examining supporting
documentation.
24
12
Inquiry
 Enquiry is a major source of audit evidence; however the results of
enquiries will usually need to be corroborated in some way through
other audit procedures.
Management representations are a sub-set of Enquiry.

The auditor obtains written representations from
management to confirm oral enquiries where:
• the issue is material or;
• where other sources of evidence cannot reasonably be
expected to exist;
• where other evidence is of lower quality.
25
Confirmation
 A specific form of enquiry

 Examples of use:
• confirmation of bank balances
• confirmation from legal advisers of actual or contingent
liabilities arising from legal proceedings
• confirmation of inventories held by third parties
26
13
Recalculation
Checking the arithmetical accuracy of the client’s
calculations.
Reperformance
 May be something relatively simple, e.g. test

checking inventory counts;
 May be more sophisticated, e.g. using IT tools to
check a receivables ageing.
27
Analytical procedures
The consideration of the relationships between figures in the financial
statements or between financial and non-financial information.
Other techniques are also available, including:

• Ratio analysis
• Trend analysis
• Proof in total, for example: an auditor might create an expectation of
payroll costs for the year by taking last year’s cost and inflating for pay
rises and changes in staff numbers.
28
14
AUDIT DOCUMENTATION
Why do we need working papers?

The job of working papers is to:
 provide a record of the basis for the auditor's report
 provide evidence that the audit was conducted in accordance with
ISAs and legal and regulatory requirements
 To assist with the planning, performance, supervision and review of the
audit.
 To aid the auditors' defense if subsequently sued for negligence
29
AUDIT DOCUMENTATION
Why do we need working papers?

There are two major principles
 If it’s not recorded, it didn’t happen
 If it can’t be understood, it might as well not have happened. Clarity is
important for two reasons:
+ Completeness – If the working papers are easy to understand it will be
more obvious if anything has been omitted.
+ Efficiency – Working papers need to be reviewed for quality control
purposes and to ensure that the audit opinion is justified. The reviewer may
be at a senior level in the firm and therefore time will be charged at an
expensive rate. Clear working papers will keep the time spent and therefore
the costs to a minimum
30
15
AUDIT DOCUMENTATION
Structure and layout

The file
 There are two broad areas to the file.
 The control part consisting of:
• the planning section;
• the completion and review section;
 The main working papers are divided into the relevant sections of
the financial statements, e.g. non-current assets, inventories,
receivables, etc…
31
AUDIT DOCUMENTATION
Custody and retention of working papers
Working paper
 Property of Auditor
 Retention
• Keep for 5 years (ISA 230)
 Security
• Expensive
• Confidentiality
• Avoid Tampering
• IT Implication
32
16
ROUND UP
Audit documentation
33
17
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 09
INTERNAL CONTROL
1
WHAT IS INTERNAL CONTROL AND
HOW DOES IT WORK?
Definition of Internal Control System
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 an entity's objectives
with regard to reliability of financial reporting, effectiveness and
efficiency of operations, and compliance with applicable laws and
regulations.

HOW DOES IT WORK?
Auditors need to
understand the  Assess their reliability for the
client’s internal preparation of financial statements.
control system  Design suitable audit procedures.
If the auditor is able to rely on the
system it will be because it contains
some of the components of internal
control as set out in ISA 315.
2
HOW DOES IT WORK?
Components of an internal control system
ISA 315 - Identifying and Assessing the Risks of Material Misstatement

Through Understanding the Entity and its Environment, states that
auditors need to understand an entity's internal controls. To assist this
process it identifies five components of an internal control system:

HOW DOES IT WORK?
1 - The control environment
The control environment includes the governance and management

function of an organisation.
It focuses largely on the attitude, awareness and actions of those

responsible for designing, implementing and monitoring internal
controls.
[ISA 315, A77]
3
HOW DOES IT WORK?
1 - The control environment
Elements of the control environment that are relevant when the auditor
obtains an understanding include the following:
• communication and enforcement of ethical values;
• commitment to competence;
• participation by those charged with governance;
• management’s philosophy and operating style;
• organisational structure;
• assignment of responsibility;
• human resource policies and practices – staff training, recruitment
procedures etc.
 This sounds quite high level, but it is really only saying that: If a client
complies with the principles of good corporate governance, the risk of
misstatement will be lower.
7

HOW DOES IT WORK?
2 – Control Activities
Control activities are those policies and procedures that help ensure
that management directives are carried out.
ISA 315 refers to five types of control activity:

 Authorization;
 Performance reviews;
 Information processing;
 Physical controls;
 Segregation of duties.
4
HOW DOES IT WORK?
3 - The entity’s risk assessment process
ISA 315 ((Revised): para. 15), says the auditor shall obtain an
understanding of whether the entity has a process for:
 Identifying business risks relevant to financial reporting objectives
 Estimating the significance of the risks
 Assessing the likelihood of their occurrence
 Deciding on actions to address those risks
 If the client has robust procedures for assessing the business risks it
faces, the risk of misstatement will be lower.

HOW DOES IT WORK?
4 - The information system relevant to
financial reporting
Includes the financial reporting system, and

consists of the procedures and records
established to initiate, record, process and
report entity transactions (as well as events
and conditions) and to maintain
accountability for the related assets,
liabilities and equity
10
5
HOW DOES IT WORK?
5 – Monitoring of controls
Monitoring of controls is 'a process to assess the effectiveness of

internal control performance over time.
It involves assessing the effectiveness of controls on a timely basis and
taking necessary remedial actions'
11

HOW DOES IT WORK?
6 - Controls in a computerized system?
Computer based controls are normally

divided into two categories:
 Application controls.
 General controls.
12
6
HOW DOES IT WORK?
General IT controls are:

Policies and procedures that relate to many applications and support
the effective functioning of application controls by helping to ensure the
continued proper operation of information systems.
General IT controls commonly include:
 Controls over data centre and network operations;
 System software acquisition
 Change and maintenance;
 Access security;
 Application system acquisition, development and maintenance.
13

HOW DOES IT WORK?
Application controls are:

 Manual or automated procedures that typically operate at a business
process level. Application controls can be preventative or detective in
nature and are designed to ensure the integrity of the accounting
records.
 Accordingly, application controls relate to procedures used to
initiate, record, process and report transactions or other financial
data.
14
7
HOW DOES IT WORK?
Examples of Application control
Application controls Examples

 Manual or programmed agreement of control totals
 Document counts
Controls over input:
 One-for-one checking of processed output to source documents
completeness
 Programmed matching of input to an expected input control file
 Procedures over resubmission of rejected controls
Programmes to check data fields (for example value, reference
number, date) on input transactions for plausibility:
 Digit verification (eg reference numbers are as expected)
 Reasonableness test (eg sales tax to total value)
Controls over input:  Existence checks (eg customer name)
accuracy  Character checks (no unexpected characters used in reference)
 Necessary information (no transaction passed with gaps)
 Permitted range (no transaction processed over a certain value)
Manual scrutiny of output and reconciliation to source
Agreement of control totals (manual/programmed)
15

HOW DOES IT WORK?
Examples of Application control
Application controls Examples

Manual checks to ensure information input was:
Controls over input:
 Authorised
authorisation
 Input by authorised personnel
 Similar controls to input must be in place when input is
Controls over completed; for example, batch reconciliations
processing  Screen warnings can prevent people logging out before
processing is complete
 One-for-one checking
 Cyclical reviews of all master files and standing data
Controls over master  Record counts (number of documents processed) and hash
files and totals (for example, the total of all the payroll numbers) used
standing data when master files are used to ensure no deletions
 Controls over the deletion of accounts that have no current
balance
16
8
HOW DOES IT WORK?
Limitation of internal control
 Any internal control system can only provide the directors with
reasonable assurance that their objectives are reached, because of
inherent limitations. These include:
 The costs of control not outweighing their benefits
 The potential for human error
 Collusion between employees
 The possibility of controls being bypassed or overridden by
management
 Controls being designed to cope with routine and not non-routine
transactions
17
2. THE USE OF INTERNAL CONTROL

SYSTEMS BY AUDITORS
Why does the auditor

carry out audit work?
Auditors are only concerned with assessing policies and

procedures which are relevant to the financial statements.
Auditors shall:
 Assess the adequacy of the accounting system as a
basis for preparing the accounts
 Identify the types of potential misstatements that could
occur in the accounts
 Consider factors that affect the risk of misstatements
 Design appropriate audit procedures
18
9
RECORDING ACCOUNTING AND
CONTROL SYSTEMS
Documenting the system
Possible ways of documenting the system and controls are:
 Narrative notes (if system is large or complex)
 Flowcharts (which can make a complex system easier to follow)
 Checklist
 Questionnaire
 Internal Control Questionnaire (ICQ): are used to ask whether controls exist which
meet specific control objectives.
 Internal Control Evaluation Questionnaire (ICEQ): are used to determine whether
there are controls which prevent or detect specified errors or omissions.
ICQ wording ICEQ wording

Does a supervisor authorize all weekly How does the company ensure that only
timesheets? hours worked are recorded on timesheets?
Does the company perform a regular How does the company try to minimize the
credit check on all customers? risk of irrecoverable debts?
19

CONTROL SYSTEMS
Documentation
Advantages Disadvantages
Method
Narrative notes • Simple to record • May be time consuming and
• Facilitate understanding cumbersome if the system is
by all audit staff complex
• May be more difficult to identify
missing controls
Flow charts • Easy to view the whole • May be difficult to amend as the
system in one diagram whole diagram may need to be re-
• Easy to spot missing drawn
controls due to the use of • There is still a need for narrative
standard symbols notes to accompany the flow chart
increasing the time involved to
document the system fully
Internal control • Quick to prepare • Controls may be overstated as
questionnaires • Can ensure all controls the client knows the answer the
(ICQs) are present auditor is looking for is 'yes‘
• May contain a number of
irrelevant controls
20
10
CONTROL SYSTEMS
Documentation
Advantages Disadvantages
Method
• Unusual controls are unlikely
to be included on a standard
questionnaire and may not be
identified
Internal control • The client has to respond • The client may still overstate
evaluations with the control they have controls as they may say a
(ICEs) in place rather than a control is in place for the control
yes/no answer which objective even if it is not
should mean controls are • The checklist may contain
less likely to be overstated control objectives not relevant
• Quick to prepare as a list to the client
of control objectives can be • Unusual risks and therefore
compiled and the objectives may not be identified
client is asked what controls
they have in place to
address them
21
3. THE EVALUATION OF INTERNAL

CONTROL COMPONENTS
If the auditors believe the system of controls is strong,
they may choose to test controls to assess whether
Purpose? they can rely on the controls having operated
effectively.
Confirming
understanding
HOW
Test of control
22
11
CONTROL COMPONENTS
Carry out walk-through tests.
Confirm  This is where they pick up a transaction and follow it
understanding through the system to see whether all the controls they
anticipate should be in existence were in operation.
An audit procedure designed to evaluate the operating

Test of effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
Controls Tests of control are performed only on those controls that
the auditor has determined are suitably designed.
(i) Inspection of documents supporting controls e.g verifying that a transaction has been authorized.
(ii) Enquiries about internal controls which leave no audit trail, e.g determining who actually
performs each function
(iii) Reperformance of control procedures, e.g reconciliation of bank accounts, to ensure they were
correctly performed by the entity
(iv) Examination of evidence of management views, e.g minutes of management meetings
(v) Testing of internal controls operating on computerised systems or over the overall IT function, eg
access controls
(vi) Observation of controls to consider the manner in which the control is being operated
23

CONTROL COMPONENTS
Communication of deficiencies in internal control
A deficiency in internal control exists when:

(a) A control is designed, implemented or operated in such a way that it
is unable to prevent, or detect and correct, misstatements in the
financial statements on a timely basis; or
(b) A control necessary to prevent, or detect and correct, misstatements
in the financial statements on a timely basis is missing’
A significant deficiency in internal control is a deficiency or combination
of deficiencies in internal control that, in the auditor's professional
judgment, is of sufficient importance to merit the attention of those
charged with governance
 ISA 265 Communicating Deficiencies in Internal Control to those
Charged with Governance and Management
24
12
CONTROL COMPONENTS
Form of communication: Management letter
Deficiency A clear description of what is wrong

What could happen if the deficiency is not
corrected?
Consequence Focus on what matters to the client – the risk of lost
profits, stolen assets, extra costs, errors in the
accounts
Recommendation This must deal with the specific deficiency you have
25

CONTROL COMPONENTS
Example Management letter extract
Deficiency Consequence Recommendation

There is a possibility that All invoices should be
purchases and liabilities sequentially filed on
are not completely receipt by the accounts
Purchase invoices recorded. department.
were missing from This could result in late Regular sequence
the sequentially payment of invoices checks should be
numbered invoice which could cause performed to ensure
file. damage to the company's completeness. Any
relationship with the missing items should
supplier resulting in be investigated and
removal of credit terms copies requested if
or discounts. necessary.
26
13
PRACTICES – Part 1
Chapter 9 - Internal control - MCQ Practice

Hockiemtoanonline.edu.vn
27
TEST OF CONTROLS
1. The Sales system

2. The purchases system
3. The inventory system
4. The bank and cash system
5. The payroll system
6. Non – current assets
28
14
1.SALES SYSTEM
29
1. SALES SYSTEM
Assertion Control objectives Controls Tests of controls
Occurrence - To ensure that - The tasks of taking - Observe the processing
and recorded sales orders, recording sales of orders through the sales
existence transactions and receiving payment cycle and inspect sign-offs to
represent goods or are allocated to three evaluate whether proper
services provided different staff segregation of duties is
members. operating.
- Sales are only - For a sample of sales invoices,
recorded if there is an ensure there is a related sales
approved sales order order form that has been
form and shipping/ authorised and shipping
dispatch documentation.
documentation. - Examine application controls
- Accounting for for authorisation.
numerical sequences - Inspect invoices to confirm
of invoices. whether they are sequentially
- Monthly customer numbered.
statements sent out - Review entity's procedures
and customer queries for sending out monthly
and complaints statements and dealing with
handled customer queries and
independently. complaints. 30
15
1. SALES SYSTEM
Occurrence - To ensure that - Authorisation of - Review entity's procedures
and goods and credit terms to for granting credit to
existence services are only customers (senior customers.
supplied to staff authorisation, - Examine a sample of sales
customers with references/credit orders for evidence of proper
good credit checks for new credit approval by the
ratings. customers, regular appropriate senior staff
review of credit member.
limits). - Examine application
- Authorisation by controls for credit limits.
senior staff required - Review all new customer
for changes in other files to ensure satisfactory
customer data such credit references have been
as address etc. obtained.
- Orders not
accepted unless
credit limits
reviewed first.
31
1. SALES SYSTEM
Occurrence - To ensure that - Authorised price - Verify that price lists and
and goods and lists and specified terms of trade are properly
existence services are terms of trade in documented, authorised and
provided at place. communicated.
authorised prices - Examine application
and on authorised controls for autho
terms.
- To ensure that
customers are
encouraged to
pay promptly.
32
16
1. SALES SYSTEM
Completeness - To ensure that - Accounting for - Review and test entity's
all revenue numerical sequences procedures for accounting for
relating to goods of invoices. numerical sequences of
despatched is invoices, and inspect invoices
recorded. to confirm whether they are
sequentially numbered.
33
1. SALES SYSTEM
Completeness - To ensure that - Shipping/dispatch - For a sample of
all goods and documentation is shipping/dispatch
services sold are matched to sales documents, ensure each has
correctly invoices. been matched to a related
invoiced. - Sales invoices are sales invoice that was
reconciled to the subsequently recorded.
daily sales report. - Review a sample of
- An open-order file is reconciliations performed.
maintained and Reperform a sample of
reviewed regularly. reconciliations.
- Inspect the open-order
file for unfilled orders.
34
17
1. SALES SYSTEM
Accuracy - To ensure that - Sales invoices and - Review supporting
all sales and matching documents documents for a sample
adjustments are required for all of sales entries to ensure
correctly entries and the date they contain the written
journalized, and reference of the details that indicate they
summarized and entry are written on were referred to when
posted to the each document.
correct accounts.
Cut-off - To ensure that - All shipping - Compare dates on sales
transactions have documentation is invoices with dates of
been recorded in forwarded to the corresponding shipping
the correct invoicing section on documentation.
period. a daily basis. - Compare dates on sales
- Daily invoicing of invoices with dates recorded
goods shipped. in the sales ledger.
35
1. SALES SYSTEM
- To ensure that all - Chart of accounts - Inspect any documentary
transactions are (COA) in place and is evidence of review (such
properly classified regularly reviewed for as emails requesting
in accounts. appropriateness and update to COA as a result
Classification updated where of review).
necessary. - Test application controls
- Codes in place for for propercodes
different types of
products or services.
36
18
2. PURCHASE SYSTEM
37
2. PURCHASE SYSTEM
Occurrence - To ensure that - Authorisation - Inspect policies and
and recorded procedures and policies procedures and assess their
existence purchases in place for ordering effectiveness.
represent goods goods and services. - Observe the processing of
and services - The responsibility for purchase orders throughout
received. placing the orders, the purchasing cycle and
recording the purchase evaluate whether proper
order and making the segregation of duties is
payment is carried out operating.
by three different staff - Select a sample of
members. purchase orders and review
- Purchase orders raised for evidence of
for each purchase and authorisation, agree this to
authorised by the approved signatories
appropriate senior list.
personnel. . - Review the approved list of
signatories to ensure they
possess sufficient authority
to sign.
38
19
2. PURCHASE SYSTEM
Occurrence - Approved purchase - For a sample of goods received
and order for each receipt of notes (GRNs), ensure there is a
existence goods. related purchase order that has
been properly approved.
- Staff receiving goods - Observe receipt of goods by
check them to the staff to confirm whether goods
purchase order. inward are checked to purchase
- Stores clerks sign for orders.
goods received. - Select a sample of goods
- Purchase orders and inwards and review for evidence
GRNs are matched with that they have been inspected
the suppliers' invoices. and signed for by stores staff.
- Supplier statements - Examine supporting
independently reviewed documentation from suppliers
and reconciled to trade to ensure it has been matched
payable records. to payables for a sample of
invoices.
- Review procedures for
reconciling supplier statements
and reperform a sample of
reconciliations.
39
2. PURCHASE SYSTEM
Completeness - To ensure that - Purchase orders and - Select a sample of purchase
all purchase GRNs are matched orders in the year and trace to
transactions that with the suppliers' their related invoices, checking
occurred have invoices. that each purchase order can
been recorded. - Periodic accounting be matched to an invoice that
for pre-numbered was subsequently created.
GRNs and purchase - Review entity's procedures
orders. for accounting for
- Independent check of prenumbered documents.
amount recorded in - Review entity's procedures
the purchase journal. for accounting for
- Supplier statements prenumbered documents.
independently - Examine application controls
reviewed and to determine whether gaps in
reconciled to trade the sequence of numbers can
payable records be detected by selecting a
sample of GRNs and
confirming whether they are
numbered sequentially.
40
20
2. PURCHASE SYSTEM
Completeness - Examine a sample of
reconciliation documents for
evidence of this check being
completed.
- Review procedures for
reconciling supplier
statements and reperform a
sample of reconciliations.
Rights and - To ensure that - Purchase orders and - Select a sample of invoices,
obligations recorded GRNs are matched and review the relevant
purchases with the suppliers' purchase orders and GRNs to
represent the invoices. ensure they have been
liabilities of the matched and relate to the
entity entity.
41
2. PURCHASE SYSTEM
Accuracy, - To ensure that - Purchase orders and - Examine supporting
valuation and purchase GRNs are matched documentation for a sample of
allocation and transactions are with the suppliers' invoices to ensure purchase
classification invoices. data is accurate.
correctly
recorded in the - Mathematical - Review a sample of invoices
accounting accuracy of the for evidence the accuracy has
system. supplier's invoice is been verified (eg signature or
verified. initials) and reperform the
- Amount posted to check
general ledger is - Review reconciliations
reconciled to the between purchase ledger and
purchases ledger. general ledger for evidence of
- Chart of accounts in this check.
place - Review purchases journal
and general ledger for
accuracy
42
21
2. PURCHASE SYSTEM
Cut - off -To ensure that - All goods received - Compare dates on a sample
purchase reports forwarded to of goods received reports to
transactions are accounts payable dates on relevant vouchers
recorded in the department daily. to identify any delays in
correct - Procedures in place recognition.
accounting that require recording - Compare dates on a sample
period. of purchases as soon of vouchers with dates they
as possible after were recorded in the
goods/services purchases journal.
received.
43
3. INVENTORY SYSTEM
Occurrence - To ensure that - Pre-numbered - Review documentation in
and all inventory documentation such use.
existence movements are as GDNs and GRNs in - Review a sample of
authorised and use. reconciliations to confirm
recorded - Reconciliations of they are performed and then
inventory records reviewed by an independent
with general ledger. person.
- Separate - Observe the recording of
responsibilities for inventory and discuss
maintenance of inventory procedures with
records and relevant staff to ensure that
custodianship. proper segregation of duties
is operating.
44
22
3. INVENTORY SYSTEM
Occurrence - To ensure that - Physical safeguards in - Review security systems in
and inventory place to ensure place (eg locked warehouses,
existence included on the inventory is not stolen. CCTV).
statement of - Separate - Review policies and
financial position responsibilities for procedures in place; discuss
physically exists. maintenance of procedures with relevant staff.
records and - Review procedures for
custodianship. counting inventory.  Attend
- Inventory counted inventory count.
regularly. .
Completeness - To ensure that - Procedures in place - Review entity's procedures
all purchases and to include inventory relating to consignment
sales of inventory held at third parties inventory.
have been and exclude inventory - Review reconciliations
recorded in the held on consignment performed and inspect them
accounting for third parties. for evidence of review.
system. - Reconciliations of Reperform a sample of
accounting records reconciliations.
with physical inventory
45
3. INVENTORY SYSTEM
Rights and - To ensure that - Procedures in place - Review entity's procedures
obligations inventory records to include inventory relating to consignment
only include held at third parties inventory.
items that belong and exclude inventory
to the entity. held on consignment
for third parties.
Cut-off - To ensure that - All despatch - Inspect documentation to

all purchases and documents processed confirm daily processing.
sales of inventory daily to record the
are recorded in despatch of finished
the correct goods.
accounting - All goods inward - Inspect documentation to
period. reports processed confirm daily processing.
daily to record the
receipt of inventory.
- Reconciliations of - Review reconciliations
inventory records performed
with general ledger.
46
23
3. INVENTORY SYSTEM
Accuracy, - To ensure that - Periodic or annual - Review and test entity's
valuation inventory comparison of procedures for taking
and quantities have inventory with physical inventory.
allocation been accurately amounts shown in
and determined. continuous
classification (perpetual) inventory
records.
- To ensure that - Standard costs - Review and test entity's
inventory is reviewed by procedures for developing
properly stated at management. standard costs.
the lower of cost - Review of cost - Inspect variance reports
and net realisable accumulation and produced.
value variance reports. - Discuss with inventory
- Inventory managers managers how this is done.
review inventory - Observe the procedure
regularly to identify being performed.
slow-moving,
obsolete and excess
inventory. 47
3. INVENTORY SYSTEM
Presentation - To ensure that - Orders for materials - Review entity's procedures
inventory and production data and documentation used to
transactions and forms used to process classify inventory.
balances are goods through
properly manufacturing.
identified and
classified in the FS
- To ensure that - Approval by Finance - Review entity's working
disclosures Director papers for evidence of
relating to review.
classification and
valuation are
sufficient.
48
24
4. BANK AND CASH SYSTEM
Occurrence - To ensure that - Separate - Observe the processing of
only valid cash responsibilities for the cash payments and review the
payments are recording, payment and entity's policies to evaluate
made. reconciliation of cash. whether proper segregation of
- Supplier statements duties is operating.
independently reviewed - Review procedures for
and reconciled to trade reconciling supplier
payable records. statements.
- Monthly bank - Review reconciliations to
reconciliations prepared confirm whether undertaken
and reviewed. and reviewed.
- Only authorised staff - Review delegated list of
can make electronic cash authority for cash payments.
- Inspect relevant
payments and issue
documentation for evidence of
cheques.
approval by senior personnel.
- Electronic cash
payments and cheques
prepared only after all
source documents have
been independently
approved. 49

Completeness - To ensure that all - Separate responsibilities - Observe the processing of
cash payments for the recording, cash payments and review the
that occurred are handling and entity's policies to evaluate
recorded. reconciliation of cash. whether proper segregation of
- Supplier statements duties is operating.
independently reviewed - Review procedures for
and reconciled to trade reconciling supplier
payable records. statements.
- Monthly bank - Review monthly
reconciliations prepared reconciliations to confirm
and reviewed. whether undertaken and
- Review of cash independently reviewed.
payments by manager - Inspect sample of listings for
before release. evidence of senior review, to
- Daily cash payments confirm authorisation.
reconciled to posting to - Review a sample of
payable accounts. reconciliations for evidence
- Use of pre-numbered that they have been done.
cheques. - Select a sample of cheque
payments and ensure that
cheque numbers follow on in
sequence. 50
25
Accuracy, - To ensure that - Reconciliation of daily - Review reconciliation, to
valuation cash payments are payments report to ensure performed, reviewed
and recorded correctly electronic cash payment and any discrepancies followed
in the ledger. transfers and cheques up on a timely basis.
allocation
issued. - Review reconciliations for a
and - Supplier statements sample of accounts.
classification reconciled to payable - Review bank reconciliation for
accounts regularly. evidence it was done and
- Monthly bank independently reviewed.
reconciliations of bank Reperform a sample of bank
statements to ledger reconciliations.
account
- To ensure that - Supplier statements - Review reconciliations for a
cash payments are reconciled to payable sample of accounts.
posted to the accounts regularly. - Review postings from journal
correct payable - Agreement of monthly to general ledger.
accounts and to cash payments journal to - Review reconciliation, to
the general ledger. general ledger posting. ensure performed, reviewed
- Payable accounts and any discrepancies followed
reconciled to general up on a timely basis.
ledger control account.
51

Cut-off - To ensure that - Reconciliation of - Review reconciliations
cash payments are electronic funds around the period end and
recorded in the transfers and cheques evaluate whether balance is
correct accounting issued with postings to correct at the period end.
period. cash payments journal
and payable accounts
Presentation To ensure that - Chart of accounts. - Review a sample of entries

cash payments are - Independent approval in the cash payments journal,
charged to the and review of general to assess whether payments
correct accounts. ledger account were classified into
assignment. appropriate accounts.
- Review assignment of
general ledger account.
52
26
5. PAYROLL SYSTEM
Occurrence - To ensure that - Segregation of duties - Review payroll and HR job
and payment is made between HR and payroll descriptions and company
existence only to bona fide functions. policies on payroll process, to
employees of the evaluate whether proper
entity. segregation of duties is in
place.
- Personnel files held for - Select a sample of starters
all employees. and leavers from the period
and determine whether they
were genuine employees by
tracing to personnel files.
- Authorisation - Review authorisation
procedures for hiring, procedures; select a sample
terminating, time of employees who were
worked, wage rates, hired, terminated, etc., and
overtime, benefits etc. determine whether
authorisation procedures
were followed.
53
5. PAYROLL SYSTEM
Occurrence - Any changes in - Review policies and
and employment status of procedures in place for
existence employees (eg changing status and consider
maternity, special leave) whether adequate.
informed to HR - Review personnel files for a
department. sample of employees whose
status changed in the year
and determine whether
procedures were followed in
line with HR guidance.
- Observe employees' use of
- Use of time clocks to time clocks.
record time worked. - Inspect a sample of clock
- Clock cards approved cards for evidence of
by supervisor. approval by appropriate level
of management.
54
27
5. PAYROLL SYSTEM
Occurrence - Employee numbers - Review procedures for
and assigned to each entering and removing
existence employee in the payroll employee numbers from the
master file. Only payroll master file.
employees with valid
employee numbers are
paid.
- Payroll budgets in - Review budgeting
place and reviewed by procedures
management.
55
5. PAYROLL SYSTEM
Completeness - To ensure that all - Pre-numbered clock - Select a sample of clock
payroll costs are cards in use. cards and determine whether
recorded for work - Regular reconciliations numerical sequence follows
done by carried out of payroll correctly.
employees. records and employee - Review a sample of
costs recorded in the reconciliations to ensure they
general ledger. are properly carried out.
- Comparison of cheques Reperform a sample of
and bank transfer list reconciliations.
with payroll to ensure all - Enquire whether
employees paid have comparisons are being made
been recorded via between payment records and
payroll. payroll and inspect any
- Preparation and documentary evidence of the
authorisation of cheques review.
and bank transfer lists - Examine paid cheques or a
certified copy of the bank list
for employees paid by cheque
or bank transfer to ensure
proper authorisation..
56
28
5. PAYROLL SYSTEM
Accuracy, - To ensure that all - Reperformance of a - Review documentary
valuation and benefits and sample of payroll evidence that recalculation
allocation and deductions (tax, benefit and deduction occurred (eg spreadsheet
classifications pension etc) are calculations. printout).
computed - Payroll budgets in - Review budgeting
correctly. place and reviewed by procedures.
management. - Inspect documentation for
- Agreement of gross evidence of management's
earnings and total tax review.
deducted with taxation
returns.
- To ensure that - Changes to master - Review reconciliation o
payroll payroll file verified 'before and after' reports to
transactions are through 'before and payroll master file.
correctly recorded after' reports. - Review reconciliation o
in the accounting - Payroll master file payroll master file to general
system. reconciled to general ledger. Confirm whether
ledger. discrepancies are followed up
promptly and resolved.
57
5. PAYROLL SYSTEM
Cut-off - To ensure that - All starters, leavers, - Review entity's procedures
payroll changes to salaries and for reporting changes to the
transactions are deductions are reported payroll department.
recorded in the promptly to payroll - Select a sample of starters
correct accounting department and and leavers around the
period. changes are updated in period end, and confirm
the payroll master file whether cut-off applied
promptly. correctly
Presentation - To ensure that - Chart of accounts. - Review chart of accounts.

payroll - Independent approval - Review procedures for
transactions are and review of accounts classifying payroll costs.
properly classified charged to payroll. - Review budgeting
in the financial - Payroll budgets in procedures.
statements place and reviewed by
management.
58
29
6. NON- CURRENT ASSETS
Completeness - To ensure that - Orders for capital items - Review policies and
& accuracy expenditure is valid. should be authorised by procedures in place.
appropriate levels of - Examine a sample of
management. orders for appropriate
- Orders should be authorisation.
requisitioned on - Inspect invoices to verify
appropriate (different to the invoice has been
revenue) documentation. appropriately approved.
- Invoices should be - Inspect invoices to verify
approved by the person the invoice has the correct
who authorised the order. general ledger code marked
- Invoices should be marked on it.
with the appropriate
general ledger code.
Classification - To ensure that - All the standard controls - See Section 2.
expenditure is over purchases are relevant
classified correctly in here (see Section 2).
the financial
statements as capital
or revenue
expenditure.
59

Completeness - To ensure that all - Capital items should be - Review reconciliation to
non-current assets written up in the non- ensure it is regularly carried
are correctly current asset register. out, reviewed by a more
recorded in the - The non-current asset senior person, and that all
accounting system register should be discrepancies are followed
reconciled regularly to the up and resolved on a timely
general ledger and any basis.
differences investigated and
resolved promptly.
Completenes, - To ensure that Maintenance of non- - Check existence and
accuracy, there is safe custody current asset register reconciliation of the non-
valuation of assets. - Physical inspection of current asset register (see
noncurrent assets – Asset above).
details agree to register. - Test operation of physical
- Precautions against theft controls eg attempt to
or misuse: access a restricted area
+ Physical safeguards in without following security
place to ensure assets are procedures.
not stolen or damaged.
60
30
+ Where necessary, access - For a sample of newly
is restricted to authorised acquired assets observe
personnel only. procedures for tagging and
+ Adequate insurance is in storing.
place. - For a sample of assets
- Portable assets (eg check insurance is adequate
laptops) should be tagged and up to date.
and any movements in and
out of the entity's premises
recorded.
Valuation To ensure that - Physical inspection of - Inspect a sample of assets
noncurrent assets noncurrent assets – Assets to determine whether they
are maintained are properly maintained are maintained in good
properly and used. condition.
- Maintenance schedule - Ascertain for a sample of
requiring checks at assets when they were last
specified intervals. checked for maintenance
and whether this is in line
with company policy
61
EXAM FOCUS
In the exam you may be asked for deficiencies in a system, and the
consequences of those deficiencies, or you could be asked for tests of
controls.
If you are asked about appropriate controls or deficiencies, remember
the control objectives for the accounting area. Controls should be in
place to fulfil the objectives given; deficiencies will mean that the
objectives are not fulfilled. You should give enough detail about the
controls you suggest to enable a nonaccountant to implement the
controls.
You should use a similar thought process when deciding how to test the
controls. Think of the objectives of the system; assess how the controls
given fulfil those objectives; and set out tests which demonstrate
whether the controls are working. Remember that different types of test
can be used to test different controls. For example, inspection can be
used to test whether different documents are being compared or
documents are being properly authorised. Recalculation and
reperformance can be used to test that invoices have been properly
completed or reconciliations correctly performed.
62
31
ROUND UP
63
32
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 10
AUDIT PROCEDURES &
SAMPLING
1
GENERAL PRINCIPLE
Consider
A transaction or event that took place during the year.
An account balance at the period end.
Presentation or disclosure
What is the nature of the item you are testing?
 Asset
 Liability
 Revenue
 Expense
What assertion(s) are you testing?
 Existence
 Occurrence
 Valuation
 Cut-off ….
3
GENERAL PRINCIPLE
Have to do
If you rely on controls, you will have to test them
Management representations are required for some items by ISA 580

and by a number of other ISAs
There are high volumes of transactions, consider using computer

assisted audit techniques (CAATs).
2
SUBSTANTIVE PROCEDURES
Substantive procedures are designed to detect material misstatement at
the assertion level . Including:
 Test of details
 Substantive analytical procedures
Use the following model for drawing up an audit plan:

 Agree opening balances with previous year's working papers
 Review general ledger for unusual records
 Agree client schedules to/from accounting records to ensure
completeness
 Carry out analytical review
 Test transactions in detail
 Test balances in detail
 Review presentation and disclosure in accounts
Test of details
Common procedures:
 Inspection of records or documents
 Inspection of tangible assets
 Enquiry
 Confirmation
 Recalculation
 Reperformance
3
Directional testing
Substantive tests are designed to discover errors or omissions.
Broadly speaking, substantive procedures can be said to fall into two
categories:
 Tests to discover errors (resulting in over or understatement)
 Tests to discover omissions (resulting in understatement)
Directional testing is particularly appropriate when testing the financial
statement assertions of existence, completeness, rights and obligations,
and valuation.
TEST OF DETAILS – EXAMPLES
Audit assertion Type of assertion Typical audit tests

 Physical verification
Existence  Account balances  Third party confirmations
 Cut-off testing
 Classes of  Inspection of supporting documentation
transactions  Confirmation from directors that
Occurrence
 Presentation and transactions relate to business
disclosure  Inspection of items purchased
 Classes of  Recalculation of correct amounts
transactions
Accuracy  Third party confirmation
Presentation and
disclosure  Analytical review
4

 Classes of  Review of post year-end items
transactions  Cut-off testing
Completeness  Account balances  Analytical review
 Presentation and  Confirmations
disclosure  Reconciliations to control accounts
 Account balances  Reviewing invoices for proof that item
Rights and belongs to the company
obligations  Presentation and
disclosure  Confirmations with third parties
 Matching amounts to invoices
 Recalculation
 Account balances  Confirming accounting policy consistent
Valuation and
 Presentation and and reasonable
allocation
disclosure  Review of post year-end payments and
invoices
 Expert valuation
9

 Classes of  Confirming compliance with law and
Classification and transactions accounting standards
understandability  Presentation and  Reviewing notes for understandability
disclosure
 Classes of  Cut-off testing
Cut-off
transactions  Analytical review
10
5
ANALYTICAL PROCEDURE
 Planning – Risk assessment – compulsory (ISA 520)

 Substantive – not compulsory per ISA 520, but usually an
effective and efficient means of gathering evidence
 Review – final check that figures make sense – compulsory
WHY (ISA 520)
 Efficient
 Effective
 Set out the figures

 Calculate ratios/compute trends/proof in total/make
comparison
 Investigate anomalies
HOW  Corroborate answers to enquiries
11
Analytical Procedures as Substantive Evidence
 ISA 520 states that analytical procedures must be used at

the planning stage to identify risks, and at the completion
stage of the audit as a final review of the FS.
 They may also be used at the substantive stage when the
auditor is auditing the draft financial statements.
12
6
Analytical procedures are not just the comparison of one year
with another. AP’s can be used in the following ways:
 Ratio analysis
 Trend analysis
 Proof in total
In order to use analytical procedures the following process should be

followed:
 Create your own expectation of what you think the figure should be
 Compare your expectation to the actual figure
 Investigate any significant differences
13
THE RATIO
 Profitability
• Gross profit %
• Net profit %
 Efficiency  To do this, the auditor will make
• Receivable days comparisons:
• Inventory turnover  between the current year and
• Payable days previous year(s)
 Liquidity  between actual figures and
• Current ratio budgets, forecasts or client’s
• Quick ration expectations with similar
• Gearing companies
 Return
• ROCE
• ROE
14
7
The suitability of this approach depends on four factors:
(1) The suitability of using substantive analytical procedures given the assertions.
 Analytical procedures are clearly unsuitable for testing the – existence of inventories
– to do this you need to go and count the items on the shelves in the warehouse.
 Analytical procedures may well be suitable for testing the value–of labour carried
forward in inventory – by comparing direct labour costs for the year with value in
inventory, in the context of the costs of raw materials and overheads in inventory.
(2) The reliability of the data.
 If controls over sales order processing are weak, it will –probably be necessary to rely
on tests of details rather than analytical procedures.
(3) The degree of precision possible.
 There is likely to be greater consistency in gross margins over – time than in
discretionary expenditure like advertising or R&D.
(4) The amount of variation which is acceptable.
 Variations in sales revenue, which may have a minor impact–on the results for the
year, will be regarded differently from receivables, which, if uncollectible will have a
proportionately greater impact.
15
ACCOUTING ESTIMATES
Definition
An accounting estimate is an approximation of a monetary amount in
the absence of a precise means of measurement.
Estimation uncertainty is the susceptibility of an accounting estimate
and related disclosures to an inherent lack of precision in its
measurement.
Management's point estimate is the amount selected by management
for recognition or disclosure in the financial statements as an
accounting estimate.
Auditor's point estimate or auditor's range is the amount, or range of
amounts, respectively, derived from audit evidence for use in
evaluating management's point estimate.
16
8
ACCOUTING ESTIMATES
Example
 Allowance for doubtful accounts

 Inventory obsolescence
 Warranty obligations
 Depreciation method or asset useful life
 Outcome of long-term contracts
 Costs arising from litigation settlements and judgements
 Provision against the carrying amount of an investment where there
is uncertainty regarding its recoverability
17
ACCOUTING ESTIMATES
Why
 Accounting estimates are of particular concern to the auditor as by

their nature there may not be any physical evidence to support them.
 They are subjective and judgmental and therefore prone to
management bias.
 If the directors wish to manipulate the accounts in any way,
accounting estimates are the easy way for them to do this
 The auditor must take care when auditing estimates to ensure this has
not been the case
18
9
ACCOUTING ESTIMATES
Procedure
Enquire of management how the accounting estimate is made and the
data on which it is base
Review the outcome of accounting estimates included in the prior
period financial statement
Determine whether events up the date of auditor’s report provide
additional evidence with regard to the appropriateness of estimates
Test how management made their estimates and evaluating whether
the method is appropriate
Test the effectiveness of controls over estimation
Develop a point estimate to use in comparison to managements If
there are significant risks associated with estimates the auditor should
also enquire whether management considered any alternative
assumptions and why they rejected them and whether the
assumptions
used are reasonable in the circumstances
19
ACCOUTING ESTIMATES
Procedure
If there are significant risks associated with estimates the auditor

should also enquire whether management considered any alternative
assumptions and why they rejected them and whether the
assumptions used are reasonable in the circumstances
Obtain written representations from management confirming that

they believe the assumptions used in making estimates are reasonable
20
10
RELYING ON THE WORK OF OTHERS
Using the work of an expert
an individual or organisation who has expertise in a field

other than auditing or accounting, whose work in that field
is used by the auditor to assist the auditor in obtaining
An auditor’s sufficient appropriate audit evidence. An auditor’s expert
expert may be an auditor’s internal expert (partner or staff,
including temporary staff, of the auditor’s firm or network
firm) or an auditor’s external expert.
an individual or organisation having expertise in a field other

Management’s than auditing or accounting, whose work in that field is used
expert by the entity to assist the entity in preparing the financial
statements
21
Using the work of an expert Why auditors rely on the work of other
 internal audit
 confirmation from external holders of the
Auditors may choose to rely on
client’s inventory
the work of others because they
find it effective and efficient to  another firm of auditors for assurance on an
do so. overseas branch or subsidiary
 service organisations
Auditor may need to rely on the  property valuations

work off others. Auditors do not  construction work in progress
need to be experts in all aspects
 specialist inventory – livestock, food and drink
of their clients’ business. Where
in the restaurant trade, technically complex
they are unable to form an
inventory
opinion without expert help the
auditors will need to consult  actuarial valuations for pension schemes.
22
11
What attributes do these ‘other people’ need?

 ISA 620 Using the Work of an Expert states that the auditor should
obtain sufficient and appropriate evidence that the work of the expert
is adequate for the purpose of the audit.
 In making this assessment the external auditor must assess the expert’s:
 independence and objectivity
 competence including qualifications and experience.
23

Agreements
ISA 620 requires the auditor to agree in writing the following with the
auditor’s expert:
 Nature, scope and objectives of the work
 Respective roles and responsibilities of the auditor and the auditor’s
expert
 Nature, timing and extent of communication between auditor and
auditor’s expert, including the form of any report
 Confidentiality requirements
24
12
Evaluating the work of the auditor’s expert

The auditor shall evaluate the adequacy of the auditor’s expert’s work
 The relevance and reasonableness of the expert’s work and
consistency with other audit evidence
 The relevance and reasonableness of any assumptions and methods
used
 The relevance, completeness and accuracy of any source data used
25

Reference to the auditor’s expert in the auditor’s report

 The auditor must not refer to the work of an auditor’s expert in the
auditor’s report containing an unmodified opinion (unless required
by law or regulation).
 If the auditor makes reference to the work of an auditor’s expert in
the auditor’s report because it is relevant to understanding a
modification to the opinion, the auditor must state in the auditor’s
report that this reference does not reduce the auditor’s
responsibility for the opinion.
26
13
Relying on internal audit
Internal audit forms a part of the client’s system of internal control.

 It may well therefore reduce control risk.
 The auditor will take this into consideration when planning audit
procedures and reduced levels of substantive testing may therefore
be appropriate.
 The auditor cannot devolve responsibility for the audit opinion onto
the internal audit department.
27

Relying on internal audit
ISA 610 Considering the Work of Internal Audit states that before relying
on the work of internal audit, the external auditor must first assess the
internal audit function including:
 The objectivity and technical competence of the internal audit staff
 Whether the internal audit function is carried out with due
professional care
 The effect of any constraints or restrictions placed on the internal
function by management or those charged with governance.
28
14
Service organization
Items Definition
a third party organisation that provides services to
A service organisation user entities that are part of those entities’
information systems relevant to financial reporting.
an entity that uses a service organisation and

A user entity
whose financial statements are being audited.
an auditor who audits and reports on the financial
A user auditor
statements of a user entity.
an auditor who, at the request of the service

A service auditor organisation, provides an assurance report on the
controls of a service organisation.
29

Items Definition
Examples of outsource  payroll
service  receivables collection
 the entire finance function
 internal audit.
User auditors must obtain an understanding of the
Understanding the
services provided by the service organisation in
services provided accordance with ISA 315.
 Nature of services provided and the significance of
these to the user entity, including effect on user
entity’s internal control
 Nature and materiality of transactions processed or
financial reporting processes affected
 Degree of interaction
 Nature of relationship including contractual terms
30
15
Items Definition
Advantages from the  The independence of the service organisation may
give increased reliability to the evidence obtained.
auditor’s point of view
 Less detailed work may therefore be required.
 The auditor will need to be confident of the

reliability and the independence of the service
organisation.
Other considerations  If the audit firm provides some of these services

itself – e.g. bookkeeping or payroll services – it
will need to ensure that it can maintain its own
independence and objectivity as auditor.
31

Items Definition
 It is the auditors' responsibility to obtain
sufficient and appropriate audit evidence in
order to arrive at the correct audit opinion.
 Therefore, no reference should be made in the
audit report to the use of others during the
Reference to the work of audit.
others in the audit report
 If the auditors cannot satisfy themselves that
the work of others is sufficiently reliable then
the auditor must find another means of
obtaining the required level of comfort.
 They cannot pass the blame onto another party
32
16
COMPUTER ASSISTED AUDIT
TECHNIQUES (CAATS)
Computer assisted audit techniques
(CAATs)
Test data Audit software
What computers
Live Dead
are good at
Calculating sorting
filtering reporting
exceptions
33

TECHNIQUES (CAATS)
Audit software
This is software specifically designed for audit purposes, there are a
number of off-the-shelf packages available, or the auditor could have a
tailor-made system. It is used to process the client’s data in order to
check that the figures themselves are correct. It can therefore carry out a
whole range of substantive procedure, across all sorts of different data.
34
17
TECHNIQUES (CAATS)
Audit software
 Extract a sample according to specified criteria
• Random
• Over a certain amount
• Below a certain amount
• At certain dates
 Calculate ratios and select those outside the criteria
 Check calculations
 Prepare reports ( budget v actual)
 Produce letters to send out to customers suppliers
 Follow items through a computerised system
35

TECHNIQUES (CAATS)
Audit software
Package programmes are generally designed to;
 Read computer files
 Select information
 Perform calculations
 Create data files, and
 Print reports in a format specified by the auditor
36
18
TECHNIQUES (CAATS)
Test Data
The assurance provider supervises the process of running data through
the clients system. To do this the auditor would have to
 Note controls in the clients system
 Decide upon the test data
37

TECHNIQUES (CAATS)
Benefit of CAAT’s
CAAT’s force the auditor to rely on programmed controls during the

audit. Sometimes it may be the only way to test controls within a
computer system, therefore enables the auditor to test program
controls
Using CAAT’s enables the auditors to comply with ISA of obtaining

appropriate audit evidence increasing the overall confidence for the
audit opinion
Example
Credit limits within a system can only be changed by the

accountant. A computer assisted check will test that this is the case.
38
19
TECHNIQUES (CAATS)
Benefit of CAAT’s
Large number of items can be tested quickly and accurately

CAAT’s test original documentation instead of print outs, therefore
the authenticity of the document is more valid this way
Example
 Checking the depreciation charged on each asset would be
quicker with a computer assisted program than manually
 Actual wages will be tested instead of paper copies.
39

TECHNIQUES (CAATS)
Weakness of CAAT’s
 CAATs can be expensive and time consuming to set up.

 Client permission and cooperation may be difficult to obtain.
 Potential incompatibility with the client's computer system.
 The audit team may not have sufficient IT skills and knowledge to
create the complex data extracts and programming required.
 The audit team may not have the knowledge or training needed to
understand the results of the CAATs.
 Data may be corrupted or lost during the application of CAATs.
40
20
AUDIT SAMPLING
Sampling
 There is no requirement to use sampling laid down in the ISAs
 100% testing may be appropriate in certain circumstances –
particularly where there is a small population of high-value items
 The use of analytical procedures – and a variation on analytical
procedures ‘proof in total’, may be a more effective and efficient
method of gathering audit evidence
 Because analytical procedures are a requirement of ISA 520 at the
planning and overall review stages of the audit, it is sensible to make
best use of the work done
41
AUDIT SAMPLING
 ‘Audit sampling’ (sampling) involves the application of audit
procedures to less than 100% of items within a class of transactions or
account balance such that all sampling units have a chance of
selection.
 This will enable the auditor to obtain and evaluate audit evidence
about some characteristic of the items selected in order to form or
assist in forming a conclusion concerning the population from which
the sample is drawn.
 Audit sampling can use either a statistical or a non-statistical
approach.
42
21
AUDIT SAMPLING
Statistical sampling Non - Statistical sampling
‘Statistical sampling’ means any  A sampling approach that

approach to sampling that has does not have both these
the following characteristics: characteristics is considered
• random selection of a sample, non-statistical sampling
and
• use of probability theory to
evaluate sample results,
including measurement of
sampling risk.
43
AUDIT SAMPLING
Statistical sampling
 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).
44
22
AUDIT SAMPLING
Non - Statistical sampling
 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
cut-off testing
45
AUDIT SAMPLING
Designing a sample
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
46
23
AUDIT SAMPLING
Perform
Anomaly & Projection of Evaluate the
audit
Deviations Misstatements result
procedures
47
AUDIT SAMPLING
 An anomaly is 'a misstatement or deviation that is demonstrably not
representative of misstatements or deviations in a population' (ISA 530:
para.5(e)).
 For tests of details, the auditor shall project misstatements found in the sample
onto the population to obtain a broad view of the scale of the misstatement but
this may not be enough to determine an amount to be recorded (ISA 530: paras.
14 and A18)). Misstatements established as anomalies can be excluded when
projecting sample errors to the population.
 The total of the projected misstatement and anomalous misstatement is the
auditor’s best estimate of misstatement in the population. If the total exceeds
tolerable misstatement, the sample does not provide a reasonable basis for
conclusions about the population. The auditor must therefore also consider the
results of other audit procedures to assist in determining the risk that actual
misstatement in the population exceeds tolerable misstatement. The risk may be
reduced if additional audit evidence is obtained (ISA 530: para. A22)
48
24
ROUND UP
 Substantive tests are designed to discover errors or omissions.
 Analytical procedures are used at all stages of the audit, including as
substantive procedures. When using analytical procedures as
substantive tests, auditors must consider the information available,
assessing its availability, relevance and comparability.
 When auditing accounting estimates, auditors must:
– Test the management process
– Use an independent estimate
– Review subsequent events
In order to assess whether the estimates are reasonable.
 Auditors need to obtain sufficient appropriate audit evidence to
support the financial statement assertions. Substantive procedures aim
to obtain that evidence.
 Auditors usually seek evidence from less than 100% of items of the
balance or transaction being tested by using sampling techniques
49
ROUND UP
 CAATs are the use of computers for audit work. The two most
commonly used CAATs are audit software and test data.
 The emergence of data analytics should lead to increased auditor
efficiency and reduced audit risk.
 External auditors may make use of the work of an auditor's expert,
internal auditors and service organisations and their auditors when
carrying out audit procedures.
 A service organisation provides services to user entities. There may be
special considerations for the auditor of a user entity when that entity
makes use of a service organisation.
50
25
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 11
AUDIT OF NON-
CURRENT ASSETS
1
TYPE OF NON – CURRENT ASSETS
NON-CURRENT
ASSETS
TANGIBLE INTANGIBLE INVESTMENT
E.g. land and buildings, E.g. Patents, Licenses, E.g. Loans

plan, Development costs. Own shares, Shares in
Fixtures and fittings Goodwill loans to group companies
IAS 16 – PPE
IFRS 7; 9 – Financial
IAS 23 – Borrowing Cost IAS 38 – Intangible Assets
Instruments…
IFRS 5 – Assets Held For Sales
AUDIT OBJECTIVES
Existence and occurrence – Additions represent assets acquired in the year and
disposal represents assets sold or scrapped in the year; Recorded assets
represent those in use at the year end
Completeness – All additions and disposals that occurred in the year have been
recorded; Balances represent assets in use at the year end
Rights and obligations – The entity has rights to the assets purchased and those
recorded at the year end
Accuracy, classification and valuation – Non-current assets are correctly stated
at cost less accumulated depreciation; Additions and disposals are correctly
recorded
2
AUDIT PROCEDURES
KEY PROCEDURES
Confirmation of ownership
Inspection of non-current assets
Valuation by third parties
Adequacy of depreciation rate
AUDIT PROCEDURES
OB ADDITIONS REDUCTIONS BALANCE
 Purchase
 Depreciation
 Self-construction  FA register (FA
 Impairment
completed listing)
 Disposal
 Revaluation  FA physical count
 Reclassification
Based on IAS related to verify:
+ The Occurrence Right & Obligation
+ The valuation Existence
+ The recognition Valuation
+ The measurement
 Inspect documents
 3rd party
 Analytical Procedure
confirmation
 Recalculate
 Observation of
 Inquiry count
3
DETAILED AUDIT PROCEDURES
Audit Plan: Tangible non- current assets
 Confirm that the company physically inspect all items in the
non-current asset register each year.
 Inspect assets, concentrating on high value items and additions
in-year. Confirm that items inspected:
- Exist
Existence - Are in use
- Are in good condition
- Have correct serial numbers
 Review records of income-yielding assets.
 Reconcile opening and closing vehicles by numbers as well as
amounts.

 Obtain or prepare a summary of tangible non-current assets
showing how the following reconcile with the opening position.
- Gross book value
- Accumulated depreciation
- Net book value
 Compare non-current assets in the general ledger with the non-
current assets register and obtain explanations for differences.
Completeness
 For a sample of assets which physically exist, agree that they are
recorded in the non-current asset register.
 If a non-current asset register is not kept, obtain a schedule
showing the original costs and present depreciated value of
major non-current assets.
 Reconcile the schedule of non-current assets with the general
ledger.
4
 Verify valuation to valuation certificate.
 Consider reasonableness of valuation, reviewing:
- Experience of valuer
- Scope of work
- Methods and assumptions used
- Valuation bases are in line with accounting standards
 Reperform calculation of revaluation surplus.
 Confirm whether valuations of all assets that have been revalued
have been updated regularly (full valuation every five years and
Valuation an interim valuation in year three generally) by asking the Finance
Director and inspecting the previous financial statements.
 Inspect draft accounts to check that client has recognized
revaluation losses in the statement of profit or loss unless there is
a credit balance in respect of that asset in equity, in which case it
should be debited to equity to cancel the credit. All revaluation
gains should be credited to equity.
 Review insurance policies in force for all categories of tangible
non-current assets and consider the adequacy of their insured
9
values and check expiry dates.

 Review depreciation rates applied in relation to:
- Asset lives
- Residual values
- Replacement policy
- Past experience of gains and losses on disposal
- Consistency with prior years and accounting policy
- Possible obsolescence
 Review non-current assets register to ensure that depreciation
has been charged on all assets with a limited useful life.
Valuation –  For revalued assets, ensure that the charge for depreciation is
depreciation based on the revalued amount by recalculating it for a sample of
revalued assets.
 Reperform calculation of depreciation rates to ensure it is
correct.
 Compare ratios of depreciation to non-current assets (by
category) with:
- Previous years
- Depreciation policy rates
 Scrutinise draft accounts to ensure that depreciation policies
10
and rates are disclosed in the accounts.
5
 Verify title to land and buildings by inspection of:
- Title deeds
- Land registry certificates
- Leases
 Obtain a certificate from solicitors/bankers:
- Stating purpose for which the deeds are being held (custody
only);
- Stating deeds are free from mortgage or lien;
 Inspect registration documents for vehicles held, confirming that
Rights and they are in client's name.
obligations  Confirm all vehicles are used for the client's business.
 Examine documents of title for other assets (including purchase
invoices, architects' certificates, contracts, hire purchase or lease
agreements).
 Review for evidence of charges in statutory books and by
company search.
 Review leases of leasehold properties to ensure that company has
fulfilled covenants therein.
 Examine invoices received after year end, orders and minutes for
evidence of capital commitments. 11

These tests are to confirm rights and obligations, valuation and
completeness.
 Verify additions by inspection of architects' certificates,
solicitors' completion statements, suppliers' invoices etc.
 Review capitalization of expenditure by examining for non-
current assets additions and items in relevant expense
categories (repairs, motor expenses, sundry expenses) to ensure
that:
Additions - Capital/revenue distinction is correctly drawn
- Capitalization is in line with consistently applied company policy
 Inspect non-current asset accounts for a sample of purchases to
ensure they have been properly allocated.
 Ensure that appropriate claims have been made for grants, and
grants received and receivable have been received, by
inspecting claims documentations and bank statements.
 Verify that additions have been recorded by scrutinizing the
non-current asset register and general ledger.
12
6
These tests are to confirm valuation and completeness.
 Verify material and labor costs and overheads to invoices, wage
records etc. assets
 Ensure expenditure has been analyzed correctly and properly
charged to capital.
 Expenditure should be capitalized if it:
- Enhances the economic benefits of the asset in excess of its
previously assessed standard of performance
Self – - Replaces or restores a component of the asset that has been
constructed treated separately for depreciation purposes, and depreciated over
assets its useful economic life
- Relates to a major inspection or overhaul that restores the
economic benefits of the asset that have been consumed by the
entity, and have already been reflected in depreciation
 Review costs to ensure that no profit element has been
included.
 Review accounts to ensure that finance costs have been
capitalized or not capitalized on a consistent basis, and costs
capitalized in period do not exceed total finance costs for period.
13

These tests are to confirm rights and obligations, completeness,
and accuracy.
 Verify disposals with supporting documentation, checking
transfer of title, sales price and dates of completion and
Disposals payment.
 Recalculate profit or loss on disposal.
 Consider whether proceeds are reasonable.
 If the asset was used as security, ensure release from security
has been correctly made.
 Review non-current asset disclosures in the financial statements
to ensure they meet IAS 16 criteria.
Classification  For a sample of fully depreciated assets, inspect the register to
ensure no further depreciation is charged.
14
7
INTANGIBLE NON-CURRENT ASSETS
Audit Plan: Other non- current assets
 Agree the consideration to sales agreement by inspection.
 Consider whether asset valuation is reasonable.
 Agree that the calculation is correct by recalculation.
Goodwill
 Review the impairment review and discuss with management.
 Ensure valuation of goodwill is reasonable / there has been no
impairment not adjusted through discussion with management.
 Confirm that capitalized development costs conform to IAS 38 criteria
by inspecting details of projects and discussions with technical
Research and managers.
development  Confirm feasibility and viability by inspection of budgets.
(R&D) costs  Recalculate amortization calculation to ensure it commences with
production / is reasonable.
 Inspect invoices to verify expenditure incurred on R&D projects
 Agree purchased intangibles to purchase documentation agreement
by inspection.
Other  Inspect specialist valuation of intangibles and ensure it is reasonable.
intangibles  Review amortization calculations and ensure they are correct by
recalculation.
15
ROUND UP
 Key areas when testing tangible non-current assets are:
– Confirmation of ownership
– Inspection of non-current assets
– Valuation by third parties
– Adequacy of depreciation rates
 Key assertions for intangible non-current assets are existence and valuation.
16
8
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 12
INVENTORIES
1
INVENTORIES AND RELATED IAS , RISK
INVENTORY
VALUATION?
COST vs NRV
BS: Inventory PL: COGS Damaged?
Obsolete/ Slow moving?
IAS 2: Inventory COSTING?

Abnormal waste?
Fixed production OH?
• It is usually crucial to assurance Stage of Completion?
about an entity’s profit.
• It may be complex.
EXISTING?
• It is usually subject to a degree of
Physical count?
estimation.
INVENTORIES AND RELATED IAS , RISK
KEY ASSERTIONS
Existence
Completeness
Rights and obligations
Valuation
Cut-off
2
AUDIT PROCEDURES
KEY ASSERTIONS
Substantive Test
Inventory count
Inventory held by 3rd parties
AUDIT PROCEDURES
 COGS
 Purchase  Inventory listing
 Impairment
 Reclassification  Physical count
Based on IAS related to verify:

+ The Occurrence Right & Obligation
+ The valuation Existence
+ The recognition Valuation
+ The measurement
 Inspect documents  Inspect documents

 3rd party
 Analytical Procedure
confirmation
 Recalculate  Observation of
 Inquiry count
3
Audit Plan: Inventory
 Observe the physical inventory count.
Existence
 Complete the disclosure checklist to ensure that all the

disclosures relevant to inventory have been made.
 Trace test counts to the detailed inventory listing.
 Where inventory is held in third-party locations, physically
Completeness inspect this inventory or review confirmations received from
the third party and match to the general ledger.
 Compare the gross profit percentage to the previous year or
industry data

 Verify that any inventory held for third parties is not included in
the year-end inventory figure by being appropriately segregated
during the inventory count.
 For any 'bill and hold' inventory (i.e where the inventory has
been sold but is being held by the entity until the customer
Rights and
requires it), identify such inventory and ensure that it is
obligations segregated during the inventory count so that it is not included
in the year-end inventory figure.
 Confirm that any inventory held at third-party locations is
included in the year-end inventory figure by reviewing the
inventory listing.
4
 Obtain a copy of the inventory listing and agree the totals to the
general ledger.
 Cast the inventory listing to ensure it is mathematically correct.
 Vouch a sample of inventory items to suppliers' invoices to ensure
it is correctly valued.
 Where standard costing is used, test a sample of inventory to
ensure it is correctly valued.
 For materials, agree the valuation of raw materials to invoices and
Accuracy, price lists.
 Confirm that an appropriate basis of valuation (e.g. FIFO) is being
valuation and used by discussing with management.
allocation  For labor costs, agree costs to wage records.
 Review standard labor costs in the light of actual costs and
production.
 Reconcile labor hours to time summaries.
 Make enquiries of management to ascertain any slow-moving or
obsolete inventory that should be written down.
 Examine prices at which finished goods have been sold after the
year end to ascertain whether any finished goods need to be
written down 9

 If significant levels of finished goods remain unsold for an unusual
period of time, discuss with management and consider the need
to make allowance.
 Compare the gross profit percentage to the previous year or
industry data.
 Compare raw material, finished goods and inventory collection
period to the previous year and industry averages.
 Compare inventory holding period with the previous year and
Accuracy, industry average.
 Compare the current year standard costs to the previous year
valuation and after considering current conditions.
allocation  Compare actual manufacturing overhead costs with budgeted or
standard manufacturing overhead costs.
 Obtain a copy of the inventory listing and cast it, and test the
mathematical extensions of quantity multiplied by price.
 If the entity has adjusted the general ledger to agree with the
physical inventory count amounts, agree the two amounts.
 Where a continuous (perpetual) inventory system is maintained,
agree the total on the inventory listing to the continuous
inventory records, using CAATs. 10
5
 Note the numbers of the last GDNs and GRNs before the year
Cut-off end and the first GDNs and GRNs after the year end and check
that these have been included in the correct financial year.
 Enquire of management and review any loan agreements and
Occurrence
board minutes for evidence that inventory has been pledged or
and rights and assigned.
obligations  Enquire of management about warranty obligation issues.
 Review the inventory listing to ensure that inventory has been
properly classified between raw materials, work-in-progress and
Classification finished goods.
 Read the notes to the accounts relating to inventory to ensure
they are understandable.
 Review the financial statements to confirm whether the cost
method used to value inventory is accurately disclosed.
Presentation  Read the notes to the financial statements to ensure that the
information is accurate and properly presented at the
appropriate amounts.
11
INVENTORY COUNT
Principle
 The inventory count is a ‘one off’. It is a single opportunity to establish what is

and what is not in inventory.
 Because of the crucial impact of inventory levels on the results for the year, it
must be tested both for existence and completeness.
 Inventory can consist of almost anything with different properties. It can
therefore be quite complex and so needs to be well organized by the client. The
auditor needs to be equally well organized to ensure that sufficient, appropriate
evidence is gathered.
 It is the client’s responsibility to establish the correct value of the inventory.
The auditor’s job is to form an opinion as to whether that value is materially
correct or not. It is therefore not the auditor’s responsibility to count the
inventory, only to check that it has been done correctly.
12
6
INVENTORY COUNT
Principle
A business may count inventory by one or a combination of the following methods:

 Physical inventory counts at the year end
 Physical inventory counts before or after the year end
 Continuous (or perpetual) inventory where management has a programme of
inventory counting throughout the year.
13
INVENTORY COUNT
Audit plan: Continuous inventory count
 Attend one of the inventory counts (to observe and confirm that instructions are
being adhered to).
 Follow up the inventory counts attended to compare quantities counted by the
auditors with the inventory records, obtaining and verifying explanations for any
differences, and checking that the client has reconciled count records with book
inventory records.
 Review the year's inventory counts to confirm the extent of counting, the
treatment of discrepancies and the overall accuracy of records (if matters are not
satisfactory, auditors will only be able to gain sufficient assurance by a full count
at the year end).
 Assuming a full count is not necessary at the year end, compare the listing of
inventory with the detailed inventory records, and carry out other procedures
(cut-off, analytical review) to gain further comfort.
14
7
INVENTORY COUNT
Planning Attendance
At Inventory Count
Attendance
3 Phase
At Inventory Count
After
The Inventory Count
15
INVENTORY COUNT
PLANNING ATTENDANCE
At Inventory Count
• Review previous year's arrangements.
Gain
• Discuss with management inventory count arrangements and
knowledge
significant changes.
• The nature and volume of the inventory

• Risks relating to inventory
• Identification of high value items
Assess key • Method of accounting for inventory
factors • Location of inventory and how it affects inventory control and
recording
• Internal control and accounting systems to identify potential
areas of difficulty
16
8
INVENTORY COUNT
PLANNING ATTENDANCE
At Inventory Count
• Ensure a representative selection of locations, inventory and
procedures are covered.
Plan • Ensure sufficient attention is given to high value items.
procedures • Arrange to obtain from any third parties’ confirmation of
inventory they hold.
• Consider the need for expert help.
• Supervision by senior staff including senior staff not normally

involved with inventory
• Tidying and marking inventory to help counting
Organization
• Restriction and control of the production process and inventory
of count
movements during the count
• Identification of damaged, obsolete, slow-moving, third party
and returnable inventory
17
INVENTORY COUNT
PLANNING ATTENDANCE
At Inventory Count
• Systematic counting to ensure all inventory is counted
Counting • Teams of two counters, with one counting and the other checking
or two independent counts
• Serial numbering, control and return of all inventory sheets

• Inventory sheets being completed in ink and signed
• Information to be recorded on the count records (location and
identity, count units, quantity counted, conditions of items, stage
reached in production process)
Recording • Recording of quantity, conditions and stage of production of
work-in-progress
• Recording of last numbers of goods inwards and outwards
records and of internal transfer records
• Reconciliation with inventory records and investigation and
correction of any differences
18
9
INVENTORY COUNT
ATTENDANCE
At Inventory Count
 Observe whether the client's staff is following instructions as this will help to
ensure the count is complete and accurate.
 Perform test counts to ensure procedures and internal controls are working
properly.
 Ensure that the procedures for identifying damaged, obsolete and slow-moving
inventory operate properly; the auditors should obtain information about the
inventory's condition, age, usage and in the case of work-in-progress, its stage of
completion to ensure that it is later valued appropriately.
 Confirm that inventory held on behalf of third parties is separately identified and
accounted for so that inventory is not overstated.
 Conclude whether the count has been properly carried out and is sufficiently
reliable as a basis for determining the existence of inventories.
 Consider whether any amendment is necessary to subsequent audit procedures.
 Gain an overall impression of the levels and values of inventories held so that the
auditors may, in due course, judge whether the figure for inventory appearing in
the financial statements is reasonable.
19
INVENTORY COUNT
AFTER
The Inventory Count
 Trace items that were test counted to final inventory sheets.

 Observe whether all count records have been included in final inventory sheets.
 Inspect final inventory sheets to ensure they are supported by count records.
 Ensure that continuous inventory records have been adjusted to the amounts
physically counted or measured, and that differences have been investigated.
 Confirm cut-off by using details of the last serial number of goods inwards and
outwards notes and of movements during the count.
 Review replies from third parties about inventory held by or for them.
 Confirm the client's final valuation of inventory has been calculated correctly.
 Follow up queries and notify problems to management.
20
10
INVENTORY COUNT
Inventory held at third parties
 Where the client has inventory at locations not visited by the auditor, the auditor
normally obtains confirmation of the quantities, value and condition from the
holder. The auditor needs to consider whether the holder is sufficiently
independent to be able to provide relevant, reliable evidence.
 As with confirmations from receivables, the auditor requests details from the
party holding the inventory on behalf of the client to confirm its existence.
 The confirmation request will be sent by the client to those parties identified by
the auditor.
 The reply should be sent directly to the auditor to prevent it being tampered with
by the client.
 Problems can occur if the third party uses a different description to that of the
client and as always, a response is not guaranteed.
21
INVENTORY COUNT
Cut-off testing
 Purchase invoices should be recorded as liabilities only if the goods were received
prior to the count. A schedule of 'goods received not invoiced' should be prepared,
and items on the list should be accrued for in the accounts.
 Sales cut-off is generally more straight forward to achieve correctly than purchases
cut-off. Invoices for goods dispatched after the count should not appear in the
statement of profit or loss for the period. Prior to the physical inventory count,
management should make arrangements for cut-off to be properly applied.
22
11
ROUND UP
 The key assertions relating to inventory are:
– Existence
– Completeness
– Rights and obligations
– Valuation
– Cut-off
 The valuation and disclosure rules for inventory are laid down in IAS 2 Inventories.
Inventory should be valued at the lower of cost and net realizable value.
 Physical inventory count procedures are vital, as they provide evidence which
cannot be obtained elsewhere or at any other time about the quantities and
conditions of inventory and work-in-progress.
 Auditors should test cut-off by noting the serial numbers of GDNs and GRNs
received and dispatched just before and after the year end, and subsequently
testing that they have been included in the correct period.
 Auditing the valuation of inventory includes:
– Testing the allocation of overheads is appropriate
– Confirming inventory is carried at the lower of cost and net realizable value
23
12
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 13
RECEIVABLES
1
OVERVIEW
RECEIVABLES
PROCEDURES
 People who owe us money

(trade, loan, receivables…) TRADE
 People who owe us services Ask them (circularisation)
(prepayment) See if they pay (after date receipt)
Review ageing
KEY QUETIONS
TRADE PREPAYMENT
Are you going to pay and fairly soon? Verify payment
Review invoice, etc… for cut off
PREPAYMENT
 Did we make the payment??
 Is it accounted for in correct format, i.e.,
is the calculation correct??
3
OVERVIEW
KEY ASSERTIONS
 Existence
 Completeness
 Valuation
RULES
 The reliability of all receivables should be assessed, and allowance made

where doubts exist. Trade receivables should therefore be valued at sales
invoiced price less any allowance for doubtful debts.
 IAS 1 requires that trade receivables due beyond 12 months after the
balance sheet date still shown in current assets rather than non-current
assets.
2
Audit Plan: Receivables and Revenue
 Agree the balance from the individual sales ledger accounts to
the aged receivables' listing and vice versa.
 Match the total of the aged receivables' listing to the sales
 Cast and cross-cast the aged trial balance before selecting any
samples to test.
 Trace a sample of shipping documentation to sales invoices and
into the sales and receivables ledger.
Completeness
disclosures relevant to receivables have been made.
 Compare the gross profit percentage by product line with the
previous year and industry data.
 Compare the level of prepayments to the previous year to
ensure the figure is materially correct and complete.
 Review detailed statement of financial position to ensure all
likely prepayments have been included.

 Perform a receivables circularization on a sample of year-end
trade receivables (see Section 3 for details of how to undertake
the receivables circularization).
 Follow up all balance disagreements and non-replies to the
receivables confirmation.
 Perform alternative procedures for any exceptions and non-
replies to the receivables confirmation, such as:
- Review after-date cash receipts by inspecting bank statements
and cash receipts documentation.
Existence
- Examine the customer's account and customer
correspondence to assess whether the balance outstanding
represents specific invoices and confirm their validity.
- Examine the underlying documentation (purchase order,
dispatch documentation, duplicate sales invoice etc).
- Enquire from management explanations for invoices
remaining unpaid after subsequent ones have been paid.
- Observe whether the balance on the account is growing and, if
so, find out why by discussing with management.
6
3
 Agree the balance from the individual sales ledger accounts to
the aged receivables' listing and vice versa.
 Match the total of the aged receivables' listing to the sales
 Cast and cross-cast the aged trial balance before selecting any
samples to test.
 Trace a sample of shipping documentation to sales invoices and
into the sales and receivables ledger.
Completeness
disclosures relevant to receivables have been made.
 Compare the gross profit percentage by product line with the
previous year and industry data.
 Compare the level of prepayments to the previous year to
ensure the figure is materially correct and complete.
 Review detailed statement of financial position to ensure all
likely prepayments have been included.

 Compare receivables turnover and receivables collection period
with the previous year and/or with industry data and investigate
any significant differences.
 Compare the aged analysis of receivables from the aged trial
balance with the previous year.
 Review the adequacy of the allowance for uncollectable
accounts through discussion with management.
 Compare the irrecoverable debt expense as a percentage of
Accuracy,
sales with the previous year and/or with industry data.
valuation and
 Compare the allowance for irrecoverable debts as a percentage
allocation of receivables or credit sales with the previous year and/or with
industry data.
 Confirm adequacy of allowance by reviewing correspondence
with customers and solicitors.
 Examine credit notes issued after year end for allowances that
should be made against current period balances.
 Examine large customer accounts individually and compare with
the previous year's balances.
8
4
 For a sample of old debts on the aged trial balance, obtain
further information regarding their recoverability by discussions
with management and review of customer correspondence.
 Review after-date cash receipts by inspecting bank statements
and cash receipts documentation.
 For a sample of prepayments from the prepayments' listing,
recalculate the amount prepaid to ensure that it has been
accurately calculated.
 Review bank confirmation for any liens on receivables.
Rights and  Make enquiries of management, review loan agreements and
obligations review board minutes for any evidence of receivables being sold
(e.g., to factors).
 Take a sample of sales invoices and examine for proper
Classification classification into revenue accounts.

 For a sample of sales invoices around the year end, inspect the
dates and compare with the dates of despatch and the dates
recorded in the ledger for application of correct cut-off.
 For sales returns, select a sample of returns documentation
around the year end and trace to the related credit entries.
 Perform analytical procedures on sales returns, comparing the
ratio of sales returns to sales.
Cut-off  Review material after-date invoices, credit notes and
adjustments and ensure that they are recorded correctly in the
relevant financial period.
 For a sample of sales invoices, compare the prices and terms to
the authorized price list and terms of trade documentation.
 Test whether discounts have been properly applied by
recalculating them for a sample of invoices.
 Test the correct calculation of tax on a sample of invoices.
10
5
 For a sample of sales transactions recorded in the ledger, vouch
Occurrence the sales invoice back to customer orders and dispatch
documentation.
 Determine, through discussion with management, whether any
Occurrence
receivables have been pledged, assigned or discounted and
and rights and
whether such items require disclosure in the financial
obligations statements.
 Review the aged analysis of receivables for any large credits,
non-trade receivables and long-term receivables and consider
Classification whether such items require separate disclosure.
 Read the disclosure notes relevant to receivables in the draft
financial statements and review for understandability
 Read the disclosure notes to ensure the information is accurate
Presentation and properly presented at the appropriate amounts.
11
RECEIVABLES CIRCULARISATION
Positive and negative confirmation
A positive confirmation request is one in which the confirming party responds
directly to the auditor indicating whether they agree or disagree with the
information in the request or provides the requested information
A negative confirmation request is one in which the confirming party responds

directly to the auditor only if they disagree with the information in the request
When confirmation is undertaken the method of requesting information from the

customer may be either positive or negative
 Under the positive method the customer is requested to confirm the accuracy
of the balance shown or state in what respect he is in disagreement.
 Under the negative method the customer is requested to reply only if the
amount stated is disputed
12
6
The positive method is generally preferable as it is designed to encourage

definite replies from those contacted.
The negative method provides less persuasive audit evidence and shall not
be used as the sole substantive procedure to audit receivables unless all of
the following are present:
 The risk of material misstatement has been assessed as low.
 The auditor has obtained sufficient appropriate audit evidence on the
operating effectiveness of relevant controls
 The population consists of a large number of small, homogeneous account
balances.
 A very low exception rate is expected
 The auditor is not aware of circumstances or conditions that would cause
customers to disregard the requests.
13
A specimen 'positive' confirmation letter
14
7
Notes:
 The letter is on the client's paper, signed by the client.
 A copy of the statement is attached.
 The reply is sent directly to the auditor in a pre-paid envelope.
15
FOLLOW – UP PROCEDURES
Definition
 A confirmation of receivables is a major procedure, usually achieved by direct

contact with customers.
 External confirmations are audit evidence obtained as a direct written
response to the auditor from a third party in paper form or by electronic or
other medium.
16
8
Exceptions and non-responses
An exception is 'a response that indicates a difference between information

requested to be confirmed, or contained in the entity's records, and information
provided by the confirming party' (ISA 505: para. 6(e)).
A non-response is 'a failure of the confirming party to respond, or fully respond, to

a positive confirmation request, or a confirmation request returned undelivered'
(ISA 505: para. 6d)).
Auditors will have to carry out further work in relation to those receivables who:
 Disagree with the balance stated (positive and negative confirmation), resulting
in exceptions
 Do not respond, resulting in non-responses
17
Client's mandate
 Confirmation is essentially an act of the client, who alone can authorise third
parties to divulge information to the auditors.
 Auditors' response when management refuses permission for the auditors to
contact third parties for evidence.
 If management asks the auditor not to seek the confirmation, the auditor
shall inquire about management’s reasons for the refusal and seek audit
evidence regarding the validity and reasonableness of the reasons.
 They shall also evaluate the implications of the refusal on the assessment
of the risk of material misstatement and on the nature, timing and extent
of other audit procedures.
 The auditor shall perform alternative audit procedures to obtain relevant
and reliable audit evidence.
 If the auditor concludes that the refusal is unreasonable, or the auditor
cannot obtain relevant and reliable audit evidence elsewhere, the auditor
shall communicate with those charged with governance in accordance
with ISA 260 and consider the implications for the auditor’s report.
18
9
Reasons for exceptions
 There is a dispute between the client and the customer. The reasons for the
dispute would have to be identified, and provision made if appropriate against the
debt.
 Cut-off problems exist, because the client records the following year's sales in the
current year or because goods returned by the customer in the current year are
not recorded in the current year. Cut-off testing may have to be extended (see
below).
 The customer may have sent the monies before the year end, but the monies were
not recorded by the client as receipts until after the year end. Detailed cut-off
work may be required on receipts.
 Monies received may have been posted to the wrong account or a cash-in-transit
account. Auditors should check if there is evidence of other mis-posting. If the
monies have been posted to a cash-in-transit account, auditors should ensure this
account has been cleared promptly.
 Customers who are also suppliers may net-off balances owed and owing. Auditors
should check that this is allowed.
 Teeming and lading, stealing monies and incorrectly posting other receipts so that
no particular customer is seriously in debt is a fraud that can arise in this area.
19
ROUND UP
 Receivables are usually audited using a combination of tests of details and

analytical procedures.
 Existence, completeness and valuation are key assertions relating to the audit
of receivables.
 A confirmation of receivables is a major procedure, usually achieved by direct
contact with customers. There are two methods of confirmation: positive and
negative.
 Sales comprise a material figure in the statement of profit or loss that is often
audited by analytical review, as it should have predictable relationships with
other figures in the financial statements.
20
10
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 14
AUDIT OF BANK & CASH
1
OVERVIEW
KEY PROCEDURES
Bank confirmation
Cash count
KEY ASSERTIONS
Existence
Completeness
Rights and obligations
Valuation
BANK
Bank confirmation procedures
Obtaining third party confirmations from the client's banks and reconciling
these with the accounting records, having regard to cut-off
 Recorded cash balances exist at the year end (existence).
 Recorded cash balances include the effects of all transactions that
occurred (completeness).
 Year-end transfers are recorded in the correct period (cut-off).
 Recorded balances are realizable at the amounts stated (accuracy,
valuation and allocation).
 The entity has legal title to all cash balances shown at the year end
(rights and obligations).
This type of audit evidence is valuable because it comes directly from an

independent source and, therefore, provides greater assurance of reliability
than that obtained solely from the client's own records
2
BANK
Confirmation Requests
The bank confirmation letter can be used to ask a variety of questions,

including queries about outstanding interests, contingent liabilities and
guarantees.
The auditors should decide from which bank or banks to request
confirmation, having regard to such matters as size of balance, volume of
activity, degree of reliance on internal control and materiality within the
context of the financial statements
BANK
Preparation and dispatch of requests and receipt of replies
Control over the content and dispatch of confirmation requests is the

responsibility of the auditors. However, it will be necessary for the request to be
authorized by the client entity. Replies should be returned directly to the
auditors and to facilitate such a reply, a pre-addressed envelope should be
enclosed with the request.
3
BANK
Content of Confirmation Requests
The auditors should decide from which bank or banks to request

confirmation, having regard to such matters as size of balance, volume of
activity, degree of reliance on internal control, and materiality within the
context of the financial statements
The auditors should determine which of the following approaches is the

most appropriate in seeking confirmation of balances or other information
from the bank
 Listing balances and other information, and requesting confirmation of
their accuracy and completeness, or
 Requesting details of balances and other information, which can then be
compared with the requesting client's records
BANK
Important Procedures
The banks will require explicit written authority from their client to
disclose the information requested
The auditors' request must refer to the client's letter of authority and the
date thereof. Alternatively it may be countersigned by the client or it may
be accompanied by a specific letter of authority.
In the case of joint accounts, letters of authority signed by all parties will
be necessary
Such letters of authority may either give permission to the bank to disclose
information for a specific request or grant permission for an indeterminate
length of time.
The request should reach the branch manager at least one month in
advance of the client's year- end and should state both that year-end date
and the previous year-end date
The auditors should themselves check that the bank response covers all
the information in the standard and other responses
8
4
BANK
Cut - off
Keeping the cash book open to take credit for remittances actually received
after the year-end, thus enhancing the balance at bank and reducing
receivables
Recording cheques paid in the period under review which are not actually
dispatched until after the year-end, thus decreasing the balance at bank
and reducing liabilities
A combination of the two above can contrive to present an artificially
healthy looking current ratio
With the possibility of 1 above in mind, where lodgements have not been
cleared by the bank until the new period, the auditors should examine the
paying-in slip to ensure that the amounts were actually paid into the bank
on or before the period-end date.
As regards (b) above, where there appears to be a particularly large
number of outstanding cheques at the year-end, the auditors should check
whether these were cleared within a reasonable time in the new period. If
not, this may indicate that dispatch occurred after the year-end
9
BANK
Audit plan: bank (to confirm completeness, valuation, existence, cut-off and
presentation)
 Obtain standard bank confirmations from each bank with which the client
conducted business during the audit period.
 Reperform arithmetic of bank reconciliation.
 Trace cheques shown as outstanding from the bank reconciliation to the cash book
prior to the year end and to the after-date bank statements and obtain
explanations for any large or unusual items not cleared at the time of the audit.
 Compare cash book(s) and bank statements in detail for the last month of the
year, and match items outstanding at the reconciliation date to bank statements.
 Review bank reconciliation previous to the year-end bank reconciliation and test
whether all items are cleared in the last period or taken forward to the year-end
bank reconciliation.
 Obtain satisfactory explanations for all items in the cash book for which there are
no corresponding entries in the bank statement and vice versa by discussion with
finance staff.
 Verify contra items appearing in the cash books or bank statements with original
entry.
 Verify by inspecting paying-in slips that uncleared bankings are paid in prior to the
year end. 10
5
BANK
presentation)
 Examine all lodgements in respect of which payment has been refused by the bank;
ensure that they are cleared on representation or that other appropriate steps have
been taken to effect recovery of the amount due.
 Verify balances per the cash book according to the bank reconciliation by inspecting
cash book, bank statements and general ledger.
 Verify the bank balances with reply to standard bank letter and with the bank
statements.
 Inspect the cash book and bank statements before and after the year end for
exceptional entries or transfers which have a material effect on the balance shown
to be in-hand.
 Identify whether any accounts are secured on the assets of the company by
discussion with management.
 Consider whether there is a legal right of set-off of overdrafts against positive bank
balances.
 Determine whether the bank accounts are subject to any restrictions by enquiries
with management.
 Review draft accounts to ensure that disclosures for bank are complete and
accurate and in accordance with accounting standards. 11
BANK
presentation)
EXAM FOCUS: Remember that the bank confirmation letter contains the balance
held by the client at the bank per the bank's records. This must be reconciled to the
balance held with the bank per the client's records. When suggesting audit procedures
for verifying bank balances, although the bank confirmation letter is important, do not
forget to suggest other procedures related to the year-end bank reconciliation.
Previous candidates have lost out on marks for not focusing enough on these
procedures.
12
6
CASH COUNT
 Auditors will be concerned that the cash exists, is complete, and belongs to
the company (rights and obligations) and is stated at the correct value.
 Where the auditors determine that cash balances are potentially material they
may conduct a cash count, ideally at the period-end. Rather like attendance at
an inventory count, the conduct of the count falls into three phases: planning,
the count itself, and follow-up procedures.
13
CASH COUNT
Planning the cash count
Planning decisions will need to be recorded on the current audit file including:
 The precise time of the count(s) and location(s)
 The names of the audit staff conducting the counts
 The names of the client staff intending to be present at each location
14
7
CASH COUNT
Cash count
The following matters apply to the count itself.
All cash/petty cash books should be written up to date in ink (or other
permanent form) at the time of the count
All balances must be counted at the same time
All negotiable securities must be available and counted at the time the
cash balances are counted
At no time should the auditors be left alone with the cash and negotiable
securities
All cash and securities counted must be recorded on working papers
subsequently filed on the current audit file. Reconciliations should be
prepared where applicable (for example, imprest petty cash float).
15
CASH COUNT
Audit plan: Cash count (to confirm completeness, valuation, existence and
presentation)
 Count cash balances held and agree to petty cash book or other record:
– Count all balances simultaneously;
– All counting to be done in the presence of the individuals responsible;
– Enquire into any IOUs or cashed cheques outstanding for a long period of time;
 Obtain certificates of cash-in-hand from responsible officials.
 Confirm that bank and cash balances as reconciled above are correctly stated in the
FOLLOW UP:
 Obtain certificates of cash-in-hand as appropriate.
 Verify unbanked cheques/cash receipts have subsequently been paid in and agree
to the bank reconciliation by inspection of the relevant documentation.
 Ensure IOUs and cheques cashed for employees have been reimbursed.
 Review whether IOUs or cashed cheques outstanding for unreasonable periods of
time have been provided for.
 Verify the balances as counted are reflected in the accounts (subject to any agreed
amendments because of shortages and so on) by inspection of draft financial
statements.
16
8
ROUND UP
 Bank balances are usually confirmed directly with the bank in question.
 The bank confirmation letter can be used to ask a variety of questions, including
queries about outstanding interests, contingent liabilities and guarantees.
 Cash balances should be verified if they are material or irregularities are
suspected.
17
9
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 11
AUDIT OF LIABILITY
AND CAPITAL
1
OVERVIEW
PAYABLES
PAYABLES & NON-CURRENT PROVISIONS &

ACCRUALS LIABILITIES CONTINGENCIES
Trade payables, expenses E.g. Provision for

accruals (i.e. payroll accrual, Borrowings… warranties, contingent
electricity accruals…) liabilities (sued…)
IAS 37 – Provisions, contingent liabilities & contingent assets

IAS 1 – Presentation of Financial Statement
MAIN RISK WITH PAYABLE

KEY RISK
NOT ALL RECORDED COMPLETENESS UNDERSTATEMENTS
WRONG ACCOUNTING UNDERSTATEMENTS

CUT-OFF
PERIOD / OVERSTATEMENTS
OBLIGATIONS NOT RIGHT &

RECORDED OBLIGATIONS
NOT PROPERLY PRESENTATION &

DISCLOSED DISCOLESURES
 Testing for completeness is harder because you're looking for something

that has not been recorded
2
PAYABLES AND ACCRUALS
 Purchase  Payment
 Supplier listing
 Revaluation of  Good return
 Supplier’s Statement
FOREX  Debit note
 Reconciliation
 Reclassification  Reclassification
 Inspect documents  Completeness

 Analytical Procedure  Right & Obligation
 Recalculate  Existence
 Inquiry  Valuation
 3rd party confirmation
 Reconciliation
 Subsequent payment
PAYABLES AND ACCRUALS

PURCHASE AND PAYABLES CYCLE
Request to Head of
Demand for sth Approved
Department
Purchase
Request Hand over
minutes
Purchase Dep. Sign contract with Goods Receipt
Supplier Goods Delivered
Makes Order Note (GRN)
Purchase Order Contract
Invoices
Record into
accounting book
Journal Voucher
(JV)
Supplier’s Sub-Ledger
Reconcile General Ledger
Statement (Supplier A, B,C…)
3
AUDIT PROCEDURES
Audit plan: accounts payables and accruals Completeness
 Obtain a listing of trade accounts payables and agree the total to
the general ledger by casting and cross-casting.
 Test for unrecorded liabilities by enquiries of management on
how unrecorded liabilities and accruals are identified and
examining post year end transactions.
 Obtain selected suppliers' statements and reconcile these to the
relevant suppliers' accounts (see Section 2.3 for details of
suppliers' statements).
Completeness
 Examine files of unmatched purchase orders and supplier invoices
for any unrecorded liabilities.
 Perform a confirmation of accounts payables for a sample (see
Section 2.2 for details of the accounts payables' confirmation).
disclosures relevant to liabilities have been made.
 Compare the current year balances for trade accounts payables
and accruals with the previous year.
AUDIT PROCEDURES
 Compare the amounts owed to a sample of individual suppliers in
the trade accounts payables listing with amounts owed to these
suppliers in the previous year.
 Compare the payables turnover and payables payment period to
the previous year and industry data.
 Reperform casts of payroll records to confirm completeness and
accuracy.
Completeness  Confirm payment of net pay per payroll records to cheque or bank
transfer summary.
 Agree net pay per cashbook to payroll.
 Inspect payroll for unusual items and investigate them further by
discussion with management.
 Perform proof-in-total (analytical procedures) on payroll and
compare to figure in draft financial statements to assess
reasonableness.
4
AUDIT PROCEDURES
 Vouch selected amounts from the trade accounts payables listing
and accruals listing to supporting documentation, such as
purchase orders and suppliers' invoices.
relevant suppliers' accounts.
Existence
 Perform a confirmation of accounts payables for a sample.
 Perform analytical procedures comparing current year balances
with the previous year to confirm reasonableness, and also
calculating payables' turnover and comparing with the previous
year.
 Vouch a sample of balances to supporting documentation, such as

Rights and
purchase orders and suppliers' invoices, to obtain audit evidence
obligations regarding rights and obligations.
AUDIT PROCEDURES
 Trace selected samples from the trade accounts payables listing
and accruals listing to the supporting documentation (purchase
orders, minutes authorizing expenditure, suppliers' invoices etc).
relevant suppliers' accounts.
 For a sample of accruals, recalculate the amount of the accrual to
ensure the amount accrued is correct.
 Compare the current year balances for trade accounts payables
Accuracy, and accruals with the previous year.
valuation and  Compare the amounts owed to a sample of individual suppliers in
allocation the trade accounts payables listing with amounts owed to these
suppliers in the previous year.
 Compare the payables turnover and payables payment period with
the previous year and industry data, and investigate any significant
differences.
 Recalculate the mathematical accuracy of a sample of suppliers'
invoices to confirm the amounts are correct.
 Recast calculation of remuneration.
 Recast calculation of other deductions.
10
5
AUDIT PROCEDURES
 Reperform calculation of statutory deductions to confirm whether
correct.
 Confirm validity of other deductions by agreeing to supporting
documentation.
 For a sample of vouchers, compare the dates with the dates they
were recorded in the ledger for application of correct cut-off.
 Test transactions around the year end to determine whether
Cut-off amounts have been recognized in the correct financial period.
 Perform analytical procedures on purchase returns, comparing
the purchase returns as a percentage of sales or cost of sales to
the previous year
 For a sample of vouchers, inspect supporting documentation, such
as authorised purchase orders.
 Agree individual remuneration per payroll to personnel records,
records of hours worked, salary agreements etc.
Occurrence
 Confirm existence of employees on payroll by meeting them,
attending wages payout, inspecting personnel and tax records,
and confirmation from managers.
 Agree benefits on payroll to supporting correspondence. 11
AUDIT PROCEDURES
 Review the trade accounts payables listing to identify any large
debits (which should be reclassified as receivables or deposits) or
Classification long-term liabilities which should be disclosed separately.
 Read the disclosure notes relevant to liabilities in the draft
financial statements and review for understandability.
 Read the disclosure notes to ensure the information is accurate

Presentation
and properly presented at the appropriate amounts. .
12
6
AUDIT PROCEDURES FOR AP
Confirmation of trade payable
where an entity’s internal controls are weak
to ensure that all liabilities are recorded, the confirmation will focus on
large balances.
Where the auditor is concerned about the presence of unrecorded

liabilities, regular suppliers with small or zero balances on their accounts
and a sample of other accounts will be confirmed as well as large balances
Auditors use a positive confirmation referred to as a blank or zero-balance

confirmation. This confirmation does not state the balance owed but
requires the supplier to declare the amount owed at the year-end and to
provide a detailed statement of the account. When the confirmation is
received back, the amount must be reconciled with the entity’s records.
13

Supplier statement reconciliations
For those suppliers’ balances selected for testing:
obtain supplier statements at the balance sheet date
compare with balance according to the client’s records
seek explanation for differences from client staff.
14
7
Reason for differences
Timing differences:
 Invoices not yet received by the client;
 Payments not yet received by the supplier;
 Returns and credit notes not yet appearing on the supplier’s statement.
Errors
 Supplier errors that will remain as part of the reconciliation until the
supplier corrects them;
 Client errors, which the client needs to adjust.
Administrative reasons: not yet processed/ on the table/ in the drawer
15

Suggested layout for a supplier’s
statement reconciliation
Supplier’s statement reconciliation Year end date
Supplier Limited
$ $
Balance per supplier statement xxxx
Less:
Returns/credit notes not yet credited xx
Payments not yet received by supplier xx
(xx)
xxx
Balance per purchase ledger xxx These
Invoices not yet posted xxx figures
Good received not invoiced xxx should be
the same
Reconciled balance xxx
16
8
OVERVIEW
PAYABLES


electricity accruals…) liabilities (sued…)

17
NON- CURRENT LIABILITY

KEY ASSERSION
Completeness: whether all non-current liabilities have been disclosed
Accuracy: whether interest payable has been calculated correctly and

included in the correct accounting period
Classification and understandability: whether long-term loans and

interest have been correctly disclosed in the financial statements
18
9
NON- CURRENT LIABILITY
AUDIT PROCEDURE
 Obtain/prepare schedule of loans outstanding at the year-end date showing,
for each loan: name of lender, date of loan, maturity date, interest date,
interest rate, balance at the end of the period and security.
 Compare opening balances to previous year's papers.
 Test the clerical accuracy of the analysis.
 Compare balances to the general ledger.
 Agree name of lender etc., to register of debenture holders or equivalent (if
kept).
 Trace additions and repayments to entries in the cash book.
 Confirm repayments are in accordance with loan agreement.
 Examine cancelled cheques and memoranda of satisfaction for loans repaid.
19
AUDIT PROCEDURES
Audit plan: Non-current liabilities
 Obtain/prepare schedule of loans outstanding at the year-end date showing, for each
loan: name of lender, date of loan, maturity date, interest date, interest rate, balance
at the end of the period and security.
 Compare opening balances to previous year's papers.
 Test the clerical accuracy of the analysis.
 Compare balances to the general ledger.
 Agree name of lender to register of debenture holders or equivalent (if kept).
 Trace additions and repayments to entries in the cash book.
 Confirm repayments are in accordance with loan agreement.
 Examine cancelled cheques and memoranda of satisfaction for loans repaid.
 Verify that borrowing limits imposed by agreements are not exceeded.
 Examine signed board minutes relating to new borrowings/repayments.
 Obtain direct confirmation from lenders of the amounts outstanding, accrued
interest and what security they hold.
20
10
AUDIT PROCEDURES
Audit plan: Non-current liabilities
 Verify that interest charged for the period is in accordance with statements and
supporting agreements, and consistent with known interest rates. Consider the
adequacy of accrued interest.
 Confirm assets charged have been entered in the register of charges and notified to
the Registrar.
 Review restrictive covenants and provisions relating to default:
– Review any correspondence relating to the loan
– Review confirmation replies for non-compliance
– If a default appears to exist, determine its effect, and schedule findings
 Review minutes and cash book to confirm that all loans have been recorded.
 Review draft accounts to ensure that disclosures for non-current liabilities are correct
and in accordance with accounting standards. Any elements repayable within one
year should be classified under current liabilities.
21
OVERVIEW
PAYABLES


electricity accurals…) liabilities (sued…)

22
11
PROVISIONS AND CONTINGENCIES
AUDIT PROCEDURE
 Make appropriate inquiries of management and others including in-house
legal advisers.
 Review minutes of meetings of those charged with governance and
correspondence between the entity and its external legal advisers.
 Review legal expense accounts.
 Use any information obtained regarding the entity's business including
information obtained from discussions with any in-house legal department.
23

Audit plan: Provisions/contingencies
 Obtain details of all provisions which have been included in the accounts and all
contingencies that have been disclosed.
 Obtain a detailed analysis of all provisions showing opening balances, movements
and closing balances.
 Determine for each material provision whether the company has a present obligation
as a result of past events by:
– Review of correspondence relating to the item
– Discussion with the directors. Have they created a valid expectation in other parties
that they will discharge the obligation?
 Determine for each material provision whether it is probable that a transfer of
economic benefits will be required to settle the obligation by:
– Checking whether any payments have been made in the post year end period in
respect of the item by reviewing after-date cash
– Review of correspondence with solicitors, banks, customers, insurance company
and suppliers both pre and post year end;
– Sending a letter to the solicitor to obtain their views (where relevant)
– Discussing the position of similar past provisions with the directors. Were these
provisions eventually settled
– Considering the likelihood of reimbursement 24
12
Audit plan: Provisions/contingencies
 Recalculate all provisions made.
 Compare the amount provided with any post year end payments and with any
amount paid in the past for similar items.
 In the event that it is not possible to estimate the amount of the provision, check that
a contingent liability is disclosed in the accounts.
 Consider the nature of the client's business. Would you expect to see any other
provisions eg warranties?
 Consider the adequacy of disclosure of provisions, contingent assets and contingent
liabilities in accordance with IAS 37.
EXAM FOCUS:
The audit of provisions is notoriously complex because of the degree of judgement used
and the availability of sufficient appropriate audit evidence. This is likely to be tested in a
mini scenario type question so you must be able to apply your knowledge to the
circumstances in the question.
25
CAPITAL AND OTHER ISSUES

Audit plan: Capital and related issues
 Agree the authorized share capital with the statutory documents
Share equity governing the company's constitution.
capital  Agree changes to authorized share capital with properly
authorized resolutions
 Verify any issue of share capital or other changes during the year
with general and board minutes.
 Ensure issue or change is within the terms of the constitution,
Issue of shares
and directors possess appropriate authority to issue shares.
 Confirm that cash or other consideration has been received or
receivable(s) is included as called-up share capital not paid.
 Verify transfers of shares by reference to:
– Correspondence
– Completed and stamped transfer forms
Transfer of – Cancelled share certificates
shares – Minutes of directors' meeting
 Review the balances on shareholders' accounts in the register of
members and the total list with the amount of issued share capital
in the general ledger.
26
13
CAPITAL AND OTHER ISSUES
Audit plan: Capital and related issues
 Agree dividends paid and declared pre year end to authority in
minute books and reperform calculation with total share capital
issued to ascertain whether there are any outstanding or
unclaimed dividends.
Dividends
 Agree dividend payments to documentary evidence (say, the
returned dividend warrants).
 Test that dividends do not contravene distribution provisions by
reviewing the legislation.
 Agree movements on reserves to supporting authority.
 Ensure that movements on reserves do not contravene the
legislation and the company's constitution by reviewing the
legislation.
Reserves  Confirm that the company can distinguish distributable reserves
from those that are non-distributable.
 Ensure that appropriate disclosures of movements on reserves
are made in the company's accounts by inspection of the financial
statements.
27
Directors' emoluments
(Remuneration)
Audit plan: Directors’ emoluments
 Agree salaries, fees, bonuses and pension contributions to payroll
records for the individual directors and check the amounts paid on
the bank statements agree with the payroll records.
 Review the directors' contracts and ensure emoluments are
consistent with the terms of these contracts.
 Review board meeting minutes and meetings of any
remuneration committee for evidence of any bonuses, fees or
other emoluments not disclosed.
 Review the cash book for any unusual transactions which suggest
Procedures
undisclosed directors' emoluments.
 Obtain and review returns to tax authorities made by the
company on behalf of the directors which detail non-cash
benefits. Ensure these are consistent with the benefits disclosed in
the financial statements.
 Consider the adequacy of disclosure of directors' emoluments in
accordance with applicable accounting standards and local
legislation, including the separate disclosure of amounts due to or
from directors in respect of directors' emoluments.
28
14
PRACTICE QUESTION – Q6B – JUNE.2015
Supplier statement reconciliations

Hawthorn receives monthly statements from its main suppliers and
although these have been retained, none have been reconciled to the
payables ledger as at 31 March 2015. The engagement partner has
asked the audit senior to recommend the procedures to be
performed on supplier statements. (3 marks)
Required:
Describe substantive procedures you would perform to obtain
sufficient and appropriate audit evidence in relation to the above
matters.
29
PRACTICE QUESTION – Q6B – JUNE.2015
PRACTISE QUESTION – 6/2016 – QUESTION 4

Kyanite Pizzas Co (Kyanite) operates a large chain of fast food restaurants.
You are an audit supervisor of Jasper & Co and are currently preparing the
audit programs for the audit of Kyanite’s financial statements for the year
ended 31 March 2016. You are reviewing the notes of last week’s meeting
between the audit manager and finance director where two material issues
were discussed.
Equity
The refurbishment was financed via a share issue in April 2015 at a premium
of $1·6 million. (4 marks)
Required:
Describe substantive procedures you should perform to obtain sufficient
and appropriate audit evidence in relation to the above two matters.
30
15
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 16
NON- PROFIT
ORGANIZATION
1
OBJECTIVES
Objectives
A hospital could operate at a profit by not spending all the money it receives in its
budget. However, the key objective of a hospital is to provide health services to
the public, not to make a profit. As its income is fixed, it is more likely to focus on
cost saving so that it can operate within its budget.
OBJECTIVES
Exam Focus Point
Many organizations which are focused on service use VFM indicators that can be
used to assess the entity's performance against objectives. Where the
organization has public accountability (for example, they are funded by taxpayers)
performance measures are often required to be reported to the public to
demonstrate that funds have been used in the most cost-effective manner. In
written scenario-based questions, it is vital that you spot clues given in the
scenario indicating what is important to the organization. Particularly on the 20-
mark questions, you need to be able to link different areas of the syllabus, for
instance applying your knowledge of VFM and internal control in the context of a
not-for-profit entity funded by taxpayers.
2
REPORT
No Fixed Templates Typical reports
A statement of financial activities that shows

all resources made available to the charity and
all expenditure incurred
A statement of comprehensive income
A balance sheet (the equivalent of a

statement of financial position) that shows the
assets, liabilities and funds of the charity)
A cash flow statement
Notes
REPORT
Audit Not required by law/ not statutory
Still Audit  For Interested Users i.e. Donator…
3
AUDIT RISK
Issue Key factors
 The complexity and extent of regulation (particularly in relation
to public sector not for-profit organizations)
 The significance of donations and cash receipts
 Difficulties of the organization in establishing ownership and
timing of voluntary income where funds are raised by non-
controlled bodies
 Lack of predictable income or precisely identifiable relationship
between expenditure and income
 Uncertainty of future income
Inherent risk For charities in particular:
 Restrictions imposed by the objectives and powers given by
charities' governing documents
 The importance of restricted funds
 The extent and nature of trading activities must be compatible
with the entity's charitable status
 The complexity of tax rules (whether income, capital, sales or
local rates) relating to charities
 The sensitivity of certain key statistics, such as the proportion of
resources used in administration.
7
AUDIT RISK
Issue Key factors
 The amount of time committed by directors/trustees to the
organization's affairs
 The skills and qualifications of individual directors/trustees
 The frequency and regularity of board/trustee meetings
 The form and content of board/trustee meetings
Control risk
 The independence of trustees from each other
 The division of duties between management/trustees
 The degree of involvement in, or supervision of, the
organization's transactions on the part of individual
directors/trustees
4
AUDIT RISK
Issue Key factors
 A recognized plan of the organization's structure clearly showing
the areas of responsibility and lines of authority and reporting
 Segregation of duties
 Supervision by management/trustees of the activities of staff
where segregation of duties is not practical
 Competence, training and qualification of paid staff and any
volunteers appropriate to the tasks they have to perform
Control  Involvement of the board/trustees in the recruitment,
environment appointment and supervision of senior executives
 Access of trustees to independent professional advice where
necessary
 Budgetary controls in the form of estimates of income and
expenditure for each financial year and comparison of actual
results with the estimates on a regular basis
 Communication of results of such reviews to the board/trustees
on a regular basis
INTERNAL CONTROLS
Cash donations
Source Examples of controls
 Numerical control over boxes and tins
 Satisfactory sealing of boxes and tins so that any opening prior
Collecting to recording cash is apparent
boxes and tins  Regular collection and recording of proceeds from collecting
boxes
 Dual control over counting and recording of proceeds
 Unopened mail kept securely
 Dual control over mail opening
Postal receipts  Immediate recording of donations on opening of mail or receipt
 Agreement of bank paying-in slips to record of receipts by an
independent person
 Regular checks and follow-up procedures to ensure due
Deeds of
amounts are received
covenant  Regular checks to ensure all tax repayments have been obtained
10
5
INTERNAL CONTROLS
Cash donations
Donations in  In case of charity shops, separation of recording, storage and
kind sale of inventory
 Comprehensive correspondence files maintained in respect of
each legacy
Legacies
 Regular reports and follow-up procedures undertaken in respect
of outstanding legacies
11
INTERNAL CONTROLS
Other income
 Records maintained for each fundraising event
Fundraising  Other appropriate controls maintained over receipts
activities  Controls maintained over expenses as for administrative
expenses
Central and  Comprehensive correspondence files maintained in respect of
local each legacy
Government  Regular reports and follow-up procedures undertaken in respect
grants and of outstanding legacies
loans
12
6
INTERNAL CONTROLS
Use of resources
 Separate records maintained of relevant income, expenditure
and assets
Restricted
 Terms controlling application of funds
funds  Oversight of application of fund monies by independent
personnel or trustees
 Records maintained, as appropriate, of requests for material
grants received and their treatment
 Appropriate checks made on applications and applicants for
grants, and that amounts paid are in accordance with legislation
Grants to  Records maintained of all grant decisions, checking that proper
beneficiaries authority exists, that adequate documentation is presented to
decision-making meetings, and that any conflicts of interest are
recorded
 Controls to ensure grants made are properly spent by the
recipient for the specified purpose
13
AUDIT PROCEDURES
KEY RISKS
Understatement or incompleteness of the recording of all income

including gifts in kind, cash donations, and legacies
Overstatement of cash grants or expenses

Misanalysis or misuse in the application of funds
Misstatement or omission of assets including donated properties and

investments
The existence of restricted or uncontrollable funds in foreign or

independent branches
14
7
AUDIT PROCEDURES
Completeness of income can be a particularly problematic area. Areas auditors

may check include:
 Loss of income through fraud

 Recognition of income from professional fund raisers
 Recognition of income from branches, associates or subsidiaries
 Income from informal fundraising groups
 Income from grants
15
ROUND UP
 There are various types of organizations such as charities which do not exist for
the purpose of maximizing shareholder wealth but which may still require an
audit.
 The audit risks associated with not-for-profit organizations may well be
different from other entities.
 Cash may be significant in not-for-profit organizations and controls may be
limited. Income may well be a risk area, particularly where money is donated or
raised informally.
 Obtaining audit evidence may be a problem, particularly where organizations
have informal arrangements and this may impact on the auditor's report.
 The nature of the report will depend on statutory and entity requirements, but
it should conform to the criteria in ISA 700 Forming an Opinion and Reporting
on Financial Statements.
16
8
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 17
AUDIT REVIEW AND
FINALISATION
1
OVERVIEW
Completation and
review
Specific
Overall review
procedure
Subsequent
events
Going concern
Management
representation
3
OVERVIEW
Completation and
review
Specific
Overall review
procedure
Subsequent
events
Going concern
Management
representation
4
2
SUBSEQUENT EVENT
Accounting IAS 10 – Events after Reporting date
Auditing ISA 560 – Subsequent Events
Audit field work
Balance F/S authorized Auditor’s report F/S issued

sheet date for issue issued
Consider all material events Ask for Amended F/S Ask for New F/S & A.R
Ask for Amended F/S If not Modify A.R (+ EoM para)
If not Modify A.R
(if not released) If not Resign/legal
Resign/legal advice advice
(if released)
SUBSEQUENT EVENT
Recall Accounting Knowledge (IAS 10)
If a material subsequent event has happened then there are two possible outcomes
Adjusting Non Adjusting

Events that provide additional evidence Events that provide additional evidence
relating to the conditions existing at the relating to the conditions which arise
time of the balance sheet date after the balance sheet date
Eg. Bad debt Eg. Floods
Inventory sold lower than cost If the incident is so major we have a going
Legal costs relating to an incident that concern issue then it will most likely
happened before the year end become an adjusting event
3
SUBSEQUENT EVENT
Subsequent event audit procedures
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'
SUBSEQUENT EVENT
Auditor have a responsibility to review subsiquents events before they sign the
auditor’s report, and may be have to take action if they become aware of
subsequent event between the date they sign the auditor’s report and the date the
financial statement are issued
The following timeline is helpful when considering subsequent events and the
auditor’s responsibilities concerning them:
Activity duty Passive duty
Financial
Year end Auditor’s Financial
Statement
report signed Statement
approved by
issued
members
4
SUBSEQUENT EVENT
Subsequent event audit procedures
 Enquiring into management procedures/systems for the identification of

subsequent events.
 Reading minutes of members’ and directors’ meetings and of audit and executive
committee meetings.
 Reviewing accounting records including budgets, forecasts and interim
information.
 Making enquiries of directors to ask if they are aware of any subsequent events,
adjusting or non-adjusting, that have not yet been included or disclosed in the
 ‘Normal’ post balance sheet work performed in order to verify yearend balances:
 checking after date receipts from receivables
 verifying the value of accrued expenses by checking invoices when received
 checking inventory valuations are at lower cost and net realisable value by
testing to eventual selling prices.
 Obtaining, from management, a letter of representation.
SUBSEQUENT EVENT
Prior to the audit report being signed
Audit procedure Examples: enquiries of management

 What is the status of items involving
Enquires of management subjective data included in the FS?
 Are there any new commitments
Reading minutes of meetings of
(borrowing/ guarantees) in the new
those charged with governance
year?
Reviewing most recent financial  Have there been any issues of capital?
information  Have there been any major of events?
 Are there any unusual accounting
treatment adjustments?
 After the audit report has been signed
 The auditors do not have any obligation to perform procedures, or

make enquiries after the date of their report.
10
5
SUBSEQUENT EVENT
Before issued for members
If directors issue different financial statements due to the effect of

subsequent events the auditors should:
• Carry out relevant audit procedures so as to issue an opinion
• Issue new audit report in place of the old one
11
SUBSEQUENT EVENT
After issue
If directors different financial statements due to the effect of subsequent

events, the auditors should:
• Carry out relevant audit procedures so as to issue an opinion
• Review steps taken by management to inform those already in receipt of
the original FS
• Issue a new audit report
If the directors do not issue a new report in either situation and the auditors
feel they should, the auditors should take action to prevent people form
relying on their report.
12
6
SUBSEQUENT EVENT
Example
A few days after signing an audit report, but before the client’s financial statements
have been approved by the shareholders at the AGM, the auditors receive a phone call
from a director indicating a material error in the financial statements.
In such circumstances, a number of things may happen.
Client produces a revised set of financial Client refuses to change the financial
statements. statements.
Where this happens, the auditor needs to Now the financial statements are
produce a new audit report, as the audit materially wrong, but the initial audit
report must always be dated on or after report said they were true and fair. The
the date that the financial statements are auditor should ask for the audit report
signed by the directors. The auditor will back, so that a new qualified report can be
therefore need to extend ‘active duties’ on issued. However, the client may refuse this
all other matters from the original date of as well.
the audit report to the new date. In such circumstances, the auditor should
obtain legal advice, consider resignation,
and speak at the AGM to notify
shareholders.
13
OVERVIEW
Completation and
review
Specific
Overall review
procedure
Subsequent
events
Going concern
Management
representation
14
7
GOING CONCERN
Recall Accounting Knowledge
<Going Concern Assumption>
Going concern assumption: an entity is ordinarily viewed as continuing in business

for the foreseeable future with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection from its creditors.
 Prepare the financial statements on the going concern basis if business is
expected to continue for the foreseeable future.
 Otherwise use the break-up basis.
 Audit questions may test going concern at any stage of the audit.
Going Concern Break-up
15
GOING CONCERN
Risk of going concern
In a company where profits are high, cash flows are positive, finance is in place,
and there is no obvious exposure to large losses, going concern procedures are
likely to be minimal.
Where any doubts regarding going concern exist, procedures are more
extensive
When companies go out of business, it is more likely to be due to a lack of cash

than a lack of profits. However, in the long term, profits are of course essential
for survival.
The auditor should remain alert for evidence of events or conditions which may
cast significant doubt on the entity’s ability to continue as a going concern, both
in the planning stage and throughout the audit.
16
8
GOING CONCERN
Risk of going concern
Financial
 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
Operating
 Loss of key management/ markets/ franchise
 Labor difficulties supply shortage
Other
 Major legal proceedings/non-compliance
17
GOING CONCERN
Responsibilities
Director's responsibilities in respect of going concern
• It is the directors’ responsibility to assess the company’s ability to continue as a
going concern when they are preparing the financial statements. [ISA 570, 4]
• In order to do this the directors should prepare forecasts to help assess whether
they are likely to be able to continue trading for the next 12 months as a
minimum.
• If they are aware of any material uncertainties which may affect this assessment,
the directors should disclose these in the financial statements.
• When the directors are performing their assessment they should take into
account a number of relevant factors such as:
– Current and expected profitability
– Debt repayment
– Sources (and potential sources) of financing
18
9
GOING CONCERN
Responsibilities
Auditor's responsibilities in respect of going concern
ISA 570 Going Concern [para 9] states that the auditor shall:
• Obtain sufficient appropriate evidence regarding the appropriateness of
management's use of the going concern basis of accounting in the preparation of
• Conclude on whether a material uncertainty exists about the entity's ability
to continue as a going concern.
• Report in accordance with ISA 570
19
GOING CONCERN
Evaluation
Process used by directors
Assumptions used
Plans for future action
20
10
GOING CONCERN
Audit Procedures
Review management’s plans for future actions based on its going concern basis
Seek written representation from management regarding its plans for future
action
Obtain information from company bankers regarding continuance of loan
facilities
Review receivables ageing analysis to determine whether there is an increase in
days – which may also indicate cash flow problems. Review future orders
coming in
Look at cash flow forecasts for the twelve months to identify if they have
enough cash to trade
Review long term contracts for loss of business when the contracts come up for
tender
21
GOING CONCERN
Audit Procedures
Look at articles on and negative press, which would have an impact on the
goodwill of the company and therefore potentially create a going concern issue.
Review legislation that the company has to comply with and ensure they are
complying
Discuss with the lawyers the possible outcome and expected costs
22
11
GOING CONCERN
Audit Procedures
Reporting questions Affect Audit Opinion
What have directors done? What do auditors think? Audit opinion

Used going concern basis Disagree Adverse opinion
Used break up basis Agree Unqualified opinion with
emphasis of matter
Used going concern basis Going concern status If adequately disclosed:
uncertain (significant  Unqualified opinion
uncertainty)
 With emphasis of matter
If not adequately disclosed
 Material disagreement 
Except for opinion
23
OVERVIEW
Completation and
review
Specific
Overall review
procedure
Subsequent
events
Going concern
Management
representation
24
12
MANAGEMENT PRESENTATION
Definition
A written representation is: A written statement by management provided to

the auditor to confirm certain matters or to support other audit evidence.
[ISA 580 Written Representations, 7].
25
Purpose
Compulsory.
Reduce expectations gap
Source of audit evidence especially where knowledge is confined to

management, but should not rely on management representations alone
Acknowledge the directors collective responsibility of the preparation of

Additional evidence would be required to ensure the auditor is happy with

opinion
We would only highlight material matters
Need to think about the quality and reliability (as it’s internally generated)
26
13
Form of written confirmation
 Representation letter from management

 Letter form the auditors acknowledged in writing by the directors
 Minutes of meeting where such a letter was approved
27
Reliability of written representations
The auditor must consider the reliability of written representations in terms of:
• Inconsistencies with other forms of evidence.
• Concerns about the competence, integrity, ethical values or diligence of
management.
Steps if written representations are inconsistent with other evidence

• Consider the reliability of representations in general.
• Reconsider the initial risk assessment.
• Consider the need to perform further audit procedures.
28
14
Steps if management refuse to provide written
representations
Discuss the matter with management to understand why they are refusing.
• Re-evaluate the integrity of management and consider the effect that this
may have on the reliability of other representations (oral or written) and
audit evidence in general.
• Consider the implication for the auditor's report
Audit reporting implications.

The auditor should issue a disclaimer of opinion if:
• The auditor concludes there is sufficient doubt about the integrity of
management which means the written representations are not reliable, or
• Management does not provide the written representations required in relation
to confirming their responsibility to prepare the financial statements and to
provide the auditor with information, and confirming completeness of
transactions.
29
Basic elements of a management representation letter
The letter should be: addressed to the auditors, contain specified information,
appropriately dated, approved by those who have the specific knowledge. Auditors
will normally request that the letter is signed by senior executive officer/senior
financial officer.
If management refuse to sign the management representation letter, the auditor
should consider whether they should rely on other (less significant) representations
made during the audit.
Other information
 Directors’ report
 Chairman’s statement
 Operating and financial review
 Financial summaries
30
15
OVERVIEW
Completation and
review
Specific
Overall review
procedure
Subsequent
events
Going concern
Management
representation
31
OVERALL REVIEW OF EVIDENCE

Do the financial statements comply with the relevant
reporting framework?
Law
Applicable accounting standards
GAAP
Other regulations (e.g. Stock Exchange listing requirements).
Does other information published with the financial statements (e.g. Directors’
report, Chairman’s review) conflict with them in any way?
32
16
Does the evidence gathered in the course of the audit
support the audit opinion?
Was the audit plan followed?
Has sufficient, appropriate audit evidence been gathered?
What issues arose? What errors were found?
Was the plan suitably modified to allow for changing circumstances?
Have necessary consultations taken place both within the firm and with
outside experts?
Has the file been adequately reviewed at lower levels within the firm (e.g. by
the senior and the manager)?
Have the necessary checklists been completed?
33

Have the necessary completion procedures been
carried out?
Final analytical review.
Consideration of the firm’s continued independence
Second partner review (if appropriate).
Subsequent events review.
Going concern review.
Management representations obtained.
34
17
REVIEW FOR CONSISTENCY AND
REASONABLENESS
The auditors should consider whether the financial statements are

consistent with their knowledge of the entity's business and with the
results of other audit procedures, and the manner of disclosure is fair.
This can be done by applying analytical procedures at or near the end of
the audit in accordance with ISA 520 Analytical procedures which states
that the auditor shall design and perform analytical procedures near the
end of the audit that assist in forming an overall conclusion as to whether
the financial statements are consistent with the auditor’s understanding
of the entity.
35
REVIEW FOR CONSISTENCY AND

REASONABLENESS
The principal consideration
Whether the financial statements adequately reflect the information and
explanations previously obtained and conclusions previously reached during the
course of the audit
Whether it reveals any new factors which may affect the presentation of, or
disclosure in, the financial statements
Whether analytical procedures applied when completing the audit, such as
comparing the information in the financial statements with other pertinent
data, produce results which assist in arriving at the overall conclusion as to
whether the financial statements as a whole are consistent with their knowledge
of the entity's business
Whether the presentation adopted in the financial statements may have been
unduly influenced by the directors' desire to present matters in a favorable or
unfavorable light
The potential impact on the financial statements of the aggregate of
uncorrected misstatements (including those arising from bias in making
accounting estimates) identified during the course of the audit and the
preceding period's audit, if any
36
18
TREATMENT OF MISSTATEMENT
During the audit requires the auditor to accumulate misstatements identified

during the audit, other than those that are clearly trivial.
A misstatement is a 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. It can
arise from error or fraud.
An uncorrected misstatement is a misstatement accumulated during the audit
by the auditor which has not been corrected
37
Type of mistatements
 Factual misstatements: misstatements about which there is no doubt
 Judgmental misstatements: misstatements arising from management’s
judgement concerning accounting estimates or accounting policies
 Projected misstatements: the auditor’s best estimate of misstatements arising
from sampling populations
38
19
Auditors shall consider whether the aggregate of uncorrected misstatements in
the financial statements is material, having first reassessed materiality in
accordance with ISA 320 Materiality in planning and performing an audit to
confirm that it is still appropriate.
When determining whether uncorrected misstatements are material (individually
or in aggregate), the auditor shall consider the size and nature of the
misstatements and the effect of uncorrected misstatements related to prior
periods on the financial statements as a whole.
39
Communication of uncorrected misstatements
Auditor have to communicate uncorrected misstatements and their effect to

those charged with governance, with material uncorrected misstatements being
identified individually. The auditor shall request uncorrected misstatements to be
corrected.
The auditor shall also communicate the effect of uncorrected misstatements
relating to prior periods.
The auditor shall request a written representation from management and those
charged with governance whether they believe the effects of uncorrected
misstatements are immaterial (individually and in aggregate) to the financial
statements as a whole.
A summary of these items shall be included in or attached to the representation.
40
20
Documentation
ISA 450 requires the auditor to document the following information:

 The amount below which misstatements would be regarded as clearly trivial
 All misstatements accumulated during the audit and whether they have been
corrected
 The auditor’s conclusion as to whether uncorrected misstatements are
material and the basis for that conclusion
41
OVERALL REVIEW – QUALITY CONTROL

Exam focus
Three pillars included:

 Planning
 Supervision
 Review
 Review is one of the three pillars of quality control, the other two being
planning and supervision.
42
21
OVERALL REVIEW – QUALITY CONTROL
What to do?
The work has been performed in accordance with professional standards and
regulatory and legal requirements
Significant matters have been raised for further consideration
Appropriate consultations have taken place and the resulting conclusions have
been documented and implemented
There is a need to revise the nature, timing and extent of the work performed
The work performed supports the conclusions reached and is appropriately
documented
The evidence obtained is sufficient and appropriate to support the auditor’s
report
The objectives of the engagement procedures have been achieved.
43
ROUND UP
44
22
PRACTICE – Q3. JUNE.2016
Grains 4U Co (Grains) manufactures breakfast cereals and has three factories, four warehouses and three distribution depots
spread across North America. The audit for the year ended 31 December 2015 is almost complete and the financial statements
and audit report are due to be signed shortly. Profit before taxation is $7·9 million. The following events have occurred
subsequent to the year end and no amendments or disclosures have been made in the financial statements.
Event 1 – Fire
On 15 February 2016, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 40% of the
company’s vehicles used for dispatching goods to customers; however, there have been no significant delays to customer
deliveries. The company estimates the level of damage to the vehicles to be in excess of $650,000. Only a minimal level of
inventory, approximately $25,000, was damaged. Grain’s insurance company has started to investigate the fire to assess the
likelihood and level of payment, however, there are concerns the fire was started deliberately, and if true, would invalidate any
insurance cover.
Event 2 – Inventory
On 18 February 2016, it was discovered that a large batch of Grain’s new cereal brand ‘Loopy Green Loops’ held in inventory at
the year end was defective, as the cereal contained too much green food colorings. To date no sales of this new cereal have been
made. The cost of the defective batch of inventory is $915,000 and the defects cannot be corrected. However, the scrapped cereal
can be utilised as a raw material for an alternative cereal brand at a value of $50,000.
Required: For each of the two subsequent events described above:
(i) Based on the information provided, explain whether the financial statements require amendment; and
(ii) Describe audit procedures which should now be performed in order to form a conclusion on any required
amendment.
45
23
ACCA
AUDIT AND ASSURANCE
Mr. Giang Ha ACCA
www.bisc.edu.vn
085 8822 168

Chapter 18
AUDIT REPORT
1
OVERVIEW
Types of Audit Report
Unmodified Audit Report Modified Audit Report
Unqualified Qualified
opinion with audit
Adverse Disclaimer
Emphasis opinion
matter Except for …
OVERVIEW
Key Elements of Audit Report
 Title  Auditor’s opinion

 Addressee  Other matters
 Introductory paragraph  Other reporting responsibilities
 Management’s responsibility  Date of the auditor’s report
for the financial statements  Auditor’s address
 Auditor’s responsibility
2
TYPE OF AUDIT REPORT
Unmodified Audit Report
Unmodified report that in the auditor’s opinion, the Financial Statement:

Do give a true and fair view (or present fairly in all material respects)
Do comply with the applicable reporting framework

Do not give the auditor any need to report other matters under the
expectation reporting rules
 Referred to as a 'clean' audit report

Modified Audit Report
Matters that do not affect the auditor’s opinion

 emphasis of matter
Matters that do affect the auditor’s opinion

 qualified opinion
 disclaimer of opinion
 adverse opinion
How to determine the Audit Opinion?
3
When Matters that do affect the auditor’s opinion
Material but NOT

Impact of Matters Pervasive
pervasive
Inability to obtain Disclaimer of opinion

sufficient and Qualified opinion (auditors state they are
appropriate audit Except for unable to form an opinion
evidence on truth and fairness)
Adverse opinion (auditors

Financial statements Qualified opinion state that the accounts do
are materially
Except for not give a true and fair
misstated
view)

MATERIALITY Value % (Reference)
Profit before tax 5 – 10%
Revenue ½ - 1%
Total assets 1 – 2%
PERVASIVE (3 TYPES)
 Pervasiveness is a term used to describe the effects or possible effects on
the financial statements of misstatements or undetected misstatements.
 There are three types of pervasive effects:
 Those that are not confined to specific elements, accounts or items in the
 Those that are confined to specific elements, accounts or items in the financial
statements and represent or could represent at substantial portion of the
 Those that relate to disclosure which are fundamental to users’ understanding
of the financial statements
4
MATTERS THAT DO AFFECT THE OPINION
Qualified opinions
(1) The auditor concludes that MISSTATEMENTS are material, but not pervasive, to
Material misstatements could arise in respect of:
 The appropriateness of selected accounting policies
 The application of selected accounting policies
 The appropriateness or adequacy of disclosures in the financial statements
(2) The auditor cannot obtain SUFFICIENT APPROPRIATE AUDIT EVIDENCE on which
to base the opinion but concludes that the possible effects of undetected
misstatements, if any, could be material but not pervasive.
The auditor’s inability to obtain sufficient appropriate audit evidence is also referred
to as a limitation on the scope of the audit and could arise from:
 Circumstances beyond the entity’s control (e.g. accounting records destroyed)
 Circumstances relating to the nature or timing of the auditor’s work (e.g. the
timing of the auditor’s appointment prevents the observation of the physical
inventory count)
 Limitations imposed by management (e.g. management prevents the auditor
from requesting external confirmation of specific account balances)

Adverse opinions
An adverse opinion is expressed when the auditor, having obtained sufficient

appropriate audit evidence, concludes that misstatements are both material
and pervasive to the financial statements.
For example, an adverse opinion might be issued if there is a material

uncertainty in respect of going concern which has not be adequately disclosed
or use of the going concern assumption is inappropriate
5
Disclaimers of opinion
An opinion must be disclaimed when the auditor cannot obtain sufficient

appropriate audit evidence on which to base the opinion and concludes that
the possible effects on the financial statements of undetected misstatements, if
any, could be both material and pervasive.
An example of when a disclaimer of opinion is used could be in relation to

going concern if management is unwilling to make or extend its assessment.
IMPACT ON THE AUDITOR’S REPORT

Example 1: Qualified opinion due to material misstatement of inventories
Basis for qualified opinion

The company’s inventories are carried in the balance sheet at xxx. Management has
not stated inventories at the lower of cost and net realisable value but has stated
them solely at cost, which constitutes a departure from International Financial
Reporting Standards. The company’s records indicate that had management stated
the inventories at the lower of cost and net realisable value, an amount of xxx would
have been required to write the inventories down to their net realisable value.
Accordingly, cost of sales would have been increased by xxx, and income tax, net
income and shareholders’ equity would have been reduced by xxx, xxx and xxx,
respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified
Opinion paragraph, the financial statements present fairly, in all material respects, (or
give a true and fair view of) the financial position of ABC Company as at December
31, 20X1, and (of) its financial performance and its cash flows for the year then ended
in accordance with International Financial Reporting Standards.
6
Example 2: Adverse opinion due to material misstatement because of non-
consolidation of a subsidiary
Basis for adverse opinion
As explained in Note X, the company has not consolidated the financial statements of
subsidiary XYZ Company it acquired during 20X1 because it has not yet been able to
ascertain the fair values of certain of the subsidiary’s material assets and liabilities at
the acquisition date. This investment is therefore accounted for on a cost basis. Under
International Financial Reporting Standards, the subsidiary should have been
consolidated because it is controlled by the company. Had XYZ been consolidated,
many elements in the accompanying financial statements would have been materially
affected. The effects on the consolidated financial statements of the failure to
consolidate have not been determined.
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for
Adverse Opinion paragraph, the consolidated financial statements do not present
fairly (or do not give a true and fair view of) the financial position of ABC Company
and its subsidiaries as at December 31, 20X1, and (of) their financial performance and
their cash flows for the year then ended in accordance with International Financial
Reporting Standards.

Example 3: Qualified opinion due to inability to obtain sufficient appropriate audit
evidence about an investment in a foreign affiliate (material but not pervasive)
Basis for qualified opinion
ABC Company’s investment in XYZ Company, a foreign associate acquired during the
year and accounted for by the equity method, is carried at xxx on the balance sheet
as at December 31, 20X1, and ABC’s share of XYZ’s net income of xxx is included in
ABC’s income for the year then ended. We were unable to obtain sufficient
appropriate audit evidence about the carrying amount of ABC’s investment in XYZ as
at December 31, 20X1 and ABC’s share of XYZ’s net income for the year because we
were denied access to the financial information, management, and the auditors of
XYZ. Consequently, we were unable to determine whether any adjustments to these
amounts were necessary.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all material
respects, (or give a true and fair view of) the financial position of ABC Company as at
December 31, 20X1, and (of) its financial performance and its cash flows for the year
then ended in accordance with International Financial Reporting Standards.
7
Example 4: Disclaimer of opinion due to inability to obtain sufficient appropriate
audit evidence about a single element of the financial statements
(financial information of a joint venture investment representing over 90% of
company’s net assets – material and pervasive)
Basis for disclaimer of opinion
The company’s investment in its joint venture XYZ (Country X) Company is carried at
xxx on the company’s balance sheet, which represents over 90% of the company’s net
assets as at December 31, 20X1. We were not allowed access to the management
and the auditors of XYZ, including XYZ’s auditors’ audit documentation. As a result, we
were unable to determine whether any adjustments were necessary in respect of the
company’s proportional share of XYZ’s assets that it controls jointly, its proportional
share of XYZ’s liabilities for which it is jointly responsible, its proportional share of
XYZ’s income and expenses for the year, and the elements making up the statement
of changes in equity and cash flow statement.
Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion. Accordingly, we do not express an
opinion on the financial statements.

audit evidence about multiple elements of the financial statements
(inventories and accounts receivable – material and pervasive)
Basis for disclaimer of opinion
We were not appointed as auditors of the company until after December 31, 20X1
and thus did not observe the counting of physical inventories at the beginning and
end of the year. We were unable to satisfy ourselves by alternative means concerning
the inventory quantities held at December 31, 20X0 and 20X1 which are stated in the
balance sheet at xxx and xxx, respectively. In addition, the introduction of a new
computerized accounts receivable system in September 20X1 resulted in numerous
errors in accounts receivable. As of the date of our audit report, management was
still in the process of rectifying the system deficiencies and correcting the errors. We
were unable to confirm or verify by alternative means accounts receivable included in
the balance sheet at a total amount of xxx as at December 31, 20X1. As a result of
these matters, we were unable to determine whether any adjustments might have
been found necessary in respect of recorded or unrecorded inventories and accounts
receivable, and the elements making up the income statement, statement of changes
in equity and cash flow statement.
8
audit evidence about multiple elements of the financial statements
(inventories and accounts receivable – material and pervasive)
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion. Accordingly, we do not express an
opinion on the financial statements.
EMPHASIS OF MATTER PARAGRAPHS

AND OTHER MATTER PARAGRAPHS
Modified opinion  Unqualified with emphasis matter
Emphasis of matter paragraphs
An emphasis of matter paragraph is a paragraph included in the auditor’s

report that refers to a matter appropriately presented or disclosed in the
financial statements that, in the auditor’s judgement, is of such importance
that it is fundamental to users’ understanding of the financial statements.
Emphasis of matter paragraphs are used to draw readers’ attention to a

matter already presented or disclosed in the financial statements that the
auditor feels is fundamental to their understanding, provided that the auditor
has obtained sufficient appropriate audit evidence that the matter is not
materially misstated.
18
9
Examples of situations:
 An uncertainty relating to the future outcome of exceptional litigation or
regulatory action
 Early application of a new accounting standard that has a pervasive effect on
the financial statements
 A major catastrophe that has had, or continues to have, a significant effect on
the entity’s financial position
Emphasis of Matter
We draw attention to Note X to the financial statements which describes the
uncertainty related to the outcome of the lawsuit filed against the company by XYZ
Company. Our opinion is not qualified in respect of this matter.
19

Other matter paragraphs
Another matter paragraph is a paragraph included in the auditor’s report that
refers to a matter other than those presented or disclosed in the financial
statements that, in the auditor's judgment, is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report.
Other matter paragraphs are used where the auditor considers it necessary to
draw readers’ attention to a matter that is relevant to their understanding of
the audit, the auditor’s responsibilities or the auditor’s report.
The other matter paragraph must be included immediately after the opinion
paragraph and any emphasis of matter paragraph, or elsewhere in the
auditor’s report if the content of it is relevant to the other reporting
responsibilities section. .
Example:
The financial statements of Murray Co for the year ended December 31, 20X3 were
audited by another auditor who expressed an unmodified opinion on those
statements on May 31, 20X4.
20
10
KEY AUDIT MATTERS
Key audit matters
ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report
requires auditors of listed companies to determine key audit matters and to
communicate those matters in the auditor's report.
Key audit matters are those that in the auditor's professional judgment
were of most significance in the audit and are selected from matters
communicated to those charged with governance.
Include:
• Areas of higher assessed risk of material misstatement, or significant risks
identified.
• Significant auditor judgments relating to areas in the financial statements
that involved significant management judgment, including accounting
estimates that have been identified as having high estimation uncertainty.
• The effect on the audit of significant events or transactions that occurred
during the period.
21
KEY AUDIT MATTERS

Key audit matters example
Specific examples include:
• Significant fraud risk
• Goodwill
• Valuation of financial instruments
• Fair values
• Effects of new accounting standards
• Revenue recognition
• Material provisions such as a restructuring provision
• Implementation of a new IT system, or significant changes to an existing
system.
22
11
KEY AUDIT MATTERS
Key audit matters paragraph example
Material Uncertainty Related to Going Concern

We draw attention to Note 6 in the financial statements, concerning the
uncertainty of Murray Company's future funding. The Company is seeking new
funding through an initial public offering of shares. In the event that the initial
public offering does not proceed, this will require the Company’s existing banking
arrangements to be renegotiated and additional funding to be raised from either
existing or new investors. This condition indicates the existence of a material
uncertainty which may cast significant doubt on the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that would result if the Company was unable to continue as a going
concern. Our opinion is not modified in respect of this matter.
23
AUDIT REPORT SAMPLE

INDEPENDENT AUDITOR'S REPORT
(Appropriate Addressee)
Report on the financial statements
We have audited the accompanying financial statements of ABC Company,
which comprise the balance sheet as at December 31, 20X1, and the
income statements, statements of changes in equity and cash flow
statement for the year then ended, and a summary of significant
accounting policies and other explanatory notes.
24
12
AUDIT REPORT SAMPLE
MANAGEMENT'S RESPONSIBILITIES FOR THE FS
Management is responsible for the preparation and fair presentation
these financial statements in accordance with International Financial
Reporting Standards. This responsibility includes: designing, implementing
and maintaining internal control relevant to the preparation and fair
presentation of financial statements that are free from material
misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are
reasonable in the circumstances.
25
AUDIT REPORT SAMPLE

AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit in accordance with
International Standards on Auditing. Those standard require that we comply
with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from
materiel misstatement.
26
13
AUDIT REPORT SAMPLE
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an option on these financial statements based on
our audit. We conducted our audit in accordance with International Standards on
Auditing. Those standard require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance whether the financial
statements are free from materiel misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor's judgment, including the assessment of the risk of material
misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our audit opinion. 27
PREPARING THE AUDIT REPORT

Basic elements of audit report
The auditor’s report must have a title that clearly indicates that
it is the report of the independent auditor. This signifies that
Title the auditor has met all the ethical requirements concerning
independence and therefore distinguishes the auditor’s report
from other reports.
The addressee will be determined by law or regulation, but is

Addressee likely to be the shareholders or those charged with
governance.
28
14
This shall identify the entity being audited, state that the
financial statements have been audited, identify the title of
each statement that comprises the financial statements being
Introductory
audited, refer to the summary of significant accounting policies
paragraph and other explanatory notes, and specify the date or period
covered by each statement comprising the financial
statements.
29

Management’s responsibility
This part of the report describes the responsibilities of those who are responsible for
the preparation of the financial statements. The report for the financial statements
shall include a section headed ‘Management’s responsibility for the financial
statements’ and describe management’s responsibility including the following:
 Management is responsible for the preparation of the financial statements in
accordance with the applicable financial reporting framework.
 Management is responsible for such internal control necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to error or fraud.
 Reference shall be made to ‘the preparation and fair presentation of these
financial statements’ (or’ the preparation of financial statements that give a true
and fair view’) where the financial statements are prepared in accordance with a
fair presentation framework.
30
15
Auditor’s responsibility
 The report shall include a section entitled ‘Auditor’s responsibility’. The report must
state that the auditor is responsible for expressing an opinion on the financial
statements based on the audit.
 This section must also state that the audit was conducted in accordance with
International Standards on Auditing and ethical requirements and that the auditor
planned and performed the audit so as to obtain reasonable assurance that the
financial statements are free from material misstatement.
31

Opinion paragraph
If the auditor expresses an unmodified opinion on financial statements prepared in
accordance with a fair presentation framework, the opinion shall use one of the
following equivalent phrases:
 The financial statements present fairly, in all material respects,...in accordance with
[the applicable financial reporting framework]; or
 The financial statements give a true and fair view of ... in accordance with [the
applicable financial reporting framework].
32
16
If the auditor is required by law to report on any other

Other reporting matters, this must be done in an additional paragraph below
responsibilities the opinion paragraph which is titled ‘Report on other legal
and regulatory requirements’ or otherwise as appropriate.
Auditor’s The report must contain the auditor’s signature, whether this
signature is the auditor's own name or the audit firm's name or both
33

The report must be dated no earlier than the date on which

Date of the the auditor has obtained sufficient appropriate audit evidence
report on which to base the auditor’s opinion on the financial
statements.
Auditor’s
The location where the auditor practices must be included
address
34
17
REPORTS TO MANAGEMENT/
MANAGEMENT LETTER
Reports to management can be sent by external auditors after both the interim
and final audits. They set out deficiencies in internal control, the implications of
those deficiencies on the business and suggested recommendations to mitigate
them. (ISA 265 - Communicating Deficiencies in Internal Control to Those
Charged with Governance and Management sets)
ABC & Co
Certified Accountants
29 high street
The Board of Directors
Manufacturing Ltd
15 South Street
Members of the board

Financial Statement for the year ended 31 May 20X8
Please find below the report to management which includes sets out
deficiencies in internal control we identified as a result of our review of the
accounting systems and procedure operated by our company during our recent
audit. The matter dealt with the report came to our notice during the conduct
of our normal audit procedures which are designed primarily for the purpose of
expressing our opinion on the financial statement. 35
REPORTS TO MANAGEMENT/
MANAGEMENT LETTER
Purchases: Ordering procedures
Deficiency
During the course our work we discovered that it was the practice of the
stores to order certain goods from X Co orally without preparing either a
purchase requisition or purchase order
Implication
There is therefore the possibility of liabilities being set up unauthorized
items and at a non- competitive price.
Recommendation
We recommend that the buying the department should be responsible
for such orders and if they placed orally, an official order should be
raised as confirmation
36
18
ROUND UP
37
ROUND UP
38
19

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ACCA

AUDIT AND ASSURANCE

Mr. Giang Ha ACCA

085 8822 168

Audit framework and regulation (A)

Planning and risk assessment (B)

Internal Control (C) Audit Evidence (D)

Review and reporting (E)

Time: 3 hours + 10 mins extra to read the exam instructions.

Total 100 marks

AUDIT AND OTHER

To delivers assurance to the principal

Directors are accountable to shareholders. Directors act as stewards

Accountability: is the quality or state of being accountable; that

Stewardship: refers to the duties and obligations of a person who

The objective of an audit of financial statements is to enable the

AUDIT AND ASSURANCE

STATUTORY AUDIT NON - STATUTORY AUDIT

Required under national Be performed by independent

An assurance engagement is one in which: A practitioner aims to obtain

AUDIT AND ASSURANCE

An audit of financial statements

AUDIT AND ASSURANCE

AUDIT REPORT AUDITOR Communicate SHAREHOLDERS

Give opinion on the Truth and Fairness of FS.

True and fair: does True:

AUDIT AND ASSURANCE

 A matter is material if its omission or misstatement

Mr. Giang Ha ACCA

085 8822 168

The auditor to express an OPINION on

Enhance the Highlight other issues i.e.

The conduct of audits is governed by three sets of rules:

Small companies do not need an audit

The following must be audited regardless of size:

 Has to be a member of a Recognized Supervisory Board (RSB)

Excluded even if three conditions met above (law):-

Ethically – we need to review independence, if this is lacking

Statutory audit Other assurance engagements

3. SETTING AUDITING STANDARDS

 Enforce the implementation of auditing standards

3. SETTING AUDITING STANDARDS

Arrangements for removing the auditor have to be

4. APPOINTMENT AND REMOVAL

 There are various legal and professional requirements on appointment,

 Requirements for the eligibility, registration and training of auditors are

 International Standards on Auditing are set by the International Auditing and

Mr. Giang Ha ACCA

085 8822 168

System by which a company is directed and controlled.

It concerns such matters as:

Ensuring that companies are run well in the interests of their

CODE OF CORPORATE GOVERNANCE

Those operating a company – its management and those appointed for

 External auditors do not have responsibility for standards of corporate

 Auditors responsibility for reporting on corporate governance

The OECD Principles of Corporate Governance

CODE OF CORPORATE GOVERNANCE

REMUNURATION RELATION WITH

 Every company should be headed by an effective board,

CODE OF CORPORATE GOVERNANCE

 The board should present a balanced and

 The board and its committees should have the