NK Professional Note

NK Professional F8-Audit and Assurance (AA)
Audit Framework and Regulations

What is an audit?
An audit is an independent examination of the financial statements of an entity in order to enable the
auditor to express an opinion as to whether it gives a true and fair opinion and if it has been properly
prepared in accordance with the applicable reporting framework.
Advantages of Audit:
1. Errors and frauds are detected and rectified.
2. For taxation purpose auditing of account is accepted.
3. Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time
of retirement/death of a partner.
4. Auditing safeguards the interest of owners, creditors, investors, and workers.
5. Acting as a “watchdog” pre-deterrent to the client’s staff
Disadvantage of Audit
1. Auditing is not objective. Judgments have to be made
2. Not all items in the financial statements are tested
3. Limitations in accounting and control systems
4. Audit report is issued a long time after balance sheet date
5. Audit evidence sometimes indicates what is probable, not certain
What are the professional codes of ethics and explain them?
The fundamental principles of professional ethics
Integrity Members should be straightforward and honest in all business and professional
relationships.
Objectivity Members should not allow bias, conflicts of interest or undue influence of
others to override professional or business judgements.
Professional Members have a continuing duty to maintain professional knowledge and skill
competence at a level required to ensure that a client or employer receives competent
and due care 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.
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 or specific authority or unless there
is a legal or professional right or duty to disclose. Confidential information
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acquired as a result of professional and business relationships should not be

used for the personal advantage of members or third parties.
Professional Members should comply with relevant laws and regulations and should avoid
Behavior any action that discredits the profession.
Under which conditions, confidentiality of auditor can be broken down?
Obligatory Disclosures
Auditors are obliged to make disclosure where, for example, there is a statutory right or duty to disclose,
such as if the auditor suspects the client is involved in money laundering, terrorism or drug trafficking in
which case they must immediately notifythe relevant authorities.
Voluntary Disclosures
In certain circumstances auditors are free, as opposed to obliged, to disclose information without
obtaining the client’s permission first. These circumstances can be categorised into the four areas below:
Public interest – An auditor may disclose information which would otherwise be confidential if
disclosure can be justified in the ‘public interest’. This would be perhaps if those charged with
governance are involved in fraudulent activities;
Protect a member’s interest – Members/auditors may disclose information to defend themselves
against a negligence action, disciplinary proceedings or if suing for unpaid fees;
Authorised by statute/laws – There are cases of express statutory provision where disclosure of
information to a proper authority overrides the duty of confidentiality;
Non-governmental bodies – Auditors may be approached by non-governmental bodies seeking
information concerning suspected acts of misconduct not amounting to a crime or civil wrong.
Disclosure should only be made to those bodies with statutory powers to compel disclosure.
Situations in which the independence of the auditor is threatened:
Self-review Threat
A self-review threat may occur when a previous judgements needs to be re-evaluated by members
responsible for that judgement.
Self-interest Threat
A self-interest threat may occur as a result of the financial or other interests of members or of
immediate or close family members.
Advocacy Threat
An advocacy threat arises when an audit firm promotes a position or opinion to the point that
subsequent objectivity is compromised.
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Familiarity Threat
A familiarity threat arises when, because of a close relationship, members become too sympathetic
to the interests of others. This can result in a substantial risk of loss of professional skepticism.
Intimidation Threat
An intimidation threat arises when members of the assurance team may be deterred from acting
objectively by threats, actual or perceived.
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Ethical Threats
Condition Threats Safeguards
Audit partner has been in the Familiarity Threat ✓ The audit partner should be removed
position for eight years from the audit team(if listed company)
✓ Assign an engagement quality control
review partner (If unlisted company)
The audit manger joined to the Familiarity Threat ✓ A different audit manager should be
FD of the client appointed.
✓ Review the composition of audit team
and change as appropriate
✓ The audit approach should be revised
to ensure procedures and items to be
tested are not predictable
Audit senior’s sister is the Familiarity Threat ✓ Rotate the audit senior
financial controller
The partner and the finance Familiarity Threat ✓ Rotate partner
director have known each ✓ Review ethical polices of firm
other socially for many years
The client has asked audit firm to Self Review Threat ✓ Separate team
carry out internal audit work
Routine maintenance of payroll Self Review Threat ✓ Separate team
records
Audit partner resigns as EQCR Self Review Threat ✓ Must resign as auditor
and accept the NED on Audit
committee of the client
An employee of the client joined Self Review Threat ✓ No assign to this client
the audit firm and was assigned
to the audit of his previous
employer
Providing tax advice Self Review Threat ✓ Use tax specialist of firm
Providing internal audit service Self Review Threat ✓ Use separate team
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The audit manger is joining Self Interest Threats ✓ Review his audit work performed
(recruitment process) to the FD ✓ Rotate audit manager
of the client
Fees will be based on 20% of Self Interest Threats ✓ No fix fee base on % so that reject it
profit after tax
Assistance with the selection of Self Interest Threats ✓ Make shortlist and not make
a new financial controller management decision
including the checking of
references
Audit manager owns shares Self Interest Threats ✓ Sell of immediately if he is member of
audit team
✓ Sell off as soon as possible if he is not
member of audit team

The fee for last year’s audit is Self Interest Threats ✓ Speak to management about the
unpaid outstanding fees and ask them to pay
as soon as possible
✓ No work should be performed until
either payment is made or a repayment
plan agreed
The audit engagement partner Self Interest Threats ✓ Decline the offer as no appropriate
attended the monthly board safeguards possible (meeting)
meetings
Audit partner resigns as EQCR Self Interest Threats ✓ Must resign as auditor
and accept the NED on Audit
committee of the client
Professional fee (all services) Self Interest Threats ✓ Disclosure to those charged with
receiving above 15% of the governance that fees from the client
firm’s total fee from one client represent more than 15% of the audit
firm’s total fee income
✓ A pre-issuance review to be
conducted by an external accountant
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✓ A post-issuance review to be
or regulatory body
✓ Assign an engagement quality control
reviewer
During audit manager planning Self Interest Threats ✓ The discount should be rejected as
meeting with the finance it is unlikely to be a trivial monetary
director he offers you and your amount
audit team the same level of
staff discount.
Tax services whereby Audit firm Advocacy Threat ✓ Politely decline the offer
would liaise with the tax
authority on the client’s behalf
The audit partner has been Advocacy Threat ✓ Politely decline the offer
requested to attend a meeting
with the bank to request a loan
Audit firm represent the client in Advocacy Threat ✓ Politely decline the offer
an insurance claim
The financial controller has told Intimidation Threat ✓ Discuss with FC and explain about the
the auditor not to find any audit work will be conducted with ISA
problems which make her look and obtain sufficient appropriate audit
bad evidence
The finance director has asked if Intimidation Threat ✓ Discuss with FD about the timing of the
the audit can be completed in a audit
shorter time frame. ✓ Inform FD that the team will undertake
with all relevant ISAs

Professional fee (all services) Intimidation Threat ✓ Disclosure to those charged with
receiving above 15% of the governance that fees from the client
firm’s total fee from one client represent more than 15% of the audit
firm’s total fee income
✓ A pre-issuance review to be
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✓ A post-issuance review to be
or regulatory body
Factors to do for managing conflict of interest when providing audit service for two main competitor
client
✓ Regular monitoring of safeguards by an engagement quality control reviewer
✓ Require the audit team of each client to sign a confidentiality agreement
✓ Use separate engagement teams with different engagement partners
✓ Operate secure data filing of all audit information
Actions to maintain audit firm’s objectivity in relation to the level of fee for exceeding 15% of total
firm for two years)
✓ The level of fee income should be communicated to those charged with governance
✓ Request a pre-issuance review be conducted by an external accountant
✓ Assign an engagement quality control reviewer
Right to disclose the confidentiality of information
Voluntary Disclosure
o Where disclosure is made to non -governmental bodies
o When the client has g iv en perm issio n
Obligatory Disclosure
o If an auditor knows or suspects his client is engaged in money laundering
o If an auditor suspects his client has committed terrorist offences
Factors to consider before accepting internal audit assignment
✓ Whether the assignments will relate to the internal controls over financial reporting or not
✓ Whether management will accept responsibility for implementing appropriate
recommendations or not
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Explain the actions that the board of directors of Company must take in order to meet corporate
governance requirements for the listing of Company.
Corporate governance is the system by which companies are directed and controlled.
The company should appoint a Chairman and Chief Executive for its board of directors and these must
be different people with clear divisions.
The company should appoint a mixture of executive and non-executive directors for the board. The
ratio of non-executive directors to executive directors should be the same. This is due to no individual
or small group of individuals can dominate the board’s decision taking. All directors should be subject
to annual re-election.
The company should set up an internal audit department which can review its internal controls and
risk management procedures and report findings to the audit committee.
The company should establish remuneration and nomination committees. The nomination committee
should consist of a majority of non-executive directors and the remuneration committee should have
at least three non-executive directors.
There should also have audit committee and risk management committee.
Role/Function of Audit Committee
Financial reporting
- to monitor the integrity of the financial statements of the company, and any formal
announcements relating to the company’s financial performance, reviewing significant financial
reporting judgements contained in them;
Internal controls
- to review the company’s internal financial controls and, unless expressly addressed by a separate
board risk committee composed of independent directors, or by the board itself, to review the
company’s internal control and risk management systems;
Internal audit
- to monitor and review the effectiveness of the company’s internal audit function;
- Where there is no internal audit function, the audit committee should consider annually whether
there is a need for an internal audit function and make a recommendation to the board,
External audit
- to make recommendations to the board, for it to put to the shareholders for their approval in
general meeting, in relation to the appointment, re-appointment and removal of the external
auditor and to approve the remuneration and terms of engagement of external auditor;
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- to review and monitor the external auditor’s independence and objectivity and the effectiveness
of the audit process, taking into consideration relevant professional and regulatory
requirements;
Advantages of Audit Committee
✓ They will bring considerable external experience to the board as well as challenging the decisions
of executive directors and contributing to independent judgements.
✓ The finance director will benefit in that he will be able to raise concerns and discuss accounting
issues with the audit committee.
✓ It will help to improve the quality of the financial reporting of the company.
✓ It can help to improve the internal control environment of the company. The audit committee is
able to devote more time and attention to areas such as internal controls.
✓ It will also improve the independence of IA.
✓ The audit committee can also provide advice on risk management to the executive directors. They
can create a climate of discipline and control and reduce the opportunity for fraud, and increase
public confidence in the credibility and objectivity of the financial statements.
✓ The audit committee will assume responsibility for appointing and liaising with the external
audit firm, thus ensuring the independence of the external auditor especially in cases of dispute
with management.
✓ The quality of financial reporting may be improved
✓ Liaison with the external audit firm will improve its independence
✓ Internal control awareness will be enhanced within company
Disadvantages of Audit Committee
• The executive directors may not understand the purpose of an AC and may perceive that it
detracts from their authority
• There may be difficulty selecting sufficient non-executive directors with the necessary
competence in auditing matters for the committee to be really effective
• Costs may be increased
Principles of the UK Corporate Governance Code
o There should be a rigorous and transparent procedure for the appointment of new
directors to the board
o The board should ensure effective communication with shareholders and
stakeholders
o The board should ensure it has the information, time and resources it needs to function
effectively and efficiently
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The overall aim of corporate governance
• To ensure that companies are well run in the interests of shareholders and the wider
community.
Normal principles of best practice corporate governance guidance
✓ All directors should receive induction on joining the board and should regularly update and refresh
their skills and knowledge.
✓ There should be a formal, rigorous and transparent procedure for the appointment of new
directors to the board.
The annual report should describe the work of the audit committee including:
✓ Significant issues considered relating to the financial statements.
✓ How it has assessed the independence and effectiveness of the external audit
process.
✓ Where there is no internal audit function, an explanation for the absence and how
internal assurance is achieved.

✓ An explanation of how auditor independence and objectivity are safeguarded, if the
external auditor provides non-audit services.

NEDs’ Remuneration
✓ NEDs' remuneration should be based on the time committed to carry out the role.
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Objectives or Responsibility for Law and Regulation

➢ To obtain sufficient appropriate audit evidence regarding compliance with the provisions of those
laws and regulations generally recognised to have a direct effect on the determination of material
amounts and disclosures in the financial statements;
➢ To perform specified audit procedures to help identify instances of non-compliance with other
laws and regulations that may have a material effect on the financial statements; and
➢ To respond appropriately to non-compliance or suspected non-compliance with L&R identified
during the audit.
Reason for understanding of the laws and regulations applicable to the client
➢ To consider the risk of material misstatement due to non – compliance.
External Audit Assignment
✓ Reports are publicly available to shareholders
✓ Express an opinion on the truth and fairness of the financial statements
Stages involved in the development of an ISA
(1) Establishment of task force to develop draft standard
(2) Discussion of proposed standard at a public meeting
(3) Distribution of exposure draft for public comment
(4) Consideration of comments received from the public
(5) Approval by IAASB members
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Question - 1
Describe the steps an audit firm should perform prior to accepting a new audit engagement.
(5 marks)
Answer
Prior to accepting
Prior to accepting an audit engagement, the firm should consider any ethical issues. If issues arise,
then their significance must be considered.
The firm should consider whether they are competent to perform the work and whether they
would have appropriate resources available, as well as any specialist skills or knowledge.
The prospective firm must obtain permission from the client to contact the outgoing auditor; if this
is not given then the engagement should be refused.
The prospective firm must communicate with the outgoing auditor to assess if there are any ethical
or professional reasons why they should not accept appointment.
In addition the audit firm should undertake client screening procedures such as considering
management integrity and assessing whether any conflict of interest with existing clients would
arise.
Question - 2 (December 08)
Auditors have various duties to perform in their role as auditors, for example, to assess the truth
and fairness of the financial statements.
Required:
Explain THREE rights that enable auditors to carry out their duties. (3 marks)
Answer
Auditor’s rights
– Right of access to the company’s books and records at any reasonable time
– Right to require from the company’s officers the information and explanations the auditor
considers necessary to perform their duties as auditors.
– Right to receive notice of and attend meetings of the company
– Right to speak at general meetings on any matter affecting the auditor or previous auditor.
– Where the company uses written resolutions, a right to receive a copy of those resolutions.
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Question 3
ISA 210 Agreeing the Terms of Audit Engagements provides guidance on the content of
engagement letters and deals with the auditor’s responsibilities in agreeing the terms of the audit
engagement with management.
Required:
(i) State the purpose of an engagement letter. (1 mark)
(ii) List SIX matters that should be included within an audit engagement letter. (3 marks)
Answer
(i) Purpose of an engagement letter
An engagement letter provides a written agreement of the terms of the audit engagement
between the auditor and management of company and confirming that there is a common
understanding between the auditor and management.
(ii) Matters to be included in an audit engagement letter:
- The objective and scope of the audit;
- The responsibilities of the auditor;
- The responsibilities of management;
- Identification of the financial reporting framework for the preparation of the financial
statements;
- Expected form and content of any reports to be issued;
- The fact that some material misstatements may not be detected;
- The basis on which fees are computed and any billing arrangements;
Second Engagement Letter
✓ a recent change of management or ownership, such as a new holding company
✓ a significant change in the nature or size of the client’s business
✓ any relevant change legal or professional requirement, or statutory changes
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Question - 4 (June-12)
Identify and explain the level of assurance provided by an external audit and other review
engagements. (3 marks)
Answer
Audit
External Audit – A high but not absolute level of assurance is provided, this is known as reasonable
assurance. This provides comfort that the financial statements are true and fair and are free of
material misstatements.
Other review engagements
In other review engagements, the practitioner gathers sufficient evidence to be satisfied that the
subject matter is plausible. In this case, negative assurance is given whereby the practitioner. It is
confirmed that nothing has come to his attention which indicates that the subject matter contains
Question 5 (June 2012)
Distinguish between internal audit and external audit. (4 marks)
Answer
Differences between internal and external audit
External Audit Internal Audit
Objective
The main objective of the external auditor is to The main objective of internal audit is to
express an opinion on the truth and fairness of improve a company’s operations, by reviewing
the financial statements. the efficiency and effectiveness of the
company’s internal controls.
Reporting
External auditors report to the shareholders or Internal auditors normally report to
members of the company. External audit management or those charged with
reports are contained within the financial governance. Internal audit reports not publicly
statements and hence are publicly available. available and are only intended to be seen by
the addressee of the report. The reports are
normally provided to the board of directors and
those charged with governance such as the
audit committee.
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Scope of work
The external auditor’s work is limited to The internal auditor can have a wide scope of
verifying the truth and fairness of the financial work and it is determined by the requirements
statements of the company. of management or those charged with
governance. Commonly internal audit focus on
the company’s internal control environment,
but any other area of a company’s operations
can be reviewed.
Relationship with company
External auditors are appointed by the Internal auditors are appointed by
company’s shareholders. They are independent management. As internal auditors are normally
of the company. employees of the company they lack
independence. However, the internal audit
department can be outsourced and this can
increase their independence.
Question 6 March/June 2018, Sept/Dec 2021
Describe Auditors’ responsibilities in relation to the prevention and detection of fraud and error.
(4 marks)
Answer
Fraud responsibility
Auditors must conduct an audit in accordance with ISA 240 The Auditor’s Responsibilities Relating to
Fraud in an Audit of Financial Statements and is responsible for obtaining reasonable assurance that
the financial statements taken as a whole are free from material misstatement, whether caused by
fraud or error.
In order to fulfil this responsibility, Auditors are required to identify and assess the risks of material
misstatement of the financial statements due to fraud.
They need to obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud through designing and implementing appropriate responses. In addition,
Auditors must respond appropriately to fraud or suspected fraud identified during the audit.
When obtaining reasonable assurance, Auditors are responsible for maintaining professional
scepticism throughout the audit, considering the potential for management override of controls and
recognising the fact that audit procedures which are effective in detecting error may not be effective
in detecting fraud.
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To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and
error, ISA 240 requires that a discussion is held within the team. For members not present at the
meeting, Company’s audit engagement partner should determine which matters should be
communicated to them.
Question – 7 (September/December 2017, March/June 2021)
In agreeing the terms of an audit engagement, the auditor is required to agree the basis on which
the audit is to be carried out. This involves establishing whether the preconditions for an audit are
present and confirming that there is a common understanding between the auditor and management
of the terms of the engagement.
Required:
Describe the process the auditor should undertake to assess whether the PRECONDITIONS for an
audit are present. (3 marks)
Answer
To assess whether the preconditions for an audit are present, the auditor must determine
whether the financial reporting framework, which is applied in the preparation of the financial
statements, is acceptable.
In considering this, the auditor should assess the nature of the entity, the nature and purpose
of the financial statements and applicable law or regulations.
In addition, they must obtain the agreement of management that it acknowledges and understands
its responsibility for the following:
• Preparation of the financial statements in accordance with the applicable financial reporting
framework
• To provide the auditor with access to all relevant information for the preparation of the
financial statements
• If the preconditions for an audit are not present, the auditor shall discuss the matter with
management. Unless required by law or regulation to do so, the auditor shall not accept the
proposed audit engagement:
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Explain the difference between an interim and a final audit. (5 marks)
Answer
Differences between an interim and a final audit
Interim audit
The interim audit is that part of the audit which takes place before the year end. The auditor uses the
interim audit to carry out procedures which would be difficult to perform at the year end because of
time pressure. There is no requirement to undertake an interim audit; factors to consider when
deciding upon whether to have one include the size and complexity of the company along with the
effectiveness of internal controls.
Typical procedures undertaken during the interim audit include documenting and testing of internal
controls, testing of profit and loss transactions for the year to date and identification of potential
problems which may affect the final audit work.
Final audit
The final audit will take place after the year end and concludes with the auditor forming and
expressing an opinion on the financial statements for the whole year subject to audit. It is important
to note that the final opinion takes account ofconclusions formed at both the interim and final audit.
Typical work carried out at the final audit includes follow up of items noted at the inventory count,
obtaining confirmations from third parties, analytical reviews of figures in the financial statements,
substantive procedures of account balances and transactions, review of events after the reporting
period and going concern review.
Question 9 (March/June 2016-June 2010)
The company’s finance director has asked your firm to undertake a non-audit assurance engagement
later in the year. The audit junior has not been involved in such an assignment before and has asked
you to explain what an assurance engagement involves.
Required:
Explain the five elements of an assurance engagement. (5 marks)
Answer
Assurance Engagement
An assurance engagement is defined as an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against criteria.
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Elements of an assurance engagement

A three-party relationship comprising of:
– The intended user who is the person who requires the assurance report.
– The responsible party, which is the organisation responsible for preparing the subject matter
to be reviewed.
– The practitioner (i.e. an accountant) who is the professional who will review the subject matter
and provide the assurance.
Subject matter
The subject matter is the data which the responsible party has prepared and which requires
verification.
Suitable Criteria
This subject matter is then evaluated or assessed against suitable criteria in order for it to be assessed
and an opinion provided.
Evidence
The practitioner must ensure that they have gathered sufficient appropriate evidence in order to give
the required level of assurance.
Assurance report
An assurance report provides the opinion which is given by the practitioner to the intended user.
Reasonable assurance
Reasonable assurance is provided in a report where the auditor has obtained sufficient and
appropriate evidence to give reasonable assurance that the information is free from material error.
Negative Assurance/Limited assurance
Negative assurance report means that nothing has come to the attention of the audit, which indicates
the financial information being reported on has errors in it.
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Audit Planning and Risk Assessment

Audit Strategy
The overall audit strategy sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit plan.
Audit Plan
The audit plan converts the audit strategies into a more detailed plan and includes the nature, timing
and extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
Audit Programme
Audit programme is an outline of how the audit is to be done, who is to do what work and within what
time. After the development of audit plan a detailed written audit programme containing the various
steps and procedures shall be required.
Professional Skepticism (March/June 2021)

An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud and a critical assessment of audit evidence.
Professional Judgement
Professional judgement is the application of relevant training, knowledge and experience in making
decisions about the appropriate courses of action in the circumstances of the audit engagement. The
auditor must exercise professional judgement when planning an audit of financial statements.
Financial Statements Assertion or Management Assertion
Assertion – Transactions and Events and Related Disclosure– COCA+CP
• Completeness – all transactions and events that should have been recorded have been recorded
and all related disclosures that should have been included in the financial statements have been
included.
• Occurrence – the transactions and events that have been recorded or disclosed, have occurred,
and such transactions and events pertain to the entity.
• Cut–off – transactions and events have been recorded in the correct accounting period.
• Accuracy – amounts and other data relating to recorded transactions and events have been
recorded appropriately, and related disclosures have been appropriately measured and described.
• Classification – transactions and events have been recorded in the proper accounts.
• Presentation – transactions and events are appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and understandable in the context of the
requirements of the applicable financial reporting framework.
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Assertion – Account Balances & Related Disclosures– CREV+CP

• Completeness – all assets, liabilities and equity interests that should have been recorded have
been recorded and all related disclosures that should have been included in the financial
statements have been included.
• Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
• Existence – assets, liabilities and equity interests exist.
• Accuracy, valuation and allocation – assets, liabilities and equity interests have been included in
the financial statements at appropriate amounts and any resulting valuation or allocation
adjustments have been appropriately recorded and related disclosures have been appropriately
measured and described.
• Classification – assets, liabilities and equity interests have been recorded in the proper accounts.
• Presentation – assets, liabilities and equity interests re appropriately aggregated or disaggregated
and clearly described, and related disclosures are relevant and understandable in the context of
the requirements of the applicable financial reporting framework.
Question – 1 (Dec 09, Dec 11, June-12, Dec 14 September 2016, Dec 2020)
Explain the importance of audit planning and state TWO matters that would be included in an audit
plan. (6 marks)
ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in planning
an audit.
Required:
Explain the benefits of audit planning. (4 marks)
Answer
An audit plan will be developed after the overall audit strategy has been established. Audit planning
is importance because of the following benefits:
– Helping the auditor to devote appropriate attention to important areas of the audit.
– Helping the auditor identify and resolve potential problems on a timely basis.
– Helping the auditor properly organise and manage the audit engagement in an effective and
efficient manner.
– Assisting in the selection of engagement team members with appropriate levels of capabilities
and competence
– Facilitating the direction and supervision of engagement team members and the review of their
work.
– Assisting, where applicable, in coordination of work done by experts.
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The following are examples of matters that would be included in the audit plan:
• A description of the nature, timing and extent of audit
• Assessment of inherent risk and control risk at both the entity and assertion level.
• Materiality
• Timetable of detailed audit work
• Allocation of work to team members
Question - 2 (June 10)
Discuss the importance of assessing risks at the planning stage of an audit. (4 marks)
Answer
Assessing engagement risks at the planning stage will ensure that attention is focused early on the
risky areas of material misstatements.
A thorough risk assessment will also help the auditor to fully understand the entity for an
effective audit. Any unusual transactions or balances would also be identified early, so that these
could be addressed in a timely manner.
The team will only focus their time and effort on key areas which are material. In addition, assessing
risk early should ensure that the most appropriate team with more experienced staff are allocated to
higher risk areas.
It should enable the auditor to have a good understanding of the risks of fraud, money laundering,
etc. Assessing risk should enable the auditor to assess whether the client is a going concern.
Question3 (September/December 2017)
Identify THREE main areas, other than audit risks, which should be included within the audit strategy
document for company, and for each area provide an example relevant to the audit. (3 marks)
Answer
• Characteristics of the client/engagement
– Scope of audit?
– Industry Specific reporting requirement?
– Extent of other auditors’ work?
– The client use of service organization?
– Client’s staff and data available?
• Reporting objective, Timing of the audit and nature of communication
– Interim audit and Final audit
– Meeting with Management and TCWG
– Communication with other auditors & Third Parties
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• Nature, timing and extent of Resources

– Selection of Audit team
• Nature – Experienced & Inexperienced Auditor?
• Timing and Extent of Resources – depend on risk areas
• Significant Factors, Preliminary engagement activities and knowledge from previous
engagements
– Materiality?
– Risk Areas?
– Other services provided by audit firm?
– Change?
• IT,
• Business Nature,
• Accounting Policies/Standards &
• Law and Regulation?
Question 4 (March/June 2017-March/June 2016)
Define audit risk and the components of audit risk. (4 marks)
Answer
Audit risk and the components of audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of two main components, being the risk
of material misstatement and detection risk. Risk of material misstatement is made up of a further
two components, inherent risk and control risk.
Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or
disclosure to a misstatement which could be material, either individually or when aggregated with
other misstatements, before consideration of any related controls.
Control risk is the risk that a misstatement which could occur in an assertion about a class of
transaction, account balance
or disclosure and which could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s
internal control.
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement which exists and which could be material, either
individually or when aggregated with other misstatements. Detection risk is affected by sampling and
non-sampling risk.
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Question -5 (March/June 2019-June 2010)

Define and explain materiality and performance materiality. (4 marks)
Answer
Materiality
Materiality is defined in ISA 320 as follows: ‘Misstatements, including omissions, are considered to be
material if they, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements.’
If the financial statements include a material misstatement, then they will not present fairly (give a
true and fair view) the position, performance and cash flows of the entity.
A misstatement may be considered material due to its size (quantitative) and/or due to its nature
(qualitative) or a combination of both. The quantitative nature of a misstatement refers to its relative
size. A misstatement which is material due to its nature refers to an amount which might be low in
value but due to its prominence and relevance could influence the user’s decision, for example,
directors’ transactions.
As per ISA 320, materiality is often calculated using benchmarks such as 5% of profit before tax or 1%
of total revenue or total assets. These values are useful as a starting point for assessing materiality,
however, the assessment of what is material is ultimately a matter of the auditor’s professional
judgement. It is affected by the auditor’s perception of the financial information, the needs of the
users of the financial statements and the perceived level of risk; the higher the risk, the lower the level
of overall materiality.
In assessing materiality, the auditor must consider that a number of errors each with a low value may,
when aggregated, amount to a material misstatement.
Performance materiality
Performance materiality is defined in ISA 320 as follows: ‘The amount 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.’
Hence performance materiality is set at a level lower than overall materiality for the financial
statements as a whole. It is used for testing individual transactions, account balances and disclosures.
The aim of performance materiality is to reduce the risk that the total of all of the errors in balances,
transactions and disclosures exceeds overall materiality.
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Question 6 (September/December 2018)

Explain why analytical procedures are used during THREE stages of an audit. (3 marks)
Answer
Analytical procedures
Analytical procedures can be used at all stages of an audit, however, ISA 315 Identifying and Assessing
the Risks of Material Misstatement through Understanding the Entity and Its Environment and ISA 520
Analytical Procedures identify three particular stages.
During the planning stage, analytical procedures must be used as risk assessment procedures in order
to help the auditor to obtain an understanding of the entity and assess the risk of material
misstatement.
During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence.
Substantive procedures can either be tests of detail or substantive analytical procedures.
At the final review stage, the auditor must design and perform analytical procedures which assist them
when forming an overall conclusion as to whether the financial statements are consistent with the
auditor’s understanding of the entity.
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Internal Control
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.
Discuss the inherent Limitation of Internal Control System. (Dec 2021)
Human error in the design of or application of an internal control
An entity may have an adequate internal control process over a particular area of the financial
statements. However, human error in applying that control gives rise to an inherent limitation, for
example a staff member may review a bank reconciliation but not identify an error.
There may also be a flaw in the design of internal control whereby there is an error in the design of,
or change to, an internal control which means it does not operate as intended.
Circumvention of internal control
No system of internal control will be completely effective at preventing and detecting fraud and error.
Employees may manipulate deficiencies in an entity’s internal control for personal gain or to conceal
fraudulent activity. This is more likely to be possible where there is collusion between employees.
Management override of internal control
Management is in a position of power to override an entity’s internal control regardless of the strength
of the system of internal control. Such management override could be to conceal information or for
personal financial gain.
Use of judgement on the nature and extent of controls
Management is responsible for implementing controls which are designed to prevent, detect and
correct material misstatements and safeguard the company’s assets. Professional judgement will be
needed to determine the type and extent of internal controls needed within the company and certain
controls may be absent or ineffective. In particular, systems may be designed to deal with routine
transactions and may therefore be inadequate in respect of non-routine transactions
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Question 7
Explain why the external auditor needs to obtain an understanding of a client’s internal control
system.
✓ In order to be able to give an opinion on the financial statements as a whole, the auditor needs to
obtain an understanding of the business and the risks it faces. Part of this process requires the
auditor to understand a client’s internal controls as these are an integral part of the business.
✓ Once the auditor has ascertained the nature and extent of the internal control system, he can
design appropriate audit procedures in order to gather sufficient appropriate evidence for his
opinion.
✓ Although IAS 265 only requires significant deficiencies to be communicated in writing to those
charged with governance, a client would expect the auditor to report any deficiencies discovered
during the course of the audit. To report these effectively requires a sound understanding of the
internal control system.
Question – 8 (Dec-11)
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and It Environment requires auditors to understand the entity’s internal control. An entity’s
internal control is made up of several components.
Required:
State the FIVE components of an entity’s internal control and give a brief explanation of each
component. (5 marks)
Answer
Internal control components
Control environment
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance.
Entity’s risk assessment process
For financial reporting purposes, the entity’s risk assessment process includes how
management identifies business risks relevant to the preparation of financial statements.
Information system
The information system includes the accounting system, consists of the procedures and records
designed and established to initiate, record, process, and report entity transactions.
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Control activities relevant to the audit

Control activities are the policies and procedures that help ensure that management directives
are carried out. Control activities have various objectives and are applied at various organisational
and functional levels.
Monitoring of controls
Monitoring of controls is a process to assess the effectiveness of internal control performance over
time.
Ongoing monitoring activities are often built into the normal recurring activities of an entity and
include regular management and supervisory activities.
Question – 9 (March/June 2019-Sept/Dec 2016, Dec 2020, March/June 2021)
Auditors are required to document a company’s accounting and internal control systems as part of
their audit process. Two methods available for documenting internal control systems are narrative
notes and questionnaires.
Required:
For each of the two methods, NARRATIVE NOTES and QUESTIONNAIRES:
(i) Describe the method for documenting internal control systems; and
(ii) Explain an ADVANTAGE of using this method.
Note: The total marks will be split equally between each part. (4 marks)
Answer
Documenting systems
Narrative notes
Narrative notes consist of a written description of the system. They detail what occurs in the system
at each stage and include any controls which operate at each stage.
Advantage:
• They are simple to record; after discussion with staff members, these discussions are easily written
up as notes.
• They can facilitate understanding by all members of the audit team, especially more junior
members who might find alternative methods too complex.
Disadvantages:
• Narrative notes may prove to be too cumbersome, especially if the system is complex or heavily
automated.
• This method can make it more difficult to identify missing internal controls as the notes record
the detail but do not identify control exceptions clearly.
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Questionnaires
Internal control questionnaires (ICQs) or internal control evaluation questionnaires (ICEQs) contain
a list of questions for each major transaction cycle; ICQs are used to assess whether controls exist
whereas ICEQs assess the effectiveness of the controls in place.
Advantage:
• Questionnaires are quick to prepare, which means they are a timely method for recording the
system.
• They ensure that all controls present within the system are considered and recorded, hence
missing controls or deficiencies are clearly highlighted to the audit team.
Disadvantages:
• It can be easy for the staff members to overstate the level of the controls present as they are
asked a series of questions relating to potential controls.
• A standard list of questions may miss out unusual or more bespoke controls used by the company.
Flowcharts
Flowcharts are a graphic illustration of the internal control system for the sales system. Lines usually
demonstrate the sequence of events and standard symbols are used to signify controls or documents.
Advantages:
• It is easy to view the system in its entirety as it is all presented together in one diagram.
• Due to the use of standard symbols for controls, it can be effective in identifying missing controls.
Disadvantages:
• They can sometimes be difficult to amend, as any amendments may require the whole flowchart
to be redrawn.
• There is still the need for narrative notes to accompany the flowchart and hence it can be a time-
consuming method.
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Question 10 (March/June 2017)

ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and Its Environment requires auditors to obtain an understanding of control activities relevant
to the audit.
Control activities are the policies and procedures which help ensure that management directives are
carried out.
Required:
Describe FOUR different types of control activities and, for each type, provide an example control a
company may implement. (4 marks)
Answer
Control activities
Segregation of duties – assignment of roles or responsibilities to ensure the tasks of authorising and
recording transactions and maintaining custody of assets are carried out by different people, thereby
reducing the risk of fraud and error occurring.
For example, the purchase ledger clerk recording invoices onto the purchase ledger, and the finance
director authorising the payment of those purchase invoices.
Information processing – controls including application and general IT controls, which ensure the
completeness, accuracy and authorisation of information being processed. For example, use of batch
control totals when entering transactions into the system.
Authorisation – approval of transactions by a suitably responsible official to ensure transactions are
genuine. For example, authorisation by a responsible official of all purchase orders.
Physical controls – restricting access to physical assets as well as computer programs and data files,
thereby reducing the risk of theft. For example, cash being stored in a safe which only a limited number
of employees are able to access.
Performance reviews – comparison or review of the performance of the business by looking at areas
such as budget versus actual results. For example, the review by department heads of monthly results
of actual trading to budget and prior year, with analysis of variances.
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Identify and explain FOUR application controls that should be adopted by Company to ensure the
completeness and accuracy of the input of purchase invoices. (4 marks)
Answer
Application controls
Document counts – the number of invoices to be input are counted, the invoices are then entered
one by one, at the end the number of invoices input is checked against the document count. This helps
to ensure completeness of input.
Control totals – here the total of all the invoices, such as the gross value, is manually calculated. The
invoices are input, the system aggregates the total of the input invoices’ gross value and this is
compared to the control total. This helps to ensure completeness and accuracy of input.
One for one checking – the invoices entered into the system are manually agreed back one by one to
the original purchase invoices. This helps to ensure completeness and accuracy of input.
Review of output to expected value – an independent assessment is made of the value of purchase
invoices to be input, this is the expected value. The invoices are input and the total value of invoices
is compared to the expected value. This helps to ensure completeness of input.
Check digits – this control helps to reduce the risk of transposition errors. Mathematical calculations
are performed by the system on a particular data field, such as supplier number, a mathematical
formula is run by the system, this checks that the data entered into the system is accurate. This helps
to ensure accuracy of input.
Range checks – a pre-determined maximum is input into the system for gross invoice value, for
example, $10,000; when invoices are input if the amount keyed in is incorrectly entered as being
above $10,000, the system will reject the invoice. This helps to ensure accuracy of input.
Existence checks – the system is set up so that certain key data must be entered, such as supplier
name, otherwise the invoice is rejected. This helps to ensure accuracy of input.
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General Control Example

Development of • Standards over systems design, programming and
computer applications documentation
• Full testing procedures using test data when developing
computer application
• Approval by computer users and management
• Segregation of duties so that those responsible for design are
not responsible for testing
• Installation procedures so that data is not corrupted in
transition
• Training of staff in new procedures and availability of
adequate documentation
Prevention or detection of • Segregation of duties
unauthorised changes to • Full records of program changes
programs • Password protection of programs so that access is limited to
computer operations staff
• Restricted access to central computer by locked doors,
keypads
• Maintenance of programs logs
• Virus checks on software: use of anti-virus software and
policy prohibiting use of non-authorised programs or files
• Back-up copies of programs being taken and stored in other
locations
• Control copies of programs being preserved and regularly
compared with actual programs
• Stricter controls over certain programs (utility programs) by
use of read-only memory
Testing and documentation of • Complete testing procedures
program changes • Documentation standards
• Approval of changes by computer users and management
• Training of staff using programs
Controls to prevent wrong • Operation controls over programs
programs or files being used • Libraries of programs
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• Proper job scheduling

Controls to prevent • Password protection
unauthorised • Restricted access to authorised users only
amendments to data files
Controls to ensure continuity of • Storing extra copies of programs and data files off-site
Operation • Protection of equipment against fire and other hazards
• Back-up power sources
• Disaster recovery procedures eg availability of back-up
computer facilities
• Maintenance agreements and insurance
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Audit Sampling
Question - 12 (December 06/Q5-a, c)
(i) In the context of ISA 530 Audit Sampling and Other Means of Testing, explain and provide
examples the terms ‘sampling risk’ and ‘non-sampling’ risk. (4 marks)
(ii) Briefly explain how sampling and non-sampling risk can be controlled by the audit firm.
(2 marks)
Answer
Sampling risk
Sampling risk is the possibility that the auditor’s conclusion, based on a sample, may be
different from the conclusion based on entire population.
Sampling risk can be controlled by the audit firm ensuring that it is using a valid method
of selecting items from a population and/or increasing the sample size.
The auditor may conclude from the results of testing that either material misstatements
exists, when they do not, or that material misstatements do not exist when in fact they do.
Non-sampling risk
Non –sampling risk arises from any factor that causes an auditor to reach an incorrect conclusion
that is not related to the size of the sample.
Non-sampling risk can be controlled by providing appropriate instruction and training for staff so
they know which audit techniques to use and will recognise an error when one occurs.
Examples of non-sampling risk include the use of inappropriate procedures, misinterpretation of
evidence or the auditor simply ‘missing’ an error.
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Question - 13 (June 09)

List and explain FOUR methods of selecting a sample of items to test from a population in
accordance with ISA 530 (Redrafted) Audit Sampling and Other Means of Testing.
(4 marks)
Answer
Random selection
Ensures each item in a population has an equal chance of selection, for example by using random
number tables.
Systematic selection
In which a number of sampling units in the population is divided by the sample size to give a sampling
interval.
Monetary Unit Sampling
This selection method ensures that each individual $1 in the population has an equal chance of being
selected.
Haphazard selection
The auditor selects the sample without following a structured technique – the auditor would
avoid any conscious bias or predictability.
Sequence or block
It involves selecting a block(s) of continguous items from within a population.
Tutorial note: Other methods of sampling are as follows:
Judgemental Sampling
Selecting items based on the skill and Judgement of the auditor.
ISA 530 Audit Sampling applies when the auditor has decided to use sampling to obtain sufficient
and appropriate audit evidence.
Required:
Define what is meant by ‘audit sampling’ and explain the need for this. (3 marks)
Answer
Audit sampling
Audit sampling is the application of audit procedures to less than 100% of items within a population
of audit relevance, such that all sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about the entire population.
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Audit sampling can be applied using either a statistical or a non-statistical approach. It involves testing
a smaller number of items and using the results to draw a conclusion about the whole balance or class
of transactions.
It is necessary for auditors to sample as it is impossible to select all items for testing as this would take
the audit team too long and it would cost too much.
In addition, auditors do not provide 100% assurance in their audit report about the financial
statements, they only provide reasonable assurance and hence it is not necessary to test every item
within a population.
Implication for the reduction in samples sizes
• The audit plan has not been followed
• Sufficient appropriate evidence may not have been obtained
• Material misstatements may go undetected
Factors to consider when deciding whether to use sampling
• The size of the population
• Completeness of the population
• Appropriateness of the population
Question 15 (December 2012)
Explain the potential advantages and disadvantages of using CAATs; and
Answer
Advantages of using CAATS
✓ CAATs enable the audit team to test a large volume of data accurately and quickly.
✓ If CAATs are utilised on the audit of company, then as long as they do not change their systems,
they can be cost effective after setup.

✓ Allows the team to test the actual system and records rather than printouts from the system which
could be incorrect.
✓ CAATs reduce the level of human error in testing and hence provide a better quality of audit
evidence.
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Disadvantages of using CAATS

• The cost of using CAATs in this first year will be high as there will be significant set up costs, it
will also be a time-consuming process which increases costs.
• If it is the first time that CAATs will be used on company’s audit, then the team may require
training on the specific CAATs to be utilised.
• If company’s inventory system is likely to change in the foreseeable future, then costly
revisions may be required to the designed CAATs.
• If testing is performed over the live system, then there is a risk that the data could be
corrupted or lost.
• If testing is performed using copy files rather than live data, then there is the risk that these
files are not genuine copies of the actual files.
Question 15
Explain the benefits and difficulties of using audit software in the audit of a Company;
(4 marks)
Answer
Benefits of using audit software
Standard systems at client
The same computerised systems and programs as used in all branches of Company. This means that
the same audit software can be used in each location providing significant time savings compared to
the situation where client systems are different in each location.
Use actual computer files not copies or printouts
Use of audit software means that the actual files can be tested rather than having to rely on printouts
or screen images. The latter could be incorrect, by accident or by deliberate mistake. The audit firm
will have more confidence that the ‘real’ files have been tested.
Test more items
Use of software will mean that more records can be tested – it is possible that all product lines could
be tested for obsolescence rather than a sample using manual techniques. The auditor will therefore
gain more evidence and have greater confidence that inventory is valued correctly.
Cost
The relative cost of using audit software decreases the more years that software is used. Any cost
overruns this year could be offset against the audit fees in future years when the actual expense will
be less.
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Difficulties of using audit software

- Substantial setup costs and time because the client’s procedures and files must be understood in
detail before implementation of the audit software.
- Audit software may not be available for the specific systems setup by the client, especially if those
systems are bespoke. The cost of writing audit software to test those systems may be difficult to
justify against the possible benefits on the audit.
- The software may produce too much output either due to poor design of the software or using
inappropriate parameters on attest.
- Checking the client’s files in a live situation. There is the danger that the client’s systems are
disrupted by the audit program.
- If the client’s systems are old the audit software may slow client's system down
- Audit staff may need to be trained to use the audit software
- Audit software can not use when client plan to implement new computerized accounting system
within the next year
Question 16
Explain the benefits and difficulties of using test data in the audit of a Company;
Benefits of Test Data
- Enables the auditor to test programmed controls which wouldn’t be able to be tested
- Once designed, costs incurred will be minimal unless the programmed controls are changed
requiring the test data to be redesigned
Limitation of Test Data
- Risk of corrupting the client’s systems
- Requires time to be spent on the client’s system if used in a live environment which may not be
convenient for the client
- Bespoke software can be expensive to set up
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Internal Audit
Internal Audit Assignment
✓ Appointed by audit committee
✓ Review efficiency and effectiveness of operations to improve operations
✓ A value for money audit
✓ Observing procedures carried out by the company's staff
✓ Reperforming procedures documented in procedures manuals
✓ Reporting findings directly to the board of directors
✓ Internal audit could review the effectiveness of the internal controls.
✓ Internal audit should report into the audit committee and
Management’s responsibility for internal audit service
✓ Taking responsibility for designing and maintaining internal control systems
✓ Determining which recommendations should take priority and be implemented
✓ Setting the scope of the internal audit work to be carried out
Factors to consider to establish Internal Audit Function for Listed Companies
• It would help the audit committee to discharge its duty for monitoring IC.
• The costs incurred against benefits gained
Concept for using the internal auditor as direct assistance
✓ Direct assistance describes the use of internal auditors to perform audit procedures under the
direction, supervision and review of the external auditor
✓ The external auditor should document their review of the work performed by the internal auditors
ISA 610 (Revised) requires the external auditor’s procedures to include re – performance of some of
the internal audit work used. Audit procedures that might be carried out by the external auditor
could include:
✓ Examination of items already examined by the internal auditors
✓ Examination of other similar items
✓ Observation of procedures performed by the internal auditors
Factors to consider when using work of Internal auditor
Primary
✓ Whether the work performed by the internal audit department relates to specific audit assertions
over which auditors’ concern
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Secondary
✓ Whether any members of internal audit department hold a professional qualification
✓ Whether a separate Audit Committee exists
✓ Whether internal audit department has a work plan which schedules the work they should
perform to the end of the year
✓ Review the internal auditor's working papers to ensure sufficient appropriate
evidence has been obtained
✓ Re-perform a sample of procedures performed by the internal auditor to ensure the same
conclusion is reached
Question 17
Explain the purpose of a value for money audit. (4 marks)
Answer
A value for money audit focuses on whether the best combination of services has been obtained
for the lowest level of resources.
In performing a value for money audit, there are three areas which an auditor will
commonly focus on being economy, efficiency and effectiveness, and these are known as the three
Es.
Economy – Keeping the cost of resources used to a minimum.
Efficiency – The relationship between the output from goods and services and the
resources used to p r o d u c e them.
Effectiveness – How well the organisation’s objectives have been achieved.
Question – 18 (March/June 2018)
The finance director is interested in establishing an internal audit department (IAD). In the company
she previously worked for the IAD carried out inventory counts, however, as this is not relevant for
Company, she has asked for guidance on what other assignments an IAD could be asked to perform.
Required:
Describe assignments the internal audit department of Company could carry out. (5 marks)
Answer
Assignments for internal audit department (IAD)
Value for money review – The IAD could be asked to assess whether Company is obtaining value for
money in areas such as capital expenditure.
Review of financial/operational controls – The IAD could undertake reviews of controls at head office
and the power station and make recommendations to management over such areas as the purchasing
process as well as the payroll cycle.
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Monitoring asset levels – The IAD could undertake physical verification of property, plant and
equipment (PPE) at the production site and head office and compare the assets seen to the PPE
register. There is likely to be a significant level of PPE and the asset register must be kept up to date
to ensure continuous production. If significant negative differences occur, this may be due to theft or
fraud.
Regulatory compliance – If the company operates in high regulatory environment, it will be subject
to a large number of laws and regulations such as health and safety and environmental legislation.
The IAD could help to monitor compliance with these regulations.
IT system reviews – The company is likely to have a relatively complex computer system linking
production data to head office. The IAD could be asked to perform a review over the computer
environment and controls.
Fraud investigations – The IAD can be asked to investigate any specific cases of suspected fraud as
well as review the controls in place to prevent/detect fraud.
The company is considering establishing an internal audit (IA) department next year. The finance
director has asked whether the work performed by the IA department can be relied upon by audit
firm.
Required:
Explain the factors that should be considered by an external auditor before reliance can be placed
on the work performed by a company’s internal audit department. (4 marks)
Answer
Reliance on internal audit
ISA 610 Using the Work of Internal Auditors details the factors the external auditors should consider
in order to place reliance on the work of the internal audit (IA) department as follows:
Objectivity
They should consider the status of IA within the company and if they are independent of other
departments, in particular the finance department. In addition, consideration should be given as to
who IA reports to, whether this is directly to those charged with governance or to a finance director.
Technical competence
The technical competence of IA staff should be considered. Consideration should be given to whether
they are members of a professional body and have relevant qualifications and experience.
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Due professional care

The external auditors should consider if the IA department have exercised due professional care, the
work would need to have been properly planned including detailed work programmes, supervised,
documented and reviewed.
Communication
In order to place reliance there needs to be effective communication between the internal auditors
and the external auditor.
This is most likely to occur when the IA department is free to communicate openly and regular
meetings are held throughout the year.
Question - 20
Discuss the advantages and disadvantages of outsourcing an internal audit department.
(8 marks)
Answer
Advantages of outsourcing internal audit
Staff recruitment
There will be no need to recruit staff for the internal audit department; the outsourcing company
will provide all staff and ensure staff is of the appropriate quality.
Skills
The outsourcing company will have a large pool of staff with specialist skills that the company may
not be able to afford if the internal audit department was run internally.
Set up time
The department can be set up in a few weeks rather than taking months to advertise and recruit
appropriate staff.
Costs
Costs for the service will be agreed in advance. This makes budgeting easier for the recipient
company as the cost and standard of service expected are fixed.
Flexibility (staffing arrangements)
Staff can be hired to suit the workloads and requirements of the recipient company rather than
full-time staff being idle for some parts of the year.
Disadvantages of outsourcing internal audit
Staff turnover
The internal audit staff allocated to one company may change frequently; this means that company
systems may not always be fully understood, decreasing the quality of the service provided.
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External auditors
Where external auditors provide the internal audit service there may be a conflict of interest (self-
review threat), where internal audit work is then relied upon by external auditors.
Cost
The cost of the outsourced service may be too high for the company, which means that an internal
audit department is not established at all. There may be an assumption that internal provision would
be even more expensive.
Control
Where internal audit is provided in-house, the company will have more control over the activities of
the department.
Question 21
The company’s directors are considering establishing an internal audit department next year, and the
finance director has asked what impact, if any, establishing an internal audit department would have
on future external audits performed by audit firm.
Required:
Explain the potential impact on the work performed by audit firm during the interim and final
audits, if company was to establish an internal audit department. (4 marks)
Answer
Impact on interim and final audit
Interim audit
Audit firm could look to rely on any internal control documentation produced by internal audit (IA) as
they would need to assess whether the control environment has changed during the year.
If the IA department has performed testing during the year on internal control systems, such as the
payroll, sales and purchase systems, then Audit firm could review and possibly place reliance on this
work. This may result in the workload reducing and possibly a decrease in the external audit fee.
During the interim audit, Audit firm would need to perform a risk assessment to assist in the planning
process. It is possible that the IA department may have conducted a risk assessment and so Apple
could use this as part of their initial planning process.
Audit firm would need to consider the risk of fraud and error and non-compliance with law and
regulations resulting in misstatements in the financial statements. This is also an area for IA to
consider, hence there is scope for Audit firm to review the work and testing performed by IA to assist
in this risk assessment.
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Final audit
It is possible that the IA department may assist with year-end inventory counting and controls and so
Audit firm can place some reliance on the work performed by them, however, they would still need
to attend the count and perform their own reduced testing.
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Service Organisation
Question 22 (March-June 2016)
Explain the additional factors Audit firm should consider during the audit in relation to Client’s use
of the payroll service organisation. (3 marks)
Answer
– The audit team should gain an understanding of the services being provided by service
organisation, including the materiality and the basis of the outsourcing contract.
– They will need to assess the design and implementation of internal controls over Client’s service
at service organisation.
– The team may wish to visit service organisation and undertake tests of controls to confirm the
operating effectiveness of the controls.
– If this is not possible, Audit firm should contact Service organisation’s auditors to request their
management letter
– Audit firm is responsible for obtaining sufficient and appropriate evidence, therefore no reference
may be made in the audit report regarding the use of information from service organisation’s
auditors.
Experts
Question 23
Explain the factors audit firm should consider when placing reliance on the work of the independent
valuer. (December 2013/2014) (5 marks)
Answer
ISA 500 Audit Evidence requires auditors to evaluate the competence, capabilities including expertise
and objectivity of a management expert.
This would include consideration of the qualifications of the valuer and assessment of whether they
were members of any professional body or industry association. The expert’s independence should
be ascertained, with potential threats such as undue reliance on client or a self-interest threat such as
share ownership considered.
In addition, audit firm should meet with the expert and discuss with them their relevant expertise, in
particular whether they have valued similar land and buildings to those of client in the past.
Audit firm should also consider whether the valuer understands the accounting requirements of IAS
16 Property, Plant and Equipment in relation to valuations.
The valuation should then be evaluated. The assumptions used should be carefully reviewed and
compared to previous revaluations at client. These assumptions should be discussed with both
management and the valuer to understand the basis of any valuations.
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Performing or Audit Fieldwork or Audit Procedure

Audit evidence
This refers to the information obtained by the auditor during the course of his audit and used by him
in forming his audit opinion. Auditors should obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to based the audit opinion.
Question 1
List and explain FOUR factors that will influence the auditor’s judgement regarding the
sufficiency of the evidence obtained. (4 marks)
Answer
Sufficiency of evidence
✓ Assessment of risk at the financial statement level and/or the individual transaction level. As
risk increases then more evidence is required.

✓ The materiality of the item. More evidence will normally be collected on material items.
✓ The nature of the accounting and internal control systems. If the auditor will place more
reliance on good accounting and internal control systems, limiting the amount of audit evidence
required.
✓ The auditor’s knowledge and experience of the business. Where the auditor has good past
knowledge of the business and trusts the integrity of staff, then less evidence will be required.
Question - 2
ISA 500 Audit Evidence requires audit evidence to be reliable.
Required:
List FOUR factors that influence the reliability of audit evidence. (4 marks)
Answer
✓ Audit evidence is more reliable when it is obtained from independent sources outside the entity.
✓ Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly.
✓ Audit evidence is more reliable when it exists in documentary form, whether paper, electronic,
or other medium than oral representation

✓ Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles.
45
Question – 3 (Sept/Dec 2017)

Describe the steps the auditor should perform in undertaking a positive receivables circularization.
(4 marks)
Answer
✓ Obtain consent from the finance director of Dashing Co in advance of undertaking the
circularisation.
✓ Obtain a list of trade receivables at the year end, cast this and agree it to the sales ledger control
account total. Select a sample from the receivables list ensuring that a number of nil, old, credit
and large balances are selected. Circularisation letters should be prepared on Dashing Co’s
letterhead paper, requesting a confirmation of the year-end receivables balance, and for replies
to be sent directly to the audit team using a pre-paid envelope.
✓ The finance director of Dashing Co should be requested to sign all the letters prior to them being
sent out by a member of the audit team.

✓ Where no response is received, follow this up with another letter or a phone call and where
necessary alternative procedures should be performed

✓ When replies are received, they should be reconciled to Dashing Co’s receivables records, any
differences such as cash or goods in transit should be investigated further.
Positive confirmation
This is a confirmation that requires the 3rd party to reply to the auditor directly regardless of
whether he agrees with the amount or not.
One alternative is the leave the amount blank and then ask the 3rd party to fill in the amount but it is
doubtful if this approach will lead to the 3rd party responding to the confirmation.
Negative confirmation
A negative confirmation will only require the 3rd party to reply the auditor if he does not agree with
the amount. In other words, the 3rd party does not need to reply the auditor if he agrees with the
amount. This type of confirmation is risky as a non-reply from the 3rd party may also mean that the
confirmation could be lost in the post.
46

(i) Describe FIVE types of procedures for obtaining audit evidence; and
(ii) For each type of procedure, describe an example relevant to the audit of BANK balances.
Answer
Procedures to obtain evidence and an audit test relevant to bank balances
(i) Inspection
Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset.
(ii) Inspect the bank reconciliation for any outstanding lodgements and agree to the pre year-end cash
book, post year-end bank statement and also to paying-in-book pre year end.
(i) Observation
Observation consists of looking at a process or procedure being performed by others.
(ii) Observe the process for the opening of mail and logging of any cheques received from customers
to ensure adequate segregation of duties.
(i) Analytical procedures
Analytical procedures consist of evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data. Analytical procedures also encompass such
investigation as is necessary of identified fluctuations or relationships which are inconsistent with
other relevant information or which differ from expected values by a significant amount.
(ii) Review the year-end bank balance against prior year to identify any significant fluctuations as these
could be evidence of window dressing and discuss with management.
(i) Inquiry
Inquiry consists of seeking information from knowledgeable persons, both financial and non-financial,
within the entity or outside the entity.
(ii) Inquire of management as to whether the company has opened/closed any bank accounts during
the period.
(i) Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation
may be performed manually or electronically.
(ii) Recalculate the additions in the year-end cash book to confirm accuracy of the amount.
47
(i) External confirmation

An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party, in paper form, electronic form or by other medium.
(ii) Obtain a standard bank confirmation from each bank the company has undertaken banking
transactions with during the year.
(i) Re-performance
Re-performance involves the auditor’s independent execution of procedures or controls which were
originally performed as part of the entity’s internal control.
(ii) Re-perform the year-end bank reconciliation to ensure the process was undertaken accurately.
Directional Testing
In a double entry system, we must have a debit entry and a credit entry for every transaction. If a
debit or a credit entry is misstated, then there must be a second misstatement to balance the first
one.
Question - 5
With reference to ISA 520 Analytical Procedures explain
(i) What is meant by the term ‘analytical procedures’; (2 marks)
(ii) The different types of analytical procedures available to the auditor; and (3 marks)
(iii) The situations in the audit when analytical procedures can be used. (3 marks)
Answer
(i) Explanation of analytical procedures
Analytical procedures are used in obtaining an understanding of an entity and its
environment and in the overall review at the end of the audit.
‘Analytical procedures’ actually means the evaluation of financial and other information, and
the review of plausible relationships in that information. The review also includes identifying
fluctuations and relationships that do not appear consistent with other relevant information or
results.
(ii) Types of analytical procedures
Analytical procedures can be used as:
– Comparison of comparable information to prior periods to identify unusual changes or
fluctuations in amounts.
– Comparison of actual results of the entity with budgets and/or forecasts, in order to
determine the variances.
– Comparison to industry information either for the industry as a whole or by
comparison to similar entities to determine whether they are reasonable.
48
(iii) Use of analytical procedures

As Risk assessment procedures
Analytical procedures are used at the beginning of the audit to help the auditor obtain an
understanding of the entity and assess the risk of material misstatement. Audit Procedures can
then be directed to these ‘risky’ areas.
As substantive procedures
Analytical procedures can be used as substantive procedures in determining the risk of
material misstatement at the assertion level during work on the income statement and
statement of financial position (balance sheet).
In the overall review at the end of the audit
Analytical procedures help the auditor at the end of the audit in forming an overall conclusion
as to whether the financial statements as a whole are consistent with the auditor’s
understanding of the entity.
ISA 230 Audit Documentation deals with the auditor’s responsibility to prepare audit documentation
for an audit of financial statements.
Required:
State FOUR benefits of documenting audit work. (4 marks)
Answer
Benefits of Documenting audit work
- Provides evidence of the auditor’s conclusion about the achievement of the overall objective of
the audit.
– Provides evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.
– Assists the engagement team to plan and perform the audit.
– Assists auditor to direct, supervise and review the audit work of team members
– Enables the engagement team to be accountable for its work.
– Retains a record of matters of continuing significance to future audits
Reasons for Producing audit documentation
✓ It provides evidence for the basis of key conclusions
✓ It enables senior team members to direct, supervise and review the audit work
✓ It enables quality control reviews to be performed
49

(i) Define a ‘test of control’ and a ‘substantive procedure’; (2 marks)
(ii) State ONE test of control and ONE substantive procedure in relation to sales invoicing.
(2 marks)
Answer
Tests of control test the operating effectiveness of controls in preventing, detecting or correcting
Substantive procedures are aimed at detecting material misstatements at the assertion level. They
include tests of detail of transactions, balances, disclosures and substantive analytical procedures.
(ii) Example tests of control over sales invoicing
✓ Inspect numerical sequence of sales invoices, if any breaks in the sequence noted, enquire of
management as to missing invoices.

✓ Review a sample of sales invoices for evidence of authorisation by a responsible offi cial of any
discounts allowed.
✓ Inspect customer statements for evidence of regular preparation.
(ii) Example substantive procedures over sales invoicing

✓ Select a sample of pre and post year end goods despatch notes and follow through to pre or
post year end sales invoices, to ensure the sales cut-off has been correctly applied.
✓ Perform an analytical review of monthly sales, compare any trends to prior years and discuss
significant fluctuations with management.

✓ Review post year end credit notes to identify if any pre year end sales should be removed.
50
Completeness
Occurrence
Accuracy
Audit Procedures for Revenue
Cut off
C&P
✓ For a samples of goods delivery notes, verify a related invoice has Yes
been raised and recorded for the appropriate value in the correct
accounting period.
✓ Compare monthly sales for the year with the sales from the same Yes
month in the previous year and to expectations. Where there are
significant differences, follow up to ensure this is not due to
unrecorded revenue.
✓ Review the unfulfilled orders tray against the goods outward notes Yes
for evidence of unrecorded sales, in case accounts staff have
actually actioned the order but forgotten to file/send on the order.
✓ Compare actual sales by product or month against budgeted sales Yes
to help identify any lines/months that are lower than expected and
may indicate unrecorded sales.
✓ Select a sample of GDNs raised during the year; agree to the sales Yes
invoice and that they are recorded in the sales day book.
✓ Review the total amount of sales, compare to the prior year and Yes
budget and investigate any significant differences.
✓ Compare the reported revenue figure to the budget and to the Yes
previous year, investigating any significant differences
✓ Select a sample of invoices from the sales day book and agree to Yes
GDNs
✓ Select a sample of sales transactions recorded in the sales day Yes
book; agree the details back to a goods despatched note (GDN)
and customer order.
✓ Review the monthly breakdown of sales per key product, compare Yes
to the prior year and budget and investigate any significant
differences.
✓ Review the treatment of a sample of post year-end returns Yes
✓ Select a sample of pre and post year-end GDNs and agree that the Yes
sale is recorded in the correct period’s sales day books.
51
✓ Review the post year-end sales returns and agree if they relate to Yes
pre year-end sales that the revenue has been correctly removed
from the sales day book.
✓ Select a sample of sales invoices and recalculate that the totals and Yes
calculation of sales tax are correct.
✓ For a sample of sales invoices, confirm the sales price stated agrees Yes
to the authorised price list.
✓ Agree for a sample of sales invoices that they have been correctly Yes
recorded within revenue nominal account codes and included
within revenue in the financial statements.
52
Completeness
Occurrence
Accuracy
Audit Procedures for Purchase
Cut off
C&P
✓ Perform analytical procedures on purchases, eg comparison to the Yes
prior year on a month-by-month basis, ratio of purchases to
payables, gross profit % etc and investigate any significant
fluctuations.
✓ For a sample of supplier invoices, trace amounts to the GRN, order Yes
and payables ledger.
✓ Inspect the unmatched GRNs file and seek explanations for any old Yes
unmatched items and trace these to the year-end accruals listing.
✓ For a sample of amounts on the ledger, agree to the computerised Yes
payments list to verify the amount and supplier
✓ For a sample of amounts in the payables ledger, trace these to the Yes
invoice and other supporting documentation such as GRNs
✓ For a sample of GRNs, agree back to the original order details Yes
✓ For a sample of payees on the computerised payments list, agree Yes
amounts back to the supporting documentation such as invoices
and GRNs
✓ For a sample of payments made after the year-end, trace back to Yes
the computerised payments list
✓ For a sample of payees on the computerised payments list, trace Yes
payment to post year-end bank statements
✓ For a sample of GRNs dated shortly before and after the year-end, Yes
agree that the amounts on invoices are posted to the correct
financial year
✓ Review the schedule of accruals and agree to GRNs, inspecting the Yes
date of receipt of goods to ensure that goods received after the
year-end are not included
✓ Inspect outstanding orders on the 'orders placed' file for any orders Yes
completed but not yet invoiced
✓ Select a sample of purchase invoices and recalculate that the totals Yes
and calculation of sales tax are correct.
53
✓ Agree for a sample of purchase invoices that they have been Yes
correctly recorded within purchase nominal account codes and
included within purchase in the financial statements.
54
Completene
Occurrence
Accuracy
Audit Procedures for Wages and Salaries
Cut off
C&P
ss
✓ Agree the total wages and salaries expense per the payroll system Yes Yes
to the trial balance, investigate any differences.
✓ Cast a sample of payroll records to confirm completeness and Yes Yes
accuracy of the payroll expense.
✓ For a sample of employees, recalculate the gross and net pay and Yes Yes
agree to the payroll records to confirm accuracy.
✓ Re-perform the calculation of statutory deductions to confirm Yes Yes
whether correct deductions for this year have been made in the
payroll.
✓ Compare the total payroll expense to the prior year and investigate Yes Yes
any significant differences.
✓ Review monthly payroll charges, compare this to the prior year and Yes Yes
budgets and discuss with management for any significant variances.
✓ Perform a proof in total of total wages and salaries, incorporating Yes Yes
joiners and leavers and the annual pay increase. Compare this to
the actual wages and salaries in the financial statements and
investigate any significant differences.
✓ Select a sample of joiners and leavers, agree their start/leaving date Yes Yes Yes
to supporting documentation, recalculate that their first/last pay
packet was accurately calculated and recorded.
✓ Agree the total net pay per the payroll records to the bank transfer Yes Yes
listing of payments and to the cashbook.
✓ Agree the individual wages and salaries per the payroll to the Yes Yes
personnel records for a sample.
✓ Select a sample of weekly overtime sheets and trace to overtime Yes Yes
payment in payroll records to confirm completeness of overtime
paid.
✓ Agree the individual wages and salaries per the payroll to the Yes
personnel records and records of hours worked per clocking in
cards.
55
✓ For a sample of payroll transactions recorded in the ledger, trace Yes

the payroll reports and attendance records to the payment
vouchers and salary receipt forms.
✓ Agree the year end tax liablility to the payroll records and Yes
subsequent payment to the post year end cash book
✓ Check the cut-off procedures that ensure that the payroll and Yes
payable payrolls are recorded in the correct period
✓ Enquire if any transactions represent payroll paid after reporting Yes
period, and if so, whether they have been included under the
correct period.
✓ Agree the total wages and salaries expenses per the payroll control Yes Yes
account to the GL and the FSs
Substantive procedures for depreciation(June 12/ March/June 2018)

✓ Discuss with management the rationale for the changes to property, plant and equipment
(PPE) depreciation rates, useful lives, residual values and depreciation methods and ascertain
how these changes were arrived at.
✓ Confirm the reasonableness of these changes, by comparing the revised depreciation rates,
useful lives and methods applied to PPE to industry averages and knowledge of the business.
✓ Review the capital expenditure budgets for the next few years to assess whether the revised
asset lives correspond with the planned period until replacement of the relevant asset
categories.
✓ Review the non-current asset register to assess if the revised depreciation rates have been
applied.
✓ Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to
assess the reasonableness of the revised depreciation rates.

✓ Select a sample of PPE and recalculate the depreciation charge to ensure that the non-
current assets register is correct and ensure that new depreciation rates have been
appropriately applied.
✓ Obtain a breakdown of depreciation by asset categories, compare to prior year; where
significant changes have occurred, discuss with management and assess whether this change
is reasonable.
56
✓ For asset categories where there have been a minimal number of additions and disposals,
perform a proof in total calculation for the depreciation charged on PPE, discuss with
management if significant fluctuations arise.
✓ Review the disclosure of the depreciation charges and policies in the draft financial statements
and ensure it is in line with IAS 16 Property, Plant and Equipment.

Substantive procedures for directors’ bonuses (March/June 2018, Dec 2020)
✓ Obtain a schedule of the directors’ bonus paid in year end and cast the schedule to ensure
accuracy and agree amount disclosed in the financial statements.

✓ Review the schedule of current liabilities and confirm the bonus accrual is included as a year-
end liability.
✓ Agree the individual bonus payments to the payroll records.
✓ Recalculate the bonus payments and agree the criteria, including the exclusion of intangible
assets, to supporting documentation and the percentage rates to be paid to the directors’
service contracts.
✓ Confirm the amount of each bonus paid post year end by agreeing to the cash book and bank
statements.
✓ Agree the amounts paid per director to board minutes to ensure the sums included in the
current year financial statements are fully accrued and disclosed.
✓ Review the board minutes to identify whether any additional payments relating to this year
have been agreed for any directors.

✓ Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
✓ Review the disclosures made regarding the bonus paid to directors and assess whether these
are in compliance with local legislation.

Substantive procedures for directors’ emoluments/remuneration (June14/March/June 2017)
✓ Vouch a sample of salary amounts to monthly payroll records and bank statements to ensure the
amounts recorded are accurately disclosed.
✓ Recalculate the level of bonuses awarded and vouch to board meeting minutes to ensure amounts
are accurately calculated and appropriately authorized.
✓ Review the directors’ emoluments disclosure note to ensure it is in accordance with applicable
law and accounting standards.
✓ Obtain a schedule of the directors’ remuneration, split by salary and bonus paid and cast the
schedule to ensure accuracy.
✓ Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.
57
✓ Review the board minutes to identify whether any additional payments relating to this year
have been agreed for any directors.
✓ Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
The order of reliability of the audit evidence relating to the accuracy of wages and salaries
1) Proof in total calculation performed by an audit team member
2) Recalculation of the gross and net pay for a sample of employees by an internal audit team
member of the company
3) Written representation from the directors of the company confirming the accuracy of wages
and salaries
4) Verbal confirmation from the finance director of the company confirming the accuracy of
wages and salaries
Substantive ANALYTICAL PROCEDURES for wages and salaries
✓ Compare the current year total payroll expense to the prior year and investigate any significant
differences
✓ Perform a proof in total calculation and compare expected expense to actual expense within the
draft financial statements
✓ Compare the total payroll expense to the prior year and investigate any significant differences.
✓ Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management any significant variances.
✓ Compare overtime pay as a percentage of factory normal hours pay to investigate whether it is at
a similar level to the prior year and within an acceptable range. Investigate any significant
differences.
✓ Perform a proof in total of total wages and salaries, incorporating joiners and leavers and any pay
increase. Compare this to the actual wages and salaries in the financial statements and investigate
58
Audit procedures is likely to provide the auditor with the MOST reliable audit evidence regarding
the legal claim
✓ Level-1 Request a written representation from management supporting their assertion that the
claim will not successful.

✓ Level-2 Review the minutes of the disciplinary hearing to understand whether the company has
acted in accordance with employment legislation and its internal rules.

✓ Level-3 Review correspondence between the company and its lawyers regarding the likely
outcome of the case.

Level-4-Send an enquiry letter to Newthorpe’s lawyers to obtain their view as to the probability
of the claim being successful.
59
Right&Obligation
Completeness
Audit Procedures for Property Plant and Equipment
Valuation
Existence
C&P
✓ Recalculate the depreciation charge for a sample of assets ensuring Yes
that it is being applied consistently and in accordance with IAS 16
Property, Plant and Equipment
✓ Select a sample of additions and agree cost to supplier invoice to Yes
confirm valuation.
✓ Review depreciation policies for reasonableness by comparison to Yes
prior year, industry practices, the entity’s replacement policy and
the profits/losses arising on disposal of assets.
✓ For a sample of assets recalculate the depreciation charge for the Yes
year and agree to the entity asset register.
✓ Perform a proof in total calculation of depreciation, considering the Yes
timing of additions and disposals and compare this expectation to
the actual charge, and investigate any significant differences.
✓ If any assets have been revalued during the year then assess the Yes
reasonableness of the valuer.
✓ In particular consider their experience, independence, scope of Yes
work and assumptions used.
✓ Agree the revalued amounts to a valuation report, for a sample Yes
recalculate the revaluation surplus and agree to the revaluation
reserve.
✓ Review the repairs and maintenance expense accounts for evidence Yes
of items of a capital nature
✓ Obtain a breakdown of additions, cast the list and agree included in Yes
the non-current assets register to confirm completeness of PPE.
✓ Reconcile the schedule of PPE with the general ledger. Yes
✓ Select a sample of assets physically present at the entity’s premises Yes
and inspect the asset register to ensure that these are included.
✓ Reperform the reconciliation of the non-current asset register to Yes
the general ledger, investigate any differences.
60
✓ Review board minutes for evidence of disposals during the year and Yes
verify that these are appropriately reflected in the non-current
assets register
✓ For a sample of additions recorded in PPE, physically verify them via Yes
site visits to confirm existence.
✓ Obtain a breakdown of disposals, cast the list and agree all assets Yes
removed from the non-current assets register to confirm existence.
✓ Verify ownership of property via inspection of title deeds and Yes
registration documents.
✓ For a sample of additions agree to purchase invoices to verify Yes
invoice relates to the entity.
✓ Review any new lease agreements to ensure assets are correctly Yes
treated as finance or operating leases.
Completene
Obligation
Valuation
Existence
Audit Procedures for Non-Current Liabilities
C&P
✓ Obtain a breakdown of all loans outstanding at the year end, cast Yes ss
to verify arithmetical accuracy and agree the total to the FSs

✓ Agree the balance outstanding to the bank confirmation letter Yes Yes
✓ Inspect bank confirmation letters for any loans listed that have not Yes
been included in the FSs
✓ Inspect the bank confirmation letter for details of any security over Yes
assets and agree the details to the disclosure in the FSs
✓ Inspect FSs for disclosures of interest rates and split of the loan Yes
between CL & NCL
✓ Recalculate the split between CL & NCL Yes
✓ Inspect the loan agreement for restrictive covenants (terms) and Yes
determine the effect of any loan covenants breaches.
✓ Inspect the cash book for loan repayments made. Yes Yes
✓ For the related FC in the SOPOL, recalculate the interest charge and Yes
any interest accrual in accordance with terms within the loan
agreement, to ensure accuracy.
61
Accuracy &
Completene
Obligation
Valuation
Existence
Audit Procedures for Bank and Cash
C&P
ss
✓ Obtain the bank reconciliation and cast to check the additions to Yes
ensure arithmetical accuracy.
✓ Obtain a bank confirmation letter from Co’s bankers for all of its Yes Yes
accounts.
✓ Agree the balance per the CB on the reconciliation to the year end Yes
CB and FSs
✓ Agree the balance per the bank statement to an original year end Yes
bank statement and also to the bank confirmation letter.
✓ Trace all of the outstanding lodgements to the pre year end CB, post Yes Yes
year end bank statement and to paying in book pre year end.
✓ Trace all unpresented cheques through to a pre year end cash book Yes Yes
and post year end statement. For any unusual amounts or
significant delays obtain explanations from management.
✓ Examine any old unpresented cheques to assess if they need to be Yes Yes
written back into the purchase ledger.
✓ Inspect the bank confirmation letter for details of any security Yes
provided by the company or any legal right of set-off as this may
require disclosures.
✓ Review the financial statements to ensure that the disclosure of Yes
bank balances is complete and accurate and classified
appropriately between current assets and current liabilities.
✓ Review the cash book and bank statements for any unusual items Yes Yes
or large transfers around the year end, as this could be evidence of
window dressing.
✓ Agree all accounts listed on the bank confirmation letter to the
company’s bank reconciliations or the trial balance/general

ledger to ensure completeness of bank balances.
✓ Count the petty cash in the cash tin at the year end and agree the Yes Yes
total to the balance included in the FSs.
62
Completene
Valuation
Existence
Audit Procedures for Trade Receivable
Right
C&P
ss
✓ Obtain a copy of the aged receivables listing, test a sample of Yes
balance to ensure the aging is accurate and discuss the
recoverability of any significant, long outstanding balances with
management. Vouch any explanations given to supporting
documentation.
✓ For a sample of year end receivable balances that include material Yes
balances, review post – year end receipts from customers to assess
their recoverability.
✓ Review pre and post year end correspondence with customers who Yes
have significant/ long overdue balances at the year end.
✓ Inspect the board minutes after the year end for evidence of Yes
discussions of uncollected receivables balances, eg due to
administration of major customers.
✓ Recalculate the allowance for irrecoverable receivables Yes
✓ Calculate the average receivable collection period and compare this Yes Yes
to prior year, investigate any significant differences.
✓ Inspect board minutes to assess whether there are any material Yes
disputed receivables that may require write off.
✓ Perform a receivable circularization Yes
✓ Review post year end cash receipts from customers and follow Yes Yes Yes
through to pre year end receivable balances
✓ Agree the receivable ledger control account with the receivable Yes Yes
ledger list of balances.
✓ Select a sample of year end receivable balances and agree back to Yes
valid supporting documentation of GDN and sale order.
✓ Select a sample of goods despatched notes from before the year Yes Yes
end and after year end, and follow through to the sale invoice to
ensure they are recorded in the correct accounting period.
63
✓ Review the receivable ledger for any credit balances and discuss Yes Yes Yes
with management whether these should be reclassified as
payables.
✓ Review bank confirmations and loan agreements for any evidence Yes
that receivables have been assigned as security for amounts owed
by the company.
✓ Review board minutes for evidence that legal title to receivables Yes
has been sold onto a third party such as a factor.
✓ For a sample of receivables, agree the balance recorded on the sales Yes
ledger to the original name of the customer on a sales order or a
contract.
✓ Compare the total trade receivable against prior year and Yes
investigate any significant differences.
✓ Select a sample of goods despatched notes from before the year Yes
end, agree to sales invoices and to inclusion in the sales ledger and
year-end receivables ledger.
✓ Agree the total of individual sales ledger accounts to the aged Yes
receivables listing and to the trial balance.
✓ Obtain the prior year aged receivables listing and for significant Yes
balances compare to the current year receivables listing for
inclusion and amount due.
✓ Discuss with management any missing receivables or significantly Yes
lower balances.
✓ Obtain a list of trade receivable, cast to verify arithmetical accuracy Yes Yes
and agree to the GL and the FSs
64
Completenes
Obligation
Valuation
Existence
Audit Procedures for Trade payable
C&P
s
✓ Analytically review the level of payables this year compared to prior Yes
year and discuss any balances that seem artificially low with
management
✓
✓ Request that the client send a confirmation letter to the suppliers Yes Yes
asking them to send a reply to the auditor stating the balance owed
by the client to them at the year end and follow up any non-replies
and any reconciling items between the balance confirmed and the
ledger balance.
✓ Review the cash book post year end for significant payments to Yes
supplier, trace large payments to the year-end payables listing.
✓ Calculate the payables payment period, compare to prior year end Yes Yes
investigate significant differences.
✓ Inspect the trade payables ledger for any debit balances, for any Yes Yes
significant amount s discuss with mgt and consider reclassification
as current assets
✓ Select a sample of goods received notes immediately before the Yes

year end and follow through to inclusion in the year end payables
balance.
✓ Enquire of mgt their process for identifying goods received but not Yes
invoiced and ensure that it is reasonable.
✓ Inspect invoices received after the year end in respect of goods Yes
delivered before the year end and trace through to the accruals
listing.
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✓ Obtain supplier statements and reconcile these to the payable Yes Yes Yes Yes
balances. Investigate any reconciling items.
✓ Reconcile the total of the individual payables’ accounts with the Yes
control account.
✓ Obtain a list of trade payables, cast to verify arithmetical accuracy Yes Yes
and agree to the GL and the FSs
✓ Review disclosure of payables in the FSs Yes
✓ Reconcile the payables list from the payables ledger to the general Yes Yes
ledger and accounts
✓ Cast the list of payables balances from the ledger at the year-end Yes Yes
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Right&Obligation
Completeness
Audit Procedures for Inventory
Valuation
Existence
C&P
✓ For a sample of invoices received from supplier vouch the cost of Yes
goods to invoices.
✓ Discuss method of cost approximation used with management(eg Yes
average cost) and compare current market price to ensure that the
use of a cost approximation is appropriate.
✓ For a sample of sales made post year end, agree sales price to sale Yes
invoices and the cash book to confirm the NRV of inventory is
greater than cost.
✓ Determine whether the valuation placed on perishable inventory at Yes
the year end is reasonable given the limited sale ability of such
items.
✓ Select a sample of goods in inventory at the year end, agree the Yes
cost per the records to a recent purchase invoice and ensure that
the cost is correctly stated.
✓ Select a sample of year-end goods and review post year-end sales Yes
invoices to ascertain if net realisable value is above cost or if an
adjustment is required.
✓ Assess the reasonableness of management’s estimates of realisable Yes
value of inventory that has not yet been sold by reviewing sales
before the year-end, comparing the values with inventory that has
been sold since the year-end and considering offers made which
have not yet been finalised.
✓ Obtain the breakdown of WIP and agree a sample of WIP assessed Yes
during the inventory count to the WIP schedule, agreeing the
percentage completion to that recorded at the inventory count.
✓ For a sample of inventory items (finished goods and WIP), obtain Yes
the relevant cost sheets and agree raw material costs to recent
purchase invoices, labour costs to time sheets or payroll records
and confirm overheads allocated are of a production related nature.
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✓ Examine post year-end credit notes to determine whether there Yes

have been returns which could signify that a write down is required.
✓ Discuss the basis of WIP valuation with management and assess its Yes
reasonableness.
✓ Select a sample of items included in WIP at the year end and Yes
ascertain the final unit cost price by verifying costs to be incurred
to completion to relevant supporting documentation. Compare to
the unit sales price included in sales invoices post year-end to
assess NRV.
✓ During the inventory count select a sample of assets recorded in the Yes
inventory records and agree to the warehouse to confirm the assets
exist.
✓ Obtain a sample of pre year-end goods despatch notes and agree Yes
that these finished goods are excluded from the inventory records.
✓ Confirm during the inventory count that any goods belonging to Yes
third parties are excluded from the inventory records and count.
✓ For year-end raw materials and finished goods confirm title belongs Yes
to the company by agreeing goods to a recent purchase invoice in
the company name.
✓ Obtain a copy of the inventory listing and agree the total to the Yes
general ledger and the financial statements.
✓ During the inventory count select a sample of goods physically Yes
present in the warehouse and confirm recorded in the inventory
records.
Substantive Procedures for Research and development (Dec 2015/March/June-2018/ 2019,

March/June 2021)
✓ Obtain and cast a schedule of intangible assets, agree the closing balances to the general
ledger, trial balance and draft financial statements.

✓ Discuss with the finance director the rationale for the the useful life and consider its
reasonableness.
✓ Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm that it is in line with the amortisation policy and that amortisation
only commenced from the point of production.
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✓ For the projects, discuss with management the details of each project along with the stage of
development and whether it has been capitalised or expensed.
✓ For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.

✓ For those capitalised as development, agree costs incurred to invoices.
✓ Confirm technically feasible and intention to complete the project by discussion with
development managers or review of feasibility reports.

✓ Review market research reports to confirm Company has the ability to sell the product once
complete and probable future economic benefits will arise.

✓ Review the costs, projected revenue and cash flow budgets for the projects to confirm
Company has adequate resources to complete the development stage and that probable
future economic benefits exist. Agree the budgets to supporting documentation.
✓ Review the disclosures for intangible assets in the draft financial statements to verify that
they are in accordance with IAS 38 Intangible Assets.

Substantive Procedures for Sales tax liability(March/June 2019)
✓ Agree the year-end sales tax liability in the trial balance to the tax return/reconciliation
submitted to the tax authority and cast the return/reconciliation.

✓ Agree the quarterly sales tax charged equates to ..% of the last quarter’s sales as per the sales
day book.
✓ Recalculate the sales tax incurred as per the reconciliation is equal to xx% of the final quarter’s
purchases and expenses as per the purchase day book.

✓ Recalculate the amount payable to the tax authority as being sales tax charged less sales tax
incurred.
✓ Compare the year-end sales tax liability to the prior year balance or budget and investigate
✓ Agree the subsequent payment to the post year-end cash book and bank statements to
confirm completeness and that it has been paid in line with the terms of the tax authority.
✓ Review any current and post year-end correspondence with the tax authority to assess
whether there are any additional outstanding payments due. If so, confirm they are included
in the year-end liability.
✓ Review any disclosures made of the sales tax liability to ensure that it is shown as a current
liability and assess whether disclosures are in compliance with accounting standards and
legislation.
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Substantive Procedure Going concern (June 12/14/September/December 2016/2018)

✓ Obtain the company’s cash flow forecast and review the cash inflows and outflows.
Assess the assumptions for reasonableness and discuss the findings with management to
understand if the company will have sufficient cash.
✓ Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.

✓ Evaluate management’s plans for future actions, including their contingency plans in relation
to ongoing financing and plans for generating revenue, and consider the feasibility of these
plans.
✓ Review the company’s post year-end sales and order book to assess if the levels of trade are
likely to increase and if the revenue figures in the cash flow forecast are reasonable.
✓ Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.

✓ Review any bank correspondence to assess the likelihood of the bank renewing the overdraft
facility.
✓ Review post year-end correspondence with suppliers to identify if any have threatened legal
action or any others have refused to supply goods.

✓ With the client’s permission, enquire of the lawyers of Co as to the existence of any litigation
and if so, the likely outcome of any litigation.
✓ Perform audit tests in relation to subsequent events to identify any items which might indicate
or mitigate the risk of going concern not being appropriate.

✓ Review the post year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.
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Substantive procedures to confirm the redundancy provision (September/December 2017)

✓ Discuss with the directors of Co as to whether they have formally announced their
intention to close the production site and make their employees redundant, to confirm that
a present obligation exists at the year end.
✓ If announced before the year end, review supporting documentation to verify that the
decision has been formally announced.

✓ Review the board minutes to ascertain whether it is probable that the redundancy payments
will be paid.
✓ Obtain a breakdown of the redundancy calculations by employee and cast it to ensure
completeness and agree to trial balance.

✓ Recalculate the redundancy provision to confirm completeness and agree components of
the calculation to supporting documentation such as employee contracts.

✓ Review the post year-end cash book to identify whether any redundancy payments have
been made, compare actual payments to the amounts provided to assess whether the
provision is reasonable.
✓ Obtain a written representation from management to confirm the completeness of the
provision.
✓ Review the disclosure of the redundancy provision to ensure compliance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
Substantive Procedures for Equity(March/June 2016)
✓ Review board minutes to confirm the issue of additional share capital during the year.
✓ Agree the issue of shares is permitted from a review of any statutory constitution agreements
in place.
✓ Inspect the cash book and bank statements for evidence of cash receipts from the share issue.
✓ Where the sum received is less than xx million, agree the difference is treated as share capital
called up but not paid in the financial statements.

✓ Recalculate the split of proceeds between the nominal value of shares and premium on
issue and agree correctly recorded within share capital and share premium account.
✓ Review the disclosure of the share issue in the draft financial statements and ensure it is in
line with relevant accounting standards and local legislation.
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Substantive procedures for bank loan (September 2016, Dec 2020)

✓ Agree the opening balance of the bank loan to the prior year audit file and financial statements.
✓ For any loan payments made during the year, agree the cash outflow to the cash book and
bank statements.
✓ Review bank correspondence to identify whether any late payment penalties have been levied
and agree these have been charged to profit or loss account as a finance charge.
✓ Obtain direct confirmation at the year end from the loan provider of the outstanding balance
and any security provided; agree confirmed amounts to the loan schedule and FSs.
✓ Review the loan agreement for details of covenants and recalculate to identify any breaches
in these.
✓ Agree closing balance of the loan to the trial balance and draft financial statements and
that the disclosure is adequate, including any security provided, that the loan is disclosed
as a current liability and disclosure is in accordance with accounting standards and local
legislation.
Substantive procedures for revaluation of PPE (September 2016)
✓ Obtain a schedule of all PPE revalued during the year and cast to confirm completeness and
accuracy of the revaluation adjustment and agree to trial balance and financial statements.
✓ Consider the competence and capability of the valuer by assessing through enquiry his
qualification, membership of a professional body and experience in valuing these types of assets.
✓ Consider whether the valuation undertaken provides sufficiently objective audit evidence. Discuss
with management whether valure has any financial interest in Co which along with the family
relationship could have had an impact on his independence.
✓ Agree the revalued amounts to the valuation statement provided by the valuer.
✓ Review the valuation report and consider if all assets in the same category have been revalued
in line with IAS 16 Property, Plant and Equipment.

✓ Agree the revalued amounts for these assets are included correctly in the non-current assets
register.
✓ Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation
surplus.
✓ Recalculate the depreciation charge for the year to ensure that for the assets revalued
during the year, the depreciation was based on the correct valuation and was for 12 months.
✓ Review the financial statements disclosures relating to the revaluation to ensure they comply
with IAS 16.
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Describe audit procedures you would perform during the audit of Company’s BEFORE and DURING
the inventory counts. ( December 2012/2015) (8 marks)
Inventory count procedures
Before the count
✓ Review the prior year audit files to identify whether there were any particular warehouses where
significant inventory issues arose last year.

✓ Discuss with management whether any of the warehouses this year are new, or have experienced
significant control issues.

✓ Decide which warehouses the audit team members will attend, basing this on materiality and risk
of each site.
✓ Obtain a copy of the proposed inventory count instructions, review them to identify any control
deficiencies and if any are noted, discuss them with management prior to the counts.
During the count
✓ Observe the counting teams of company to confirm whether the inventory count instructions are
being followed correctly.

✓ Select a sample of inventory and perform test counts from inventory sheets to warehouse aisle
and from warehouse aisle to inventory sheets.

✓ Confirm the procedures for identifying and segregating damaged goods are operating correctly,
and assess inventory for evidence of any damaged or slow moving items.
✓ Observe the procedures for movements of inventory during the count, to confirm that all
movements have ceased.

✓ Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up
testing on the final audit.
✓ Identify and make a note of the last goods received notes and goods despatched notes for the
year end in order to perform cut-off procedures.

✓ Discuss with the internal audit supervisor how any raw materials quantities have been estimated.
Where possible, reperform the procedures adopted by the supervisor.
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After the count

✓ Following up on any discrepancies identified during the count and ensure proper investigations
have been carried and how was the discrepancies resolved.

✓ Ensure the completed count sheets are accurate and complete by comparing to Photostatted
copies.
✓ Trace the sample items test-counted by the auditor to computerized stock listings.
✓ If the count is not done at the balance sheet date, examine stock movement during the intervening
period by tracing to GRN and GDN.

Substantive procedures for supplier statement reconciliations (June 2015)
✓ Select a representative sample of year-end supplier statements and agree the balance to
the purchase ledger of company. If the balance agrees, then no further work is required.
✓ Where differences occur due to invoices in transit, confirm from goods received notes (GRN)
whether the receipt of goods was pre year end, if so confirm that this receipt is included in
year-end accruals.
✓ Where differences occur due to cash in transit from company to the supplier, confirm from the
cashbook and bank statements that the cash was sent pre year end.
✓ Discuss any further adjusting items with the purchase ledger supervisor to understand the
nature of the reconciling item, and whether it has been correctly accounted for.
Substantive procedures for bank reconciliation (June 2015)
✓ Obtain Company’s bank account reconciliation and cast to check the additions to ensure
arithmetical accuracy.
✓ Agree the balance per the bank reconciliation to an original year-end bank statement and to
the bank confirmation letter.

✓ Agree the reconciliation’s balance per the cash book to the year-end cash book.
✓ Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank
statement and also to paying-in-book pre year end.

✓ Trace all unpresented cheques through to a pre year-end cash book and post year-end
statement. For any unusual amounts or significant delays, obtain explanations from
management.
✓ Examine any old unpresented cheques to assess if they need to be written back into the
purchase ledger as they are no longer valid to be presented.
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Substantive procedures for work in progress (WIP) (December 2014)

✓ Prior to attending the inventory count, discuss with management how the percentage
completions are attributed to the WIP, for example, is this based on motor cars passing certain
points in the production process.
✓ During the count, observe the procedures carried out by Jackdaw staff in assessing the level of
WIP and consider the reasonableness of the assumptions used.

✓ Agree for a sample that the percentage completions assessed during the count are in accordance
with Jackdaw’s policies communicated prior to the count.

✓ Discuss with management the basis of the standard costs applied to the percentage completion
of WIP, and how often these are reviewed and updated.

✓ Review the level of variances between standard and actual costs and discuss with management
how these are treated.

✓ Obtain a breakdown of the standard costs and agree a sample of these costs to actual invoices or
payroll records to assess their reasonableness.

✓ Cast the schedule of total WIP and agree to the trial balance and financial statements.
✓ Agree sample of WIP assessed during the count to the WIP schedule, agree percentage completion
is correct and recalculate the inventory valuation.

Substantive Procedures for Accrual for income tax payable on employment income (June 2014)
Procedures the auditor should adopt in respect of auditing this accrual include:
✓ Agree the year-end income tax payable accrual to the payroll records to confirm accuracy.
✓ Re-perform the calculation of the accrual to confirm accuracy.
✓ Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.
✓ Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due; if so, agree they are included in the year-end accrual.
✓ Review any disclosures made of the income tax accrual and assess whether these are in
compliance with accounting standards and legislation.

✓ Factors to review for the auditor to conclude that the revaluation of the PPE’s the disclosures are
adequate
✓ Effective date of the revaluation
✓ The amount of the revaluation increase
✓ Carrying amount of the company under the cost model
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Audit procedures for continuous (perpetual) inventory counts (June 2014)

✓ The audit team should attend at least one of the continuous (perpetual) inventory counts to
review whether the controls over the inventory count are adequate.
✓ The audit team should confirm that all of the inventory lines have been counted or are due to be
counted at least once a year by reviewing the schedules of counts undertaken/due to be

undertaken.
✓ Review the adjustments made to the inventory records on a monthly basis to gain an
understanding of the level of differences arising on a month by month basis.

✓ If significant differences consistently arise, this could indicate that the inventory records are not
adequately maintained.
✓ Discuss with management how they will ensure that year-end inventory will not be under or
overstated.
✓ Consider attending the inventory count at the year end to undertake test counts of inventory from
records to floor and from floor to records in order to confirm the existence and completeness of
inventory.
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ISA 510 Initial Audit Engagements – Opening Balances requires auditors to undertake additional audit
procedures for confirming opening balances for new audit engagements. In addition, the ISA gives
guidance on audit report implications if auditors are unable to confirm opening balances or if they
contain misstatements.
Required:
(i) Describe procedures the auditor should undertake to confirm opening balances for a new audit
engagement; and
(ii) Explain the impact on the audit report if the auditor is unable to confirm the opening balances,
or if the opening balances contain misstatements.
Note: The total marks will be split equally between each part. (December 2013) (4 marks)
Answer
An auditor is required to obtain sufficient appropriate evidence as to whether the opening balances
contain misstatements which may materially impact the current year financial statements and
whether accounting policies are consistently applied.
(i) The auditor should perform the following procedures:
✓ Review the most recent financial statements, if any, and the prior year auditor’s report, if any,
for information relevant to opening balances, including disclosures.

✓ The auditor shall agree the opening balances to the prior year’s financial statement closing
balances to confirm whether they have been correctly brought forward to the current year.
✓ They should determine whether the opening balances reflect the application of appropriate
accounting policies.
✓ They should consider reviewing the prior auditor’s working papers to obtain evidence
regarding opening balances.

✓ If this is not possible, then they should consider whether procedures performed in the current
period provide evidence over the opening balances.

✓ In exceptional cases the auditor may need to perform specific audit procedures to obtain
evidence regarding the opening balances.

(ii) Impact on the audit report
If the auditor is unable to confirm the opening balances, they will be required to express a qualified
or disclaimer opinion as they are unable to obtain sufficient evidence.
If the opening balances contain misstatements and they may materially impact the current financial
statements, the auditor should express a qualified or adverse opinion.
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Substantive Procedures for Reorganisation (December 2012, Dec 2020)

✓ Review the board minutes where the decision to reorganise the business was taken, ascertain if
this decision was made pre year end.

✓ Review the announcement to confirm that this was announced before the year end.
✓ Obtain a breakdown of the reorganisation provision and confirm that only direct expenditure from
restructuring is included.
✓ Review the expenditure to confirm that there are no retraining costs included.
✓ Cast the breakdown of the reorganisation provision to ensure correctly calculated.
✓ For the costs included within the provision, agree to supporting documentation to confirm validity
of items included.
✓ Obtain a written representation confirming management discussions in relation to the
announcement of the reorganisation.

✓ Review the adequacy of the disclosures of the reorganisation in the financial statements to ensure
they are in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Substantive procedures in respect of the owing from liquidation of customer
✓ Inspect correspondence from the insolvency practitioner
✓ Inspect post year end bank statements to identify if any payments has been received from the
customer
✓ Review the allowance for receivables to identifying if any allowance has been made in relation to
the customers
Substantive procedures in respect of the recoverability of the debt from customer
✓ Review correspondence with Yellowmix regarding the late payment
✓ Perform a review of post year-end cash receipts
Substantive procedures for Website development

✓ Obtain a breakdown of the website development costs, cast to ensure arithmetical accuracy and
agree to the financial statements.
✓ Agree a sample of costs included in the breakdown to purchase invoices to verify the accuracy of
the cost recorded.
✓ Review the breakdown for items of expenditure which are not allowed to be capitalised in
accordance with the relevant accounting standard.
✓ Review forecasts of revenue to support the assumption that the website will generate future
economic benefits.
✓ Enquire of management how they have determined the useful life of the website for the basis of
amortisation and assess the reasonableness of the basis.
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✓ Recalculate the amortisation charge to verify arithmetical accuracy.

✓ If amortisation is not being charged, discuss with management the need for an impairment review
on an annual basis to ensure the asset is not overstated.
Benefits of Trade Receivable Circularization
• It provides evidence from an independent external source
• It improves the reliability of audit evidence as the process is under the control of the auditor
The auditor’s responsibilities in relation to receivable confirmation’s misstatements
✓ As part of their finalization procedures, the auditor shall consider whether the aggregate of
uncorrected misstatements in the financial statements is material.
✓ In deciding whether the uncorrected misstatements are material, the auditor shall consider the
size and nature of the misstatements.
Audit software procedures on the receivables balance
✓ Cast the receivables ledger to ensure it is arithmetically correct
✓ Compare the balance on each receivable account with its credit limit to ensure this
has not been exceeded

✓ Stratify the receivables balances and select an appropriate sample for testing
✓ Produce an aged receivables analysis to assist with the identification of irrecoverable
receivables
Supplier balances would indicate a high risk in relation to the COMPLETENESS of the liability
recorded at the year end
✓ A supplier with a low balance at the year end and with a high volume of transactions during
the year
Reason for the payables payment period has increased
✓ Client purchased an unusually high level of goods at year end to satisfy a large order and had
not paid for those goods by the year end
Appropriate action in respect of the inconsistency in the balance with supplier
✓ The auditor should request that an accrual is created in respect of the goods received but not
yet invoiced
Selecting trade payables balances on which supplier statement reconciliations will be performed
✓ Suppliers with material balances at the year end
✓ Suppliers which have a high volume of business with client
✓ Major suppliers with nil balances at the year end
✓ Supplier with negative balances
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Audit Procedures to confirm the trade payable balance owing to Supplier

✓ Review post year-end credit notes for evidence of acceptance of return
✓ Inspect pre year-end goods returned note in respect of the items sent back to the supplier
Factors to consider to select and check the trade payable balances f or which supplier
statement reconciliations will be performed.
✓ Suppliers with material balances at the year-end
✓ Suppliers which have a high volume of business with company
✓ Major suppliers of company with nil balances at the year-end
Consequences for lack of supplier statement reconciliations
✓ There is an increased risk of misstatement of trade payables
✓ Misstatements in the purchase accrual balance may go undetected
✓ Increased substantive testing will need to be performed over purchases and payables
Audit Procedures for whether the financial statements require amendment in relation to the unfair
dismissal claim
✓ Inspect relevant correspondence with Company's lawyers
✓ Review the post year-end cash book and bank statements for evidence the claim has been
settled
✓ Request management confirms their views in a written representation letter
✓ Review board meeting minutes relating to the unfair dismissal claim
Audit Procedures for assessing the uncertainty arising in relation to the overdraft renewal
✓ Inspect correspondence with the bank to identify any disputes which may indicate the
overdraft facility will not be renewed

✓ Enquire with management whether any alternative sources of finance have been
considered if the bank does not renew the overdraft facility

✓ Inspect board minutes for discussions of management as to how they plan to improve
the financial position of company
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Audit Procedures for Legal Claims (March/June 2021)

✓ Review customer correspondence to establish the details of the claims and the amounts being
claimed.
✓ Review correspondence with Co’s lawyers or, with the client’s permission, contact the lawyers to
establish the likely outcome of the customer claims made to date.
✓ Discuss with the lawyers the likelihood and amount of potential future claims.
✓ Inspect board minutes to establish details of the circumstances of the claims and to ascertain
management’s view as to the likelihood that the existing claims will be successful and the extent
of possible future claims.
✓ Compare levels of returns and claims to date against sales volumes of the product to assess the
potential level of future claims.
✓ Review post-year end payments for damage settlements and compare with any amounts provided
at the year end to assess the reasonableness of the provision
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Review and Reporting

Subsequent Events Review
Subsequent Events (favourable or unfavourable events) occurs between the reporting date and the
date that the financial statements are authorised for issue.
Adjusting Events
An event after the reporting date that provides further evidence of conditions that existed at the
reporting date.
Non-Adjusting Events
An event after the reporting date that is indicative of a condition that arose after the reporting date.
Emphasis of matter paragraph (EOM)
The EOM paragraph is a paragraph included in the auditor’s report that refers to a matter appropriately
presented or disclosed within the FSs, that in the auditor’s judgement, is of such importance that it is
fundamental to the users’ understanding of the FSs.
Other matter paragraph
The Other Matter paragraph should be included in the auditor’s report to refer to a matter other than
those presented or disclosed in the FSs that, in the auditor’s judgement, is relevant to users’
understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
Key audit matters
Key audit matters are matters that, in the auditor’s professional judgment, were of most significance in
the audit of the financial statements of the current period. Key audit matters are selected from matters
communicated with TCWG.
Written Representation/ Letter of Representation/ Management Representations
This is written letter given by the directors to the auditor at the end of each year’s audit to confirm
certain matters relating to the audit. It is issued just prior to the completion of audit work and before
the audit report is signed.
Misstatement
A difference between the reported amount, classification, presentation, or disclosure of a FS item
and the amount classification, presentation or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework. Misstatements can arise from error or
fraud.
Factual Misstatement
Factual misstatements are misstatements about which there is no doubt.
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Judgemental Misstatement(JM)
JM are differences arising from the judgements of management including those unconcerning
recognition, measurement, presentation and disclosure in the FSs that the auditor considers
unreasonable or inappropriate.
Projected Misstatement(PM)
PM are the auditor’s best estimate of misstatements in populations, involving the projection of
misstatements identified in audit samples to the entire populations from which the samples were
drawn.
Procedures to undertake in relation to the uncorrected misstatement (June 2014)
✓ The extent of the potential misstatement should be considered and therefore a large sample of
inventory items should be tested to identify the possible size of the misstatement.
✓ The potential misstatement should be discussed with Co’s management in order to understand
why these inventory differences are occurring.
✓ The misstatement should be compared to materiality to assess if the error is material individually.
✓ If not, then it should be added to other errors noted during the audit to assess if in aggregate the
uncorrected errors are now material.

✓ If material, the auditors should ask the directors to adjust the inventory balances to correct the
misstatements identified in the year end.

✓ Request a written representation from the directors about the uncorrected misstatements
including the inventory errors.

✓ Consider the implication for the audit report if the inventory errors are material and the directors
refuses to make adjustments.

Question 1
Describe the auditor’s responsibility in relation to misstatements.
Answer
The auditor has a responsibility to accumulate misstatements which arise over the course of the
audit unless they are very small amounts.
All misstatements should be communicated to those charged with governance on a timely basis
and request that they make necessary amendments. If this request is refused then the auditor
should consider the potential impact on their audit report.
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Question 2 (September/December 2018-June 2013)

ISA 260 Communication with Those Charged with Governance provides guidance to auditors in
relation to communicating with those charged with governance on matters arising from the audit of
an entity’s financial statements.
Required:
(i) Explain why it is important for auditors to communicate throughout the audit with those charged
with governance; and
(ii) Identify TWO examples of matters which the auditor may communicate to those charged with
governance.
Answer
(i) Importance of communicating with those charged with governance
In accordance with ISA 260 Communication with Those Charged with Governance, it is important for
the auditors to report to those charged with governance as it helps in the following ways:
– It assists the auditor and those charged with governance in understanding matters related to the
audit, and in developing a constructive working relationship. This relationship is developed while
maintaining the auditor’s independence and objectivity.
– It helps the auditor in obtaining, from those charged with governance, information relevant to the
audit. For example, those charged with governance may assist the auditor in understanding the
entity and its environment, in identifying appropriate sources of audit evidence and in providing
information about specific transactions or events.
– It helps those charged with governance in fulfilling their responsibility to oversee the financial
reporting process, thereby reducing the risks of material misstatement of the financial statements.
– It promotes effective two-way communication between the auditor and those charged with
governance.
(ii) Matters to be communicated to those charged with governance
– The auditor’s responsibilities with regards to providing an opinion on the financial statements
and that they have carried out their work in accordance with International Standards on
Auditing.
– The auditor should explain the planned approach to the audit as well as the audit timetable.
– Any key audit risks identified during the planning stage should be communicated.
– In addition, any significant difficulties encountered during the audit should be communicated.
– Also significant matters arising during the audit, as well as significant accounting adjustments.
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– During the audit, any significant deficiencies in the internal control system identified should
be communicated in writing or verbally.
– How the external auditor and internal auditor may work together and any planned use of the
work of the internal audit function.
– Those charged with governance should be notified of any written representations required by
the auditor.
– Other matters arising from the audit which are significant to the oversight of the financial
reporting process.
– If any suspected frauds are identified during the audit, these must be communicated.
– If the auditors are intending to make any modifications to the audit opinion, these should be
communicated to those charged with governance.
– For listed entities, a confirmation that the auditors have complied with ethical standards and
appropriate safeguards have been put in place for any ethical threats identified.
Auditors have a responsibility under ISA 265 Communicating Deficiencies in Internal Control to those
Charged with Governance and Management, to communicate deficiencies in internal controls. In
particular SIGNIFICANT deficiencies in internal controls must be communicated in writing to those
charged with governance.
Required:
Explain examples of matters the auditor should consider in determining whether a deficiency in
internal controls is significant. (5 marks)
Answer
Examples of matters the external auditor should consider in determining whether a deficiency in
internal controls is significant include:
– The likelihood of the deficiencies leading to material misstatements in the financial statements in
the future.
– The susceptibility to loss or fraud of the related asset or liability.
– The subjectivity and complexity of determining estimated amounts.
– The financial statement amounts exposed to the deficiencies.
– The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
– The importance of the controls to the financial reporting process.
– The cause and frequency of the exceptions detected as a result of the deficiencies in the controls.
– The interaction of the deficiency with other deficiencies in internal control.
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A member of your audit team has asked for information on ISA 701 Communicating Key Audit Matters
in the Independent Auditor’s Report as she has heard this standard is applicable to listed clients such
as Airsoft Co.
Required:
Identify what a key audit matter (KAM) is and explain how the auditor determines and
communicates KAM. (5 marks)
Answer
Key audit matters
Key audit matters (KAM) are those matters which, in the auditor’s professional judgement, were of
most significance in the audit of the financial statements of the current period. Key audit matters are
selected from matters communicated with those charged with governance.
The purpose of including key audit matters in the auditor’s report is to help users in understanding
the entity, and to provide a basis for the users to discuss with management and those charged with
governance about matters relating to the entity and the financial statements. A key part of the
definition is that these are the most significant matters. Identifying the most significant matters
involves using the auditor’s professional judgement.
ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report suggests that in
determining key audit
matters the auditor should take the following into account:
– Areas of higher assessed risk of material misstatement, or significant risks.
– Significant auditor judgements relating to areas in the financial statements which involved
significant management judgement.
– The effect on the audit of significant events or transactions which occurred during the period.
The description of each KAM in the Key Audit Matters section of the auditor’s report should include a
reference to the related disclosures in the financial statements and covers why the matter was
considered to be one of most significance in the audit and therefore determined to be a KAM; and
how the matter was addressed in the audit.
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Question 5 (September 2016)

In line with ISA 220 Quality Control for an Audit of Financial Statements, describe the audit
supervisor’s responsibilities in relation to supervising and reviewing the audit assistants’ work during
the audit. (4 marks)
Answer (September 2016)
▪ Monitor the progress of the audit engagement to ensure the audit timetable was met
▪ Consider the competence and capabilities of team members re sufficient available time,
understanding of instructions and if work in accordance with planned approach
▪ Address any significant matters arising, consider their significance and modifying the approach
▪ Responsible for identifying matters for consultation/consideration by senior team members
▪ Work performed in line with professional standards and other requirements
▪ Work supports conclusions reached and properly documented
▪ Significant matters raised for partner attention or further consideration
▪ Appropriate consultations have taken place with conclusions documented
Actions for quality control issues encountered during the audit of client
• More frequent quality control reviews may need to take place
• Further training may be provided to staff
• The firm's policies and procedures may need to be updated
Factors to consider for appointment of Quality Control Reviewer
• Must have technical knowledge & regulatory issues relating to the client
• Must be an experienced auditor
• Must have a level of authority of the firm
• Must be independent of the audit team
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Question - 6 (December 2013)

Auditors are required to perform an overall review of the financial statements before they provide
their audit opinion.
Required:
Explain THREE procedures an auditor should perform in conducting their overall review of the
financial statements. (3 marks)
Answer
Overall review of financial statements
▪ Reviewing the financial statements to ensure compliance with accounting standards and local
legislation disclosure. This is sometimes done via the use of a disclosure checklist.
▪ Reviewing the disclosure of the accounting policies to ensure that they are in accordance with the
accounting treatment adopted in the financial statements, and that they are sufficiently disclosed.
▪ Reviewing the financial statements to ensure they are consistent with the auditor’s knowledge of
the business and the results of their audit work.
▪ Reviewing the financial statements to assess whether they adequately reflect the information and
explanations previously obtained and conclusions reached during the course of the audit.
▪ Performing analytical procedures of the financial statements, under ISA 520 Analytical
Procedures; this helps the auditor to form an overall conclusion on the financial statements.
▪ Reviewing the aggregate of uncorrected misstatements to assess whether in aggregate a material
misstatement arises; if so discuss with management with regards to a potential adjustment.
▪ As part of the overall review, the auditor should assess whether the audit evidence gathered by
the team is sufficient and appropriate to support the audit opinion.
Actions for the auditor's overall review of the financial statements
✓ Assessing whether the information and explanations obtained during the audit are adequately
reflected
✓ Reviewing the adequacy of the disclosure of accounting policies
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Question 7(December 2012)

Explain the purpose of, and procedures for, obtaining written representations. (5 marks)
Written representations are necessary information that the auditor requires in connection with the
audit of the entity’s financial statements. Accordingly, similar to responses to inquiries, written
representations are audit evidence.
The auditor needs to obtain written representations from management and, where appropriate, those
charged with governance that they believe they have fulfilled their responsibility for the preparation
of the financial statements and for the completeness of the information provided to the auditor.
Written representations are needed to support other audit evidence relevant to the financial
statements or specific assertions in the financial statements, if determined necessary by the auditor
or required by other International Standards on Auditing.
This may be necessary for judgemental areas where the auditor has to rely on management
explanations.
Written representations can be used to confirm that management have communicated to the auditor
all deficiencies in internal controls of which management are aware.
Written representations are normally in the form of a letter, written by the company’s management
and addressed to the auditor. The letter is usually requested from management but can also be
requested from the chief operating officer or chief financial officer. Throughout the fieldwork, the
audit team will note any areas where representations may be required.
Factors should be included in the written representation letters for each client
✓ The client believes the effects of uncorrected misstatements are immaterial.
✓ Management have prepared the financial statements in accordance with an appropriate financial
reporting framework.
✓ All known instances of non – compliance with laws and regulations have been disclosed to the
auditor.
✓ Confirmation from management that they have provided the auditor with all information and
access to records during the audit
✓ Confirmation from management that all transactions have been reflected in the financial
statements
✓ Fraud and error affair
✓ Going concern affair
✓ Subsequent Events
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Actions In relation to the refusal of the client’s management to provide a written representation
letter
✓ A written representation letter is required if an auditor is to be compliant with auditing standards.
✓ Auditor should discuss the issue with the client to understand why they are refusing to provide
the written representation.
✓ Auditor should re-evaluate the integrity of Managment
✓ Auditor should consider whether the audit plan and strategy need to be revised.
✓ If the client (listed) still refuse to provide the letter then the key audit matters paragraph would
be removed from the auditor’s report. (to provide disclaimer of opinion)
Concepts of Going Concern
✓ The going concern assumption is that the entity will be able to continue in business for the
foreseeable future
✓ The going concern basis of accounting assumes that the entity will be able to realise its assets and
discharge its liabilities in the normal course of business
Factors to include in auditor’s communication with TCWG/Client in accordance with ISA 570 Going
concern
(1) Whether the circumstances you have identified constitute a material uncertainty
(2) Whether the use of the going concern basis of accounting is appropriate in the preparation and
presentation of the financial statements
(3) The adequacy of the related disclosures
Factors are indicators that may cast doubt on Client’s ability to continue as a going concern
(1) The entry of the new competitor reducing Client’s market share
(2) The significant increase in the overdraft
(3) The reluctance of the shareholders to provide further investment
Audit Procedures for whether client going concerns or not
Primary
✓ Obtain the cash flow forecasts and assess whether the cash inflows and outflows appear realistic
and consistent with knowledge built up during the audit.
✓ Review board minutes for meetings held after the year end for evidence which indicate further
financial difficulties or evidence of alternative sources of finance
Secondary
✓ Obtain confirmation from the bank that the overdraft facility will be renewed
✓ Obtain written representations from management that they consider the going concern
assumption to be appropriate
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Example for Significant Uncertainty

✓ Company is due to repay a substantial loan on coming one year. Company is currently negotiating
revised terms with the bank but it is unlikely that negotiations will be concluded before the
auditor's report is signed. This will be disclosed in the financial statements.
✓ A major supplier to company has just gone out of business with a number of unfulfilled orders.
✓ A new product which was due to account for 30% of revenue has not been successful.
Responsibilities of directors in relation to going concern
✓ The directors must assess whether the company can continue to trade for the foreseeable future.
✓ The directors will usually prepare a cash flow forecast to assess whether the company is likely to
be able to trade for the foreseeable future
✓ If directors are aware of any material uncertainties which may affect this assessment, the directors
should disclose these in the FSs
✓ 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
Responsibilities of auditor in relation to going concern
✓ The auditor will evaluate management's assessment of going concern
✓ Obtain sufficient appropriate evidence regarding the appropriateness of management’s use of the
going concern basis of accounting in the preparation of the FSs
Other information (OI)
Financial or non-financial information (other than FSs and Auditor’s report) included in an entity’s
annual report
Objectives of auditor for other information
• To consider whether there is a material inconsistency (MI) between the OI and FSs
• To consider whether there is a MI between the OI and Auditor’s knowledge obtained during the
audit.
• To response appropriately when MI existed
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Auditor’s Duties for Other information

✓ The auditor must read any other information published with the financial statements
✓ The auditor review that FSs are correct or not, if FSs are correct and then auditor make
management to amend other information.
✓ If management still refuse to amend, the auditor write the other information paragraph about
there is an inconsistency between other information and financial Statements.
The purpose of the ADDRESSEE element of the unmodified audit report
➢ It clarifies who may rely on the opinion included within the report
Audit procedures should be performed to form a conclusion as to whether the financial statements
require amendment or not for receivable balance
✓ Discuss with management the reasons for not amending the financial statements
✓ Review the cash book post year end for receipts from customer
Actions for auditor’s report to be amended after the FSs issued
✓ Discuss the matter with management and, where appropriate, those charged with governance
✓ Enquire how management intends to address the matter in the financial statements where
appropriate
Question 8
Describe the further actions the auditor should take to confirm the inconsistencies between the
financial statements and the other information, and describe the impact on the auditor’s report if
the inconsistencies are not resolved.
✓ Discuss the inconsistency between the other information and the financial statements with
management in order to determine whether the auditor’s understanding of the entity is correct.
✓ Request that the other information be corrected.
✓ If management refuse to correct the other information, communicate with those charged with
governance asking that the correction be made.
✓ The auditor’s report should include a separate section with the heading ‘other information’ and
due to the inconsistencies the section should describe the uncorrected misstatement of the other
information. The auditor’s opinion is not modified in this regard.
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Conditions
Situations in which the independence of the auditor is threatened:
Self-Interest Threat Conditions
Conditions Reasons Safeguard

➢The finance director is sister- ✓ The audit partner and the ✓ Remove and appoint
in-law of the audit finance director both hold alternative partner.
engagement partner senior positions and
therefore are in a position to
influence the outcome of
the audit.
✓ They may place their family
relationship above the
needs of the users of the
financial statements.
➢The audit firm received ✓ The total fees could ✓ Assess whether audit,
substantial Fees represent a significant non-audit and total
proportion of the audit taxation fees would
firm’s income and the firm represent a significant
could become overly reliant proportion of recurring
on the client. fee income.
✓ If the fees are likely to be
significant, consider as to
whether the taxation
and/or non-audit
assignments should be
undertaken by the firm.
➢The client invited the whole ✓ The acceptance of goods ✓ This offer should be
team to attend an evening and services, unless politely declined other
out watching the national insignificant in value, is not than insignificant value.
football team permitted.
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➢The audit partner attend ✓ The audit firm may be ✓ decline this request as it
audit committee meetings as perceived as performing the represents too great a
a non-executive director of role of management by threat to independence
Client attending these meetings
and this threatens
objectivity.
➢The audit firm received ✓ The total fees could ✓ Assess more than 15% of
professional fee would represent a significant gross practice income for
represent more than 15% of proportion of the audit two consecutive years.
the firm’s total income firm’s income. ✓ If the fees are likely to
exceed 15%, consider as to
whether the non-audit
services should be
➢Last year professional fee are ✓ The audit firm may feel ✓ Discuss with those
outstanding pressure to agree to certain charged with governance
accounting adjustments in the reasons
order to have the previous ✓ Make a revised payment
year and this year’s audit fee schedule before much
paid. more work is performed
for the current year
audit.
➢The audit manager of client is ✓ The audit manager is ✓ Appoint new audit
leaving the audit firm to familiar with the audit plan manager
become the financial which is to be adopted at ✓ Modify the audit plan
controller at the client. the client and he may also
have commenced work on
this year’s audit.
➢The client has several ✓ These assurance fees along ✓ Assess more than 15% of
potential assurance with the external audit fee gross practice income for
assignments available and could represent a significant two consecutive years.
the audit firm wish to be proportion of the audit ✓ If the fees are likely to
appointed to these. firm’s fee income. exceed 15%, consider as to
whether these
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assignment should be
➢The client has offered the ✓ The acceptance of goods ✓ This offer should be
team a free weekend away at and services, unless politely declined other
a luxury hotel. insignificant in value, is not than insignificant value.
permitted.
➢The client has offered a ✓ The loan is on preferential ✓ Review the loan contract
senior team member a loan rates whether there are
at discounted interest rates. preferential term or not.
✓ If it have, the terms
should be amended or
these two members
should be removed from
the audit team.
➢The client has offered a staff ✓ These are valuable product ✓ Review whether
discount of 10% on then this may still be a significant discount, if it is,
purchasing the client’s significant value. then decline this offer.
product.
➢The partner and the finance ✓ Personal relationships and ✓ Review the firm’s ethical
director know each other the senior positions held by policies
socially and have holidayed both parties then there is a ✓ Rotate the alternative
together. risk that independence may partner
be perceived to have been
threatened.
➢ The audit senior, received ✓ As long as the audit senior ✓ Should not accept this
services from the client paid a full fee to the client services
during the year and intends for the investment advice,
to do the same next year. then there is no ethical
threat. This would be a
normal commercial
transaction.
✓ However, continued use of
client services could imply a
lack of independence
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especially if the audit senior

is not paying a full fee and
therefore receiving a benefit
from the client.
➢ The client also states that ✓ There will be pressure to ✓ Should not accept this fee.
the fee for taxation services gain the highest tax refund
this year should be based on for the client and this could
a percentage of tax saved tempt the audit firm to
suggest illegal tax avoidance
schemes.
➢ A non-executive director ✓ The audit firm cannot ✓ Undertake roles such as
(NED) of the client has just undertake the recruitment reviewing a shortlist of
resigned and the directors of members of the board of candidates and reviewing
have asked whether the the client, especially a NED qualifications and
partners of the audit firm who will have a key role in suitability.
can assist them in recruiting overseeing the audit process ✓ Not make management
to fill this vacancy. and audit firm. decision
➢ The audit firm provides ✓ the total fees could ✓ Assess more than 15% of
taxation services, the audit represent a significant gross practice income for
engagement and possibly proportion of the audit two consecutive years.
services related to the firm’s income. ✓ If the fees are likely to
recruitment of the NED. ✓ exceed 15%, consider as to
➢ whether the recruitment
and taxation services
should be undertaken by
the firm.
➢ The finance director has ✓ Contingent fees give rise to ✓ Do not accept contingent
suggested that the audit fee a self-interest threat and are fees
is based on the profit before prohibited under ACCA’s ✓ The fee are based on the
tax of the company which Code of Ethics and Conduct. time spent and levels of
constitutes a contingent fee. ✓ Can ignore audit skill and experience of the
➢ adjustments which could required audit team
lead to a reduction in profit. members.
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Advocacy Threat Conditions

➢ The audit firm accept a ✓ The firm may promote an ✓ Declines this request.
service from the client for opinion on behalfs of the
negotiations to resolve client, such that the
some outstanding issues independence of the firm
with the taxation is compromised.
authorities
➢ The audit partner attend ✓ The audit firm may be ✓ Decline this request
meetings with potential perceived as promoting
investors. investment in the client
and this threatens
objectivity.
➢ Audit firm has been ✓ Audit firm may be seen to ✓ Using professionals who
approached by client to be promoting Client as an are not involved in the
assist with the investor audit to perform the
identification of acquisition service (e.g. corporate
targets. finance) and having an
appropriate reviewer
who was not involved in
providing the service
review the audit work or
service performed.
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Intimidation Threat Conditions

➢The client has implied to the ✓ The audit team may feel ✓ Undertake the audit in
audit firm that they must pressure to cut corners accordance with all
complete the audit quickly and not raise issues, and relevant ISAs
and with minimal this could compromise ✓ Consider resigning from
questions/issues the objectivity of the the engagement if remain
audit team and quality of to refuse.
audit performed. ✓
➢The finance director is keen ✓ The audit team may feel ✓ Discuss the timing of the
to report the Company’s pressure to cut corners audit with the finance
financial results earlier than and not raise issues, and director
normal and has asked if the this could compromise ✓ Undertake the audit in
audit can be completed in a the objectivity of the accordance with all
shorter time frame. audit team and quality of relevant ISAs
➢ audit performed. ✓ Consider resigning from
the engagement if remain
to refuse.
➢ The audit firm provides ✓ The firm could become ✓ Assess more than 15% of
taxation services, the audit overly reliant on the client, gross practice income for
engagement and possibly resulting in the firm being two consecutive years.
services related to the less challenging or ✓ If the fees are likely to
recruitment of the NED. ✓ objective due to fear of exceed 15%, consider as to
losing such a significant whether the recruitment
client. and taxation services
should be undertaken by
the firm.
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Familiarity Threat Conditions

➢The finance director is sister- ✓ The audit partner and the ✓ Remove and appoint
in-law of the audit finance director both hold alternative partner.
engagement partner senior positions and
therefore are in a position
to influence the outcome
of the audit.
✓ They may place their
family relationship above
the needs of the users of
the financial statements.
➢ The client invited the whole ✓ The acceptance of goods ✓ This offer should be
team to attend an evening and services, unless politely declined other
out watching the national insignificant in value, is than insignificant value.
football team not permitted.
➢The partner audited over ✓ This means he may be too ✓ Rotate the partner
seven years familiar with the client to
be able to make objective
decisions due to this long
association.
➢ The current engagement ✓ The partner will have been ✓ Should not serve 2 year as
partner reappoint associated with the client the independent review
immediately as independent for a long period of time partner for a period of two
review partner. and so may not retain years.
professional scepticism ✓ Appoint alternative review
and objectivity. partner
➢The partner and the finance ✓ Personal relationships and ✓ Review the firm’s ethical
director know each other the senior positions held policies
socially and have holidayed by both parties then there ✓ Rotate the alternative
together. is a risk that independence partner
may be perceived to have
been threatened.
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➢The engagement quality ✓ The partner will have been ✓ As the client is a listed
control reviewer (EQCR) associated with the client company, then the
assigned to the client (listed) for a long period of time previous audit
was until last year the audit and so may not retain engagement partner
engagement partner. professional scepticism should not be involved in
➢ and objectivity. the audit for at least a
period of two years. An
alternative EQCR should
be appointed instead.
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Self-Review Threat Conditions

➢Produce the financial ✓ If the client is currently not ✓ Make separate team
statements a listed company then the
audit firm are permitted to
produce the financial
statements and also audit
them.
➢A member of the audit team ✓ The team member ✓ Decline the request, or the
can be seconded to fill the prepares records and team member should be
role of client’s staff schedules which support removed from the audit
the financial statements team.
and is then part of the audit
team responsible for
auditing these
➢The assistant finance ✓ he was in a position to ✓ must not be involved for a
director of the client has influence the financial period of at least two
joined audit firm as an statements years
independent review partner. ✓ Appoint alternative review
partner
➢An audit senior has been on ✓ prepares records and ✓ Review what areas the
secondment as the financial schedules which support senior assisted the client
controller. the financial statements on.
and is then part of the audit ✓ If areas related to the FSs,
team responsible for he remove in the audit
auditing these team.
✓ If it is not, he can remain
in the audit team.
➢Audit firm has been ✓ the potential acquisition is ✓ using professionals who
approached by client to subsequently reflected in are not involved in the
assist with the identification the financial statements audit to perform the
of acquisition targets. and the audit team may be service (e.g. corporate
less likely to challenge the finance) and having an
figures included appropriate reviewer who
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was not involved in

providing the service
review the audit work or
service performed.
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Corporate Governance Conditions

Weakness Conditions Key Features/Reason Recommendation
The chairman of the Company is No one individual should have The roles of chairman and
both the chairman and chief such unrestricted levels of chief executive should be split
executive. decision-making, as this can and not performed by the
lead to an abuse of power. same individual.
The board is comprised of four There should be an Appoint an additional one to
executives and two non- appropriate balance of two non-executive directors
executive directors. executives and non-
executives, to make the best
interest of the stakeholders of
the company.
The finance director is the only The board as a whole should Should be reviewed by BOD to
member of the board who be presented to aware of the understand the financial
reviews the financial financial implications of any position of the company and
statements and budgets of the business decisions made. to make informed business
company. decisions.
The audit committee is The audit committee should The audit committee must be
comprised of two non- be made up of independent comprised of non-executives
executives, the chairman and non-executives as opposed to only and so appoint additional
the finance director. having executive directors as NED.
well.
The task of appointing and If executive directors are Should be made by audit
remunerating the external responsible, the auditors may committee to strengthen the
auditors is undertaken by the feel that if they do not independence of the external
chairman and the finance provide an unmodified audit auditors.
director. opinion then they could be
removed.
In order to reduce costs, of the Where there is no internal Both costs and benefits
company has not established an audit function, the audit should be considered, as it is
internal audit function. committee is required to not sufficient to solely
annually consider the need consider cost savings.
for one.
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The remuneration for the This may result in excessive The NEDs should decide on
directors is set by the finance levels of pay being set. the remuneration of the
director and chairman. executives. The finance
director or chairman should
decide on the pay of the
NEDs.
Executive remuneration is Annual targets can encourage Should be restructured to
comprised of a salary and short-term strategies rather include a significant
annual bonus. than maximising shareholder proportion aimed at long-
wealth. term company performance.
No member of the board of The shareholders should The directors should be
directors has been subject to re- review composition of the subject to re-election by the
election by shareholders for board on a regular basis. shareholders at regular
over five years. intervals not exceeding three
years.
One of the NEDs and the This may not bring the Appoint independent NEDs
chairman are former executive required level of
directors of the company who independence and objective
were asked to take on their judgement to the role as is
existing roles following necessary.
retirement.
All four members of the audit It is unlikely they possess the Recruit the new independent
committee were previously required financial experience. NEDs that at least one of
involved in sales or production them has the required recent
related roles. and relevant financial
experience.
The chairman has sole This is a role which the board All members of the board
responsibility for liaising with as a whole should undertake. should be involved in
the shareholders and answering discussion with shareholders.
any of their questions.
The chairman was the chief The chairman is supposed to Should return to his role as
executive until last year. be an independent non- chief executive and appoint
executive director to prevent another independent NEDs
for chairman.
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too much power residing in

the hands of one individual.
The chairman is considering It is possible that he will not Appoint independent NEDs
appointing his close friend as a be independent and does not
non-executive director; the have any relevant experience
friend has experience of of the same industry.
running other industry.
The company does not Audit committees undertake Appoint an audit committee
currently have an audit an important role in that they as soon as possible.
committee. help the directors to satisfy
their responsibility of
accountability with regards to
maintaining an appropriate
relationship with the
company’s auditor.
A new sales director was All directors should receive Should immediately receive
appointed nine months ago, induction training when they relevant training to
however, he has not undergone first join the board. understand of his role
any board training.
The company is not planning to The AGM is an important Should continue to hold the
hold an annual general meeting meeting in that it gives the AGM.
(AGM) as the number of shareholders an opportunity
shareholders are such that it to raise any concerns, receive
would be too costly and an answer and vote on
impractical. important resolutions.
Instead, the board has
suggested sending out the
financial statements and any
voting resolutions by email;
shareholders can then vote on
the resolutions via email.
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Audit Risk Conditions
1.Audit Risk - Receivables
1.The following situations give rise to the risk of irrecoverable debts:

1.1. Receivables increased XX days from last year’s YY days
1.2. Management extends credit term
1.3. Management allows customers in financial difficulty to pay by instalments
Audit risk
There is a risk that the receivables may be overvalued as they are not recoverable.
Auditor’s response
✓ Extend post year-end cash receipts testing to assess valuation.
✓ Consider the adequacy of allowance for receivables.
✓ Review aged receivable analysis report
2.Teeming and lading fraud had been carried out by four members of the sales ledger department
who had colluded.
Audit Risk
There is a risk that the full impact of the fraud has not been quantified and any additional fraudulent
transactions would need to be written off in the statement of profit or loss. If these have not been
uncovered, the financial statements could be misstated.
In addition, individual receivable balances may be under/overstated as customer receipts have been
misallocated to other receivable balances.
Auditor’s Response
✓ Discuss with the finance director what procedures they have adopted to fully identify and quantify
the impact of the teeming and lading fraud. In addition, discuss with the finance director, what
controls have been put in place to identify any similar frauds.
✓ Maintain their professional scepticism and be alert to the risk of further fraud and errors.
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3.The company recognised like other income for previous year receivable balance was written off
as it was deemed irrecoverable as the customer had declared itself bankrupt. However, the
company has not received a formal notification from the liquidators confirming the payment
Audit Risk
As per IAS 37 Provisions, Contingent Liabilities and Contingent Assets, this would therefore represent
a possible contingent asset. this should not be recognised until the receipt is virtually certain. With
no firm response to date, the inclusion of this sum overstates profit and current assets.
✓ Discuss with management whether any notification of payment has been received from the
liquidators and review the related correspondence.
✓ If virtually certain, the treatment adopted is correct. If payment has been received, agree to post-
year end cash book.
✓ If receipt is not virtually certain, management should be requested to remove it from profit and
receivables. If the receipt is probable, the auditor should request management include a
contingent asset disclosure note.
2.Audit Risk – Inventories – NRV
1.The following situations indicate the inventories’ net realisable values might be lower than cost:
1.1. Inventory days have increased from XX days to YY days.
1.2. The company has decreased the selling price of products significantly.
1.3 Co holds inventory of $.... that it can no longer sell in its home market. It believes it can be sold to
an international customer, but there are significant additional costs that Co will incur.
Audit risk
IAS 2 Inventory requires inventory to be stated at the lower of cost and NRV.
It is possible that the net realisable value of the inventories is lower than cost. Hence it is likely that
this inventory is overvalued.
Perform detailed cost and NRV testing to assess whether inventory is overvalued and requires write
down.
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2.Client values its inventory at the lower of cost and net realisable value. Cost includes both
production and general overheads.
Audit Risk
IAS 2 Inventories requires that costs included in valuing goods and services should only be those
incurred in bringing inventory to its present location and condition. Although production overheads
meet these criteria, general overheads do not. If these are included in inventory cost, then this will
result in over-valued inventory.
✓ Discuss with management the nature of the OH included in inventory valuation. If general
overheads are included, request management remove them from the valuation to be included in
the draft financial statements.
✓ Review supporting documentation to verify those overheads deemed to be of a production
nature are valid.
3.Audit Risk – Inventories – Stock count
1.Inventories stored in third party warehouses and there is no year-end stock count at 3rd party
store.
Audit risk
Auditor may not be able to obtain evidence to confirm the existence and completeness of inventories
at 3rd party warehouses.
Additional procedures will be required to ensure that inventory quantities have been confirmed for
third party locations, e.g. obtain direct confirmation from the 3rd party warehouse to confirm
existence and condition of the company’s inventories.
2.The company undertakes continuous (perpetual) inventory count.
Audit risk
Under such a system all inventory must be counted at least once a year with adjustments made to the
inventory records.
Inventory could be under or overstated if:
• the continuous (perpetual) inventory counts are not complete (not frequent enough) and
• the inventory records are not accurately updated for adjustments.
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✓ Review the time schedule of the continuous (perpetual) inventory counts to ensure it is frequent
enough.
✓ Review the level of adjustments made to inventory to assess whether the inventory records at the
year-end can be relied upon.
3.The company is planning to undertake the full year-end inventory counts after the year end and
then adjust for movements from the year end.
Audit Risk
If the adjustments are not completed accurately, then the year-end inventory could be under or
overstated.
✓ Attend the inventory count held after the year end and note details of goods received and
despatched post year end, in order to agree to the reconciliation.
✓ Review the year-end inventory adjustments schedule.
4.Audit Risk – Inventories – Standard cost and Retail Method
1.The company’s inventory valuation policy is standard costing but not updated or selling price less
average profit margin.
Audit risk
IAS 2 Inventories allows this inventory valuation method as long as standard cost is a close
approximation to actual cost.
If this is not the case, then inventory could be under or overvalued.
✓ Compare actual cost (e.g. supplier invoice for raw material cost) to the standard cost to confirm
whether standard cost is a close approximation to actual cost.
✓ If there are significant variations this should be discussed with management, to ensure that the
valuation is appropriate.
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5.Audit Risk – Inventories – Work In Progress (WIP)
1.The work in progress balance at the year-end is likely to be material.

Audit risk
There is a risk that the audit team may not be sufficiently qualified to assess the quantity and value of
work in progress leading to misstated work in progress.
✓ With consent from management, arrange for an independent expert to value the work in progress
at the year-end count.
6.Audit Risk – Loan
1.The company has borrowed $x from the bank during the year via an eight-year loan.
Audit risk
There is a risk that the disclosure of any security given is not complete.
This loan needs to be correctly split between current and non-current liabilities in order to ensure
correct disclosure.
As the level of debt has increased, there should be additional finance costs. There is a risk that this has
been omitted from the statement of profit or loss leading to understated finance costs and overstated
profit.
✓ Review the loan contract) to ascertain whether any security has been given
✓ Perform bank circularisation to confirm loan details.
✓ Confirm that the loan finance was received.
✓ Review split between current and non-current liabilities and the disclosures.
✓ Recalculate Finance costs.
2.The company has borrowed $x from the bank during the year. The loan is repayable within 12
months.
Audit risk
This loan should be disclosed as a current liability.
The risk is the loan is wrongly classified as non-current loan.
✓ Review the loan contract to confirm the loan is repayable within 12 months.
✓ Perform bank circularisation to confirm loan details.
✓ Review the financial statements to ensure the loan is correctly classified as current loan.
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3.The loan has a number of covenants attached to it which include maintaining:

• Minimum total assets; or
• Minimum profits.
Audit risk
Management may be under pressure manipulate the financial figures to avoid breaching the loan
covenants.
If these are breached then the loan would be instantly repayable and would be classified as a current
liability.
If the company did not have sufficient cash flow to meet this loan repayment then there could be
going concern implications.
✓ Maintain their professional scepticism and be alert to the risk that figures might be misstated to
ensure compliance with covenants.
✓ Review the covenant calculations prepared by the company and identify whether any defaults
have occurred.
7.Audit Risk – PPE
1.The company has incurred $X on updating, repairing and replacing (or refurbishing) a significant
amount of the plant and equipment.
Audit risk
If this expenditure is of a capital nature, it should be capitalised as part of property, plant and
equipment (PPE) in line with IAS 16 Property, Plant and Equipment.
If this expenditure it relates to repairs, then it should be expensed to the statement of profit or loss
(income statement).
If the expenditure is not correctly classified, profit and PPE could be under or overstated.
Review a breakdown of the costs and agree to invoices to assess the nature of the expenditure and:
✓ if capital, agree to inclusion within the asset register and,
✓ if repairs, agree to the income statement.
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2.The company revalued its land and buildings during the year.
Audit risk
Valuation should be carried out according to IAS 16 Property, Plant and Equipment. If not, land and
building could be overvalued or undervalued.
Discuss with management the process adopted for undertaking the valuation:
• whether the whole class of assets was revalued and
• whether the valuation was undertaken by an expert.
• This process should be reviewed for compliance with IAS 16.
3.The directors have extended the useful lives of PPE from XX to YY years, resulting in the
depreciation charge reducing.
Audit risk
Under IAS 16 Property, Plant and Equipment, useful lives are to be reviewed annually, and if asset lives
have genuinely increased, then this change is reasonable.
However, there is a risk that this the change in useful lives has occurred in order to achieve profit
targets. If this is the case, then plant and machinery is overvalued and profit overstated.
Discuss with the directors the rationale for extending the useful lives.
Compare the useful life to how often these assets are replaced, as this provides evidence of the useful
life of assets.
4.The company has purchased and entered new PPE which may be under legal process by the year
end.
Audit risk
Only assets which physically exist at the year-end should be included in property, plant and
equipment.
If the legal transaction has not been completed by the year end & the company incorrectly includes
the PPE at the year end, there is a risk that assets are overstated.
✓ Discuss with Management whether PPE purchase was completed by the year end
✓ Inspect legal documents of ownership, such as title deeds to ensure these are dated prior to next
year
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5.Unused plant and equipment

Audit risk
As per IAS 16 and IAS 36, this plant and equipment should be stated at the lower of its carrying value
and recoverable amount, which may be at scrap value depending on its age and condition.
✓ Detailed testing as per IAS 16, 36 and confirm expert.
6.The company purchased and installed a new manufacturing line. The costs include purchase price,
installation costs and a five-year servicing and maintenance plan.
Audit Risk
IAS 16 does not allow servicing and maintenance costs to be capitalised as part of the cost of a non-
current asset, as they are not directly related to the cost of bringing the asset to its working condition.
The servicing costs should be charged to profit or loss over five year.
Therefore property, plant and equipment (PPE) and profits are overstated and prepayments are
understated.
✓ Review the purchase documentation for the new manufacturing line to confirm the exact cost of
the servicing and that it does relate to a five-year period.
✓ Discuss the accounting treatment with the finance director and the level of any necessary
adjustment to ensure treatment is in accordance with IAS 16.
7.Co placed an order for $....m of machinery, paying $....m in advance. The machinery will now be
delivered post year end.
Audit Risk
If the deposit of $.....m paid in advance has been capitalised within PPE then prepayments are
understated and PPE will be overstated
✓ Review the non-current asset register to determine if the $....m paid in advance has been
capitalised.
✓ Discuss the correct accounting treatment with management to confirm that the amount paid in
advance is recognised as a prepayment
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8.Co has included in wages and salaries, significant staff costs involved in the preparation of the site
for the new machinery and in testing the new machinery.
Audit Risk
IAS 16 Property, Plant and Equipment states that costs, directly attributable to bringing the asset to
the condition necessary for its intended use, are capitalised as part of the cost of the asset. These
directly attributable costs include costs of site preparation and costs of testing.
It appears that an incorrect accounting treatment has been applied in respect of the staff costs
resulting in understated property, plant and equipment (PPE) and overstated wages and salaries
expense.
✓ Discuss with management the accounting treatment applied and request that the relevant staff
costs are included in the cost of PPE.
✓ Undertake a review of the staff costs expensed and the process for allocating staff costs to work
undertaken to confirm the amounts that should be capitalised as part of the cost of machinery.
9.A member of Peach Co’s finance team fraudulently purchased assets for personal use. The
reconciliation of physical assets to the non-current assets register will be ongoing at the year end.
Audit Risk
There is a risk that non-current assets are overstated as they may include the personal assets
purchased.
Control risk is also increased if the fraud has gone undetected for a period of time.
✓ Obtain a list of all non-current assets capitalised in the year and agree the new assets to an
authorised purchase order.
✓ Select an increased sample of assets from the non-current assets register to confirm the existence
of the assets and that they are used in the business
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8.Audit Risk – Equity
1.The company has issued $XX of irredeemable preference shares

Audit risk
Incorrectly accounted and classified made.
Inadequate disclosure made.
Understated equity and overstated non-current liabilities
✓ Review share issue documentation to confirm correctly classified as equity
✓ Review disclosure
2.The company has restructured its finance and raised $XXX through issuing shares at a premium.
Audit risk
Can make Inadequate disclosure.
Can allocate incorrectly between share capital and share premium.
✓ Check that the split of the equity finance is correct.
✓ Review the disclosures for this finance in detail.
9.Audit Risk – Sales
1.Revenue has grown by XX% in the year. But cost of sales has only increased by YY%.
Audit risk
There is a risk that sales may be overstated.
Obtain a detailed breakdown of sales and discuss with management to understand and test the sales
increase.
2.A sales-related bonus scheme for salesmen has been introduced in the year.
Audit risk
This may lead to sales cut-off errors with salesmen reporting sales early to maximise their current year
bonus.
Some of the customers may not actually exist. Sales and receivables could be overstated.
✓ Increase sales cut-off testing.
✓ External confirmation of receivables to confirm that customers exist and the amounts due are
valid.
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3.Goods sold are recalled during the year

Audit risk
As the quality of the goods, Inventory may be overvalued as its NRV may be below its cost.
Test cost and NRV of the goods line-by-line basis the goods are valued correctly.
Audit risk
If refunds is needed, sale is overstated and liability and inventory is understated
✓ Review the list of sales made
✓ Agree that the sale has been removed from revenue and the inventory included.
✓ If the refund has not been paid pre year end, agree it is included within current liabilities
4.Customers pay a …% deposit on signing the contract to purchase the goods.
Audit risk
There is a risk that revenue is overstated and current liabilities understated if the deposits have been
recorded within revenue.
✓ obtain a copy of the contracts with customers and review them to understand the performance
obligations.
✓ discuss with management the criteria for determining whether performance obligations have
been satisfied
✓ undertake increased testing over the cut-off of revenue and the completeness of deferred income.
5.The company has a returns policy allowing a customer to return goods within .. days of purchase
if they are dissatisfied with the product.
Audit risk
IFRS® 15 Revenue from Contracts with Customers requires that revenue should only be recognised to
the extent that goods will not be returned. The company should recognise a refund liability for goods
which are expected to be returned. If the company has not correctly accounted for the refund liability,
revenue will be overstated and the refund liability understated.
✓ Enquire with the finance director how the returns policy has been applied at the year end and
whether the provisions in IFRS 15 have been reflected.
✓ Review the assumptions underpinning the refund liability for reasonableness and whether they
meet the historic 5% value of returns.
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✓ Compare the level of post year-end returns to the refund liability and discuss any significant
differences with management.
10.Audit Risk – Purchases - Import
1.The company purchases their goods from overseas and the goods are in transit for several weeks.
Audit risk
At the year-end, only goods which have been received into the warehouse should be included in the
inventory balance and a respective payables balance recognised.
At the year-end there is a risk of cutoff error and inventory, purchases and payables may not be
accurate.
✓ Detailed cut-off testing of goods in transit from the suppliers overseas to ensure that the cut-off
is complete and accurate.
✓ Discuss with management the point at which inventory is recorded and review the contract with
the supplier to verify the requirements in place.
11.Audit Risk – Provision
1.The company faces legal claim which is outstanding at year end.

Audit risk
If it is probable that the company will make payment to settle the claim, a provision for legal claim is
required.
If the payment is possible rather than probable, a contingent liability disclosure would be necessary.
The risk is there is no provision or no disclosure of contingent liabilities.
There is a risk that provisions and expenses are understated if the company has not recognised a
liability in respect of this legal claim.
✓ Write to the company’s lawyers to enquire of the existence and likelihood of success of the claim.
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2.To try and improve profits, the company changed their main material supplier to a cheaper
alternative. This has resulted in some customers claiming on their product warranties for extensive
repairs.
Audit risk
If the overall number of people claiming on the warranty is likely to increase, then the warranty
provision should possibly be higher.
If the directors have not increased the level of the provision, then there is a risk the provision is
understated.
✓ Review the level of the warranty provision in light of the increased level of claims to confirm
completeness of the provision.
3.The provision is calculated as ….% of revenue in the current year against …..% in the prior year,
despite there being no changes in the construction techniques or the level of claims
Audit risk
Under IAS® 37 Provisions, Contingent Liabilities and Contingent Assets this should be recognised as a
warranty provision.
There is a risk that the warranty provision could be understated, leading to understated expenses and
liabilities.
✓ discuss with management the basis of the provision calculation and compare this to industry
averages and the level of post year-end claims, if any, made by customers.
✓ compare the prior year provision with the actual level of claims in the year, to assess the
reasonableness of the judgements made by management.
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12.Audit Risk – Intangible Asset
1.The company spent $XX on research and development during the year.
Audit risk
According to IAS 38 Intangible Assets:
• Research expenditure must be charged to income statement
• Development expenditure can be capitalised it must meet all of the criteria under IAS 38 Intangible
Assets.
There is a risk that:
• Research expenditure is wrongly capitalised
• Development expenditure that did not meet the criteria is wrongly capitalised
Intangible assets could be overstated.
✓ Review and test in detail a breakdown of the development expenditure to ensure that those
developments which meet the capitalisation criteria are included as an intangible asset, with the
balance being expensed.
✓ Discuss the accounting treatment with the finance director and ensure it is in accordance with IAS
38.
2.A patent has been purchased for $XXX, and this enables the company to manufacture specialised
inventory for the next XXX years.
Audit risk
As per IAS 38 Intangible Assets, this should be included as an intangible asset and amortised over its
XXX-year life.
If management has not correctly accounted for the patent, intangible assets and profits could be
overstated.
✓ Agree the purchase price to supporting documentation
✓ Confirm the useful life.
✓ Recalculate the amortisation charge.
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13.Audit Risk – Going concern problem
The following are indicators that company faces going concern uncertainty:
1. Difficult trading conditions:
• increased competition,
• reduction in selling price
• financial difficulties of a key customer,
2. Worsening current ratio and quick ratio
• The current ratio has decreased from ---- to….
• The quick ratio has decreased from ____ to ____.
3. The company breached the terms of its overdraft facility
Audit risk
There is an increased risk that company is facing going concern difficulties.
✓ Perform detailed going concern testing
✓ Discuss with the directors to ensure that the going concern basis is reasonable.
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14.Audit Risk – Finance Director left
1.The finance director) has left and the replacement has not yet started.
Audit risk
This increases the inherent and control risk as errors may have been made within the accounting
records by the finance team members.
The audit team should remain alert throughout the audit for additional errors within the finance
department.
15.Audit Risk – Management under pressure or has incentives to manipulate FS

The following are situations that create pressure on management:
1. The management receives a significant annual bonus based on the value of year-end total assets.
2. The directors receive their annual bonus if the profit met the target of $XX.
3. Management needs to borrow loan from the bank.
4. Management arranges to get on the stock exchange listing during the year.
Audit risk
There is a risk that they might feel under pressure to overstate the value of assets or profits through
their judgements taken
The audit team should remain alert throughout the audit for additional errors within the finance
department.
16.Audit Risk – Reconciliation
1.The purchase ledger supervisor left and no reconciliation of supplier statements and purchase
ledger control account have been performed.
Audit risk
There is an increased risk of errors within trade payables and the year-end payable may be under or
overstated.
The audit team should increase their testing on trade payables at the year end.
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2.A number of reconciliations, including the bank reconciliation, were not performed at the year
end.
Audit risk
Balances including bank balances are not under or overstated.
✓ Discuss this issue with the finance director and request that the year end control account
reconciliations are undertaken.
✓ All reconciling items should be tested in detail and agreed to supporting documentation.
17.Audit Risk – New System
1.The company implemented a new system during the year (e.g. general ledger system or inventory
system)
Audit risk
There is a risk that data transfer error from the old system to the new system, resulting in opening
balances in the new system being misstated. This could result in significant errors arising in the
financial statements.
Perform detailed testing to confirm that all opening balances have been correctly recorded in the new
general ledger system.
2.Upgraded the Company’s website during the year
Audit risk
As the website has been upgraded, there is a possibility that the new processes and systems may not
record data reliably and accurately. This may lead to a risk over completeness and accuracy of data in
the underlying accounting records.
Tests over the completeness and accuracy of data recorded from the website to the accounting
records.
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18.Audit Risk – Detection risk
1.The company is a new client for the audit firm.

Audit risk
As the team is not so familiar with the accounting policies, transactions and balances of the company,
there will be an increased detection risk on the audit.
The audit firm should ensure they have a suitably experienced team.
Allocate adequate time for team members to obtain an understanding of the company and the risks
of material misstatement.
2.The reporting timetable is very tight.
Audit risk
This will increase detection risk and place additional pressure on the team in obtaining sufficient and
appropriate evidence.
✓ Discuss the timetable with the finance director.
✓ Perform an interim audit to reduce the pressure on the final audit.
3.The audit team will only attend the WIP counts at …..places of the ….places.
Audit risk
As the audit team is not attending all sites, detection risk is increased as the team will be unable to
directly obtain evidence relating to WIP.
✓ assess which inventory counts the team will attend, most likely to be those with the most
material WIP balances or the greatest risk of misstatement
✓ need to obtain and review documentation relating to the controls surrounding the counts and
will need to review reports from any experts used to value the WIP for those inventory counts
not attended
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21.Audit Risk – Services Organisation
1.The company outsourced its payroll processing to an external service organisation during the year
Audit risk
Can arise the detection risk as it is unsure to get sufficient and appropriate audit evidence from the
company.
If any errors occurred during the transfer process, these could result in the payroll charge and related
employment tax liabilities being under/overstated.
✓ Discuss with management the extent of records maintained at the company and transferring data
process
✓ Contact the service organisation’s auditor to confirm the level of controls in place.
✓ Conduct test of control over the transfer process
✓ Conduct substantive test on the transfer of information from the old to the new system.
2.The Company outsourced its sales ledger processing to an external service organisation.
Audit Risk
A detection risk arises as to whether sufficient and appropriate evidence is available at company to
confirm the completeness and accuracy of controls over the sales and receivables cycle and balances
at the year end.
If any errors occurred during the transfer process, these could result in sales and receivables being
under/overstated.
✓ Discuss with management the extent of records maintained at the company and transferring data
process
✓ Contact the service organisation’s auditor to confirm the level of controls in place.
✓ Conduct test of control over the transfer process
✓ Conduct substantive test on the transfer of information from the old to the new system.
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22.Audit Risk – Directors’ Remuneration
1.Directors’ remuneration disclosures have been made in line with IFRS® Standards but not local
legislation.
Audit Risk
Where the local legislation is more comprehensive than IFRS Standards it is likely that the company
must comply with local legislation.
The directors’ remuneration disclosure will not be complete if the additional information is not
disclosed.
Discuss this matter with management and review the requirements of local legislation to determine
if the disclosure in the financial statements is included appropriately.
23.Audit Risk - Payables
1The payables ledger supervisor was dismissed in June 20X5 due to a fraud.
Audit Risk
If additional frauds committed by the payables ledger supervisor are not discovered, this could result
in expenses being understated and payables being overstated. Control risk is also increased if the
fraud has gone undetected for a period of time.
✓ Discuss with the finance director the details of the fraud perpetrated by the payables ledger
supervisor and what procedures have been adopted to date to identify any further adjustments
which are needed in the financial statements.
✓ Undertake additional substantive procedures over the payables balance, particularly the
fictitious supplier set up on the payables ledger to ensure this has been removed
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2.Since the dismissal of the payables ledger supervisor, purchase invoices have yet to be logged
onto the payables ledger
Audit Risk
There is a risk that the purchases and trade payables balance at the year end will be understated if
these invoices are not logged onto the payables ledger before it is closed down for the year or
accrued for
✓ Review the unprocessed invoices file at the year end to identify any invoices which relate to the
supply of pre year-end goods and ensure they have been properly accrued for in the year-end
financial statements and recognised as a liability.
✓ Discuss with the finance director the approach to be adopted to resolve the issue of
unprocessed purchase invoices.
24.Audit Risk - Expenses
1.The directors have not accounted for any costs under the new contract for goodss as no amounts
are due to be paid until after the year end.
Audit Risk
There is a risk that the costs incurred to date have not been recognised and therefore costs and
liabilities are understated and profit is overstated.
✓ Review the terms of the contract to understand the amounts payable and terms of payment.
✓ Review the goods received not invoiced accrual listing to ensure that amounts payable to the
supplier for goodss received have been accrued despite not being invoiced
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Objectives of Purchase System

Ordering ➢ All purchases are made with suppliers who have been checked for quality, reliability
and pricing.
➢ Purchases are only made for a valid business use.
➢ Orders are placed taking consideration of delivery lead times to avoid disruption to
the business.
Goods ➢ Only goods ordered by the company are accepted.
Received ➢ Goods received are recorded promptly.
Invoice ➢ Invoices received relate to goods actually received.
received ➢ Invoices received relate to the company.
➢ Invoices received are correct in terms of quantities, prices, discounts.
Recording ➢ All purchases and related payables are recorded.
➢ Purchases are recorded accurately and related payables are recorded at an
appropriate value.
➢ Purchases are recorded in the period to which they relate.
➢ Purchases and payables are recorded in the correct accounts.
Cash ➢ Payments are only made for goods received.
payments ➢ Payments are only made once.
➢ All payments are made on time.
Step-1 Prepare Purchase Budget

• Prepared by
• Purchase Dept or Operation Director or Project Manager
• Based on
• Past data, Data from Production Dept, Data from other Dept
Step-2 Request Purchase (Purchase Requisition Note)
• Prepared by
• Relevant Dept
• Based on
• Their requirements & Budget
• Purchase Requisition Note
• Purchase Dept, Relevant Dept
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Step-3 Prepare to Purchase (Tendering)

• Prepared by
• Tender Dept or Purchase Department
• Based on
• Purchase Requisition Note
• Tender Document
• Advertising Company and Tender or Purchase Dept
Step-4 Accept Tender
• Sent by
• Supplier
• Based on
• The company’s requirement
• Accepted and Checked by
• Tender Dept or Purchase Department
• Based on
• Tender Document
Step-5 Organise Tender Selection Team
• Organized by
• Senior management
• Based on
• Relevant skilled employee
• Choose quality, cost, credit,
Step-6 Conduct Contract
• Prepared by
• Senior management with relevant expert
• Based on
• Relevant country Law & Regulation requirement, company’s requirement
• Contract
• Supplier & Company
Step-7 Place Purchase (Purchase Order)
• Prepared by
• Purchase Dept
• Based on
• Purchase Requisition Note, Contract
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• Purchase Order
• Supplier, Finance Dept, Purchase dept, Goods receiving Dept or Store Dept
Step-8 Receive Goods Ordered (Goods Received Note)
• Prepared by
• Goods Received Dept or Store Dept
• Based on
• Purchase order, Supplier’s Delivery Order
• Goods Receipt Note
• Finance Dept, Purchase Dept, Goods receiving dept or Store dept
Step-9 Receive and check Sale Invoice (Purchase Invoice)
• Prepared by
• Supplier
• Based on
• Their Delivery Order
• Checked by
• Finance Dept
• Based on
• Supplier’s Deliver Order
Step-10 Record Transactions in the account
• Prepared by
• Finance Dept
• Based on
• Supplier’s invoice, Goods Received Note
Step-11 Pay Cash (Payment Voucher)
• Prepared by
• Finance dept
• Based on
• Supplier’s Invoice & Cash Receipt, Goods Received Note
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Purchase System
Weakness Reasons/Implication Recommendation/Control
It is not possible for a store to This could result in the An inter-branch transfer
order goods from other stores company losing valuable system should be established
for customers who request sales. between stores.
them
Purchase orders below $xxx are This could result in non- All purchase orders should be
not authorised and are business related purchases. authorised by a responsible
processed solely by the official.
purchase order clerk who is also
responsible for processing
invoices.
Goods received notes (GRNs) This could result in delays in A copy of the GRNs should be
are sent to the accounts suppliers being paid as the sent to the accounts
department every two weeks. purchase invoices could not department on a more
be agreed to a GRN and also regular basis, such as daily.
recorded liabilities being
understated.
Any prompt payment
discounts offered by
suppliers may be missed due
to delayed payments
GRNs are only sent to the This could result in a The GRN should be created in
accounts department and significant level of unfulfilled three parts and a copy of the
failing to send a copy to the orders leading to a loss of GRN should be sent to the
ordering department sales and stock-outs. purchase order department.
The purchase ordering clerk has There is a lack of segregation The roles of purchase
responsibility for ordering of duties and this increases ordering and processing of
goods below $xxx and for the risk of fraud and non- the related supplier invoices
processing all purchase invoices business related purchases should be allocated to
for payment. being made. separate members of staff.
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The finance director authorises There is a risk that suppliers The finance director should
the bank transfer payment list could be being paid an review the whole payments
for suppliers; however, she only incorrect amount, or that list prior to authorising.
views the total amount of sums are being paid to
payments to be made. fictitious suppliers.
Supplier statement This may result in errors in the Supplier statement
reconciliations are no longer recording of purchases and reconciliations should be
performed. payables not being identified performed on a monthly basis
in a timely manner. for all suppliers and these
should be reviewed by a
responsible official.
Requisition forms are This increases the risk of Requisition forms should be
completed by production fraudulent purchases, or of authorised by the production
supervisors but are not goods being ordered which manager or director prior to
authorised. are not required, leading to being sent to the purchase
unnecessary cash outflows. ordering department.
Orders are being placed for This could result in goods When completing the
goods without the inventory being ordered which are not purchase order, the ordering
levels being checked first. required, leading to clerk should check the current
unnecessary cash outflows. level of inventory on the
system
The company does not It could experience stock-outs The company should set
currently monitor inventory resulting in the company minimum authorised reorder
levels, being unable to meet levels for inventory items.
customer orders.
The purchase ordering This could result in the The approved supplier list
department maintains an company paying increased should be reviewed and
approved supplier list; costs for raw materials or updated as necessary.
however, this has not been receiving poorer quality
updated for several months. goods.
Goods are being received This could result in the A copy of the authorised
without any checks being made company receiving and order form should be sent to
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against purchase orders and subsequently paying for the warehouse department.
leading to loss of sales (if goods it did not order. This should then be checked
remain PO). to the goods when received.
Purchase invoices are manually There is a risk that they may The purchase ledger clerk
filed by the purchase ledger be misplaced and not should record the invoices in
clerk and only updated to the entered. This would result in the ledger on a daily rather
ledger on a weekly basis. an understatement of trade than weekly basis.
payables and the company If this is not practical, then
failing to make payment to upon receipt of the invoices,
the suppliers on time. each should be attributed a
sequential number and filed.
Purchase invoices are not being This could result in invoices All purchase invoices should
agreed to the relevant goods being paid for goods which be matched to the related
received notes (GRNs) prior to were not received. GRN.
authorisation and payment by
the finance director.
Purchase invoices are not This could result in the All purchase invoices should
sequentially numbered. company’s finance be sequentially numbered
department are unable to and on a regular basis a
monitor if all invoices have sequence check of
been completely recorded; unrecorded invoices should
this could result in a failure to be performed.
make payment to a supplier
on time.
Invoices are authorised by the There is the risk that the Consideration should be given
finance director, but payment is company is missing out on to earlier payment if the
only made xx days after the early settlement discounts. settlement discounts are
invoice is input. Also, failing to pay in sufficient. If not, invoices
accordance with the should be paid in accordance
supplier’s payment terms can with the supplier’s payment
lead to a loss of supplier terms.
goodwill as well as the risk
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that suppliers may refuse to

supply goods to the company
The purchasing manager This could result in stores The purchasing manager
decides on the inventory levels ordering goods that are not should initially hold a meeting
for each store without likely to sell and hence with area managers of stores;
discussion with store or sales require heavy discounting. if meeting all store managers
managers. is not practical, he should
understand the local markets
before agreeing jointly goods
to be purchased
The store managers are If the store managers forget Automatic re-order levels
responsible for re-ordering or order too late, then as the should be set up in the
goods through the purchasing ordering process can take up inventory management
manager. to many weeks, the store systems. As the goods sold
could experience significant reach the re-order levels the
stock outs leading to loss of purchasing manager should
income. receive an automatic re-order
request.
Goods received checked by If the sales assistants are only The goods should then be
sales assistants to the supplier’s checking quantities then checked on arrival for
delivery note to agree goods which are not of a quantity and quality prior to
quantities but not quality. saleable condition may be acceptance from the supplier.
Sales assistants are producing accepted. A responsible official at each
the goods received note (GRN) The assistants may not be store should produce the GRN
on receipt of a supplier’s adequately experienced to from the supplier’s delivery
delivery note. produce the GRN, and this is information.
an important document used
in the invoice authorisation
process. Errors could lead to
under or overpayments.
When raising purchase orders, This could result in the An approved supplier list
the clerks choose whichever company ordering goods at a should be compiled; this
supplier can despatch the goods much higher price or a lower should take into account the
the fastest. quality than they would like, price of goods, their quality
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as the only factor considered and also the speed of

was speed of delivery. delivery.
There is out of date ordering This could result in wasted The ordering system should
system. time in correcting orders be updated.
produced automatically.
Supplier statement This may result in errors in the Supplier statement
reconciliations are no longer recording of purchases and reconciliations should be
performed. payables not being identified performed on a monthly basis
in a timely manner. for all suppliers and these
responsible official.
Changes to supplier details in This could lead to key supplier Only purchase ledger
the purchase ledger master file data being accidently supervisor should have the
can be undertaken by purchase amended or fictitious authority to make changes to
ledger clerks. suppliers being set up, which master file data. This should
can increase the risk of fraud. be controlled via passwords.
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Control Strength for Purchase

Strengths Reduce control risk/Reason
The centralised buying department purchases all This ensures that the company is being
supplies after researching for the lowest costs. economical as the least amount of resources is
being used.
All orders are authorised by a purchasing This will ensure that only valid expenditure is
director. incurred.
The purchasing manager authorises purchases This should ensure errors are detected before an
before an order is placed. order is placed reducing the risk of unnecessary
cost to the company.
Inventory is reviewed daily and goods The store manager has the most knowledge of
requisitioned by each store manager. the requirements of their store and daily review
of inventory ensures items are only ordered if
necessary reducing the risk of obsolete
inventory and stock outs.
The computer system automatically generates a This ensures outstanding orders are followed up
computerised sequentially pre-numbered order promptly minimising the risk of stock outs which
and a sequence check is performed on a weekly will result in lost revenue and ensures that all
basis with an exception report produced which orders are recorded.
is reviewed by the purchasing manager.
Goods received are checked for damage. If any items are damaged they can be returned
immediately to the supplier. This will reduce the
risk of inappropriate valuation of inventory and
additional cost for the company.
Inventory records are updated immediately for This also ensures that inventory records are
goods received by a different member of staff to complete and accurate with regards to the
that which recorded the delivery. Inventory sold goods received.
is updated automatically at the point of sale.
Purchase orders up to $…. are authorised by the This reduces the risk that the automated system
purchasing manager and above $..... by the generates errors during the payroll processing.
purchasing Any errors would be identified on a timely basis
to prevent wages being over or under paid.
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The warehouse department agrees the receipt This ensures that Co is not recording liabilities
of goods from suppliers to a copy of the and subsequently paying for the receipt of
purchase order and confirms the quantity and inferior quality goods or for goods it did not
quality of the goods received and signs the order.
goods received notes (GRNs) to evidence the
checks.
Purchase invoices are logged into the purchase Utilising control totals ensures both
day book in batches, utilising control totals. completeness and accuracy over the input of
purchase invoices. If the invoices are not all
input completely and accurately payables may
be misstated
Supplier statement reconciliations are This ensures that any errors in the recording of
undertaken on a monthly basis and these are purchases and payables are identified and
reviewed by the financial controller. corrected in a timely manner and therefore that
payables are complete and accurate.
The finance director authorises the bank This reduces the risk that suppliers could be
transfer payment list for suppliers after agreeing being paid an incorrect amount, or that sums are
the amounts to be paid to supporting being paid to fictitious suppliers
documentation and reviewing for any duplicate
payments.
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Property Plant and Equipment

➢ Assets are only purchased if there is a business need.
➢ Assets are purchased at an appropriate price.
➢ The company can afford the capital expenditure proposed.
➢ Capital expenditure is appropriately treated in the accounting records.
➢ Capital expenditure is completely and accurately recorded in the accounting records.
➢ Assets are covered by adequate insurance to prevent loss to the company.
➢ Documents relating to assets are safeguarded from theft or damage.
Control Strength for PPE
Approval of the five-year and annual budgets by Reduce unauthorised non-current assets are
the board of directors. purchased.
The budget is updated when the order for new Reduce duplication of assets purchased.
equipment is placed.
Pre-numbered goods received notes are Reduce pay for goods that have not been
available to the accounting department for received.
comparison with the purchase invoice.
Informed people in the production department Reduce the operational ineffectiveness of plant
carefully assess the proper operation of the and equipment.
equipment.
The accounting department updates the non- Reduce fraudulent entries to cover theft/
tangible assets register and only the accounting unauthorised purchases.
department has access to it.
Accounting department personnel perform Reduce the theft and loss of plant and
rolling tests to ensure that the non-current equipment and all items in the register existing
assets register and non-current assets on hand increased.
are in agreement with each other.
The internal audit department tests on a sample Reduce the non-current assets register is
basis that recorded non-current assets are overstated.
inexistence.
Internal audit test the operation of the entire Reduce the controls which are not operating
non-current assets recording system. effectively.
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The company has heavily invested in new Reduce the ineffectiveness operation of the
equipment, which will lead to more operations company.
being performed.
A capital expenditure committee has been This should ensure that significant cash flow
established to plan and authorise the purchase expenditure is budgeted for, and that the
of significant capital items. expenditure will be for valid items only.
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Objectives of Sale System

Ordering ➢ Goods are only supplied to customers who pay promptly and in full.
➢ All orders are processed.
Despatch ➢ Orders are despatched promptly and in full to the correct customer.
➢ All orders are despatched.
Invoicing ➢ All goods despatched are invoiced.
➢ Invoices are raised accurately.
Recording ➢ Only valid sales are recorded.
➢ All sales and related receivables are recorded and in the correct accounts.
➢ Revenue is recorded in the period to which it relates.
➢ Sales are recorded accurately and related receivables are recorded at an
appropriate value.
Cash ➢ Cash received is allocated against the correct customer and invoices to minimise
received disputes.
➢ Overdue debts are followed up on a timely basis.
➢ Irrecoverable debts identified and written off appropriately.
Step-1 Prepare Sale Budget

• Prepared by
• Sale Department
• Based on
• Past data for regular company & data similar company
Step-2 Receive Purchase order
• Prepared by
• The relevant customer
• Based on
• Their requirement
Step-3 Conduct credit checking
• Conducted by - Credit control Department or Credit Checking Agency
• For New Customers
• Review audited report
• Ask necessary document eg Company Registration Card
• Review bank account
• Ask two reference of existing customers
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• Observe the location of new customers

• If agree,
• Provide small credit limit than existing new customers
• If disagree,
• Do not provide credit sale
• For existing customers,
• Check whether credit limit is over or not
Step-4 Send Sale Order
• Prepared by
• S&M Dept
• Based on
• Purchase order from customers
• Sale Order
• Customer, Store Dept, Despatches Dept & S&M Dept
Step-5 Despatches Inventory (Goods Despatches Note or Goods Delivery Order)
• Prepared by
• Despatches Dept or S&M Dept
• Based on
• Purchase order from customers, Sale order from S&M Dept
• Goods Despatches Note
• Customers, Finance Dept, S&M Dept
Step-6 Send Sale invoice
• Prepared by
• S&M Dept
• Based on
• Goods Despatches Note
• Sale invoice
• Customer, Finance Dept, S&M dept
Step-7 Record Transactions in Accounts
• Prepared by
• Finance dept
• Based on
• Sale Invoice & Goods Despatches Note
Step-8 Receive Cash
140
• Prepared by
• Finance Dept
• Based on
• Sale Invoice & Goods Despatches Note
• Cash Receipt Voucher
• Customer, Finance Dept
141
Sale System
The sales clerk receives This is a lack of segregation of Another sales ledger clerk
customer orders, raises sales duties and could lead to a risk should be involved in the
invoices and processes of fraudulent transactions or processing of customer
payments. errors, as no one checks the transactions so that no one
work undertaken by this clerk. individual undertakes all
elements of the sales cycle.
The sales clerk manually edits This significantly increases the All sales invoices for customers
the invoices prior to dispatch. risk of error, as if the sale clerk should be double checked by
incorrectly increases the sales another member of the
prices, then this can lead to a finance department prior to
loss of customer goodwill and being sent out.
if they are too low, this results
in a loss of revenue for the
company.
Credit limits are determined by This can result in limits being Customer credit limits should
the finance director when a too high and sales being made be regularly reviewed by the
new trade customer is set up in to poor credit risks or too low finance director.
the system. However, these and the company losing
limits was out of date. potential revenue.
Customer orders and goods Without sequential numbers, Sales orders and goods
despatched notes (GDN) are it is difficult for the company to despatched notes should be
given a number based on the identify missing orders and to sequentially numbered. On a
customer account number and monitor if all orders are being regular basis, a sequence
order number. These numbers despatched in a timely check of orders should be
are not sequential. manner, leading to a loss of undertaken to identify any
customer goodwill. missing orders.
The company has changed from There is a risk that orders may The courier company should
a reliable national courier be lost resulting in a loss of be set targets with regards to
company to a cheaper local revenue for the company or timeliness of despatches. A
courier; as a result some orders orders arriving later than review should be undertaken
have been delivered late. normal which would lead to a of target despatch times and
loss of customer goodwill.
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actual times taken by the new

courier company.
Customers’ sales invoices are This is likely to lead to a loss of The system should be
automatically generated by the customer goodwill and the amended so that it links into
system at the same time that early recognition of revenue in the despatch system. Sales
the online order is placed. the accounting records. invoices should not be raised
until after goods have been
despatched.
If the company makes special There is a risk that these When special offers or
offers or discounts sales, the amendments could be made discounted sales occur, the
sales prices is amended by a incorrectly resulting in a loss of changes to master file data
senior sales ledger clerk. sales revenue or overcharging should be made by a
of customers. supervisor and each change
This could also increase the risk checked by a responsible
of fraud. official to reduce the risk of
errors occurring.
Monthly statements are not This increases the likelihood of The company should produce
sent to the customers. errors and any disputed monthly customer statements
invoices not being quickly for customers and send them
identified and resolved by the out promptly.
company.
The sales ledger control account If the sales ledger is only The sales ledger control
is only reconciled at the year- reconciled annually, there is a account should be reconciled
end balance. risk that errors will not be on a monthly basis to identify
spotted promptly. any errors. The reconciliations
responsible official and they
should evidence their review.
Inventory availability for There is the risk that where When telephone orders are
telephone orders is not checked goods are not available, order placed, the order clerk should
at the time the order is placed. clerks could forget to contact check the inventory system
the customers, leading to whilst the customer is on the
143
unfulfilled orders. This could phone; they can then give an

lead to customer accurate assessment of the
dissatisfaction, and would availability of goods and there
impact the company’s is no risk of forgetting to
reputation. inform customers.
Telephone orders are not There is a risk that incorrect or All telephone orders should be
recorded immediately on the insufficient details may be recorded immediately on the
three part pre-printed order recorded by the clerk and this three part pre-printed order
forms. could result in incorrect orders forms. The clerk should also
being despatched or orders double check all the details
failing to be despatched at all, taken with the customer over
resulting in a loss of customer the telephone to ensure the
goodwill. accuracy of the order recorded
Telephone orders are not Therefore if orders are The three part pre-printed
sequentially numbered. misplaced, these orders will orders forms should be
not be fulfilled, resulting in sequentially numbered and on
dissatisfied customers. a regular basis the despatch
department should run a
sequence check of orders
received. Where there are
gaps in the sequence, they
should be investigated to
identify any missing orders
A daily pick list is used by the It does not appear that the In addition to the pick list,
despatch department when goods are checked back to the copies of all the related orders
sending out customer orders. original order; this could result should be printed on a daily
in incorrect goods being sent basis. When the goods have
out. been picked ready to be
despatched, they should be
cross checked back to the
original order.
The extra staff have been asked As the extra staff will not be as Only the sales clerks should be
to help out temporarily with experienced as the sales clerks, able to raise sales invoices.
producing the sales invoices. there is an increased risk of
144
mistakes being made in the

sales invoices. This could result
in customers being under or
overcharged.
Discounts given to customers This could result in The invoicing system should be
are manually entered onto the unauthorised sales discounts amended to prevent sales
sales invoices by sales clerks. being given as there does not clerks from being able to
seem to be any authorisation manually enter sales discounts
required. onto invoices.
In addition, a clerk could forget
to manually enter the discount
or enter an incorrect level of
discount for a customer,
leading to the sales invoice
being overstated and a loss of
customer goodwill.
New customers undergo a Over a period of time it may be Credit limits should continue
credit check, after which a that the customers’ credit to be approved by the sales
credit limit is proposed by the limits have been set too high, director; however, on a regular
sales staff and approved by the leading to irrecoverable debts, basis the sales director should
sales director, these credit or too low, leading to a loss of review these limits based on
limits are not reviewed after sales. order history and payment
this. record.
Sale are made through the This can result in the company The website should be
website is not integrated into accepting customer orders updated to include an
inventory system. when they do not have the interface into the inventory
goods in inventory. This can system; this should check
cause them to lose sales and inventory levels and only
customer goodwill. process orders if adequate
inventory is held.
For goods despatched by local This can lead to customers The company should remind all
couriers, customer signatures falsely claiming that they have local couriers that customer
are not always obtained. not received their goods. signatures must be obtained as
proof of despatch and
145
payment will not be made for

any despatches with missing
signatures.
There have been a number of This can lead to a loss of Once goods are despatched
situations where the sales customer goodwill and they should be matched to
orders have not been fulfilled in damage the reputation of the sales orders and flagged as
a timely manner. company as a reliable supplier. fulfilled.
New customer credit limits are Sales ledger clerks are not New customers should
set by sales ledger clerks. sufficiently senior and so may complete a credit application
set limits too high, leading to which should be checked
irrecoverable debts, or too through a credit agency with a
low, leading to a loss of sales. credit limit set.
Sales discounts are set by the In order to boost their sales, All discounts to be granted to
company’s sales team. members of the sales team customers should be
may set the discounts too high, authorized in advance by a
leading to a loss of revenue. responsible official, such as the
sales director.
Sales staff are able to make There is a risk that these Sales staff should not be able
changes to the customer amendments could be made to access the master data file
master data file, in order to incorrectly resulting in a loss of to make amendments. Any
record discounts allowed and sales revenue or overcharging such amendments to master
these changes are not of customers. file data should be restricted
reviewed. so that only supervisors and
above can make changes.
Inventory availability does not There is a risk that where Prior to the salesperson
appear to be checked by the goods are not available, finalising the order, the
sales person at the time the leading to unfulfilled orders inventory system should be
order is placed. In addition, The and customer dissatisfaction, checked in order for an
Company markets itself on which would impact the accurate assessment of the
being able to despatch all company’s reputation. availability of goods to be
orders within three working notified to customers.
days.
146
Customer orders are recorded The sales department of The The order form should be
on a two-part pre-printed form, Company does not hold these amended to be at least four-
one copy is left with the orders centrally and hence part.
customer and one with the would not be able to monitor if The third part of the order
sales person. orders are being fulfilled on a should be sent to the
timely basis. This could result warehouse department and
in a loss of revenue and the fourth part sent to the
customer goodwill. finance department.
Orders placed on the internet Errors could be made when The systems should be
are manually transferred onto this transfer is made, resulting integrated so that once the
the inventory control and sales in incorrect inventory figures order is placed, it
system. and the wrong orders being automatically updates the
sent to customers, resulting inventory and sales systems.
ultimately in loss of customers
and goodwill.
Customer orders are given a Without sequential numbers, Sales orders should be
number based on the sales it is difficult for the Company sequentially numbered. On a
person’s own identification (ID) to identify missing orders and regular basis, a sequence
number. These numbers are not to monitor if all orders are check of orders should be
sequential. being despatched in a timely undertaken to identify any
manner, leading to a loss of missing orders.
customer goodwill.
The sales person emails the There is a risk that incorrect or The third part of the sales
warehouse despatch team with insufficient details may be order should be forwarded
the customer ID and the sales recorded by the sales person directly to the warehouse
order details, rather than a copy and this could result in department.
of the sales order itself, and a incorrect orders being The pick list should be
pick list is generated from this. despatched, resulting in a loss generated from the original
of customer goodwill and order form and the warehouse
revenue. team should check correct
quantities and quality before
sent it.
147
The finance department does This could result in goods being Upon despatch of goods, a
not receive a copy of these despatched but not being four-part GDN should be
GDNs, they will not know when invoiced, leading to a loss of completed, with copies to the
to raise the related sales revenue. customer, warehouse
invoices. department, sales department
to confirm despatch of goods
and a copy for the finance
department.
Upon receipt of the GDN, a
clerk should raise the sales
invoices in a timely manner.
The sales person who have sale They are more likely to focus A credit controller should be
target is given responsibility to on generating sales orders appointed and it should be
chase customers directly for rather than chasing payments. their role, rather than the
payment once an invoice is This could result in an increase salesperson, to chase any
outstanding for xx days. in bad debts and reduced outstanding sales invoices
profit and cash flows. which are more than xx days
old.
A random code is generated for Orders not yet despatched will If the systems are automated,
each order, which is based on be difficult to monitor. the computer should generate
the name of the employee a numerical code
inputting the details, the date automatically once the order is
and the products ordered. placed and this will mean
orders can be monitored more
easily.
Customers' credit cards are If payments are rejected, then The credit card should be
charged after despatch of the the company will lose out on charged as soon as the
order has taken place, rather sales income, resulting in customer has placed the order
than when they place the order. increased levels of bad debts over the internet.
and falling profit margins.
There is no control in place to Outstanding orders will result Orders should be monitored
monitor orders that have not in queries from customers and on a regular, weekly basis to
148
been despatched or those that ultimately result in loss of identify any that have not been
remain uninvoiced. these customers and a loss in despatched.
income.
149
Payroll System
Clock cards (or ➢ Employees are only paid for work actually done.
timesheets)
submitted
Payroll calculation ➢ Only genuine employees are paid.
➢ Employees are paid at the correct rates of pay.
➢ Gross pay is calculated and recorded accurately.
➢ Net pay is calculated and recorded accurately.
Standing data ➢ Standing data is kept up to date.
amendments ➢ Access to standing data is restricted to prevent fraud or error
occurring.
Recording ➢ All payroll amounts are recorded.
➢ Payroll amounts are recorded accurately.
➢ Payroll costs are recorded in the period to which they relate.
Payments to employees ➢ Correct amounts are paid to the employees and taxation authorities.
and ➢ Payments are made on time.
tax authorities ➢ Payments are only made to valid employees.
Step-1 Recruitment and Selection

Step-2 Employment Contract Conducted
• Prepared by
• HR Dept
• Based on
• Relevant Labour Law & Requirement of the Company
• Employment Contract
• Employee, Company & Relevant Government Dept
Step-3 Time Recorded
• Prepared by
• HR Dept
• Based on
• Clock Cards or Finger Print or Attended Register
150
Step-4 Calculation Conducted

• Prepared by
• HR Dept or Payroll Dept
• Based on
• Time Recorded for Hour worked & Contract for Rate
Step-5 Other Amendment Input
• Prepared by
• HR Dept or Payroll
• Based on
• The Rule and Regulation of the Company – Uniform & Attended bonus
• The relevant Law and Regulation of the company – Salary Tax & SSB
Step-6 Payments to Employees & Tax Authority
• Prepared by
• HR Dept or Payroll Dept and Finance Dept
• Based on
• Number of employees employed by the company
Step-7 Transaction Recorded in Accounts
• Prepared by
• Finance Dept
• Based on
• Data provided by the HR Dept or Payroll Dept
151
Payroll System
The wages calculations are If system errors occur during A senior member of the payroll team
generated by the payroll the payroll processing, this should recalculate the gross to net
system and there are no would not be identified. This pay workings for a sample of
checks performed. could result in wages being employees and compare their results
over or under calculated, to the output from the payroll
leading to an additional system.
payroll cost or loss of These calculations should be signed
employee goodwill. as approved before payments are
made.
Annual wages increases are Payroll clerks are not senior The annual wages increase should be
updated in the payroll system enough to be making changes performed by a senior member of
standing data by clerks. to standing data as they could the payroll department and this
make mistakes leading to should be checked by another
incorrect payment of wages. responsible official for errors.
In addition, if they can access
standing data, they could
make unauthorised changes.
Overtime worked by This increases the risk that All overtime hours worked should be
employees is not all authorised employees will claim for authorised by the relevant
by the relevant department overtime even though they department head. This should be
head. did not work these additional evidenced by signature on the
hours resulting in additional employees’ weekly overtime sheets.
payroll costs for the company.
If employees choose instead to Employees could be taking Payroll clerks should be reminded of
take days off, the payroll clerks unauthorised leave if they the procedures to be undertaken
did not check back to the take time off but have not when processing the overtime
‘overtime worked’ report. worked the required sheets. They should sign as evidence
overtime. on the overtime sheets that they
have agreed any time taken off to the
relevant overtime report.
The overtime worked report is If department heads are busy All department heads should report
emailed to the department or do not receive the email to the payroll department on
152
heads and they report by and do not report to payroll whether or not the overtime report
exception if there are any on time, then it will be is correct. The payroll department
errors. assumed that the overtime should follow up on any non-replies
report is correct even though and not make payments until agreed
there may be errors. This by the department head.
could result in the payroll
department making incorrect
overtime payments.
Department heads was not If overtime sheets are Department heads should be
authorised on overtime sheet authorised late, then this can reminded of the procedures with
for annual leaves on a timely lead to employee regards to annual leave and
basis. dissatisfaction as it will delay arrangement of suitable cover
payment of the overtime
worked.
The finance director reviews There could be employees The finance director when
the total list of bank transfers omitted along with fictitious authorising the payments should on
with the total to be paid per employees added to the a sample basis perform checks from
the payroll records. payment listing, so that payroll records to payment list and
although the total payments vice versa to confirm that payments
list agrees to payroll totals, are complete and only made to bona
there could be fraudulent fide employees. The finance director
payments being made. should sign the payments list as
evidence that he has undertaken
these checks.
Employees swipe their cards at This could result in a number The clocking in and out process
the beginning and end of the of employees being swiped in should be supervised by a
eight-hour shift; this process is as present when they are not. responsible official to prevent one
not supervised. This will result in a individual clocking in multiple
substantially increased employees.
payroll cost for the company.
Employees are entitled to a xx- Employees could be taking Employees should be allocated set
minute paid break and do not excessive breaks resulting in a break times and there should be a
need to clock out to access the decrease in productivity and supervisor present to ensure that
dining area. increased payroll costs.
153
employees only take the breaks they

are entitled to.
Although there is a human The supervisor could appoint All appointment of staff, whether
resources department, unsuitable employees and temporary or permanent, should
appointments of temporary may not carry out all the only be made by the human
staff are made by factory required procedures for new resources department.
production supervisors. joiners. This could result in
these temporary employees
not receiving the correct pay
and relevant statutory
deductions.
Overtime reports which detail These reports are reviewed All overtime should be authorised by
the amount of overtime after the payments have been a responsible official prior to the
worked are sent out quarterly made which could result in payment being processed by the
by the payroll department to unauthorised overtime or payroll department.
production supervisors for amounts being paid
review. incorrectly and the company’s
payroll cost increasing.
Production supervisors Production supervisors are The bonus should be determined by
determine the amount of the not senior enough to a more senior individual, such as the
discretionary bonus to be paid determine this as they could production director, and this should
to employees. pay extra bonuses to friends be communicated in writing to the
or family members. payroll department.
The bonus is input by a clerk This could result in input Once the clerk has input the bonus
into the payroll system. There errors or the clerk could amounts, all entries should be
is no indication that this input fraudulently change the double checked against the written
process is reviewed. amounts leading to incorrect confirmation from the production
bonus payments. director.
The payroll manager reviews There is a lack of segregation The authorisation of the bank
the bank transfer listing prior of duties as it is the payroll transfer listing should be undertaken
to authorising the payments team which processes the by an individual outside the payroll
and also amends the payroll amounts and the payroll department, such as the finance
records for any changes manager who authorises director.
required. payments.
154
The manager could

fraudulently increase the
amounts to be paid to certain
employees, process this
payment as well as amend the
records.
A payroll clerk distributes cash There is a risk that without The payroll clerks should be
pay packets to employees identity checks wages could informed that all cash wages can only
without requesting proof of be paid to incorrect be paid upon sight of the employee’s
identity. employees. clock card and photographic
identification as this confirms proof
of identity
During the year, the human This is a lack of segregation This role must immediately revert
resources (HR) department has of duties, this leads to an back to HR to undertake.
been busy; therefore the increased risk of Additionally, a review should be
payroll department has set up fictitious/duplicate undertaken of all new joiners set up
new joiners to the company. employees being set up. by payroll with agreement to
employee files to confirm that all
new employees are bona fide.
The wage rate has been Wage rage increased should All increases of pay should be
increased by the HR director be made by the board as a proposed by the HR
and notified to the payroll whole and not just by the HR department and then formally
supervisor by email. director. agreed by the board of directors.
This increases the risk of fraud
or errors arising within
payroll.
The foreman has a record of all This would allow him to The issue of new employee numbers
employee numbers and can collect cash wages for such should be authorised by a manager
issue temporary numbers for bogus employees. and supported by employee contract
new employees. letters etc.
The two staff in the wages They could therefore, in The list of personnel should be
department make collusion, set up bogus matched with the payroll by a
amendments to the employees and collect cash manager and all new employee
computerised wages system in wages from them.
155
respect of employee holidays, records should be authorised before

illness, as well as setting up being set up on the system.
and maintaining all employee
records.
The computer system Errors could be made and A payslip should be generated by the
calculates gross pay and any incorrect wages issued. computer system and including in
deductions but these are the wage packet to reduce the
hand-written by the wages chance of errors in deductions and
clerks for the staff pay packets. gross pay being made.
The computer automatically There is no check to ensure One of the wages clerks should check
calculates gross pay and the calculations are accurate. the gross pay and deductions for a
deductions. sample of employees to gain
assurance that the computer is
calculating amounts correctly.
The foreman distributes cash He could therefore The distribution of wages should be
wages to the employees. misappropriate any wages overseen by another manager. Any
not claimed. unclaimed wages should be noted on
a form and returned to the wages
department.
For the night shift workers, the This cash will not be in a Consideration should be given to
pay packets are given to the secure location and so is open operating a shift system for the
factory supervisor to to the risk of theft. payroll department to ensure that
distribute. there are sufficient payroll
employees to perform the wages
payout to the night shift employees.
Employee joined; however, The company could continue During periods of illness or holidays,
due to staff holidays in the HR making payments to key roles of the affected employees
department, they delayed employees who have left, or should be reallocated to other
informing the payroll pay new employees late, members of the team to ensure that
department, resulting in resulting in a loss of employee controls are maintained.
incorrect salaries being paid goodwill. Forms for new joiners should be
out. completed and distributed to all
156
relevant departments to reduce new

joiners missed out.
The total amount of net wages ‘Dummy’ employees – Prior to net wages being sent to the
transferred to employees is payments that do not relate bank for payment, the financial
not agreed to the total of the to any real employee – could accountant should agree the total of
list of wages produced by the be added to the payroll the payments list to the total of
payroll department. payments list in the accounts wages from the payroll department.
department.
Details of employees leaving There is no check to ensure There needs to be a control to ensure
the company are sent on an e- that all e-mails sent are all e-mails are received and sent back
mail from the personnel actually received in the to the personnel department.
department to payroll. payroll department.
The code word for the The code word is not secure The code word should be based on a
computerized wages system is and could be easily guessed random sequence of letters and
the name of a domestic cat by an employee outside the numbers and changed on a regular
belonging to the department department. basis
head and is therefore generally
known around the
department.
In the accounts department, The clerk may not be able to The payroll should be authorised by
the accounts clerk authorises identify errors in the payroll a senior manager or finance director.
payment of net wages to or could even have included
employees. ‘dummy employees’ and is
now authorising payments to
those ‘people’.
Student loan deduction forms There is the risk that he payroll department should
are completed by relevant overpayments may be made, maintain a schedule, by employee, of
employees and payments are which then need to be payments made to third parties as
made directly to the reclaimed, leading to well as the cumulative balance
government until the employee dissatisfaction. owing.
employee notifies HR that the On a regular basis, at least annually,
loan has been this statement should be reconciled
157
repaid in full. to the loan statement received from

the government and sent to the
employee for agreement.
Holiday request forms are This could result in employees Employees should be informed that
required to be completed and taking unauthorised leave, they will not be able to take holiday
authorised by relevant line resulting in production without completion of a holiday
managers, however, this does difficulties if an insufficient request form, with authorisation
not always occur. number of employees are from the line manager.
present.
The pay packets are delivered They could adjust pay packets All pay packets should be distributed
to the production who to increase those of close by the payroll department, directly
distribute them to employees friends whilst reducing to employees, upon sight of the
at the end of their shift. The others. employee’s clock card and
supervisor is not sufficiently photographic identification as this
independent to pay wages out. confirms proof of identity.
Monthly management These could occur due to The monthly management accounts
accounts do not analyse the extra employees being should be amended to include an
variances between actual and recruited which were not analysis of wages and salaries
budgeted wages and salaries; budgeted for, or an increase compared to the budgeted costs.
this is because there are no in wage pay out rates. These should be broken down to
overtime costs. each
relevant department and could also
include an analysis of headcount
numbers compared to budget.
The financial controller This lack of segregation of Once the bank transfer has been
prepares the bank transfers for duties increases the risk of prepared by the financial controller,
the payroll and also authorises fraud/error as the financial it should be passed to the finance
these to be paid. controller could pay director to be reviewed and
themselves or certain authorised for payment.
employees more than they The review and authorisation should
are due without this being be evidenced by the finance director.
detected.
The payroll clerk amends the As the edit report is not The payroll supervisor or a member
payroll and an edit report of checked, errors made by the of the finance team should review all
158
changes is produced but this payroll clerk when updating edit reports and agree changes made
report is not reviewed. the system will not be to the details on the joiner/leavers
identified promptly. This forms.
would lead to loss of The payroll supervisor should
employee goodwill and errors evidence their review on the edit
in accounting records for report with their signature.
wages and salaries.
Only overtime in excess of five This means that employees All overtime, including that below
hours per week needs could claim to have worked five hours, should be authorised by a
authorisation by the up to five hours overtime responsible official before being
operations manager. without authorisation processed in the payroll.
resulting in payments being This authorisation should be
made to employees for hours evidenced by way of signature.
not worked and additional
payroll costs
The operations manager Without approved Approved bonus parameters should
decides on the bonus to be parameters, the operations be established by the board. All
paid to delivery drivers each manager may award bonuses should be determined by a
quarter and there are no excessive bonuses or pay senior official, such as the sales
approved parameters for the additional sums to friends and director, in line with these
bonus levels family members resulting in parameters, who should
additional payroll costs. communicate the bonus in writing to
the payroll department.
159
Control Strength for Payroll

Factory staff are each issued a sequentially Reduce to pay unworked-hour and to record
numbered clock card which details their employee incompletely all employees
number and name.
The clock card information identifies the This reduces the risk of input errors in entering
employee number and links into the hours worked hours to be paid in calculating payroll,
report produced by the payroll system. ensuring that employees are paid the correct
amount.
The payroll system automatically calculates gross Reduce incorrect wages and statutory
and net pay along with any statutory deductions. deductions.
A sample of the calculations made by the Reduce the system is operating ineffectively
automated system is checked by the payroll
supervisor
The company has a human resources department Reduce the risk of fictitious employees being
which is responsible for setting up new permanent set up and also being paid.
employees and leavers.
The discretionary bonus is communicated in Reduces the risk of the bonus being recorded
writing to the payroll department. at an incorrect amount in the payroll records.
For employees paid by bank transfer, the list of the This reduces the risk of fraudulent payments
payments is reviewed in detail and agreed to the for fictitious employees and other employees
payroll records prior to authorising the bank being omitted from the payment run.
payment.
The company has introduced an overtime scheme This has resulted in an overall reduction in
which has seen a reduction in the use of labour costs and possibly improved care levels
temporary staff, which was expensive. with permanent.
The company has implemented a new procedure This ensures that staff are only paid for the
of time clocking in and out cards to record the hours they have worked.
hours staff members have worked.
Pre-printed forms are completed by HR for all new This ensures that all relevant information, such
employees, and includes assignment of a unique as tax IDs, is obtained about employees prior
employee number, and once verified, a copy is to set up. This minimises the risk of incorrect
sent to the payroll department. wage and tax payments.
160
The quarterly production bonus is input by a clerk This reduces the risk of input errors resulting
into the payroll system, each entry is checked by a in
senior clerk for input errors prior to processing, over/underpayment of the bonus to
and they evidence their review via signature. employees.
On a quarterly basis, exception reports of changes This ensures that any unauthorised
to payroll standing data are produced and amendments to
reviewed by the payroll director. standing data are identified and resolved on a
timely basis.
For production employees paid in cash, cash is It is important that cash is adequately
received weekly from the bank by a security safeguarded to reduce the risk of
company. misappropriation.
The pay packets are prepared by two members of This ensures there is segregation of duties
staff with one preparing and one checking the pay which prevents fraud and errors not being
packets and this is evidenced by each staff identified.
member signing the weekly listing.
The payroll supervisor selects a sample of payslips This reduces the risk that the automated
and recalculates the gross to net pay calculations, system generates errors during the payroll
compares the results to the output from the processing. Any errors would be identified on
payroll system and investigates any discrepancies. a timely basis to prevent wages being over or
under paid.
The clocking-in process is monitored by a camera This will prevent staff members fraudulently
on entry to the distribution centre and video clocking-in for other employees and hence
footage is reviewed by HR every week. employees will only be paid for actual hours
worked.
The payroll clerk confirms the transfer of hours This reduces the risk that errors occur in the
and calculations has been done accurately by automated transfer and calculations during
recalculating, for a sample of employees, their the payroll processing. Any errors would be
gross to net pay. This check is also reviewed by the identified on a timely basis to prevent salaries
payroll supervisor who evidences their review being over or under paid.
The payroll system is password-protected and the This reduces the risk of fraud by preventing
payroll manager changes the password on a unauthorised changes being made to the
monthly basis using a random password generator standing data and unauthorised access to
sensitive payroll information.
161
Each month, the finance director carries out a This will ensure the payroll expense and
payroll control account reconciliation and employment tax liability is accurate and is not
investigates any differences. misstated in the year-end financial
statements.
The amount due to the tax authority is calculated This ensures that the amount paid to the tax
by the payroll supervisor who then passes it to the authority is correct. It also creates segregation
financial controller for review. of duties between the payroll supervisor
calculating the liability and the financial
controller reviewing the calculation which
reduces the risk of error
162
Inventory System
➢ Inventory levels meet the needs of production (raw materials and components) and customer
demand (finished goods).
➢ Inventory levels are not excessive, preventing obsolescence and unnecessary storage costs.
➢ Inventory is safeguarded from theft, loss or damage.
➢ Inventory received and despatched is recorded on a timely basis.
➢ All inventory is recorded.
➢ Inventory should be recorded at the appropriate value (lower of cost and NRV).
➢ Only inventory owned by the company is recorded.
Inventory System
Control Deficiency Reasons/Implication Recommendation/Control
High value inventory is stored As the code is the same across The access codes for all of the
in a secure location across all all sites, this significantly sites should be changed. Each
nine warehouses and access is increases the risk of fraud. site should have a unique code,
via a four digit code, which is known to a small number of
common to all sites. senior warehouse employees.
These codes should be
changed on a regular basis.
Monthly perpetual inventory If the counts are outstanding, Any inventory which have
counts are supposed to be some goods may not be been missed out should be
undertaken at each of the nine counted, and the inventory included in the remaining
warehouses, but some of records may be incorrect. counts.
these are outstanding.
The count will be undertaken If the same team are The counting teams should be
by teams of warehouse staff. responsible for maintaining independent of the
and checking inventory, then warehouse; hence members of
errors and fraud could be alternative departments
hidden. should undertake the counting
rather than the warehouse
staff.
The inventory sheets contain There is a risk that the counting The count sheets should be
quantities as per the inventory teams may simply agree with sequentially numbered and
records. the pre-printed quantities
163
rather than counting the contain product codes and

balances correctly, resulting in descriptions but no quantities.
significant errors in inventory.
There are xx teams of Both members of staff could Each team should be informed
counters, each team having count together rather than that both members are
two members of staff. checking each other’s count; required to count their
However, there is no clear and errors in their count may assigned inventory separately.
division of responsibilities not be identified. Therefore, one member
within the team. counts and the second
member also undertakes a
count and then records the
inventory on the count sheets
correctly.
Inventory owned by third There is a risk that these goods All inventories belonging to
parties is also being counted by may not be correctly removed third parties should be moved
the teams with adjustments from the inventory count to one location. This area
being made by the finance sheets, resulting in inventory should be clearly marked and
team to split these goods out being overstated. excluded from the counting
later. process.
High value inventory which is This significantly increases the The high value inventory
normally stored in a secure risk of theft as any member of should be kept in the locked
location will be accessible by the counting team could area of the warehouse.
all team members as they will subsequently access these Senior members of the team
be given the access code. goods. should be allocated to count
these goods, and they should
be given the access code to
enter the area.
Upon completion of the count
the access code should be
changed.
164
Each place of the warehouse is If inventory is only checked Once all inventories have been
counted once only. once, then counting errors counted once, each area
may arise resulting in under or should be recounted by a
overstated inventory. different team (at least sample
check).
Once areas are counted, the There is the risk that some All areas should be flagged as
teams are not marking the areas of the warehouse could completed, once the inventory
areas as completed. be double counted or missed has been counted.
out.
The inventory sheets are If sheets are missing, then the After the counting has
sequentially numbered and at inventory records could be . finished, each team should
the end of the count they are return all of their sequentially
given to the count supervisor numbered sheets and the
who confirms with each team supervisor should check the
that they have returned all sequence of all sheets at the
sheets. However, no sequence end of the count.
check of the sheets is
performed.
The teams are allowed to This lack of detailed Each team of counters should
choose which inventory they organisation may lead to be given specific instructions
count within each area of certain inventory items being regarding which area of the
stores. counted more than once whilst stores they are responsible for.
some items may not be
counted at all.
There is no system for marking Again this increases the risk All inventory should be marked
items which have been that inventory will be double systematically to indicate that
counted. counted or omitted it has been counted,
completely.
Information on the count This increases the risk that the Results of all counts on the
sheets is recorded in pencil. information could be amended count sheets should be
after the count without recorded in ink.
authorisation, resulting in
inventory being incorrectly
stated.
165
Additional count sheets are Lost count sheets may then go All count sheets should be
not pre-numbered. unnoticed. prenumbered before they are
issued.
Count sheets are not signed by It may be difficult to identify All count sheets should be
the count teams. who is responsible for the signed by the members of the
count of specific items if count team.
subsequent questions arise.
The warehouse manager is He may want to hide An alternative supervisor who
planning to supervise the inefficiencies and any issues is not normally involved with
inventory count. Whilst he is that arise so that his the inventory, such as an
familiar with the inventory, he department is not criticised. internal audit manager, should
has overall responsibility for supervise the inventory count.
the inventory and so is not
independent.
The company undertakes Inventory records could be For the day of inventory
continuous production and so under/overstated if goods are counting,
there will be movements of missed or double counted due Any raw materials required
goods during the count. to movements in the should be estimated and put to
warehouse. one side, the goods which are
manufactured should be
stored to one side, any goods
received from suppliers should
be stored in one location and
Goods to be despatched to
customers should be kept to a
minimum.
Damaged goods are not being It will be difficult for the Damaged goods should be
stored in a central area, and finance team to decide on an clearly flagged by the counting
instead the counter is just appropriate level of write teams and at the end of the
noting on the inventory sheets down if they are not able to see count appropriate machinery
the level of damage. the damaged goods. should be used to move all
damaged windows to a central
location. This will avoid the risk
of selling these goods. A senior
166
member of the finance team

should then inspect these
goods to assess the level of any
write down or allowance.
Inventory not listed on the The supervisor will be unable All separate count sheets
sheets is to be entered onto to ensure the completeness of should be prenumbered
separate sheets, which are not all inventory sheets. before they are issued.
sequentially numbered.
The warehouse manager is to It is unlikely that the A specialist should be utilized
assess the level of work-in- warehouse manager has the to assess both work-in-
progress and raw materials. In experience to assess the level progress and the quantities of
the past, a specialist has of work-in-progress as this is raw materials.
undertaken this role. something that the factory
manager would be more
familiar with.
167
Cash System
➢ Petty cash levels are kept to a minimum, preventing theft.
➢ Payments can only be made for legitimate business expenditure.
➢ Cash can only be withdrawn for business purposes.
➢ Cash is safeguarded to prevent theft.
➢ Receipts are banked on a timely basis to prevent theft.
➢ Cash movements are recorded on a timely basis.
Cash System
Weakness Reasons/Implications Recommendation/Control
The amount of cash held in the This increases the risk that the The amount of the petty cash
petty cash box is high ($xxx) in cash will be stolen or that errors balance at each branch should
comparison to the average will be made in counting. be reviewed. Based on an
monthly expenditure of ($xxx). average monthly expense of
$xx, a balance of $xx would
seem reasonable.
The petty cash box is not This increases the risk of theft. The petty cash box should be
physically secure as it is kept kept in the branch safe or in a
on a bookcase in the accounts locked drawer in the
office. accountant's desk.
Reimbursement for petty cash This may result in false claims All petty cash claims should be
expenditure takes place being made. supported by a receipt.
without evidence of the
expenditure being incurred eg
receipt.
The petty cash vouchers are This may result in false claims All petty cash vouchers should
not authorised - employees being made. be authorised by the accounts
are only signed by the clerk.
individual claiming
reimbursement.
In some instances significant This could result in unnecessary Expenditure over a certain limit
items are purchased through expense being incurred by the (eg $xx) should be authorised in
petty cash (up to $xxx). These business. advance.
168
are not authorised prior to the

purchase being made.
There is no indication that the Unauthorised claims could be Petty cash vouchers should be
vouchers are prenumbered, made and then blamed on pre-numbered.
meaning that the branch missing vouchers.
cannot confirm completeness
of the vouchers.
There is a lack of segregation There is no additional The accountant should check
of duties. The petty cash is independent check on the petty the petty cash count to confirm
counted by the accounts clerk cash balance. the accuracy of the balance and
who is also responsible for the ensure that the asset is
cash balance. safeguarded.
The accountant confirms that This may result in false claims The petty cash vouchers should
the cheque to reimburse petty being made. be reviewed by the accountant
cash agrees to the journal to confirm that the monthly
entry to the general ledger. petty cash expenditure agrees
The petty cash vouchers are to the reimbursement cheque
not reviewed to support the and journal entries.
amounts involved.
A junior clerk opens the post This could result in cash being A second member of the
unsupervised. misappropriated. accounts team or staff
independent of the accounts
team should assist with the
mail, one should open the post
and the second should record
cash received in the cash log.
Cash and cheques are secured A small locked box is not Cash and cheques should be
in a small locked box and only adequate for security of ideally banked banked daily, if
every few days. considerable cash receipts, as it not then it should be stored in a
can easily be stolen. fi re proof safe, and access to
this safe should be restricted to
supervised individuals.
169
Cash and cheques are only Cash should ideally not be held Cash and cheques should be
banked every few days and any over-night as it is not secure. banked every day.
member of the finance team
performs this.
The cashier updates both the This is weak segregation of The cashier should update the
cash book and the sales ledger. duties, as the cashier could cash book from the cash
incorrectly enter a receipt and received log. A member of the
this would impact both the sales ledger team should
cash book and the sales ledger. update the sales ledger.
In addition weak segregation of
duties could increase the risk of
a ‘teeming and lading’ fraud.
Bank reconciliations are not Errors in the cash cycle may not Bank reconciliations should be
performed every month and be promptly identified if performed monthly. A
they do not appear to be reconciliations are performed responsible individual should
reviewed by a senior member infrequently. then review them.
of the finance department.
The petty cash sum held and This could be as a result of On purchase of the items, the
receipts may not equal the sundry items being purchased relevant employee should
float. without the relevant receipt or return the relevant receipt or
voucher being returned. voucher and any funds not
There is also a possibility that spent.
the cash is being On a weekly basis, the
misappropriated by staff responsible person should
members, or being spent on reconcile the petty cash and if
non-business related items. any receipts are missing, these
should be followed up with the
relevant employee.
To speed up the cash payment In the event of cash Each employee should be
by customers, for each shop discrepancies arising in the tills, provided with a unique log on
the tills have the same log on it would be difficult to ascertain code and this is required to be
code and these codes are which employees may be entered when using the tills.
changed fortnightly. responsible as there is no way
170
of tracking who used which till. In order to facilitate the

This could lead to cash being investigation of till differences,
easily misappropriated. employees should be allocated
to a specific till point for
their shift.
Daily sales sheets are scanned There is a possibility that some Daily sales sheets for each shop
and emailed to head office on sales sheets could be misplaced should be sequentially
a weekly basis. by the shop manager resulting numbered and remitted to head
in incomplete sales and cash office on a daily basis.
receipts data being recorded At head office, a sequence
into the accounting system. check should be undertaken on
a regular basis to identify any
missing sheets and any gaps
should be investigated further.
The bank reconciliations are If they are not reviewed, then The bank reconciliations should
only reviewed by the financial this reduces its effectiveness be reviewed by the financial
controller if the sum of and also results in a lack of controller on a monthly basis,
reconciling items is significant; assurance that bank even if the reconciling items are
therefore some reconciliations reconciliations are being carried not significant, and he should
are not being reviewed. out at all or on a timely basis. evidence his review by way of
signature on the bank
reconciliation.
The company’s saving If these accounts are only All bank accounts should be
(deposit) bank accounts are reconciled periodically, there is reconciled on a regular basis,
only reconciled every two the risk that errors will not be and at least monthly, to identify
months. spotted promptly. any unusual or missing items.
Invoices are authorised by the There is the risk that the Consideration should be given
finance director, but payment company is missing out on early to earlier payment if the
is only made xx days after settlement discounts and settlement discounts are
receipt of the invoice. OR suppliers may refuse to supply sufficient. If not, invoices should
The company has a policy of goods to the company. be paid in accordance with the
delaying payments to their supplier’s payment terms.
171
suppliers for as long as

possible.
The IA department does not These branches are may not The IA department should
conduct cash control and visit comply with company control conduct the rolling programme
all branches. so that can occur the fraud. of visit to all branches.
All employee can use each till. Increase the risk of fraud and Each employee should have a
and error arising. designated till.
It would be difficult to ascertain
for cash discrepancies arising in
the till.
The employee can serve their The employee could give the The client should instigate a
family member and friends at goods away for free or policy whereby employees are
the till point. undercharge for goods sold. unable to serve friends and
family member at the point.
The client should carry out
regular inventory counts to
identify if googs in the stores
are below the levels in the
inventory records.
The sale report reconciled to It will be difficult to identify The reconciliation should be
the aggregate till rather than which till caused the difference. undertaken on an individual till
for each till by till basis rather than in
aggreagate.
The cash counting and There is fraud is as the staff cold The cash counted should be
recording of any cash remove some of the cash and conducted by two staff; one for
discrepancies is undertaken by then simply record. counting and another for
just one persons. reocording.
The cash is kept at the store The cash can be stolen. The cash should be collected
overnight in a small safe. daily.
The sale clerk sent to the bank The cash being stolen on the Should fix a float amount per till
to change smaller way to the bank. and assign a staff to change
denomination and no smaller denomination and fully
confirmation of how much record movement in and out of
cash is returned is carried out. the till.
172
Cash is stored in a safe at shop There is a risk of significant cash The current key lock safe should
and the shop manager stores losses due to theft if be replaced with a safe
the safe key in a drawer of access to the safe key is not with a digital code. Only
their desk when carefully controlled. authorised personnel should
not in use. have the code which should be
updated on a regular basis.
Cashier receives the daily sales There is a lack of segregation of These key roles should be split
sheets from shops, agrees that duties and errors will not between different members
cash has cleared into the bank be identified on a timely basis. of the finance team, with ideally
statements, updates the cash the bank reconciliations being
book and undertakes the undertaken by another member
bank reconciliations. of the team.
The cashier is not checking that There is a risk that receipts of The cashier should reconcile the
payments made by credit card cash by credit card may have credit card vouchers to the
have resulted in cash being been omitted and this would monthly statement received
received by company. not be identified on a timely from the card
The credit card statements are basis and may result in company. The daily amounts
not reviewed or reconciled, difficulties in resolving any per the statement should be
they are just filed away. discrepancies with the credit agreed to the bank statement
card company. to ensure that all funds have
been received.
This reconciliation should be
reviewed by a responsible
official, such as the financial
controller, who should evidence
by signature that the review has
been undertaken
173
Control Strength for Cash

Cash received from customers is taken to the This ensure that cash is safeguarded and that the
bank daily via collection by a security company. risk of theft when transferring to the bank is
minimized.
The daily sales report from the tills along with This should ensure that sales and cash records
the cash and credit card data are transferred to are updated on a prompt basis and are complete
head office through a daily interface into the and accurate.
sales and cash receipts records.
On a daily basis the clerk agrees that the cash This should ensure the completeness of cash
banked and the credit card receipts have been receipt.
credited to the bank statement in full.
Bank reconciliations are undertaken on a This should ensure that any discrepancies
monthly basis. between the cash book and the bank statements
are identified promptly.
An internal audit (IA) department which has This ensure that company procedures are
undertaken a number of internal control maintained as they would not wish IA to report
reviews, which specifically focused on cash any exceptions at their store.
controls at stores during the year.
At the end of each day, the tills are closed This ensure that the cash is controlled and
down with daily readings of sales taken; these reduce the risk of fraud as employees are aware
are reconciled to the total of the cash in the tills that the assistant manager will be looking for
and the credit card payment slips and any cash discrepancies.
discrepancies are noted.
174

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NK Professional F8-Audit and Assurance (AA)

Audit Framework and Regulations

acquired as a result of professional and business relationships should not be

member of audit team

with all relevant ISAs

The overall aim of corporate governance

internal assurance is achieved.

external auditor provides non-audit services.

Objectives or Responsibility for Law and Regulation

Question 8 (June 2014)

Elements of an assurance engagement

Audit Planning and Risk Assessment

Professional Skepticism (March/June 2021)

Assertion – Account Balances & Related Disclosures– CREV+CP

• Nature, timing and extent of Resources

Question -5 (March/June 2019-June 2010)

Question 6 (September/December 2018)

Control activities relevant to the audit

Question 10 (March/June 2017)

Question 11 (June 2013)

General Control Example

• Proper job scheduling

Question - 13 (June 09)

they can be cost effective after setup.

Disadvantages of using CAATS

Difficulties of using audit software

Due professional care

Performing or Audit Fieldwork or Audit Procedure

risk increases then more evidence is required.

or other medium than oral representation

Question – 3 (Sept/Dec 2017)

sent out by a member of the audit team.

necessary alternative procedures should be performed

Question 4 (March/June 2016)

(i) External confirmation

(iii) Use of analytical procedures

Question 7 (June 2010)

management as to missing invoices.

(ii) Example substantive procedures over sales invoicing

signiﬁcant ﬂuctuations with management.

✓ For a sample of payroll transactions recorded in the ledger, trace Yes

Substantive procedures for depreciation(June 12/ March/June 2018)

assess the reasonableness of the revised depreciation rates.

and ensure it is in line with IAS 16 Property, Plant and Equipment.

accuracy and agree amount disclosed in the financial statements.

have been agreed for any directors.

are in compliance with local legislation.

claim will not successful.

acted in accordance with employment legislation and its internal rules.

outcome of the case.

to verify arithmetical accuracy and agree the total to the FSs

company’s bank reconciliations or the trial balance/general

✓ Select a sample of goods received notes immediately before the Yes

✓ Examine post year-end credit notes to determine whether there Yes

Substantive Procedures for Research and development (Dec 2015/March/June-2018/ 2019,

ledger, trial balance and draft financial statements.

documentation and to inclusion in profit or loss.

development managers or review of feasibility reports.

complete and probable future economic benefits will arise.

they are in accordance with IAS 38 Intangible Assets.

submitted to the tax authority and cast the return/reconciliation.

purchases and expenses as per the purchase day book.

Substantive Procedure Going concern (June 12/14/September/December 2016/2018)

company has in terms of its net cash in/outflow.