Slide 13.

Overview of a Group Audit

Principles of Auditing: An Introduction to
International Standards on Auditing - Ch 13

Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.2

Contents of Group Audit Instructions

 General
 Specific procedures
 Company
 Audit scope, fees & coverage
 Critical and Significant audit concerns .
 Management Letters
 New Accounting Standards
 Independence

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.3

Contents of Audit Planning Memo- Strategy

Part

I. Introduction
II. Follow- up from last year
III. Insights
IV. Initial Risk analysis
V. Internal controls & control
procedures
VI. Identification of Critical Audit Objectives
VII. Client Service Aspects item- action
VIII. Important contacts
IX. Service Audit Team
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.4

Audit Planning Memo – Plan Part

• The plan part of the audit planning memorandum

summarizes technical matters,client service
matters and logistical matters.
• It expands on the strategy part and provides an
overview of the client company, the industry
environment, significant audit concerns, and
areas of interest to the audit team.
• The audit program primarily focuses on
substantive year-end procedures to provide
guidance for the audit work in a practical way
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.5

Contents of Audit Planning Memo - Plan

Part

I. Introduction
II. Audit approach
III. Critical audit objectives
IV. Significant audit areas
and accounting issues
V. Fees
VI. Timetable
VII. Client contacts
VIII. Local Firm service team
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.6

Audit Program (Audit Plan)

• The audit plan, traditionally called “audit program” is

a set of standardized audit procedures that are
needed to substantially test the account balances
and transactions outlined in the audit planning
memorandum.
• The audit program starts out with the basic data
about value of assets and revenue, the basis on
which the testing will be made and the gauge or
monetary precision or materiality, the amount of
maximum misstatements allowed.
• Illustration 13.6 shows an Audit Plan.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.7

Investments Audit
Objectives & Audit Program

• For investments audit procedures there are three

objectives:
– Objective II is Investments exist and are owned by
the entity. (The financial statement assertions of
management are existence and ownership).
• Procedure Number 3 (from Objective II) is agree
to authorization in the minutes of the Board of
Directors
– Local this year bought controlling interest in Newco,
Design Information Planning and Programming
Resources (DIPPER), Financial Investment
National Enterprises (FINE) and 15 per cent of Zap.
Check the minutes of the board of directors to see if
the board of directors authorized the purchases.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.8

Objective II Oohh-Oh
• Ask management for purchase agreements for
Newco, DIPPER and FINE. The team traces the
purchase amounts to the bank statement to verify
the amount and payment. Review a due diligence
report for the purchase of FINE.
• One purchase agreement shows Sister
Information Systems (SIS), not Local (who was
thought to be the owner), has entered into a share
purchase agreement to purchase all shares of
Newco. A discussion with management indicates
that Newco is owned by SIS, which is owned by
Brother, which is supposedly owned by Local.
There is no documentation supporting ownership
of Brother by Local. Send a confirmation letter to
Newco to determine ownership.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.9

Expenses and Payables OBJECTIVES

1 All unpaid amounts due to suppliers or others for goods and services
received prior to year-end are included or otherwise accrued.
(Completeness, existence, accuracy, and ownership.)
2. All cash disbursements are valid and properly recorded (i.e., they are
for goods and services received by the entity; classification as asset,
expense, liability, and other accounts is appropriate.) (Existence and
accuracy.)
3. Accounting principles are appropriate and applied consistently (e.g.,
interest adjustments, if required, are recognized.) (Valuation,
presentation and disclosures.)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.10

Expenses and Payables Audit Program

3 Review liabilities recorded after the end of the period

and review subsequent cash payments.
5. Vouch claims for credit from suppliers (e.g.,
receivables from suppliers) to supporting documents

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.11

Revenue and Receivables Procedures

1. Vouch sales from shipping records to sales
authorization, sales invoices, and sales I register,
including relevant data (e.g. party, price, description,
quantity, and dates).
2. Test sales invoice price of items to authorized lists.
3. Test processing to general and subsidiary ledgers.
4. Determine sequential numbering of sales invoices.
5. Analyze the VAT-payable to total sales (Netherlands).
6. Evaluate propriety and consistency of accounting
principles.
7. Verify cut-off for sales, cash receipts, returns, etc.
8. Verify the mathematical accuracy of relevant
supporting schedules and agree to trial balance and
subsidiary records.
9. Confirm recorded receivables (amount, date, terms,
interest rate, etc.).
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.12

Revenue and Accounts Receivable OBJECTIVES

4 Trade accounts receivable

represent uncollected sales or
other charges to bona fide
customers and are owned by the
entity. (Existence and ownership.)
5 All cash collections are accurately
recorded. (Completeness and
accuracy.)
7 Valuation of trade receivables is
appropriate (i.e., provision is made
for uncollectable amounts).
(Valuation, presentation and
disclosures.)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.13

Revenue and Accounts Receivable Audit

Program
Confirm recorded receivables.
Check replies to confirmations
and investigate exceptions.
Send second requests where
replies to positive requests are
not received. (Exceptions to sending second
requests for nonresponding positive confirmations
should be rare and the reasons for not sending
them should be fully documented.)
Investigate undelivered requests returned by post
office. If possible obtain better addresses and
mail again.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.14

Trade Accounts Receivable Audit

Program (continued)
Confirm recorded receivables
(amount, date, terms, interest
rate, etc.).
Where replies are not received
to positive requests for confirmation
apply alternative audit procedures (e.g.
check subsequent remittance advices,
shipping documents, billing records,
customer orders and correspondence
files.)
Summarize results of confirmation
requests and alternative procedures.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.15

Inventory and Cost of Sales OBJECTIVES

1. Inventory is
accurately
compiled
and priced in
conformity with
acceptable methods
(e.g., FIFO, LIFO)
consistently applied.
(Accuracy.)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.16

Inventory Audit Procedures

1. Verify accuracy of supporting schedules and agree to

trial balance and subsidiary records.
2. Test priced inventory listing.
3. Vouch purchases of inventory to and from perpetual
records.
4. Vouch sales from perpetual inventory records.
5. Ascertain that cut-off is proper.
6. Determine the application of correct rates of
exchange for amounts expressed in foreign currency.
7. Review accounting principles for appropriateness
and consistency.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.17

Inventory Audit Program

 Test priced inventory listing.

 Check the mathematical accuracy of the listing.
 Agree test counts with recorded quantities.
 Compare items on final inventory listing to physical
inventory tags, sheets, or lists, and vice versa.
 Determine that unused, voided, and no-quantity tags are
accounted for property.
 Reconcile totals with general ledger control
 Ascertain that corrections and adjustments to the final
listing are proper.
 Scan the inventory listing and investigate unusual
quantities or amounts.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.18

Obsolete Inventory

• To review if inventory is obsolete you talk to

management and see if they have any products or
product lines they plan to cancel in the future.
• You also take a look at the sales budget to see what
products sales are based on.
• You look at inventory turnover on a historical basis
and determine that the product management
intends to cancel is a very slow-moving product
and should have increased allowances for
obsolescence.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.19

Asset Balances / Expenses

Objective

Objective: Amounts prepaid, deferred or

capitalized provide future benefits; amounts
and related amortization are calculated
correctly; and write-down or loss provision is
recorded. (existence, accuracy, valuation,
ownership, presentation and disclosure)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.20

Asset Balances / Expenses Audit

Program
Audit procedure number 6 is: Test write-offs during the
period.
■ Does the Board of Directors authorize assumptions by
which the write-offs are calculated?
■ Have these assumptions changed because of change in
financial accounting standards?
■ Are the projections management used to determine
recoverability of assets reasonable and are they upgraded
on a regular basis?
■ Are the valuation methods used in the projections the
same as those used in the financial statements?
■ Is the allocation of overheads properly and consistently
done?
■ Is the recovery of goodwill amortized over a reasonable
period of time?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.21

Contents of Completion Memorandum

I. General
II. Critical audit areas
III. Accounting issues
IV. Special audit problems (FINE)
V. Other matters
V. Outstanding matters
VI. Attached schedules

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.22

General – Completion Memo

• The first item in the completion memorandum

is the statement that the engagement
manager and partner have reviewed the audit
papers related to critical areas.
• The other important elements to discuss
immediately are audit schedules, going
concern considerations and your overall
opinion on the work.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.23

Critical Audit Areas / Accounting Issues / Other

Matters

• Critical Areas are those to do with risk and

significant concerns.
• Accounting issues are broadly defined. Other
topics described in the completion memorandum
are foreign exchange, pension plan and
postretirement benefits.
• Other matters are a round-up of miscellaneous
matters including illegal and questionable acts,
management letter, summary of unadjusted audit
differences and the status of statutory financial
statements.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 13.24

Thank You for Your Attention

Any Questions?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007