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ACCA Paper F8 – Audit and Assurance – Mnemonics and Charts

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You are a partner at Green, Green and Associates, a medium to large accounting firm. One Thursday morning a letter is received from Goodies Sweet Manufacturing (GSM) Company, a local unlisted UK company which requests your company to submit a proposal for its current audit. You understand, from the letter, that GSM is of a size considered ‘small’ by UK legislation but that its principal shareholder, who is not employed by the company, using a legal entitlement has insisted on an audit by an independent auditor. This will be GSM’s first independent audit.

The senior partner in your firm has assigned you to be GSM’s ‘engagement partner’.

The following ‘overview’ takes us through the stages, procedures and documents involved in such an audit engagement (and also gives you quite a good idea of what is involved in the ACCA Paper F8 syllabus).

Start here and get an overview of what Paper F8 entails …..

An overview of what is involved in Paper F8 …… (1 of 4)






What you need to knowBEFORE

YOU START

Before you get involved in the audit work itself, you must be aware of the background requirements. In essence, you must know and act according to:

the objectives of the audit the legal requirements the auditing standards that you will use (your firm has adopted the

International Auditing Standards issued by the IAASB) the code of ethical behaviour of your professional body (you are

an accredited member of the ACCA) the procedures and rules of your accounting firm.

This is no problem for you. You are a professional accountant accredited by ACCA.

Obtaining the engagement

PHASE 1

Acceptance OF the client ….. Acceptance BY the client

This is the first step on your journey through the audit. In this phase of the audit you will have two objectives:

(i) To examine GSM (the client - who the International Auditing Standards refer to as ‘entity’) to determine whether there is any reason to reject the engagement. In others words, do we want the audit engagement?

(ii) On the basis that you do want to obtain the audit engagement to convince GSM to employ your firm.

This first step involves six procedures:

1. Determine whether your accounting firm is able to meet the ethical requirements regarding the client.

2. Determine whether your firm will need to employ the work of other specialists or experts as part of the audit.

3. Communicate with predecessor auditor. (Not in this case because it is a ‘first’ audit.)

4. Select the staff who will form the audit team and consider the audit costs and budget.

5. Prepare a client proposal.

6. Prepare and obtain an engagement letter which will only be issued when the client agrees to your proposal.







Planning the audit

PHASE 2

So you have obtained the audit ….. Now you need to plan it!

One day, soon after submitting your proposal a telephone call from GSM’ finance director confirms that your accounting firm has been awarded the engagement contract. You have sent your new client the engagement letter and all is satisfactory. So now you need to plan the audit – not an easy task!

Your audit will be made of two main parts:

(i) Tests of controls. This is sometimes referred to as the ‘interim audit’and involves mainly testing the entity’s internal control structure to establish how much reliance can be placed on it.

(ii) The final audit. This involves detailed substantive procedures such as gathering and assessing evidence.

The aim of the audit is to give assurance to the users of the financial statements (mainly the shareholders of GSM) that there is no material misstatement of the financial statements.

The procedures involved in planning the two parts of your audit will be:

(i) To collect and analyse more information about GSM. This will help you understand the entity and its environment, including its internal controls.

(i) Assess the risks of material misstatements of GSM’s financial statements.

(ii) Determine the level of materiality you consider acceptable.

(iii) Use the information and your analysis to prepare a planning memorandum for the audit.

(v) Prepare an audit plan (or ‘programme’) which will contain the procedures you plan in response to the risks you have identified.







Testing and evidence

PHASE 3

Down to work …… gathering data and carrying out audit tests

The audit team have been assigned. Your plan is established …. after discussion with the members of the audit team Now the audit work begins. Your aims in this, the main part of the audit, are to test for evidence of the strengths or weakness of GSM’s internal control structure (interim) and then test for evidence of the fairness of the financial statements (final).

This phase of your audit will involve five main procedures:

1. Tests of GSM’s internal control2. Substantive tests of transactions.3. Analytical procedures.4. Tests of details of balances.5. Search for unrecorded liabilities.

Everything that is done and all the evidence gathered will be documented in the audit’s ‘working papers’.

Evaluation and reporting

PHASE 4

You will now need to wrap up the audit …… and of course produce reports

Your objective in this final phase of the audit is to complete the auditprocedures, form an audit opinion and issue audit reports.

There are at least seven procedures involved:

1. Evaluate evidence of governance in GSM.2. Perform procedures to identify subsequent events.3. Review financial statements and other relevant materials to assess

the going concern assumption for GSM.4. Perform wrap-up procedures.5. Prepare Matters for Attention of Partners.6. Report to the board of directors. This is called a ‘Management Letter’.7. Prepare Audit report.

Now you can relax …… a job well done!







ACCA Paper F8 syllabus:Map of the mnemonics and charts

AUDIT FRAMEWORK AND REGULATIONSection

A

INTERNAL AUDITSectionB

PLANNING AND RISK ASSESSMENTSection

C

INTERNAL CONTROLSectionD

AUDIT EVIDENCESection E

REVIEWSection F

REPORTINGSection G

The Audit and Assurance syllabus is essentially divided into seven areas. The Tony Surridge +AddVance e-book is based on the ACCA syllabus and contains the following seven sections:

1. The concept of audit and other assurance engagements 2. Statutory audits 3. The regulatory environment and corporate governance 4. Professional ethics and ACCA’s Code of Ethics and Conduct

1. Internal audit and corporate governance 2. Differences between external and internal audit 3. The scope of the internal audit function 4. Outsourcing the internal audit department 5. Internal audit assignments

1. Objective and general principles 2. Understanding the entity and knowledge of the business 3. Assessing the risks of material misstatement and fraud 4. Analytical procedures 5. Planning an audit 6. Audit documentation 7. The work of others

1. Internal control systems 2. The use of internal control systems by auditors 3. Transaction cycles 4. Tests of control 5. The evaluation of internal control components 6. Communication on internal control

1. The use of assertions by auditors 2. Audit procedures 3. The audit of specific items 4. Audit sampling and other means of testing 5. Computer-assisted audit techniques 6. Not-for-profit organisations

1. Subsequent events 2. Going concern 3. Management representations 4. Audit finalisation and the final review

1. Audit reports 2. Reports to management 3. Internal audit reports

Click on Section E above, in the pink box, to review a small extract.






Section E:AUDIT

EVIDENCE

1. The use of assertions by auditors 2. Audit procedures 3. The audit of specific items 4. Audit sampling and other means of testing 5. Computer-assisted audit techniques 6. Not-for-profit organisations






Substantive procedures

Substantive procedures are tests performed to obtain audit evidence to detect material misstatements in the financial statements, are of two types:

(a) tests of detailed transactions; and(b) analytical procedures.

Para 4, ISA 500

‘The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion’.

‘Sufficiency’ and ‘appropriateness’ are interrelated and apply to both tests of controls and substantive procedures.

Sufficiency is the measure of the QUANTITY of audit evidence. (Sufficient evidence has been gathered when AUDIT RISK is considered to be at an acceptable level. Auditors use professional judgement to determine the extend of tests necessary to obtain sufficient evidence. In exercising this professional judgement, auditors consider both the materiality of the item in question (e.g. monetary size) as well as the inherent risk of the item (e.g. cash, due to its liquidity, may have a higher inherent risk than do certain property, plant and equipment items).

Appropiateness is the measure of the QUALITY or RELIABILITY of the audit evidence. The quantity of audit evidence required is affected by the level of risk in the area being audited. The quality and reliability of audit evidence is influenced by its source and by its nature. The following generalisations may help in assessing the quality and reliability of audit evidence.

Sufficiency

Appropriateness

We should remember what was discussed earlier:

Whenever an individual or a business decides that success has been attained, progress stops.

Thomas J. Watson Jr

Relevant standard:ISA 500


http://web.ifac.org/download/2009_Auditing_Handbook_A022_ISA_500.pdf�







Gatheringevidence

We start here

Substantive procedures form the main part of the audit

Substantive procedures:What you need to know …..

Assertions

Sufficient and appropriate evidence

Sampling

Accountingestimates

Opening balances

Substantive tests:Bank and cash

Substantive tests:Accounts receivable

Substantive tests:Bank and cash

Substantive tests:Inventory

Substantive tests:Accounts payable

Substantive tests:Property, plant and equipment

PP&E)

Substantive tests:Long-term debt

Substantive tests:Shareholders’ equity

Confirmation






Gathering evidence:Financial statements assertions

Audit tests are designed and conducted to obtain evidence about the financial statement assertions. Financial statement assertions are the representations of the directors that are contained in the financial statements. By authorising the financial statements, the directors are making representations about the information therein. In planning and performing the audit, an auditor considers these assertions for the various financial statements and accounts. When all of these assertions have been met for an account, the account is confirmed with the accepted accounting principle. Thus, errors or fraud may be viewed as having the effect of misstating one or more of the assertions. These representations or assertions may be described in general terms in a number of ways, for example:

C Completeness. The assertion is that all transactions and accounts are included, and there are no liabilities, transactions, events, unrecorded assets or undisclosed items.

O Occurrence. The assertion is that the transaction or event took place during the relevant period.

M Measurement. The assertion is that the transaction or event is recorded in the proper amount.

P Presentation and disclosure. The assertion is that the item is disclosed, classified and described in accordance with the applicable reporting framework (relevant legislation and applicable accounting standards).

A Appropriate valuation. The assertion is that the asset or liability is recorded at the appropriate carrying value (e.g. inventories are stated at lower of cost or market value).

R Rights and obligations. The assertion is that assets or rights of the entity are liabilities or obligations at a given date (e.g. that the firm has legal right to the inventory).

E Existence. The assertion is that the asset or liability exists at a given date.

Memory jog: in order to obtain evidence about the financial statement assertions the auditor needs to ‘COMPARE’ many things against the financial statements.






Gathering evidence: Assertions tested by the auditor

OCCURRENCE

COMPLETENESS

ACCURACY

CUTOFF

CLASSIFICATION

Management assertionsused by the auditor about

CLASSES OF TRANSACTIONS

AND EVENTS FOR THE PERIOD

UNDER REVIEW

…… that transactions and events that have been recorded have occurred and pertain to the organisation.

…… that all transactions and events that should have been recorded have been recorded.

…… that amounts and other data relating to recorded transactions and events have been recorded appropriately.

…… that transactions and events have been recorded in the correct accounting period.

…… that transactions and events have been recorded in proper accounts.

EXISTENCE

RIGHTS AND OBLIGATIONS

COMPLETENESS

VALUATION AND ALLOCATION

BALANCES AT THE PERIOD END

…… that assets, liabilities and equity interests exist.

…… that the organisation holds or controls the rights to assets, and liabilities are the obligations of the organisation.

…… that all assets, liabilities and equity interests that should have been recorded have been recorded.

…… that assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

OCCURRENCE AND RIGHTS AND

OBLIGATIONS

COMPLETENESS

CLASSIFICATION AND UNDERSTANDABILITY

ACCURACY AND VALUATION

…… that disclosed events, transactions and other matters have occurred and pertain to the organisation.

…… that all disclosures that should have been included in the financial statements have been included.

…… that financial information is appropriately presented and described, and disclosures are clearly expressed.

…… that financial and other information are disclosed fairly and at appropriate amounts.

PRESENTATION AND DISCLOSURE

About ……

About ……

About ……






Procedures and approach:Substantive audit tests: terms

Note: Some of the more frequent terms you will find in written audit programmes include the following:

Agree To confirm that balances in the general ledger are correct.

Analyse Separation of account balances into separate parts and the ascertainment of those parts.

Compare To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to compare the beginning balances with last year’s audited figures.

Count To sum the value of (volume, monetary value, etc), such as reckoning the value of cash, inventory, etc.

Examine To enquire into evidence, such as to enquire into authoritative documents.

Foot Add figures, such as to add the figures in a column of monetary values.

Prove To test the genuineness of, such as to re-calculate totals to ascertain their correctness.

Read To interpret facts, such as to read minutes of directors’ meetings, etc.

Reconcile To prove consistency, such as to test that cash balances, or accounts receivables balances are consistent with the facts.

Review An inspection of, such as the inspection of disclosures, legal documents, etc.

Scan To examine critically, for example to study a set of data to specifically identify unusual items.






… the auditor to obtain SUFFICIENT and APPROPRIATE audit evidence.

We must remember that the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.

Definition

Gathering evidence:Sufficient and appropriate audit evidence

Audit objective

Which requires ……

Audit evidence

Audit tests

Evidence is obtainedfrom ……

Test of controls


Audit evidence is the information that auditors obtain in arriving at the conclusions on which their report is based.

Audit evidence includes all the information contained within the accounting records and accounting system underlying the financial statements, and other information gathered by the auditors, such as confirmations from third parties. They are not expected to look at all the information and will usually select samples.

To reach a position in which to express a professional opinion, the auditor needs to gather evidence from various sources. There are two types of test which the auditor will carry out.

Tests of controls are conducted to obtain audit evidence about the effectiveness of the: design of the accounting and internal control

systems to establish whether they are suitably designed to prevent or detect and correct material misstatements; and

operation of the internal controls throughout the period being audited.

Substantive procedures are tests to obtain audit evidence to detect material misstatements in the financial statements. There are generally of two types: Analytical procedures Other substantive procedures such as tests of

detail of transactions and balances, review of minutes of directors’ meetings and enquiry.





Gathering evidence: Quality of evidence

ISA 500 Audit evidence requires auditors to

‘obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion’.

‘Sufficiency’ and ‘appropriateness’ are interrelated and apply to both tests of controls and substantive procedures.

Sufficiency is the measure of the QUANTITY of audit evidence. (Sufficient evidence has been gathered when AUDIT RISK is considered to be at an acceptable level. Auditors use professional judgement to determine the extend of tests necessary to obtain sufficient evidence. In exercising this professional judgement, auditors consider both the materiality of the item in question (e.g. monetary size) as well as the inherent risk of the item (e.g. cash, due to its liquidity, may have a higher inherent risk than do certain property, plant and equipment items).

Appropiateness is the measure of the QUALITY or RELIABILITY of the audit evidence. The quantity of audit evidence required is affected by the level of risk in the area being audited. The quality and reliability of audit evidence is influenced by its source and by its nature. The following generalisations may help in assessing the quality and reliability of audit evidence.

W Written. Evidence in the form of documents (paper or electronic) or written representations are more reliable than spoken words or representations.

O Originals. Original documents are more reliable than photocopies, or facsimiles.

R Records with strong controls. Evidence obtained from the organisation’s records is more reliable when the system that produces them uses strong and effective controls.

D Directly by the auditor. Evidence obtained directly by the auditor is more reliable than that obtained indirectly or by inference.

S Sources that are external. Audit evidence from external sources is more reliable than that obtained from the organisation’s records.

Memory jog: ‘WORDS’ are more reliable when they come from external sources, and are obtained directly by the auditor, and written (not just spoken), are from originals and are produced by systems using strong and effective controls.

Sufficiency

Appropriateness









Audit evidence can be obtained by one or more of the following procedures:

C Confirmation. Seeking confirmation from another source concerning details in the organisation’s accounting records, e.g. confirmation from customers of debtor balances.

A Assets inspection. Inspection of assets that are recorded in the accounting records to confirm existence, to give evidence of valuation, but without confirming rights and obligations.

R Recalculation. Checking arithmetic of organisation’s records, e.g. totalling a ledger account.

R Re-performance. Independently executing procedures or controls, either through the use of computer assisted audit techniques (CAATs) or manually.

I Inquiry. Seeking information from the organisation’s staff or external sources. Strength of evidence depends on the knowledge and the integrity of the source of information.

E Evaluation by analytical procedures. Evaluating and comparing financial and/or non-financial data for plausible relationships.

S Sight (observation). Involves watching a procedure being performed, e.g. cash and cheques being banked. This has limited value, as it only confirms the procedure took place when the auditor was present.

Gathering evidence:Audit procedures for obtaining audit information

Memory jog: the auditor ‘CARRIES’ out these procedures in order to obtain the necessary audit evidence.

I’m telling you….. This is an important

page

Note: Some sources add TWO more procedures to this list

1. Vouching - checking from recorded entry to supporting document.2. Tracing - checking from supporting document to recorded entry.






Gathering evidence:Audit procedures for obtaining audit information – 1 of 2

CONFIRMATIONUsed to corroborate information contained in the accounting records

ExamplesUsed to confirm: accounts receivable accounts payable balances held with banks cash surrender value of life insurance notes payable (with lenders or bond holders) etc.

INSPECTIONConsists of examining records, documents, or tangible assets

ExamplesUsed to review: sales orders sales invoices purchase invoices shipping documents bank statements customer return documents customer complaint letters etc.

RECALCULATIONConsists of checking the arithmetical accuracy of source documents and accounting records or performing independent calculations.

Examples Extending sales invoices and inventory.. Adding journal and subsidiary records. Checking the calculation of prepaid expenses. Calculation of depreciation expense. etc.

RE- PERFORMANCEConsists of independent execution of procedures or controls that were originally performed as part of the entity’s internal control.

Examples Re-perform aging of accounts receivable. Use of CAATs* to check controls recorded

in the database.

* CAATs are ‘Computer aided auditing techniques’ (which we cover later.)






Gathering evidence:Audit procedures for obtaining audit information – 2 of 2

INQUIRYConsists of seeking information of knowledgeable persons inside or outside the entity

ExamplesObtaining written or oral information from the client in response to specific questions during the audit

ANALYTICAL PROCEDURESConsist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or that deviate from predictable amounts.

Examples Calculation trends in sales over the past few

years. Comparing net profit as a percentage of sales

in current year with the percentage of the preceding year.

Comparing client current ratio to the industry current ratio.

Comparing budgets to actual results. Etc.

OBSERVATIONConsists of looking at a process or procedure being performed by others.

Examples Observation by the auditor of the counting of inventories by

entity’s personnel. Site visit at the client’s facilities. Etc.






When asked a general question about how to design audit procedures you should remember the auditor’s need to:

1. Concentrate on management’s financial statements assertions.

2. Link them to the three main aspects that concern the audit.3. Use appropriate procedures to seek assurance about the

three main aspects.

Financial statements assertions:

C CompletenessO OccurrenceM MeasurementP Presentation and disclosureA Appropriate valuationR Rights and obligationsE Existence

Seeking assurance about the assertions in terms of the three main aspects of:

1. Classes of transactions and events for the period under review.

2. Balances at the period end.3. Presentation and disclosure

Audit procedures:

C ConfirmationA Assets inspectionsR Re-calculationsR Re-performanceI InquiryE Evaluation by analytical

techniquesS Sight (observation)

What is the auditor doing?

What are management’s assertions?

How does the auditor do it?

Click here for the mnemonic COMPARE

Click here for the mnemonic CARRIES






Gathering evidence: Substantive audit tests

Corroborating evidence is the supporting documentation that is the basis for a transaction recorded in the journals and ledgers, and assertions represented in the financial statements. While there may be many types of corroborating evidence, the following list are the ones mainly used by auditors carrying out substantive procedures. Remember them as the mnemonic: IS A CAP.

I Interrelationships. Interrelationships within the data such as interest expense and accrued interest payable, unusual items, etc. provide assurance as to the reasonableness of items and the absence of material misstatements due to errors.

S Subsequent events. Subsequent events confirm the status of estimates and assertions at the financial date. For example, subsequent collection of receivables gives evidence as to their valuation and collectibility.

A Authoritative statements. Authoritative statements by a client provide support for a treatment of certain items in the recording and aggregation of transaction data. Authoritative statements by third parties such as confirmations provide evidence concerning the existence of transactions with third parties.

C Calculations. Calculations by auditors such as the calculation of depreciation expense, tax liabilities, etc. support the application of IASs.

A Authoritative documents. Authoritative documents such as property deeds, suppliers’ invoices.

P Physical existence. Physical existence is determined by observation and count.

Memory jog: just remember it as ‘IS A CAP’.






Problems associated with

confirmation

Situations where

confirmation may not be appropriate

Risks where confirmation

may be appropriate

Negative confirmation

may be appropriate

Gathering evidence:

Confirmation method

Confirmation

We start here

Gathering evidence: ConfirmationWhat you need to know ……

In the main confirmation means writing a letter to a

third party






Gathering evidence: Confirmation method – 1 of 5

Confirmation

Confirmation consists of the response to an enquiry of a third party to collaborate information contained in the accounting records. The procedure is the process of asking third parties to confirm information known to them, such as asking receivables (debtors) to confirm amounts due to them. Confirmation is the auditor’s receipt of a request from an independent third party verifying the accuracy of the information requested. It is the act of obtaining audit evidence from a third party.

Confirmation is an example of a

substantive test

Confirmation, say confirmation of balances of accounts receivable, will provide a test of the ending account balance and is therefore a detailed test of a balance – a type of substantive test.

Confirmation is a generally accepted auditing procedure

But take note of the Mnemonic: ACCA.

Key procedures necessary to

obtain a confirmation

1. Auditor reviews the need to obtain a confirmation using the information obtained from the preliminary risk assessment of the client.

2. Auditor prepares the confirmation letter as appropriate for the particular request, for example in the case of a bank confirmation the letter is in the format agreed with banks in the client’s jurisdiction.

3. The client authorises (signs) the letter thus giving the third party (e.g. the debtor) ‘permission’ to divulge confidential details. Where the client has provided the third party with a ‘standing authority to disclose information to the auditor’, the authorising reference is quoted on the ‘confirmation request letter’.

4. The auditor, not the client, mails these letters. The auditor should check randomly to ensure that letters are addressed to the respondents that the auditor chose, and for the amounts shown in the books of account.

5. The third party is requested to respond in writing directly to the auditor.

Confirmation may be used for

specific risks

An auditor may use confirmation in response to a specific risk of misstatement. Examples of likely risks are shown in the Mnemonic: A CA IS BLIND.








Advantages of using confirmation

Confirmation provides highly persuasive evidence, because audit evidence is more reliable when it is obtained from independent sources, para A1, ISA 500 Audit Evidence states:

‘The reliability of information to be used as audit evidence, and therefore ofthe audit evidence itself, is influenced by its source and its nature, and thecircumstances under which it is obtained, including the controls over itspreparation and maintenance where relevant. Therefore, generalizationsabout the reliability of various kinds of audit evidence are subject toimportant exceptions. Even when information to be used as audit evidence isobtained from sources external to the entity, circumstances may exist thatcould affect its reliability. For example, information obtained from anindependent external source may not be reliable if the source is notknowledgeable, or a management’s expert may lack objectivity. Whilerecognizing that exceptions may exist, the following generalizations aboutthe reliability of audit evidence may be useful:

The reliability of audit evidence is increased when it is obtained from independent sources outside the entity’.

- There is, however, a distinction between evidence provided by independent third parties acting in a professional capacity, e.g. a bank manager, lawyer, other qualified accountants, and evidence from the third parties such as customers and suppliers in the business contact group.

- A letter from, say a debtor, confirming that the amount due from him/her is correctly recorded in the books of the client, is useful to the auditor, but generally, non-professional business contacts such as debtors may have a closer, more dependent relationship to the client.

- Neither can the auditor be certain that the debtor’s accounting and control systems are reliable.

Problems associated with

confirmation

For possible disadvantages of using confirmation refer to Mnemonic: CINT











Positive and negative

confirmation

ISA 505External Confirmations identifies two forms of confirmation:(i) Positive confirmation(ii) Negative confirmation

Positive confirmation

The positive form/letter requests a reply from the recipient by either confirming agreement with stated information or by asking the respondent to fill in information (a ‘blank’ confirmation).

By using the ‘blank’ confirmation approach the auditor may reduce the risk that a respondent replies to a request without verifying the information. With a blank confirmation the recipient must enter the value from their own records.

However, the ‘blank’ confirmation letter requires more work from the recipient and this may result in lower response rates.

When no reply is received to a positive confirmation request, a second letter is normally mailed to the third party. If a reply is still not received, or the first confirmation request is returned undelivered, the auditor normally performs alternative procedures. Para 6, ISA 505 defines ‘non-response’ as:

‘A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.

Para 12, ISA 505 states:

‘In the case of each non-response, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence. (Ref: Para A18-A19)’.


NEXT CHART NEXT MNEMONIC











Gathering evidence: Confirmation method- 4 of 5

Positive and negative

confirmation(continued)

Positive confirmation requests are normally appropriate when inherent and/or control risk is assessed as high (in other words a low level of detection risk is to be achieved).

Negative confirmation

The negative confirmation form/letter confirmation requests the recipient to respond only if he/she disagrees with the information stated on the request. Para 15, ISA 505 External Confirmations states as follows:

‘Negative confirmations provide less persuasive audit evidence than positive confirmations. Accordingly, the auditor shall not use negative confirmation requests as the sole substantive audit procedure to address an assessed risk of material misstatement at the assertion level unless all of the following are present: (Ref: Para. A23)

(a) The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion;

(b) The population of items subject to negative confirmation procedures comprises a large number of small, homogeneous, account balances, transactions or conditions; (See Mnemonic: LANE and para 15, ISA 505)

(c) A very low exception rate is expected; and

(d) The auditor is not aware of circumstances or conditions that wouldcause recipients of negative confirmation requests to disregard such requests’.












When client does not authorise confirmation(continued)

If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor would communicate with those charged with governance in accordance with ISA 260(Revised and Redrafted) Communication with Those Charged with Governance.

The auditor also would determine the implications for the audit and the auditor’s opinion in accordance with ISA 705 Modifications to the Opinion in the Independent Auditor’s Report.

The implications of ISA 505 External Confirmations are:

(i) When the auditor seeks an external confirmation and management refuses to grant permission for him/her to do so, the auditor should carefully balance the validity of the client’s request and the validity of the third-party confirmation.

(ii) If the auditor agrees with the reasonableness of management’s request not to seek third-party confirmation regarding a particular matter, the auditor should apply alternative procedures to obtain sufficient and adequate evidence regarding that matter.

(iii) If the auditor does not accept the validity of management’s refusal and is prevented from carrying out the confirmation, there has been a limitation on the scope of the auditor’s work and he/she should consider the impact of this limitation on the auditor’s opinion and report.

Situations where negative confirmation may be appropriate

Memory jog: in such cases the negative confirmation request is a‘LANE’ the auditor can use.

Negative confirmation requests may be appropriate where:

L Large numbers of small homogeneous, account balances, transactions or conditions is involved in the test.

A Assessed level of inherent risk and control risk is low, and therefore there is a low risk of material misstatement.

N No obvious reason exists why respondents will disregard the confirmation requests. The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests.

E Errors of a substantial number are not anticipated. ‘A very low exception rate is expected.’









A Accounts receivable balance with debtors.- the auditor may take a random sample, or- may list customers with very large balances or very small balances, customers that are slow in

paying, and/or that buy and pay erratically- the auditor then gives this list to the client to prepare a confirmation letters (format already

agreed) requesting that customers reply direct to the auditor- the auditor, not the client, mails these letters.

C Contract terms with customers, creditors or suppliers. Auditors are interested in all contracts and in particular long-term notes and bonds payable, stock options, pension agreements, contracts with vendors for future delivery of supplies, government contracts for completion, royalty agreements, trade-union contracts, and leases. Contracts may affect the assessed inherent risk.

A Accounts payable balance. Similar approach is taken to that adopted for accounts receivable (see above).

I Inventory quantity and value held by third parties. For example, if the client is involved with timber importation and the timber is held in bonded warehouses until required by the entity for manufacture and sale, the auditor would normally regard a letter from the bonded warehouse company that they hold stocks of timber (of a stated quantity/value/date) on behalf of the client as good evidence, provided that the warehouse company is of good reputation.

S Shares outstanding with stock transfer agents. A stock transfer agent is a company (broker), usually a third party unrelated to stock transactions, which cancels the name and certificate of the former stockholder who 'sold' the stock, and substitutes the 'new' owner's name on the Official Master Shareholder listing.

B Bank balances with banks As part of their verification procedures, auditors obtain confirmation from bank managers of bank balances and other matters at the year-end. The letter requests the bank to give details of bank accounts, of customers assets held, either as a security or for safe custody, of contingent liabilities and certain other information. (A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from the outcome of a past event).

L Life insurance cash surrender value with insurer.

I Insurance cover with insurer.

N Notes payable with lender – such as promissory notes held by suppliers.

D Debenture or bond holders – to determine indenture conditions.

Gathering evidence:Specific risks for which confirmation may be relevant

Memory jog: ‘A’ certified auditor (‘CA’) ‘IS’ often ‘BLIND’concerning existence, quantity and condition of assets and liabilities relating to a third party without obtaining independent confirmation from that third party.






Confirmation of accounts or balances is a generally accepted auditing procedure, unless:

A Account or balance is immaterial.

C Confirmation would be ineffective as an audit procedure possibly due to the inability of the confirmations to adequately address the completeness assertion.

C Combined assessment of inherent and control risk is low e.g. in situations where the auditor feels that there is low risk of material misstatement.

A Assessment using other substantive evidence is sufficient to reduce the audit risk to an acceptable level e.g. confirmation procedures may be omitted due to the availability of externally generated evidence (e.g. both purchase agreements and suppliers’ invoices)

Gathering evidence:Situations where confirmation may not be appropriate

Memory jog: blame the ‘ACCA’ for having to learn all this.

Possible disadvantages of confirmations are:

C Costly way of gathering evidence.

I Inconvenient to those asked to supply the information.

N Non-compliance by recipients of confirmation letters.

T Time-consuming for the auditor.

Gathering evidence:Problems associated with confirmation

Memory jog: ‘CINT’ is a word that has no meaning (but that’s the case with Kit-Kat, Kodak, Twix and many other brand names which are used specifically for quick memory recall!)






Disadvantages of statistical

sampling

Advantages of sampling

Statistical sampling

techniques

Evaluation of tests

Testing the sample

Sample selection methods

Deciding sample size

Design of the sample

Where sampling is

not appropriate

Three steps

Main aspects

Sampling

We start here

Gathering evidence by sampling:What you need to know ……

Many students find sampling a difficult concept.

ISA 530might help!










Gathering evidence by sampling

Risk assessment

Risk-based auditing

Audit risk

Inherent risk

Control risk

Detection risk

Testing by sample

Design of sample

Testing by sample

Evaluation of test results

Statistical v non-statistical

Statistical sampling

techniques

Objectives

Sample population

Sample size

Selection method

Random selection

Haphazard selection

Judgemental selection

Block sampling

Systematic sampling

Test of controls


Analysis of errors

Inferences

Attribute sampling

Variables sampling

Monetary-unit sampling









Appendix A:International Standards:

June 2010 and December 2010 – 1 of 7

The following six screens itemise the International Audit Standards and other examinable documents for the June 2010 and December 2010 examination.

Reference is made to them as applicable in the body of this Tony Surridge +AddVance e-publication.

Hyperlinks are provided both on the following screens or when referred to in the text.





©Tony Surridge Online Limited, 2010

Knowledge of new examinable regulations issued by 30th September will be examinable in examination sessions being held in the following calendar year. Documents may be examinable even if the effective date is in the future. This means that all regulations issued by 30th September 2009 will be examinable in the June and December 2010 examinations.

The study guide offers more detailed guidance on the depth and level at which the examinable documents should be examined. The study guide should therefore be read in conjunction with the examinable documents list.

Accounting Standards Paper F8 Audit and Assurance The accounting knowledge that is assumed for Paper F8 is the same as that examined in Paper F3. Therefore, candidates studying for Paper F8 should refer to the Accounting Standards listed under Paper F3.

Paper P7 Advanced Audit and Assurance The accounting knowledge that is assumed for Paper P7 is the same as that examined in Paper P2. Therefore, candidates studying for Paper P7 should refer to the Accounting Standards listed under Paper P2.

N.B. P7 will only expect knowledge of accounting standards and financial reporting standards from Paper P2. Knowledge of exposure drafts and discussion papers will not be expected.

EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010 AUDIT INTERNATIONAL – 2 of 7

Click here Title F8 P7

International Standards on Auditing (ISAs)

CLICK Glossary of Termshttp://web.ifac.org/download/2009_Auditing_Handbook_A005_Glossary.pdf

√ √

CLICK International Framework for Assurance Assignmentshttp://web.ifac.org/download/2008_Auditing_Handbook_A055_Framework.pdf

√ √

CLICK Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Serviceshttp://web.ifac.org/download/2009_Auditing_Handbook_A004_2009_Preface-WithConformingAmendments.pdf

√ √

ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditinghttp://web.ifac.org/download/2009_Auditing_Handbook_A008_ISA_200.pdf

√ √

ISA 210 Agreeing the Terms of Audit Engagementshttp://web.ifac.org/download/2009_Auditing_Handbook_A009_ISA_210.pdf

√ √

ISA 220 Quality Control for an Audit of Financial Statementshttp://web.ifac.org/download/2009_Auditing_Handbook_A010_ISA_220.pdf

√ √

31

The linkages are disabled for the purpose of this free download







ISA 230 (Redrafted) Audit Documentationhttp://web.ifac.org/download/2009_Auditing_Handbook_A011_ISA_230.pdf

√ √

ISA 240 (Redrafted) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statementshttp://web.ifac.org/download/2009_Auditing_Handbook_A012_ISA_240.pdf

√ √

ISA 250 (Redrafted) Consideration of Laws and Regulations in an Audit of Financial Statementshttp://web.ifac.org/download/2009_Auditing_Handbook_A013_ISA_250.pdf

√ √

ISA 260 (Revised and Redrafted) Communication with Those Charged with Governancehttp://web.ifac.org/download/2009_Auditing_Handbook_A014_ISA_260.pdf

√ √

ISA 265 Communicating Deficiencies in Internal Control to those Charged with Governance and Managementhttp://web.ifac.org/download/2009_Auditing_Handbook_A015_ISA_265.pdf

√ √

ISA 300 (Redrafted) Planning an Audit of Financial Statementshttp://web.ifac.org/download/2009_Auditing_Handbook_A016_ISA_300.pdf

√ √

ISA 315 (Redrafted) Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environmenthttp://web.ifac.org/download/2009_Auditing_Handbook_A017_ISA_315.pdf

√ √

ISA 320 Materiality in Planning and Performing and Audithttp://web.ifac.org/download/2009_Auditing_Handbook_A018_ISA_320.pdf

√ √

ISA 330 (Redrafted) The Auditor’s Responses to Assessed Riskshttp://web.ifac.org/download/2009_Auditing_Handbook_A019_ISA_330.pdf

√ √

ISA 402 Audit Considerations Relating to an Entity Using a Service Organisation http://web.ifac.org/download/2009_Auditing_Handbook_A020_ISA_402.pdf

√ √

ISA 450 Evaluation of Misstatements Identified During the Audithttp://web.ifac.org/download/2009_Auditing_Handbook_A021_ISA_450.pdf

√ √

EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010 AUDIT INTERNATIONAL - 3 of 7

32







ISA 500 Audit Evidencehttp://web.ifac.org/download/2009_Auditing_Handbook_A022_ISA_500.pdf

√ √

ISA 501 Audit Evidence – Specific Considerations for Selected Itemshttp://web.ifac.org/download/2009_Auditing_Handbook_A023_ISA_501.pdf

√ √

ISA 505 External Confirmationshttp://web.ifac.org/download/2009_Auditing_Handbook_A024_ISA_505.pdf

√ √

ISA 510 (Redrafted) Initial Audit Engagements – Opening Balanceshttp://web.ifac.org/download/2009_Auditing_Handbook_A025_ISA_510.pdf

√ √

ISA 520 Analytical Procedureshttp://web.ifac.org/download/2009_Auditing_Handbook_A026_ISA_520.pdf

√ √

ISA 530 Audit Samplinghttp://web.ifac.org/download/2009_Auditing_Handbook_A027_ISA_530.pdf

√ √

ISA 540 (Revised and Redrafted) Auditing Accounting Estimates, Including Fair Value Estimates and Related Disclosureshttp://web.ifac.org/download/2009_Auditing_Handbook_A028_ISA_540.pdf

√ √

ISA 550 (Revised and Redrafted) Related Parties http://web.ifac.org/download/2009_Auditing_Handbook_A029_ISA_550.pdf

√

ISA 560 (Redrafted) Subsequent Eventshttp://web.ifac.org/download/2009_Auditing_Handbook_A030_ISA_560.pdf

√ √

ISA 570 (Redrafted) Going Concernhttp://web.ifac.org/download/2009_Auditing_Handbook_A031_ISA_570.pdf

√ √

ISA 580 (Revised and Redrafted) Written Representationshttp://web.ifac.org/download/2009_Auditing_Handbook_A032_ISA_580.pdf

√ √

ISA 600 (Revised and Redrafted) Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors)http://web.ifac.org/download/2009_Auditing_Handbook_A033_ISA_600.pdf

√


33






Click here

Title F8 P7

ISA 610 Using the Work of Internal Auditors http://web.ifac.org/download/2009_Auditing_Handbook_A034_ISA_610.pdf

√ √

ISA 620 Using the Work of an Auditor’s Experthttp://web.ifac.org/download/2009_Auditing_Handbook_A035_ISA_620.pdf

√ √

ISA 700 Forming an Opinion and Reporting on Financial Statementshttp://web.ifac.org/download/2009_Auditing_Handbook_A036_ISA_700.pdf

√ √

ISA 705 Modifications to the Opinion in the Independent Auditor’s Reporthttp://web.ifac.org/download/2009_Auditing_Handbook_A037_ISA_705.pdf

√ √

ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Reporthttp://web.ifac.org/download/2009_Auditing_Handbook_A038_ISA_706.pdf

√ √

ISA 710 Comparative Information – Corresponding Figures and Comparative Financial Statementshttp://web.ifac.org/download/2009_Auditing_Handbook_A039_ISA_710.pdf

√ √

ISA 720 (Redrafted) The Auditor’s Responsibilities Related to Other Information in Documents Containing Audited Financial Statements http://web.ifac.org/download/2009_Auditing_Handbook_A040_ISA_720.pdf

√ √

ISA 800 Special considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworkshttp://web.ifac.org/download/2009_Auditing_Handbook_A041_ISA_800.pdf

√

International Auditing Practice Statements (IAPSs)

IAPS 1000

Inter-bank Confirmation Procedures http://web.ifac.org/download/2008_Auditing_Handbook_A220_IAPS_1000.pdf

√

IAPS1010

The Consideration of Environmental Matters in the Audit of Financial Statementshttp://web.ifac.org/download/2008_Auditing_Handbook_A240_IAPS_1010.pdf

√

IAPS 1013

Electronic Commerce: Effect on the Audit of Financial Statementshttp://web.ifac.org/download/2008_Auditing_Handbook_A250_IAPS_1013.pdf

√ √


34







IAPS 1014 Reporting by Auditors on Compliance with International Financial Reporting Standardshttp://web.ifac.org/download/2008_Auditing_Handbook_A255_IAPS_1014.pdf

√ √

International Standards on Assurance Engagements (ISAEs)

ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial Informationhttp://web.ifac.org/download/2008_Auditing_Handbook_A270_ISAE_3000.pdf

√ √

ISAE 3400 The Examination of Prospective Financial Informationhttp://web.ifac.org/download/2008_Auditing_Handbook_A275_ISAE_3400.pdf

√

International Standards on Quality Control (ISQCs)

ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagementshttp://web.ifac.org/download/ISQC_1_standalone_2009_Handbook.pdf

√

International Standards on Related Services (ISRSs) √ √

ISR 4400 Engagements to Perform Agreed-Upon Procedures Regarding Financial Information http://web.ifac.org/download/2008_Auditing_Handbook_A280_ISRS_4400.pdf

√

ISR 4410 Engagements to Compile Financial Information http://web.ifac.org/download/2008_Auditing_Handbook_A285_ISRS_4410.pdf

√

International Standards on Review Engagements (ISREs)

ISRE 2400 Engagements to Review Financial Statementshttp://web.ifac.org/download/2008_Auditing_Handbook_A260_ISRE_2400.pdf

√ √

ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entityhttp://web.ifac.org/download/2008_Auditing_Handbook_A265_ISRE_2410.pdf

√

Exposure Drafts (EDs)

Other documents

CLICK ACCA’s ‘Code of Ethics and Conduct’http://rulebook.accaglobal.com/

√ √


35






Note: Topics of exposure drafts are examinable to the extent that relevant articles about them are published in student accountant.

Turnbull’s Report (Internal Control) Click herehttp://www.frc.org.uk/documents/pagemanager/frc/Revised%20Turnbull%20Guidance%20October%202005.pdf

Smith’s Report (Audit Committee) Click herehttp://www.frc.org.uk/documents/pagemanager/frc/Smith%20Report%202005.pdf

Higgs Report (Non-Executive Directors) Click herehttp://www.berr.gov.uk/files/file23012.pdf


CLICK IFAC’s ‘Code of Ethics for Professional Accountants’http://web.ifac.org/download/2008_Auditing_Handbook_A025_Code_of_Ethics.pdf

√

CLICK FFE Integrity in Professional Ethics A Discussion Paperhttp://www.icaew.com/index.cfm/route/168076/icaew_ga/Technical_and_Business_Topics/Thought_leadership/Market_foundations/Integrity_in_professional_ethics_FEE_discussion_paper/pdf

√

CLICK ACCA’s Technical Factsheet 94 – Anti Money-Laundering (Proceeds of Crime and Terrorism) http://www.accaglobal.com/pubs/members/publications/technical_factsheets/downloads/94.pdf

√

CLICK The Combined Code (of the Committee on Corporate Governance) as an example of a code of best practicehttp://www.frc.org.uk/documents/pagemanager/frc/Combined%20Code%20June%202006.pdf

√

CLICK Background Information on the Clarity Project of the International Auditing and Assurance Standards Board http://web.ifac.org/clarity-center/index

√

CLICK IAASB Practice Alert Challenges in Auditing Fair Value Accounting Estimates in the Current Market Environment (October 2008)http://web.ifac.org/publications/international-auditing-and-assurance-standards-board/practice-alerts-and-q-as#audit-considerations-in-res

√

CLICK IAASB Practice Alert Audit Considerations in Respect of Going Concern in the Current Economic Environment (January 2009)http://web.ifac.org/publications/international-auditing-and-assurance-standards-board/practice-alerts-and-q-as#audit-considerations-in-res

√

CLICK IAASB Applying ISAs Proportionately with the Size and Complexity of an Entity (August 2009)http://web.ifac.org/publications/international-auditing-and-assurance-standards-board/practice-alerts-and-q-as#applying-isas-proportionate

√

EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010 AUDIT INTERNATIONAL - 7 of 7

36






Examples below are taken from UK legislation (Companies Act, 2006). (Note: It is a lengthy Act and if you want to see it in its complete form will take time to download. Each separate Section [indicated below] is hyperlinked almost instantly.)

Sec. 248 Minutes of directors' meetingsSec. 382 Companies qualifying as small: generalSec. 415 Duty to prepare directors' reportSec. 418 Contents of directors' report: statement as to disclosure to auditorsSec. 419 Approval and signing of directors' reportSec. 437 Public companies: laying of accounts and reports before general meetingSec. 475 Requirement for audited accountsSec. 476 Right of members to require auditSec. 477 Small companies: conditions for exemption from auditSec. 478 Companies excluded from small companies exemptionSec. 489 Appointment of auditors of public company: generalSec. 490 Appointment of auditors of public company: default power of Secretary of StateSec. 491 Term of office of auditors of public companySec. 492 Fixing of auditor's remunerationSec. 495 Auditor's report on company's annual accountsSec. 496 Auditor's report on directors' reportSec. 497 Auditor's report on auditable part of directors' remuneration reportSec. 498 Duties of auditorSec. 499 Auditor's general right to informationSec. 501 Auditor's rights to information: offencesSec. 502 Auditor's rights in relation to resolutions and meetingsSec. 503 Signature of auditor's reportSec. 507 Offences in connection with auditor's reportSec. 510 Resolution removing auditor from officeSec. 511 Special notice required for resolution removing auditor from officeSec. 516 Resignation of auditorSec. 517 Notice to registrar of resignation of auditorSec. 518 Rights of resigning auditorSec. 519 Statement by auditor to be deposited with companySec. 520 Company's duties in relation to statementSec. 521 Copy of statement to be sent to registrarSec. 1212 Individuals and firms: eligibility for appointment as a statutory auditorSec. 1213 Effect of ineligibilitySec. 1214 Independence requirementSec. 1215 Effect of lack of independenceSec. 1217 Supervisory bodies

Note: the term ‘public company’ as used in the Act refers to a plc (i.e. public limited company).

Appendix BExtracts of UK Companies Act, 2006 (Used only as an illustration of typical legislation in different countries)

Only the first two are active for demonstration






248Minutes of directors' meetings(1) Every company must cause minutes of all proceedings at meetings of its directors to be recorded.

(2) The records must be kept for at least ten years from the date of the meeting.

(3) If a company fails to comply with this section, an offence is committed by every officer of the company who is in default.

(4) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale.

382Companies qualifying as small: general(1) A company qualifies as small in relation to its first financial year if the qualifying conditions are met

in that year.

(2) A company qualifies as small in relation to a subsequent financial year —

(a) if the qualifying conditions are met in that year and the preceding financial year;(b) if the qualifying conditions are met in that year and the company qualified as small in relation

to the preceding financial year;(c) if the qualifying conditions were met in the preceding financial year and the company

qualified as small in relation to that year.

(3) The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements —

1. Turnover Not more than £5.6 million2. Balance sheet total Not more than £2.8 million3. Number of employees Not more than 50

(4) For a period that is a company's financial year but not in fact a year the maximum figures for turnover must be proportionately adjusted.

(5) The balance sheet total means the aggregate of the amounts shown as assets in the company's balance sheet.

(6) The number of employees means the average number of persons employed by the company in the year, determined as follows —

(a) find for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not),

(b) add together the monthly totals, and(c) divide by the number of months in the financial year.

Appendix BExtracts of UK Companies Act, 2006 (Used only as an illustration of typical legislation in different countries)






Title F8 P7

Click here ACCA’s ‘Code of Ethics and Conduct’ √ √

Click here IFAC’s ‘Code of Ethics for Professional Accountants’ √

Click here ACCA’s Technical Factsheet 94 – Anti Money-Laundering (Proceeds of Crime and Terrorism)

√

Click here The Combined Code (of the Committee on Corporate Governance) as an example of a code of best practice

√

Click here Background Information on the Clarity Project of the International Auditing and Assurance Standards Board

√

Click here Status of the IAASB’s Work to Clarify the Status of its Standards (IAASB document)

√

OTHER USEFUL LINKS

Note: Topics of exposure drafts are examinable to the extent that relevant articles about them are published in student accountant.

Title F8 P7

Click here Turnbull’s Report (Internal control) √

Click here Guidance on Audit Committees The Smith Guidance) √

Click here Review on the role and effectiveness of non-executive directors (Higgs Report)

√

Click here Tony Surridge Online Glossary of Terms √ √

CLICK AND GO

CLICK AND GO

Appendix C:Codes: June 2010 and December 2010

The linkages are disabled for the purpose of this free download






The following screens provide specimen audit working papers. They are not exclusive.

You do not have to reproduce these forms in the exam. They are included simply to help enlarge your understanding.

APPENDIX DSpecimen audit working papers:

Except for the single linkage coloured pink all linkages are disabled for the

purpose of this free download






APPENDIX DSpecimen Working Papers: Index 1 of 2

SPECIMEN AUDIT WORKING PAPERS‘Click and

go’Title Number of

screensF8 P7

Title Screen 1 √ √

Click here Permanent File 1 √ √

Click here Current File 1 √ √

Click here Account Analysis Schedule 1 √ √

Click here Client Risk Evaluation Questionnaire 7 √ √

Click here Risk Assessment Internal Control Questionnaire 1 √ √

Click here Audit Planning Memorandum 6 √ √

Click here Audit Programme – Accounts Receivable 1 √ √

Click here Organisation Chart of Assignment of Authority and Responsibility

1 √ √

Click here Trial Balance 1 √ √

Click here Lead Schedule 1 √ √

Click here List Schedule 1 √ √

Click here Reconciliation: Accounts Receivable 1 √ √

Click here Test of Reasonableness Schedule 1 √ √

Click here Narrative Description of the Control Environment 1 √ √

Click here Internal Control Narrative Table 1 √ √

Click here Internal Control Questionnaire:Accounts Receivable

2 √ √

Click here Internal Control Questionnaire:General Accounting System

2 √ √

Click here Internal Control Questionnaire:Cash Funds

2 √ √

Click here Internal Control Questionnaire:Cash Receipts

2 √ √

Please go to the next screen to continue ‘Specimen Audit Working Papers’

Specimen Audit Working Papers are also hyperlinked from relevant screens in the text.

CLICK AND GO






SPECIMEN AUDIT WORKING PAPERS - 2Click and

goTitle Number of

screensF8 P7

Click here Internal Control Questionnaire:Cash Disbursements

2 √ √

Click here Internal Control Questionnaire:Inventory and Cost of Sales

2 √ √

Click here Internal Control Questionnaire:Fixed Assets

2 √ √

Click here Internal Control Questionnaire:Accounts Payable

2 √ √

Click here Internal Control Questionnaire:Payroll

2 √ √

Click here Manual System: Chart of Accounts 1 √ √

Click here Computer System: Chart of Accounts 1 √ √

Click here Analytical Review: Planning Stage 3 √ √

Click here Computer Input Control Forms: Title Screen 1 √ √

Click here Sales Invoices 1 √ √

Click here Sales Credit Notes 1 √ √

Click here Sales Receipts 1 √ √

Click here Purchase Invoices 1 √ √

Click here Purchase Payments 1 √ √

Click here Bank Receipts 1 √ √

Click here Bank Payments 1 √ √

Click here Petty Cash Receipts 1 √ √

Click here Petty Cash Payments 1 √ √

Click here Journal 1 √ √

CLICK AND GO

APPENDIX DSpecimen Working Papers: Index 2 of 2






Specimen Working Papers: Permanent File

Description# PagesIndexGeneral Client and Engagement InformationIClient information formEngagement proposal

1

Engagement letter3Statutory and Legal InformationIIArticles of Association, Memorandum of Association1Special legal, statutory or contractual definitions2Members’ register3Extracts of continuing importance:4

Copies: Title deeds5Borrowing agreements, lease agreements6Lease agreements7Details of other important agreements8Accounting System and Internal ControlIII

Documentation of accounting system and internal control structure2Chart of accounts3Authorisation limits, initials and signature list4Accounting policy documents and procedure instructions5Continuing AuditIVMinutes of continuing relevance1Correspondence of continuing relevance2Documentation: computer applications3Configuration and registration codes: hardware and software4Financial Statement InformationVFinancial statement analysis/previous year’s summary1Details: intangible on-current assets2Details: property, and other single assets with value exceeding $1m3Details: other tangible non-current assets4Details: holding, subsidiary, associates and other participants5Personnel, employment conditionsVIPrevious year’s summary: personnel establishment1Collective bargaining agreements, standard employee contracts, salary scales and individual employee contracts2

Composition of board of directors3Names of directors, roles and contacts4Pension arrangements/early retirement rules and regulations5Expense allowance rules and regulations6

PERMANENT FILE Engagement Code:

Other employment conditions7TaxationVII

Organisation Chart of assignment of authority and responsibility1

Client:

Engagement proposal2

Legal documentsContractsLoan agreementsOther funding agreementsPension plansOthers

Just cast your eyes over the separate constituent parts of the typical ‘Permanent Audit File’. They are self-explanatory.






A B C D E F G H I J K

L M N O P Q R S T U V W

APPENDIX E:GLOSSARY OF TERMS

(* International Auditing and Assurance Standards Board [IAASB] - February 2009)

Only a small sample of our Glossary is available in this free download. The

hyperlinks indicated above have been disabled for this download.






Appropriateness (of audit evidence)*The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

Archived filesAn archive is a collection of records, and the location in which the collection is kept. Archives contain records which have accumulated over the course of time. The archives of an organisation tend to contain administrative files, business records, memos, official correspondence and meeting minutes. In general, archives consist of records which have been selected for permanent or long-term preservation,

Arm’s length transaction*A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

ArrestmentAn arrestment is a notice which prohibits a debtor from handing over to his creditor money or property until a debt due by that creditor to a third party, the arrester, is paid or secured.

Assertions*Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur.

Assertions (and the ‘assertion level’, i.e. the assertion for which audit procedures are used) used by the auditor fall into the following categories:

(a) Assertions about classes of transactions and events for the period under audit:(i) Occurrence—transactions and events that have been recorded have occurred and pertain to the

entity.(ii) Completeness—all transactions and events that should have been recorded have been recorded.(iii) Accuracy—amounts and other data relating to recorded transactions and events have been

recorded appropriately.(iv) Cutoff—transactions and events have been recorded in the correct accounting period.(v) Classification—transactions and events have been recorded in the proper accounts.

(b) Assertions about account balances at the period end:(i) Existence—assets, liabilities, and equity interests exist.(ii) Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the

obligations of the entity.(iii) Completeness—all assets, liabilities and equity interests that should have been recorded

have been recorded.(iv) Valuation and allocation—assets, liabilities, and equity interests are included in the financial

statements at appropriate amounts and any resulting valuation or allocation adjustments areappropriately recorded.

GLOSSARY OF TERMS (* International Auditing and Assurance Standards Board [IAASB] - February 2009)






Carrying valueIs the value of an asset or liability in a company’s books or balance sheet.

Casual vacancyIs an unforeseen vacancy

Check-point restartCheckpoint restart is a facility offered by some database management systems (DBMSs) and backup-restore software. Checkpoints are taken in anticipation of the potential need to restart a software process.Many ordinary batch processes on impersonal computers are time-consuming, as are backup and restore operations. They consist of many units of work. If checkpointing is enabled, checkpoints are initiated at specified intervals, in terms of units of work or of processing time. At each checkpoint the process's progress is saved to back-up storage. The contents of the program's memory area may also be saved. The purpose of checkpointing is to minimise the amount of time and effort wasted when a long software process is interrupted by a hardware failure, a software failure, or resource unavailability. With checkpointing, the process can be restarted from the latest checkpoint rather than from the beginning.

CompareTo set one group of figures with another set so as to ascertain how far they agree or disagree, such as to compare the beginning balances with last year’s audited figures.

Comparative financial statements*Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s opinion. The level of information included in those comparative financial statements is comparable with that of the financial statements of the current period.

Comparative information*The amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable financial reporting framework.

Compare To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to compare the beginning balances with last year’s audited figures.

Compensating cash balanceA compensating cash balance is an account with a bank in which a company has agreed to maintain a specified minimum amount; compensating balances are typically required under the terms of bank loan agreements. Such restrictions on cash, when material, should be disclosed in financial statements.

ComplianceAgreement with, such as agreement that there has been correct application of International Financial Reporting Standards.

GLOSSARY OF TERMS (* International Auditing and Assurance Standards Board [IAASB] - February 2009)






ContentsTony Surridge Online +

AddVance Mnemonics and Charts e-book for ACCA Paper F8

The Contents section of this e-book which can be accessed on the following screens is designed for two purposes:

1. To provide page numbers for hard-copy reference if printed.

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The following 22 screens show the contents of our e-book. Except for those coloured pink, the

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Contents- 1 of 22Tony Surridge Online +

+AddVance Mnemonics and Charts e-book for ACCA Paper F8

Type Title Start screen no No. of screens

SECTION A: AUDIT FRAMEWORK AND REGULATION

Chart An overview of what is involved 28 4

Chart The concept of audit and other assurance engagements. What you need to know ….

37 1

Chart What is an audit? What is an auditor? 38 6

Chart Audit staff 44 1

Chart The need for auditing 45 1

Chart The audit link and terminology 46 1

Mnemonic Assurance engagements 47 1

Chart Services of the professional accountant 48 1

Mnemonic Characteristics of an assurance engagement or a review engagement

49 1

Mnemonic Examples of suitable criteria used in an assurance review

50 1

Mnemonic Characteristics for assessing suitable criteria in assurance reviews

51 1

Mnemonic Subject matter of an assurance engagement 52 1

Chart Engagements to review financial statements 53 7

Chart Example of an Engagement Letter for a Review of Financial Statements

60 1

Chart Example of an unqualified report for a Review of Financial Statements

61 1

Chart Example of a report other than unqualified for a Review of Financial Statements

61 1

Mnemonic Assurance engagements on subject matters other than historical financial information

62 1

Mnemonic Factors to consider when providing assurance services on matters other than historical financial information

63 1

Chart The 5 elements of ALL assurance engagements 64 2

Chart Levels of assurance 66 1






Contents – 2 of 22Tony Surridge Online +




Chart Services performed by professional accountants – a summary

67 1

Chart What is a financial audit? 68 1

Mnemonic Purposes and advantages of an audit 69 1

Mnemonic Disclosures are audited as well as historical financial statements

70 1

Chart Limitations of auditing 71 1

Mnemonic The limitations of modern auditing 72 1

Mnemonic Concept of ‘Principal-Agency Theory (PAT) applied to shareholders and directors

73 1

Chart Protecting the interests of shareholders and other stakeholders

74 1

Chart Differences between internal and external audit 75 1

Chart Our first look at Internal Audit and review 76 1

Chart Interim and final audits 77 1

Chart The audit report 78 1

Chart The meaning of ‘true and fair’ 79 1

Chart Materiality of misstatement 80 2

Chart Statutory audit. What you need to know. 82 1

Chart Audit regulation 83 1

Chart International Federation of Accountants (IFAC) 84 3

Chart Relationship between International Standards on Auditing and national standards – The UK’s APB

87 2

Mnemonic Statutory framework of auditing 89 1

Chart Auditing and company legislation 90 1

Mnemonic Eligibility to conduct a statutory audit (external audit) 91 1

Chart ACCA is a ‘Recognised Supervisory Body’ (Sec. 1217 of UK Companies Act, 2006)

92 1










Mnemonic Audit exemption 93 1

Mnemonic The audit requirement: Small entity 94 1

Mnemonic The benefits of the statutory audit to small companies 95 1

Mnemonic The arguments against the statutory audit of small companies

96 1

Chart Appointments of auditors(Reference made to UK legislation by way of example.)

97 2

Chart Removal of auditors(Reference made to UK legislation by way of example.)

99 1

Chart Resignation of auditors 100 1

Mnemonic Auditor’s rights and duties: DUTIES 101 1

Mnemonic The auditor’s duties 102 1

Mnemonic Auditor’s rights and duties: RIGHTS 103 1

Chart Reports of listed companies: Directors’ report(Reference made to UK legislation by way of example.)

104 1

Chart Reports of listed companies: Auditor’s report(Reference made to UK legislation by way of example.)

105 1

Mnemonic The statutory audit opinion 106 1

Chart Public sector auditing(Reference made to UK by way of example.)

107 1

Chart The regulatory environment and corporate governance. What you need to know.

108 1

Chart The rights and privileges of the STAKEHOLDER 109 1

Chart Typical stakeholder groups 110 1

Chart The relationships companies have with their stakeholders

111 1

Mnemonic OECD Principles of Corporate Governance 112 1

Mnemonic General principles of governance 113 1

Mnemonic Features of poor governance 114 1










Mnemonic Corporate governance: Best Practice 115 1

Chart The FRC’s ‘Combined Code’ (UK)(FRC is the Financial Reporting Council, UK)

116 1

Chart The FRC’s Combined Code: Directors 117 1

Mnemonic Role of the Chairman 118 1

Mnemonic Role of the Board of Directors 119 1

Mnemonic Role of Non-Executive Directors 120 1

Mnemonic Problems with non-executive directors 121 1

Mnemonic Independence of non-executive directors 122 1

Chart Corporate Governance reports which make up the FRC’s ‘Combined Code’ (UK)

123 1

Chart Committees recommended by Cadbury 124 1

Chart The Audit Committee. What you need to know. 125 1

Chart The FRC’s: Accountability band audit 126 1

Mnemonic Aims of the Audit Committee 127 1

Mnemonic Duties of the Audit Committee 128 1

Mnemonic Benefits of the Audit Committee 129 1

Mnemonic Problems associated with having an Audit Committee 130 1

Mnemonic The Audit Committee and internal audit 131 1

Mnemonic Review of Internal Audit by the Audit Committee 132 1

Mnemonic Review of the remuneration of directors’ policy 133 1

Chart The FRC’s ‘Combined Code’: Directors’ remuneration 134 1

Mnemonic The role of the Nomination Committee 135 1










Chart The FRC’s ‘Combined Code’: Relations with shareholders

136 1

Chart Professional ethics and the ACCA’s ‘Code of Ethics and Conduct’. What you need to know.

137 1

Mnemonic ACCA’s ‘Fundamental Principles’ 138 1

Mnemonic Summary: Integrity, objectivity and independence 139 1

Mnemonic Potential threats to an auditor’s independence 140 1

Chart Potential threats to an auditor’s independence 141 1

Mnemonic Threats to independence and objectivity 142 1

Mnemonic Examples of conflict of self-interest 143 1

Mnemonic Family and other personal relationships 144 1

Mnemonic Factors which have an impact on the auditor’s ability to withstand pressure on his/her independence

145 1

Chart Safeguards to protect audit independence 146 1

Mnemonic Safeguards to protect audit independence created by the accounting profession, legislation or regulation

147 1

Mnemonic Safeguards to protect audit independence within the client firm

148 1

Mnemonic Safeguards to protect audit independence within the audit firm

149 1

Mnemonic Preserving independence and objectivity 150 1

Mnemonic Rotation of auditor appointments 151 1

Chart Statement 3.5: The professional duty of confidence 152 1

Mnemonic Statement 3.5: The professional duty of confidence 153 1

Chart The use of confidential information 154 1

Mnemonic Due skill and care 155 1

Chart Enforcement mechanisms associated with ACCA’s ‘Code of Ethics and Conduct’

156 2










Chart Areas of controversy 158 1

Mnemonic Range of business services which an audit firm’s portfolio could include

159 1

Mnemonic Whistleblowing 160 1

Chart Do we want the audit? 161 1

Chart The procedure for tendering and accepting a new audit assignment

162 1

Chart Sources of information for client evaluation 163 1

Mnemonic Source of information about new clients 164 1

Mnemonic Client acceptance: Topics for discussion with prospective client to help evaluate their background

165 1

Mnemonic The client’s regulatory framework 166 1

Chart Client screening 167 1

Mnemonic Low risk clients 168 1

Mnemonic High risk clients 169 1

Mnemonic Client acceptance: Determine whether the audit firm is able to meet ethical requirements regarding the engagement – review of existing auditor and audit-team competence

170 1

Mnemonic Client acceptance: Determine whether the audit firm is able to meet ethical requirements regarding the engagement

171 1

Mnemonic Changes in professional appointments 172 1

Mnemonic Matters which may warrant the existing auditor bringing to the attention of the prospective auditor

173 1

Mnemonic Issues to be considered before submitting a proposal (tender) for the engagement

174 1

Mnemonic Tendering and obtaining audit work 175 1

Chart Client acceptance: Prepare the Client Proposal 176 1

Mnemonic Contents of an audit engagement letter 177 1

Chart Example: ‘Audit Engagement Letter’ 178 2










Mnemonic Other matters that could be included in an engagement letter

180 1

SECTION B: INTERNAL AUDIT

Chart Internal audit: Things you need to know. 182 1

Mnemonic The scope of the internal audit function 183 1

Chart The role of internal audit 184 1

Chart Internal audit and risk 185 1

Mnemonic Means of identifying risk 186 1

Mnemonic Main types of risk faced by business entities 187 1

Mnemonic Factors contributing to business risk 188 1

Mnemonic Considerations concerning entity objectives, strategies and related business risks

189 1

Mnemonic External risks 190 1

Mnemonic Internal risks 191 1

Mnemonic Factors contributing to financial risk 192 1

Mnemonic Ways of identifying risk 193 1

Chart A risk management policy 194 1

Chart Dealing with risk (risk response) 195 1

Mnemonic Benefits of a risk policy 196 1

Chart The main process of Internal Audit when auditing internal controls

197 1

Chart Internal audit assignments 198 1

Mnemonic Computer systems audits 199 1

Mnemonic Fraud risk factors 200 1









SECTION B: INTERNAL AUDIT

Chart Internal audit assignments – Operational audits 201 3

Chart Value for Money 204 1

Mnemonic Value for Money audit coverage 205 1

Mnemonic The problems with Value for Money (VFM) audits 206 1

Chart Best Value 207 1

Mnemonic Benefits of internal audit 208 1

Mnemonic Potential limitations associated with internal audit 209 1

Mnemonic Minimising the limitations of internal audit 210 1

Mnemonic Reasons why management might be against establishing an internal audit department

211 1

Mnemonic Increasing the effectiveness of internal auditors 212 1

Mnemonic The advantages of outsourcing the internal audit function

213 1

Mnemonic The disadvantages of outsourcing the internal audit function

214 1

Chart Differences between internal and external audit (a second look …… just to remind us!)

215 1

Mnemonic External auditors using the work of internal auditors 216 1

Mnemonic The responsibility of the external (independent) auditor when relying upon the work on internal auditors

217 1

SECTION C: PLANNING AND RISK ASSESSMENT

Chart Audit process model 219 1

Chart So we have the audit …… 220 1

Mnemonic Objectives of planning audit work 221 1

Chart Typical audit planning procedures 222 2

Mnemonic Planning the audit: Perform audit tasks to understand the entity and its environment

224 1

Mnemonic Planning the audit: Perform audit tasks to understand the entity and its environment – The business operations of the client

225 1










Mnemonic Planning the audit: Perform audit tasks to understand the entity and its environment – Investments of the client

226 1

Mnemonic Planning the audit: Perform audit tasks to understand the entity and its environment – Financing and capital structure

227 1

Mnemonic Planning the audit: Perform audit tasks to understand the entity and its environment – Financial reporting

228 1

Chart Planning the audit: Perform audit tasks to understand the entity and its environment – Classification of individual business risk

229 1

Chart Planning the audit: Evaluation of the client’s internal control

230 1

Chart Assessing the risks of material misstatement. What you need to know

231 1

Chart Audit planning – The role of Risk Assessment 232 1

Chart Audit risk: inherent risk, control risk and detection risk 233 1

Chart Components of audit risk 234 1

Chart Components of audit risk (another look!) 235 2

Chart Components of audit risk (a deeper look!) 237 1

Chart Components of audit risk – example 238 1

Chart The risk approach to auditing 239 1

Chart Structure of the audit: 3 possible ‘routes’ 240 1

Chart A business risk approach to auditing: Assessing inherent risk

241 1

Mnemonic Inherent risk: Risks that require special audit consideration

242 1

Chart Deciding materiality 243 3

Chart Tolerable error: reliability, precision and amount of evidence

246 1

Chart Analytical procedures. What you need to know 247 1










Chart Appropriateness of analytical procedures 248 1

Mnemonic Analytical procedures 249 2

Mnemonic Analytical procedures: developing an ‘expectation’ 251 1

Mnemonic Analytical procedures: plausible relationships 252 1

Mnemonic Analytical procedures: customary ratios 253 1

Mnemonic Analytical procedures: limitations 254 1

Chart Analytical procedures - Question 255 2

Chart Analytical procedures – Answer to the question 257 5

Chart Analytical procedures: used at the planning stage 262 1

Mnemonic Analytical procedures: used at the planning stage 263 1

Chart Audit documentation. What you need to know 264 1

Mnemonic Audit working papers: ACCA ‘Code of Ethics and Conduct’

265 1

Mnemonic Audit documentation and working papers 266 4

Mnemonic Significant findings or issues documented 270 1

Mnemonic The ways that documentation is useful for auditors 271 1

Mnemonic Audit working papers: Form and content of working papers: The permanent audit file

272 1

Mnemonic Audit working papers: Form and content of working papers: The current audit file

273 1

Mnemonic Audit working papers: Preparation of working papers 274 1

Mnemonic Audit working papers: Automated working papers 275 1

Chart Audit working papers: Schedules 276 1

Chart Summary of Audit Process Documents and the people responsible for the documentation

277 1

Chart Using the work of other. What you need to know 278 1

Mnemonic Client acceptance: Determine the need for other specialists

279 1

Mnemonic Client acceptance: Using the work of experts 280 1










Chart Using the work of an expert: Communicating, evaluating and reporting

281 1

Chart Rules for using the work of an expert 282 1

SECTION D: INTERNAL CONTROL

Chart Internal control: The two dimensions 284 1

Chart The Up and Down effect 285 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: What you need to know

286 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control structure

287 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal controls used to reduce risk

288 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Administration controls

289 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Social controls

290 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Self imposed control

291 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Control environment

292 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Requirement for a strong control environment

293 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Risk assessment

294 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Employment of accounting information system and communication

295 1

Mnemonic Planning the audit: Internal control 296 1










Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Activities designed for control purposes

297 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Physical controls over assets

298 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Authorisation and approval controls

299 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Segregation of duties controls

300 2

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Segregation - authorisation

302 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Segmentation - custody

303 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Segregation - recording

304 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Supervision controls

305 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Arithmetic and accounting controls

306 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Management controls

307 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Organisational controls

308 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Personnel controls

309 1










Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Human resources management

310 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Recruitment and selection (problems)

311 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Recruitment and selection

312 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Causes of high labour turnover in the financial accounting system

313 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Performance reviews

314 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems

315 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: General controls used in IT systems

316 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Software controls

317 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems – Continuity of operations

318 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems – Main threats to data security

319 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems – Back up

320 1

Chart Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems - Access controls

321 1










Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems – Contingency arrangements

322 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems – Concept of ‘disaster pack’

322 1

Mnemonic General IT controls: Problems associated with web-based technology: protecting against virus

323 1

Mnemonic General IT controls: Problems associated with web-based technology: safety measures

324 1

Chart General IT controls: Security and its management 325 1

Chart IT Application controls: Input controls 326 1

Mnemonic IT Application controls: Output controls 327 1

Mnemonic Planning the audit: Assessing the risks of material misstatements of the financial statements. Internal control: Computer-based systems – Audit trail

328 1

Chart The next step: Tests of control 329 1

Chart Down to work ….! 330 1

Chart The process of auditing based on internal controls 331 1

Chart Understanding the system of internal controls 332 5

Chart Transaction cycles: Audit documentation of controls 337 1

Chart Flowcharting - Don’t’ panic! 338 1

Chart Transaction cycles: Flowcharts 339 1

Chart Transaction cycles: Organisation chart: ‘Assignment of Authority and Responsibility’

340 1

Chart Transaction cycles: Flowcharts– Sales Orders Processing (manual system)

341 5

Chart Transaction cycles: Flowcharts– Sales Order Processing (computer system)

346 3










Chart Transaction cycles: Flowcharts - Cash Receipts (manual system)

349 5

Chart Transaction cycles: Flowcharts - Accounts Payable Disbursements (manual system)

354 7

Chart Transaction cycles: Flowcharts – Accounts Payable Disbursements (computer system)

361 4

Chart Transaction cycles: Flowcharts – Payroll (manual system)

365 7

Chart Transaction cycles: Flowcharts – Payroll (computer system)

372 3

Chart Other transaction types 375 2

Chart Internal Control Questionnaire forms 377 2

Chart Tests of controls 379 1

Chart Tests of control: Sales system 380 6

Chart Tests of control: Purchasing system 386 6

Chart Tests of control: Payroll 392 6

Chart Cash system 398 7

Chart Inventory 405 3

Chart Capital expenditure 408 2

Chart Summary of the main areas of controls testing 410 1

SECTION E: AUDIT EVIDENCE

Chart Substantive procedures 412 1

Chart Substantive procedures. What you need to know 413 1

Chart Gathering evidence: Financial statements assertions 414 1

Chart Gathering evidence: Assertions tested by the auditor 415 1

Chart Procedures and approach: Substantive audit tests -terms

416 1

Chart Gathering evidence: Sufficient and appropriate audit evidence

417 1

Only the hyperlinks shaded in pink are active for this sample download










Mnemonic Gathering evidence: Quality of evidence 418 1

Mnemonic Gathering evidence: Audit procedures for obtaining audit information

419 1

Chart Gathering evidence: Audit procedures for obtaining audit evidence

420 2

Mnemonic Exam tip …… 422 1

Mnemonic Gathering evidence: Substantive audit tests 423 1

Chart Gathering evidence: Confirmation. What you need to know

424 1

Chart Gathering evidence: Confirmation method 425 5

Mnemonic Situations where negative confirmation may be appropriate

429 1

Mnemonic Gathering evidence: Specific risks for which confirmation may be relevant

430 1

Mnemonic Gathering evidence: Situations where confirmation may not be appropriate

431 1

Mnemonic Gathering evidence: Problems associated with confirmation

431 1

Chart Gathering evidence by sampling. What you need to know

432 1

Chart Gathering evidence by sampling 433 1

Chart Gathering evidence by sampling: Three steps for testing by using statistical sampling

434 1

Mnemonic Gathering evidence by sampling: Cases where audit sampling is not appropriate

435 1

Chart Gathering evidence by sampling: Design of the sample

436 6

Chart Gathering evidence by sampling: Selection of the sample and using the sample

442 1

Chart Gathering evidence by sampling: Evaluation of tests obtained

443 1

Chart Gathering evidence by sampling: Statistical sampling techniques

444 2

Mnemonic Audit sampling: Advantages of statistical sampling 446 1










Mnemonic Disadvantages of statistical sampling 447 1

Chart Gathering evidence by sampling: A summary 448 1

Chart Management’s accounting estimates 449 5

Chart Opening balances 454 4

Chart Audit objectives and substantive audit tests (in more detail)

458 1

Chart Substantive audit tests: Bank and cash 459 1

Mnemonic Typical substantive audit procedures for bank and cash

460 1

Mnemonic Main substantive audit procedures for bank and cash 461 1

Chart Substantive audit tests: Bank and cash (topics) 462 2

Chart Substantive audit tests: the Bank confirmation procedure

464 1

Chart Substantive audit tests: typical bank confirmation letter

465 2

Chart Substantive audit tests: the Cash count 467 2

Chart Substantive audit tests: Receivables 469 1

Chart Substantive audit tests: Confirmation of Receivables 470 2

Chart Substantive audit tests: Accounts receivable confirmation letter

472 1

Chart Substantive audit tests: Reconciliation of Accounts Receivable

473 1

Chart Substantive audit tests: Provision for bad debts 474 1

Chart Substantive audit tests: Inventory 475 1

Chart Substantive audit tests: Inventory (observation) 476 1

Chart Substantive audit tests: inventory count 477 1

Chart Substantive audit tests: inventory count – after the count

478 1










Chart Substantive audit tests: inventory – the importance of cut-off

478 1

Chart Substantive audit tests: inventory – cost versus net realisable value

478 1

Chart Substantive audit tests: Accounts payable 479 1

Chart Substantive audit tests: Confirmation of Payables 480 1

Chart Substantive audit tests: Payroll 481 1

Chart Substantive audit tests: Property, plant and equipment (PP&E)

482 1

Chart Substantive audit tests: PP&E 483 1

Chart Substantive audit tests: Long-term debt 484 1

Chart Substantive audit tests: Long-term debt 485 1

Chart Substantive audit tests: Long-term debt: Test of reasonableness schedule - debt

486 1

Chart Substantive audit tests: Shareholders’ equity 487 1

Chart Computer-assisted audit techniques (CAATs). What you need to know

488 1

Chart Computer-assisted audit techniques (CAATs): Computers used for different aspects of audit work

489 1

Mnemonic Computer-assisted audit techniques (CAATs): The use of computers in auditing

490 1

Mnemonic Computer-assisted audit techniques (CAATs): The use of computers in auditing (2)

491 1

Mnemonic Computer-assisted audit techniques (CAATs): Special features of computer-based systems

492 1

Mnemonic Computer-assisted audit techniques (CAATs): Auditing in a computer environment

493 1










Mnemonic Computer-assisted audit techniques (CAATs): Using the computer to gather evidence – Use of audit software

494 1

Chart Computer-assisted audit techniques (CAATs): The three main focus areas

495 1

Chart Computer-assisted audit techniques (CAATs): Main types of CAATs

496 1

Chart Computer-assisted audit techniques (CAATs): Other types of CAATs

497 1

Mnemonic Computer-assisted audit techniques (CAATs): The advantages of CAATs to the auditor

498 1

Mnemonic Computer-assisted audit techniques (CAATs): Difficulties of using CAATs

499 1

Mnemonic Computer-assisted audit techniques (CAATs): Problems associated with small computer systems

500 1

Chart Computer-assisted audit techniques (CAATs): Computer software used by auditors

501 1

Mnemonic Computer-assisted audit techniques (CAATs): The auditor’s consideration of internal control when a computer is present in the audit area

502 1

Mnemonic Computer-assisted audit techniques (CAATs): Information and communications technology (ICT) provide advantages for the accounting function

503 1

Chart Not-for-Profit organisations. What you need to know 504 1

Chart Not-for-profit organisations 505 4

Chart Audit report – in accordance with a compliance framework

508 2

Mnemonic Audit problems associated with charities and other small entities

511 1

Chart Internal Control Questionnaire: Small Entity 512 4









SECTION F: REVIEW

Chart The Final Review Stage 517 1

Chart At last …. The reports! 518 1

Chart Subsequent events. What you need to know 519 1

Chart Subsequent events 520 6

Mnemonic Events occurring between the date of the financial statements and the date of the auditor’s report

526 1

Mnemonic Enquiries of management and, where appropriate those charged with governance, as to whether any subsequent events have occurred that might affect the financial statements

527 1

Chart Review for discovery of Subsequent Events 528 1

Chart Going concern. What you need to know 529 1

Chart Going concern: Indications that the Going Concern assumption might be questioned

530 5

Chart The ‘Going concern assumption’ 535 1

Mnemonic Implications that the ‘going concern assumption’ might be questioned: Financial implications

536 1

Mnemonic Implications that the ‘going concern assumption’ might be questioned: Operating implications

537 1

Mnemonic Implications that the ‘going concern assumption’ might be questioned: Other implications

538 1

Mnemonic ‘Going concern assumption’ – The auditor’s responsibilities

539 1

Mnemonic ‘Going concern assumption’ – Procedures to gather sufficient appropriate audit evidence

540 1

Chart Management representations. What you need to know

541 1

Chart Management representations 542 5

Mnemonic Management Representations Letter 547 1

Chart Example: Management Representations Letter 548 3









SECTION F: REVIEW

Chart Audit finalisation and the final review 551 1

Chart Matters for the Attention of Partners (MAPs) 552 1

SECTION G: REPORTING

Chart Now we are able to produce appropriate audit reports 554 1

Chart Audit reports. What you need to know 555 1

Chart Audit reports 556 7

Chart Audit reports – Unqualified Report 563 2

Chart Audit reporting 565 1

Mnemonic The statutory audit opinion 566 1

Chart Modifications to the audit report. What you need to know

567 1

Chart Modifications to the audit report 568 3

Chart The audit report: Unqualified Opinion with Going Concern emphasis of matter paragraph

570 2

Chart The audit report: Unqualified opinion with legal uncertainty emphasis of matter paragraph

572 2

Chart The audit report: Limitation on Scope – Qualified opinion

575 2

Chart The audit report: Disagreement on accounting policies – inappropriate accounting method – qualified opinion

577 2

Chart The audit report: Limitation on Scope – Disclaimer of opinion

579 2

Chart The audit report: Disagreement on accounting policies – inadequate disclosure – adverse opinion

581

Chart Circumstance that may result in other than an unqualified opinion: Limitation on scope

583 3

Chart Circumstance that may result in other than an unqualified opinion: Disagreement with management

586 2









SECTION G: REPORTING

Chart Summary of the different forms of Auditor’s Report 588 3

Chart Audit reporting - overview 591 1

Chart Private reporting to the client’s management. What you need to know.

592 1

Chart Private reporting: to the client’s management 593 2

Chart Reports to the management by the external auditor: The Management Letter

595 2

Chart Example: Management Letter 597 6

Chart Well done! 603 1
