Podcast
Questions and Answers
What is one of the principal purposes of a letter on internal control?
What is one of the principal purposes of a letter on internal control?
At which stage of the audit must analytical procedures be utilized?
At which stage of the audit must analytical procedures be utilized?
Which factor is crucial for auditors when using analytical procedures as substantive procedures?
Which factor is crucial for auditors when using analytical procedures as substantive procedures?
What is a consideration auditors must have regarding recorded amounts when using substantive analytical procedures?
What is a consideration auditors must have regarding recorded amounts when using substantive analytical procedures?
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When can analytical procedures NOT be considered as substantive procedures?
When can analytical procedures NOT be considered as substantive procedures?
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What is the primary reason for using the direct verification approach in audits?
What is the primary reason for using the direct verification approach in audits?
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Which procedure is NOT considered a substantive procedure?
Which procedure is NOT considered a substantive procedure?
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What do financial statement assertions represent?
What do financial statement assertions represent?
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Which analytical procedure is an example of studying plausible relationships?
Which analytical procedure is an example of studying plausible relationships?
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Which of the following procedures involves gathering information from clients or external sources?
Which of the following procedures involves gathering information from clients or external sources?
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In audit procedures, which method is used to confirm the arithmetic accuracy of a client’s records?
In audit procedures, which method is used to confirm the arithmetic accuracy of a client’s records?
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What is the underlying focus of tests of controls?
What is the underlying focus of tests of controls?
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What could be a potential issue if the internal control system is very weak?
What could be a potential issue if the internal control system is very weak?
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What is one purpose of analytical procedures in auditing?
What is one purpose of analytical procedures in auditing?
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Which audit evidence should be obtained concerning accounting estimates?
Which audit evidence should be obtained concerning accounting estimates?
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Why is inventory one of the most challenging areas to audit?
Why is inventory one of the most challenging areas to audit?
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What is a primary responsibility of auditors during the inventory count?
What is a primary responsibility of auditors during the inventory count?
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When is the best time for auditors to perform the inventory count?
When is the best time for auditors to perform the inventory count?
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What is required of management in a perpetual inventory system?
What is required of management in a perpetual inventory system?
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What complicates the cut-off testing of inventory?
What complicates the cut-off testing of inventory?
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How should auditors evaluate management's performance during the inventory count?
How should auditors evaluate management's performance during the inventory count?
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What is the purpose of matching goods received notes with purchase invoices during an inventory audit?
What is the purpose of matching goods received notes with purchase invoices during an inventory audit?
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Which of the following procedures is primarily concerned with assessing the understanding of the inventory count process among staff?
Which of the following procedures is primarily concerned with assessing the understanding of the inventory count process among staff?
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What is the focus of the audit test related to slow-moving and damaged inventory?
What is the focus of the audit test related to slow-moving and damaged inventory?
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What is critical to confirm when validating the valuation of raw materials?
What is critical to confirm when validating the valuation of raw materials?
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Which process helps ensure that income is recorded in the correct accounting period?
Which process helps ensure that income is recorded in the correct accounting period?
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What should be reviewed to determine if the client’s system for inventory assessment is effective?
What should be reviewed to determine if the client’s system for inventory assessment is effective?
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What are auditors looking for when reviewing standard labour costs against actual costs?
What are auditors looking for when reviewing standard labour costs against actual costs?
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Why is it important to review the quantities of goods sold after year-end during an inventory audit?
Why is it important to review the quantities of goods sold after year-end during an inventory audit?
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What is the primary objective of reviewing the list of additions related to plant and equipment?
What is the primary objective of reviewing the list of additions related to plant and equipment?
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Which step is important in verifying disposals of non-current assets?
Which step is important in verifying disposals of non-current assets?
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What should be reviewed to assess whether an allowance for bad debts is necessary?
What should be reviewed to assess whether an allowance for bad debts is necessary?
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What is the key factor in assessing the completeness of accounts receivable?
What is the key factor in assessing the completeness of accounts receivable?
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How can disputes over receivables be identified?
How can disputes over receivables be identified?
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Why is it important to review board minutes in relation to capital expenditures?
Why is it important to review board minutes in relation to capital expenditures?
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What should be done if missing receivables or significantly lower balances are identified?
What should be done if missing receivables or significantly lower balances are identified?
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What evidence should be reviewed to confirm rights and obligations of receivables?
What evidence should be reviewed to confirm rights and obligations of receivables?
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Study Notes
Direct Verification Approach
- This approach doesn't rely on internal control systems.
- Auditors directly verify individual transactions and balances in financial statements.
- Used when internal control systems are weak.
- Only substantive procedures are used.
Substantive Procedures
- Detect material misstatements at the assertion level.
- Include analytical procedures and tests of details.
Tests of Controls
- Evaluate the operating effectiveness of controls.
- Prevent, detect, and correct material misstatements at the assertion level.
Financial Statement Assertions
- Representations by management incorporated in the financial statements.
- Used by auditors to consider potential misstatements.
- Completeness cannot be confirmed if the internal control system is very weak.
Audit Procedures
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Analytical Procedures: Evaluation of financial information by studying relationships between financial and non-financial data.
- Example: Comparing current period gross margin with prior years.
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External Confirmation: Seeking confirmation from another source regarding details in client's accounting records.
- Example: Sending receivable confirmation letters.
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Inquiry: Seeking information from the client or external sources about control operation or how certain items are treated in accounting records.
- Example: Asking the payable clerk how they record purchase invoices.
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Inspection: Examining records or documents, in paper, electronic, or other media, or physically examining an asset.
- Example: Inspecting a purchase invoice posted to the payable ledger.
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Observation: Watching a procedure being performed.
- Example: Observing the client's inventory count.
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Recalculation: Confirming the arithmetic accuracy of client records.
- Example: Recalculating depreciation charged on non-current assets.
- Reperformance: Auditor's independent execution of procedures of controls originally performed as part of the entity's internal control.
Letter on Internal Control - Principal Purposes
- To highlight deficiencies in accounting records, systems, and controls identified during the audit that may lead to material errors.
- To provide constructive advice to management on various aspects of the business identified during the audit.
- To highlight matters that may affect future audits.
Analytical Procedures - Stages of Audit
- Used at the planning stage as risk assessment procedures to understand the client and its environment.
- Used as a substantive procedure to provide evidence for financial statement assertions.
- Used as part of the final review of financial statements to ensure they are consistent with the auditor's knowledge of the business.
Analytical Procedures - Factors to Consider
- Suitability for using substantive analytical procedures given the assertion.
- Reliability of data, whether internal or external, from which the expectation of recorded amounts or ratios is developed.
- Precision of the expectation to identify a material misstatement at the desired level of assurance.
- Acceptable amount of any difference between recorded amounts and expected values.
Purposes of Analytical Procedures
- Identify relationships between financial data or financial and non-financial data.
- Identify consistencies, patterns, significant fluctuations, and unexpected relationships.
- Increase the auditor's understanding of the business.
- Highlight risky areas and provide alternative means of audit assurance to extensive tests of details.
Audit of Accounting Estimates
- Obtain audit evidence from events occurring up to the date of the auditor's report.
- Test how management made the accounting estimate and the significance of the assumptions and data on which it is based.
- Develop an auditor's point estimate or range to determine whether the estimate is reasonable.
- Use an independent estimate.
Audit of Inventory - Challenges
- Closing inventory is not normally part of the double-entry bookkeeping system.
- Inventory existence is generally verified by attending the inventory count and follow-up procedure.
- Control over inventory count might be difficult if it takes place in multiple locations.
- Cut-off can be difficult to test because inventory might be moved during the count.
- Valuation of inventory can be subjective (assessing slow-moving, obsolete, and damaged items, and valuation of work-in-progress).
Auditor's Responsibilities during Inventory Count
- Evaluate management's instructions and procedures for recording and controlling physical inventory count results.
- Observe the performance of inventory count procedures.
- Inspect the condition of inventory.
- Perform test counts.
Best Time to Perform Inventory Count
- From the auditor's perspective, the best time is at year-end.
Audit Procedures for Inventory Cut-Off
- Record all movement notes relating to the period.
- Observe whether correct cut-off procedures are being followed in the despatch and receiving areas.
- Discuss procedures with company staff performing the count to ensure they understand.
- Determine from management whether finished goods will be transferred to the warehouse on the day of the count.
- Match goods received notes with purchase invoices to ensure liabilities are recorded in the correct accounting period.
- Match goods dispatched notes with sale invoices to ensure income/revenue is recorded in the correct accounting period.
- Match requisition notes to work in progress figures for the receiving department to ensure correct recording.
Audit Tests for Cost Attributable Production
- Agree the valuation of raw materials to invoices and price lists to confirm accuracy.
- Confirm appropriate basis of valuation is being used in accordance with IAS2.
- Confirm correct quantities are used when calculating raw material value in work in progress and finished goods to confirm valuation.
- Agree labour costs to wage records to determine if the labour cost included is reasonable.
- Review standard labour costs in light of actual costs and production.
- Agree labour hours to time summaries to confirm the number of hours allocated to production is reasonable.
- Review the proportion of overheads to the cost of inventory.
Audit Tests for Inventory Valuation
- Review and test the client's system for identifying slow-moving, obsolete, or damaged inventory to determine its effectiveness.
- Follow up on any such items identified at the inventory count, ensuring the client has made adequate provision to write down items to net realisable value.
- Examine inventory records to identify slow-moving items.
- Examine prices at which finished goods have been sold after year-end to ascertain whether any finished goods items need to be reduced below cost.
- Review quantities of goods sold after year-end to determine that inventory at year-end has been realised.
Audit of Non-Current Assets - Additions
- Select a sample of additions and agree cost to the supplier invoice to confirm valuation.
- Verify rights and obligations by agreeing the addition of plant and equipment to a supplier invoice in the client's name.
- Review the list of additions and confirm they relate to capital expenditure items rather than repairs and maintenance.
- Review board minutes to ensure significant capital expenditure purchases have been authorized.
- Physically verify a sample of additions recorded in P&E on the factory floor to confirm existence.
Audit of Non-Current Assets - Disposals
- Obtain a breakdown of disposals, cast the list, and agree all assets removed from the non-current asset register to confirm existence.
- Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry sales invoices.
- Recalculate the profit/loss on disposal and agree this to the income statement.
Audit of Accounts Receivable - Assertion: Accuracy, Valuation, and Allocation
- Review after-date cash receipts and follow through to pre year-end receivable balances.
- Inspect the aged receivables report to identify slow-moving balances and discuss these with the credit control manager to assess if an allowance or write-down is necessary.
- For slow-moving/aged balances, review customer correspondence to assess if any invoices are in dispute.
- Review board minutes to assess whether there are any material disputed receivables.
Audit of Accounts Receivable - Assertion: Completeness
- Select a sample of goods despatched notes from before year-end, agree to sales invoices, and to inclusion in the sales ledger and year-end receivables ledger.
- Agree the total of individual sales ledger accounts to the aged receivables listing and to the trial balance.
- Obtain the prior year aged receivables listing and for significant balances, compare to the current year receivables listing for inclusion and amount due.
- Discuss with management any missing receivables or significantly lower balances.
- Review the sales ledger for any credit balances and discuss with management whether these should be reclassified as payables.
Audit of Accounts Receivable - Assertion: Right and Obligations
- Review bank confirmations and loan agreements for any evidence that receivables have been assigned as security for amounts owed by the client.
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Description
This quiz explores essential concepts related to audit procedures, including the direct verification approach, substantive procedures, and financial statement assertions. Understand how auditors evaluate internal controls and detect misstatements through various procedures. Test your knowledge of these critical auditing principles.
