1. F8: Audit and Assurance

2. 2 Designed to give you knowledge and application of: Section A: Audit Framework and Regulation Section B: Internal audit Section C: Planning and risk assessment Section D: Internal control Section E: Audit evidence Section F: Review Section G: Reporting

3. 3 Designed to give you knowledge and application of: Section E: Audit Evidence E1.The use of assertions by auditors E2.Audit procedures E3.The audit of specific items E4.Audit sampling & other means of testing E5.Computer - assisted audit techniques E6.Not-for-profit organisations E7. Work of others

4. 4  Discuss the quality and quantity of audit evidence. [2]  Discuss the relevance and reliability of audit evidence. [2]  Discuss and provide examples of how analytical procedures are used as substantive procedures. [2]  Discuss the problems associated with the audit and review of accounting estimates. [2]  Describe why smaller entities may have different control environments and describe the types of evidence likely to be available in smaller entities. [2]  Explain the auditor’s responsibilities and describe procedures to be applied in relation to opening balances and comparative information. [2] Learning Outcome E2. Audit procedures

5. 5 Sources & relative merits of different types of evidence available a) Inspection of records or documents Ownership, cut-off, operation of controls, existence of paper assets (i.e. ownership)such as shares Source Tests assertions regarding Example A procedural manual stipulates that cash collections are to be deposited on the day of collections. A new cashier joined &, being unaware of the instructions in the manual, did not deposit the cash daily. This increases the risk of cash misappropriations. The auditor should not assume that the manual is available to and used by every employee. b) Inspection of tangible assets Existence of tangible assets i.e. assets are physically verified Example Items of machinery are physically checked with reference to their identification number & location recorded in the assets register. Continued…

6. 6 c) Observation Gives evidence of completeness, valuation and accuracy Any assertions, but it has corroborative value only d) Inquiry Example An auditor consults the client about the method of valuation of inventories. He is told that the FIFO method is used to identify the costs and that the inventories are valued at the lower of cost or net realisable value. The auditor cannot rely only on this answer to his inquiry. He has to test the actual calculations by re-performing the calculations on a sample selected. Example Observation of the counting of inventories and the disbursement of wages to employees. Continued…

7. 7 e) Confirmation f) Recalculation Existence & valuation Accuracy Example  A bank’s certificate confirming balances at a given date  Circularisation of receivables, where requests are sent to customers to confirm balances  Confirmation from legal experts about the contingent liability  Confirmation of inventories / investments held by third parties Example Depreciation calculations are checked by the auditor’s staff by recalculating. Continued…

8. 8 g) Re-performance Accuracy & valuation Example  Ageing of receivables is provided by the client to the auditors. The auditor re-performs the process & prepares an ageing analysis.  A few items of inventory are recounted by the auditor, to test check whether the count taken by the client’s staff was correct. h) Analytical procedure Completeness, accuracy, valuation & classification Example When an auditor finds that an inventory turnover ratio has gone down substantially in the current year, the auditor will decide to verify the inventory & revenue figures more closely than he does usually. Continued…

9. 9 Sufficient appropriate audit evidence Audit Evidence Sufficient Appropriate Quantity: sufficient to support the audit opinion Factors to consider  Source & reliability of available information  Experience of earlier audits  Results of audit procedures  Risk assessment  Nature of accounting & internal control systems  Materiality RelevantReliable  Contributes to conclusions that assist in forming an opinion by the auditor  External evidence is more reliable than internal  Internal evidence is more reliable when the related controls are effective  Evidence obtained directly by the auditor is more reliable than indirect evidence  Documentary evidence is more reliable  Original documents are more reliable than photocopies / facsimiles.

10. 10 Substantive procedures: Audit procedures performed to detect material misstatements at assertion level. They include: (a)tests of details of classes of transactions, account balances & disclosures (b) substantive analytical procedures Examples of how analytical procedures are used as substantive procedures Substantive analytical procedures are suitable when there is a large volume of predictable transactions relationships between data exist & continue the risk of material misstatement is insignificant tests of details are directed towards the same assertion Refer to examples on pages 380 to 382

11. 11 Problems associated with audit & review of accounting estimates Accounting estimate an approximation of the amount of an item in the absence of a precise means of measurement. require further audit procedures to be designed and performed to check whether the accounting estimates are appropriate Accounting estimates are appropriately disclosed Refer to Example on page E2.13 are often made in conditions of uncertainty regarding the outcome of events. Therefore they are prone to material misstatement Continued…

12. 12 Determine if the events occurring provide audit evidence regarding accounting estimate Test operating effectiveness of controls over how management made the estimate Test how management made the estimate & the data on which it is based Develop a range to evaluate managements point of estimate The auditor should use one or more of the following approaches Continued…

13. 13 Further substantive procedures to respond to significant risks Auditor evaluates: The alternative assumptions considered by management & why it has rejected them whether significant assumptions are reasonable management’s intent to carry out specific courses of action Audit procedures related to disclosures of accounting estimates (AE):  The auditor shall obtain audit evidence that the disclosures in the FS related to the AE are correct  If it gives rise to significant risks, the auditor shall evaluate the adequacy of the disclosure Continued…

14. 14 RECAP  Discuss the quality and quantity of audit evidence. [2]  Discuss the relevance and reliability of audit evidence. [2]  Discuss and provide examples of how analytical procedures are used as substantive procedures. [2]  Discuss the problems associated with the audit and review of accounting estimates. [2]  Describe why smaller entities may have different control environments and describe the types of evidence likely to be available in smaller entities. [2]  Explain the auditor’s responsibilities and describe procedures to be applied in relation to opening balances and comparative information. [2]

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