ANS: ​1)​team holds a meeting with mgmt​; audit team should ​exercise professional judgment, n extend test of control

n sample size​; ​ineffective ​control testing approach, combo of

substantive tests e.g.​:​oPerform substantive analytical review, including reasonableness test;oReview ​sales contracts ​and relevant terms and condition;oCirculate confirmation to key
customers to confirm sales rebates;oRe-compute sales rebates based on sales contracts ​2)​On the ​financial statement level ​of material misstatement (AR=IR*CR*DR):​Risk of material
misstatement -> risk of material misstatement that related ​pervasively to fin statement ​as a whole ​and potentially affect many assertions; ​often related to entity’s control environment
/​Control of environment-> ​includes gov & mgmt functions; attitudes, awareness, and actions of directors and mgmt concerning IC and its importance​/​Nature of risks ​arising from weak
IC is that ​weak control environment- lacked awareness ​of importance of principle of ​segregation of duties​; close relationship​→ under control of xx;​concentration of mgmt power ​poses
a ​higher risk of error​→ lack of checking & Risk of fraud.​/​other conditions ​lead to ​higher risks of misstatement at fin statement level (eg. aggressive biz strategies, significant biz risks
arising from changes or complexity of biz operations, unusually high pressures on performance measures and review):o​entered a new market​→ not familiar with new biz environment
& exposed to higher risks;o​high staff turnover ​in accts dept→ If replacement is not competent enough ​in fin reporting and ICs, risk of material misstatement at fin statement level
higher
3)​recorded an inventory value of x million at date,amount for ​33.33% of total assets​-material.​audit objectives of an inventory valuation assertion: costs are accurately determined with
standards;inventories are recorded at year-end at the lower of cost and net realisable value. Factors increase the risks of material misstate. of inventory valuation:has different forms of
inventory items, subject to different valuation methodologies;may require special knowledge to value;involvement of 3rd-party for the provision of work -valuation more
complicated;different markup;Inventories are kept by different sub divisions at multi-locations.​/​Proposed audit procedures:​Overall:​Investigate client inventory accounting policy
-complies with relevant accounting standards;obtain a full list of inventory, recalculate the amount and match the recalculated result to the amount in the statement of financial
position​/​Apply analytical procedures including:Compare the xx to the previous year or industry data;Compare raw materials, finished goods and total inventory turnover days to the
previous year and industry averages. ​4)​responsibility:​a subsequent event, occurring between the date of financial statements and the date of the auditor’s report. The engagement
team should perform procedures designed to obtain sufficient appropriate audit evidence that all the events up to the date of the auditor’s report that may require adjustment of the
financial statements have been identified. Such procedures ordinarily include: eg.Reviewing procedures the management has established to ensure that subsequent events are
identified.​/​When the engagement team ​became aware of the settlement before the issue of the report, the engagement team should determine whether SMC’s financial statements
should be amended.Given that the settlement of the 8 mil subsequent to the financial period provides evidence as to the recoverability of the receivable as at 31 Dec 20X9, the
engagement team should normally request SMC to amend the financial statement such that the amount of impairment of receivables for the year ended 12/31/X9 would be reduced
by 8 mil.If the management of SMC refuse to amend the financial statements, the engagement team should consider whether it is appropriate to issue a qualified opinion in accordance
with HKSA 705. ​5)​As the balance of AP is significantly reduced ​from prior year and does ​not match with the performance of the entity, the risk of material misstatement relating to the
completeness assertion of Limited’s accounts payable is high,may be caused by:Amounts posted to accounts payable that do not relate to valid adjustments (credit notes);Payment to
trade creditors being recorded before the period end in error;Amounts in respect of goods-in-transit;being recorded in the incorrect period;Inputting error.​/​audit confirmation of
account payable​: 1.make a selection of relevant account balance items and prepare or have the entity prepare confirmation requests for such a selection. The samples for
confirmations are selected from the AP subledger with total amount tied to the general ledger by representative sampling. 2. Accuracy and validity of confirmation letters:compare the
addresses with the addresses on invoices or purchase orders;obtain the client’s authorization by endorsing or signing the confirmations;agree the amounts shown on the confirmations
to the AP subledger. 3.Control the proper response – request the suppliers to send the confirmations to the auditor directly.​/​follow up procedures-not receive the confirmation reply:
1. Arrange second request and or phone the party to ask them;2.Perform the following alternate procedures;3. Consider if the nonresponse is an indication of a previously unidentified
risk of material misstatement.The auditor may need to reconsider or revise the assessed risk of material misstatement or modify planned audit procedures.
OVERVIEW: ​Auditing​: ​a systematic process of objectively obtaining and evaluation evidence regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria, and communicating the results to interested users.​Parties involved: ​management (​maintain internal control and
prepare reports), internal audit function (provide ​internal assurance on internal control and reports), audit committee (provides ​oversight of the reporting process and other parties),
external auditor (provides ​independent audit of internal controls and financial statements)​. ​Drivers of audit quality​:​Audit firm culture; Skills and personal qualities of audit partners and
staff; Effectiveness of the audit process; Reliability and usefulness of audit reporting; Factors outside the control of auditors that affect audit quality
o Why we need Audit?​Decision makers’ needs for reliable financial and internal control information;transparent and unbiased;The need for independent assurance (arises from:
potential bias, remoteness, complexity, consequences)​o Objective​:​obtain​ reasonable assurance​ about whether the​ financial statements​ are ​free from material misstatement
o Audit Profession:​Professional skills: intellectual; interpersonal and communication; personal; organizational; team management and leadership
Audit Quality:​make quality decisions throughout the audit;Unbiased; meet the expectations of reasonable users; comply with professional standards; incorporate sufficient appropriate
evidence.​ ​Ethical Requirements --Independence
#Independence:​The fundamental principles for professional accountant: ​integrity and ​objectivity;​Integrity​: honest and straightforward in all professional and business relationships;
fair dealing and truthfulness;​Objectivity: NOT biased, ​do NOT ​have conflicts of interest ​or undue influence; ​should NOT compromise professional judgment ​due to bias;Professional
accountants in public practice should not engage in an y activities that impair or might impair integrity, objectivity or the good reputation of the profession;​Process​: identify threats to
independents → evaluate whether the threats are insignificant → if not significant, identify and apply safeguards to eliminate risk or reduce it to an acceptable level; if no safeguard is
available: eliminate the interest or activities causing the threat, decline the engagement or discontinue it;​Independence in mind: the state of mind that permits the expression of a
conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional
scepticism;​Independence in appearance: the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would likely to conclude weighting
all the specific facts and circumstances that a firm’s or a member of the engagement team’s integrity, objectivity or professional scepticism has been compromised; ​Financial interest: a
firm has a financial interest in an entity’s affairs (e.g. the firm owns shares in the entity, or is a trustee​ 受托人​ of a trust that holds shares in the entity
#Threats to Independence 1)​Self-interest threats: financial or other interests of a professional accountant or of close family member (has ​a direct financial interest or a ​material
indirect financial interest in the audit client, the self-interest threat created would be ​so significant ​that no safeguards could reduce the threat to an acceptable level.) 2)​Self-review
threats: a previous judgment needs to be reviewed by the professional accountant responsible for that judgment 3)​Advocacy threats: a professional accountant promotes a position or
opinion that subsequently objectivity may be compromised → threatens the ​appearance of independence; ​safeguards​, including separate teams and disclosures, but if the threat
cannot be reduced to an acceptable level the firm must withdraw from the engagement. 4)​Familiarity threats: a close relationship, a professional accountant become too sympathetic
to the interests of others (how long the staff member has been in the team, their role, the nature of the engagement; ​long association of senior personnel with entities​: an individual
shall NOT be a key audit partner for ​more than seven years​, and shall NOT be a member of the engagement team or key audit partner for another two years) 5)​Intimidation​恐吓
threats​: a professional accountant may be deterred from acting objectivity by threats, actual or perceived (e.g. loss of business, loss of fee revenue, litigation) ⇒ firm shall establish
policies and procedures, set out criteria for determining the need for safeguards
#​Safeguards​:​When threats are identified and the threats are clearly significant;Apply safeguards to ​eliminate the threats or ​reduce them to an acceptable level;​Decline or ​discontinue
the service if ​NO ​safeguards can be implemented;Safeguards are actions or other measures that may eliminate a threat or reduce a threat to an acceptable level;​Three general
categories of safeguard:​Created by the​ profession, legislation or regulation;​In the ​work environment;​Created​ by individual
o Attributes of Auditors (Personal Development)​ – Need both logical thinking and think out of box mindset.
#Internal Control over Financial Reporting:​Internal control helps an organization mitigate the risks of not achieving its objectives;Process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance
→ Roles: Safeguard the company's assets;Help to prevent and detect fraud;Protect the shareholders' investment​→ Functions: ​Good internal control is designed to reduce identified
risks to the business. lt helps deter and detect fraud. Good internal control also helps to ensure reliability of reporting, and compliance with laws ​→ inherent limitations: ​no absolutely
efficient internal control ​→ components of internal control (COSO): ​Control environment (e.g. leadership culture);Risk assessment;Control activities;Information and communication
(identifying, capturing, and exchanging information in a timely fashion);Monitoring (provides feedback on the effectiveness of each of the five components of internal control)
→ Deficiencies in Internal Control: Control deficiency;Significant deficiency;Material weakness ​→ Importance of Internal Control to the External Audit: ​The auditor needs to
understand a client’s internal controls in order to (Anticipate the types of material misstatements that may occur, and Develop appropriate audit procedures); Ineffective internal
controls (If a client has ineffective internal controls, the auditor will plan the audit with this in mind)
#Framework for obtaining Audit Evidence: ​1. ​Sufficient ​Appropriate Audit Evidence: ​Sufficient (quantity)+ ​Appropriateness (quality)​:o Relevance of evidence o Reliability of
evidence ​-- more reliable evidence: (Directly obtained; from a well-controlled information system; from independent outside sources; exists in documentary form; original document)
2. Five different Assertions (see below); 3. 9 Different Audit Procedures (see below)
#Audit Processes & Application
o Making Acceptance and Continuance Decision: 1. Understanding of Client’s Business (Client’s relative risk and audit fee; Whether audit firm is qualified to perform (client grows
larger and internationally → complex → require size and expertise ) 2. Meeting the Ethical Requirements 3. Related to own clients portfolios for decision
o Planning the Audit, Performing Risk Assessment, Responses to Risk Assessment: ​1. Understanding Client;
2. Audit Risk Model
● Audit Risk = Inherent Risk × Control Risk × Detection Risk
Client business risk → auditors set audit risk → auditors assess the risk of material misstatement (inherent risk x control risk) → auditors determine the detection risk
Control risk: will not be prevented or detected and corrected on a timely basis by the entity's internal control.
Detection Risk: auditors have a degree of control, because, if risk is too high to be tolerated, the auditors can carry out more work to reduce this aspect of audit risk.
3.Materiality: gives an guidance as to whether the misstatement is material in a quantitative way; ​refers to risks of material misstatement that relate pervasively to the financial
statements as a whole and potentially affect many assertions
Overall materiality (planning materiality, whether the FSs are overall materially correct); Performance materiality (tolerable error); Posting materiality
4. Assessment of the Risk of Material Misstatement: Using planning analytical procedure (trend analysis, ratio analysis)
5. At Entity Level – taking account of the current economic conditions; the industry, the nature of business and the management of the company.
6. For particular audit cycle, particular assertions – other than the nature of the entity also unique features of the cycles/operations in question.
o Test of Controls & Substantive Procedures (obtain evidence about internal control and operating effectiveness)
1. Interrelationship between Test of Controls and Substantive Procedures​: •When substantive procedures alone do not provide sufficient appropriate audit evidence, the auditor is
required to perform tests of controls to obtain audit evidence about their operating effectiveness.
2. How th​e result of Test of Controls​ could​ affect the initial plan​, and thus​ the extent, nature and timing of substantive procedures​: ​greater the risk of material misstatement, ​the
greater the extent of substantive procedures is required. Auditor's assessment of the risk of material misstatement. The higher the inherent risk and control risk, the more tests of
details have to be performed to reduce the risk of nondetection. Therefore, a larger sample is required. The extent of substantive procedures may depend on the ​results from tests of
controls ​ie if tests of controls are unsatisfactory, the extent may need to be increased.
A Test of Controls:​1. Inspection of documentation (completeness, existence, valuation)2. Observation (indirect: completeness, existence, valuation)3.Reperformance (completeness)
B Substantive Procedures:​ ​Purpose: Determine whether material misstatements exist in the financial statements (used to obtain sufficient evidence)
1.​ ​Inspection of documentation (existence, completeness, valuation); 2.​ ​Inspection of assets (existence, valuation); 3.​ ​External confirmation (existence, completeness, valuation,
rights); 4.​ ​Recalculation (valuation);5.​ ​Analytical procedures (all five (presentation));6.​ ​Scanning (all five (presentation));7.​ ​Inquiry (right, completeness, valuation)
o Application: Auditing Inventory, Goods and Services and Accounts Payable (Obtaining Substantive Evidence About Accounts, Disclosures, and Assertions)
1. Auditing Inventory
Inventory: 1)Inventory count: it is unlikely that the auditor will be able to attend all inventory counts and therefore they need to ensure that they obtain sufficient evidence over the
inventory counting controls, and completeness and existence of inventory for any warehouses not visited. The auditor should assess which of the inventory sites they will attend the
counts for. This will be any with material inventory or which have a history of significant errors. For those not visited, the auditor will need to review the level of exceptions noted
during the count and discuss with management any issues which arose during the count. ​2)valuation method: inventory should be valued at the lower of cost and net releasable
value(NRV) and if this is not the case, then inventory could be under or overstated. Testing should be undertaken to confirm cost and NRV of inventory and that on a line-by-line basis
the goods are valued correctly. Other method is applicable as long as it is a close approximation to cost. If this is not the case, then inventory could be under or overvalued. In addition,
valuation testing should focus on comparing the cost of inventory to the selling price less margin to confirm whether this method is actually a close approximation to cost. ​3)damaged:
inventory should be at the lower of cost and NRV. It is likely that inventory overvalued. Detailed cost and net realizable value testing to be performed to assess how much the inventory
requires writing down by.
2. Auditing Accounts Payable
Payable: 1)loan:​ loan needs to be correctly split between current and non-current liabilities. Auditor need to confirm the loan finance was received. In addition, the split between current
and non-current liabilities and the disclosures for this loan should be reviewed in detail to ensure compliance with relevant accounting standards. ​2)charge: ​company may give the bank a
charge over its assets as security for the loan. There is a risk that the disclosure of any security given is not complete. The loan agreement should be reviewed to ascertain whether any
security has been given, and this bank should be circularized as part of the bank confirmation process.
#Completing the Audit

· Auditors have responsibility for some events occurring after client’s BS date
o review for subsequent events & transactions occur in btw BS date and audit report date è period A
· no responsibilities continue obtaining audit evidence after audit report date
· Review of Subsequent Events (Period A)
o Type I Subsequent Events
§ provide evidence about conditions that existed at BS date; § FS numbers adjusted to reflect these events
o Type II Subsequent Events
§ indicate conditions not exist at BS date, but may require disclosure; § events auditor should consider for disclosure are fin in nature and material
· Dual Dating (Period B)
o Aware of event occurs prior to report release, disclose event in footnotes
§ Use date of this event as date for audit report; § Dual-date report, 2 separate reports disclosing work done after original audit report date
· Period C
o Known after report release date (eg. By reading new reports, perform subsequent audit)
o Make appropriate & timely disclosure of new facts if needed to prevent further reliance on FS
3. Going Concern Review
· A carefully analyze all factor indicating going-concern problem è determine mgmt has viable plan to address
· Indicators of going-concern
o Negative trends, eg. Losses, negative CF from operating acts; o Internal matters, eg. Loss of key personnel; o External matters, eg. New legislation
· Method: bankruptcy prediction models è analyze going-concern assumption
· Mitigating factors
o If conclude going-concern not valid è assess mgmt’s plan to overcome problem
§ Identify factors mostly likely to overcome problem; § Gather independent evidence to determine success of plans; § Evaluate reasonableness of
assumptions by mgmt Eg. Increase prices
è assess whether mgmt can mitigate going concern
4. Final Analytical Review
· Help form overall conclusion about whether FS consistent with AU’s understanding of entity
· Review analytical procedures
o Less precise than substantive procedure o Whether confirm conclusions formed during audit
· Responses
o Unrecognized risk of MM found → revise original risk assessment è additional procedures address risk
5. Representation letter
· AU obtain mgmt representation letter at end of each audit
· Purpose
o Remind mgmt its responsibility for FS o Confirm oral responses obtained by AU earlier in audit & continuing appropriateness of responses
o Reduce possibility of misunderstanding about subject matter of representations