Principle audit procedures -

Shares purchased -
 Agree the cash paid on the purchase of the shares to the bank
statements and the cash book.
 Inspect the board minutes of the client company, or other internal
documents, for evidence that the investment has been classified to be
measured at FVOCI.
 If classified to be measured at FVOCI, enquire of management to confirm
that they do not intend to trade the shares in the short term.
 Inspect profit and cash flow forecasts to verify that the shares are not
expected to be sold within the next year.
 Review past share sales to assess if the client has a history of trading
shares in the short term.
 Enquire of management if legal or broker fees had been incurred on the
share purchase. If so, agree to invoices and ensure the treatment is
appropriate. (FVP/L - expense to P/L) (FVOCI – added to carrying
amount).
 If non listed entity – enquire of management how the fair value of non-
listed shares had been determined.
 Review the FV calculation for accuracy and assess the reasonableness for
the assumptions used.
 Inspect financial statement disclosures, particularly around the level of
input used to measure the FV of the shares.

Bonds issued -
 Agree the cash receipt to the bank statements and cash book.
 Agree the interest payments to the bank statement and cash book.
 Obtain documentation relating to the bond issue to verify the interest
rate and the redemption premium.
 Recalculate the effective rate of interest on the bonds to confirm
arithmetic accuracy.
 Enquire of management if legal or broker fees were incurred on the
bond issue. If so, agree to the invoices. An audit adjustment would need
to be proposed to deduct these from the initial carrying amount of the
liability.
  Calculate the audit adjustment required so that the finance cost in profit
and loss is based on the effective rate of interest.
 Inspect the financial statements to ensure the liability in respect of the
bonds are correctly classified as non-current.

Reviewing Interim Financial statements -

 Compare the interim financial information to the prior year interim
financial information. Discuss significant fluctuations with the
management.
 Calculate the key ratios such as receivables collection period, payables
payment period, inventory holding period etc and compare with the
ratios calculated from the last audited financial statements. Discuss
significant differences with management.
 Compare the accounting policies used in the interim financial
information with the accounting policies used in the audited financial
statements to ensure they are consistent.
 Enquire of management if there have been any significant control
deficiencies during the period which could impact the figures.
 Review the audit file from the year end audit to identify issues arising in
the subsequent events review which could impact the figures.
 Enquire of management of any significant changes that have happened
to update the understanding of the entity.
 Consider the nature of any uncorrected misstatements and any
identified uncorrected immaterial misstatements in the prior year’s
financial statements, and whether there could be and similar
misstatements in the interim financial information.
 Obtain written representations from the management confirming
management's responsibility for the interim financial information,
internal controls to prevent and detect fraud and error and that they
have disclosed any irregulates to the auditor such as non-compliance
with the laws and regulations and suspected fraud or error.

Going concern matters -

 Obtain and review management accounts for the period after the
reporting date and any interim financial accounts which have been
 prepared. Perform analytical review to ascertain the trends in
profitability and cash flows since the year end.
 Read the minutes or meeting with shareholders, those charges with
governance and the relevant committees for reference to trading the
financial difficulties.
 Review the company’s current order book and assess the level of future
turnover required to breakeven / make profit.
 Analyse and review cashflow, profit and other relevant cash flow with
management and review assumptions to ensure they are in line with
management strategy and auditor’s knowledge of the business,
 Perform sensitivity analysis of key performance indicators to evaluate
the impact of changes such as interest rates, predictions of sales
patterns and the timing of cash receipts from customers.

Letter of support -
 Discuss with the management the reason for the letter of support being
given to the supplier to understand business rationale and its
implications.
 Inspect minutes of meeting with the management where those charged
with governance discussed the letter of support and authorised its
issuance.
 Obtain any further documentation in relation to the letter of support for
example, legal documentation and correspondence with issuer.

Planning procedures for initial engagements - (new audit clients)

ISA 300 – Planning and audit of Financial Statements.
In an initial audit engagement, there are several factors which should be
considered in addition to the planning procedures which are carried out for
recurring audits. ISA 300 suggests that, unless prohibited by law or regulation,
arrangements should be made with the predecessor auditor to review their
working papers. It will help the current audit firm in planning the audit for
example, as it may highlight matters pertinent to the audit of opening balances
or an assessment of the appropriateness of the client’s accounting policies. It
will also be important to consider whether any previous year’s auditor’s report
was modified and the reason behind such modifications.
There should also be consideration of the matters which were discusses with
the client’s management in connection with the appointment of the audit firm.
The audit team should consider any key issues which have been discussed
with management at initial meetings and how these matters impact on the
overall strategy and audit plan.
Care should be taken in planning the audit procedures necessary to obtain
sufficient appropriate audit evidence regarding opening balances, and
procedures should be planned in accordance with ISA 510 - Initial
Engagements - Opening Balances and Continuing Engagements - Opening
Balances. Procedures should be performed to determine whether the opening
balances reflect the application of appropriate accounting policies and
determining whether the prior periods closing balances have been correctly
brought forward into the current period.

With an initial audit engagement, it is particularly important to develop and

understanding of the business, including the legal and regulatory framework
applicable to the company. This understanding must be fully documented and
will help the audit team to perform effective analytical procedures and to
develop an effective audit strategy.
Quality management responses may require another partner or individual with
appropriate authority to review the overall audit strategy prior to commencing
significant audit procedures.

Given that a new client, when developing audit strategy consideration should
be given to using an experienced audit team to reduce detection risk.

Investment properties -
 Review board minutes for details of the reason for the purchase to
understand the business rationale, and confirm board approval of the
transaction.
 Agree the cost paid to the company’s cash book and bank statements.
  Agree the carrying amount of the property to the non-current asset
register to confirm the initial value of the property has been
appropriately recorded.
 Obtain proof of ownership – legal documents and inspect title deeds.
 If property is rented, confirm this by inspecting the rental agreement,
and bank statements and cash book for rent receipts - to confirm that
the property has been appropriately classified as an investment
property.
 Enquire as to whether the client company holds any other investment
property and confirm if the accounting treatment is consistent for all
investment property.
 Obtain the independent expert’s market valuation and confirm that
gains or losses arising from the valuation has been recognised withing
the statements of profit and loss appropriately.
 Discuss with management the rationale for the accounting policy choice
and confirm appropriate disclosures are made in the financial
statements.

Audit procedures for sale of property / asset (related party transaction and
normal sale) -
 Review to see if the asset sale has been deliberated, I.e., has the
rationale for the transaction been discussed, and formally approved by
the company’s board.
 Agree the sale price to the legal documentation relating to the sale of
the property.
 Confirm the carrying amount of the property at the date of disposal to
underlying accounting record and the non-current asset register.
 Confirm that the asset has been removed from the company accounts at
the date of disposal.
 Obtain management’s determination of the profit or loss on disposal,
reperform the calculations based on supporting evidence and agree the
profit or loss is recognised appropriately in the company statement of
profit or loss.
 Obtain an estimate of the fair value of the property / asset, and consider
the reasonableness of the transaction and sale price.
  Obtain written representation from the management that all related
party transactions have been disclosed to the group management and
the group audit team.
 Review cash receipts of (sale amount) at the reporting date to confirm
whether they payments have been received regarding the sale
transaction.

In respect of government grant received.

 Obtain the documentation relating to the grant and review to obtain an
understanding of -
 The terms of the grant including the amount received, and requirements
relating to the specific use of the funds.
 The date by which the funds must be used.
 Any clauses relating to repayment of some or all the grant should certain
conditions arise.
 Agree the amount received to bank statements and client’s cash book.
 Discuss with management the method of recognition of the amount
received, how much grant has been recognised in profit and treatment
of the amount o=deferred in the statement of financial position.
 Using draft financial statements, confirm the accounting treatment
outlined by discussion with management has been applied and
recalculate the amounts recognised.
 Obtain a written representation from management that the grant
received will be used for the specific purposes requires by the
government.

Audit procedures on the goodwill arising on acquisition of a subsidiary

company -
 Obtain the legal documentation pertaining to the acquisition, and review
to confirm the figures included in the goodwill calculation relating to
consideration paid and payable are accurate and complete.
 Agree the cash paid as consideration to the bank statement and cash
book of the acquiring company.
  Review the board minutes for discussions relating to the acquisition, and
the relevant minute for board approval.
 For contingent consideration (if applicable), obtain management
calculation of the present value and evaluate the assumptions used in
the calculation, to consider the probability of payment by obtaining
revenue and profit forecast of the newly acquired subsidiary company.
 Discuss with management the reason for using X% as a discounting /
interest rate asking for justifications and explanations.
 Confirm that the fair value of non-controlling interest has been
calculated based on an externally available share price at the date of
acquisition. Agree the share price calculations used by management to
stock market records showing that price at the date of acquisition.
 Evaluate the methods used to determine the fair value of acquired
assets, including properties and liabilities to confirm compliance with
IFRS 3 Business combinations and IFRS 13 Fair value measurement.
 Review the calculation of net assets acquired to confirm that group
accounting policies have been applied.

Planned audit procedures in relation to claim -

 Obtain the letter of claim received from the defendant (the one who
files the claim) and review to understand the basis for the claim, to
confirm it refers to a specific incident when damage was caused.
 Discuss the issue with the group’s legal advisor, to understand whether,
the group / client could be liable for the damages, for example to
ascertain if there is any evidence that damage was caused by the
activities performed or good and services provided by the client co.
 Discuss with the group’s legal advisor the remit and scope of the
legislation to ensure an appropriate level of understanding in relation to
the regulatory framework under which the group / client operates.
 Obtain and read all correspondence between the client and defendant,
to track the progress of the legal claim up to the date the auditor’s
report is issued, and to form an opinion on its treatment in the financial
statements.
  Obtain a written representation from management, as required by ISA
250, that all known instances of non-compliance, whether suspected or
otherwise, has been made known to the auditor.
 Review the disclosures, if any provided in the notes to the financial
statements, to conclude as to whether the disclosure is sufficient for
compliance.
 Read any other information presented with the financial statements,
including chairman’s statement and director’s report, to assess whether
any disclosure relating to the issue has been made, and if so, whether it
is consistent with the financial statements.

Impairment of intangible assets -

 Obtain managements calculations relevant to the impairment and
review to understand methodology, for example, whether the intangible
asset has been partly or entirely written off.
 Evaluate the assumptions used by management in their impairment
review and assess their reasonableness.
 Confirm the carrying value of the intangible asset pre-impairment to
prior financial statements or management accounts.
 Obtain a breakdown of operating expenses to confirm that impairment
is accurately recorded.

Acquisition of a subsidiary -
 Read board minutes to understand the rationale for the acquisition and
to see that the acquisition is approved.
 Discuss with the group management the way the control will be
exercised over the subsidiary.
 Review the minutes of relevant meetings held between the
management and the subsidiary to confirm matters such as -
 The date the deal is likely to go ahead.
 The timescale.
 Amount and nature of considerations to be paid.
 Shareholding to be acquired and whether equity or non-equity shares.
 Planned operational integration of the subsidiary into the group.
  Obtain due diligence reports which have been obtained by the client
group and review for matters which may need to disclosed accordance
its IAS 10 or IFRS 3.
 Obtain copies of the finance agreement for the funds used to purchase
the subsidiary.
 After the reporting date, agree the cash consideration paid to the bank
records.
 If any contingent consideration amounts have been calculated by the
management, obtain the information and check if appropriate
assumptions and disclosures are present.

Work in progress -
 Obtain a schedule itemising the jobs included in work in progress at the
year end, cast it and agree the total to the general ledger and draft
financial statements.
 Agree a sample of items from the schedule to the inventory count
records.
 For a sample of jobs included on the schedule -
- Agree the costs to supporting documentation such as supplier’s invoice
and payroll records.
- For any overheads absorbed into the work in progress valuation, review
the basis of the absorption and assess its reasonableness.
- Assess how the degree of completion of the job has been determined at
the year end and agree the stage of completion of the job to records
taken at the inventory count.
- Agree details of the job specification to customer orders.
 To assess the completeness of work in progress, select a sample of
customer orders to trace through to the list of jobs included in work in
progress.

In relation to purchased brand name -

  Review the board minutes for evidence of discussion of the purchase of
the acquired brand, and for its approval.
 Agree the cost to client's cash and bank statements.
 Obtain the purchase agreement and confirm the rights of the client over
the brand name.
 Discuss with management the useful life of the brand and obtain an
understanding of how the useful life has been determined as
appropriate.
 Confirm to the terms of the agreement if the useful life is a period
stipulated in the purchase document.
 Consider whether there are any indicators or potential impairment at
the year-end by obtaining year-end sales information and reviewing
terms of contracts.
 Recalculate the amortisation expenses for the year-end and agree the
charge to the financial statements and confirm adequacy of disclosure in
the notes to the financial statements.

Procedures to be performed in respect of component auditor work -

 Obtain confirmation from the component auditor of adherence to any
local ethical code and the IESBA code. Establish through discussion if the
component audit team is a member of an auditing regulatory body, and
the professional qualifications issued at the body.
 Obtain confirmations of membership from the professional body to
which the component auditor belongs.
 Discuss the audit methodologies used by the component auditor in the
audit of the client’s subsidiary, and compare to those under ISA.
 A checklist should be provided to present a summary of the procedures
used.
 Ascertain the quality management procedures and policies used by the
client, both firm wide and those applied for individual audit
engagements.
 Request any monitoring or inspection visits conducted by the regulatory
authority under which the component auditor operates.