ACCA Audit & Assurance Complete Notes PwC's Academy

Audit and Assurance
Class Notes
PwC
Exam Format
Section A (30 marks)
• 3 OT cases with 5 OT questions worth 2 marks each: 10 marks per case
Tips for answering OT questions
• Read each question carefully • If unsure, eliminate incorrect answers
• Think before answering • Answer all questions
Section B (70 marks)
• 3 Questions – one worth 30 marks and 2 worth 20 marks
Tips for answering Section B questions
• Read each requirement carefully to • Make clear and concise points specific to
understand what is asked for the given scenario
• Draw on the scenario to plan the points • Describe "how" procedures should be
you need to make performed
• Use concise headings • Do not give rote-learnt answer points
• Attempt all requirements
PwC 2
Approaching AA
Approach How to
to objective approach
test OT your AA
questions exam
information
Managing
Specific
How to AA skills
approach How to
audit approach
evidence audit risk
questions questions
How to
approach
internal control
questions
What is AA about?
Audit and Assurance provides you with an understanding of the knowledge and application and
application skills required to carry out an audit engagement.
PwC 3
Exam Format
AA: An overview
Accept audit engagement
Understand the entity and its environment
Asses the risk of material misstatement
Effective controls No
Yes
expected?
Communicate
Tests of control Unsatisfactory
deficiencies
Satisfactory
Reduced substantive Full substantive

procedure procedure
Report to
Final review
management
Auditor’s report
PwC 4
Study Planner
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY SATURDAY SUNDAY
Weeks until
exam Phase Areas
12 weeks to go Learning
27 March
Progress
11 weeks to go Learning Test 1
10 April
Progress
25 April
6 weeks to go Learning Progress test 3
10 May Progress
3 weeks to go Revision
2 weeks to go Revision
Final
1 week to go Preps
5
PwC
Agenda
1. Introduction to audit and assurance 7

2. Statutory audit and regulation 14
3. Corporate governance 16
3.1 Past paper question 25
4. Professional ethics 27
5. Pre acceptance 37
6. Audit planning 45
7. Summary of accounting standards 57
8. Internal controls 71
9. Audit evidence 102
3
PwC
Agenda

10. Completion review 151
11. Reporting 172
3
PwC
Introduction to Audit and Assurance
Why audit?
External audit - objectives - Independent auditor is expressing an opinion
1. FS are free from material misstatements due to error or fraud
2. FS are prepared in accordance with all the rules and regulations
3. FS are prepared in a true and fair view
Financial statements are produced by management which give a true and fair view of the entity’s
results.
The auditor in reviewing these financial statements gives an opinion on the truth and fairness of
them.
True
Information is factual and conforms with reality in that there are no factual errors.
In addition, it is assumed that to be true it must comply with accounting standards and any
relevant legislation.
Lastly true includes data being correctly transferred from accounting records to the financial
statements.
Fair
Information is clear, impartial and unbiased
PwC 8
Elements of Assurance Engagement
CRITERIA : Subject matter is

evaluated or assessed
against suitable criteria in
order for it to be assessed
and an opinion provided.
THREE PARTY
REPORT : A written report
RELATIONSHIP : An
submitted to the users of the
assurance engagement
subject matter.
always contains three parties
SUBJECT MATTER : The

EVIDENCE : All the
subject matter is the data
evidences must be sufficient
which the responsible party
and appropriate for the
has prepared, and which
subject matter
requires verification.
PwC 9
Types of relationship between shareholders and
directors that makes assurance a requirement
Agency Theory: The Accountability: Directors are Stewardship: Stewardship is

shareholders are the principal, accountable to the entrusting someone with our
and the directors are the shareholders for every action. resources. Directors are the
agents who is working on stewards of the shareholders.
behalf of them
PwC 10
Levels of Assurance
IAASB introduces guidance designed for better understanding of two levels of assurance:
Reasonable Assurance Limited Assurance
Sufficient Appropriate evidence is collected This provides assurance that the financial
to express an opinion on the FS statements present fairly in all material
respects (or are true and fair) and are free
of material misstatements.
Extensive procedures are carried out to Not as extensive as a reasonable

confirm the subject matter is correct. assurance engagement
This provides comfort that the financial In this case a negative opinion is given “
statements present fairly in all material Nothing has come to my attention to
respects (or are true and fair) and are free suggest that the subject matter is not
of material misstatements. correct “
Highest level of assurance but its not Another name for this assurance is
absolute assurance ( 100%) Negative assurance
Positive opinion : “In our opinion the FS are

prepared in a true and fair view
Eg: External Audit
Eg : Review engagements : This would

involve the practitioner undertaking
procedures to state whether anything has
come to their attention which causes the
practitioner to believe that the financial data
is not in accordance with the financial
reporting framework
Examples:
PwC 11
Expectations Gap
The expectation gap is the difference between what the public and financial statement users
believe auditors are responsible for and what auditors themselves believe their responsibilities
are.
There are three expectation gaps which are as follows;
STANDARDS GAP
Stakeholders believe that auditors should detect all fraud and errors. Auditors however test
based on materiality and are officially only responsible for planning and performing work to detect
material errors/fraud.
Stakeholders believe that auditors are responsible for preparing financial statements however
this is a management responsibility.
PERFORMANCE GAP
This is where the auditors perform below the required standards that they are expected to follow.
For example, Enron.
LIABILITY GAP
This is where the public do not understand who the auditors are legally liable to. The
stakeholders expect that the auditors are liable to all stakeholders whereas the auditors are only
liable to shareholders and any third party in the case of any criminal or civil cases.
PwC 12
Limitations of Audit
Judgements Evidence can be

must be made persuasive
Limitations
of Audit
Auditors test on Internal controls

a sample basis of the client have
inherent
limitations
PwC 13
Key Abbreviations
ISA - International Standards on Auditing The process of producing an ISA :
IAS - Internal accounting standards A project task force is established to

develop draft standards
IFRS - International financial reporting
standards The proposed standards are then open to
comments and given to public
IAASB - International Auditing and
assurance standards boards - Issues Exposure drafts are made and put on
auditing standards IAASB website and distributed for
comments for 120 days
IASB - International Accounting Standards
Board - Issues accounting standards If the comments are valid and necessary ,
the drafts will be revised
IFAC - International federation of
accountants - Professional body of The revised draft will be made official with
accountants at least 2/3 of IAASB members approval
IAS /IFRS - Will not override the local

regulations if LOCAL REGULATION has to be
followed mandatorily in the country where the
company operates.
PwC 14
Statutory Audit and Regulations
Why Regulations?
https://www.youtube.com/watch?v=jrEf8uabe7E
The auditors must follow the following principles:
ETHICAL
IFAC (Code of Ethics for Professional Accountants)
PROFESSIONAL
IAASB (International Auditing &Assurance Standard’s Board) develops the ISA’s (International
Standards on Auditing) which is required by the auditors to be followed during the audit.
PROFESSIONAL SCEPTICISM (ISA 240)
The auditor must have an attitude that includes a questioning mind and a critical assessment of
evidence.
LEGAL
Companies Act based in the country the auditor is performing the audit will need to be complied
with.
Who can audit?
Appointment of auditors:
PwC 15
Statutory Audit and Regulations
Rights
Access to the company’s books, accounts and vouchers.
To receive all information or explanations that they think necessary for the performance of
their duties as auditors.
To receive all communications relating to written resolutions.
To receive all notices of, and other communications relating to, any general meeting which a
member of the company is entitled to receive.
To attend any general meeting of the company and to be heard at any general meeting which
an auditor attends on any part of the business of the meeting which concerns them as auditor
Removal
The auditor can only be removed by shareholders at a General Meeting with a majority vote.
Again, the shareholders will be led by the directors in their decision making when the Directors
write to the shareholders to communicate the holding of the meeting, they must also inform the
auditor.
The auditor has the right to attend the meeting and speak.
The auditor must produce a “statement of circumstances” . If there are no circumstances that
need to be brought to the attention of the shareholders, then a statement of no circumstances is
required. If they have been removed before the end of their term of office, they must notify ACCA
Resignation
An auditor can resign, at any time, in writing. If they wish, they can also request that the company
calls an Extraordinary General Meeting (EGM). As with removal, the auditor can attend and
speak at this meeting.
In all cases where an auditor ceases to audit a particular company, it must submit a “statement
of circumstances” to the company, explaining any issues involved in the auditor ceasing to audit
the company. This statement must be submitted, even if it says there are no circumstances that
need to be reported. Again, if the auditors have resigned before the end of their term of office,
they must notify ACCA
PwC 16
Corporate Governance
A set of policies and procedures that determine how an organization is directed and controlled
Executive directors - are involved in the day-to-day running of the company. They are usually full-
time employees and paid a salary.
Non-executive directors (NEDs) are independent, part-time directors who scrutinize the company’s
affairs. They generally only attend Board meetings and the meeting of any committees to which
they belong. As this is more of a part-time role, NEDs are usually paid a fee, depending on their
experience and time commitment to the company.
NEDs should, as far as possible be ‘independent’ of the company (i.e. not former employees) so
that they can be more objective.
Many countries have issued their own codes of corporate governance. In the UK, the “UK
Corporate Governance Code” is the model used by listed companies.
The UK Corporate Governance Code is comply or explain, with listed companies having to
disclose if they have not followed the Code
PwC 17
Principles of UK corporate governance
code:
LEADERSHIP
Every company should be headed by an effective board which is collectively responsible for
the long-term success of the company. The board should comprise of a balance between
executive directors and non-executive directors.
There should be a clear division of responsibilities at the head of the company between the
running of the board and the executive responsibility for the running of the company’s
business. No one individual should have unfettered powers of decision.
EFFECTIVENESS
The board and its committees should have the appropriate balance of skills, experience,
independence and knowledge of the company to enable them to discharge their respective
duties and responsibilities effectively.
There should be a formal, rigorous and transparent procedure for the appointment of new
directors to the board.
All director should be able to allocate sufficient time to the company to discharge their
responsibilities effectively.
PwC 18
Principles of UK corporate governance
code:
All directors should receive induction on joining the board and should regularly update and
refresh their skills and knowledge
The board should undertake a formal and rigorous annual evaluation of its own performance and
that of its committees and individual directors.
All directors should be submitted for re-election at regular intervals, ( 3 years ) subject to
continued satisfactory performance.
ACCOUNTABILITY
The board should present a balanced and understandable assessment of the company’s
position and prospects.
The board should maintain sound risk management and internal control systems.
REMUNERATION
Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality
required to run the company successfully, but a company should avoid paying more than is
necessary for this purpose.
Remunerations should be linked to performances.
No director should be involved in deciding his or her own remuneration.
RELATIONS WITH SHAREHOLDERS
There should be a dialogue with shareholders based on the mutual understanding of objectives. The
board has a responsibility for ensuring that a satisfactory dialogue with shareholders takes place
The board should use the AGM to communicate with investors and to encourage their participation.
PwC 19
Corporate Governance
COMMIITTEES WITHIN CORPORATE GOVERNANCE:
Risk committee: This committee will assess all the risks that are faced by the company and
decide on appropriate risk management approach .
Remuneration committee: This committee decides on the remuneration packages of

executive directors and ensure that they are not paid excessive amounts
Nomination committee: This committee appoints the executive directors and ensures that
there is a transparent process for it.
PwC 20
Audit Committee / TCWG
All members of the audit committee should be NED’s so they can independently review the
company’s affairs thus looking after the shareholders’ interests.
Composition
There should be a minimum of three non-executive directors with one of them should have
recent relevant financial experience.
The committee members should be independent from the company’s operations.
Functions of audit committee:
Monitoring the preparation of Making recommendation on Reviewing the company’s

the financial statements to the appointment and removal internal control to ensure the
improve quality of financial of the external auditors. controls ate operating
reporting. effectively and efficiently.
Strengthen the position of If there is no internal audit department then the audit committee
internal audit by providing should review the need for an internal audit department
greater independence from annually and make the required recommendations to the board.
management.
Reviewing and monitoring the Reviewing arrangements for

external auditor’s independence whistle blowing
and effectiveness of the audit
process.
PwC 21
Audit Committee / TCWG
Benefits of an audit committee Limitations of audit committee
Shareholder and general public confidence Difficulty in selecting NED with sufficient
are enhanced as a result of the financial competence
information being reviewed by an
independent committee. Executive directors may perceive NED’s
as a threat to their authority
Independence of internal audit is
increased as they report to audit Non-executive directors are not full-time
committee who are independent NED’s and therefore a lot of information reported
to them can make their jobs difficult.
Audit committee can exert high level
pressure where internal audit More costly as there are more people
recommendations are not being involved and they are independent.
implemented in the organization.
Creates an additional level of decision
Audit committee ensures that all relevant making so decisions taking longer to be
parties are communicating effectively made.
Audit committee will strengthen the

independence of the external auditor by
providing an additional reporting line
PwC 22
Multiple Choice Question
Conoy designs and manufactures luxury motor vehicles. It is not a listed company, but its board
has recently decided that it would like to improve its corporate governance in order to apply best
practice. Conoy's shares are held equally by six shareholders, four of whom are also executive
directors. The remaining two shareholders are not involved with Conoy, other than as
shareholders.
Conoy has an internal audit department which is managed by Adrian Muse, the chief internal
auditor. Adrian frequently comments that Conoy's board does not understand his reports and
does not provide sufficient support for his department and for the company's internal control
systems. RWG S Co, Conoy's external auditors, have also expressed concern in this area
Adrian has submitted a proposal to the board to establish an audit committee, and this is
currently under consideration. The proposed membership of the audit committee is:
Adrian Muse (chief internal auditor)
Penny Dinty (existing executive director with some financial expertise)
Sharon Header (proposed new non-executive director)
Fredrick Rowe (proposed new non-executive director)
The board is also considering a significant expansion of the company. However, the company's
bank is concerned by the standard of financial reporting as Conoy's finance director recently left
the company. The board is delaying providing the bank with financial information until a new
finance director has been appointed. As part of its commitment to the effectiveness of the
external audit process, the chair of Conoy's audit committee, Leslie Schiff, is keen to ensure that
the external audit makes use of the latest auditing techniques. She has heard about data
analytics routines but is unsure exactly what they entail.
PwC 23
Conoy's internal audit department is currently not well understood or supported by the board.
Which TWO of the following statements describe the main advantages of establishing an audit
committee?
The position of the internal audit department will be strengthened within the organisation.
Corporate governance will be enhanced as the board of directors will report to the audit
committee.
The effectiveness of the internal audit department will be improved as the audit committee
will monitor and review its performance on a regular basis.
The workload of the internal audit department will be better managed as the audit committee
will be able to minimise the extent to which the external auditors rely on the work of the
internal auditors.
Once established, the audit committee will have many objectives.
Which of the following does NOT form part of the audit committee's objectives?
Safeguarding the privacy of whistleblowers
Appointing the external auditor
Monitoring the independence of the external auditor
Implementing a policy on the supply of non-audit services by the external auditor
PwC 24
In relation to the proposed membership of the audit committee, state whether each proposed
member should be included or not
Proposed member Include in audit committee Do not include in audit

committee
Adrian Muse
Penny Dinty
Sharon Header
Fredrick Rowe
Which of the following statements best describes why having an audit committee could help
Conoy raise additional finance by addressing the concerns of the bank?
The independent non-executive members of the audit committee can provide guarantees to
the bank concerning Conoy's financial viability.
The audit committee will have at least one member who has relevant financial experience.
This person will be able to stand in as Conoy's finance director before a new finance
director is appointed.
The audit committee will have at least one member who has relevant financial experience,
so that they can monitor the integrity of the financial statements.
The audit committee will review all the available evidence to substantiate information in
financial reporting, thus improving the credibility of the financial statements.
PwC 25
Section B Past Question
You are an audit manager of Satsuma & Co and have been assigned to the audit of Tangerine
Tech Co (Tangerine), a company which is planning to list on a stock exchange within six months.
The listing rules of the stock exchange require compliance with corporate governance principles,
and the directors are unsure whether they are following best practice in relation to this. They
have asked the audit engagement partner for their view on this matter.
Tangerine’s board is comprised of six executive directors, a non-executive chairman and three
other non-executive directors (NEDs). The chairman and one of the NEDs are former executive
directors of Tangerine and on reaching retirement age were asked to take on non-executive
roles. The company has established an audit committee, and all NEDs are members including
the chairman who chairs the committee. All four members of the audit committee were previously
involved in sales or production related roles.
All of the directors have been members of the board for at least four years. As the chairman does
not have an executive role, he has sole responsibility for liaising with the shareholders and
answering any of their questions. The company has not established an internal audit function to
monitor internal controls.
Required:
Using the information above:
Describe FIVE corporate governance weaknesses faced by Tangerine Tech Co and

provide a recommendation to address each weakness to ensure compliance with
corporate governance principles.
PwC 26
Self Read
The relationship between ISAs and national standards
ISAs V Local Legislation
1. IFAC is not able to enforce its standards.
2. It is up to individual countries to implement the standards if they deem it appropriate.
3. National Regulatory bodies will be charged with enforcing implementation of auditing

standards, enforce quality control of audit and inspect audit files.
4. Countries may do this by allowing the accountancy profession to implement the above or set
up an independent authority to do it.
5. Countries also have the choice to set their own standards of implement or modify ISAs’ to suit
their needs.
The Organisation for Economic Co-operation and Development issued principles of

Corporate Governance in 1999
These principles are intended to ‘improve the legal, institutional and regulatory framework for
corporate governance’
6 Principles relevant to the Auditor
1. There should be a clear basis for an effective corporate governance framework. This
should ensure transparency and acceptance of responsibility of all parties involved.
2. Shareholders Rights should be upheld. Management of the company should recognise that
they are agents of the shareholders and act in their interests at all times.
3. Shareholders should be treated equitably. All shareholders whether institutional or minority

should be treated in a fair and just manner.
4. Rights of Stakeholders should be recognized. Co-operation between the organisation and

stakeholders should be encouraged.
5. Timely and accurate disclosures should be made. All Material matters such as the financial
situation, performance, ownership and governance of the company should be disclosed.
6. Duties of the board: The strategic guidance of the company should be ensured by the
corporate governance framework. The board should effectively monitor management and be
accountable to the company and shareholders.
PwC 27
Professional Ethics
Ethics - doing the right thing, the right way
IFAC is the international body responsible for issuing a Code of Ethics.
ACCA as a professional body that has implemented the same Code of Ethics for consistency.
• Why auditors need to be ethical?
• Why codes / guidelines and not rules?
Rules cannot define each and every situation will try to find loopholes. So, for that reason Code
of Conduct is given. Auditors need to appear to be independent
PwC 28
Fundamental Principles of Ethical
Behavior
Professional competence and due care
Members should ensure that they have the skills and professional knowledge to complete each
assignment to a sufficiently competent level. If there is insufficient knowledge/skill, the member
should not carry out the assignment or they should take alternative steps to allow them to
complete the assignment such as training.
Due care is when member should ensure that they exercise diligence in accordance with
applicable technical and professional standards when providing services.
Integrity
Members should be straightforward, honest, truthful and fair in all professional and business
relationships.
Confidentiality
Members must refrain from disclosing any information acquired because of their
professional/business relationship to any parties outside their firm unless there is proper and
specific authority or unless there is a legal or professional obligation to do so.
Objectivity
Members should not compromise their professional or business judgement by introducing bias,
conflict of interest or undue influence by others.
Professional behaviour
Members should comply with laws and regulations and ensure that they avoid actions that may
discredit the profession.
PwC 29
Threats to the Fundamental Principles
Intimidation Self interest
Familiarity Self
review
Advocacy
What are safeguards? Ethical principles must be considered when:
These are measures to reduce threats
If in a scenario where there are no safeguards 1 Accepting new audit client

to threats available - Politely Decline
Auditors' responsibility with regards to 2 Acting for an existing audit client

threats:
Change in circumstances of auditor
The firm must establish procedures to guard 3
or the client
against threats :
Identify possible threats, 4 Planning of audit
Evaluate the risks arising from the threats

5 Completion of audit
Evaluate whether necessary safeguards
are in place
Take corrective action if necessary
PwC 30
Independence
Independence of mind - When the auditor Independence of appearance / behavior - A

doesn’t have any undue influence over the reasonable third party should be concluding
judgements that is made. that the auditor is independent of the client.
Common exam scenarios for threats:
THREATS SAFEGUARDS
OWNING SHARES
The audit team member or their immediate

family owning shares in the audit client
This indicates that the firm or the member

of the assurance team has a financial
interest in the client and thus gives rise to a
LOANS
A loan will not create a threat to the firm if it The firm or the member of the audit team can
is on commercial terms and made in normal accept the loan as far as it is not material and it
course of the business. is under the normal course of the business.
If not, this will lead to If material, the firm should carry out a second
partners review - quality review.
PwC 31
Independence
THREATS SAFEGUARDS
PURCHASING FROM THE CLIENT
The member of the team purchasing goods

from the client.
There is no threat to independence if the

purchase is being carried as a normal
transaction at arm’s length basis.
If the transaction is not on a normal basis,

then this creates a
GIFTS AND HOSPITALITY
Accepting gifts or hospitality from an audit

client.
This will create a
PwC 32
Independence
THREATS SAFEGUARDS
LONG ASSOCIATION
The engagement partner being with the Rotate the audit partner and the member of the
audit client for 12 years. audit team.
This gives rise to familiarity threat Listed clients:
• 7 years plus then a gap of 5 years for audit

partner
• In the 5 years gap period, not participate in

the auditor, provide quality control for the
engagement, or consult with the engagement
team or the client regarding technical or
industry-specific issues
EQCR: Maximum 7 years 3 years cooling off

period
In a non-listed client, there is no statutory

regulation as to when the member of the partner
of the audit client should be rotated but to reduce
the threat, it is advisable to rotate the partner
and the member of the team.
PERSONAL RELATIONSHIP
Family and personal relationships between The member with personal relations with the
a member of team and a director of the client should be removed from team if the
client or any employee of the client who is relationship is with a senior person at the client
able to exert significant influence over the with influence over the f/s.
subject matter.
This gives rise to
PwC 33
Independence
THREATS SAFEGUARDS
OTHER SERVICES
The total fees from an audit client represent In a listed company or non-listed company, the
a large proportion of a firm's total income audit fee must not represent more than 15% of
the total firm’s fee income for two consecutive
This gives rise to years
• Discuss with client’s TCWG about the fee

income
• Independent QCR or external QCR before OR

after issuing 2nd year’s opinion to ensure that
the audit firm has implemented the required
safeguards.
• Consider resignation if the threat can’t be

reduced to an acceptable level
Audit firm providing non-audit services such If it is a listed client, non-audit service cannot be
as bookkeeping & accounting, internal audit provided as it is a financial service and will
services, taxation services impact the financial statements.
This gives rise to a Any routine or mechanical in nature services can

be provided as it doesn’t involve significant
judgements.
If it is a non-listed client, audit firm should ensure

two separate teams are performing the audit and
non-audit services.
REPRESENTING CLIENT
The audit client wants the audit firm to The audit firm must not represent the client in
represent them in a dispute with the any situation if the audit client has asked to do
regulatory authorities. so especially if the amounts are material
This gives rise to advocacy threat. If the court or any other regulators have asked to
speak about an audit client of the firm then the
audit firm has the right to disclose the client’s
information to the regulators or authorities.
(confidentiality)
PwC 34
Independence
THREATS SAFEGUARDS
OVERDUE FEES
The audit firm has not received the fee of The firm should take steps to make sure the fees
last year from the audit client are paid before the audit report is handed over.
This gives rise to self-interest threat. The firm should avoid providing services for the
current year till the outstanding fees are paid or
have arrangements with client about payment.
Have a second partner review to ensure that the

audit firm is not providing the services to the
audit client before the collection of the fees.
CONTINGENT FEES
The auditor would have incentive to ensure

a particular outcome is achieved in order to
maximise the audit fee.
E.g. overlook audit adjustments that would

reduce profit if the fee is a percentage of
the profit.
This will give rise to a self-interest threat as

the audit firm will have an interest to
increase the firm’s income by manipulating
the profit.
AUDIT FIRM MEMBER JOINS THE CLIENT
The member of the firm joins as finance The team member should be changed in such
director with the client that the finance director is not familiar with any of
the member.
This gives rise to familiarity, self - interest
and intimidation threat. The audit plan should be reviewed and revised.
PwC 35
Independence
THREATS SAFEGUARDS
PERSONNEL AT CLIENT JOINS THE

FIRM
Director or employee of the client in a

position to exert influence over FS
becomes an employee of the audit firm
This will give rise to self-review and

familiarity threat.
CONFLICT OF INTEREST:
Conflict of interest is a situation in which the professional accountants cannot make a fair
decision because they will be affected by the result.
If an auditor audits two competitors in the same industry, then,
The firm should ensure no conflict of interest may arise by implementing the safeguards
• Advice both the clients of the possible conflict of interest,
• Have separate teams with different engagement partner and team,
• Procedures to prevent access to information - confidential secure data filing,
• Clear guidelines for the member of each audit team on issues of security and confidentiality -
these will be included as part of the engagement letter,
• Confidentiality agreements signed by both member and partner of the audit team,
• Advise the client to seeks independent professional advice,
• Review of the safeguards on a regular basis by an independent quality reviewer.
If safeguards will not reduce the conflict of interest to an acceptable level, the auditor should not
accept the engagement or resign from one.
PwC 36
Section B: Past Question
You are an audit manager of Pink Partners & Co (Pink) and are planning the audit of Golden
Finance Co (Golden), a banking institution which provides a range of financial services including
loans. Your firm has audited Golden for four years and the company’s year-end is 30 September
2015.
At the end of August, Goldens financial controller left, and the new replacement is not due to start
until approximately two months after the year end. The finance director, who is the sister-in-law of
the audit engagement partner, has asked if a member of the audit team can be seconded to
Golden for three months to act as the temporary financial controller.
You are aware that a number of the audit team members currently bank with Golden, and two
team members have significant loans owing to the company. Pink’s taxation department also
provides services to Golden. They have been approached by Golden to represent them in
negotiations to resolve some outstanding issues with the taxation authorities, for which the fees
quoted are substantial.
The finance director has informed the audit engagement partner that when the audit is complete,
she would like the whole team to attend an evening watching the national football team play a
match followed by a luxury meal.
Required:
Using the information above:
i. Identify and explain FIVE ethical threats which may affect the independence of Pink
Partners & Co’s audit of Golden Finance Co; and
ii. For each threat, explain how it might be reduced to an acceptable level.
Note: The total marks will be split equally between each part.
(10 marks)
PwC 37
Pre-acceptance
New engagements are obtained through
Advertising Client requests Tendering
Matters to be considered before

accepting an engagement
PROFESSIONAL CLEARANCE
If offered an audit role, the prospective audit firm must:
INDEPENDENCE
Prior to acceptance of the audit engagement, if the auditor is aware that the ethical threats
cannot be reduced to an acceptable level by putting in the relevant safeguards then the audit
should not be accepted.
PwC 38
MANAGEMENT INTEGRITY RESOURCES
If the firm believes that the client lacks The firm should assess whether there is
integrity, there exists a greater risk of fraud adequate resources - time, staff etc. to
and intimidation which will increase and the perform the audit. If not, it will impact the
risk for the firm to perform the audit. The firm quality of work being performed.
will need to assess whether this risk is within
the risk capacity of the firm.
RISKS
MONEY LAUNDERING Any risks identified with the prospective client

will need to be assessed to evaluate whether
The firm is required to carry out client due it will have an impact on the opinion to be
diligence to comply with money laundering made. The firm will also need to assess
regulations. whether it is within the risk capacity of the
firm.
If there any suspicion or actual money
laundering is been committed, then the firm
cannot accept the engagement.
FEES
Establish the identity of the entity and its
business activity eg. by obtaining a The firm should consider the acceptability of
certificate of incorporation the fees. The firms should consider the risk
involved in performing the audit.
If the client is an individual, obtain official
documentation including a name and
address, eg. by looking at photographic
PROFESSIONAL COMPETENCE
identification such as passports and
driving licenses An engagement should only be accepted if
the firm has the necessary skill and
Obtain evidence of the company’s
experience to perform the audit with due care.
registered address eg. by obtaining
headed letter paper
Establish the current list of principal

shareholders and directors.
PwC 39
REPUTATION OF CLIENT
The firm should consider the reputation of the client for example adverse media attention and
assess whether the engagement should be accepted or not.
PRE-CONDITIONS TO AUDIT
Auditors should accept an agreement only if the preconditions of the audit exist. The
international auditing standards (ISA) requires the auditors to:
Determine whether the financial reporting framework used in the financial statements is
acceptable,
Obtain agreement from the management that it acknowledges and understands its
responsibility for the following
o Preparing the financial statements in line with the financial reporting framework,
o Internal controls to be free from material misstatements,
o Providing the auditor with access to information relevant for the audit and access to
staff.
If the preconditions do not exists, then the auditor should discuss the matter with the
management and should not accept the engagement unless required to do so or by law or
regulations
PwC 40
Letter of Engagement
Purpose
Minimize the risk of any misunderstanding between the auditor and the client
Confirm the acceptance of the audit
Establish the terms and conditions of the audit.
Not required to be reissued every year - but needs to be reviewed
Matters to be included in an audit engagement letter
The objective and scope of the audit;
The responsibilities of the auditor;
The responsibilities of management;
Identification of the financial reporting framework for the preparation of the financial
statements;
Expected form and content of any reports to be issued;
Elaboration of the scope of the audit with reference to legislation;
The fact that some material misstatements may not be detected;
Arrangements regarding the planning and performance of the audit, including the composition
of the audit team;
Management responsibilities
The basis on which fees are computed
Arrangements concerning the involvement of internal auditors and other staff of the entity;
PwC 41
When to Revise LOE
If entity misunderstands the objective and scope of the audit, as

this misunderstanding would need to be clarified.
Any revised or special terms of the audit engagement, as these

would require inclusion in the engagement letter.
A recent change of senior management or significant change in

ownership.
A significant change in nature or size of the entity’s business. The

approach taken by the auditor may need to change to reflect the
change in the entity and this should be clarified in the engagement
letter.
A change in legal or regulatory requirements. The engagement

letter is a contract; hence if legal or regulatory changes occur,
then the contract could be out of date.
A change in the financial reporting framework adopted in the

preparation of the financial statements. The engagement letter
clarifies the role of auditors and those charged with governance, it
identifies the reporting framework of the financial statements and
if this changes, then the letter requires updating.
PwC 42
Past Question
Which TWO of the following should be

included in an audit engagement letter?
1. Objective and scope of the audit
2. Results of previous audits
3. Management’s responsibilities
4. Need to maintain professional skepticism
A. 1 and 2
B. 1 and 3
C. 2 and 4
D. 3 and 4
ISA 210 Agreeing the Terms of Audit

Engagements requires auditors to agree the
terms of an engagement with those charged
with governance and formalize these in an
engagement letter.
Required:
a) Identify and explain TWO factors which

would indicate that an engagement
letter for an existing audit client should
be revised. (2 marks)
b) List SIX matters which should be

included within an audit engagement
letter. (3 marks)
PwC 43
ISA 220 : Elements Of Quality Control
Audit Firms should establish a system of quality control
EQCR: Engagement Quality Control Reviewer.
HUMAN RESOURCE
The engagement partner should ensure that the engagement team has the competences and
capabilities to perform the audit in accordance with ISA. The firm needs to ensure that there are
sufficient audit team members and an audit partner to perform the audit.
ETHICAL CONSIDERATION
The firm should ensure that the code of ethics has been complied by the members within the
firm.
ACCEPTANCE AND CONTINUANCE
Before accepting the audit engagement, the firm will need to consider compliance with the ethical
requirements, assess the integrity of management, ensure the engagement team has the
required competences.
LEADERSHIP
The engagement partner takes the overall responsibility for the overall quality of the audit and
ensures the following;
• Compliance with the ethical requirements.
• Acceptance and continuance procedures have been carried out.
• Engagement team have the appropriate skills and competences.
• Reviews have been performed.
• Sufficient and appropriate audit evidence has been obtained to support the audit opinion.
• Appropriate consultation on difficult matters (senior or external expert ) has been undertaken.
PwC 44
ISA 220 : Elements Of Quality Control
MONITORING
The firm must ensure compliance with ISA and legal requirements, quality control procedures
have been implemented and are effective.
Cold reviews are carried out after the audit report is signed it is done to ensure the firms quality
control procedures are working effectively.
If any issues identified, the firm may decide in providing more training, update their policies and
procedures and where necessary, take disciplinary actions against individuals.
Hot review is carried out before the audit report is signed and it is carried out to ensure
appropriate audit report is issued. Hot reviews are carried out for listed entities, those of unusual
circumstances and high risk. It is conducted by the engagement quality control reviewer who is
also referred to as an independent review partner who will perform the following;
Discuss the significant matters with engagement partner.
Review the financial statement and proposed audit report.
Review selected documentation and working papers which include high levels of judgment
and risk.
ENGAGEMENT PERFORMANCE
Engagement performance comprises of direction, supervision and review of the engagement.
Direction - it involves informing the team members their responsibility, the nature of the
business, the objectives of the work to be performed, risks involved, problematic areas and
the detailed approach to audit.
Supervision - it includes tracking the progress of the audit to ensure the timetables are met,
considering the competences of the team members, addressing significant matters and
identifying matters for consultation internally and externally
Review - it includes whether the work is performed as per ISA, appropriate consultations has
taken place, work performed supports the conclusion and evidence gathered to support the
conclusion.
PwC 45
Audit Planning
Why plan the audit?
Professional Skepticism:
STAGES IN PLANNING AN AUDIT
Develop audit Select

Assess strategy Select audit Assess appropriate
risk based on risk team materiality audit
assessment procedures
PwC 46
Audit Plan & Audit Strategy
Audit Strategy:
Audit Plan:
ISA 315 : Identifying and Assessing the Risks of. Material Misstatement
What
Why
How
PwC 47
Materiality & Risk Assessment
Materiality / Planning Materiality:
‘Misstatements, including omissions, are considered to be material if they, individually or in the

aggregate, could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements
Items can be material by value , nature / circumstances:
Value:
Revenue ½%-1%
Profit before tax 5% - 10%
Total assets 1% - 2%
Nature / circumstances: A party is said to be related to an entity if any of the

following three situations occur:
If the item turns a profit to a loss
Controls / is controlled by entity
Directors' remuneration is under common control with entity
RP transactions has significant influence over the entity
Question will never tell you to calculate materiality.
But if the following is given
Profit (P&L)
Sales (P&L)
Total Assets (SOFP)
Then you would need to calculate the materiality.
Performance materiality is normally set at a level lower than overall materiality. It is used for
testing individual transactions, account balances and disclosures. The aim of performance
materiality is to reduce the risk that the total of errors in balances, transactions and disclosures
does not in total exceed overall materiality.
PwC 48
Audit Risk
INHERENT RISK: This is the susceptibility of an account or a transaction which contains a

misstatement either individually or aggregate before consideration of any related controls
Eg:
CONTROL RISK: This is the risk that the internal controls of the company doesn’t prevent ,
detect or correct material misstatements in the FS
Eg:
DETECTION RISK: Any risk arising due to insufficient procedures done by the auditor and
therefore not detecting material misstatements
PwC 49
Impact of Audit Risk
If the audit risk is high then:
Assigning more experienced staff to risk Increasing the emphasis on substantive

areas, procedures,
Increasing supervision levels, Increasing more year end testing,
Increasing sample size, More reliable evidence to be gathered.
How does auditors assess risk?
ISA 315 (Revised) requires auditors to use the following procedures to understand the entity
which in turn addresses risk:
Enquiries of the client.
Observations (i.e. looking at how the client does the stock take) and inspection (i.e. reviewing
documents).
Analytical review
The auditor has no control over the extend of either the inherent risk or the control risk as these
are borne by the entity subject to audit. However, the auditor has to assess them in the process
of audit.
Examining team comments
Auditor’s responses should focus on how the team will obtain evidence to reduce the risks identified to an
acceptable level. Their objective is confirming whether the financial statement assertions have been adhered to,
and whether the financial statements are true and fair.
Responses are not as detailed as audit procedures; instead, they relate to the approach the auditor will adopt to
confirm whether the transactions or balances are materially misstated. Therefore, in relation to the risk of going
concern, the response is to focus on performing additional going concern procedures, such as reviews of cash
flow forecasts.
Also, auditor responses should not be too vague such as ‘increase substantive testing’ without making it clear
how, or in what area, this would be addressed.
In addition, candidates must ensure that they do not provide impractical responses. A common example of this is
to request directly from the company’s bank as to whether the bank will provide a loan or renew a bank overdraft.
The bank is not going to provide this type of information to the auditor, especially if they have not yet informed the
company, and therefore this response will not generate any marks.
PwC 50
Sample Auditors’ Responses
Auditors’ response : What can auditor do to confirm whether this risk exists or not?
Risk : NCA might not have been depreciated using the correct useful life
Auditors’ response : Review depreciation ledger to confirm whether the calculation is correct
Customer of the client is filing for a legal case : present obligation : provision / contingent
liability
Risk :
Response :
AUDIT RISK GENERAL RESPONSES
Calculation related risk: Recalculate .……. And agree with mgt calculation to confirm its
correct
Inventory valuation: Auditor must do a detailed cost and NRV testing to confirm
inventory valuation
Revenue / Capex issue Obtain a detailed breakdown of cost from invoice to identify the
nature of expenses as to whether it is capital or revenue
Long term loan: Split Review FS to see whether the liability has been split between
between CL & NCL current and non-current
Finance cost calculation
wrong
Estimation involved Discuss with the directors the rationale behind ………………… and
assess the reasonableness of their assumptions
Damaged Inventory - Review whether any of the goods that were damaged are sold and
mgt estimated value if yes , review the invoice for this sale to assess whether the
estimated value is correct
If none of the goods are sold , then discuss with mgt and advise
that the inventory should be written off
Irrecoverable debit / Review the cash receipts to reconcile it with the receivables
credit period increased balance to identify any chance of irrecoverable items which should
be discussed with the mgt and request them to write it off
PwC 51
Analytical Review / Procedures:
This is the evaluation of financial information by analyzing the relationship between financial and
non-financial information and identifying any significant fluctuations or inconsistent relationship
and investigating them
Examples :
Ratio analysis, Variance analysis , Trend analysis
Using analytical procedures in audit
Planning Execution Completion

It is used to get an It is used as a substantive To understand whether the
understanding about the procedure FS are consistent with the
entity and its environment auditors understanding of
to assist with the risk the entity
assessment process
When is analytical review not useful?
PwC 52
Suitability of Analytical Procedures
Assertions - Analytical procedures should be suitable for the assertion tested.
Reliability of the data - If the internal control system of the company is weak then the data
that is generated will contain misstatements making an analytical review meaningless.
Precision required - Analytical procedures are applied on the financial statements as a

whole and there it would be difficult to identify misstatements individually in the account
balances and transactions.
Acceptable variation - If the acceptable variation between the figures that’s being compares
are below the materiality level then analytical reviews are useful and it’s above the level
further procedures will have to done to get sufficient appropriate audit evidence
PROFITABILITY RATIOS
Gross profit margin Gross profit/ sales revenue × 100%
Operating profit margin Operating profit(PBIT)/ sales revenue × 100%
Return on capital Profit before interest and tax/ capital employed (total assets -
employed current liabilities OR total equity + non-current liability)
EFFICIENCY RATIOS
Receivable days Receivable/ revenue × 365 days
Payable days Payable/ purchases × 365 days
Inventory days Inventory/ cost of sales × 365 days
LIQUIDITY RATIOS
Current ratio Current assets/ current liabilities
Quick ratio (Current assets - inventory)/ current liabilities
RISK RATIOS
Gearing Debt/ equity
Interest Cover PBIT / Interest expense
PwC 53
Fraud
An intentional act involving the use of deception to obtain an unjust or illegal advantage
Financial reporting fraud: It results in Misappropriation of assets: It is where

manipulation of figures in the financial assets are stolen or used for non-business
statements such as overstatement of sales, purposes i.e. theft of stock, use of company
omitting liabilities etc. car as your own without proper consent of
company
DIRECTORS RESPONSIBILITIES EXTERNAL AUDITORS RESPONSIBILITIES
Implement an effective system of internal Obtain reasonable assurance that the financial
controls that prevents and detects fraud. statements are free from material fraud.
Be aware of potential for fraud. Maintain an attitude of professional skepticism.
Incorporate fraud potential to risk Discuss the risk of fraud with management,
assessment and corporate governance. internal audit and those charged with
governance.
If required to have an audit committee, Plan work and design procedures to detect
ensure the committee reviews procedures material fraud.
are working effectively from fraud
viewpoint.
Report material fraud to management or those

charged with governance if the management is
involved or third parties.
PwC 54
Laws and Regulations
DIRECTORS RESPONSIBILITIES AUDITORS RESPONSIBILITIES
Ensuring the entity is aware of all relevant Understand laws and regulations affecting
laws and regulations. the client business.
Ensuring the entity has controls in place to Discuss the risk of non-compliance with
ensure laws and regulations are complied management, internal audit and those
with. charged with governance.
Plan work and design procedures on order

to detect non-compliance.
Inspect correspondence with lawyers.
Obtain written representations from

management.
Report non-compliance to the management

and to third parties.
PwC 55
Sunflower Stores Co (Sunflower) operates 25 food supermarkets. The company’s year end is
31 December 2012. The audit manager and partner recently attended a planning meeting with
the finance director and have provided you with the planning notes below.
You are the audit senior, and this is your first year on this audit. In order to familiarize yourself
with Sunflower, the audit manager has asked you to undertake some research in order to gain an
understanding of Sunflower, so that you are able to assist in the planning process. He has then
asked that you identify relevant audit risks from the notes below and also consider how the team
should respond to these risks.
Sunflower has spent $1•6 million in refurbishing all of its supermarkets; as part of this
refurbishment programme their central warehouse has been extended and a smaller warehouse,
which was only occasionally used, has been disposed of at a profit. In order to finance this
refurbishment, a sum of $1•5 million was borrowed from the bank. This is due to be repaid over
five years.
The company will be performing a year-end inventory count at the central warehouse as well as
at all 25 supermarkets on 31 December. Inventory is valued at selling price less an average profit
margin as the finance director believes that this is a close approximation to cost.
Prior to 2012, each of the supermarkets maintained their own financial records and submitted
returns monthly to head office. During 2012 all accounting records have been centralised within
head office.
Therefore at the beginning of the year, each supermarket’s opening balances were transferred
into head office’s accounting records. The increased workload at head office has led to some
changes in the finance department and in November 2012 the financial controller left. His
replacement will start in late December.
Required:
Using the information provided, describe FIVE audit risks and explain the auditor’s
response to each risk in planning the audit of Sunflower Stores Co. (10 marks)
PwC 56
You are an audit supervisor of Pluto & Co and are currently planning the audit of your client,
Venus Magnets Co (Venus) which manufactures decorative magnets. Its year end is
31 December 2015 and the forecast profit before tax is $9·6 million.
During the year, the directors reviewed the useful lives and depreciation rates of all classes of
plant and machinery. This resulted in an overall increase in the asset lives and a reduction in the
depreciation charge for the year.
Inventory is held in five warehouses and on 28 and 29 December a full inventory count will be
held with adjustments for movements to the year end. This is due to a lack of available staff on
31 December. In October, there was a fire in one of the warehouses; inventory of $0·9 million
was damaged and this has been written down to its scrap value of $0·2 million. An insurance
claim has been submitted for the difference of $0·7 million. Venus is still waiting to hear from the
insurance company with regards to this claim, but has included the insurance proceeds within the
statement of profit or loss and the statement of financial position.
The finance director has informed the audit manager that the October and November bank
reconciliations each contained unreconciled differences; however, he considers the overall
differences involved to be immaterial.
A directors’ bonus scheme was introduced during the year which is based on achieving a target
profit before tax. In order to finalise the bonus figures, the finance director of Venus would like the
audit to commence earlier so that the final results are available earlier this year.
Required:
Describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the
audit of Venus Magnets Co.
(10 marks)
PwC 57
Summary of Accounting Standards
IAS 2 Inventory IAS 8 accounting policies, changes in

accounting estimates and errors
Inventories should be valued at the lower of
cost and net realizable value. Accounting policies: the principles, bases and
rules applied by an entity specifying how
i. Cost transactions and events are treated in the
financial statements.
The cost of inventories shall comprise
all costs of purchase, costs of The same accounting policies should be
conversion and other cost incurred in adopted from year to year (“consistency”).
bringing the inventories to their present
location and condition. Changes should be rare and only made if
required:
Cost of purchase: Purchase price,
irrecoverable taxes, transport, handling By a change in accounting standards, or
and other costs directly attributable to
the acquisition of finished goods, If the change will result in a more
materials and services. appropriate presentation of information.
Trade discounts are deducted but cash A change in accounting policy should be
or settlement discounts are not. applied retrospectively, i.e. as though the
new policy had always applied.
ii. Net realizable value

A change in an accounting estimate is an
Estimated selling price less the adjustment to the estimation technique that
estimated costs of completion and the helps to calculate the carrying amount of an
estimated costs necessary to make the asset or liability.
sale.
Changes in accounting estimates result from
new information or new developments.
Changes in accounting estimates are simply

adjusted in the financial statements of the
period in which they arise.
Prior Period errors: misstatements identified

that relate to prior year. These are adjusted
prospectively and restated figures are
reflected in the current year.
PwC 58
IAS 12 Income taxes IAS 16 Property, plant and equipment
Deferred tax is accounted for on temporary A non-current asset is an asset acquired for
differences between carrying amount and tax use on a continuing basis, normally over more
base of assets and liabilities than one year.
Permanent differences are ignored

Examples include:
If the tax base is higher than the carrying
amount = deferred tax asset Land and buildings
If the carrying amount is higher than the Plant and machinery

tax base = deferred tax liability
Fixtures and fittings
Non-current assets are recorded in the

Deferred tax is calculated by applying the Statement of Financial Position. The items
applicable tax rate to the temporary difference above are tangible non-current assets (with a
physical existence).
Deferred tax is not discounted to present
value
Deferred tax assets can only be

recognised if probable benefits are
expected
The deferred tax charge (or credit) is recorded

in the same statement as the underlying
transaction
Most deferred tax is recorded in profit or

loss
Deferred tax on transactions in OCI (such

as PPE revaluations) is recorded in OCI
PwC 59
Initial recognition Measurement after recognition
The cost of an item of property, plant and An entity can choose either the cost model or the
equipment is made up of: revaluation model as its accounting policy applied
consistently to each class of property, plant and
Purchase price after deducting trade discounts equipment. The resulting carrying amount will be
held under non-current assets.
Initial estimate of the costs of dismantling and
removing the item and restoring the site on
which it is located where a present obligation
exists (IAS37). CARRYING AMOUNT = COST -
ACCUMULATED DEPRECIATION
The cost of an asset should include all the
costs incurred in bringing the asset into use, i. Cost model - benchmark treatment - historic
e.g. delivery, installation and set up costs. cost less any accumulated depreciation and
accumulated impairment losses.
However, the costs of training staff on how to
use an asset are not included in the cost of the ii. Revaluation model:
asset.
Fair value - the amount for which an asset could
The reason is that it is uncertain whether staff will be exchanged between knowledgeable, willing
stay in the business and hence the benefit of the parties in an arm’s length transaction.
training may not last for the full life of the asset.
After initial recognition of the asset, an item of
All assets with a finite useful life have to be property, plant and equipment whose fair value
depreciated. This includes buildings, but not land can be measured reliably can be carried at a
(unless the benefit of the land is being used up, revalued amount.
e.g. quarrying).
i.e. its fair value at the date of the revaluation less
Depreciation is charged to the statement of profit any subsequent accumulated depreciation and
or loss as an expense. subsequent accumulated impairment losses.
Some items of property, plant and equipment A business may decide to dispose of a non-
comprise separate components with different current asset at any time during or after the end of
useful lives. In such situations the separate its useful life. When it does so, it may make a
components should be capitalised as separate profit or loss on disposal which is recorded in the
assets and each depreciated over their useful statement of profit or loss. This is calculated as
lives. follows:
PwC 60
PROFIT/(LOSS) = SALE PROCEEDS - CARRYING AMOUNT OF ASSET AT DATE OF

DISPOSAL
Capital It increases the value of non-current assets

expenditure It improves the earning capacity of an asset
e.g. purchase of computers, vehicles, building, land, plant and machinery;
stamp duty, registration fees, solicitor’s fees, architect’s fees, installation
charges; fitting of air conditioner in vehicles
Capitalize as part of non-current asset
Revenue It is incurred to maintain existing capacity of asset

expenditure e.g. repairs and maintenance to machinery, electricity cost for machinery,
spare parts for machinery
Expense in SOPL
https://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exams-study-
resources/f7/technical-articles/ppe.html
IAS 20 Government grant
Government grants are assistance by government in the form of transfers of resources to an

entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity.
A grant should not be recognised until there is reasonable assurance that:
i. The entity will comply with the conditions attaching to them; and
ii. The grants will be received
PwC 61
There are two types of grant:
1. Those relating to income (e.g. a grant towards training costs). The grant should be
recognised as “other income” in the same periods as the related costs, so as to match them.
2. Those relating to assets (e.g. a grant towards the purchase of a non-current asset). At the
discretion of the company these grants should either be presented as:
i. “Deferred income” on the SFP and then amortised over the asset’s life, or
ii. By deducting the grant from the cost of the asset acquired and reporting the net amount in
the SFP, thus leading to a lower annual depreciation charge.
IAS 21 Foreign exchange
Initially, all foreign currency transactions shall be translated to functional currency by applying the
spot exchange rate
Subsequently, at the end of each reporting period, you should translate:
All monetary items in foreign currency using the closing rate;
All non-monetary items measured in terms of historical cost using the exchange rate at the
date of transaction (historical rate);
All non-monetary items measured at fair value using the exchange rate at the date when the
fair value was measured.
Any exchange gains or losses recorded in P&L
IAS 23 Borrowing costs
Where assets are self-constructed, a business may have to borrow funds. Borrowing costs
comprise interest and other costs incurred by a business in connection with the borrowing of
funds.
IAS 23 requires these costs to be capitalised as a part of the cost of a “qualifying asset”,
providing they meet the conditions in the standard below.
A qualifying asset is an asset that necessarily takes a substantial period of time to be ready for its
intended use or sale.
PwC 62
Capitalization commences when:
Expenditures for the asset are being incurred;
Borrowing costs are being incurred; and
Activities that are necessary to prepare the asset for its intended use or sale are in progress
(e.g. when construction begins).
Capitalization should be suspended during extended periods when development is interrupted

(e.g. strikes, bad weather).
Capitalization should cease when substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
IAS 36 Impairment of assets
An asset is impaired if its carrying amount is greater than its recoverable amount, where
recoverable amount is the higher of:
Fair value less costs of disposal (net proceeds from the sale of the asset at arm’s length)
Value in use (the present value of the future cash flows that the asset is expected to
generate)
Impairment of the assets is intended to avoid the possibility that non-current assets are carried at
excessive amounts in the statement of financial position.
Indications of impairment are as follows;
Operating losses,
Advanced technology
Damage
PwC 63
IAS 37 Provisions contingent liabilities contingent assets
A provision is a liability of uncertain timing or amount.
When an entity has a present obligation as a result of a past event;
It is probable (> 50% chance) that an outflow of economic resources will be required to settle
the obligation, and
A reliable estimate can be made of the amount of the obligation.
All 3 criteria need to be met before a provision can be recognised.
Warranty provisions
An entity that sells goods “under warranty” will have a legal obligation to repair those goods
should any faults occur. The entity should make a provision based on its best estimate of the
repair costs.
If the obligation is possible rather than probable a Contingent liabilities are disclosed in the notes.
A contingent asset is a possible asset arising from past events whose existence will only be
confirmed by the occurrence of one or more uncertain future events not wholly within the control
of the entity.
An entity should only recognize an asset when the realization of the profit is virtually certain.
If the realization is merely probable (> 50% chance), then we can refer to that asset as a
contingent asset and disclose it in the notes to the financial statements.
The following disclosures are required for each class of contingent asset:
A brief description of its nature
An estimate of the financial effect
If the realization is possible (i.e. < 50% chance), then no disclosure is required
PwC 64
IAS 38 Intangible assets
Intangible asset is an identifiable non-monetary asset without physical substance.
Amortization is the systematic allocation of the depreciable amount of an intangible asset over its
useful economic life.
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction.
Active market is a market in which the following conditions are met:
The items traded are homogenous
Willing buyers and sellers can normally be found at any time
Prices are available to the public
Initial recognition of an intangible asset
An intangible asset is recognised if, and only if;
It is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and
The cost of the asset can be measured reliably
An intangible asset shall be measured initially at cost
PwC 65
Internally generated intangibles
Goodwill
No internally generated goodwill should be recognised.
RESEARCH & DEVELOPMENT
Research
The original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
Accounting treatment: Research costs must be written off (i.e. recorded as an expense in the
statement of profit or loss) in the period in which they are incurred.
Development
Accounting treatment: Development costs should be written off in the period in which they are
incurred, unless they satisfy all of the following conditions:
P robable future economic benefits will be generated by the asset
I ntention to complete and use/sell asset
R esources adequate and available to complete and use/sell asset
A bility to use/sell the asset
T echnical feasibility of completing asset for use/sale
E xpenditure can be measured reliably.
Where costs meet all of these criteria they must be capitalized as an intangible non-current asset
and amortised over their expected useful life.
Internally generated brands, customer lists and items similar in substance should not be
recognised as intangible assets.
PwC 66
AMORTISATION
If an intangible has a finite life, then it should be amortised over its useful economic life. Residual
value is normally assumed to be zero unless there is a commitment from a buyer or an active
market exists.
An intangible could be considered to have an indefinite useful life should be tested for impairment
annually.
IAS 40 investment properties
Many companies own more than one property. It might occupy one for its day-to-day activities
and another which it could rent out for its rental income and/or capital appreciation - an
investment property.
Initially, an investment property should be measured at cost. At each subsequent year end, a
business can either:
a) Value the property as a normal non-current asset at depreciated cost or
b) It can choose the fair value model, whereby the property is revalued each year end, with any
gain or loss recognised in the statement of profit or loss. Under this model, depreciation is not
charged on the revalued asset.
Whichever policy it chooses should be applied to all of its investment properties.
PwC 67
IFRS 5 Assets held for sale and discontinued operations
Assets held for sale
An asset is classified as held for sale if its carrying amount will be recovered principally through a
sale transaction rather than through continuing use.
For this to be the case the asset must be available for immediate sale and its sale highly
probable i.e.:
Management commitment to the sale
Active programme to locate a buyer has been initiated
Actively marketed at a reasonable price
Completed with one year
The asset should be held at the lower of its carrying value and fair value less costs to sell.
IFRS 15 Revenue
IFRS 15 Revenue from contracts with customers defines revenue as income arising in the course
of an entity’s ordinary activities:
Revenue arises from the sale of goods and/or the provision of services; i.e., the normal
trading activities of the business.
Income from the sale of one of the company’s own non-current assets is not included in
revenue, because this is not part of its ordinary activities.
Revenue is recognized when the performance obligations are satisfied.
A bill-and-hold arrangement is a contract under which a seller bills a customer for a product but
retains physical possession. This may arise if a customer has a lack of available storage space
for the item.
Revenue should be recognised when the customer obtains control of the product
PwC 68
Consignment inventories
These arise when a seller delivers a product to another party (such as a dealer or a distributor)
for sale to end customers but retains control of that product.
The seller should not recognise revenue upon delivery of a product to another party if the
delivered product is held on consignment.
IFRS 16 Leases
Lease - a contract that conveys the right to use an asset (the underlying asset) for a period of
time in exchange for consideration
Lessee - the entity that obtains the right to use an underlying asset in exchange for consideration
Lessor - the entity that provides the right to use an underlying asset in exchange for
consideration
Right of use asset - represents the lessee’s rights to use an underlying asset for the lease term
The lease liability is effectively a “loan”, reflecting the substance of the transaction i.e. you have
borrowed in order to fund the purchase of a non-current asset.
The lease liability is initially measured at the present value of the future lease payments.
The right of use asset is initially recognised at cost. The initial cost comprises:
The amount of the lease liability, plus
Any payments previously made (e.g. a deposit), plus
Any initial direct costs (incremental costs of obtaining the lease), plus
Any costs of removing or dismantling the asset at the end of the lease, as specified by the
agreement.
The asset will be depreciated, in the normal way, over the shorter of the lease term and its useful
life.
If there is a reasonable certainty that the lessee will obtain ownership by the end of the lease
term then the asset should be depreciated over its useful life
PwC 69
As the company makes its regular lease payments, the amount of the payment will pay off an
element of capital and an element of interest.
The following amounts related to leases are included in the financial statements:
Non-current assets (PPE): Net carrying amount of the leased (right-of-use) asset added to
other PPE
Non-current liabilities: Lease liability due after more than one year
Current liabilities: Lease liability due within one year
Statement of profit or loss: Depreciation of leased PPE (right-of-use asset) and finance costs
If the lease is for a period of 12 months or less or the asset is of a low value then a simplified
treatment is allowed.
The lessee can choose to recognise the lease payments as an expense in the statement of profit
or loss on a straight line basis. No right of use asset or lease liability is recognised in the
statement of financial position.
Examples of low value assets include: tablets, small PC’s, telephones and small items of
furniture.
Note: IFRS 16 explicitly states that cars are not low value assets.
Receivables:
Receivables are current assets. An asset is a right to future economic benefits arising from past
transactions or events. Sometimes amounts invoiced to customers may turn out to be
irrecoverable,
e.g. if a customer has gone into liquidation (or if an individual has been declared bankrupt). Such
receivables may be referred to as irrecoverable or “bad debts”.
PwC 70
Management should carry out a review for irrecoverable and doubtful debts after the initial trial
balance has been drawn up. If a receivable is considered to be irrecoverable it should be “written
off” to the statement of profit or loss so that assets are not overstated. Double entry:
Dr Bad and doubtful debt expense (Statement of profit or loss)
Cr Receivables control account
Sometimes management may have concerns over the recoverability of its receivables,
eg. where a customer disputes an invoice or is in some financial difficulty. Such receivables are
called “doubtful debts”.
In these cases, we do not want to write the debt off, but we still want to take a reasonably
cautious approach. The alternative to a write off is to set up an allowance for receivables /
doubtful debts. NB
Allowances are Statement of Financial Position accounts. They reduce the value of assets.
If we want to create an allowance for doubtful debts the entries are as follows:
Dr Bad and doubtful debt expense (Statement of profit or loss)
Cr Allowance for receivables (Statement of financial position)
PwC 71
Internal Controls
Syllabus content
Understanding the entity, its environment and the applicable financial reporting
framework
a) Explain how auditors obtain an initial understanding of the entity, its environment and the
applicable financial reporting framework.[2]
Internal control systems
a) Explain why an auditor needs to obtain an understanding of the components of internal

control relevant to the preparation of the financial statements.[1]
b) Describe and explain the five components of a system of internal control.[2]
i. Control environment
ii. The entity's risk assessment process
iii. The entity's process to monitor the system of internal control
iv. The information system and communication
v. Control activities
The use and evaluation of systems of internal control by auditors
a) Explain how auditors record systems of internal control including the use of narrative notes,
flowcharts and questionnaires.[2]
Tests of controls
a) Describe computer systems controls including general IT controls and information processing
controls.[2]
b) Describe control objectives, control procedures, control activities, direct controls, indirect
controls and tests of controls in relation to:[2]
i. The sales system
ii. The purchases system
iii. The payroll system
iv. The bank and cash system
PwC 72
Internal Controls
v. The inventory system
vi. Non-current assets
b) Explain, in a format suitable for inclusion in a report to management, significant deficiencies

within a system of internal control and provide control recommendations for overcoming
these deficiencies to management.[2]
PwC 73
Internal Controls
A “misstatement” is simply the incorrect statement of a value or word e.g. a non-current asset
stated at a cost of $1m when the actual cost is $1.5m. Note that a misstatement can occur
due to an error, irregularity or fraud.
An “error” is an unintentional mistake or oversight made by an employee of a company e.g.

an unintentional mathematical error.
An “irregularity” can be defined as an action that is contrary to a rule or principle e.g. not
depreciating a non-current asset.
Why does auditors need to know IC?
PwC 74
Internal Controls
Components of internal control system:
Environment Information system Monitoring

and communication
1 2 3 4 5
Risk assessment Control activities

process
1. Environment:
It’s the management’s attitude towards designing, implementing and monitoring internal controls.
It’s about whether management overrides controls by abusing their authority. The control
environments sets the tone and culture of the organization. This is assessed by the auditors
through inspecting policies and procedures, making enquiries and observing client practices.
2. Risk assessment process:
o The client should assess the risk faced by company and this should be managed
adequately using a risk committee
o The client assesses the business risk which is defined as :
o The risk that the client is not able to achieve its objectives. There are three types of
business risk
3. Information system and communications
Consists of infrastructure , software , people , data and the accounting records which are used to
record , process and report items in FS
PwC 75
Internal Controls
4. Control activities:
Control activities are the policies and procedures which help ensure that management directives
are carried out. Control activities, whether within information technology or manual systems,
have various objectives and are applied at various organizational and functional levels.
Authorisation - This is implemented where a senior personnel in a company authorizes the

transactions and events to avoid unnecessary expenses or frauds.
Comparison - Comparing actual figures with previous year / budgets/forecast/industry

averages and investigating the variances.
Computer control - This is where computer controls like usernames, passwords, backups
etc are implemented to prevent unauthorized access.
Arithmetic controls - Such controls are implements to ensure the accuracy of the figures in
the financial statements.
Accounting reconciliations - Reconciliation is the process of ensuring that two sets of

records from different sources agree .Reconciliations generally address the completeness
and/or accuracy of processing transactions
Physical controls - Physical measures like security accesses, CCTV , biometrics etc.,
Segregation of duties - Where the responsibilities are divided so that one person doesn’t
carry out every activity tin the company.
5. Monitoring of controls
Monitoring Is where the management is assessing the controls on its effectiveness and what are
the responses of the management regarding any deficiencies in the control. Monitoring can be an
ongoing activity which will be carried out by the internal audit department or performed on a
periodic basis by external experts
PwC 76
Internal Controls
Direct v indirect controls
The auditor may plan to test:
Direct controls are controls that are sufficiently precise to prevent, detect or correct
misstatements
Indirect controls are those that support direct control including general IT controls
Controls in the control environment, risk assessment process and monitoring process are
primarily indirect controls (but may also be direct). Controls in the information system and
communication and control activities are primarily direct controls (but may also be indirect).
5. Management override of 1. Expensive: Cost benefit

controls analysis
Limitations
of IC
2. Unforseen circumstances
4. Collusion of employees where control doesnt exist
3. Human error
PwC 77
Internal Controls
Auditors work towards internal controls
1. Understand the IC system in the company and how it operates.
2. Document the system
How do you document?
Narrative notes:
Advantages Disadvantages
Simple & quick to record Can be cumbersome, especially if the

system is complex
Easy to understand for all of the audit
team (including juniors) Can make it more difficult to identify
missing internal controls as the notes
record the detail but do not identify
control expectation clearly
Flowcharts:
Easier to identify missing internal Can be time-consuming to prepare

controls Needs a little training to prepare and
This visual aid can make it easier to understand
record complex systems
PwC 78
Internal Controls
Questionnaires:
Internal control questionnaires(ICQ’s) : List of questions just ask whether
Internal control evaluation questionnaires (ICEQ’s) : These questions ask whether there are
controls in place for a particular risk, or how a particular risk is managed in terms of controls.
The motive is to verify if there are controls to reduce the chances of risks. Open ended
question.
An example of a question on an ICEQ is:
Is there reasonable assurance that ‘Goods cannot be received without an associated liability
being recorded in the accounting records?’
The idea behind the above question is that the person responsible for this part of the purchases
cycle will answer:
‘Yes, because a sequentially numbered, multi-part goods received note is generated upon
receipt of the goods and one copy passed to the accounts department. This is then filed
whilst we wait for the supplier's invoice. This file is then reviewed at the end of each month
and an accrual made for any goods received which have not yet been invoiced.’
If drafted thoroughly, questionnaires can Can be drafted vaguely, hence

ensure all controls are considered misunderstood and important controls
not identified
Quick to prepare
May contain a large number of irrelevant
Easy to use and control and can
controls
therefore be given to junior staff to
complete May not include unusual controls, which
are nevertheless effective in particular
ICEQs are easier to apply to a variety of
circumstances
systems than ICQs because they are
drafted in terms of objectives rather
than specific controls
PwC 79
Internal Controls
Answering ICEQs should enable Can give a distorted view of the entity’s
auditors to identify the key controls internal controls as there is no weighting
which they are most likely to test during of more important controls. In many
control testing systems, one ‘NO’ answer (for example
lack of segregation of duties) will cancel
ICEQs can highlight deficiencies
out a string of ‘YES’ answers
where extensive substantive procedures
will be required The client may be able to overstate
controls
3. Perform Walkthrough Tests
4. Test the internal control system : Performed to obtain evidence about whether the internal
controls are designed appropriately and whether they are working effectively.
5. Report the internal control deficiencies to the management.
6. Decide the impact on audit approach
PwC 80
Internal Controls
Differentiate between a control objetcive , a control procedure and test of control
1. Control Objective: What we want to achieve- i.e. reduce the risk
2. Control Procedures: How we plan to achieve the objective- actions taken
3. Test of controls: The test carried out by Auditor to test if controls are effective, exist and
operational
Internal controls can be tested using the following procedures:
Inspection: Look at a evidence of internal control procedures. For example, inspect the file of
paid supplier invoices to see if they have indeed been stamped or initialed to indicate that
they had been paid. (e.g. authorizations)
Observation: Watch employees as they carry out certain transactions and procedures. Of
course, employees would be on their best behavior if they knew they were being observed.
Reperformance: For example, reperform what the employees have done to make sure that
they have done it correctly.
Enquiries: about internal controls which leave no audit trail ( e.g. is the person who is
SUPPOSED to perform the function actually performing it or is someone else is doing so)
* IMPORTANT note: Enquiry is required as a risk assessment procedure but is never sufficient to
test the operating effectiveness of controls. Therefore, other audit procedures must always be
performed in combination with enquiry. Enquiry + inspection or reperformance is better than
enquiry + observation (at a point in time).
PwC 81
Internal Controls
Samples from past papers
Deficiency Control Test of Control

Customer credit limits are Credit limits should be set The auditor should take a
set by sales ledger clerks. by a senior member of the sample of new customers
sales ledger department accepted in the year and
Sales ledger clerks are not
and not by sales ledger review the authorization of
sufficiently senior and so
clerks. These limits should the credit limit, and ensure
may set limits too high,
be regularly reviewed by a that this was performed by
leading to irrecoverable
responsible official. a responsible official.
debts, or too low, leading to
a loss of sales.
Supplier statement Supplier statement The auditor should review
reconciliations are no longer reconciliations should be the file of reconciliations to
performed. performed on a monthly ensure that they are being
basis for all suppliers and performed on a regular
This may result in errors in
these should be reviewed basis and that they have
the recording of purchases
by a responsible official. been reviewed by a
and payables not being
responsible official.
identified in a timely
manner.
Revenue Cycle
Objectives of sales system
To ensure that orders are only accepted if goods are available to be processed for customers.
To ensure that all orders are recorded completely and accurately.
To ensure that goods are not supplied to poor credit risks.
To ensure that goods are despatched for all orders on a timely basis.
To ensure that goods are despatched correctly to customers and that they are of an adequate
quality.
To ensure that all goods despatched are correctly invoiced.
To ensure completeness of income for goods despatched.
To ensure that sales discounts are only provided to valid customers.
PwC 82
Internal Controls
Sales order All sales orders documented on a sequentially numbered multi-part

placed Decide whether to accept this order (Check for availability of product
with stores and
Production) Question whether to sell on credit if yes how much credit
can be offered and the time
Communicate with the purchaser and give confirmation
Goods Sequentially pre-numbered Goods Dispatched Note

dispatched to Signed by the warehouse manager after quantity and quality checks
the customer
3 copies( warehouse, customer, accounts/invoicing)
Customer should sign the copies to acknowledge receipt of goods
Sales invoice Sequentially pre-numbered invoices

raised and Matched to GDN
entered in the
accounting 3 copies ( accounts dept, customer, sales dept )
system Ensure the authorized price list is used to prepare the invoice
Any discounts authorized from a senior personnel
Arithmetic checks on invoices
Sequence check on GDNs to ensure all GDNs have been invoiced
Sequence check on Invoices to ensure all invoices have been entered
in the accounting system
Customer statements should be sent monthly to ensure any errors and
disputed invoices are quickly identified and resolved
The sales ledger control account should be reconciled on a monthly
basis to the individual ledger to identify any errors. The reconciliations
should be reviewed by a responsible official and they should evidence
their review
Payment Match payment to invoice

received from Check validity of any settlement discounts availed by the customer
the customer
Segregation of duties: receiving payment and recording
Encourage bank transfers
A Bank Reconciliation Statement should be prepared on a monthly
basis
PwC 83
Introduction
Tinkerbell Toys Co (Tinkerbell) is a manufacturer of children’s building block toys; they have been
trading for over 35 years and they sell to a wide variety of customers including large and small
toy retailers across the country. The company’s year end is 31 May 2011.
The company has a large manufacturing plant, four large warehouses and a head office. Upon
manufacture, the toys are stored in one of the warehouses until they are despatched to
customers. The company does not have an internal audit department.
Sales ordering, goods despatched and invoicing
Each customer has a unique customer account number and this is used to enter sales orders
when they are received in writing from customers. The orders are entered by an order clerk and
the system automatically checks that the goods are available and that the order will not take the
customer over their credit limit.
For new customers, a sales manager completes a credit application; this is checked through a
credit agency and a credit limit entered into the system by the credit controller. The company has
a price list, which is updated twice a year. Larger customers are entitled to a discount; this is
agreed by the sales director and set up within the customer master file.
Once the order is entered an acceptance is automatically sent to the customer by mail/email
confirming the goods ordered and a likely dispatch date. The order is then sorted by address of
customer. The warehouse closest to the customer receives the order electronically and a
dispatch list and sequentially numbered goods dispatch notes (GDNs) are automatically
generated.
The warehouse team pack the goods from the dispatch list and, before they are sent out, a
second member of the team double checks the dispatch list to the GDN, which accompanies the
goods.
PwC 84
Once dispatched, a copy of the GDN is sent to the accounts team at head office and a
sequentially numbered sales invoice is raised and checked to the GDN. Periodically a computer
sequence check is performed for any missing sales invoice numbers.
Requirement :
Identify the controls and recommend SIX tests of controls the auditor would normally
carry out on the sales system of Tinkerbell and explain the objective for each test.
(12 marks)
PwC 85
Internal Controls
Purchases Cycle
Objectives of purchase system risk of holding cost/

Procurement is made only when the requirements are genuine. obsolete
Purchases are made at the most optimum prices and terms. authorized supplier list
Purchases meet the required quality standards and if substandard quality is accepted, must
be at negotiated terms.
Payments are made according to agreed terms.
They are procured on time and the payments are made according to agreed terms.
Purchase Sequentially pre-numbered

requisition Authorized to ensure only those goods are ordered which are required
Inventory level checked before raising the requisition to ensure only
order when required
Purchase Sequentially pre-numbered and matched to requisition

order Authorized supplier list used and updated annually (this should take
into account the price of goods, their quality and the speed of delivery.)
3 copies ( supplier, order department, warehouse)
Follow up on order placed but not yet received ( exception reports can
be created in a computerized environment) and sequence check can
be performed for any unfulfilled orders
a report that will highlight an
Goods Sequentially pre-numbered GRN out of ordinary situation in a
received Matched to purchase order process.
Signed by the warehouse manager after quantity and quality checks
3 copies ( ordering department, warehouse for their records, account)
Invoice Match to GRN

received from File in an order manually number it
supplier
Arithmetic checks
Stamp ‘entered’ when recorded
PwC 86
Internal Controls
Before approving invoices for payment, a senior official should match

them to the audit trail ( esp. the GRN)
Bank transfer preferred
If payment by cheque: senior individuals only plus two signatories for
high amounts
Stamp invoice ‘paid’
Try and avail settlement discounts and pay according to supplier’s
terms to maintain supplier goodwill
Supplier statement reconciliation with PL
Monthly BRS
How to identify internal control weakness
In exam read the control used by client and try to identify whether it reduces the risk or creates
another risk?
PwC 87
Section B: Past question
Cherry Co (Cherry) manufactures custom made furniture and its year end is 30 April. The
company purchases its raw materials from a wide range of suppliers. Below is a description of
Cherry’s purchasing system.
When production supervisors require raw materials, they complete a requisition form and this is
submitted to the purchase ordering department. Requisition forms do not require authorization
and no reference is made to the current inventory levels of the materials being requested. Staff in
the purchase ordering department use the requisitions to raise sequentially numbered purchase
orders based on the approved suppliers list, which was last updated 24 months ago. The
purchasing director authorizes the orders prior to these being sent to the suppliers.
When the goods are received, the warehouse department verifies the quantity to the suppliers
dispatch note and checks that the quality of the goods received are satisfactory. They complete a
sequentially numbered goods received note (GRN) and send a copy of the GRN to the finance
department.
Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file
until the end of each week. He then inputs them into the purchase ledger using batch controls
and gives each invoice a unique number based on the supplier code. The invoices are reviewed
and authorized for payment by the finance director, but the actual payment is only made 60 days
after the invoice is input into the system.
Required:
In respect of the purchasing system of Cherry Blossom Co:
i. Identify and explain FIVE deficiencies; and
ii. Recommend a control to address each of these deficiencies. (10 marks)
Note: The total marks will be split equally between each part.
PwC 88
Internal Controls
Payroll Cycle
Standing data is the information that is held on computer files for long-term use. It is called
standing data as it tends to change less frequently than other data. Examples of standing data
would be:
The hourly pay rate for a factory worker to be used when calculating payroll;
Employee bank account details.
The main objective of a payroll is to ensure that:
Wages and salaries are paid at the correct rates
Wages and salaries are paid to the right people.
Wages and salaries are paid on time
Appointment/ leavers
Appointments: All appointment of staff, whether temporary or permanent, should only be

made by the human resources department, separate from the payroll department
There should be formal procedures requiring the interviews manager to provide detailed
written notification to a responsible official of starters and leavers.
Update ‘starters and leavers’ details on a timely basis. Procedures should ensure that
‘starters’ and ‘leavers’ details are added to or deleted from the master file/standing data
immediately after starting or leaving the company’s employment.
All increases of pay should be proposed by the HR department and then formally agreed by
the board of directors.
PwC 89
Internal Controls
Standing data in the

master file:
‘Read’ and ‘amend’ access

to the master file should be
available from specified
terminals to responsible
officials who have a need
and authorized cause to
access the information.
Maintain a log of access

attempts (Controls should
include a computer log
which registers date and
time access to the master
file by the various users.
This should regularly be
reviewed by a senior
responsible official of the
company)
Match standing data to the

personnel filed periodically
PwC 90
Introduction and client background
You are the audit senior of Blair & Co and your team has just completed the interim audit of
Chuck Industries Co, whose year end is 31 January 2012. You are in the process of reviewing
the systems testing completed on the payroll cycle, as well as preparing the audit programmes
for the final audit.
Chuck Industries Co manufactures lights and the manufacturing process is predominantly

automated; however there is a workforce of 85 employees, who monitor the machines, as well as
approximately 50 employees who work in sales and administration. The company manufactures
24 hours a day seven days a week.
Below is a description of the payroll system along with deficiencies identified by the audit team:
Factory workforce
The company operates three shifts every day with employees working eight hours each. They
are required to clock in and out using an employee swipe card, which identifies the employee
number and links into the hours worked report produced by the computerised payroll system.
Employees are paid on an hourly basis for each hour worked. There is no monitoring/supervision
of the clocking in/out process and an employee was witnessed clocking in several employees
using their employee swipe cards.
The payroll department calculates on a weekly basis the cash wages to be paid to the workforce,
based on the hours worked report multiplied by the hourly wage rate, with appropriate tax
deductions. These calculations are not checked by anyone as they are generated by the payroll
system. During the year the hourly wage was increased by the Human Resources (HR)
department and this was notified to the payroll department verbally.
system actions should be manually checked on a sample basis
PwC 91
Each Friday, the payroll department prepares the pay packets and physically hands these out to
the workforce, who operate the morning and late afternoon shifts, upon production of
identification. However, for the night shift workers, the pay packets are given to the factory
supervisor to distribute. If any night shift employees are absent on pay day then the factory
supervisor keeps these wages and returns them to the payroll department on Monday.
Sales and administration staff
The sales and administration staff are paid monthly by bank transfer. Employee numbers do
fluctuate and during July two administration staff joined; however, due to staff holidays in the HR
department, they delayed informing the payroll department, resulting in incorrect salaries being
paid out.
Required:
a) For the deficiencies already identified in the payroll system of Chuck Industries Co:
i. Explain the possible implications of these; and
ii. Suggest a recommendation to address each deficiency. (12 marks)
PwC 92
Internal Controls
Inventory Cycle
Before the stock count :
1. The auditor should review the prior year audit file for evidence of issues and follow up with
management if required.
2. The auditor should obtain a copy of the stock count instructions and ensure that they review it
for any discrepancies.
3. Instructions should be compare with the prior year instructions to identify any changes and
enquire with management if required.
4. The auditor should enquire with the client about any inventory that is held in third part
locations.
5. The auditor also obtain an approximate value of the inventory held in 3rd part locations and
try to allocate any audit staff to attend the count.
During the stock count
1. The auditor should ensure that the stock areas are laid out well and marked with specific
codes to distinguish each areas.
2. The stock take instructions must be preprinted, and the stock count sheets also preprinted
and sequentially numbered with only items mentioned in the sheets .
3. Stock count sheets should be completed in pen so that unauthorized changes are not being
made to the sheets
4. The counts must be done in teams of 2 where at least 1 member should not be from the
warehouse department in order reduce the chances of discrepancies in the counts.
5. The teams of 2 should not count separate inventory and one of them should recount the
inventory that has already been counted.
6. Inventory count sheets should be properly signed off to identify who has done the first and
second count so that questions could be directed to them.
7. Once each areas are counted it should be marked as “completed” so that miscounting or
double counting doesn’t happen.
PwC 93
Internal Controls
8. If any damaged inventory is identified during the stock count , it should be separately kept
from the good inventory to avoid selling it.
After the stock count
1. Results of the count should be recorded as soon as the count is completed.
2. Auditor should carry out random inventory counts on a sample basis an trace it to the result of
the inventory count team to ensure that the results are matching.
3. Any records on damaged or obsolete inventory should be reviewed to ensure that its been
appropriately handled.
Non Current Assets
These include:
Ensure authorized by senior management
The asset register includes invoice for the purchase, location, value etc
The existence of the assets should be checked on a regular basis
The documents confirming the ownership of the assets should be kept safe in a fire proof
environment
PwC 94
Bonsai Trading Co (Bonsai) manufactures electrical equipment, and its year end is 30 September
2015. You are the audit supervisor of Poplar & Co and are developing the audit programmes for
the forthcoming interim audit.
The company’s internal audit department has provided you with documentation relating to the
non-current assets cycle including the related controls listed below.
Bonsai has a capital expenditure committee and all purchase orders for capital items are
required to be authorised by this committee.
On receipt, each asset is assigned a unique serial number and this is recorded on the asset
and in the non-current assets register.
When the asset arrives, a goods received note (GRN) is completed which details the nature
of the expenditure (i.e. whether it is capital or revenue), and the GRN classification is
reviewed and initialled by a responsible official. Copies of the GRNs relating to capital
expenditure are then submitted to the finance department for updating of the non-current
assets register.
Periodically, internal audit undertakes a review of assets in the register and compares them to
assets on site, using the serial number to confirm existence of the asset.
Access to the non-current assets register is restricted through passwords to a small number
of staff in the finance department.
Required:
Describe a test of control which the auditor of Bonsai Trading Co would perform to
assess whether or not each of the non-current asset controls listed above is operating
effectively. (5 marks)
PwC 95
Internal Controls
Cash Cycle
Shiny Happy Windows Co (SHW) is a window cleaning company. Customers’ windows are
cleaned monthly, the window cleaner then posts a stamped addressed envelope for payment
through the customer’s front door.
SHW has a large number of receivable balances and these customers pay by cheque or cash,
which is received in the stamped addressed envelopes in the post. The following procedures are
applied to the cash received cycle:
1. A junior clerk from the accounts department opens the post and if any cheques or cash have
been sent, she records the receipts in the cash received log and then places all the monies
into the locked small cash box.
2. The contents of the cash box are counted each day and every few days these sums are
3. The cashier records the details of the cash received log into the cash receipts day book and
also updates the sales ledger.
4.
he misses a month then he catches this up in the following month’s reconciliation.
Required:
For the cash cycle of SHW:
i.
ii.
iii. List tests of controls the auditor of SHW would perform to assess if the controls are
operating effectively. (3 marks)
PwC 96
Internal Controls
Communicating the significant deficiency ( highly examinable ) tested in

March / June 2020
Examples of matters the external auditor may consider in determining whether a deficiency in
internal controls is significant include:
The likelihood of the deficiencies leading to material misstatements in the financial statements
in the future
The susceptibility to loss or fraud of the related asset or liability
The subjectivity and complexity of determining estimated amounts
The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies
The importance of the controls to the financial reporting process
The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls
When a significant deficiency is been identified then it needs to be reported through

management letter in writing to those charged with governance.
The management letter will express the fact that the weaknesses found are not necessarily all
weaknesses but just those found by the auditor.
The report will also express that it is for the sole use of management and no disclosure will be
made to third parties
The structure of the report will be:
Deficiency Implication Recommendation
PwC 97
Communicating deficiencies – Covering
Letter sample
To,
Board of Directors
XYZ Co
Dear Sirs,
Audit of XYZ Co for year ended ………
Please find enclosed the report to management on significant deficiencies in internal controls
identified during the audit for the year ended …….
The report considers deficiencies in the purchases system, implications of those deficiencies and
provides recommendations to address those deficiencies.
Please note that this report only addresses any significant deficiencies identified during the audit
and if further testing had been performed then more deficiencies may have been reported.
This report is solely for the use of management and if you have any further questions then please
do not hesitate to contact us.
Yours faithfully
An audit firm
PwC 98
Internal Controls
Importance of communicating with those charged with governance (SELF READ)
It assists the auditor and those charged with governance in understanding matters related to
the audit
It helps the auditor in obtaining, from those charged with governance, information relevant to
the audit. For example, those charged with governance may assist the auditor in
understanding the entity and its environment, in identifying appropriate sources of audit
evidence and in providing information about specific transactions or events.
It helps those charged with governance in fulfilling their responsibility to oversee the financial
reporting process, thereby reducing the risks of material misstatement of the financial
statements.
It promotes effective two-way communication between the auditor and those charged with
governance
Matters to be communicated to those charged with governance ISA 260
The auditor’s responsibilities with regards to providing an opinion on the financial statements
and that they have carried out their work in accordance with International Standards on
Auditing.
The auditor should explain the planned approach to the audit as well as the audit timetable.
Key audit risks identified during the planning stage should be communicated.
In addition, any significant difficulties encountered during the audit should be communicated.
Significant matters arising during the audit, as well as significant accounting adjustments.
Significant deficiencies in the internal control system
How the external auditor and internal auditor may work together and any planned use of the
work of the internal audit function.
Those charged with governance should be notified of any written representations required by
the auditor.
If any suspected frauds are identified during the audit, these must be communicated.
PwC 99
Internal Controls
If the auditors are intending to make any modifications to the audit opinion, these should be
communicated to those charged with governance.
For listed entities, a confirmation that the auditors have complied with ethical standards and
appropriate safeguards have been put in place for any ethical threats identified.
IT Controls
General controls Application controls
General IT controls ensure the information system can run properly
Examples include
Making regular back-ups of data and storing them off-site;
Having an IT helpdesk and IT training for staff;
Keeping computers in locked rooms;
Having a disaster recovery plan;
All computers have log in codes;
Anti-virus software and firewalls;
Segregation of duties between programmers and users.
Review of the data center or information processing facility should cover the adequacy of air
conditioning (temperature, humidity), power supply (uninterruptible power supplies,
generators) and smoke detectors
Application controls are those controls that relate to the transaction and standing data relating to
a computer-based accounting system.
PwC 100
Internal Controls
They are specific to a given application and their objectives are to ensure the completeness and
accuracy of the accounting records and the validity of entries made in those records.
An effective computer-based system will ensure that there are adequate controls existing at the
point of input, processing and output stages of the computer processing cycle and over standing
data contained in master files.
Application controls need to be ascertained, recorded and evaluated by the auditor as part of the
process of determining the risk of material misstatement in the audit client’s financial statements.
Examples include:
Format checks: These ensure that information is input in the correct form.
Range / Reasonableness checks: These ensure that input data is rejected or highlighted if it
is outside pre-set parameters.
Compatibility / dependence checks: These ensure that data input from two or more fields
is compatible.
Exception checks: These ensure that an exception report is produced highlighting unusual
situations that have arisen following the input of a specific item.
Sequence checks: ensure that sequential input of documentation/data is maintained.
Check digit verification: Check digits are used to protect against the transposition of data
i.e. errors arising due to accidental reversal of digits. This process uses algorithms to ensure
that data input is accurate.
Existence checks: the system is set up so that certain key data must be entered, such as
supplier name, otherwise the invoice is rejected. This helps to ensure accuracy of input
Control totals / Batch controls: These also facilitate completeness of processing by ensure
that pre-input, manually prepared control totals are compared to control totals input.
One for one checking: the invoices entered into the system are manually agreed back one
by one to the original purchase invoices. This helps to ensure completeness and accuracy of
input.
Document counts: The number of invoices to be input are counted, the invoices are then
entered one by one, at the end the number of invoices input is checked against the document
count. This helps to ensure completeness of input.
PwC 101
Computer controls
On receipt of the purchase invoice from the supplier, an accounts clerk matches it to the GRN.
The invoice is then sent to the purchase ordering clerk, Mr.James , who processes it for
payment. The finance director is given the total amount of the payments list, which she
authorizes and then processes the bank payments. Due to staff shortages in the accounts
department, supplier statement reconciliations are no longer performed.
Explain four application controls that should be adopted by the company to ensure completeness
and accuracy of input of purchase invoices ? (4 marks)
PwC 102
Internal Audit
Internal Audit: Link between IA and corporate governance (VIDEO IN LMS)
Overall responsibility for the

analysis of risk and
implementation of internal
controls
Board Monitor management’s

responsiveness to IA findings
Audit committee and recommendations
Monitor and review Regular report on results

effectiveness of IA of IA work
Approve Meet Head of IA at least Direct access to board
appointment/termination once a year without chairman and audit
of Head of IA management present committee
Review and assess Accountable to audit
annual IA work plan committee.
Internal audit function
PwC 103
Audit Evidence
Sufficient
Appropriate
Past question:
List and explain FOUR factors that will influence the auditor’s judgement regarding the
sufficiency of the evidence obtained.
Assessment of risk at the financial statement level and/or the individual transaction level. As
risk increases then more evidence is required.
The materiality of the item. More evidence will normally be collected on material items
whereas immaterial items may simply be reviewed to ensure they appear correct.
The nature of the accounting and internal control systems. The auditor will place more
reliance on good accounting and internal control systems limiting the amount of audit
evidence required.
The auditor’s knowledge and experience of the business. Where the auditor has good
past knowledge of the business and trusts the integrity of staff then less evidence will be
required.
The findings of audit procedures. Where findings from related audit procedures are
satisfactory (e.g. tests of controls over receivables) then substantive evidence will be
collected.
The source and reliability of the information. Where evidence is obtained from reliable
sources (e.g. written evidence) then less evidence is required than if the source was
unreliable (e.g. verbal evidence).
PwC 104
Audit Evidence
QUE: ISA 500 Audit Evidence requires auditors to obtain sufficient and appropriate audit
evidence. Appropriateness is a measure of the quality of audit evidence; that is, its
relevance and its reliability.
Required:
Identify and explain THREE factors which influence the reliability of audit evidence. (3 marks)
QUE : The directors of a company have provided the external audit firm with an oral
representation confirming that the bank overdraft balances included within current
liabilities are complete. Evaluate the evidence ( 1 mark )
PwC 105
Audit Evidence
Sources of audit evidence
Test of controls Substantive procedures
Test of controls
Test of controls are performed to evaluate the operating effectiveness of controls in preventing or
detecting and correcting material misstatements.
The stronger the control system, the lower the control risk and as a result lower the risk of
material misstatements on the financial statements.
The main focus of test of control is not the monetary value of a transaction, it provides
evidence as to whether a control procedure is operating effectively.
Substantive procedures
Substantive procedures are designed to detect material misstatements at an assertion level.
Substantive procedures consist of the following;
TEST OF DETAILS
Test of detail is performed to verify individual transactions and account balances.
ANALYTICAL PROCEDURES
Used as a substantive procedure
PwC 106
Audit Evidence
A reminder of the audit approach
Let’s just review again how audits are carried out.
First of all, evaluate the design of the system. If suitable controls appear to exist, the audit will
tend to proceed by testing those controls to evaluate whether the controls are indeed operating
effectively.
If however, internal controls are absent or not operating effectively, evidence must be obtained
from substantive procedures alone. This means examining transactions for direct verification
rather than relying on the operation of controls.
When controls operate effectively, the audit will usually be more efficient and cost effective if the
auditor tests the operation of controls and reduces the extent of substantive procedures.
However, some substantive procedures will always be required (for each material class of
transactions, account balance and disclosure) due to inherent limitations of internal control.
In some audit areas it may actually be more efficient to perform only substantive procedures to a
relatively small number of actual transactions (eg. additions to/disposals of non-current assets).
These promises have a

fancy name “ASSERTIONS”
Stage 1 Stage 2 Stage 3
Auditor’s “test” these This process has a fancy

promises and gather proof name “SUBSTANTIVE
that they have tested TESTING”
Assertions
Assertions are used for transactions, balances and disclosures to see if sufficient evidence on
them has been collected
PwC 107
Audit Evidence
Statement of profit or loss
1. Occurrence: Transactions and events that have been recorded have occurred and pertain to
the entity.
2. Completeness: All transactions and events that should have been recorded have been
recorded.
3. Accuracy: Amounts and other data relating to recorded transactions and events have been
recorded appropriately.
4. Cut-off: Transactions and events have been recorded in the correct accounting period.
Before and after year end
5. Classification: Transactions and events have been recorded in the proper accounts.
Statement of financial position
1. Existence: Assets, liabilities and equity interests exist.
2. Rights and Obligations: The entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.
3. Completeness: All assets, liabilities and equity interests that should have been recorded
have been recorded.
4. Valuation and Allocation , Accuracy: Assets, liabilities and equity interests are included in
the financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded
5. Classification ,Presentation and disclosure: Account balances have been recorded in the
proper accounts.
PwC 108
Audit Evidence
RECALCULATION ANALYTICAL REVIEW

It involves verifying the mathematical It is a useful method for reviewing
accuracy of the client’s calculations. The completeness however other testing is
client calculations may be manual or usually required to corroborate the findings
computerised. of the analytical review.
REPERFORMANCE ENQUIRY
It involves the auditor re-performing It is where the auditors ask the client for
something the client has already done i.e. information. This type of testing is useful
counting inventory. This type of testing is for getting information however it is a less
useful for verifying controls. reliable form of audit evidence and should
therefore be used alongside some of the
other audit procedures.
CONFIRMATION OBSERVATION
It involves asking a 3rd party for evidence It involves looking at the way the client
of a balance/transaction i.e. bank does things i.e. the way the client does the
confirmation, receivables circularization stock count. This gives evidence of
etc. This evidence involves the auditor controls being in existence and robust.
writing to the 3rd party and asking for Observation works well for the year-end
written confirmation of a stock count as this verifies controls against
transaction/balance. a balance the auditors are concluding
upon.
PHYSICAL VERIFICATION INSPECTION

It means looking at and inspecting the It involves reviewing documents and
asset. This gives conclusive evidence of records such as invoices, title deeds, bank
existence and may give evidence of statements etc. This gives evidence of
valuation as the auditor will be able to see rights and obligations, controls being in
if an asset looks in poor condition. place and being robust i.e. authorizations
PwC 109
Audit Evidence
Audit of specific items
Receivables:
Process of circularization (Past Question - Dec 2017)
1. Obtain permission from the client to carry out circularization
2. Obtain a list of receivables at the year end and cast it and select a sample by focusing on old
balances, large balances, nil balances.
3. On the letter head of the client request a confirmation from the debtors about the balances
and that the replies should be directly send to auditors. This should be signed by the client.
4. The management should sign all the letter before sending them out.
5. If no response is received follow it up with another letter or a phone call or alternative

procedures for a positive circularization
6. All the replies should be reconciled to client’s receivables records.
7. For non-replies:
o With the client’s permission, the team should arrange to send a follow up
circularization.
o If the receivable does not respond to the follow up, then with the client’s permission,
the senior should telephone the customer and ask whether they are able to respond in
writing to the circularization request.
o If there are still non-responses, then the auditor should undertake alternative
procedures to confirm receivables. These procedures include verifying post year end
receipts from that customer, verifying order placement and dispatch documentation
and carrying out bad debt procedures
8. For responses with differences:
i. The auditor should identify any disputed amounts and identify whether these relate to
timing differences or whether there are possible errors in the records of the client.
ii. Any differences due to timing, such as cash in transit, should be matched with cash
received after the year end
PwC 110
Audit Evidence
i. The receivables ledger should be reviewed to identify any possible mis postings as
this could be a reason for a response with a difference.
ii. If any balances have been flagged as disputed by the receivable, then these should
be discussed with management to identify whether a write down is necessary
NEGATIVE - Only responds if he disagrees with the balance.
Circularisation
POSITIVE - Responds no matter what the outcome is
Completeness:
Obtain the figure for RECEIVABLES from the FS and trace it back to the trial balance, aged
receivables listing, receivables ledgers and journal to ensure the completeness
Review the disclosure notes to ensure that all the necessary disclosures are made as per the
financial reporting framework
Accounts Receivable Aging

31 to 60 61 to 90 Over 90
Current 1 to 30 days Total
days days days
Company ABC $200 $400 $0 $0 $0 $600
XYZ, LLC UVW,
Inc. $0 $500 $100 $0 $0 $600
$0 $0 $1000 $500 $250 $1750
Total $200 $900 $1100 $500 $250 $2950
PwC 111
Audit Evidence
Rights and Obligations
For a sample , Obtain receivables circularization from the customers to confirm the rights and
obligations.
Presentation , Classification
Review the FS to confirm correct presentation and classification n as per the accounting
standard
Prepayments
They are the payments for goods and

services which the company has paid in
advance. Eg : Rent , Insurance, Phone
charges
Procedures:
1. Inspect bank statements to ensure

whether payments have been made to
confirm existence
2. Inspect the invoices for prepayments

related to any goods or services not yet
received to ensure existence
3. Analytically review the prepayments for

current year to previous year and
investigate any significant variances.
4. Cast the prepayments and agree it with

the managements results to ensure
completeness and accuracy
PwC 112
a) Dashing Co manufactures women’s clothing, and its year end was 31 July 20X7. You are an
audit supervisor of Jaunty & Co and the year-end audit for Dashing Co is due to commence
shortly.
The draft financial statements recognised profit before tax of $2·6m and total assets of $18m.
You have been given responsibility for auditing receivables, which is a material balance, and as
part of the audit approach, a positive receivables circularization is to be undertaken.
At the planning meeting, the finance director of Dashing Co informed the audit engagement
partner that the company was closing one of its smaller production sites and as a result, a
number of employees would be made redundant. A redundancy provision of $110,000 is included
in the draft financial statements.
Required:
a) Describe the steps the auditor should perform in undertaking a positive receivables
circularization for Dashing Co. (4 marks)
PwC 113
Dose operates a chain of health and fitness clubs. Its year end was 31 October 2012. You are
the audit manager and the year-end audit is due to commence shortly. The following matter has
been brought to your attention.
Receivables
Dose’s trade receivables have historically been low as most members pay monthly in advance.
However, during the year a number of companies have taken up group memberships at Dose
and hence the receivables balance is now material. The audit senior has undertaken a
receivables circularization for the balances at the year-end; however, there are a number who
have not responded and a number of responses with differences.
Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate
audit evidence in relation to the above matter. (5 marks)
PwC 114
You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the
files of two audit clients.
Palm Industries Co (Palm)
Palm’s year end was 31 March 2015, and the draft financial statements show revenue of $28·2
million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for
this audit has been completed.
A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April
highlighted that no amounts had been paid to Palm from this customer as they were disputing the
quality of certain goods received from Palm. The finance director is confident the issue will be
resolved and no allowance for receivables was made with regards to this balance
Required:
Discuss the issue and write audit procedures to collect more evidence (5 marks)
PwC 115
Audit Evidence
Inventory
Continuous or perpetual count system:
Where the client uses a perpetual system, the auditor should:
Attend at least one count to ensure that adequate controls are applied during the counts.
Inspect the number and value of adjustments made as a result of the count. If significant
adjustments are required each month, this would indicate that the system figures for inventory
cannot be relied on at the year end and full count should be requested.
GDN’s and GRN’s around the year end should be inspected to confirm correct cut off.
NRV testing and comparison of inventory days with prior year will be performed to identify
issues with valuation.
Inspection of purchase invoices for the name of the client will enable rights to be confirmed.
Existence:
Valuation:
PwC 116
Audit Evidence
Cost of Manufactured goods and WIP
Different elements of cost:
Get breakdown
of costs of finished and WIP goods
Calculations
Materials
Labour
Check pay rates against payroll records
Check hours worked with time records
Review costs against actual labor and production
Production overheads
Ensure only production overheads (not selling or admin)
Ensure overhead absorption rates are based on normal levels of output
Work in Progress
PwC 117
Audit Evidence
Tests to determine whether NRV is lower than cost:
Compare the selling prices of goods sold after the year end per sales invoices with their
purchase price per supplier statements.
Review the order book to determine at what price the goods are ordered.
Write down from last year – Are these items in inventory still?
For unsold items, discuss with mgt to determine whether they are slow moving and provision
has been created
Review aged inventory reports and identify any slow-moving goods, discuss with
management why these items have not been written down
Cut- Off:
Review GDN’s and GRN’s pre and post year end and look at the dates to ensure correct cut off
Right and Obligations
Inspect the purchase invoice to identify thr name and address of the client
to confirm rights.
Obtain any cofirmation from the third party to confirm the rights of goods
held on behalf of the client.
PwC 118
i. Identify and explain FOUR financial statement assertions relevant to account balances at the
year end; and
ii. For each identified assertion, describe a substantive procedure relevant to the audit of year-
end inventory. (8 marks)
Que: Elounda Co manufactures chemical compounds using a continuous production process. Its
year end was 31 July 20X6 and the draft profit before tax is $13·6 million. You are the audit
supervisor, and the year-end audit is due to commence shortly. The following matters have been
brought to your attention.
Inventory valuation
Your firm attended the year-end inventory count for Elounda Co and ascertained that the process
for recording work in progress (WIP) and finished goods was acceptable. Both WIP and finished
goods are material to the financial statements and the quantity and stage of completion of all
ongoing production was recorded accurately during the count.
During the inventory count, the count supervisor noted that a consignment of finished goods,
compound E243, with a value of $720,000, was defective in that the chemical mix was incorrect.
The finance director believes that compound E243 can still be sold at a discounted sum of
$400,000.
Q.153 has similar question

Required:
a) Describe substantive procedures you should perform to obtain sufficient, appropriate

audit evidence in relation to the above matter (6 marks)
obtain a breakdown of the $720,000 to identify components of the value to ensure correct
valuations. Inspect the quality control report for the period to identify any other compounds
that are defective and need adjustment to ensure valuations. Discuss with the finance director
the assumptions with assuming the $400,000 and assess the reasonableness of it. If sold then
obtain any post year end sales invoices to confirm that the E243 was sold for $400,000 to ensure
valuations. If not sold, then discuss with the management the reasons and request that the
inventory has to be written off for correct valuations. Obtain the inventory records and follow
through to FS to ensure the E243 was written down by $320,000 to ensure valuations.
PwC 119
You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the
files of audit clients.
Ash Trading Co (Ash)
Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only
appointed auditors in February 2015, as the previous auditors were suddenly unable to
undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen
by the company’s internal audit department. Neither Chestnut & Co nor the previous auditors
attended the count. Detailed inventory records were maintained but it was not possible to
undertake another full inventory count subsequent to the year end.
The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million
and inventory of $510,000.
Required:
i. Discuss the issue, including an assessment of whether it is material;
ii. Recommend one procedure the audit team should undertake to try to resolve the
issue;
The amount of inventory $510,000 is 21% and therefore it’s material.
Ash Trading appointed chestnut as their auditor post year end and therefore, Chestnut was not able to
attend the inventory count and another count isn’t possible at this stage; thus have to rel on the report of
internal auditors. As per accountng standard, inventory should be valued at lower of cost & NRV. There
is a risk that evaluation wouldn’t be correct and auditors weren’t able to collect sufficient appropriate audit
evidence on the inventory balance due to their subsequent appointment leading to under or over stated
inventory. Analytically review the inventory days and compare it with previous years to identify significant
variances and investigate them to ensure valuations of inventory. Inspect the internal auditors report on the
inventory to identify the results of the count and level of adjustment that were made to confirm the
accuracy of the count and valuations of inventory. On a sample basis, obtain the inventory records and
physically verify it with warehouse and compare the results to the count reuslts from management to
ensure valuations.
PwC 120
Audit Evidence
Non current assets
Company X – Non Current asset Register

31/12/20Y1
Purchased Depreciation Cost Acc Dep NBV
Asset Years Method $ $ $
Building 01/01/20X6 50 SL 1,000,000 120,000 880,000
Computer 1 01/01/20Y0 3 SL 1,000 667 333
Computer 2 01/01/20Y0 3 SL 2,000 1,333 667
Computer 3 01/01/20Y1 3 SL 3,000 1,000 2,000
Desks 01/01/20X8 5 SL 8,000 6,400 1,600
Chairs 01/01/20X9 5 SL 2,000 1,200 800
Total 1,016,000 130,600 885,400
Existence:
Obtain the NCA list and for a sample physically verify these to ensure existence.
Completeness:
Physically verify the assets and then obtain the NCA list and ensure completeness of record.
Inspect and trail back to ledgers. Review the disclosure notes of NCA to ensure all adequate disclosures
are made as per accounting standards. Analytically review NCA register & compare with previous year
to identify variances and investigate them.
Rights and Obligations:
Inspect the title deeds / legal purchase documents of the assets to confirm the name and address of the
client to ensure rights. For any assets purchased during the year, inspect the invoices to identofy the
name and address of the client to confirm rights.
PwC 121
Audit Evidence
Valuation:
Recognition: Cost model / Revaluation model
NBV = Cost – Accumulated Depreciation
Cost = Any cost incurred to bring the asset to its present location and condition
Revaluation surplus = fair value – carrying amount of asset at date of valuation
Depreciation is charged on the revalued amount over the remaining useful life of the asset.
Sale of an asset = Loss / profit on disposal
Depreciation: Useful life of the asset – Accounting estimate – Estimates are subjective and
judgmental
Cost – Proforma
Opening Balance Obtain the previous year closing balance oof NCA & agree these to the
current year opening balance to confirm valuations
Inspect the purchase amount and agree the amount to the FS to ensure correct
+ Additions
valuations. Review the board meeting minutes to see the discussion on the
purchases of NCA and its authorization.
Inspect the selling amount and agree the amount to the FS to ensure
-Disposals correct valuation. Review the board meeting minutes to the discussion of
selling the NCAs and its authorization. Inspect the NCA register to
identify that disposed assets have been correctly removed for correct
valuations. Recalculate the profit or loss on disposal and agree with the
management’s calculation to ensure accuracy.
Closing Balance Cast the closing balance to confirm the arithmatical accuracy.
PwC 122
Audit Evidence
Review the valuation certificate from the valuer and agree with the value in the FS to confirm
the amount
Consider the reasonableness of valuation by reviewing the experience of valuer , scope of

work assumptions used
Reperform the calculation of revaluation surplus and discuss with management for any
variances
Depreciation:
Recalculate the depreciation and agree with the mgt calculation to confirm the accuracy
Review the NCA register to ensure that depreciation has been charged on all assets with a
limited life.
For assets revalued, obtain the depreciation schedule to ensure that the depreciation
is calculated on revalued amount for correct valuations.
(Assess depreciation method is reasonable: compare with last year / compare with industry
practice)
PwC 123
Elounda Co manufactures chemical compounds using a continuous production process. Its year
end was 31 July 20X6 and the draft profit before tax is $13·6 million. You are the audit supervisor
and the year-end audit is due to commence shortly. The following matters have been brought to
your attention.
If scenario is short, always look at title to understand which procedures to write.

i. Revaluation of property, plant and equipment (PPE)
At the beginning of the year, management undertook an extensive review of Elounda Co’s non-
current asset valuations and as a result decided to update the carrying value of all PPE. The
finance director, Peter Dullman, contacted his brother, Martin, who is a valuer and requested that
Martin’s firm undertake the valuation, which took place in August 20X5. (5 marks)
Required:
a. Describe substantive procedures you should perform to obtain sufficient, appropriate

audit evidence in relation to the above matter
Obtain the board meeting minutes to see discussion on the update to the value of assets and its
authorizations. Consider the reasonableness of the valuation by reviewing the experience of the
valuer, the independence, scope of work and assumptions used. Inspect the valuers report to
identify the valuation figure and agree it with NCA figure in the financial statements to ensure
correct valuations. Inspect the NCA register to confirm that the valuations have been correctly
reflected in it for presentation and classification. Recalculate the depreciation and agree with
management’s calculation to ensure its on the revalued amount and accuracy. Review the NCA
schedule to ensure that the whole class of the assets have been revalued for valuations.
PwC 124
Paradise Hotel Co (Paradise) operates a hotel providing accommodation, leisure facilities and
restaurants. Its year-end was 30 April 2019. You are the audit senior of Turner & Co and are
currently preparing the audit programmes for the year-end audit of Paradise. You are reviewing
the notes of last week’s meeting between the audit manager and finance director where material
issues were discussed.
Depreciation
If it didn’t happen during the year, there could be no board minutes.
Paradise incurred significant capital expenditure during the year on updating the leisure facilities
for the hotel. The finance director has proposed that the new leisure equipment should be
depreciated over 10 years using the straight-line method
Required:
Describe substantive procedures to obtain sufficient and appropriate audit evidence in

relation to the above issues.
(5 marks)
Obtain board meeting minutes to see discussion on the capex and its authorization. Discuss
with the management the basis of assumption of the useful life of 10 years and assess the
reasonableness of it. Obtain the depreciation policy for any similar assets in the past and
compare it with management policy to ensure the reasonableness of it. Recalculate the
depreciation calculation and agree with management’s calculation to ensure accuracy.
Inspect the NCA register to ensure the inclusion of the new equipment and the depreciation
policy, life, etc. to confirm valuations. Obtain any capital expenditure forecast for the next
few years to confirm if management has any plans to replace any of these equipments to
ensure the accuracy of the 10 year estimation.
PwC 125
Audit Evidence
Intangible asset
What are they: Anything that doesn’t have a physical existence – Goodwill, Patents, Copyrights,
Research and development
Research and development
Accounting treatment: Development costs should be written off in the period in which they are
incurred, unless they satisfy all the following conditions:
• Probable future economic benefits
• I ntention to use or sell
• R esources adequate
• A bility to compelte and use or sell
• T echnicial Feasibility
• Expenditure reliabiliy measured
For the research costs, agree the costs to invoices and supporting documentation to confirm the
figure and agree it to the P&L
Inspect feasibility report to confirm that the item has the technical feasibility as per the accounting
std to confirm correct capitalization.
Review the market research reports to confirm that the client has ability to sell the asset and
there are probable future economic benefits
Review disclosure notes to identify relevant disclosures made as per the accounting standard.
PwC 126
Basset Co (Basset) is a client of your firm. You have been assigned to the following audit areas:
Intangible assets
Since the capitalization is already checked there wont be marks
for writing any procedures on if it’s research or development.
During the year, Basset obtained a patent from a competitor. The directors have discussed the
accounting treatment with your firm, and you are satisfied that it is appropriate to treat this as an
intangible asset. As they purchased the patent at what they believe to be below market value, the
directors wish to carry it at its fair value which they estimate to be substantially above the cost
price. They have estimated that the useful life of the patent is 20 years. (4 marks)
Describe substantive procedures you would perform to obtain sufficient and appropriate audit
evidence in relation to the matter
Inspect the purchase invoice to identify the cost of the patent to ensure valuations. Obtain
board meeting minutes to see discussions on the patent purchase and its authorizations.
Obtain the details about directors qualification to understand whether thay can accurately
estimate the value to ensure correct valuations. (this procedure is only valid because
question says that the directors are valuing this). Discuss with the management about the
basis of assumptions behind 20 years and assess the reasonableness of it. Recalculate the
ammoritization calculation and agree with management’s calculation to ensure accuracy.
PwC 127
Audit Evidence
Bank and cash Q156 is a similar question.
Cash in hand:
Physically verify the cash in hand and agree these to the petty cash records to confirm existence,
completeness, validation, etc.
Cash at bank:
Bank reconciliation
Obtain bank confirmation letter to confirm the balance and agree
Balance as per bank statement: these to the amount used in the reconciliation for correct valuations.
+ Outstanding lodgments (cheques recd by business – but not yet cleared the bank )
- Unpresented Cheque (cheques sent to suppliers but not yet cleared by the bank )
Balance as per cash book

Trace the outstanding lodgments to the pre-year end cashbook and
post-year end bank statement to confirm valuations.
Why is there a difference?
Unrecorded items – interest , bank charges
Errors Trace the unpresented cheques to the pre-year end cashbook and
post-year end bank statement to confirm valuations.
Timing difference
Obtain the figure from the bank reconciliation and agree it to the
cashbook for correct valuations. Cast the bank reconciliation to
check the valuation and accuracy.
Bank confirmation letters are a valuable source of audit evidence because they come directly
from an independent source and therefore provide greater reliability that evidence from client's
own records.
Cast the bank reconciliation to check arithmetical accuracy
Obtain bank confirmation letter and agree the balances for each bank account to the relevant
bank reconciliation and the year end balance in the financial statements. to confirm existence
remove
PwC 128
Hawthorn Enterprises Co (Hawthorn) manufactures and distributes fashion clothing to retail

stores. Its year end was 31 March 20X5. You are the audit manager and the year-end audit is
due to commence shortly. The following three matters have been brought to your attention.
Bank reconciliation
During last year's audit of Hawthorn's bank and cash, significant cut-off errors were discovered
with a number of post year end cheques being processed prior to the year end to reduce
payables. The finance director has assured the audit engagement partner that this error has not
occurred again this year and that the bank reconciliation has been carefully prepared. The audit
engagement partner has asked that the bank reconciliation is comprehensively audited. (4
marks) The answer to this is all the notes made on previous page.
Q.156 (c)
Obtain a bank confirmation letter to confirm the savings account and current account and
agree these to the items listed in the financial statements to confirm existence and
valuations. Obtain the bank statement and bank confirmation letter and agree the figure
used in bank reconciliation to confirm valuations. Trace the outstanding lodgments to the
pre-year end cashbook and post-year end bank statement to confirm valuations. Trace the
unpresented cheques to the pre-year end cashbook and post-year end bank statement to
confirm valuations. Obtain the cashbook and agree the figure of balance as per cashbook
obtained in bank reconciliation statement. Cast bank reconciliation to ensure arithmetical
accuracy and valuations.
PwC 129
Audit Evidence
Accounting estimates
Used in the absence of a precise means of measurement for the amounts.
Exam focus :
Provisions for legal liabilities
Provision for warranties

board meeting minutes pre-year end
high Provisions for restructuring (detailed formal plan, implementation of the restructuring / public
priority announcement DO NOT INCLUDE cost for retraining , relocations, marketing expenses etc.)
Provisions for redundancies
(Standard procedures for any estimate related question)
1. Discuss with the management the basis of their assumptions used to determine the estimate
and ensure the reasonableness of the assumptions.
aka point estimate
2. Develop auditors own independent estimate and compare it with managements estimate to
identify any significant variances and enquire with the management about it.
3. Obtain management representation letter to confirm the assumptions used to determine the
estimates made are reasonable.
4. Review the FS for adequate disclosures of the estimates to ensure they are in accordance
with the accounting standards.
PwC 130
Que: Paradise Hotel Co (Paradise) operates a hotel providing accommodation, leisure facilities
and restaurants. Its year-end was 30 April 2019. You are the audit senior of Turner & Co and are
currently preparing the audit programs for the year-end audit of Paradise. You are reviewing the
notes of last week’s meeting between the audit manager and finance director where two material
issues were discussed.
Food poisoning
copy of correspondence for proof
Paradise’s directors received correspondence in March from a group of customers who attended
a wedding at the hotel. They have alleged that they suffered severe food poisoning from food
eaten at the hotel and are claiming substantial damages. Paradise’s lawyers have received the
claim and believe that the lawsuit against the company is unlikely to be successful.
confirmation from lawyer
Required:
Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to
the above issues. (5 marks)
Accounting Estimates review

breakdown of
Que: Reorganization
year end is 30th of October provision
The company recently announced its plans to reorganize its health and fitness clubs. This will
involve closing some clubs for refurbishment, retraining some existing staff and disposing of
some surplus assets. These plans were agreed at a board meeting in October and announced to
their shareholders on 29 October. The finance director is proposing to make a reorganization
provision in the financial statements.
Describe substantive procedures you would perform to obtain sufficient and appropriate audit
evidence in relation to the above matter (4 marks)
PwC 131
Audit Evidence
Share capital, reserves and directors’ emoluments
Share capital audit tests
Agree the share capital figure to the statutory documents of the company
Inspect the board minutes to get evidence on issue of shares authorization and approval
Agree the cash received for the shares to the cash book and bank statement
Reconcile the list of shareholders to the nominal ledger
Reserves
Discuss the company’s reserves with the directors to establish which reserves they have (e.g.
retained earnings, revaluation surplus, share premium)
Agree the movement in any of the reserves to supporting documentation:
o Share premium to board minutes
o Revaluation surplus to third party valuation report
o Retained earnings to the statement of profit and loss and dividend payments
Review the financial statements to ensure that the movements in reserves is accurately
recorded in the statement of changes in equity.
PwC 132
Audit Evidence
or/ identify
Material by nature - very risky - high chance to be manipulated. variances and
Directors’ emoluments all the renumerations paid to the directors
investigate them.
Perform analytical procedures of directors’ total emoluments year on year to determine
reasonableness. Discuss any large discrepancies with the directors
For each director, obtain a breakdown of total emoluments for the year, split between salary,
bonuses, other benefits and pension contributions as per
Inspect accounting
Check the directors’ emoluments back to the signed directors’ letters of employment /
standard
contracts for correct valuations
Review the financial statements to ensure the adequate disclosure of director’s emoluments
Inspect minutes of the board meeting for evidence of approval of director’s bonuses to ensure
for valuation and existence
Inspect bank statements for evidence of the payments made to the directors and trace it to
the payroll records to ensure for valuations
Obtain management representation letter to confirm that all the director’s emoluments have
been disclosed appropriately on the financial statements
Review board meeting minutes to confirm any discussions and authorizations on additional
payments during the year. (This can be written in any directors renumeration question).
Q.156 (d)
Review disclosure notes to ensure that the adequate disclosure for the overall directors’
renumeration is made as per local standards. Obtain a breakdown of the salary for a
month to identify the salary component and the bonus component to ensure correct
valuations. Obtain the bank statement and compare the payments made in December
and agree these to the payroll records to ensure valuations. Cast the schedule of
directors’ renumeration to identify the payments and accuracy. Review board meeting
minutes to confirm any discussions and authorizations on additional payments during
the year.
PwC 133
ISA 610 & 620: Using the work of others
& IA
Using the work

of others
Service
Experts Internal Audit
Organisations
Relying on work Internal audit

Auditor Management
already performed Payroll
Valuers
Lawyers
For example, if external auditor didn’t
attend the inventory count and the
internal auditors of the company
attended it, then the external auditors
can use the work of internal auditors as
an evidence only if they report to the
audit commite, not the FD. You need
the chief internal auditor to be
qualified but not the team.
PwC 134
Factors to be considered before relying
on work of others
Scope of work — the work of others must be evaluated to determine if

S it is sufficient and appropriate to be used as audit evidence
Organizational status — (relevant to internal audit only). The external

auditor must evaluate the status of the internal audit department within
o the entity. How seriously are its reports taken? Are its
recommendations for improvements implemented?
Due skill and care — the auditor must determine that the work of
D others is completed with due skill and care, ie that it is planned,
directed, supervised and adequately reviewed
Independence — the auditor must determine that the expert, service

I organisation or internal audit department is independent of the client to
ensure no bias is reflected in their work
should report to audit commite
Technical competence — the work of others must be of appropriate

quality to be relied upon by the auditor and hence the expert, service
T organisation or internal auditor must have the technical ability and/or
qualifications to provide such work
PwC 135
Service Organisations If the client is outsourcing certain parts of
their operations like receivables collection
or internal audit. This is called a service
organization.
This will help him in assessing the risk of material misstatement and designing and performing
further audit procedures Factors auditors should consider in relation to client’s use of the service
organisation include:
possibly by obtaining a contract
1. The audit team should gain an understanding of the services being provided by the service
organisation , including the materiality of that area and the basis of the outsourcing contract.
2. They will need to assess the design and implementation of internal controls at the service
organisation
3. The team may wish to visit the service organisation and undertake tests of controls to confirm
the operating effectiveness of the controls.
4. If this is not possible, auditors should contact the service organization’s auditors to request
either a type 1 (report on description and design of controls) or type 2 report (on description,
design and operating effectiveness of controls).
5. The auditor is responsible for obtaining sufficient and appropriate evidence; therefore no
reference may be made in the audit report regarding the use of information from the
service organization’s auditors
No matter who helped you,
type 1 report is on a particular date,
there should be no references
type 2 is over a period of time to
made to anyone.
ensure it was working throughout
the period (bank reconciliation
working every month and senior
person reviewing it).
PwC 136
You are an audit supervisor of Amethyst & Co and are currently planning the audit of your client,
Aquamarine Co (Aquamarine) which manufactures elevators. Its year end is 31 July 2016 and
the forecast profit before tax is $15·2 million.
The company undertakes continuous production in its factory, therefore at the year end it is
anticipated that work in progress will be approximately $950,000. In order to improve the
manufacturing process, Aquamarine placed an order in April for $720,000 of new plant and
machinery; one third of this order was received in May with the remainder expected to be
delivered by the supplier in late July or early August.
At the beginning of the year, Aquamarine purchased a patent for $1·3 million which gives them
the exclusive right to manufacture specialized elevator equipment for five years. In order to
finance this purchase, Aquamarine borrowed $1·2 million from the bank which is repayable over
five years.
In January 2016 Aquamarine outsourced its payroll processing to an external service

organisation, Coral Payrolls Co (Coral). Coral handles all elements of the payroll cycle and sends
monthly reports to Aquamarine detailing the payroll costs. Aquamarine ran its own payroll until 31
December 2015, at which point the records were transferred over to Coral.
The company has a policy of revaluing land and buildings, and the finance director has
announced that all land and buildings will be revalued at the year end. During a review of the
management accounts for the month of May 2016, you have noticed that receivables have
increased significantly on the previous year end and against May 2015.
The finance director has informed you that the company is planning to make approximately 65
employees redundant after the year end. No decision has been made as to when this will be
announced, but it is likely to be prior to the year end.
Required:
a) Explain the additional factors Amethyst & Co should consider during the audit in
relation to Aquamarine Co’s use of the payroll service organisation. (3 marks)
PwC 137
Automated Tools and Techniques
Application of auditing procedures using computer as a tool.
Computers can be used to perform either substantive procedures or Test of controls
Computer Assisted Audit Automated tools and techniques

Technique (CAAT)
Audit software Test data
Test data is used for test of

Audit softwares are used to control by using dummy
carry out substantive transactions. It can be done
procedures at the client like on live environment (when
extracting data, selecting system is operational) or
samples or performing demo environment. It can
calculations, etc. also be done on true or false
data.
Example: any transaction above $10,000 needs quthorization.

True Data: checking whether the system will accept abpve $10,000 with authorization.
False Data: checking whether the system will reject above $10,000 without authorization.
PwC 138
Data analytics
Data analytics (DA) is the process of examining data sets in order to draw conclusions about the
information they contain, increasingly with the aid of specialized systems and software.
With the increasing volume of data in business today, data analytics can be used as an audit
technique to better understand and analyze large volumes of data.
Data analytics increases the automation in the audit process which allows the auditor to increase
his focus on the more fundamental audit procedures and the more complex and risky areas of
audit.
Data analytics can be applied throughout the phases of the audit, including:
Plan the audit
Perform tests of operating effectiveness of control
Perform substantive procedures
Evaluate results
PwC 139
Commonly performed data analytics
Comparing the last time an item was bought with the last time it was sold, for cost/NRV
purposes.
Inventory ageing and how many days inventory is in stock by item.
Receivables and payables ageing and the reduction in overdue debt over time by customer.
Analyses of revenue trends split by product or region.
Analyses of gross margins and sales, highlighting items with negative margins.
Matches of orders to cash and purchases to payments.
Auditors can test program controls as Setting up the software needed for
well as general internal controls automated tools and techniques can be
associated with computers. time consuming and expensive.
Auditors can test a greater number of Audit staff will need to be trained so
items more quickly and accurately than they have a sufficient level of IT
would be the case otherwise. knowledge to apply automated tools and
techniques.
Auditors can test transactions rather
than paper records of transactions that Not all client systems will be compatible
could be incorrect. with the software used with automated
tools and techniques.
Automated tools and techniques are
cost effective in the long term if the There is a risk that live client data is
client does not change its systems. corrupted and lost during the use of
automated tools and techniques.
Results from automated tools and
techniques can be compared with
results from traditional testing - if the
results correlate, overall confidence is
increased.
PwC 140
Video Class
Q: Which of the following is NOT an audit software technique?
A. Using computer programs to extract a sample for a receivables circularisation
B. Running a computer program to test the addition of the cash book
C. Using a computer to perform an analytical review comparison of administration expenses

against the prior year
D. Entering a sample of dummy sales orders through the computer system which takes
customers over their credit limit to ensure the system rejects the orders
where it says dummy, it’s not audit software
Notes for the video uploaded in LMS
SAMPLING - VIDEO
STATISTICAL VERSUS NON-STATISTICAL SAMPLING
‘Statistical’ sampling: ‘An approach to sampling that has the following characteristics:
i. Random selection of the sample items, and
ii. The use of probability theory to evaluate sample results, including measurement of sampling
risk.’
The ISA goes on to specify that a sampling approach that does not possess the characteristics in
(i) and (ii) above is considered non-statistical sampling.
AUDIT SAMPLING
STATISTICAL SAMPLING NON-STATISTICAL SAMPLING
VALUE
RANDOM SYSEMATIC WEIGHTED/ HAPHAZARD BLOCK
SAMPLING SELECTION MONETARY SELECTION SELECTION
SAMPLING
PwC 141
Random selection: This method of sampling ensures that all items within a population stand an
equal chance of selection by the use of random number tables or random number generators.
The sampling units could be physical items, such as sales invoices or monetary units.
Systematic selection: This is a method of selection in which the auditor selects items using a
constant interval between selections. The first item may be selected on a random or haphazard
basis, and thereafter the sampling interval is derived by the auditor, for example, by dividing the
population by the sample size.
Monetary Unit Sampling: This is a type of value-weighted selection in which sample size,
selection and evaluation results in a conclusion in monetary amounts. This selection method
ensures that each individual $1 in the population has an equal chance of being selected.
Haphazard selection: The auditor selects the sample without following a structured technique –
the auditor would avoid any conscious bias or predictability.
Block selection: This involves selection of a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because most populations
are structured such that items in a sequence can be expected to have similar characteristics to
each other, but different characteristics from items elsewhere in the population.
The advantages of using statistical sampling rather than judgemental sampling (non-statistical
sampling) include:
1. The size of the sample is determined objectively having regard to the degree of risk
associated with the area being tested.
2. Bias is eliminated.
3. Results of statistical sampling can be more easily justified as being representative of the
population as a whole, thus increasing the level of confidence in the results of testing the
sample. As a consequence of this, the conclusion drawn from the results of sample testing
are more easily justified where an audit client disputes the audit conclusions.
4. In instances when there is a large population, the use of statistical sampling techniques may
reduce the sample size, and therefore the amount of audit work required, as compared to the
sample size that would be selected using judgement sampling methodology
PwC 142
Other factors that affect sample sizes:
FACTOR EFFECT ON SAMPLE SIZES
Risk of material If inherent and control risk is high, then detection risk should be
misstatements lower.
Detection risk includes both sampling and non-sampling risk and
for sampling to be lower a large sample size is needed.
Required If the auditor required large confidence over the samples, then
confidence level sample size should be larger.
Expected Error If level of error expected by auditor is high, then sample size
should be larger
Tolerable error / Level of error or misstatement that the auditor can accept in the
misstatement population before he is concerned that there is a material
misstatement
Lower the level of tolerable error larger the sample size.
PwC 143
Following a competitive tender, your audit firm Cal & Co has just gained a new audit client Tirrol
Co. You are the manager in charge of planning the audit work. Tirrol Co’s year end is 30 June
2009 with a scheduled date to complete the audit of 15 August 2009. The date now is 3 June
2009.
Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory,
sales and purchasing systems are computerized, with each location maintaining its own
computer system.
The software in each location is the same because the programs were written specifically for
Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly
basis at Tirrol Co’s head office to produce management and financial accounts.
You are currently planning your audit approach for Tirrol Co. One option being considered is to
re-write Cal & Co’s audit software to interrogate the computerized inventory systems in each
location of Tirrol Co (except for head office) as part of inventory valuation testing.
However, you have also been informed that any computer testing will have to be on a live basis
and you are aware that July is a major holiday period for your audit firm.
Required:
i. Explain the benefits of using audit software in the audit of Tirrol Co; (4 marks)
ii. Explain the problems that may be encountered in the audit of Tirrol Co .
PwC 144
Delphic Co is a wholesaler of furniture (such as chairs, tables and cupboards).
Delphic buys the furniture from six major manufacturers and sells them to over 600 different
customers ranging from large retail chain stores to smaller owner-controlled businesses.
The receivables balance therefore includes customers owing up to $125,000 to smaller balances
of about $5,000, all with many different due dates for payments and credit limits.
All information is stored on Delphic’s computer systems although previous audits have tended to
adopt an ‘audit around the computer’ approach.
You are the audit senior in charge of the audit of the receivables balance.
For the first time at this client, you have decided to use audit software to assist with the audit of
the receivables balance.
Computer staff at Delphic are happy to help the auditor, although they cannot confirm
completeness of systems documentation, and warn that the systems have very old operating
systems in place, limiting file compatibility with more modern programs.
The change in audit approach has been taken mainly to fully understand Delphic’s computer
systems prior to new internet modules being added next year.
To limit the possibility of damage to Delphic’s computer files, copy files will be provided by
Delphic’s computer staff for the auditor to use with their own audit software
Required:
a) Explain the audit procedures that should be carried out using audit software on the
receivables balance at Delphic Co. apparently it’s a scary question
PwC 145
Audit Documentation Video Class
Possible Q: What is purpose of working papers?

Audit documentation – video
Audit working papers provide a record of:
Auditors basis for the auditor report,
Planning and performance of the audit (including the nature, timing and extent of audit
procedures)
Supervision and review of audit work,
Audit evidence obtained to support the audit opinion
The general rule of thumb with documentation is that if it’s not document it is not done,
irrespective of whether the work has been completed or not.
Although documentation needs to be sufficiently complete and detailed, its extent is a matter of
professional judgement. It is impractical to document every consideration.
How much to document?
An experienced auditor with no previous connection with the audit should at least be able to gain
an understanding of the work performed and the basis of any decisions taken.
Contents of the auditor’s working papers
The following items should be recorded on every working paper prepared by the audit team:
Name of client and year-end date
Title identifying the area of the financial statements being audited and the topic area e.g.
receivables circularization. The working paper should also be given a reference
e.g. PPE4 being the fourth working paper in the audit of property, plant and equipment
Who performed the audit work
The date work was completed
Who reviewed the audit work performed
The date and extent of such review
A description of the work performed, including the objective of the testing (e.g. to support a
financial statement assertion), samples selected, testing performed, results and conclusion.
PwC 146
Audit Documentation
Past Question: List & explain the purspose of 6 items included in the working paper.
Auditors should maintain the confidentiality and safe custody of working papers.
Working papers are the property of the auditor and clients have no rights to demand access.
Portions of or extracts from working papers may be made available to the entity at the discretion
of the auditor but are not a substitute for the entity's accounting records and shouldn’t be used as
one.
Safekeeping of working papers should include locked fireproof cabinets and the use of physical
keys and logical passwords. Electronic documentation may be particularly susceptible to
corruption or loss and should be backed up.
Audit files should be retained not longer than five years from the date of the auditor’s report.
Working paper may be divided into two types:
Permanent audit file – Containing information of continuing importance to the audit
Current Audit File - Containing information relevant to the current years audit
PwC 147
Audit Documentation
Engagement letters
Accounting systems notes

and internal control New client questionnaire
questionnaires
PAF
Previous year’s signed and
Memorandum and articles
reports to management
Details of the history of the Legal documents,

client business eg leases
This is a report where we will

communicate significant
deficiencies to TCWG (chapter:
internal controls)
Financial
Notes of board statements
Accounts checklist
minutes
Report to Summary of
management unadjusted errors
CAF Report to partner

Written
(significant events
representations
and errors)
Time budgets and

Review notes
summaries
Accounting systems notes and Audit strategy and
internal control questionnaires planning memo
The current audit file also contains working papers covering each audit area. These should
include a lead schedule for each balance in the financial statements and a list of audit
procedures performed along with the results and conclusions of the testing.
PwC 148
Following a discussion with the management at Bart Co you now understand that the internal
audit department are prepared to assist with the statutory audit. Specifically, the chief internal
auditor is prepared to provide you with documentation on the computerized inventory systems at
Bart Co
The documentation provides details of the software and shows diagrammatically how
transactions are processed through the inventory system. This documentation can be used to
significantly decrease the time needed to understand the computer systems and enable audit
software to be written for this year’s audit.
Required:
Explain how you will evaluate the computer systems documentation produced by the internal
audit department in order to place reliance on it during your audit. (6 marks)
Answer:
Reliance on internal audit documentation
There are two issues to consider; the ability of internal audit to produce the documentation and
the actual accuracy of the documentation itself.
The ability of the internal audit department to produce the documentation can be determined by:
Ensuring that the department has staff who have appropriate qualifications. Provision of a
relevant qualification e.g. membership of a computer related institute would be appropriate.
Ensuring that this and similar documentation is produced using a recognised plan and
that the documentation is tested prior to use. The use of different staff in the internal audit
department to produce and test documentation will increase confidence in its accuracy.
Ensuring that the documentation is actually used during internal audit work and that
problems with documentation are noted and investigated as part of that work. Being
given access to internal audit reports on the inventory software will provide appropriate
evidence.
PwC 149
Regarding the actual documentation:
Reviewing the documentation to ensure that it appears logical and that terms and symbols
are used consistently throughout. This will provide evidence that the flowcharts, etc should be
accurate.
Comparing the documentation against the ‘live’ inventory system to ensure it correctly reflects
the inventory system. This comparison will include tracing individual transactions through the
inventory systems.
Using part of the documentation to amend Client’s audit software, and then ensuring that the
software processes inventory system data accurately. However, this stage may be limited due
to the need to use live files at Bart Co.
List and explain the purpose of FOUR items that should be included on every working paper
prepared by the audit team. (4 marks)
PwC 150
ISA 230 Audit Documentation deals with the auditor’s responsibility to prepare audit
documentation for an audit of financial statements.
Required:
State FOUR benefits of documenting audit work. (4 marks)
Documenting audit work
Provides evidence of the auditor’s basis for a conclusion about the achievement of the overall
objective of the audit
Provides evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements
Assists the engagement team to plan and perform the audit
Assists members of the engagement team responsible for supervision to direct, supervise
and review the audit work
Enables the engagement team to be accountable for its work
Retains a record of matters of continuing significance to future audits
PwC 151
Interim vs Final Audits
Interim audits
Interim audits are completed part way through the financial year of the client. Interim work
typically reviews 6 or 9 months of the financial year although other periods are also acceptable.
Final audits
Final audits take place just after the yearend and audit the financial year in question. If interim
testing has been performed, then roll forward testing tends to be performed on the income
statement.
Interim audit Final audit
Risk assessment Substantive testing
Recording entity’s system of Internal Analytical procedures

control Subsequent events review
Evaluating the design of internal control Agreeing FS to records
Carrying out tests of controls Consideration of GC status
Performing substantive testing on Performing test to ensure that the
certain transactions and balances conclusion made on interim audit is still
Identification of issues that may have an valid
impact on final audit work
Balances like non-current assets

(existence, assertion, etc.) can be
tested in the interim stage.
PwC 152
Completion and Review
ISA 560 Subsequent Events
Subsequent events : Events occurring between the date of financial statements and the auditors
report and up till the FS issue date
Auditors have an active duty Auditors have a passive duty
between year end and audit between audit report signing
report signing date. and FS issue date.
AUDIT REPORT
YEAR END DATE FS ISSUE
SIGNING
31 - 12 - 2020 30 - 04 - 2021
27 - 02 - 2021
However, if they’re aware about an event in this
Any events happening in that period
period and they believe that the initial audit
should be investigated by the auditor
report was wrong, the passive duty will become
by collecting sufficient & appropriate
an active duty, meaning they should collect
audit evidence.
sufficient & appropriate audit evidence.
Adjusting event Non adjusting event
Any events that provide evidence of Any events that DO NOT provide evidence of
conditions existing at the date of FS: conditions existing at the date of FS:
ADJUST THE FS DISCLOSURE
Eg : Receivables from a major customer Eg : COVID - Natural disasters, Pandemics

which is gone bad.
Settlement of court case which was filed Dividends declared after the year end
before year end
Sale of inventory after year end providing Announcement of a major restructuring

evidence of NRV at the year end
Fraud or error discovered after year end

showing that accounts are incorrect
about the details of the event,

any financial statement effect of
it or a statement that such
financial estimates cannot be
made.
PwC 153
Completion and Review
Active duty Passive duty

Review procedures mgt has to identify Discuss the matter with mgt to determine
subsequent events whether the FS need amendment
Review the board minutes after the date of If mgt amend the FS, then the auditor should
FS up to date of audit report conduct audit procedures and assess if audit
report has an impact.
Enquire with mgt whether any subsequent If mgt refuses to make amendment FS ,
events have occurred which might affect the AUDITOR SHOULD CONSIDER IMPACT
FS ON AUDIT REPORT.
Inspect any legal correspondences which
relates to a legal case
Obtain written representations from mgt
about the completeness of subsequent
events identified by mgt.
Inspect any post year end bank statements
for evidence of any payment or receipt of a
subsequent event
Facts discovered after the financial statements have been issued
After the financial statements have been issued, the auditor has no obligation to make any
inquiry regarding such financial statements.
However, if the auditor becomes aware of a fact which existed at the date of the auditor’s report
and which, if known at that date, may have caused the auditor’s report to be modified, the
auditor should:
Consider whether the financial statements need revision;
Discuss the matter with management; and
If needed, issue a new report on the revised financial statements. This report should include
an emphasis of matter paragraph or other matter paragraph referring to the reason for the
revision.
If management do not revise the financial statements, the auditor should take legal advice with
the objective of trying to prevent further reliance on the report.
PwC 154
You are an audit senior in Check and Co and you are finalizing the audit of Dress You Like Co for
the year ending 30 September 20X6. Revenue is $51,895,000 and profit before tax is
$1,025,000.
During the audit, you learnt that the finance director left the company in March 20X6 and was
suing the company for constructive dismissal. After much discussion between the audit partner
and directors of Dress You Like Co, the company agreed to make a provision of $100,000 in
relation to this claim.
It is now 18 November 20X6 and the auditor's report has not yet been signed. As part of your
finalization procedures, you have spoken to Dress You Like Co's legal counsel and they have
informed you that the finance director has won the case. Dress You Like has been ordered to pay
damages of $500,000 by the court.
The case is an adjusting event because
even though the result came post year-
end, the case was filed before year end.
Required If it was filed after, you don’t adjust it.
Explain whether the financial statements of Dress You Like Co for the year ending 30 September
20X6 will need amending in relation to the result of the court case with the legal director.
Answer plan
1. Materiality of the misstatement ($500k - $100k) / $1,025,000 = 39% of PBIT and it’s material.
2. Identification as to whether it’s a subsequent event or not
3. Explain why it is an adjusting event / non adjusting event: use words from the scenario
4. Accounting standard – Risk - FS impact
5. Procedures:
i. Scenario specific
ii. Discuss with mgt whether they will make the adjustment
iii. Review FS to ensure correct adjustment made
PwC 155
Panda Co manufactures chemicals and has a factory and four offsite storage locations for
finished goods. Panda Co's year end was 30 April 20X3. The final audit is almost complete and
the financial statements and auditor's report are due to be signed next week. Revenue for the
year is $55 million and profit before taxation is $5.6 million.
The following two events have occurred subsequent to the year end. No amendments or
disclosures have been made in the financial statements.
Event 1 - Defective chemicals
Panda Co undertakes extensive quality control checks prior to the dispatch of any chemicals.
Testing on 3 May 20X3 found that a batch of chemicals produced in April was defective. The cost
of this batch was $0.85 million. In its current condition it can be sold at a scrap value of $0.1
million. The costs of correcting the defect are too significant for Panda Co's management to
consider this an alternative option.
Event 2 - Explosion
An explosion occurred at the smallest of the four offsite storage locations on 20 May 20X3. This
resulted in some damage to inventory and property, plant and equipment. Panda Co's
management have investigated the cause of the explosion and believe that they are unlikely to
be able to claim on their insurance. Management of Panda Co has estimated that the value of
damaged inventory and property, plant and equipment was $0.9 million and it now has no scrap
value.
For each of the two events above:
i. Explain whether the financial statements require amendment; and
ii. Describe audit procedures that should be performed in order to form a conclusion on any
required amendment.
Note. The total marks will be split equally between each event. (12 marks)
PwC 156
ISA 570 Going Concern
Going concern is the assumption that the business will continue in existence for 12 months from
the date of balance sheet.
FS are prepared on a going concern basis.
Not a going concern
If a company is not a going concern, then the FS should be prepared on a

Break up basis:
PAST QUESTION: In accordance with ISA 570 Going Concern, explain the responsibilities
of auditors and management regarding going concern. (3 marks)
Auditor needs to check whether

the company is about to get
Responsibility towards Going concern liquidated but still assuming going
concern basis.
Management’s responsibility Auditors’ responsibility
Assess whether the company can continue Assess whether the FS are prepared on an
as a going concern appropriate basis
Disclose any going concern uncertainties in If going concern basis is used , obtain
the FS sufficient appropriate audit evidence
Review the ability of the company to pay If there is any material uncertainty to GC ,
their liabilities review whether adequate disclosures are
made or not
Review how alternative finances can be If the company is not a GC then auditors
raised should ensure that FS are prepared on a
break up basis.
Disclose: doubts about

going concern, effects on
FS, basis of preparation of
FS, time period (DEBT)
PwC 157
Going Concern Indicators:
Net Liability position
Withdrawal of financial support by creditors
Negative operating cash flows
Adverse financial ratios: Eg: Low current ratio, Poor profit margin, High gearing
Discontinuance of dividends
Significant deterioration in the value of assets
Inability to pay creditors on time
Inability to comply with terms of loan arrangement
Change from credit to cash on delivery terms with suppliers
Inability to obtain new financing
Loss of key supplier, customer, license
Loss of key management without replacement
Shortage of important supplies
Emergence of a highly successful competitor
Pending legal claims, if successful company needs to pay high compensation
Change in government policy adversely affecting the entity
Uninsured during a catastrophe
PwC 158
Procedures maximum 6 marks

If there are events that may cast doubt on entity’s going concern auditor should carry out audit
procedures to determine whether a material uncertainty exists – CAN HAVE AN IMPACT ON
AUDIT REPORT
Obtain the company’s cash flow forecast and review the cash inflows and outflows. Assess
the assumptions for reasonableness and discuss the findings with management to
understand if the company will have sufficient cash.
Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.
Evaluate management’s plans for future actions, including their contingency plans in relation
to ongoing financing and plans for generating revenue and consider the feasibility of these
plans.
Review the company’s post year-end sales and order book to assess if the levels of trade are
likely to increase and if the revenue figures in the cash flow forecast are reasonable.
Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.
Review any bank correspondence to assess the likelihood of the bank renewing the overdraft
facility.
Review post year-end correspondence with suppliers to identify if any have threatened legal
action or any others have refused to supply goods.
With the client’s permission, enquire of the lawyers of Client Co as to the existence of any
litigation and if so, the likely outcome of any litigation.
Perform audit tests in relation to subsequent events to identify any items which might indicate
or mitigate the risk of going concern not being appropriate.
Review the post year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.
Review post year-end management accounts to assess if in line with cash flow forecast.
Review disclosure notes Consider whether any additional disclosures as required by IAS 1
Presentation of Financial Statements in relation to material uncertainties over going concern
should be made in the financial statements.
Review FS and the notes to Consider whether the going concern basis is appropriate for the
preparation of the financial statements.
Obtain a written representation confirming the directors’ view that Client is a going concern.
PwC 159
Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years.
The company is funded partly through overdrafts and loans and also by several large
shareholders; the year end is 30 April 2014.
Clarinet has experienced significant growth in previous years; however, in the current year a new
competitor, Drums Design Co (Drums), has entered the market and through competitive pricing
has gained considerable market share from Clarinet. One of Clarinet’s larger customers has
stopped trading with them and has moved its business to Drums.
In addition, a number of Clarinet’s specialist developers have left the company and joined Drums.
Clarinet has found it difficult to replace these employees due to the level of their skills and
knowledge.
Clarinet has just received notification that its main supplier who provides the company with
specialist electrical equipment has ceased to trade.
Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It
has approached its shareholders to finance this development; however, they declined to invest
further in Clarinet.
Clarinet’s loan is long term and it has met all repayments on time. The overdraft has increased
significantly over the year and the directors have informed you that the overdraft facility is due for
renewal next month, and they are confident it will be renewed.
The directors have produced a cash flow forecast which shows a significantly worsening position
over the coming 12 months. They are confident with the new products being developed, and in
light of their trading history of significant growth, believe it is unnecessary to make any
disclosures in the financial statements regarding going concern.
At the year end, Clarinet received notification from one of its customers that the hardware
installed by Clarinet for the customers’ online ordering system has not been operating correctly.
As a result, the customer has lost significant revenue and has informed Clarinet that they intend
to take legal action against them for loss of earnings. Clarinet has investigated the problem post
year end and discovered that other work-in-progress is similarly affected and inventory should be
written down.
PwC 160
The finance director believes that as this misstatement was identified after the year end, it can be
amended in the 2015 financial statements.
Required:
a) Explain SIX potential indicators that Clarinet Co is not a going concern. (6 marks)
b) Describe the audit procedures which you should perform in assessing whether or not Clarinet
Co is a going concern. (6 marks)
You are the audit senior of Holtby & Co and are planning the audit of Walters Co (Walters) for the
year ended 31 December 2014. The company produces printers and has been a client of your
firm for two years; your audit manager has already had a planning meeting with the finance
director. He has provided you with the following notes of his meeting and financial statement
extracts.
Walters’s management were disappointed with the 2013 results and so in 2014 undertook a
number of strategies to improve the trading results. This included the introduction of a generous
sales-related bonus scheme for their salesmen and a high profile advertising campaign. In
addition, as market conditions are difficult for their customers, they have extended the credit
period given to them.
PwC 161
The finance director of Walters has reviewed the inventory valuation policy and has included
additional overheads incurred this year as he considers them to be production related. The
finance director has calculated a few key ratios for Walters; the gross profit margin has increased
from 44·4% to 52·2% and receivables days have increased from 61 days to 71 days. He is happy
with the 2014 results and feels that they are a good reflection of the improved trading levels.
Financial statement extracts for year ended 31 December
Draft Actual
2014 2013
$m $m
Revenue 23·0 18·0
Cost of sales (11·0) (10·0)
Gross profit 12·0 8·0
Operating expenses (7·5) (4·0)
Profit before interest and taxation 4·5 4·0
Inventory 2·1 1·6
Receivables 4·5 3·0
Cash – 2·3
Trade payables 1·6 1·2
Overdraft 0·9 –
Required:
Describe the procedures that the auditor of Walters Co should perform in assessing
whether or not the company is a going concern. (5 marks)
PwC 162
Overall Review
D13 Q: Explain 3 procedures auditors should perform in overall review.
After the completion of the audit work and before the audit report is signed, the auditor should
perform an overall review of the financial statements and the information published with
them. This review should determine:
That the financial statements are prepared using appropriate accounting policies (e.g.
comparable with other firms in the same industry) and whether they have been consistently
applied.
Whether the information in the financial statements is consistent with the auditor’s knowledge
of the business and compatible with their audit findings. mandatory analytical review
in completion stage
Whether the information contained in other information published with the financial statements
is consistent with it and does not mislead users of the financial statements
Whether the information in the financial statements is properly presented and disclosed in
accordance with accounting standards, legislation and other regulatory requirements.
That sufficient, appropriate audit evidence has been obtained to support the audit opinion.
The auditor would also consider uncorrected misstatements at this stage of the audit to
ensure that the overall effect of uncorrected misstatements was not material to the financial
statements.
> Was the plan flexed appropriately for new circumstances?
PwC 163
ISA 450 – Evaluation of misstatements :
(Tested in March 2020)
Factual misstatements are misstatements

about which there is no doubt. An example
would be a clear breach of an IFRS
requirement meaning that the financial
statements are incorrect.
Judgmental misstatements are differences

arising from the judgments of management
concerning accounting estimates that the
auditor considers unreasonable, or the
selection or application of accounting policies
that the auditor considers inappropriate.
Projected misstatements are the auditor’s

best estimate of misstatements in
populations, involving the projection of
misstatements identified in audit samples to
the entire populations from which the
samples were drawn.
For example,
Receivables = $100,000
Sample = $10,000
Misstatement in sample = $5,000
Projected misstatement = $50,000
PwC 164
ISA 450 – Evaluation of misstatements :
The auditor must consider the effect of misstatements on both the audit procedures and the
audit opinion.
To achieve this the auditor must accumulate all identified misstatements and consider the
impact either at an individual level or at an aggregate level on the audit opinion.
If material, then need to consider whether the audit plan or strategy needs to be revised. The
auditor will need to report these misstatements to those charged with governance and
request all misstatements to be corrected. If the management refuses to make the correction,
investigate on the reasons for the refusal and consider the impact on the financial statements
as a whole.
Uncorrected misstatements are misstatements found during the audit that the client does not
make a correction for. The auditor must review the misstatement in the light of materiality to
determine whether the misstatement requires adjustment due to its size or nature. If the
transaction is considered material and the client refuses to make the adjustment, the audit
report will require modification. If however the transaction is not material either individually or
in aggregate, the auditor should still detail the transaction in the report to management and
they should also ask management to provide a written representation that they believe the
balance is not material both individually and in aggregate.
PwC 165
ISA 580 Written representations /
Management representation letter
Form of audit evidence
Written statement by management provided to the auditor to confirm certain matters or to support
( corroborative ) other audit evidence
Written representations are mainly collected for:
To confirm that mgt has fulfilled their responsibility to prepare FS pre-conditions to audit.
To support other audit evidence
As per ISA’s (fraud , laws and regulations , going concern , accounting estimates ,
subsequent events)
If written representation are not provided:
Discuss the matter with management
Reassess the integrity of the management and evaluate the effect of this on other audit
evidences provided by the management
Take appropriate action and think about the impact on audit report
How are written representations obtained?
As the audit progresses, the audit team will assemble a list of those items about which it is
appropriate to seek management representations.
During completion, the auditors will write to the client confirming these issues
The client must formally document, and sign, a response and send it to the auditor.
In what form are they?
A letter from the client to the auditors responding to the necessary points. (It is common for
the auditor to draft the letter for the client, who simply reproduces it on their own letter-headed
paper, approves it and signs it).
Or even, minutes of a meeting where representations were made orally, which can be signed
by management.
PwC 166
ISA 580 Written representations /
management representation letter
Quality and reliability?
They are internal sources of evidence, and therefore subject to bias, and potentially unreliable
ISA 580 also clearly states that written representations should only be sought to support other
audit evidence. They do not, on their own, constitute sufficient evidence.
Before they can be used
The auditor must consider their reliability in terms of:
Inconsistencies with other forms of evidence; and
If they’re inconsistent then perform further procedures
If worries about integrity etc then consider withdrawal, or if not permitted, consider the impact on
the audit report. (likely a disclaimer of opinion)
If management refuses to provide written representations - then again a probable disclaimer or

withdrawal
Additional matters requiring written representation
Directors have assessed the risk of fraud and consider it to be low;
Directors are not aware of any actual, or suspected, instances of fraud;
All related parties have been identified and transactions with them disclosed
Directors consider the aggregate of all uncorrected misstatements to be immaterial;
The directors have considered all subsequent events
The directors have considered all possible events, matters and contingencies in performing
their going concern review.
PwC 167
ISA 580 Written representations –
Sample for understanding
(Entity Letterhead)
(To Auditor) (Date)
This representation letter is provided in connection with your audit of the financial statements of
ABC Company for the year ended December 31, 20XX2 for the purpose of expressing an opinion
as to whether the financial statements are presented fairly, in all material respects, (or give a true
and fair view) in accordance with International Financial Reporting Standards.
We confirm that (, to the best of our knowledge and belief, having made such inquiries as we
considered necessary for the purpose of appropriately informing ourselves):
Financial Statements
• We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated
[insert date], for the preparation of the financial statements in accordance with International
Financial Reporting Standards; in particular the financial statements are fairly presented (or give
a true and fair view) in accordance therewith.
• Significant assumptions used by us in making accounting estimates, including those measured

at fair value, are reasonable. (ISA 540)
• Related party relationships and transactions have been appropriately accounted for and
disclosed in accordance with the requirements of International Financial Reporting Standards.
(ISA 550)
• All events subsequent to the date of the financial statements and for which International
Financial Reporting Standards require adjustment or disclosure have been adjusted or disclosed.
(ISA 560)
• The effects of uncorrected misstatements are immaterial, both individually and in the aggregate,
to the financial statements as a whole. A list of the uncorrected misstatements is attached to the
representation letter. (ISA 450)
• [Any other matters that the auditor may consider appropriate (see paragraph A10 of this ISA).]
PwC 168
ISA 580 Written representations –
Sample for understanding
Information Provided
• We have provided you with:
o Access to all information of which we are aware that is relevant to the preparation of the
financial statements, such as records, documentation and other matters;
o Additional information that you have requested from us for the purpose of the audit; and o
Unrestricted access to persons within the entity from whom you determined it necessary to
obtain audit evidence.
• All transactions have been recorded in the accounting records and are reflected in the financial
statements. • We have disclosed to you the results of our assessment of the risk that the
financial statements may be materially misstated as a result of fraud. (ISA 240)
• We have disclosed to you all information in relation to fraud or suspected fraud that we are
aware of and that affects the entity and involves
o Management;
o Employees who have significant roles in internal control; or
o Others where the fraud could have a material effect on the financial statements. (ISA 240)
• We have disclosed to you all information in relation to allegations of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by employees, former employees,
analysts, regulators or others. (ISA 240)
• We have disclosed to you all known instances of non-compliance or suspected non-compliance

with laws and regulations whose effects should be considered when preparing financial
statements. (ISA 250)
• We have disclosed to you the identity of the entity’s related parties and all the related party
relationships and transactions of which we are aware. (ISA 550)
-------------------------
Management
PwC 169
Past Question
Que : You are the audit manager of Savage & Co and you are briefing your team on the
approach to adopt in undertaking the review and finalization stage of the audit. In particular, the
audit senior is unsure about the steps to take in relation to uncorrected misstatements.
Required:
Describe the auditor’s responsibility in respect of misstatements. (2 marks)
Que : You are the audit manager of Savage S Co. It is a busy time of year for you as you have
several ongoing audit clients at the moment, and you are in the process of dealing with a number
of outstanding issues and queries from members of your audit teams.
Czech Co (Czech)
Czech is a pharmaceutical company. The fieldwork has been completed and you are currently
reviewing the audit file. The audit senior is not sure how to deal with the following issue. Czech
has incurred $2.1m and development expenditure of $3.2m during the year, all of which has been
capitalized as an intangible asset. Profit before tax is $26.3m.
Dawson Co (Dawson)
The fieldwork on this audit is also complete except for the following issue which the audit senior
has been unable to deal with.
Dawson's computerized wages program is backed up daily; however, for a period of two months
the wages records and back-ups have been corrupted, and therefore cannot be accessed.
Wages and salaries for these 2 months are $1.1m. Profit before tax is S10m.
PwC 170
Past Question
You have just received a phone call from one particular audit senior who is unsure about the
steps to take in relation to uncorrected misstatements.
Which of the following statements correctly describe the auditor's responsibility in respect of
misstatements?
ISA 450 Evaluation of Misstatements Identified During the Audit states that the auditor only
has a responsibility to accumulate material misstatements identified during the audit
Where misstatements are not material the auditor should request that management correct
the misstatements in the following accounting period
If management refuses to correct some or all of the misstatements, the auditor should
consider the implications of this for their audit opinion
A written representation should be requested from management to confirm whether they

believe that the effects of the unadjusted misstatements are immaterial, both individually and
in aggregate, to the financial statements as a whole
Which TWO of the following audit procedures should be performed in order to form a conclusion
on whether an amendment is required to Czech's financial statements in respect of the research
and development expenditure?
Discuss the requirements of IAS 38 Intangible Assets with the directors in order to determine
whether they understand the required accounting treatment of research and development
expenditure
Obtain a breakdown of the $5.3m capitalised as an intangible asset and agree to supporting
documentation to determine the nature of the projects to which the expenditure relates
Review minutes of board meetings to determine whether the expenditure was authorised
Visit the laboratory where the current research is being undertaken and to confirm occurrence
of the research expenditure
PwC 171
Which of the following correctly summarises the effect of the issue relating to the wages balance
in the financial statements of Dawson?
Material Financial statement impact
No Liabilities to tax authorities may be understand
No Profit may be overstated
Yes Wages may be materially misstated
Yes Proper accounting records have not been kept
PwC 172
Not For Profit Organizations (Self-Read)
NFPs have no external shareholders, dividends or profit maximization objective either
This has potential audit problems:
1. Lack of segregation of duties (small staffing)
2. Unqualified volunteers (poor knowledge of controls)
3. Less formalized systems
4. Donations without audit trail
5. Difficulty in assessing going concern (unpredictability of donations)
Audit Implications
Value for money audits (see earlier)
Concentrate on substantive procedures (due to possible weak internal controls)
Analytical reviews and management representations where little audit trail
Test larger % of population due to smaller volumes
Reporting
If required by law = Normal audit report
If voluntary = Reflect objective of audit
In either case - follow the accepted structure:
1. Addressee
2. Scope
3. Responsibilities of auditors & managers
4. Work done
5. Opinion
6. Date, name and address of auditor
PwC 173
Audit Reporting
Contents of an audit report
Title and addressee INDEPENDENT AUDITORS REPORT

To the shareholders of XX company
Opinion - Identify the name of the client.

- Identify the year-end of the client.
- Identification of the components audited separately
- Add the opinion paragraph using words like “financial statements are true & fair. ”
- As opinion changes, the title will also change.
Basis for opinion (Basis - This will mention that the audit was conducted in accordance with the ISA.
para explains the reasons - It will identify the name of the ethical code followed by the auditors and a
declaration that they are independent.
why the above-mentioned
- It will also explain whether sufficient appropriate audit evidence is obtained.
opinion para is provided) - As opinion changes, the title will also change (Basis for Qualified Opinion).
Material uncertainty If the client is facing going concern issues and they have made adequate
related to Going disclosures about these in the financial statements as per the standard, then
Concern (MURGC) auditor can highlight this matter again in MURGC paragraph in the audit
{only if required} report where they will cross reference it to the disclosure note made by the
client.
PwC 174
Audit Reporting
Key Audit Matters Matters to be communicated to TCWG
High Priority
( Listed company : KAM -

mandatory requirement ) Matters that require significant auditor attention
Matters of most significance -KAM

Examples:
- Areas with high auditor judgements due to management judgement.
- Areas that have high ROMM
- Any areas with significant events or transactions
Describing the Content of KAM
work done on the 1. Title: Key Audit Matters
KAM 2. Definition of KAM
3. Comment that there is no separate opinion on these matters
4. Justify why a matter is KAM and how the audit responded to them.
5. Cross reference the KAM to the notes in the FS.
Emphasis of Matter If the auditor wants to highlight any significant event fundamental to users
Paragraph (EOMP) understanding of entity it will be inlcuded here, provided that this item is
{only if required}
correctly treated as per IFRS.
Other Matter Paragraph

(OMP) If the auditor wants to highlight any other issues outside the financial
{only if required} statements.
eg. auditor wants to resign but legally cannot or first time audit for the
client as they just became listed.
Other information All information included in the annual report other than audited FS & auditors ‘ report.
Chairman’s Report - “… our company has been very successful over the past year and
This paragraph is written we have an increase in profitability by 67%…”
regardless of material Financial Statements - PY & CY profitability difference = 43%
inconsistency or not.
Though chairman’s report is irrelevant to auditors, but they should still read it in
order to identify material inconsistency (the contradiction between other information
and the audited FS / auditors understanding of entity).
If inconsistency is identified:
1. Where does the inconsistency exist? — (is it in the FS or other info)
2. To determine that more testing needs to be done on FS.
3. If the issue is in FS — opinion will change.
4. If not in FS, discuss with chairman and PCWG & request amendment.
5. If not amended, include in other information paragraph in audit report.
PwC
6. If amended, an other information paragraph will be written as “nothing to report.”175
Audit Reporting
Responsibilities of mgt
and TCWG for the FS
Auditors’ responsibility Detailed summary of the auditors objectives starting with

for the audit of FS reasonable assurance , also stresses the part about auditors
judgmental & professional skepticism and communication of
matters to TCWG
Report on other legal and Country wide regulation

regulatory requirements
Signed Auditors Name, date, signature, address
PwC 176
Past Question
Cannavaro.com is a website design company whose year end was 31 December 20X4. The
audit is almost complete, and the financial statements are due to be signed shortly. Profit before
tax for the year is $3.8 million and revenue is $11.2 million.
The company has only required an audit for the last two years and the board of directors has
asked your firm to provide more detail in relation to the form and content of the auditor's report.
During the audit it has come to light that a key customer. Pirlo Co. with a receivables balance at
the year end of $285.000. has just notified Cannavaro.com that they are experiencing cash flow
difficulties and so are unable to make any payments for the foreseeable future. The finance
director has notified the audit team that he will write this balance off as an irrecoverable debt in
the 20X5 financial statements.
To explain to the board the content of the audit report. the audit partner has asked you to provide
details as to why certain elements are included within an unmodified report.
Which of the following explains the purpose of the ADDRESSEE element of the
unmodified audit report in line with ISA 700 Forming an Opinion and Reporting on
Financial Statements?
A. It demonstrates the point at which sufficient appropriate evidence has been obtained
B. It clarifies who may rely on the opinion included within the report
C. It explains the role and remit of the audit
D. It sets out the location where the auditor practices
According to ISA 701. which of the following should be included in the 'Key Audit Matters'
paragraph in the auditor's report?
A. Matters which required significant auditor attention
B. Matters which result in a modification to the audit opinion
C. All matters which were communicated to those charged with governance
D. All matters which are considered to be material to the financial statements
PwC 177
Past Question
An emphasis of matter paragraph is used in an audit report to draw attention to a matter affecting
the financial statements.
Which TWO of the following are correct in relation to an Emphasis of Matter Paragraph in
the Auditor's Report?
1. It is used when there is a significant uncertainty
2. It constitutes a qualified audit opinion
3. The audit report is referred to as an unmodified report
4. The matter is deemed to be fundamental to the users understanding of the financial

statements
A. 1 and 2
B. 1 and 4
C. 1 and 3
D. 2 and 4
PwC 178
Audit Report
Auditors Report
is usually when more items

are added to report which
aren’t compulsory.
Unmodified report Modified report
financial statements are

showing a true & fair view
Unmodified Unmodified
Modified opinion
Opinion opinion
Material
Emphasis of
uncertainty Other matter para
matter para
related to GC
(EOMP) (MURGC)
Insufficient /
Material
inappropriate
mistatement
audit evidence
Multiple items
Multiple items are wrong.
Single item Material and
Single item is wrong. Material and
pervasive
pervasive Material but not
Material but not pervasive DISCLAIMER OF
pervasive ADVERSE
OPINION
OPINION QUALIFIED
QUALIFIED "We do not
"The FS do no “except for”
“except for” express an
present fairly "
except for is only the wording. opinion "
If disclaimer is given there won’t be
a Key Audit Matter paragraph.
PwC 179
Audit Reporting
Going concern implication on reporting
Are there going

concern issues ?
Yes No
Correct basis used No impact on the

to prepare FS ? audit report
Yes No
Adequate Adverse
disclosures made opinion
Yes No
Qualified except
MURGC
for / adverse
PwC 180
Extracts for Understanding
Independent Auditor's Report
[Appropriate Addressee (i.e. the shareholders)]
Report on the Financial Statements of Fl Ltd
Opinion
We have audited the financial statements of Fl Ltd for the year ended 31 December 2016, which
comprise the statement of financial position, the statement of comprehensive income, statement
of changes in equity, statement of cash flows and a summary of significant accounting policies
and other explanatory information.
This is an “unmodified audit opinion”
In our opinion, the financial statements give a true and fair view of the financial position of FI Ltd
as of December 31, 2016, and its financial performance and its cash flows for the year then
ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of Financial Statements section of our report. We are independent of the
company in accordance with the ethical requirements that are relevant to our audit of financial
statements in [jurisdiction], and we have fulfilled our ethical responsibilities in accordance with
these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Code of Ethics for Professional Accountants.
Other information
Management is responsible for the other information. The other information comprises the
[description of other information] but does not include the financial statements and audit report
thereon.
PwC 181
Our opinion on the financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon. In connection with our audit of the financial
statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially is stated. If based on the work we
have performed, we conclude that there is a material misstatement of this information, we are
required to report that fact. We have nothing to report in this regard.
Illustration: Emphasis of Matter
We draw attention to Note X to the financial statement which describes the uncertainty related to
the outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not
modified in respect of this matter.
Qualified Opinion
We have audited ... (as in unmodified report)
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
paragraph, the financial statements present fairly, in all material respects, (or give a true and fair
view of) the financial position of ABC Company as at December 31, 20X2, and (of) its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards.
Basis for Qualified Opinion
The company's inventories are carried in the statement of financial position at xxx. Management
has not stated the inventories at the lower of cost and net realisable value but has stated them
solely at cost, which constitutes a departure from International Financial Reporting Standards.
The company's records indicate that had management stated the inventories at the lower of cost
and net realisable value, an amount of xxx would have been required to write the inventories
down to their net realisable value. Accordingly, cost of sales would have been increased by xxx,
and income tax, net income and shareholders' equity would have been reduced by xxx, xxx and
xxx, respectively.
We conducted our audit ... (as unmodified report)
PwC 182
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse
Opinion paragraph, the consolidated financial statements do not present fairly (or do not give a
true and fair view of) the financial position of ABC Company and its subsidiaries as at December
31, 20X2, and (of) their financial performance and their cash flows for the year then ended in
accordance with International Financial Reporting Standards.
Basis for Adverse Opinion
As explained in Note X, the company has not consolidated the financial statements of subsidiary
XYZ Company it acquired during 20X2 because it has not yet been able to ascertain the fair
values of certain of the subsidiary's material assets and liabilities at the acquisition date. This
investment is therefore accounted for on a cost basis. Under International Financial Reporting
Standards, the subsidiary should have been consolidated because it is controlled by the
company. Had XYZ been consolidated, many elements in the accompanying financial statements
would have been materially affected. The effects on the consolidated financial statements of the
failure to consolidate have not been determined.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion paragraph, the financial statements present fairly, in all material respects, (or give a true
and fair view of) the financial position of ABC Company as at December 31, 20X2, and (of) its
financial performance and its cash flows for the year then ended in accordance with International
Financial Reporting Standards.
PwC 183
Basis for Qualified Opinion
ABC Company's investment in XYZ Company, a foreign associate acquired during the year and
accounted for by the equity method, is carried at xxx on the statement of financial position as at
December 31, 20X2, and ABC's share of XYZ's net income of xxx is included in ABC's income for
the year then ended. We were unable to obtain sufficient appropriate audit evidence about the
carrying amount of ABC's investment in XYZ as at December 31, 20X2 and ABC's share of
XYZ's net income for the year because we were denied access to the financial information,
management, and the auditors of XYZ. Consequently, we were unable to determine whether any
adjustments to these amounts were necessary.
PwC 184
Dashing Co manufactures women’s clothing, and its year end was 31 July 20X7. You are an
audit supervisor of Jaunty & Co and the year-end audit for Dashing Co is due to commence
shortly. The draft financial statements recognize profit before tax of $2·6m and total assets of
$18m. You have been given responsibility for auditing receivables, which is a material balance,
and as part of the audit approach, a positive receivables circularization is to be undertaken.
At the planning meeting, the finance director of Dashing Co informed the audit engagement
partner that the company was closing one of its smaller production sites and as a result, a
number of employees would be made redundant. A redundancy provision of $110,000 is included
in the draft financial statements.
A few months have now passed, and the audit team is performing the audit fieldwork including
the audit procedures which you recommended over the redundancy provision. The team has
calculated that the necessary provision should amount to $305,000. The finance director is not
willing to adjust the draft financial statements.
Required:
Discuss the issue and describe the impact on the auditor’s report, if any, should this
issue remain unresolved.
Answer plan:
PwC 185
You are the audit manager of Violet & Co and you are currently reviewing the audit files for
several of your clients for which the audit fieldwork is complete. The audit seniors have raised the
following issues:
Daisy Designs Co (Daisy)
Daisy’s year end is 30 September, however, subsequent to the year end the company’s sales
ledger has been corrupted by a computer virus. Daisy’s finance director was able to produce the
financial statements prior to this occurring; however, the audit team has been unable to access
the sales ledger to undertake detailed testing of revenue or year-end receivables. All other
accounting records are unaffected and there are no backups available for the sales ledger.
Daisy’s revenue is $15·6m, its receivables are $3·4m and profit before tax is $2m.
Explain the impact on audit report?
PwC 186
© 2022 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers
to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the
context requires, individual member firms of the PwC network. Each member firm is a separate legal
entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any
services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member
firms nor can it control the exercise of their professional judgment or bind them in any way. No member
firm is responsible or liable for the acts or omissions of any other member firm nor can it control the
exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any
way.

ACCA Audit & Assurance Complete Notes PwC's Academy

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACCA Audit & Assurance Complete Notes PwC's Academy

Uploaded by

Copyright:

Available Formats

Audit and Assurance

Section A (30 marks)

• 3 OT cases with 5 OT questions worth 2 marks each: 10 marks per case

Tips for answering OT questions

• Read each question carefully • If unsure, eliminate incorrect answers

• Think before answering • Answer all questions

Section B (70 marks)

• 3 Questions – one worth 30 marks and 2 worth 20 marks

Tips for answering Section B questions

• Use concise headings • Do not give rote-learnt answer points

• Attempt all requirements

Accept audit engagement

Understand the entity and its environment

Asses the risk of material misstatement

Reduced substantive Full substantive

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY SATURDAY SUNDAY

1. Introduction to audit and assurance 7

9.4 Past paper question 118

External audit - objectives - Independent auditor is expressing an opinion

1. FS are free from material misstatements due to error or fraud

2. FS are prepared in accordance with all the rules and regulations

3. FS are prepared in a true and fair view

Information is clear, impartial and unbiased

CRITERIA : Subject matter is

SUBJECT MATTER : The

Agency Theory: The Accountability: Directors are Stewardship: Stewardship is

Reasonable Assurance Limited Assurance

Extensive procedures are carried out to Not as extensive as a reasonable

Positive opinion : “In our opinion the FS are

Eg: External Audit

Eg : Review engagements : This would

There are three expectation gaps which are as follows;

Judgements Evidence can be

Auditors test on Internal controls

ISA - International Standards on Auditing The process of producing an ISA :

IAS - Internal accounting standards A project task force is established to

IAS /IFRS - Will not override the local

The auditors must follow the following principles:

IFAC (Code of Ethics for Professional Accountants)

PROFESSIONAL SCEPTICISM (ISA 240)

Who can audit?

Access to the company’s books, accounts and vouchers.

To receive all communications relating to written resolutions.

Remunerations should be linked to performances.

No director should be involved in deciding his or her own remuneration.

RELATIONS WITH SHAREHOLDERS

COMMIITTEES WITHIN CORPORATE GOVERNANCE:

Remuneration committee: This committee decides on the remuneration packages of

The committee members should be independent from the company’s operations.

Functions of audit committee:

Monitoring the preparation of Making recommendation on Reviewing the company’s

Reviewing and monitoring the Reviewing arrangements for

Benefits of an audit committee Limitations of audit committee

Audit committee will strengthen the

Adrian Muse (chief internal auditor)

Penny Dinty (existing executive director with some financial expertise)

Sharon Header (proposed new non-executive director)

Fredrick Rowe (proposed new non-executive director)

Once established, the audit committee will have many objectives.

Safeguarding the privacy of whistleblowers

Appointing the external auditor

Monitoring the independence of the external auditor