CAF 8 Volume 2 TOC & SP IT WD Logo

KnS School of Business Studies
CA CAF- 8 Audit & Assurance

Summary Notes by SK
Index of Handouts
 S. Description Page No.

No.
1 Test of Controls 2
2 Financial Statement Assertions (Total 12 Assertions) 106
3 ISA 505 - External Confirmation 111
4 Debtors / Receivables 130
5 Cash in Hand & Cash at Bank - Substantive Procedures 145
6 Tangible & Intangible Fixed Assets - Substantive Procedures 155
7 Trade Payables, Accruals, Provisions & Others 185
8 Inventory / Counting Process 211
9 Sales/ Purchases/ Expenses 243
10 ISA 520 - Analytical Procedures 255
11 ISA 580 - Written Representation 279
12 ISA 550 - Related Parties 306
13 ISA 240 - Fraud & Error 319
14 ISA 210 - Engagement Letter 339
15 ISA 530 - Sampling 351
16 Small Concepts 374
17 ICAP Code of Ethics 427
18 Company Law 481
19 C.A.AT 490
20 Last Class Handouts / Summaries 504
21 Solutions of Test Questions 525
Page 1 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Summary Notes by SK
Test of Controls (T.O.C’s)

Summary Notes by SK
Index of T.O.C
S. No. Description
1. Expected questions on T.O.Cs
2. General Internal control weaknesses
3. Sales Cycle
4. Purchase Cycle
5. Payroll Cycle
6. Control weaknesses in a scenario-based question
7. The Sales System: Control Objectives

Further important Internal Control weaknesses and Internal
8.
Controls
9. Sales Cycles Kay Summarized Points
10. Purchase Cycle Kay Summarized Points
11. Payroll Cycle Kay Summarized Points
12. Constructing T.O.C’s from Controls ………. (Few Examples)
13. ACCA F8 T.O.C Practice Questions
14. Test of Controls summary
15. CA CAF 8 T.O.C Practice Questions

Summary Notes by SK
Expected Questions on T.O.Cs

Summary Notes by SK
Question:
What is the difference between T.O.C & Substantive Procedures?
Conceptual difference between T.O.C and Substantive Procedures
Test of Control:
The objective of T.O.C is to determine and access the control risk prevailing at the Audit Client. T.O.C’s
are performed on transactions that occurred during the year. These can be any transactions of the year
and can be performed on seven cycles for transactions that occurred during the period of twelve months.
Please Note:
The objective of T.O.C is NOT to verify the closing balance at the year end, but the objective of T.O.C
is to make sure and access that whether the controls/SOP’s were operating effectively during the period
or not.
Normally, 25 to 30 transactions are drawn by the external auditor on a sample basis for each mentioned
cycle.
Substantive Procedures:
The objectives of substantive procedures is to detect material misstatement at the assertion level and
thereby reducing the detection risk and reducing the overall audit risk to an acceptable low level.
Please Note:
The objective of substantive procedure is to verify/substantiate the closing balances as at year
end/balance sheet date.
(E.g. auditor will perform substantive procedures to verify fixed assets balance as of Dec 31, 2019 and
perform substantive procedures to verify debtors for the year ended Dec 31, 2019)

Summary Notes by SK
General Internal control weaknesses
(For MY CAF 8 Cheetahs to start with…  )

1. Purchase Orders are not made when ordering for good and services.
2. Purchase Orders are not sequentially pre-numbered
3. Sales invoices are not approved / authorized
4. Sales Invoices are not sequentially pre-numbered.
5. Dispatch Notes are not signed by the customers at the time of delivery of goods.
6. Purchases are not made from authorized vendors.
7. Bank reconciliations are not prepared & reviewed regularly by authorized personnel.
8. Supplier statements are not reconciled with creditors control account on regular basis.
9. Sales discount & credit limits are not approved by Senior/Authorized personnel.
10. Sales/Customer Orders are not documented and approved by authorized personnel.
11. Monthly payroll sheets are not approved.
12. Cash is not timely banked when received.
13. Annual Bonus is not approved by H.R department
14. Monthly / weekly overtime hours are not approved by authorized personal.
15. Payslips are hand written and not system generated.
16. Monthly time sheets are not approved by departmental heads.
17. Sales master records can be accessed by junior sales clerks.
18. Purchase master records can be accessed by junior purchase clerks.
19. Payroll master records can be accessed by junior purchase clerks.
20. Sales credit limits are not reviewed annually by the sales department.
21. Online ordering system is not linked with the inventory system.
22. Recovery from customers is done by sales staff rather than recovery / credit dept.

Summary Notes by SK
Sales cycle / system

Start
Every customer has a Customer approaches the By Independent credit agency or by

unique customer I.D. company company’s own credit department
Credit terms &

Credit limit to be set
Raises Query
For the product And Inserted into
Master records by
responsible official
Credit limit & terms must

NOT be set by junior clerk / staff.
Via online SALES ordering system Credit worthiness of customer

______________________________ To be checked/ verified
Online ordering system
must be linked / integrated
with the inventory system Sales Quotation to be given to Yes Yes
the customer
Manual Quotation by sales staff Refuse the

Quotation must be provided by Customer
responsible official. Purchase order (P.O) to be
given by the customer
Sales discount (If any)
1) Sale order must be documented Sales order to be given by the Must be approved by Responsible
Official And inserted in
2) Sale order must be sequentially company
Customer master records
pre-numbered
3) Inventory must be checked at a time of issuing
4) Sale order from must be pre-printed having 3-4 copies. Sale discount must not be
approved by junior clerks or
junior sale staff.

Summary Notes by SK
Sales department to inform This intimation to

dispatch department / stores dispatch / warehouse
Dept dept. must be made on
time
Dispatch department prepares
to deliver the goods to the This intimation to
customer 1. GDN dispatch / warehouse
is documented
dept. must be pre-numbered.
2. It is sequentially made on
Daily pick list is prepared by timely basis.
3. It is approved by authorized or
Warehouse Team / dispatch responsible official.
ly basis.
team
At the time of goods being loaded Vehicle dispatching the Goods Goods Dispatch
there should be a comparison between Note (G.D.N) is
the original P.O, S.O & Daily pick list made at the time of
dispatch of goods
Packing list must be installed from the factory /
or placed on the goods before dispatched warehouse
Delivery Note (D.N) is signed by It's an acknowledgement that the

the customer at the time of good have been received by
dispatch of goods the customer.
Sales invoice must be

Dispatch department to inform Sequentially pre numbered
finance department to raise It must be approved by
commercial / sales invoice responsible official.
Invoice must be dispatched
on timely basis.
End

Summary Notes by SK
Important Points for Sales Cycle:
1. Credit limits to be reviewed periodically (per annum) by authorized personnel.
Risk
Sales being made to poor credit risk leading to irrecoverable debts or risks of losing revenue.
2. Credit limits to be set by credit dept OR independent credit agency and approved by sales director/
credit controller. (Preferred Credit Controller)
RISK
Risk of excess credit limits resulting in irrecoverable debts for the company. (decrease in company
profits)
3. Sales staff should not have access to master records / master data files.
Risk
Risk of unauthorized amendments resulting in loss of sales revenue or over charging of customers
plus could increase the risk of fraud.
4. Inventory availability to be checked at the time of issuing sales order.
Risk
Risk of unfulfilled customer order + customer dissatisfaction + negative Goodwill of the company.
5. Invoice must be prepared either by the sales dept. OR finance dept as the case may be. (as per SOP
of the company)
Risk
Risk of Wrong invoices or mistakes in invoices can also lead to over or under charging to customers.
6. Sale dept shouldn't be involved in the recovery of receivables OR chase receivables because it’s the
job of recovery dept./ credit dept.
Risk
7. Sales invoices to be approved and dispatched to customers on a timely basis.
8. Any communication within sales Department should be formal that is via internal memorandum or
other formal document.
9. Sales order must have multiple copies (Min 4 to 5 copies) one for customer, one for sales dept. itself,
one for warehouse & one for finance dept.
10. GDN's to be filed in the ware house as well as sent to finance dept on timely basis so that sales
invoice can be raised on timely basis.
Risk: Loss of sales revenue as sales invoices will not be raised and recorded on timely basis.

Summary Notes by SK
Purchase cycle / system

Start
Material Requisition (MR) Request from user department

It shall be documented
It should be sequentially
pre numbered Issue from
Must be approved by authorized Material/ Purchase requisition to be Yes Stock
Official / person raised by user department Department
1) Quotation to be obtained from No

approved vendors Purchase Manager to obtain
2) The purchase to ensure value for Quotation
money (3E`s)
3) At the time of purchase, recorder
level to be verified Goods received in the factory 1) Inspection of goods to be
made.
4) Seq. Pre numbered P.O to be
raised 2) Match the physical goods
received
G.R.N to be made with P.O to verify both
5) GRN’s to be sent to respective Quantity & Quality.
dept. on timely basis (4 Copies)
Invoice received from supplier/

vendor 1) Documented
2) sequentially pre numbered
3) Must be approved by
Match supplier / Purchase Invoice authorized official
with purchase order and G.R.N
Reconcile these documents
to ensure correct payments
Payment to be made to supplier by
Finance department
End

Summary Notes by SK
Important Points for Purchase Cycle
1. Purchase orders to be made for all purchases incurred irrespective of the amount of P.O, however
there should be authority limits / authority slabs for the approvals.
2. Within shops / branches there must be intra branch purchase system so that if goods are not available
in one shop / branch they can arranged from other giving convenience to customers.
3. Purchase order should not be approved by junior clerks/ staff.
4. There must be proper segregation of duties in the purchase cycle / purchase department.
5. Supplier list should be updated annually and approved by senior personnel.
6. When selecting new suppliers / vendors input to be taken from all department heads and not only
procurement department.
RISK
If input only taken from Procurement department or junior staff than there is a risk of biased decisions
or risk of fraud in purchases.
7. When selecting suppliers to procure good/services, all factors to be considered like rate, quality,
speed of delivery and other after sales service.
(Value for money to be ensured)
8. Liability to be recorded on the basis of GRN and not on the basis of supplier invoice.
RISK
If liability is not recorded on the basis of GRN, there is a risk that liability will not be recorded on a
timely basis and purchases and payables will not be recorded correctly.
Common points for both Purchase and Payment Cycle

9. When approving payments for suppliers, breakup of total payment to be reviewed and approved
rather than approving lump sum payments.
RISK
Risk of payment being made to fictitious suppliers or incorrect payment made to suppliers.
10. In order to manage cashflows, there should not be delay in payment to suppliers.
RISK
Goods not being supplied by the supplier
Risk of law suit being filed by the supplier
Negative goodwill for the company
Loss of early bird discounts

Summary Notes by SK
Common points for both Sale and Purchase Cycle
1. There must be timely reconciliation between both supplier &customer via supplier &customer
statements and these statements must be reviewed by responsible official.
2. Supplier & customer information held by the organization is highly confidential& must be taken
care of i.e. every employee in the organization must not have access to such confidential data
including operational managers, line managers, sales staff &junior staff/clerks.
RISK
In case any junior staff gets the access of supplier database than there is a risk of setting up fictitious
suppliers resulting in fraudulent payments
3. There must be authority slabs or limits for the approval of expenditures and all payments made for
such expenditures.
4. There must be a combination of both technical & finance personnel when approving purchase of
capital expenditures. (Relevant to CAPEX cycle)

Summary Notes by SK
Capital Expenditure cycle / (CAPEX Cycle)

1. Capital Revenue Expenditure Budget is prepared and approved by Director Finance + the whole
Board of Directors.
2. For every fixed asset purchased, capital expenditure form is prepared and signed by the authorized
personnel. ( _______________________________)
3. Quotation obtained from approved vendor/supplier.
4. Raise formal purchase order (P.O) by procurement department.
5. Goods receipt note (G.R.N) to be made for fixed asset on arrival in the factory.
6. Inspection of fixed asset to be done on arrival.
7. Every fixed asset to be assigned a unique serial number. ( ____________)
8. Fixed Asset to be entered in the fixed Asset Register (Non-current asset register) once serial number
or asset code is assigned.
9. CAPEX budget to be updated after every purchase.
10. Proper capitalization must be done as per company policy as per the criteria of IAS-16.
11. There must be timely reconciliation between physical and recorded fixed assets and any differences
must be investigated and reconciled.
12. There must be adequate safeguards on the physical access of fixed assets. (termed as physical controls)
13. Not all persons should have access to fixed assets (especially expensive and portable ones)
14. Only authorized personnel should have access to non-current asset register.
15. Only authorized personnel should have access to non-current asset budget.
Student Notings

Summary Notes by SK
Cash & Bank Cycle
General controls on Cash & Bank
1. There must be proper & adequate physical control over cash (i.e.) it must be kept in a safe deposit
box/locker or vault (Physical Access Controls)
2. Cash must be timely banked. This depends upon the frequency of cash transactions.
3. Petty cash & Cash book must be upgraded on timely basis.
4. All cash records/ books must be authorized & approved by responsible official.
5. There must be proper segregation of duties on cash & bank handling.
Bank Reconciliation
1. Bank reconciliation should be prepared on timely basis (weekly or monthly)
2. Bank reconciliation must be approved by authorized personal.
3. Bank reconciliation should be reviewed by responsible official irrespective of reconciling amounts/
items or closing balance.
Cash Sales
1. There must be proper recording of cash sales in cash register / journal.
2. There must be adequate physical controls over cash.
3. At the close of business all cash recorded in point of sale terminal should be reconciled with Physical
cash.
4. All employees in the shop/dept. should not have the access to cash till/ cash flow & the point of
sale terminal.
5. Any shortage/excess of cash to be accounted for as per company policy.
6. There must be segregation of duties in complete handling of cash transactions.
7. In case of cash & credit sales from various shops & branches daily records must be transferred to the
head office.
8. Cash that is banked daily should be verified from bank statement along with sales made on credit
via credit cards.
9. Junior staff or unauthorized staff should not have access to cash / cash float or cash till.
10. For staff / employees handling cash till or large amount of cash, controls to be in place to avoid cash
handling of relatives and friends.
11. In the case, company has internal audit dept. then its staff / employees to visit all branches to verify
cash controls and company procedures (SOP)
12. In case of more than one outlet, cash to be reconciled in every outlet rather than in aggregate.
13. There must be proper segregation of duties at the time of cash/cheque receipt. (I.e. one person to
receive the cash and second person to observe its recording).
14. Both petty cashbook and cashbook are 02 separate books and must be maintained independently
and separately.
Internal controls on Cash and Bank payments

1. All payments must be approved by a responsible official/ authorized person.
2. All payments to be processed either by cash vouchers or bank vouchers.
3. All payments must be accompanied by supporting documents.
4. All payments vouchers must be dated & sequentially pre-numbered.
5. There must be proper segregation of duties on cash & bank payments.

Summary Notes by SK
Internal Controls on Petty Cash system
1. All petty cash vouchers must be approved by an independent person.
2. All petty cash vouchers must have supporting documents (bills &invoices etc).
3. All petty cash vouchers must be sequentially pre-numbered.
4. All petty cash expenses must be within limit (i.e. no major expense to be made from petty cash).
5. The petty cash limit must be reasonable i.e. it must not exceed the average petty cash monthly
expenses.
6. Regular & surprise cash counts must be conducted independently.
7. All petty cash expenses must be for business purpose only.
8. There must be proper segregation of duties in petty cash cycle.
9. Petty cash book must be updated on timely basis and must be approved by authorized personnel.
10. All petty cash vouchers must be approved by senior official at the time of reimbursement of cash.

Summary Notes by SK
Payroll Cycle
1- Hiring process of 7- Preparation of
an organization Monthly Payslips
2- Training of 8- Disbursement of
employees monthly Salary
(B.O.C)
Via Cash (lower management
staff)
3- Daily Attendance& Via Bank
recording of daily (Admin & Senior Mgmt) Staff
hours
9- Annual Appraisals
4- Recording & (increments, bonus &
approval of Overtime promotions)
hours
10- Notifications of
joiners & leavers
5- Calculation of
during the year
Monthly Salary
6- Approval of
Monthly Salary / General Payroll Points for
Payroll Sheets scenario-based questions

Summary Notes by SK
Payroll Cycle
1. Hiring of employees/hiring Process in an Organization
i. Advertisement is given in the newspaper.
ii. Aptitude tests and interviews are conducted.
iii. On final selection of candidate, personal file/H.R file is maintained.
2. Training of new employees

i. Basic orientation / training will be undertaken for new employees about company and its
various department and functions.
3. Daily Attendance and Record of Daily Hours

i. Process of time in /clock in or clock out / time out to record daily hours worked on the basis
of which monthly remuneration will computed by the payroll department, these hours are
recorded by Time Management System (TMS) (employees swipe cards).
Control in this area: This clock in & out process should be supervised either by CCTV
cameras or by responsible official i.e. Physical control.
i. Overtime hours worked on daily monthly basis should be recorded separately by the TMS.
ii. Lunch breaks/dine out breaks to be recorded and must be supervised by the department or
the HR dept.
iii. Attendance system should mark attendance of one person at a time i.e. One person should
not be able to mark attendance more than on time.
(This attendance could be marked either by swapping cards or via Biometrics i.e.
Thumb impression etc)
Control in this area: CCTV cameras, physical supervision or built in control in the
TMS.
4. Recording and Approval of overtime hours

(Overtime hours can be either be encashed or taken as days off)
i. Monthly / weekly overtime hours must be reviewed and approved by immediate supervisor or
manager to ensure only authorized hours are paid for.
ii. Overtime rates / perks must be approved by responsible official.
iii. Monthly salary should incorporate the monthly overtime calculated.
iv. All overtime hours should be authorized by a responsible official prior to being paid by the
payroll department.
RISK:
There is a risk that company would be paying for hours not worked or hours not approved resulting in
excessive payroll cost for the company.

Summary Notes by SK
5 & 6. Calculation & Approval of Monthly Salary
i. Payroll system automatically calculates monthly salary at the end of the month, and this system-
based calculation must be re-calculated on sample basis by authorized personnel to ensure that
calculation is correctly and accurately performed by the system.
ii. Monthly salary sheets must be approved by authorized personnel from
PAYROLL department.
RISK
There is a risk that incorrect salary will be processed resulting in demotivation for
the employees. (_________________________________________________)
7. Preparation of monthly salary pay slips
i. Monthly salary pay slips should always be system generated i.e. it must not be hand
written.
ii. Pay slips are very confidential and must not be disclosed to anyone.
8. Disbursement of salaries
Via Cash
i. Cash salaries are the most risky and therefore must be taken care of.
ii. Cash disbursement must be supervised and there must be strong physical control over cash. Such
disbursement must not be made on weekends or late evenings.
iii. Undistributed / unclaimed wages must be kept in a secured location e.g. safe deposit box or
vault room.
Via Bank Transfer – (E Transfer)
i. Bank transfer listing should be authorized by authorized personnel
ii. Salaries paid via bank transfer should be reviewed in detail and agreed to the payroll records
prior to being authorized for bank payments
9. Annual Increments/ Bonus and promotions
i. Annual increments/bonus and promotions must be approved by department head, HR dept and
Board of Directors.
ii. These must be communicated to payroll dept on timely basis and formally
(_________________________________) so that increase in salaries are plus BOD.
10. Notification of joiner and leavers.
i. The detail of joiners and leavers must be documented by H.R and must be timely communicated
to payroll department to ensure correct and accurate calculation of salaries.

Summary Notes by SK
General Points on Payroll Cycle

1. There must be segregation of duties between HR & payroll dept.
(It reduces the risk of setting up off fictitious employees and reduces the risk of paying
incorrect salaries).
2. There must be pre-printed forms with HR Dept. for all new employees.
3. All input into the standing data / master records or inputs should be done by senior
personnel or authorized personal.
4. There must be exception reporting in the case of any change in payroll master record.
5. Any hiring in the organization either permanent or contractual staff must be done by H.R
only.
6. Department must not be on leaves at a same time.
7. In case of annual leaves proper delegation must be done to fellow colleagues or subordinates.
8. There must be segregation of duties at all levels with in both H.R & Payroll dept.
9. When approving payroll payments, breakups should be reviewed rather than reviewing total
lump sum amount.
Student Notings

Summary Notes by SK
.
Control weaknesses in a scenario-based question
(An Extract from the CAF 8 Text Book)
The exam may include a question based on a case study in which you are asked to comment on
weaknesses in the controls of a client entity. You may be required to identify weaknesses, explain why
they are weaknesses and the nature of the risk that they create, and then suggest improvements in the
control system to remove the risk. (already covered via Various Cycles like Sales and Purchases etc.)
Other General internal control weakness to look for in the exam question in the following categories…….
1. Control environment. (Already Covered in Internal Control Components)
An effective system of internal control depends on having a suitable control environment. This is
provided through leadership of senior management, who should promote a risk awareness culture
within the organization. If senior management show little concern for risks and controls, it is probable
that the entire system of internal controls will
be weak and ineffective.
Eg (Lack of participation by the CEO and CFO)
2. Lack of checks & balances and controls.

In some cases, there may be control weaknesses because suitable controls simply do not exist.
Auditors look for weaknesses in control systems and recommend improvements to the clients.
Eg No SOPs for Sales and Purchases department
3. Segregation of duties
You should consider whether the risk of error or fraud might be reduced by separating particular tasks
and responsibilities.
Eg Sales invoices are only approved by the person making the invoice and Payment Vouchers are not
signed as per signature mandate. (4 people should sign the document).
Cash is received and banked by the same person
4. Physical Access controls

There should be controls to protect the physical security of assets (Inventory, Fixed Assets and Cash
and Bank) and to protect them against theft, loss or unauthorized access by employees.
Eg Passwords to access portable and expensive fixed assets

5. Personnel (Qualification and Experience)
Consider whether there are any weaknesses in the personnel who perform particular tasks in various
departments. For example, the use of inexperienced or unqualified staff to do certain work may create
a high risk of error and fraud in that department.
6. Management structure and organization structure.

There may be weaknesses in management / organization structure of the client entity.
In a weak organisation structure, lines of responsibility and reporting may not be clear: when this
happens, management may not exercise control effectively because they are unsure or unaware of
their exact responsibilities.

Summary Notes by SK
7. I.T controls.
Already covered in general and application I.T controls
8. Risk of computational error.

There may be weaknesses in the procedures for making and checking various calculations. For
example in an entity that provides services and charges customers on a time-related fee basis, there
may be weaknesses in the computation of fees to charge to customers.
Similarly, customers are wrongly invoiced for the respective month or Interest charges are wrongly
charged on the credit card bill.
9. Lack of internal audit department

The lack of an internal audit department could also be seen as a control weakness. (or say weak
control environment)
Eg Risk of fraud and misappropriation of assets is high but there is no management initiative to
establish I.A dept and to conduct operational audits and surprise cash and inventory counts.

Summary Notes by SK
Control Objectives
The Sales System: Control Objectives
Control Objectives
 To ensure that recorded sales transactions represent goods or services provided
 To ensure that goods and services are only supplied to customers with good credit ratings.
 To ensure that goods and services are provided at authorized prices and on authorized terms.
 To ensure that customers are encouraged to pay promptly.
 To ensure that all revenue relating to goods dispatched is recorded
 To ensure that all goods and services sold are correctly invoiced
 To ensure that all sales and adjustments are correctly journalized, summarized and posted to
correct accounts.
 To ensure that transaction have been recorded in the correct period.
 To ensure that all transactions are properly classified in accounts.
The Purchases System: Control Objectives

Control objectives
 To ensure that recorded purchases represent goods or services received
 To ensure that all purchase transactions that occurred have been recorded
 To ensure that recorded purchases represent the liabilities of the entity.
 To ensure that purchase transactions are correctly recorded in the accounting system.
 To ensure that purchase transactions are recorded in the correct accounting period.
The Inventory System: Control Objectives

Control objectives
 To ensure that all Inv. movements are authorized and recorded
 To ensure that inventory included on the statement of financial position physical exits.
 To ensure that all purchases and sales of inventory have been recorded in the accounting
system.
 To ensure that inventory records only include items that belongs to the entity.
 To ensure that inventory quantities have been accurately determined
 To ensure that inventory is properly stated at the lower of the cost and NRV
 To ensure that all purchases and sales of inventory are recorded in the correct accounting
period.
 To ensure that inventory transactions and balances are properly identified and classified in the
financial statements.
 To ensure that disclosures relating to classification and valuation are sufficient.

Summary Notes by SK
The Bank and cash System: Control Objectives
Cash Payments Control Objectives

 To ensure that only valid cash payments are made.
 To ensure that all cash payments that occurred are recorded
 To ensure that cash payments are recorded correctly in the ledger
 To ensure that cash payments are posted to the correct general ledger.
 To ensure that cash payments are recorded in the correct accounting period.
 To ensure that cash payments are charged to the correct accounts.
Cash Receipts Control Objectives

 To ensure that all valid cash receipts are received and deposited.
 To ensure that all cash receipts are recorded
 To ensure that cash receipts are recorded at correct amounts.
 To ensure that cash receipts are recorded in correct accounting period
 To ensure that cash receipts are charged to correct accounts.
The Payroll System: Control Objectives
Control Objectives
 To ensure that payment is made only to Bonafide employees of the Entity
 To ensure that all payroll costs are recorded for work done by employees.
 To ensure that all benefits and deductions (Tax, EOBI, Loan instalment and provident fund
etc) are computed correctly
 To ensure that payroll transactions are correctly recorded in the accounting system.
 To ensure that payroll transactions are recorded in the correct accounting period
 To ensure that payroll are properly classified in the financial statements.
The Revenue and Capital Expenditure: Control Objectives

(CAPEX Cycle)
Control Objectives
 To ensure that expenditure is properly authorized
 To ensure that expenditure is classified correctly in the financial statements as capital or
revenue expenditure.
 To ensure that all non-current assets are correctly recorded in the accounting system.

Summary Notes by SK
Further important Internal Control weaknesses and
Internal Controls
1. Exceeding annual capital expenditure budgets.

2. Understaffed internal audit department.
3. Sample size of verifying fixed assets is very low/less.
4. All employees can access master / standing data.
5. Payroll Manager has the authority to review and amend payroll records
6. Sales credit limits are not reviewed regularly or periodically.
7. Credit limits should be approved independently.
8. Invoice are being chased long after due dates.
9. There is no credit controller or not being appointed on time.
10. All commercial documents must have minimum 04 copies
11. Flat discount is given to all customers without credit check.
12. Customer statements are not sent on regular basis.
13. Receivable/creditors ledger is not reconciled on timely basis.
14. All commercial documents should be sequentially pre-numbered e.g. Sales Invoice,
GRN & GDN.
15. When distributing the salary, the total of bank transfer list is only compared with the
total of payroll records.
16. In the case of petty cash, petty cash balance maintained must be equal to cash total float
(petty cash balance) & supporting documents/ petty cash vouchers.
17. In the case of more than one cash customer / cash till in an outlet all employees should
not have access to the cash counters (where physical cash is kept & cash sale records are
maintained)
18. Where there is more than one cash counter at an outlet/ restaurant cash must be reconciled with
counter sales records for each counter/ cash till separately so that discrepancies / exceptions can be
noted separated.

Summary Notes by SK
Sales Cycles Kay Summarized Points
Internal Controls
1. Credit worthiness to be checked for every customer
2. Credit limits must be reviewed periodically
3. Every customer must have unique customer I.D
4. Credit limit to be approved by sales director / credit controller / independent credit agency /
authorized person
5. Junior clerks / staff not to approve credit limits
6. Junior clerks / staff not to approve sales discounts
7. Junior clerks / staff not to have access of master data
8. Junior staff / operational staff must only access or insert data in master records under the
supervision of senior staff / approved person.
9. Sales quotation must be approved
10. Online ordering system must be linked with the inventory system
11. Sales discounts given must be approved as per SOP of the company
(Rem! Segregation of duties)
12. Sales order must be documented, sequentially pre-numbered and must have minimum 4 copies.
13. Inventory levels must be checked at the time of making sales order ( either manual or via telephone
calls )
14. Sales order must be timely communicated to dispatch department / stores / warehouse
(as the case may be)
15. Daily pick list must be prepared by dispatch department / warehouse / stores dept
16. When goods are being dispatched, packing list must be prepared and must be compared with
customer purchase order, sales order and daily pick list.
17. GDN must be made at the time of goods being and it should be sequentially pre-numbered and
must be approved.
18. GDN's to be filed in the ware house as well as sent to finance department on timely basis so that
sales invoice can be raised on timely basis.
19. Delivery notes must be signed by the customers on dispatch of goods.(acknowledgement)
20. Sales invoice must be sequentially pre-numbered and must be approved by responsible official.
21. Sales Invoice must be dispatched to customers on a timely basis.
22. Invoice must be prepared either by the sales dept. OR finance dept. as the case may be. (as per SOP
of the company)
23. Sale dept shouldn't be involved in the recovery of receivables OR chase receivables
24. Communication within sales department should be formal i.e via internal memorandum or other
formal document.
25. All documents prepared must be approved and sequentially pre-numbered.
26. There must be timely reconciliation of receivable balance with the customer records via customer
statements and these must be reviewed by responsible official.
27. Customer information held by the organization is highly confidential i.e. every employee in the
organization must not have access to such confidential data including operational managers, line
managers, sales staff &junior staff/clerks.
28. There must be segregation of duties at all levels

Summary Notes by SK
Purchase Cycle Kay Summarized Points
Internal Controls
1. Material requisition (M.R)/ purchase requisition (P.R) to be made for ALL purchases
2. M.R / P.R must be sequentially pre-numbered and approved by responsible person / authorized
personnel.
3. Quotations to be obtained from approved vendors only.
4. Vendor / supplier list should be updated on timely basis ( say annually )
5. When updating vendor list, input to be taken from all department heads including head of
procurement / purchase.
6. When selecting vendors, various factors must be considered other than cost i.e. Quality, delivery
time and after sales service (i.e. Value for money must be achieved)
7. Purchase orders must be made for all purchases irrespective of the amount.
8. Purchase orders must be approved as per the expenditure limits / authority slabs
9. Purchase orders must be sequentially pre-numbered.
10. There must be minimum 4 copies of P.Os
11. Good must be inspected on arrival for quality and quantity.
12. GRNs must be made for all goods received.
13. GRNs must be sequentially pre-numbered and must be approved by authorized person /
responsible official.
14. GRNs must be reconciled with purchase order and delivery challan (document of transportation).
15. Minimum 4 copies of GRNs must be maintained and copy to finance department must be send on
a timely basis.
16. Supplier invoice must be reconciled with P.O,GRN and delivery challan
17. Liability to be recorded on the basis of GRN and not on the basis of supplier invoice.
18. Junior clerks / junior staff / operational staff must not have access of supplier / vendor master data
/ confidential information of supplier.
19. There must be timely reconciliation of supplier balance (our company balance) via supplier
statements and these statements must be reviewed by responsible official.
20. There must be a combination of operational, technical & finance staff /personnel ( as per the
authority slab)when approving purchase order for capital expenditure items. (Relevant to CAPEX
cycle)
----------------------------------------------------------------------------------------------------------------------------------------------------
Payroll Cycle Kay Summarized Points
Internal Controls
1. Basic orientation / training to be given to employees on joining the organization.

2. There must be segregation of duties between HR & payroll dept.
3. Any hiring in the organization either permanent or contractual staff must be done by H.R only.
4. There must be pre-printed forms with HR Dept. for all new employees.
5. All input into the payroll standing data / payroll master records should be done by senior personnel
or authorized personal only.
6. The payroll system should be password protected and authorized person should change the
password periodically.

Summary Notes by SK
7. If inputs is done by junior staff / employee than this process must be observed by senior personnel
/ responsible official.
8. There must be exception reporting in the case of any change in payroll master records.
9. Daily hours worked must recorded via time in /clock in or clock out / time out process via Time
Management System (TMS) (employees swipe cards) and this process is monitored either manually
or via cameras (CCTV cameras)
10. Input of daily hours by employees can be recorded via Swipe wards, numeric key
pads or biometrics.
11. All staff members are issued with sequentially pre-numbered key cards.
12. Attendance system should mark attendance of one person at a time i.e. One person
should not be able to mark attendance more than on time.
13. Employee overtime hours worked on daily / monthly basis should be recorded
separately by the TMS.
14. ALL overtime hours worked should be authorized by a responsible official prior to
being paid by the payroll department.
(ideally overtime hours must be approved at month end before the monthly salary is
disbursed)
15. Overtime perks / benefits must be approved by responsible official.
16. System-based payroll calculation (accounting software) must be re-calculated on
sample basis by authorized personnel to ensure that system calculation is correct and
accurately performed by the system.
17. Monthly payroll salary sheets must be approved by authorized personnel /
responsible official from PAYROLL department.
18. Every month payroll control account reconciliation should be done with the posting
in GL, TB and financial statements.
19. Tax payable must be calculated by a staff member and approved by responsible
official ( CFO or FD )
20. When approving payroll payments, breakups should be reviewed rather than
reviewing total lump sum amount.
21. Lunch breaks /dine out breaks OR any other breaks should be recorded /
documented and must be monitored by department head as well as HR dept.
22. Monthly salary pay slips should always be system generated i.e. it must not be hand
written.
23. Cash salaries are the most risky therefore cash disbursement must be supervised by
responsible official and there must be strong physical controls over cash. ( cash must
be kept in safe deposit box / vault room / cash drawer)
24. Cash salary must be disbursed on the basis of proof of identification / signature.
(must be supervised by responsible official)
25. Cash salary disbursement must not be made on weekends or late evenings
26. Undistributed /unclaimed wages must be kept in a safe and secured location e.g. safe deposit box
or vault room.
27. Salaries paid via bank transfer should be reviewed in detail and agreed to the
payroll records prior to being paid.
28. Preparation of payroll bank transfer list and approval for payroll payment must be
done by separate personnel.
29. Preparation of bank transfer list and any subsequent editing in this list should be done
by separate personnel.

Summary Notes by SK
30. Annual increments / bonus and promotions must be approved by department head,
HR dept. and subsequently Board of Directors.( segregation of Duties)
31. BONUS and increment policy must be approved by both HR and B.O.D
32. Approved bonus / increments must be formally communicated to payroll
department.
33. The above must be communicated to payroll department on a timely basis as well as
communicated formally so that salaries are calculated correctly.
34. The details of joiners and leavers must be documented by H.R and must be timely
communicated to payroll department to ensure correct and accurate calculation of
salaries.
35. Annual leaves / holidays must be approved via holiday forms / annual leave forms by immediate
supervisor / department head and the employee must be notified as to the number of holidays
approved.
36. In case of annual leaves proper delegation must be done to fellow colleagues or subordinates.

Summary Notes by SK
Constructing T.O.C’s from Controls ………. (Few Examples)

(For my CAF 8 Cheetahs) 
Controls Test of Controls
1. Purchase Orders are made and approved by Inspect a sample of purchase orders made & also
responsible official. review proper approval by authorized personnel.
2. Cash vouchers are approved by responsible Inspect a sample of cash vouchers to verify the
official. approvals.
3. Credit limits are set by senior member of the For a sample of customers review that the
sales team. authorization is given by authorized personnel.
4. Supplier statement reconciliation should be Inspect the file of reconciliation to ensure that they
performed on monthly basis. are performed on a regular basis.
5. Credit limit is set for all customers by Enter a sales order which will take the order, above
Authorized Personnel. the agreed limit, the system must reject the order.
6. Every customer has a unique account We will enter fake customer Id’s and the system
number. must reject it.
7. Customers are entitled to discount which are Enter discount in the case of customer normally not
approved by respective authorized personnel. entitled to a discount, the system must reject the
order or should not accept the discount.
8. The website must be integrated with the We will enter a dummy product/dummy data/test
inventory system of the company. data and check the system which must indicate or
show that the item is out of stock plus also inform
its next availability.
9. Goods are inspected on arrival. Observe inspection process on arrival of goods.
10. All purchase invoices are compared with Review such comparisons made and also verify
G.R.Ns before approval of payment. approvals by inspecting the documents.
11. There is adequate segregation of duties btw Review the job descriptions of payroll and H.R to
H.R and Payroll dept. confirm the split of responsibilities between them.
12. On monthly basis exception reports are Select a sample of exception reports and review for
produced incase of any changes to standing evidence of review done by authorized personnel.
data / master records and such reports are (by looking at his signatures)
reviewed by the payroll director.
13. Salary pay packets are prepared by 02 Observe the preparation of the pay packets ensuring
members of the staff – one prepares the that 02 members of the staff are involved and also
packet and the other checks the pay packets. are checked for accuracy.
14. Segregation of Duties in any given process Review the job descriptions (J.D) and
Discuss with members of the Dept to inquire about
their responsibilities or J.D
15. Documents are made e.g. Pre numbered Select a sample of documents OR
invoice or purchase Order or Gate pass or pre- Review/ verify / inspect the documents on sample
printed forms or Overtime sheets or goods basis and verify approval by authorized person and
received note that the document is sequentially pre-numbered.
16. Data is input by the person into master records Make a person input into system not authorized to
/ accounting software. do and observe the response of the system (system
must reject it ) or
In case a person posts / inputs under the
supervision of a senior official than observe the

Summary Notes by SK
process to ensure control is being followed and
adhered to.
17. Document is authorized by responsible official Select a sample of documents and review the
/ authorized person. evidence for authorization e.g. Signature of
authorized person on the doc.
18. In case of an automated system Insert Test data / Dummy data and verify the
i.e Time clock card or attendance system or results with predetermined results.
Bar code reader
19. In case of any instructions given Inspect the document or review the document to
verify the instructions given
20. In case of any calculations being done e.g. Recalculate OR verify a sample of calculations for
Sales discount or Wages calculation OR evidence that they are correctly calculated
Totaling of sales invoices
21. In case the control is reflected by an email from Review a sample of emails done or received to
one dept to another or an email from one verify responses
person to another within department
22. In case systems are integrated e.g Online Insert test data / dummy data to review the
ordering system with inventory system response of the system with pre-determined results
and corrective actions to be communicated.
23. In case any reconciliations are performed e.g. Review / verify / inspect reconciliations on a
stock reconciliation, bank reconciliation and sample basis to ensure they are properly made and
are approved by responsible person. also obtain evidence of approval by review of
signatures of authorized personnel / responsible
official.

Summary Notes by SK
Student Notings

Summary Notes by SK
ACCA F8 TOC Practice Questions

S. No. Question Attempt Marks
1 Pear International Co June 2012 15 marks
2 Fox Industries Co June 2013 14 marks
3 Oregano Co Dec 2013 2 + 12 marks
4 Blair & Co Dec 2011 12 marks
5 Equestrian Co March / June 2017 16 marks
6 Hummingbird Scents Co Dec 2014 16 marks
7 Raspberry Co Mar / June 2018 20 marks
8 Heraklion Co Sept 2016 14 marks
9 Hessonite & Co March / June 2016 15 marks
10 Scarlet & Co Sept / Dec 2015 20 marks
11 Bonsai Trading Co June 2015 10 marks
12 Lily Window Glass (Co) Dec 2012 12 marks
13 Shiny Happy Windows June 2010 20 marks
14 Matalas Co Dec 2007 12 marks
15 South Lea Co ------------------ 20 marks
16 Brennon & Co June 2008 26 marks
17 Letham Co Dec 2009 20 marks
18 Trombone June 2014 30 marks

Summary Notes by SK
TOC Practice Questions

ACCA F8 June 2012 (15 marks)
Question 1
Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country
and its customer base includes retailers as well as individuals, to whom direct sales are made through
their website. The company’s year end is 30 September 2012. You are an audit supervisor of Apple &
Co and are currently reviewing documentation of Pear’s internal control in preparation for the interim
audit.
Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently
the website is not integrated into the inventory system and inventory levels are not checked at the time
when orders are placed.
Goods are dispatched via local couriers; however, they do not always record customer signatures as
proof that the customer has received the goods. Over the past 12 months there have been customer
complaints about the delay between sales orders and receipt of goods. Pear has investigated these and
found that, in each case, the sales order had been entered into the sales system correctly but was not
forwarded to the dispatch department for fulfilling.
Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly
by sales ledger clerks. These customers place their orders through one of the sales team, who decides on
sales discount levels.
Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a
result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer
performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken
by purchase ledger clerks as well as supervisors.
In the past six months Pear has changed part of its manufacturing process and as a result some new
equipment has been purchased, however, there are considerable levels of plant and equipment which
are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by
production supervisors and little has been done to reduce the surplus of old equipment.
Required:
a) In respect of the internal control of Pear International Co.
i. Identify and explain five deficiencies
ii. Recommend a control to address each of these deficiencies ; and
iii. Describe a test if control Apple & Co would perform to asses of each of these controls is
operating effectively. (15 marks)

Summary Notes by SK
Answer:
Deficiency Control Test of control

Currently the website is not The website should be updated Test data could be used to attempt
integrated into inventory to include an interface into the to process orders via the website
system. inventory system; this should for items which are not currently
check inventory levels and only held in inventory. The orders
This can result in Pear process orders if adequate should be flagged as being out of
accepting customer orders inventory is held. If inventory is stock and indicate an approximate
when they do not have the out of stock, this should appear waiting time.
goods in inventory. This can on the website with an
cause them to lose sales and approximate waiting time.
customer goodwill.
For goods dispatched by local Pear should remind all local Select a sample of despatches by
couriers, customer signatures couriers that customer couriers and ask Pear for proof of
are not always obtained. signatures must be obtained as despatch by viewing customer
proof of dispatch and payment signatures.
This can lead to customers will not be made for any
falsely claiming that they have despatches with missing
not received their goods. Pear signatures.
would not be able to prove that
they had in fact despatched the
goods and may result in goods
being despatched twice.
There have been a number of Once goods are despatched Review the report of outstanding
situations where the sales they should be matched to sales sales orders. If significant, discuss
orders have not been fulfilled in orders and flagged as fulfilled. with a responsible official to
a timely manner. understand why there is still a
significant time period between
This can lead to a loss of sales order and despatch date.
customer goodwill and if it The system should
persists will damage the automatically flag any Select a sample of sales orders and
reputation of Pear as a reliable outstanding sales orders past a compare the date of order to the
supplier. predetermined period, such as goods despatch date to ascertain
five days. This report should be whether this is within the
reviewed by a responsible acceptable predetermined period.
official.
Customer credit limits are set Credit limits should be set by a For a sample of new customers
by sales ledger clerks. senior member of the sales accepted in the year, review the
ledger department and not by authorisation of the credit limit,
Sales ledger clerks are not sales ledger clerks. These limits and ensure that this was
sufficiently senior and so may should be regularly reviewed by performed by a responsible
set limits too high, leading to a responsible official. official.
irrecoverable debts, or too low,
leading to a loss of sales. Enquire of sales ledger clerks as to
who can set credit limits.
Sales discounts are set by Pear’s All members of the sales team Discuss with members of the sales
sales team. should be given authority to team the process for setting sales
grant sales discounts up to a set discounts.
In order to boost their sales, limit. Any sales discounts
members of the sales team may above these limits should be

Summary Notes by SK
set the discounts too high, authorised by sales area
leading to a loss of revenue. managers or the sales director.
Regular review of sales

discount levels should be
undertaken by the sales Review the sales discount report
director, and this review should for evidence of review by the sales
be evidenced. director.
Supplier statement Supplier statement Review the file of reconciliations
reconciliations are no longer reconciliations should be to ensure that they are being
performed. performed on a monthly basis performed on a regular basis and
for all suppliers and these that they have been reviewed by a
This may result in errors in the should be reviewed by a responsible official.
recording of purchases and responsible official.
payables not being identified in
a timely manner.
Changes to supplier details in Only purchase ledger Request a purchase ledger clerk to
the purchase ledger master file supervisors should have the attempt to access the master file
can be undertaken by purchase authority to make changes to and to make an amendment, the
ledger clerks. master file data. This should be system should not allow this.
controlled via passwords.
Review a report of master data
This could lead to key supplier Regular review of any changes changes and review the authority
data being accidently amended to master file data by a of those making amendments.
or fictious suppliers being set responsible official and this
up, which can increase the risk review should be evidenced.
of fraud.
Pear has considerable levels of Regular review of the plant and Observe the review process by
surplus plant and equipment. equipment on the factory floor senior factory personnel,
by senior factory personnel to identifying the treatment of any
Surplus unused plant is at risk identify any old or surplus old equipment.
of theft. In addition, if the equipment.
surplus plant is not disposed of Review processed capital
then the company could lose As part of the capital expenditure forms to ascertain if
sundry income. expenditure process there the treatment of replaced
should be a requirement to equipment is stated.
confirm the treatment of the
equipment being replaced.
Purchase requisitions are Capital expenditure Review a sample of authorised
authorised by production authorisation levels to be capital expenditure forms and
supervisors. established. Production identify if the correct signatory has
supervisors should only be able authorised them.
Production supervisors are not to authorise low value items,
sufficiently independent or any high value items should be
senior to authorise capital authorised by the board.
expenditure.

Summary Notes by SK

Question 1
Introduction
Fox Industries Co (Fox) manufactures engineering parts. It has one operating site and a customer base
spread across Europe. The company’s year end was 30 April 2013. Below is a description of the
purchasing and payments system.
Purchasing system
Whenever production materials are required, the relevant department sends a requisition form to the
ordering department. An order clerk raises a purchase order and contacts a number of suppliers to see
which can despatch the goods first. This supplier is then chosen. The order clerk sends out the purchase
order. This is not sequentially numbered and only orders above $5,000 require authorisation.
Purchase invoices are input daily by the purchase ledger clerk, who has been in the role for many years
and, as an experienced team member, he does not apply any application controls over the input process.
Every week the purchase day book automatically updates the purchase ledger, the purchase ledger is
then posted manually to the general ledger by the purchase ledger clerk.
Payments system
Fox maintains a current account and a number of saving (deposit) accounts. The current account is
reconciled weekly but the saving (deposit) accounts are only reconciled every two months.
In order to maximise their cash and bank balance, Fox has a policy of delaying payments to all suppliers
for as long as possible. Suppliers are paid by a bank transfer. The finance director is given the total
amount of the payments list, which he authorises and then processes the bank payments.
Required:
b) As the external auditors of Fox Industries Co, write a report to management in respect of the
purchasing and payments system described above which:
i. Identifies and explains FOUR deficiencies in the system; and

ii. Explains the possible implication of each deficiency; and
iii. Provides a recommendation to address each deficiency. (14 marks)
A covering letter IS required.
Note: Up to two marks will be awarded within this requirement for presentation and the remaining
marks will be split equally between each part.

Summary Notes by SK
Answer:
Report to management
Board of directors
Fox Industries Co
15 Dog Street
Cat Town
X Country
6 June 2013
Dear Sirs,
Audit of Fox Industries Co (Fox) for the year ended 30 April 2013
Please find enclosed the report to management on deficiencies in internal controls identified during the
audit for the year ended 30 April 2013. The appendix to this report considers deficiencies in the
purchasing and payments system, the implications of those deficiencies and recommendations to
address those deficiencies.
Please note that this report only addresses the 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
Deficiency Implication Recommendation

When raising purchase orders, This could result in Fox An approved supplier list should
the clerks choose whichever ordering goods at a much be compiled; this should take into
supplier can despatch the higher price or a lower quality account the price of goods, their
goods the fastest. than they would like, as the quality and also the speed of
only factor considered was delivery.
speed of delivery.
Once the list has been produced,
It is important that goods are all orders should only be placed
despatched promptly, but this with suppliers on the approved list.
is just one of many criteria that
should be used in deciding
which supplier to use.
Purchase orders are not Failing to sequentially number All purchase orders should be
sequentially numbered. the orders means that Fox’s sequentially numbered and on a
ordering team are unable to regular basis a sequence check of
monitor if all orders are being unfulfilled orders should be
fulfilled in a timely manner; performed.
this could result in stock outs.

Summary Notes by SK
If the orders are numbered,
then a sequence check can be
performed for any unfulfilled
orders.
Purchase orders below $5,000 This can result in goods being All purchase orders should be
are not authorised and are purchased which are not authorised by a responsible
processed solely by an order required by Fox. In addition, official. Authorised signatories
clerk. there is an increased fraud risk should be established with varying
as an order clerk could place levels of purchase order
orders for personal goods up to authorisation.
the value of $5,000, which is
significant.
Purchase invoices are input Without application controls The purchase ledger clerk should
daily by the purchase ledger there is a risk that invoices input the invoices in batches and
clerk and due to his experience, could be input into the system apply application controls, such as
he does not utilise any with inaccuracies or they may control totals, to ensure
application controls. be missed out entirely. completeness and accuracy over
the input of purchase invoices.
This could result in suppliers
being paid incorrectly or not
all, leading to a loss of supplier
goodwill.
The purchase day book Manually posting the amounts The process should be updated so
automatically updates with the to the general ledger increases that on a regular basis the purchase
purchase ledger but this ledger the risk of errors occurring. ledger automatically updates the
is manually posted to the This could result in the general ledger.
general ledger. payables balance in the
financial statements being A responsible official should then
under or overstated. confirm through purchase ledger
control account reconciliations
that the update has occurred
correctly.
Fox’s saving (deposit) bank If these accounts are only All bank accounts should be
accounts are only reconciled reconciled periodically, there is reconciled on a regular basis, and
every two months. the risk that errors will not be at least monthly, to identify any
spotted promptly. unusual or missing items.
The reconciliations should be
Also, this increases the risk of reviewed by a responsible official
employees committing fraud. If and they should evidence their
they are aware that these review.
accounts are not regularly
reviewed, then they could use
these cash sums fraudulently.
Fox has a policy of delaying Whilst this maximizes Fox’s Fox should undertake cash flow
payments to their suppliers for bank balance, there is the risk forecasting/budgeting to
as long as possible. that Fox is missing out on early maximize bank balances. The
settlement discounts. Also, this policy of delaying payment should
can lead to a loss of supplier be reviewed, and suppliers should
goodwill as well as the risk that be paid in a systematic way, such
suppliers may refuse to supply that supplier goodwill is not lost.
goods to Fox.

Summary Notes by SK
The finance director authorises Without looking at the detail of The finance director should review
the bank transfer payment list the payments list, as well as the whole payments list prior to
for suppliers; however, he only supporting documentation, authorizing. As part of this, he
views the total amount of there is a risk that suppliers should agree the amounts to be
payments to be made. could be being paid an paid to supporting documentation,
incorrect amount, or that sums as well as reviewing the supplier
are being paid to fictitious names to identify any duplicates or
suppliers. any unfamiliar names. He should
evidence his review by signing the
bank transfer list.
ACCA F8 Dec 2013 (14 marks)

Question 3
You are a member of the recently formed internal audit department of Oregano Co (Oregano). The
company manufactures tinned fruit and vegetables which are supplied to large and small food retailers.
Management and those charged with governance of Oregano have concerns about the effectiveness of
their sales and despatch system and have asked internal audit to document and review the system.
Sales and despatch system

Sales orders are mainly placed through Oregano’s website but some are made via telephone. Online
orders are automatically checked against inventory records for availability; telephone orders, however,
are checked manually by order clerks after the call. A follow-up call is usually made to customers if there
is insufficient inventory. When taking telephone orders, clerks note down the details on plain paper and
afterwards they complete a three part pre-printed order form. These order forms are not sequentially
numbered and are sent manually to both despatch and the accounts department.
As the company is expanding, customers are able to place online orders which will exceed their agreed
credit limit by 10%. Online orders are automatically forwarded to the despatch and accounts department.
A daily pick list is printed by the despatch department and this is used by the warehouse team to despatch
goods. The goods are accompanied by a despatch note and all customers are required to sign a copy of
this. On return, the signed despatch notes are given to the warehouse team to file.
The sales quantities are entered from the despatch notes and the authorised sales prices are generated by
the invoicing system. If a discount has been given, this has to be manually entered by the sales clerk onto
the invoice. Due to the expansion of the company, and as there is a large number of sale invoices, extra
accounts staff have been asked to help out temporarily with producing the sales invoices. Normally it is
only two sales clerks who produce the sales invoices.
Required:
b. List TWO control objectives of Oregano Co’s sales and despatch system. (2 marks)
c. Identify and explain SIX deficiencies in Oregano Co’s sales and despatch system
and provide a recommendation to address each of these deficiencies. (12 marks)

Summary Notes by SK
Answer:
b) Control objectives for sales and despatch 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
c) Deficiencies and controls for Oregano Co’s sales and despatch system
Deficiency Control
Inventory availability for telephone orders is not When telephone orders are placed, the order clerk
checked at the time the order is placed. The should check the inventory system whilst the
order clerks manually check the availability later customer is on the phone; they can then give an
and only then inform customers if there is accurate assessment of the availability of goods and
insufficient inventory available. there is no risk of forgetting to inform customers.
There is the risk that where goods are not

available, order clerks could forget to contact the
customers, leading to unfulfilled orders. This
could lead to customer dissatisfaction, and
would impact Oregano’s reputation.
Telephone orders are not recorded immediately All telephone orders should be recorded
on the three part pre-printed order forms; these immediately on the three part pre-printed order
are completed after the telephone call. There is a forms. The clerk should also double check all the
risk that incorrect or insufficient details may be details taken with the customer over the telephone
recorded by the clerk and this could result in to ensure the accuracy of the order recorded.
incorrect orders being despatched or orders
failing to be despatched at all, resulting in a loss
of customer goodwill.
Telephone orders are not sequentially The three part pre-printed orders forms should be
numbered. Therefore if orders are misplaced sequentially numbered and on a regular basis the
whilst in transit to the despatch department, despatch department should run a sequence check
these orders will not be fulfilled, resulting in of orders received. Where there are gaps in the
dissatisfied customers. sequence, they should be investigated to identify
any missing orders.
Customers are able to place online orders which Customer credit limits should be reviewed more
will exceed their agreed credit limit by 10%. This regularly by a responsible official and should reflect
increases the risk of accepting orders from bad the current spending pattern of customers. If some
credit risks. customers have increased the level of their
purchases and are making payments on time, then
these customers’ credit limits could be increased.

Summary Notes by SK
The online ordering system should be amended to
not allow any orders to be processed which will
exceed the customer’s credit limit.
A daily pick list is used by the despatch In addition to the pick list, copies of all the related
department when sending out customer orders. orders should be printed on a daily basis. When the
However, it does not appear that the goods are goods have been picked ready to be despatched,
checked back to the original order; this could they should be cross checked back to the original
result in incorrect goods being sent out order. They should check correct quantities and
product descriptions, as well as checking the quality
of goods being despatched to ensure they are not
damaged.
Additional staff have been drafted in to help the Only the sales clerks should be able to raise sales
two sales clerks produce the sales invoices. As invoices. As Oregano is expanding, consideration
the extra staff will not be as experienced as the should be given to recruiting and training more
sales clerks, there is an increased risk of mistakes permanent sales clerks who can produce sales
being made in the sales invoices. This could invoices.
result in customers being under or overcharged.
Discounts given to customers are manually For customers who are due to receive a discount,
entered onto the sales invoices by sales clerks. the authorised discount levels should be updated to
This could result in unauthorised sales discounts the customer master file. When the sales invoices
being given as there does not seem to be any for these customers are raised, their discounts
authorisation required. should automatically appear on the invoice.
In addition, a clerk could forget to manually The invoicing system should be amended to prevent
enter the discount or enter an incorrect level of sales clerks from being able to manually enter sales
discount for a customer, leading to the sales discounts onto invoices.
invoice being overstated and a loss of customer
goodwill.

Question 1
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 programs 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.

Summary Notes by SK
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.
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:
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)
Answer:
Payroll system implications and recommendations
Implication Recommendation
Clocking in process
As there is no supervision of the clocking in The clocking in and out procedures should be
process then, as witnessed, employees can clock supervised by a responsible official to prevent one
in multiple employees simply by using their individual clocking in multiple employees. In
employee swipe cards. This will result in a addition, Chuck Industries could consider linking
substantially increased payroll cost for Chuck the access to the factory floor with the employee
Industries. swipe card system. Hence employees can only
access the factory one at a time upon presentation
of their employee swipe card.
In addition, this could create a weaker control Employees should be reminded about the
environment whereby employees consider it importance of following Chuck Industries’ policies
acceptable not to follow controls. and procedures, especially in relation to the
clocking in/out process.
Without supervision/monitoring of the clocking
in or out process, employees could try to boost Overtime hours should be reviewed by the
their hours worked by clocking out several hours production supervisor prior to payment, to ensure
after their shift has finished, this will lead to that only previously authorized overtime is paid
invalid and unauthorized overtime payments. for.
Wages calculations
The wages calculations are generated by the A senior member of the payroll team should
payroll system and there are no checks recalculate the gross to net pay workings for a
performed. Therefore, if system errors occur sample of employees and compare their results to
during the payroll processing then this would not the output from the payroll system. These
be identified. This could result in wages being calculations should be signed as approved before
wages payments are made.

Summary Notes by SK
over or under calculated, leading to an
additional payroll cost or loss of employee
goodwill.
Hourly wage increase
The hourly wage has been increased by the All increases of pay should be proposed by the HR
Human Resources (HR) department and department and then formally agreed by the board
notified to the payroll department verbally. As of directors
payroll can be a significant expense for a
business, any decision to increase this should be Written notification of the increase should be sent
made by the board as a whole and not just by to payroll and HR and only then should the pay
HR. rise be incorporated into the payroll package.
The payroll department should not accept verbal
notifications of pay increases as it could be an
unauthorized increase, or an effort by an
employee in HR to increase the pay of certain
members of staff, such as their friends.
Wage payout
The factory supervisor should not be given the Consideration should be given to operating a shift
pay packets of the night shift staff as this is a system for the payroll department on Fridays. This
significant amount of cash, being approximately will ensure that there are sufficient payroll
one-third of the workforce. This cash will not be employees to perform the wages payout to the
in a secure location and so is open to the risk of night shift employees. Therefore the same controls
theft.. applied to the morning and late afternoon shifts
In addition, the supervisor is not sufficiently can be put in place for the night shift
independent to pay wages out. He could adjust
Employees who miss the payout by the payroll
pay packets to increase those of his close friends
whilst reducing others. department will need to wait until Monday for
their pay. No factory supervisor should be allowed
For employees absent on pay day, the supervisor to hand out wages.
retains the wages and only returns them on
Monday. This cash is therefore not secure and is Pay packets of absent employees should be safely
susceptible to loss or theft. secured in the safe overnight and then banked on
Monday.
Joiners/leavers
Notification of joiners and leavers should be During periods of illness or holidays, key roles of
made on a timely basis to the payroll the affected employees should be reallocated to
department, even if some staff are on holiday. other members of the team to ensure that controls
Otherwise Chuck Industries could continue are maintained.
making payments to employees who have left, or
pay new employees late, resulting in a loss of Forms for new joiners should be completed when
employee goodwill. they are appointed with appropriate start dates
filled in, these should then be distributed to all
relevant departments. This should reduce the risk
of new joiners being missed out by the payroll
department.

Summary Notes by SK
ACCA F8 Mar / Jun 2017 (16 marks)
Question 18
Equestrian Co manufactures smartphones and tablets. Its main customers are retailers who then sell to
the general public. The company’s manufacturing is spread across five sites and goods are stored in its
nine warehouses located across the country. You are an audit supervisor of Baseball & Co and in
preparation for the forthcoming audit for the year ending 30 June 20X7, you are reviewing the following
notes your audit manager has provided you with in relation to the company’s internal controls.
Equestrian Co has a small internal audit (IA) department. During the year, IA started a program of
physically verifying the company’s assets and comparing the results to the non-current assets register, as
this type of reconciliation had not occurred for some time. To date only 15% of assets have had their
existence confirmed as IA has experienced significant staff shortages and several members of the current
IA team are new to Equestrian Co.
During the year, Equestrian Co conducted an extensive reorganisation of its manufacturing process to
improve efficiency. Due to the significant number of employee changes required, the human resources
department (HR) has been very busy and to ease their workload during this period, the payroll
department has assisted by setting up any new employees who have joined the company. In January
20X7, the wage rate paid to employees was increased by the HR director and he notified payroll by
emailing the payroll supervisor.
A new sales ledger system was introduced in May 20X6 and will continue to be run in parallel with the
old system until IA has completed its checks between the two systems. New customers obtained by the
sales team are required to undergo a full credit check; on the basis of this, a credit limit is proposed by
sales staff and approved by the sales director and these credit limits remain static in the sales system.
Monthly perpetual inventory counts are undertaken at each of the nine warehouses, as a full year-end
inventory count is too disruptive for the company. High value items are stored in a secure area in each
warehouse. Access is via a four digit code, which for convenience is the same across all sites. Due to the
company’s reorganisation programme, some of the monthly inventory counts were not performed.
Bank reconciliations are undertaken monthly by an accounts clerk and details of all reconciling items
are included. Where the sum of the reconciling items is significant, the reconciliation is sent to the
financial controller for review. In order to maximize cash balances, the finance director approves all
purchase invoices for payment 75 days after receipt of the invoice.
Required:
(b) Identify and explain EIGHT deficiencies in Equestrian Co’s internal controls and provide a
recommendation to address each of these deficiencies. (16 marks)
Note: Prepare your answer using two columns headed Control deficiency and Control recommendation
respectively

Summary Notes by SK
Answer:
Equestrian Co deficiencies and controls
Control deficiency Control recommendation
Physical verification of assets within the non- Additional resources should be devoted to
current asset register has not been undertaken for completing the physical verification of all assets
some time. A current programme has started but within the register. If any assets cannot be located,
is only 15% complete, due to staff shortages. they should be written off.
If non-current assets are not physically verified
on a regular basis, there is an increased risk of Following this full review, on a monthly basis a
assets being misappropriated or misplaced as sample of assets at the sites should be agreed back
there is no check that the assets still exist in their to the register to confirm existence.
correct location.
Equestrian Co has experienced significant staff Senior management should consider recruiting
shortages within their internal audit (IA) additional employees to join the IA department.
department. In addition, several members of the
current IA team are new to the company. In the interim, employees from other departments,
such as finance, could be seconded to IA to assist
Maintaining an IA department is an important them with the internal audits, provided these
control as it enables senior management to test reviews do not cover controls operating in the
whether controls are operating effectively within department where the employees normally work.
the company. If the team has staff shortages or
lack of experience, this reduces the effectiveness
of this monitoring control.
During the year, the human resources (HR) The HR director should as a matter of urgency
department has been busy; therefore the payroll review the workloads of the department to assess
department has set up new joiners to the whether other tasks can be reprioritized as payroll
company. should cease to set up new joiners. This role must
immediately revert back to HR to undertake.
This is a lack of segregation of duties, as
employees are able to set up new joiners in the Additionally, a review should be undertaken of all
payroll system and process their pay, this leads new joiners set up by payroll with agreement to
to an increased risk of fictitious/duplicate employee files to confirm that all new employees
employees being set up. are bona fide.
The wage rate has been increased by the HR All increases of pay should be proposed by the HR
director and notified to the payroll supervisor by department and then formally agreed by the board
email. As payroll can be a significant expense for of directors.
a business, any decision to increase this should
be made by the board as a whole and not just by Upon agreement of the pay rise, a written
the HR director. notification of the board decision should be sent to
the payroll supervisor who enters the revised pay
In addition, the notification of the payroll rate into the system. This change should trigger an
increase was via email and the payroll supervisor exception report for the payroll director, and the
was able to make changes to the payroll standing new rate should not go live until the director has
data without further authorisation. This signed off the changes.
increases the risk of fraud or errors arising within
payroll.
New customers undergo a credit check, after Credit limits should continue to be approved by
which a credit limit is proposed by the sales staff the sales director; however, on a regular basis the

Summary Notes by SK
and approved by the sales director, these credit sales director should review these limits based on
limits are not reviewed after this. order history and payment record.
Over a period of time it may be that the

customers’ credit limits have been set too high,
leading to irrecoverable debts, or too low,
leading to a loss of sales.
High value inventory is stored in a secure The access codes for all of the sites should be
location across all nine warehouses and access is changed. Each site should have a unique code,
via a four digit code, which is common to all known to a small number of senior warehouse
sites. employees. These codes should be changed on a
regular basis.
As the code is the same across all sites, this
significantly increases the risk of fraud. A
considerable number of people will be aware of
the codes and could access inventory at any of
the nine sites.
Monthly perpetual inventory counts are The programme of perpetual inventory counts
supposed to be undertaken at each of the nine should be reviewed for omissions. Any lines which
warehouses, but some of these are outstanding. have been missed out should be included in the
remaining counts
In order to rely on inventory records for decision
making and the year-end financial statements, At the year end, if any lines are identified as having
all lines of inventory must be counted at least not been counted, the company should organise an
once a year, with high value or high turnover additional count to ensure that all items are
items counted more regularly. If the counts are confirmed to inventory records.
outstanding, some goods may not be counted,
and the inventory records may be incorrect.
The bank reconciliations are only reviewed by The bank reconciliations should be reviewed by
the financial controller if the sum of reconciling the financial controller on a monthly basis, even if
items is significant; therefore some the reconciling items are not significant, and he
reconciliations are not being reviewed. The should evidence his review by way of signature on
financial controller relies solely on the accounts the bank reconciliation.
clerk’s notification that the bank reconciliations
require review.
The bank reconciliations could contain

significant errors, but a low overall amount of
reconciling items, as there could be
compensating errors which cancel each other
out.
Bank reconciliations are a key control which

reduces the risk of fraud. If they are not
reviewed, then this reduces its effectiveness and
also results in a lack of assurance that bank
reconciliations are being carried out at all or on
a timely basis.
Invoices are authorised by the finance director, The policy of making payment after 75 days
but payment is only made 75 days after receipt should be reviewed. Consideration should be

Summary Notes by SK
of the invoice. There is the risk that Equestrian given to earlier payment if the settlement discounts
Co is missing out on early settlement discounts. are sufficient. If not, invoices should be paid in
accordance with the supplier’s payment terms.
Also, failing to pay in accordance with the
supplier’s payment terms can lead to a loss of
supplier goodwill as well as the risk that
suppliers may refuse to supply goods to the
company.

Question 5
Hummingbird Scents Co (Hummingbird) manufactures and sells luxury toiletries; they have been trading
for over 20 years and the company’s year end is 30 September 2014. Hummingbird sells products to trade
customers via its own website; this represents 60% of revenue. Remaining revenue is generated by
contracts to supply toiletries to hotels. Below is a description of the sales system.
Hotel revenue
The hotel revenue is made up of four key customers. Hummingbird has one sales clerk, Brenda, who
maintains all aspects of this revenue stream; Brenda receives customer orders, raises sales invoices and
processes payments. In raising invoices, the sales system automatically inserts the online trade customer
prices for products. However, each hotel customer has contracted prices which are lower than the online
prices and hence Brenda manually edits the invoices prior to despatch.
Online revenue
New trade customers are set up in the sales ledger master file upon passing suitable credit checks, and a
credit limit is set at this stage by the finance director. Customers place online orders up to their pre-set
credit limit; they receive an email confirmation and the sales order interfaces into the despatch system.
The order number is linked to the customer account number. Goods are despatched daily with a goods
despatched note which is referenced to the sales order number but are not sequentially numbered.
Hummingbird used to despatch goods via a reliable national courier company. However, to reduce costs
they have changed to a cheaper local courier and some orders have been delivered to customers late.
Trade customers’ sales invoices are automatically generated by the system on the day the online order is
placed. The prices are inserted in accordance with the website rates. Occasionally Hummingbird makes
special offers or discounts sales; when this occurs the master file data has to be amended to ensure that
the correct prices are used on invoices. This task is usually performed by a senior sales ledger clerk .
Revenue and receivables records

On a monthly basis statements are sent to the hotel customers; a number of trade customers have been
requesting monthly statements and Hummingbird is considering this request. The company only
reconciles the sales ledger control account at the end of September in order to verify the year-end balance.
Required:
(a) As the external auditor of Hummingbird Co, write a report to management in respect
of the sales system described above which:
i. Identifies and explains SEVEN deficiencies in the sales system; and
ii. Provides a recommendation to address each of these deficiencies. (16 marks)
A covering letter IS required.

Note: Up to two marks will be awarded within this requirement for presentation and the remaining marks will
be split equally between each part.

Summary Notes by SK
Answer:
Board of directors
Hummingbird Co
Dear Sirs,
Audit of Hummingbird Scents Co (Hummingbird) for the year ended 30 September 2014
Please find enclosed the report to management on deficiencies in internal controls identified during
the audit for the year ended 30 September 2014. The appendix to this report considers deficiencies in
the sales system and recommendations to address those deficiencies.
Please note that this report only addresses the 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
Deficiency Control
Brenda the sales clerk receives customer orders, Another sales ledger clerk should be involved in
raises sales invoices and processes payments for the processing of hotel customer transactions so
hotel customers. This is a lack of segregation of that no one individual undertakes all elements of
duties and could lead to a risk of fraudulent the sales cycle. The work could be split so that one
transactions or errors, as no one checks the work clerk raises orders and invoices but a second clerk
undertaken by this clerk. processes the payments.
As hotel customers account for 40% of revenue,
Hotel customers have contracted sales prices; consideration should be given to amending the
however, as online trade prices are automatically sales system so that each customer’s agreed prices
loaded into the sales invoices, Brenda has to are pre-loaded, therefore no manual amendment
manually amend the invoices. of invoices would be required.
This significantly increases the risk of error, as if If this is not feasible, then all sales invoices for
Brenda incorrectly increases the sales prices, then hotel customers should be double checked by
this can lead to a loss of customer goodwill and if another member of the finance department prior to
they are too low, this results in a loss of revenue being sent out.
for Hummingbird.
Credit limits are determined by the finance Customer credit limits should be regularly
director when a new trade customer is set up in reviewed by the finance director and updated
the system. However, these limits could be out of based on the level of sales transactions and credit
date, resulting in limits being too high and sales risk.
being made to poor credit risks or too low and
Hummingbird losing potential revenue.
Customer orders and goods despatched notes Sales orders and goods despatched notes should be
(GDN) are given a number based on the customer sequentially numbered. On a regular basis, a
account number and order number. These sequence check of orders should be undertaken to

Summary Notes by SK
numbers are not sequential. Without sequential identify any missing orders. Upon despatch, the
numbers, it is difficult for Hummingbird to GDN should be matched to the order; a regular
identify missing orders and to monitor if all review of unmatched orders should be undertaken
orders are being despatched in a timely manner, to identify any unfulfilled orders.
leading to a loss of customer goodwill.
Hummingbird has changed from a reliable The courier company should be set targets with
national courier company to a cheaper local regards to timeliness of despatches. A review
courier; as a result some orders have been should be undertaken of target despatch times and
delivered late. There is a risk that orders may be actual times taken by the new courier company. If
lost resulting in a loss of revenue for late delays continue, then consideration should be
Hummingbird or orders arriving later than given to changing back to the original courier
normal which would lead to a loss of customer company.
goodwill.
The system should be amended so that it links into
Trade customers’ sales invoices are automatically the despatch system. Sales invoices should not be
generated by the system at the same time that the raised until after goods have been despatched.
online order is placed. However, if goods are not
despatched straight away, then customers could
be invoiced in advance of receipt of their goods.
This is likely to lead to a loss of customer
goodwill and the early recognition of revenue in
the accounting records.
If Hummingbird makes special offers or discounts When special offers or discounted sales occur, the
sales, the master file data for sales prices is changes to master file data should be made by a
amended by a senior sales ledger clerk. There is a supervisor and each change checked by a
risk that these amendments could be made responsible official to reduce the risk of errors
incorrectly resulting in a loss of sales revenue or occurring.
overcharging of customers.
In addition, the sales ledger clerk, although Amendments to master file data should be
senior, is not senior enough to be given access to restricted so that only supervisors and above can
changing master file data as this could increase make changes.
the risk of fraud.
Monthly statements are not sent to trade Hummingbird should produce monthly customer
customers. If statements are not sent regularly, statements for both hotel and trade customers and
this increases the likelihood of errors and any send them out promptly.
disputed invoices not being quickly identified and
resolved by Hummingbird.
The sales ledger control account is only The sales ledger control account should be
reconciled at the end of September in order to reconciled on a monthly basis to identify any
verify the year-end balance. If the sales ledger is errors. The reconciliations should be reviewed by
only reconciled annually, there is a risk that errors a responsible official and they should evidence
will not be spotted promptly. their review.

Summary Notes by SK
ACCA F8 March/June 2018 (20 marks)
Question 16 a & b
Raspberry Co. operates an electric power station, which produces electricity 24 hours a day, seven days
a week. The company’s year end is 30 June 20X8. You are an audit manager of Grapefruit & Co, the
auditor of Raspberry Co. The interim audit has been completed and you are reviewing the
documentation describing Raspberry Co’s payroll system.
Systems notes – payroll

Raspberry Co employs over 250 people and approximately 70% of the employees work in production at
the power station. There are three shifts every day with employees working eight hours each. The
production employees are paid weekly in cash. The remaining 30% of employees work at the head office
in non-production roles and are paid monthly by bank transfer.
The company has a human resources (HR) department, responsible for setting up all new joiners. Pre-
printed forms are completed by HR for all new employees and, once verified, a copy is sent to the payroll
department for the employee to be set up for payment. This form includes the staff member’s employee
number and payroll cannot set up new joiners without this information. To encourage staff to attend
work on time for all shifts, Raspberry Co introduced a discretionary bonus, paid every three months, for
production staff. The production supervisors determine the amounts to be paid and notify the payroll
department. This quarterly bonus is entered into the system by a clerk and each entry is checked by a
senior clerk for input errors prior to processing. The senior clerk signs the bonus listing as evidence of
undertaking this review.
Production employees are issued with clock cards and are required to swipe their cards at the beginning
and end of their shift. This process is supervised by security staff 24 hours a day. Each card identifies
the employee number and links into the hours worked report produced by the payroll system, which
automatically calculates the gross and net pay along with relevant deductions. These calculations are
not checked.
In addition to tax deductions from pay, some employees’ wages are reduced for such items as
repayments of student loans owed to the central government. All employers have a statutory obligation
to remit funds on a timely basis and to maintain accounting records which reconcile with annual loan
statements sent by the government to employers. At Raspberry Co student loan deduction forms are
completed by the relevant employee and payments are made directly to the government until the
employee notifies HR that the loan has been repaid in full.
On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and
reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to take
28 holiday days annually. Holiday request forms are required to be completed and authorised by relevant
line managers, however, this does not always occur.
On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of
bank payments and agrees this to the payroll records prior to authorising the payment. If any errors are
noted, the payroll senior manager amends the records.
For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank
by a security company. Two members of the payroll department produce the pay packets, one is
responsible for preparing them and the other checks the finished pay packets. Both members of staff are
required to sign the weekly payroll listing on completion of this task. The pay packets are then delivered

Summary Notes by SK
to the production supervisors, who distribute them to employees at the end of the employees’ shift, as
they know each member of their production team.
Monthly management accounts are produced which detail variances between budgeted amounts and
actual. Revenue and key production costs are detailed, however, as there are no overtime costs, wages
and salaries are not analysed.
Required:
a) In respect of the payroll system for Raspberry Co:
i. Identify and explain FIVE KEY CONTROLS which the auditor may seek to place reliance
on; and
ii. Describe a TEST OF CONTROL the auditor should perform to assess if each of these key
controls is operating effectively.
Note: Prepare your answer using two columns headed Key control and Test of control respectively. The
total marks will be split equally between each part. (10 marks)
b) Identify and explain FIVE DEFICIENCIES in Raspberry Co’s payroll system and provide a
recommendation to address each of these deficiencies.
respectively. (10 marks)
Answer:
a) Key controls and tests of control
Key controls Tests of control

Raspberry Co has a separate human resources Review the job descriptions of payroll and HR
(HR) department which is responsible for setting to confirm the split of responsibilities with
up all new employees. regards to setting up new joiners.
Having a segregation of roles between human Discuss with members of the payroll department
resources and payroll departments reduces the process for setting up new joiners and for
the risk of fictitious employees being set up confirmation that the process is initiated by HR.
and also being paid.
Pre-printed forms are completed by HR for all Select a sample of new employees added to the
new employees, and includes assignment of a payroll during the year, review the joiner forms for
unique employee number, and once verified, a evidence of completion of all parts and that the
copy is sent to the payroll department. Payroll is information was verified as accurate and was
unable to set up new joiners without information received by payroll prior to being added to the
from these forms. system.
The use of pre-printed forms ensures that all Select a sample of edit reports for changes to
relevant information, such as tax IDs, is payroll during the year; agree a sample of new
obtained about employees prior to set up. This employees added to payroll to the joiners forms.
minimises the risk of incorrect wage and tax
payments. In addition, as payroll is unable to
set up new joiners without the forms and
employee number, it reduces the risk of
fictitious employees being set up by payroll.
The quarterly production bonus is input by a If attending Raspberry Co at the time of bonus
clerk into the payroll system, each entry is processing, observe the clerk inputting and senior
checked by a senior clerk for input errors prior

Summary Notes by SK
to processing, and they evidence their review clerk checking the bonus payments into the payroll
via signature. system.
This reduces the risk of input errors resulting in
over/underpayment of the bonus to In addition, obtain listings of quarterly bonus
employees. payments and review for evidence of signature by
the senior clerk who checks for input errors.
Production employees are issued with clock Observe the use of clock cards by employees when
cards and are required to swipe their cards at entering the power station.
the beginning and end of their shift, this
process is supervised by security staff 24 hours Confirm the security team is supervising the
a day. process and following up on discrepancies through
discussions with the security staff.
This ensures that genuine employees are only
paid for the work actually done, and reduces
the risk of employees being paid but not
completing their eight-hour shift. In addition,
due to the supervision it is unlikely that one
employee could swipe in others.
The clock card information identifies the Utilise test data procedures to input dummy clock
employee number and links into the hours card information, verify this has been updated into
worked report produced by the payroll system. the payroll system.
As the hours worked are automatically

transferred into the payroll system, this reduces
the risk of input errors in entering hours to be
paid in calculating payroll, ensuring that
employees are paid the correct amount.
On a quarterly basis, exception reports of Select a sample of quarterly exception reports and
changes to payroll standing data are produced review for evidence of review and follow up of any
and reviewed by the payroll director. unexpected changes by the payroll director.
This ensures that any unauthorised amendments

to standing data are identified and resolved on a
timely basis.
For production employees paid in cash, cash is Enquire of payroll clerks how cash is delivered to
received weekly from the bank by a security Raspberry Co for weekly pay packets.
company.
It is likely the sum of money required to pay Review a sample of invoices from the security
over 175 employees would be considerable. It company to Raspberry Co for delivery of cash.
is important that cash is adequately
safeguarded to reduce the risk of
misappropriation.
The pay packets are prepared by two members Observe the preparation of the pay packets
of staff with one preparing and one checking ensuring that two members of staff are involved
the pay packets and this is evidenced by each and that pay packets are checked for accuracy.
staff member signing the weekly listing.
This ensures there is segregation of duties For a sample of weeks throughout the year, inspect
which prevents fraud and errors not being the weekly payroll listing for evidence of signature
identified. by the two members of staff involved in the
preparation of the pay packets.

Summary Notes by SK
b) Deficiencies and recommendations
Control deficiency Control recommendations
Production supervisors determine the amount of The bonus should be determined by a responsible
the discretionary bonus to be paid to employees. official, such as the production director and
should be formulated based on a written policy. If
Production supervisors should not determine this significant in value, the bonus should be formally
as they could pay extra bonuses to friends or agreed by the board of directors.
family members, resulting in additional payroll
costs. The bonus should be communicated in writing to
the payroll department.
The wages calculations are generated by the A senior member of the payroll team should
payroll system and there are no checks recalculate the gross to net pay workings for a
performed. sample of employees and compare their results to
the output from the payroll system. These
Therefore, if system errors occur during the calculations should be signed as approved before
payroll processing, this would not be identified. payments are made.
This could result in wages being over or under
calculated, leading to an additional payroll cost
or loss of employee goodwill.
Student loan deduction forms are completed by The payroll department should maintain a
relevant employees and payments are made schedule, by employee, of payments made to
directly to the third party until the employee third parties, such as the central government as
notifies HR that the loan has been repaid in full. well as the cumulative balance owing. On a
regular basis, at least annually, this statement
As the payments continue until the employee should be reconciled to the loan statement
notifies HR, and employees are unlikely to be received from the government and sent to the
closely monitoring payments, there is the risk that employee for agreement.
overpayments may be made, which then need to
be reclaimed, leading to employee dissatisfaction. In accordance with the schedule, payments which
are due to cease shortly should be confirmed in
In the case of underpayments, Raspberry Co has writing with the third party, prior to stopping
an obligation to remit funds on time and to
reconcile to annual loan statements. If the
company does not make payments in full and on
time, this could result in non-compliance by both
the company and employee, which could result in
fines or penalties.
Holiday request forms are required to be Employees should be informed that they will not
completed and authorized by relevant line be able to take holiday without completion of a
managers, however, this does not always occur. holiday request form, with authorisation from the
line manager.
This could result in employees taking Payroll clerks should not process holiday
unauthorized leave, resulting in production payments without agreement to the authorized
difficulties if an insufficient number of employees holiday form.
are present to operate the power plant. In
addition, employees taking unauthorized leave
could result in an overpayment of wages.
The senior payroll manager reviews the bank The senior payroll manager should not be able to
transfer listing prior to authorising the payments process changes to the payroll system as well as
authorise payments.

Summary Notes by SK
and also amends the payroll records for any
changes required.
There is a lack of segregation of duties as it is the The authorisation of the bank transfer listing
payroll team which processes the amounts and should be undertaken by an individual outside the
the senior payroll manager who authorises payroll department, such as the finance director.
payments. The senior manager could
fraudulently increase the amounts to be paid to
certain employees, process this payment as well
as amend the records.
The pay packets are delivered to the production All pay packets should be distributed by the
supervisors, who distribute them to employees at payroll department, directly to employees, upon
the end of their shift. sight of the employee’s clock card and
photographic identification as this confirms proof
The supervisor is not sufficiently independent to of identity.
pay wages out. They could adjust pay packets to
increase those of close friends whilst reducing Payroll should undertake a reconciliation of pay
others. packets issued to production supervisors, wages
distributed with employee signatures to confirm
In addition, although the production supervisors receipt and pay packets returned to payroll due to
know their team members, payment of wages staff absences. Any differences should be
without proof of identity increases the risk that investigated immediately.
wages could be paid to incorrect employees.
As employees work eight-hour shifts over 24
hours, consideration should be given to operating
a shift system for the payroll department on
wages pay out day. This will ensure that there are
sufficient payroll employees to perform the wages
pay out for each shift of employees, with the same
level of controls in place.
Monthly management accounts do not analyse The monthly management accounts should be
the variances between actual and budgeted wages amended to include an analysis of wages and
and salaries; this is because there are no overtime salaries compared to the budgeted costs. These
costs. should be broken down to each relevant
department and could also include an analysis of
However, wages and salaries are a significant headcount numbers compared to budget.
expense and management needs to understand
why variances may have arisen. These could
occur due to extra employees being recruited
which were not budgeted for, or an increase in
wage pay out rates. The board would need to
monitor the wages and salaries costs as if they are
too high, then this would impact the profitability
of the company.

Summary Notes by SK
ACCA F8 September 2016 (14 marks)
Question 16 b
Heraklion Co is a manufacturer of footballs and is a new audit client for your firm. You are an audit
supervisor of Spinalonga & Co and are currently preparing for the forthcoming interim and final audit
for the year ending 31 October 20X6. You are required to document and assess the sales system,
recommend control improvements to deal with a specific fraud issue as well as undertake substantive
testing of revenue.
Sales ordering, goods despatched and invoicing

Heraklion Co sells footballs to a range of large and small sports equipment retailers in several countries.
Sales are made through a network of sales staff employed by Heraklion Co, but new customer leads are
generated through a third party company. Sales staff are responsible for assessing new customers’
creditworthiness and proposing a credit limit which is then authorised by the sales director. The sales
staff have monthly sales targets and are able to use their discretion in granting sales discounts up to a
maximum of 10%. They then record any discount granted in the customer master data file.
The sales staff visit customer sites personally and orders are completed using a two-part pre-printed order
form. One copy is left with the customer and the other copy is retained by the sales person. The sales
order number is based on the sales person’s own identification (ID) number.
The company markets itself on being able to despatch all orders within three working days. Once the
order is taken, the sales person emails the finance department and warehouse despatch team with the
customer ID and the sales order details and from this a pick list is generated. Sequentially numbered
goods despatched notes are completed and filed in the warehouse.
Sequentially numbered invoices are generated using the pick lists for quantities and the customer master
data file for prices. Standard credit terms for customers are 30 days and on a monthly basis sales invoices
which are over 90 days outstanding are notified to the relevant sales person to chase payment directly
with the customer.
Required:
b. Identify and explain SEVEN deficiencies in the sales system of Heraklion Co and provide a
recommendation to address each of these deficiencies.
Answer
b. Deficiencies and controls over the sales system
Control deficiency Control recommendation

New customers' creditworthiness is assessed by New customers should complete a credit
a salesperson who sets the credit limit, which is application which should be checked through a
authorized by the sales director. credit agency with a credit limit set. Once
authorized by the sales director, the limit should
The sales staff have sales targets, and hence may be entered into the system by a credit controller.
suggest that new customers are creditworthy

Summary Notes by SK
simply to meet their targets. This could result in
sales being made to poor credit risks.
Sales staff have discretion to grant sales All discounts to be granted to customers should
discounts to customers of up to 10%. This could be authorized in advance by a responsible
result in a loss of revenue as they may award official, such as the sales director. If not
unrealistic discounts simply to meet sales practical, then the supervisor of the sales staff
targets. should undertake this role.
The discounts granted by sales staff are not being

reviewed and could result in unauthorized
discounts allowed.
Sales staff are able to make changes to the Sales staff should not be able to access the master
customer master data file, in order to record data file to make amendments. Any such
discounts allowed and these changes are not amendments to master file data should be
reviewed. restricted so that only supervisors and above can
make changes.
There is a risk that these amendments could be
made incorrectly resulting in a loss of sales An exception report of changes made should be
revenue or overcharging of customers. In generated and reviewed by a responsible official.
addition, the sales staff are not senior enough to
be given access to changing master file data as
this could increase the risk of fraud.
Inventory availability does not appear to be Prior to the salesperson finalising the order, the
checked by the sales person at the time the order inventory system should be checked in order (or
is placed. In addition, Heraklion Co markets an accurate assessment of the availability of
itself on being able to despatch all orders within goods to be notified to customers.
three working days.
There is a risk that where goods are not
available, the customer would not be made
aware of this prior to placing their order, leading
to unfulfilled orders and customer
dissatisfaction, which would impact the
company’s reputation.
Customer orders are recorded on a two-part pre- The order form should be amended to be at least
printed form, one copy is left with the customer tour-part. The third part of the order should be
and one with the sales person. sent to the warehouse department and the fourth
part sent to the finance department.
The sales department of Heraklion Co does not
hold these orders centrally and hence would not The copy the sales person has should be stored
be able to monitor if orders are being fulfilled on centrally in the sales department. Upon
a timely basis. This could result in a loss of despatch, the goods despatch note should be
revenue and customer goodwill. matched to the order; a regular review of
unmatched orders should be undertaken by the
sales department to identify any unfulfilled
orders.
Customer orders are given a number based on Sales orders should be sequentially numbered.
the sales person's own identification (ID) On a regular basis, a sequence check of orders
number. These numbers are not sequential. should be undertaken to identify any missing
Without sequential numbers, it is difficult for orders.
Heraklion Co to identify missing orders and to
monitor if all orders are being despatched in a

Summary Notes by SK
timely manner, leading to a loss of customer
goodwill.
The sales person emails the warehouse despatch The third part of the sales order as mentioned
team with the customer ID and the sales order previously should be forwarded directly to the
details, rather than a copy of the sales order warehouse department.
itself, and a pick list is generated from this.
The pick list should be generated from the
There is a risk that incorrect or insufficient original order form and the warehouse team
details may be recorded by the sales person and should check correct quantities and product
this could result in incorrect orders being descriptions are being despatched, as well as
despatched, orders being despatched late or checking the quality of goods being despatched
orders failing to be despatched at all, resulting in to ensure they are not damaged.
a loss of customer goodwill and revenue.
Sequentially numbered goods despatched notes Upon despatch of goods, a four-part GDN
(GDNs) are completed and filed by the should be completed, with copies to the
warehouse department. If the finance customer, warehouse department, sales
department does not receive a copy of these department to confirm despatch of goods and a
GDNs, they will not know when to raise the copy for the finance department. Upon receipt of
related sales invoices. This could result in goods the GDN, once matched to the fourth part of the
being despatched but not being invoiced, leading sales order form, a clerk should raise the sales
to a loss of revenue. invoices in a timely manner, confirming all
details to the GDN and order.
The sales person is given responsibility to chase A credit controller should be appointed and it
customers directly for payment once an invoice should be their role, rather than the salesperson,
is outstanding for 90 days. This is considerably to chase any outstanding sales invoices which
in excess of the company's credit terms of 30 are more than 30 days old.
days which will lead to poor cash flow.
Further, as the sales people have sales targets,

they are more likely to focus on generating sales
orders rather than chasing payments. This could
result in an increase in bad debts and reduced
profit and cash flows.

Question 5
You are an audit senior of Hessonite & Co and are in the process of reviewing the inventory system
documentation for your audit client, Lemon Quartz Co (Quartz) which manufactures computer
equipment. The company’s factory and warehouse are based on one large site, and their year end is 30
June 2016. Quartz is planning to undertake a full inventory count at the year end of its raw materials,
work in progress and finished goods and you will be attending this count. In preparation you have been
reviewing the inventory count instructions for finished goods provided by Quartz.
The count will be undertaken by 15 teams of two counters from the warehouse department with Quartz’s
financial controller providing overall supervision. Each team of two is allocated a number of bays within
the warehouse to count and they are provided with sequentially numbered inventory sheets which
contain product codes and quantities extracted from the inventory records. The counters move through
each allocated bay counting the inventory and confirming that it agrees with the inventory sheets. Where
a discrepancy is found, they note this on the sheet.
The warehouse is large and approximately 10% of the bays have been rented out to third parties with

Summary Notes by SK
similar operations; these are scattered throughout the warehouse. For completeness, the counters have
been asked to count the inventory for all bays noting the third party inventories on separate blank
inventory sheets, and the finance department will make any necessary adjustments.
Some of Quartz’s finished goods are high in value and are stored in a locked area of the warehouse and
all the counting teams will be given the code to access this area. There will be no despatches of inventory
during the count and it is not anticipated that there will be any deliveries from suppliers.
Each area is counted once by the allocated team; the sheets are completed in ink, signed by the team and
returned after each bay is counted. As no two teams are allocated the same bays, there will be no need to
flag that an area has been counted. On completion of the count, the financial controller will confirm with
each team that they have returned their inventory sheets.
Required:
(a) In respect of the inventory count procedures for Lemon Quartz Co:
(i) Identify and explain FIVE deficiencies;

(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the external auditors would perform to assess if
each of these controls, if implemented, is operating effectively.
Note: The total marks will be split equally between each part. (15 marks)
Answer:
a) Deficiencies Control Test of Control
The count will be undertaken The counting teams should be Attend the year-end count and
by teams of warehouse staff. independent of the warehouse; enquire of the counting teams
hence members of alternative which department they normally
There should be a segregation departments should undertake work in.
of roles between those who the counting rather than the
have day-to-day responsibility warehouse staff. Inspect the updated inventory
for inventory and those who are count instructions to verify that
checking it. If the same team they have been communicated to
are responsible for maintaining members of staff outside the
and checking inventory, then warehouse department
errors and fraud could be
hidden.
The inventory sheets contain The count sheets should be Inspect a sample of the counting
quantities as per the inventory sequentially numbered and sheets being used by the counting
records. There is a risk that the contain product codes and teams to verify that only the
counting teams may simply descriptions but no quantities. inventory product codes and
agree with the pre-printed description are pre-printed on
quantities rather than counting them.
the balances correctly, resulting
in significant errors in
inventory.
There are 15 teams of counters, Each team should be informed Observe the counting teams to
each team having two members that both members are required assess if they are counting
of staff. However, there is no to count their assigned together or if one counts and the
clear division of responsibilities inventory separately. other then double checks the
within the team. Therefore, Therefore, one member counts quantities counted.

Summary Notes by SK
both members of staff could and the second member also
count together rather than undertakes a count and then Review the records of the sample
checking each other’s count; records the inventory on the checks undertaken by the
and errors in their count may count sheets correctly. supervisor of the inventory count.
not be identified.
In addition, the financial
controller supervising the count
should undertake some sample
checks of inventory counted by
each team.
Inventory owned by third All inventories belonging to Enquire of the count supervisor
parties is also being counted by third parties should be moved where the third party inventory is
the teams with adjustments to one location. This area to be stored, confirm through
being made by the finance team should be clearly marked and inspection of the counting sheets
to split these goods out later. excluded from the counting that these bays are not included
There does not appear to be a process. on any pre-printed forms.
method for counters to identify
which items are third party
inventory.
There is a risk that these goods

may not be correctly removed
from the inventory count
sheets, resulting in inventory
being overstated.
High value inventory which is The high value inventory Attempt to access the area where
normally stored in a secure should be kept in the locked the high value inventory is stored;
location will be accessible by all area of the warehouse. Senior this should not be possible
team members as they will be members of the team should be without the access code.
given the access code. This allocated to count these goods,
significantly increases the risk and they should be given the At the year-end visit attempt to
of theft as any member of the access code to enter the area. access with the code which was
counting team could supplied during the inventory
subsequently access these Upon completion of the count count.
goods. the access code should be
changed.
Each bay of the warehouse is Once all inventories have been Observe the counting team
counted once only. If inventory counted once, each area should undertake second counts of all
is only checked once, then be recounted by a different areas; confirm that different teams
counting errors may arise team. Any differences on the undertake this process.
resulting in under or overstated first count should be promptly
inventory. notified to the count supervisor
and a third count undertaken if
necessary.
If a full second count would be

too time-consuming for the
company, then sample checks
on the inventory counted
should be undertaken by a
different counting team.

Summary Notes by SK
Once areas are counted, the All bays should be flagged as Physically confirm that the
teams are not marking the bays completed, once the inventory completed bays of the warehouse
as completed. Therefore, there has been counted. In addition, have been flagged to indicate that
is the risk that some areas of the the count supervisor should the goods have been counted.
warehouse could be double check at the end of the count
counted or missed out. that all of the bays with At the end of the count, review
Quartz’s inventory have been any bays containing Quartz’s
flagged as completed. goods which have not been
flagged.
The inventory sheets are After the counting has finished, Review the sequence of the
sequentially numbered and at each team should return all of inventory sheets for any gaps in
the end of the count they are their sequentially numbered the sequence and obtain an
given to the count supervisor sheets and the supervisor explanation from the count
who confirms with each team should check the sequence of all supervisor.
that they have returned all sheets at the end of the count
sheets.
However, no sequence check of

the sheets is performed. If
sheets are missing, then the
inventory records could be
understated
ACCA F8 Sept/Dec 2015 (20 marks)

Question 5
You are an audit senior of Scarlet & Co and are in the process of reviewing the systems testing completed
on the payroll cycle of Bronze Industries Co (Bronze), as well as preparing the audit programmes for
the final audit.
Bronze operate several chemical processing factories across the country, it manufactures 24 hours a day,
seven days a week and employees work a standard shift of eight hours and are paid for hours worked at
an hourly rate. Factory employees are paid weekly, with approximately 80% being paid by bank transfer
and 20% in cash; the different payment methods are due to employee preferences and Bronze has no
plans to change these methods. The administration and sales teams are paid monthly by bank transfer.
Factory staff are each issued a sequentially numbered clock card which details their employee number
and name. Employees swipe their cards at the beginning and end of the eight-hour shift and this process
is not supervised. During the shift employees are entitled to a 30-minute paid break and employees do
not need to clock out to access the dining area. Clock card data links into the payroll system, which
automatically calculates gross and net pay along with any statutory deductions. The payroll supervisor
for each payment run checks on a sample basis some of these calculations to ensure the system is
operating effectively.
Bronze has a human resources department which is responsible for setting up new permanent employees
and leavers. Appointments of temporary staff are made by factory production supervisors. Occasionally
overtime is required of factory staff, usually to fill gaps caused by staff holidays. Overtime reports which
detail the amount of overtime worked are sent out quarterly by the payroll department to production
supervisors for their review.
To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six
months to factory staff; the production supervisors determine the amounts to be paid. This is

Summary Notes by SK
communicated in writing by the production supervisors to the payroll department and the bonus is input
by a clerk into the system.
For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to
the payroll records prior to authorising the bank payment. If any changes are required, the payroll
manager amends the records. For employees paid in cash, the pay packets are prepared in the payroll
department and a clerk distributes them to employees; as she knows most of these individuals, she does
not require proof of identity.
Required:
a) Identify and explain FIVE internal control STRENGTHS in Bronze Industries Co’s payroll system.
(5 marks)
b) Identify and explain SIX internal control DEFICIENCIES in Bronze Industries Co’s payroll
system and provide a RECOMMENDATION to address each of these deficiencies.
(12 marks)
c) Describe substantive ANALYTICAL PROCEDURES you should perform to confirm Bronze
Industries Co’s payroll expense. (3 marks)
(20 marks)
Answer:
a) Bronze Industries Co (Bronze) payroll system internal control strengths
Strengths in Bronze’s payroll system are as follows:

 Factory staff are each issued a sequentially numbered clock card which details their employee
number and name. This should ensure that employees are only paid for hours they have worked
and that the payroll records record completely all employees, as any gaps in the sequence would be
identified.
 The payroll system automatically calculates gross and net pay along with any statutory deductions.
This should reduce the risk of employees’ wages and statutory deductions being incorrect as there
is a reduced risk of errors occurring.
 A sample of the calculations made by the automated system is checked by the payroll supervisor to
ensure the system is operating effectively; this tests the automated controls within the system.
 Bronze has a human resources department which is responsible for setting up new permanent
employees and leavers.
Having a segregation of roles between human resources and payroll departments reduces the risk
of fictitious employees being set up and also being paid.
 The discretionary bonus is communicated in writing to the payroll department. As this is in writing
rather than verbal, this reduces the risk of the bonus being recorded at an incorrect amount in the
payroll records.
 For employees paid by bank transfer, the list of the payments is reviewed in detail and agreed to
the payroll records prior to authorising the bank payment. This reduces the risk of fraudulent
payments being made through the creation of fictitious employees and other employees being
omitted from the payment run.

Summary Notes by SK
b) Bronze payroll system deficiencies and controls
Deficiencies Controls
Employees swipe their cards at the beginning The clocking in and out process should be
and end of the eight-hour shift; this process is supervised by a responsible official to prevent one
not supervised. This could result in a number individual clocking in multiple employees.
of employees being swiped in as present when
they are not. This will result in a substantially A supervisor should undertake a random check of
increased payroll cost for Bronze. employees by reviewing who has logged in with a
swipe card and confirming visually that the
employee is present.
Employees are entitled to a 30-minute paid Employees should be allocated set break times
break and do not need to clock out to access the and there should be a supervisor present to ensure
dining area. Employees could be taking that employees only take the breaks they are
excessive breaks resulting in a decrease in entitled to.
productivity and increased payroll costs.
All appointment of staff, whether temporary or
Although there is a human resources permanent, should only be made by the human
department, appointments of temporary staff resources department
are made by factory production supervisors.
The supervisor could appoint unsuitable

employees and may not carry out all the
required procedures for new joiners. This
could result in these temporary employees not
receiving the correct pay and relevant statutory
deductions.
Overtime reports which detail the amount of All overtime should be authorised by a responsible
overtime worked are sent out quarterly by the official prior to the payment being processed by the
payroll department to production supervisors payroll department. This authorisation should be
for review. These reports are reviewed after the evidenced in writing.
payments have been made which could result in
unauthorised overtime or amounts being paid
incorrectly and Bronze's payroll cost increasing
Production supervisors determine the amount The bonus should be determined by a more senior
of the discretionary bonus to be paid to individual, such as the production director, and
employees. Production supervisors are not this should be communicated in writing to the
senior enough to determine this as they could payroll department.
pay extra bonuses to friends or family members.
Once the clerk has input the bonus amounts, all
The bonus is input by a clerk into the payroll entries should be double checked against the
system. I here is no indication that this input written confirmation from the production
process is reviewed. This could result in input director by another member of the team to
errors or the clerk could fraudulently change the
identify any amounts entered incorrectly.
amounts leading to incorrect bonus payments
The payroll manager should not be able to process
changes to the payroll system as well as authclrise

Summary Notes by SK
payments. The authorisation of the bank transfer
The payroll manager reviews the bank transfer
listing should be undertaken by an individual
listing prior to authorising the payments and outside the payroll department, such as the finance
also amends the payroll records for any changes director.
required.
There is a lack of segregation of duties as it is
the payroll team which processes the amounts
and the payroll manager who authorises
payments. The manager could fraudulently
increase the amounts to be paid to certain
employees, process this payment as well as
amend the records.
A payroll clerk distributes cash pay packets to The payroll clerks should be informed that all
employees without requesting proof of identity. cash wages can only be paid upon sight of the
Even if most employees are known to the clerk, employee's clock card and photographic
there is a risk that without identity checks identification as this confirms proof of identity.
wages could be paid to incorrect employees.

Question 2
a) ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity
and Its Environment describes the five components of an entity’s internal control.
Required:
Identify and briefly explain the FIVE components of an entity’s internal control. (5 marks)
b) 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
initialed 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.

Summary Notes by SK
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)
(10 marks)
Answer:
a) Internal control components
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity
and Its Environment considers the components of an entity’s internal control. It identifies the following
components
Control environment
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management concerning the entity’s
internal control and its importance in the entity. The control environment sets the tone of an
organisation, influencing the control consciousness of its people.
The control environment has many elements such as communication and enforcement of integrity and
ethical values, commitment to competence, participation of those charged with governance,
management’s philosophy and operating style, organisational structure, assignment of authority and
responsibility and human resource policies and practices.
Entity’s risk assessment process
For financial reporting purposes, the entity’s risk assessment process includes how management
identifies business risks relevant to the preparation of financial statements in accordance with the entity’s
applicable financial reporting framework. It estimates their significance, assesses the likelihood of their
occurrence, and decides upon actions to respond to and manage them and the results thereof.
Information system, including the related business processes, relevant to financial reporting, and
communication
The information system relevant to financial reporting objectives, which includes the accounting system,
consists of the procedures and records designed and established to initiate, record, process, and report
entity transactions (as well as events and conditions) and to maintain accountability for the related
assets, liabilities, and equity.
Control activities relevant to the audit
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 organisational and functional levels.
Monitoring of controls
Monitoring of controls is a process to assess the effectiveness of internal control performance over time.
It involves assessing the effectiveness of controls on a timely basis and taking necessary remedial actions.
Management accomplishes the monitoring of controls through ongoing activities, separate evaluations,
or a combination of the two. Ongoing monitoring activities are often built into the normal recurring
activities of an entity and include regular management and supervisory activities.

Summary Notes by SK
b) Tests of controls
Tests of control to assess whether the internal controls of Bonsai Trading Co are operating effectively or
not are as follows:
Capital expenditure committee
 Select a sample of capital additions during the year and confirm through a review of the capital
expenditure committee minutes that this purchase was authorized.
 Review a sample of capital expenditure purchase orders for evidence of authorisation by the capital
expenditure committee.
Serial numbers
 Select a sample of non-current assets on site, agree that a serial number is recorded on the asset and
confirm it is included in the non-current assets register.
 Inspect the non-current assets register and verify that there are no duplicated serial numbers.
Goods received note (GRN)
 Select a sample of GRNs, review to see if there is documentation of whether the item is of a capital
or revenue nature, and confirm whether the GRN is initialled as reviewed by a responsible official.
If the GRN is of a capital nature, agree it is included in the non-current assets register.
Review of assets
 Discuss with internal audit their programme of inspections; if there are any due to be carried out
between now and the year end, a member of Poplar & Co should attend this review to observe the
controls in operation.
 Review internal audit reports and working papers for inspections undertaken earlier in the year for
evidence the control operated.
Access to non-current asset register

 Attempt to access the non-current register using the password of a non-authorised individual.

Question 1
Lily Window Glass Ltd (Lily) is a glass manufacturer, which operates from a large production facility,
where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two
warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31
December.
Lily is finalising the arrangements for the year-end inventory count, which is to be undertaken on 31
December 2012. The finished windows are stored within 20 aisles of the first warehouse. The second
warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The
following arrangements have been made for the inventory count:
The warehouse manager will supervise the count as he is most familiar with the inventory. There will
be ten teams of counters and each team will contain two members of staff, one from the finance and one
from the manufacturing department. None of the warehouse staff, other than the manager, will be
involved in the count.

Summary Notes by SK
Each team will count an aisle of finished goods by counting up and then down each aisle. As this process
is systematic, it is not felt that the team will need to flag areas once counted. Once the team has finished
counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse. In
addition to the above, to assist with the inventory counting, there will be two teams of counters from
the internal audit department and they will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are printed on them
but no quantities. If the counters identify any inventory which is not on their sheets, then they are to
enter the item on a separate sheet, which is not numbered. Once all counting is complete, the sequence
of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are
completed in ink.
Any damaged goods identified by the counters will be too heavy to move to a central location, hence
they are to be left where they are but the counter is to make a note on the inventory sheets detailing the
level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw materials and
finished goods in and out of the warehouse during the count. These will be kept to a minimum where
possible.
The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It
is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be
approximated by measuring the height and width of the raw material piles. In the past this task has been
undertaken by a specialist; however, the warehouse manager feels confident that he can perform this
task.
Required:
a. For the inventory count arrangements of Lily Window Glass Ltd:
(i) Identify and explain SIX deficiencies; and

(ii) Provide a recommendation to address each deficiency.
The total marks will be split equally between each part (12 marks)
Answer:
a. inventory count arrangements
Deficiencies Recommendations
The warehouse manager is planning to supervise An alternative supervisor who is not normally
the inventory count. Whilst he is familiar with involved with the inventory, such as an internal
the inventory, he has overall responsibility for audit manager, should supervise the inventory
the inventory and so is not independent. He may count. The warehouse manager and his team
want to hide inefficiencies and any issues that should not be involved in the count at all.
arise so that his department is not criticised.
There are ten teams of counters, each team Each team should be informed that both members
having two members of staff. However, there is are required to count their assigned inventory
no clear division of responsibilities within the separately. Therefore, one counts and the second
team. Therefore, both members of staff could member checks that the inventory has been counted
count together rather than checking each other's correctly.

Summary Notes by SK
count: and errors in their count ma not be
identified.
The internal audit teams are undertaking The internal audit counters should sample check
inventory counts rather than reviewing the the counting undertaken by the ten teams to provide
controls and performing sample test counts. an extra control over the completeness and
Their role should be focused on confirming the accuracy of the count
accuracy of the inventory counting: procedures
Once areas are counted, the teams are not All aisles should be flagged as completed, once the
flagging the aisles as completed. Therefore there inventory has been counted. In addition, internal
is the risk that some areas of the warehouse audit or the count supervisor should check at the
could be double counted or missed out. end of the count that all 20 aisles have been flagged
as completed.
Inventory not listed on the sheets is to be entered
onto separate sheets, which are not sequentially Each team should be given a blank sheet for
numbered. Therefore the supervisor will be entering any inventory count which is not on their
unable to ensure the completeness of all sheets. This blank sheet should be sequentially
inventory sheets. numbered, any unused sheets should be returned at
the end of the count, and the supervisor should
check the sequence of all sheets at the end of the
count.
The sheets are completed in ink and are All inventory sheets should be signed by the
sequentially numbered, however, there is no relevant team upon completion of an aisle. When
indication that they are signed by the counting the sheets are returned, the supervisor should check
team. Therefore, if any issues arise with the that they have been signed.
counting in an aisle, it will be difficult to follow
up as the identity of the counting team will not
be known.
Damaged goods are not being stored in a central Damaged goods should be clearly flagged by the
area, and instead the counter is just noting on the counting teams and at the end of the count
inventory sheets the level of damage. However, appropriate machinery should be used to move all
it will be difficult for the finance team to decide damaged windows to a central location. This will
on an appropriate level of write down if they are avoid the risk of selling these goods.
not able to see the damaged goods. In addition,
if these goods are left in the aisles, they could be A senior member of the finance team should then
inadvertently sold to customers or moved to inspect these goods to assess the level of any write
another aisle down or allowance.
Lily Window Glass Ltd (Lily) undertakes It is not practical to stop all inventory movements
continuous production and so there will be as the production needs to continue. However, any
movements of goods during the count. raw materials required for 31 December should be
Inventory records could be under/overstated if estimated and put to one side. These will not be
goods are missed or double counted due to included as raw materials and
movements in instead will be work-in-progress.
the warehouse.
The goods which are manufactured on 31
December should be stored to one side, and at the
end of the count should be counted once and
included within finished goods.
Any goods received from suppliers should be stored

in one location and counted at the end and included

Summary Notes by SK
as part of raw materials. Goods to be despatched to
customers should be
kept to a minimum for the day of the count.
The warehouse manager is to assess the level of A specialist should be utilised to assess both
work-in-progress and raw materials. In the past, work-in-progress and the quantities of raw
a specialist has undertaken this role. It is unlikely materials.
that the warehouse
manager has the experience to assess the level of
work-in-progress as this is something that the
factory manager would be more familiar with.
In addition, whilst the warehouse manager is

familiar with the raw materials, if he makes a With regards to the warehouse manager, he could
mistake in assessing the quantities then estimate the raw materials and the specialist could
inventory could be materially misstated check it. This would give an indication as to
whether he is able to accurately assess the quantities
for subsequent inventory
counts.
b) Procedures during the inventory count

 Observe the counting teams of Lily to confirm whether the inventory count instructions are being
followed correctly.
 Select a sample and perform test counts from inventory sheets to warehouse aisle and from
warehouse aisle to inventory sheets.
 Confirm the procedures for identifying and segregating damaged goods are operating correctly.
 Select a sample of damaged items as noted on the inventory sheets and inspect these windows to
confirm whether the level of damage is correctly noted.
 Observe the procedures for movements of inventory during the count, to confirm that no raw
materials or finished goods have been omitted or counted twice.
 Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing
on the final audit.
 Identify and make a note of the last goods received notes (GRNs) and goods despatched notes
(GDNs) for 31 December in order to perform cut-off procedures.
 Observe the procedures carried out by the warehouse manager in assessing the level of work-in-
progress and consider the reasonableness of any assumptions used.
 Discuss with the warehouse manager how he has estimated the raw materials quantities. To the
extent that it is possible, re-perform the procedures adopted by the warehouse manager.
 Identify and record any inventory held for third parties (if any) and confirm that it is excluded from
the count.
-------------------------------------------------------------------------------------

Summary Notes by SK
Question 3
a) i. Define a 'test of control' and a 'substantive procedure'; (2 marks)

ii. State ONE test of control and ONE substantive procedure in relation to sales invoicing.
(2 marks)
b) 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 banked by
whichever member of the finance team is available.
3. The cashier records the details of the cash received log into the cash receipts day book and also
updates the sales ledger.
4. Usually on a monthly basis the cashier performs a bank reconciliation, which he then files, if he
misses a month then he catches this up in the following month's reconciliation.
Required:
For the cash cycle of SHW:
(i) Identify and explain THREE deficiencies in the system; (3 marks)

(ii) Suggest controls to address each of these deficiencies; and (3 marks)
(iii) List tests of controls the auditor of SHW would perform to assess if the controls are
operating effectively. (3 marks)
c) Describe substantive procedures an auditor would perform in verifying a company's bank balance.
(7 marks)
(20 marks)
Answer:
a) (i) Tests of control test the operating effectiveness of controls in preventing, detecting or
correcting material misstatements.
Substantive procedures are aimed at detecting material misstatements at the assertion level. They
include tests of detail of transactions, balances, disclosures and substantive analytical procedures.
(ii) Example tests of control over sales invoicing

 Inspect numerical sequence of sales invoices, if any breaks in the sequence noted, enquire of
management as to missing invoices.
 Review a sample of sales invoices for evidence of authorisation by a responsible official of any
discounts allowed.
 Inspect customer statements for evidence of regular preparation.

Summary Notes by SK
Example substantive procedures over sales invoicing
 Select a sample of pre and post year end goods despatch notes and follow through to pre or post
year end sales invoices, to ensure the sales cut-off has been correctly applied.
 Perform an analytical review of monthly sales, compare any trends to prior years and discuss
significant fluctuations with management.
 Review post year end credit notes to identify if any pre year end sales should be removed.
Deficiency Control Test of Control

A junior clerk opens the post A second member of the Observe the mail opening process,
b) unsupervised. This could result accounts team should assist to assess if the control is operating
in cash being misappropriated. with the mail, one should open effectively.
the post and the second should
record cash received in the cash
log.
Cash and cheques are secured Cash and cheques should be Enquire of management where the
in a small locked box and only ideally banked daily, if not then cash receipts not banked are stored.
banked every few days. A small it should be stored in a fire Inspect the location to ensure cash
locked box is not adequate for proof safe, and access to this is suitably secure.
security of considerable cash safe should be restricted to
supervised individuals.
Cash and cheques are only Cash and cheques should be Inspect the paying-in-books to see if
banked every few days and any banked every day. cash and cheques have been banked
member of the finance team daily or less frequently.
performs this.
Review bank statements against the
cash received log to confirm all
amounts were banked promptly.
Cash should ideally not be held The cashier should prepare the Enquire of staff as to who performs
over-night as it is not secure. paying-in-book from the cash the banking process and confirm
Also if any member of the team received log. Then a separate this person is suitably responsible.
banks cash, then this could responsible individual should
result in very junior clerks have responsibility for banking
having access to significant this cash.
amounts of money. Observe the process for recording
The cashier updates both the The cashier should update the cash received into the relevant
cash book and the sales ledger. cash book from the cash ledgers and note if the segregation
This is weak segregation of received log. of duties
duties, as the cashier could A member of the sales ledger is occurring.
incorrectly enter a receipt and team should update the sales
this would impact both the cash ledger
book and the sales ledger. In
addition weak segregation of
duties could increase the risk of
a 'teeming and lading' fraud.
Bank reconciliations are not Bank reconciliations should be Review the file of reconciliations
performed every month and performed monthly. A for evidence of regular performance
they do not appear to be responsible individual should and review by senior finance team
reviewed by a senior member of then review them. members.

Summary Notes by SK
the finance department. Errors
in the cash cycle may not be
promptly identified if
reconciliations are performed
infrequently.
-------------------------------------------------------------------------------------------
Matalas Co sells cars, car parts and petrol from 25 different locations in one country. Each branch has
up to 20 staff working there, although most of the accounting systems are designed and implemented
from the company’s head office. All accounting systems, apart from petty cash, are computerised, with
the internal audit department frequently advising and implementing controls within those systems.
You are an audit manager in the internal audit department of Matalas. You are currently auditing the
petty cash systems at the different branches.
Your initial systems notes on petty cash contain the following information:
1. The average petty cash balance at each branch is $5,000.

2. Average monthly expenditure is $1,538, with amounts ranging from $1 to $500.
3. Petty cash is kept in a lockable box on a bookcase in the accounts office.
4. Vouchers for expenditure are signed by the person incurring that expenditure to confirm they have
received re-imbursement from petty cash.
5. Vouchers are recorded in the petty cash book by the accounts clerk; each voucher records the date,
reason for the expenditure, amount of expenditure and person incurring that expenditure.
6. Petty cash is counted every month by the accounts clerk, who is in charge of the cash. The petty
cash balance is then reimbursed using the ‘imprest’ system and the journal entry produced to record
expenditure in the general ledger.
7. The cheque to reimburse petty cash is signed by the accountant at the branch at the
same time as the journal entry to the general ledger is reviewed.
Required:
Explain the internal control deficiencies in the petty cash system at Matalas Co. For each deficiency,
recommend a control to overcome that deficiency. (12 marks)
Answer:
Deficiency Control
The amount of cash held in the petty cash box is The amount of the petty cash balance at each
high ($5,000) in comparison to the average branch should be reviewed. Based on an average
monthly expenditure of ($1,538). This increases monthly expense of $1,538, a balance of $2,000
the risk that the cash will be stolen or that errors would seem reasonable.
will be made in counting.
The petty cash box is not physically secure as it The petty cash box should be kept in the branch
is kept on a bookcase in the accounts office. This safe or in a locked drawer in the accountant's desk
increases the risk of theft.
Reimbursement for petty cash expenditure takes All petty cash claims should be supported by a
place without evidence of the expenditure being receipt.

Summary Notes by SK
incurred e.g., receipt. This may result in false
claims being made.
The petty cash vouchers are not authorized they All petty cash vouchers should be authorized by
are only signed by the individual claiming accounts clerk.
reimbursement.
In some instances, significant items are Expenditure over a certain limit (e.g. $50 should
purchased through petty cash (up to $500). be authorised in advance.
These are not authorised prior to the purchase
being made. This could result in unnecessary
expense being incurred.
There is no indication that the vouchers are pre- Petty cash vouchers should 6'e pre-numbered. On
numbered, "meaning that the branch cannot entry into the petty cash book the sequential
confirm completeness of the vouchers. numbering should be Checked to ensure that all
Unauthorized claims could be made and then expenditure has been completely recorded.
Warned on missing
vouchers
There is a lack of segregation of duties. The petty The accountant should check the petty cash count
cash is counted by the accounts clerk who is also to confirm the accuracy of the balance and ensure
responsible for the cash balance. There is no that the asset is safeguarded
additional independent check on the petty cash
balance.
Whilst the accountant confirms that the cheque The petty cash vouchers should be- reviewed by
to reimburse petty cash agrees to the journal the accountant to confirm that the monthly petty
entry to the general ledger, the petty cash cash expenditure agrees to the reimbursement
vouchers are not reviewed to 'support the cheque and journal entries.
amounts involved.
ACCA Dec 2009 (20 marks)

South Lea Co
South Lea Co is a construction company (building houses, offices and hotels) employing a large
number of workers on various construction sites. The internal audit department of SouthLea Co is
currently reviewing cash wages systems within the company.
The following information is available concerning the wages systems:
1. Hours worked are recorded using a clocking in/out system. On arriving for work and at the end
of each days work, each worker enters their unique employee number on a keypad.
2. Workers on each site are controlled by a foreman. The foreman has a record of all employee
numbers and can issue temporary numbers for new employees.
3. Any overtime is calculated by the computerised wages system and added to the standard pay.
4. The two staff in the wages department make amendments to the computerised wages system in
respect of employee holidays, illness, as well as setting up and maintaining all employee records.
5. The computerised wages system calculates deductions from gross pay, such as employee taxes,
and net pay. Finally a list of net cash payments for each employee is produced.
6. Cash is delivered to the wages office by secure courier.
7. The two staff place cash into wages packets for each employee along with a handwritten note of
gross pay, deductions and net pay. The packets are given to the foreman for distribution to the
individual employees.

Summary Notes by SK
Required:
a. (i) Identify and explain weaknesses in SouthLea Co’s system of internal control over the wages system
that could lead to mis-statements in the financial statements.
(ii) For each weakness, suggest an internal control to overcome that weakness. (8 marks)
b. Compare the responsibilities of the external and internal auditors to detect fraud. (6 marks)
The computer system in the wages department needs to be replaced. The replacement will be carried
out under the control of a specialist external consultant.
Required:
c. Explain the factors that should be taken into consideration when appointing an external
consultant. (6 marks)
Answer:
a Wages system — deficiencies and recommended controls
(i) Deficiency (ii) Internal control recommendation

The foreman is in a position to set up fictitious The Issue of new employee numbers should be
employees onto the wages system as he has authorised by a manager and supported by
authority to issue temporary employee employee contract letters etc.
numbers. This would allow him to collect cash
wages for such bogus employees.
The two wages clerks are responsible for the set The list of personnel should be matched with the
up and maintenance of all employee records. payroll by a manager and all new employee records
They could therefore, in collusion, set up bogus should be authorised before being set up on the
employees and collect cash wages from them. system.
The wages clerks are responsible for making Any amendments to standing data on the wages
amendments to holidays and illness etc. They system should be done by an authorised manager so
could make unauthorised amendments which that unauthorised amendments are not made. A log
affect individual staff members' pay. of amendments should be regularly reviewed.
The computer system calculates gross pay and A payslip should be generated by the computer
any deductions but these are hand-written by system and including in the wage packet to reduce
the wages clerks for the staff pay packets, so the chance of errors in deductions and gross pay
errors could be made and incorrect wages being made.
issued.
The computer automatically calculates gross One of the wages clerks should check the gross pay
pay and deductions, however there is no checkand deductions for a sample of employees to gain
to ensure the calculations are accurate. assurance that the computer is calculating amounts
correctly.
The foreman distributes cash wages to the The distribution of wages should be overseen by
employees. He could therefore misappropriate another manager. Any unclaimed wages should be
any wages not claimed. noted on a form and returned to the wages
department.
b. Responsibilities for the detection of fraud External auditors

It is not the responsibility of the external auditors to detect fraud within a client. This responsibility lies
with the management and those charged with governance.
ISA 240 The auditor's responsibilities relating to fraud in an audit of financial statements sets out

Summary Notes by SK
guidance in this area. It states that the auditor shall maintain an attitude of professional scepticism
throughout the audit, recognising the possibility that a material misstatement due to fraud could exist,
notwithstanding the auditor's past experience of the honesty and integrity of the entity's management
and those charged with governance.
The auditor is required to consider the potential for management override of controls and recognise that
audit procedures that are effective in detecting error may not be appropriate in detecting fraud due to
the nature of fraud.
As part of the audit planning process, the audit team must discuss the susceptibility of the clients
financial statements to material misstatement by fraud.
Internal auditors
Responsibility for the prevention and detection of fraud lies with the management and those charged
with governance at the client. To this end, management should place a strong emphasis on fraud
prevention and fraud deterrence.
Internal audit can help in this regard because its aim is to review the internal control systems of the
company to ensure they are effective and efficient. Part of this review could involve detailed work to
ensure that fraud was not occurring. The internal audit department could also be required to undertake
special projects to investigate suspected instances of fraud.
c. Factors to consider when appointing an external consultant:
Qualifications
The professional qualifications of the consultant should be considered. He should be appropriately
qualified to carry out the work required.
Experience
The technical experience of the consultant should be considered as he should be sufficiently experienced
to undertake the assignment. He should also be familiar with the system being implemented.
Cost and service
The company should consider the cost to be incurred for replacing the wages system. It should also
consider what the cost includes, for example, whether it includes a servicing agreement
Availability
The company should consider whether the consultant will be available post-implementation to assist
with any teething problems and other issues that might arise.
Training
The company should consider whether staff who will be using the new system will require training in
order to be able to use the new package.
References and background

The company should consider who the consultant works for or whether he works alone and details of
his previous clients and work.
____________________________________________________________

Summary Notes by SK
ACCA June 2008 (26 marks)
Brennon & Co
Introduction – audit firm
You are an audit senior in Brennon & Co, a firm providing audit and assurance services. At the request
of an audit partner, you are preparing the audit programme for the income and receivables systems of
Seeley Co.
Audit documentation is available from the previous year’s audit, including internal control
questionnaires and audit programmes for the despatch and sales system. The audit approach last year
did not involve the use of computer-assisted audit techniques (CAATs); the same approach will be taken
this year. As far as you are aware, Seeley’s system of internal control has not changed in the last year.
Client background – sales system
Seeley Co is a wholesaler of electrical goods such as kettles, televisions, MP3 players, etc. The company
maintains one large warehouse in a major city. The customers of Seeley are always owners of small
retail shops, where electrical goods are sold to members of the public. Seeley only sells to authorised
customers; following appropriate credit checks, each customer is given a Seeley identification card to
confirm their status. The card must be used to obtain goods from the warehouse.
Despatch and sales system

The despatch and sales system operates as follows:
1. Customers visit Seeley’s warehouse and load the goods they require into their vans after showing
their Seeley identification card to despatch staff.
2. A pre-numbered goods despatch note (GDN) is produced and signed by the customer and a member
of Seeley’s despatch staff confirming goods taken.
3. One copy of the GDN is sent to the accounts department, the second copy is retained in the despatch
department.
4. Accounts staff enter goods despatch information onto the computerised sales system. The GDN is
signed.
5. The computer system produces the sales invoice, with reference to the inventory master file for
product details and prices, maintains the sales day book and also the receivables ledger. The
receivables control account is balanced by the computer.
6. Invoices are printed out and sent to each customer in the post with paper copies maintained in the
accounts department. Invoices are compared to GDNs by accounts staff and signed.
7. Paper copies of the receivables ledger control account and list of aged receivables are also available.
8. Error reports are produced showing breaks in the GDN sequence.

Summary Notes by SK
Information on receivables
The chief accountant has informed you that receivables days have increased from 45 to 60 days over
the last year. The aged receivables report produced by the computer is shown below:
number of more than 2

range of debt total debt $ current $ 1 to 2 months old $
receivables months old $
15 less than $0 (87253) (87253)

197 $0 to $20000 2167762 548894 643523 975345
153 $20001 to $50000 5508077 2044253 2735073 728751
23 $50001 or more 1495498 750235 672750 72513
___ ___ ___ ___ ___
388 9084084 3256129 4051346 1776609

___ ___ ___ ___ ___
In view of the deteriorating receivables situation, a direct confirmation of receivables will be performed
this year.
Required:
Explain the steps necessary to check the accuracy of the previous year's internal control questionnaires.
Using information from the scenario, list six tests of control that an auditor would normally carry out on
the despatch and sales system at Seeley Co and explain the reason for each test.
(12 marks)
State and explain the meaning of four assertions that relate to the direct confirmation of receivables.
(4 marks)
(i) Describe the procedures up to despatch of letters to individual receivables in relation to a direct
confirmation of receivables. (5 marks)
(ii) Discuss which particular categories of receivables might be chosen for the sample. (5 marks)
Answer: (26 marks)

Prior year internal control questionnaires
a.  Obtain the audit file from last year's audit. Ensure that the documentation on the sales system
is complete.
 Review the audit file for indications of weaknesses in the sales system and note these for
investigation this year.
 Obtain system documentation from the client. Review this to identify any changes made in
the last 12 months.
 Interview client staff to ascertain whether systems have changed this year and to ensure that
the internal control questionnaires produced last year are correct
 Perform walk-through checks. Trace a few transactions through the sales system to ensure that
the internal control questionnaires on the audit file are accurate and can be relied upon to
produce the audit programmes for this year.

Summary Notes by SK
b. Test of control Reason for test
review a sample of goods despatch notes (GDN) ensures that the goods despatched are correctly
for signatures of the goods despatch staff and recorded on the GDNS
customer.
review a sample of GDNS for signature of the ensures that the GDN details have been entered
accounts staff. onto the computer system.
observe despatch system ensuring seeley staff have ensures that goods are only despatched to
seen the customers' identification card prior to authorised customers.
goods being loaded into customers' vans.
review the error report on numeric sequence of ensures that the sequence of GDNs is complete
GDNs produced in the accounts department and
enquire action taken regarding omissions.
observe despatch process to ensure that the ensures that goods are not despatched to poor/bad
customers' credit limit is reviewed prior to goods credit risks.
being despatched.
Note: reviewing credit limits is not specifically
stated in the scenario: however, most despatch/
sales systems will have this control and most
candidates mentioned this in their answers. Hence
marks were awarded for this point.
review a selection of invoices ensuring they have ensures the accurate transfer of goods despatched
been signed by accounts staff. information from the GDN to the invoice.
c.
assertions receivables
assertion existence application to direct confirmation of receivables
the receivable actually exists which is confirmed by the receivable replying
to the receivables confirmation.
the receivable belongs to seeley co. the receivable confirms that the amount
rights and obligations is owed toseeley again by replying to the confirmation.
valuation and allocation receivables are included in the financial statements at the correct amount
cut-off — the receivable will dispute any amounts that do not relate to that
account transactions and events have been recorded in the correct
accounting period. The circularisation will identify reconciling items such
as sales invoices/cash in transit.
(i) Receivables circularisation – procedures

 Obtain a list of receivables balances, cast this and agree it to the receivables control account total
at the end of the year. Ageing of receivables may also be verified at this time.
 Determine an appropriate sampling method (cumulative monetary amount, value-weighted
selection, random, etc.) using materiality for the receivable balance to determine the sampling
interval or number of receivables to include in the sample.
 Select the balances to be tested, with specific reference to the categories of receivable noted below.
 Extract details of each receivable selected from the ledger and prepare circularisation letters.
 Ask the chief accountant at Seeley Co (or other responsible official) to sign the letters.
 The auditor posts or faxes the letters to the individual receivables

Summary Notes by SK
(ii) Specific receivables for selection:
1. Large or material items. These will be selected partly to ensure that no material error has occurred
and partly to increase the overall value of items tested.
2. Negative balances. There are 15 negative balances on Seeley’s list of receivables. Some of these
will be tested to ensure the credit balance is correct and to ensure that payments have not been
posted to the wrong ledger account.
3. Receivables in the range $0 to $20,000. This group is unusual because it has a relatively higher
proportion of older debts. Additional testing may be necessary to ensure that the receivables exist
and to confirm that Seeley is not overstating sales income by including many smaller receivables
balances in the ledger.
4. Receivables with balances more than two months old. Receivables with old balances may indicate
a provision is required for non-payment. The lack of analysis in Seeley Co’s receivable
information indicates a high risk of non- payment as the age of many debts is unknown.
5. Random sample of remaining balances to provide an overall view of the accuracy of the
receivables balance
------------------------------------------------------------------------------------------

Letham Co
ISA 315 (Redrafted) Identifying and Assessing the Risks of Material Misstatement Through
Understanding; the Entity and Its Environment requires auditors to obtain an understanding of the
entity and its environment, including its internal control.
Required:
(a) Explain why obtaining an understanding of the entity and its environment is important for the
auditor. (4 marks)
Letham Co is a large engineering company with ten manufacturing units throughout the country in
which it is located. The manufacturing process is capital intensive and the company holds a wide variety
of plant and equipment.
The finance director is responsible for the preparation of a detailed non-current assets budget annually,
which is based on a five-year budget approved by the whole board of directors after consultation with
the audit committee. This annual budget, which is also approved by the full board, is held on computer
file and is the authority for the issue of a purchase order.
When the item of plant and equipment is delivered to the company, a pre-numbered goods received note
(GRN) is prepared, a copy of which is sent to the accounting department, and used to update the non-
current assets budget to reflect the movement. The equipment is carefully inspected by production
personnel and tested for proper operation.
An operational certificate is prepared by the production department and this is used by the accounting
department, together with the GRN, to check against the purchase invoice when it is received.
At the same time as the purchase invoice enters the purchasing system, a computerised non-current
assets register is updated. Access to the non-current assets register is restricted to personnel in the
accounting department. On a rolling basis throughout the year the non-current assets register is

Summary Notes by SK
compared to plant and equipment on site by accounting department personnel, using identification
numbers in the register and permanently marked onto each item in the factory.
The internal audit department also tests on a sample basis the operation of the system from budget
preparation to entry in the non-current assets register. Internal audit staff also compare a sample of
entries in the non-current assets register with equipment on the shop floor.
Required:
b) SIX STRENGTHS in Letham’s control environment in respect of non-current assets and explain why
they may reduce control risk. (12 marks)
c) As part of your work as external auditor you are reviewing the non-current assets audit programme
of the internal auditors and notice that the basis of their testing is a representative sample of purchase
invoices. They use this to test entries hi the non-current assets register and the updating movements on
the annual budget.
Required:
(i) Explain why this is not a good test for completeness;
(ii) State a more appropriate test to prove completeness of the non-current assets records, including the
non-current assets register. (4 marks)
Answer: (20 marks)
An important objective would be to determine the extent and nature of audit procedures to reduce
detection risk, and therefore audit risk, to an acceptable level.
(iii) to set the scene for identifying assertions and collecting sufficient appropriate evidence to prove that
the assertions are reasonable.
(Tutorial note: Marks would also be available for additional points such as:
 To assess the adequacy of the accounting system as a basis for preparing financial statements
 To assess whether competent to perform the audit
 To understand relevant law and regulations impacting the entity
 To consider the reliability of various evidence sources.)
Strong points in the control environment of Letham Co in respect of non-current assets are set out below,
together with explanations as to their impact on control risk:
Strengths Impact on control risk

Approval of the five-year and annual budgets by The annual budget is the ‘trigger’ for placing
the board of directors. equipment. orders for equipment. Its approval by the board
will ensure that only authorised non-current
assets are purchased.
The budget is updated when the order for new The company can use the updated budget at any
equipment is placed. time to anticipate cash outflows. it will also
ensure that there is no duplication of assets
purchased
Pre-numbered goods received notes and Only goods that have been received and are
operational certificates are available to the operating effectively will be paid for
accounting department for comparison with the
purchase invoice.

Summary Notes by SK
Informed people in the production department This will help to ensure the operational
carefully assess the proper operation of the effectiveness of plant and equipment.
equipment.
The accounting department, independent of the The potential for fraudulent entries to cover
production facility, updates the non-tangible theft/unauthorised purchases will be reduced and
register and only the accounting department has the non-current assets register, an important non-
access to it. current control document, cannot be manipulated
by the people who hold the assets
Accounting department personnel, independent of The risk of theft and loss of plant and equipment
production, perform rolling tests to ensure that the is reduced and the likelihood that all items in the
non-current assets register and non-current assets register existing increased
on hand are in agreement with each other.
The internal audit department tests on a sample The internal auditing department will be more
basis that recorded non-current assets are in independent than the accounting department and
existence, but see (c) below. hence will provide further comfort that the non-
current assets register is not overstated.
Internal audit test the operation of the entire non- Any controls which are not operating effectively
current assets recording system. (tutorial note: are likely to be identified and rectified before
marks would also be available for additional significant errors can occur
strengths:
 Pre-numbered goods received notes used to

update the budget
 permanent identification numbers recorded on
assets
 purchase invoice automatically updates the
non-current assets register.
(c)
i. Great care must be taken in selecting the starting point for audit testing. The test that the internal auditors
performed, namely, selecting a representative sample of purchase invoices for testing to the non-current
assets register and to the updating movements on the annual budget, proves merely that register and
budget are in agreement with the purchase invoices issued. It is therefore not a good test to prove the
completeness of purchase invoices and therefore of the entries in the register and budget. In addition, the
purchase invoices are issued by many different suppliers and there is no common serial number to enable
the company to ensure that all purchases are accounted for.
ii. A more appropriate test would be to make the selection from goods received notes (GRNs), as the issue
of a GRN is normally the point at which liability is accepted and is in any event the document used to
update the non-current assets budget. In other words, it is important to identify your audit objective and
then to decide on what sample will be the most appropriate to aid you in meeting that objective. The
GRNs would be traced to the recorded purchase invoices to ensure that the latter were complete and then
to the entries in the non-current assets register and to the updating entries in the budget to ensure that
these too were complete.

Summary Notes by SK
An additional appropriate test would be to select a sample of plant and equipment visible on the shop
floor and trace them to the non-current assets register to identify whether they have been:
 included in the register
 noted against the budget as purchased
 paid (or by tracing purchase invoice through to payment.
(Tutorial note: The auditor would of course wish to prove that the GRNs are complete and might select
a sample of purchase orders and trace them to the GRNs to ensure GRNs have been prepared in each
case or the order rejected for good reason. Another appropriate test on the GRNs would be to prove that
the numbering sequence was complete. This list is not exhaustive and other completeness procedures
may be appropriate.)
-----------------------------------------------------------------------------------------------

Question 1
Trombone Co (Trombone) operates a chain of hotels across the country. Trombone employs in excess of
250 permanent employees and its year end is 31 August 2014. You are the audit supervisor of Viola & Co
and are currently reviewing the documentation of Trombone's payroll system, detailed below, in
preparation for the interim audit.
Trombone's payroll system

Permanent employees work a standard number of hours per week as specified in their employment
contract. However, when the hotels are busy, staff can be requested by management to work additional
shifts as overtime. This can either be paid on a monthly basis or taken as days off.
Employees record any overtime worked and days taken off on weekly overtime sheets which are sent to
the payroll department. The standard hours per employee are automatically set up in the system and the
overtime sheets are entered by clerks into the payroll package, which automatically calculates the gross
and net pay along with relevant deductions. These calculations are not checked at all. Wages are increased
by the rate of inflation each year and the clerks are responsible for updating the standing data in the payroll
system.
Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any
overtime worked in the previous month. If employees choose to be paid for overtime, authorisation is
required by department heads of any overtime in excess of 30% of standard hours. If employees choose
instead to take days off, the payroll clerks should check back to the 'overtime worked' report; however,
this report is not always checked.
The 'overtime worked' report, which details any overtime recorded by employees, is run by the payroll
department weekly and emailed to department heads for authorisation. The payroll department asks
department heads to only report if there are any errors recorded. Department heads are required to arrange
for overtime sheets to be authorised by an alternative responsible official if they are away on annual leave;
however, there are instances where this arrangement has not occurred.
The payroll package produces a list of payments per employee; this links into the bank system to produce
a list of automatic payments. The finance director reviews the total list of bank transfers and compares

Summary Notes by SK
this to the total amount to be paid per the payroll records; if any issues arise then the automatic bank
transfer can be manually changed by the finance director.
Required:
a) In respect of the payroll system of Trombone Co:
Identify and explain FIVE deficiencies;
Recommend a control to address each of these deficiencies; and
Describe a test of control Viola & Co should perform to assess if each of these controls is operating
effectively.
b) Explain the difference between an interim and a final audit. (5 marks)

c) Describe substantive procedures you should perform at the final audit to confirm the completeness
and accuracy of Trombone Co's payroll expense. (6 marks)
Trombone deducts employment taxes from its employees' wages on a monthly basis and pays these to
the local taxation authorities in the following month. At the year end the financial statements will
contain an accrual for income tax payable on employment income. You will be in charge of auditing
this accrual.
Required:
d) Describe the audit procedures required in respect of the year end accrual for tax payable on
employment income. (4 marks)
Answer 1:
a. Trombone Co’s payroll system deficiencies, controls and test of controls
Deficiencies Controls Test of controls
The wages calculations are A senior member of the Review a sample of the gross to
generated by the payroll system payroll team should net pay calculations for evidence
and there are no checks recalculate the gross to net that they are undertaken and
performed. pay workings for a sample of signed as approved
employees and compare their
Therefore, if system errors occur results to the output from the
during the payroll processing, payroll system. These
this would not be identified. This calculations should be signed
could result in wages being over as approved before payments
or under calculated, leading to are made
an additional payroll cost or loss
of employee goodwill.
Annual wages increases are Payroll clerks should not have Ask a clerk to attempt to make a
updated in the payroll system access to standing data change to payroll standing data;
standing data by clerks. changes within the system. the system should reject this
attempt.
Payroll clerks are not senior
enough to be making changes to The annual wages increase Review the log of standing data
standing data as they could should be performed by a amendments to identify whether
make mistakes leading to senior member of the payroll the wage rate increases were
incorrect payment of wages. In department and this should changed by a senior member of
addition, if they can access be checked by another payroll.
standing data, they could make responsible official for errors.
unauthorised changes.

Summary Notes by SK
Overtime worked by employees All overtime hours worked Review a sample of employee
is not all authorised by the should be authorised by the weekly overtime sheets for
relevant department head, as relevant department head. evidence of signature by relevant
only overtime in excess of 30% This should be evidenced by department head
of standard hours requires signature on the employees'
authorisation. weekly overtime sheets.
This increases the risk that

employees will claim for
overtime even though they did
not work these additional hours
resulting in additional payroll
costs for Trombone.
Time taken off as payment for Payroll clerks should be Select a sample of overtime sheets
overtime worked should be reminded of the procedures to with time taken off and confirm
agreed by payroll clerks to the be undertaken when that there is evidence of a check
overtime worked report; processing the overtime by the payroll clerk to the
however, this has not always sheets. They should sign as overtime worked report
occurred. evidence on the overtime
sheets that they have agreed
Employees could be taking any time taken off to the
unauthorised leave if they take relevant overtime report
time off but have not worked the
required overtime.
The overtime worked report is All department heads should For a sample of overtime reports
emailed to the department heads report to the payroll emailed to department heads
and they report by exception if department on whether or not confirm that a response has been
there are any errors. the overtime report is correct. received from each head by
The payroll department reviewing all responses.
If department heads are busy or should follow up on any non-
do not receive the email and do replies and not make
not report to payroll on time, payments until agreed by the
then it will be assumed that the department head.
overtime report is correct even
though there may be errors. This
could result in the payroll
department making incorrect
overtime payments.
Department heads are meant to Department heads should be Discuss with payroll clerks the
arrange for annual leave cover reminded of the procedures process they follow for obtaining
so that overtime sheets are with regards to annual leave authorisation of overtime sheets,
authorised on a timely basis; and arrangement of suitable in particular during periods of
however, this has not always cover. annual leave. Compare this to the
happened. During annual leave periods, process which they should adopt
If overtime sheets are authorised payroll clerks should monitor to identify any control exceptions.
late, then this can lead to that overtime sheets are being
employee dissatisfaction as it submitted by department
will delay payment of the heads on a timely basis and
overtime worked. follow up any late sheets.

Summary Notes by SK
The finance director reviews the The finance director when Obtain a sample of payments list
total list of bank transfers with authorising the payments and review for signature by the
the total to be paid per the should on a sample basis finance director as evidence that
payroll records. perform checks from payroll the control is operating correctly.
records to payment list and
There could be employees vice versa to confirm that
omitted along with fictitious payments are complete and
employees added to the payment only made to bona fide
listing, so that although the total
employees
payments list agrees to payroll The finance director should
totals there could be fraudulent sign the payments list as
payments being made. evidence that he has
undertaken these checks.

Summary Notes by SK
.
Test Questions – T.O.C
Question 1: (Payroll) (30 marks)
It is 1 July 20X5 You are an audit supervisor of Apple & Co and are in the process of reviewing extracts of
the systems documentation which has been completed on the payroll cycle of Castle Courier Co, as well
as preparing the audit programmes for the forthcoming final audit for the year ending 30 September 20X5.
Castle Courier Co is a package delivery company which operates from a large distribution centre.
Payroll
The company employs 200 staff of whom 120 of these staff are delivery drivers. All staff work a standard
eight-hour shift each day and are paid monthly. All staff members are required to clock-in and out using a
sequentially numbered key card which contains their unique employee number and name. Sequence checks
on the key cards and the data recorded in the clocking-in system are carried out by the human resources
(HR) supervisor on a regular basis. The clocking-in process is monitored by a camera on entry to the
distribution centre and weekly checks are carried out by the HR department who review the video footage
to ensure that no staff member clocks-in for someone else. Recordings are kept in date order in the HR
department and logged on a spreadsheet together with the name of the person who has reviewed the
footage.
The clocking-in system is directly linked to the payroll system and information regarding the hours worked
by the staff is automatically transferred into the payroll system. The payroll system then automatically
calculates gross pay, deductions and net pay. The payroll clerk confirms that the transfer of hours and
calculations has been done correctly by recalculating a sample of employees' gross to net pay. A payroll
supervisor then reviews this check which is evidenced by the supervisor's signature.
All staff are entitled to 22 days holiday a year. Employees are paid for any holiday which has not been
taken at the end of the year. Department managers are required to approve all holiday requests by
authorising employees' holiday forms, however this does not always occur
The payroll system is password-protected, and the password is changed on a monthly basis by the payroll
manager using a random password generator.
Once the payroll has been agreed by the payroll supervisor the payroll clerk provides details of the net pay
due to each employee to the financial controller who then prepares and authorises the bank transfer to be
paid to the employees’ bank accounts.
Each month as part of the month-end procedures, the finance director undertakes a payroll control account
reconciliation and investigates any differences to ensure that the payroll figures have been posted into the
accounting records correctly.
The company's HR department is responsible for processing starters and leavers using a joiner/leaver form
to notify the payroll department of the change. On receipt of the joiner/leaver form a payroll clerk updates
the payroll system. An edit report is generated which records the changes made but this report is not
reviewed Two staff members from the HR department have been absent for some time due to illness. As a
result, the operations manager has processed six newly recruited temporary delivery drivers and instructed
the payroll department to set up the new employees.
Delivery drivers are sometimes required to work overtime particularly in busy periods. Where overtime is
necessary, the operations manager has to authorise overtime in excess of five hours per week.

Summary Notes by SK
Some temporary delivery drivers receive their wages in cash. The delivery driver collects their pay packet
from the finance department when it is ready. The member of staff in the finance department will ask for
the delivery driver's name to check that there is a pay packet prepared and. it there is, they provide the
delivery driver with their pay packet.
The company has to pay employment taxes to the tax authority by the end of each month. Each month the
payroll supervisor calculates the total liability due to the tax authority and this is then passed to the financial
controller who checks the calculations prior to the payment being made.
To encourage delivery drivers to make deliveries on time, the company pays a discretionary bonus to
delivery drivers on a quarterly basis. The operations manager decides on the bonus to be paid and notifies
the payroll clerk in writing every quarter as to who will receive a bonus and how much it will be.
As delivery drivers spend the majority of their day driving the company vehicles, they are required by law
to take a 15-minute paid break in the morning and afternoon, as well as a one-hour lunch break. The
company has no way of monitoring the length of these breaks as the delivery drivers are out on deliveries.
a. Describe the following methods for documenting internal control systems and for each explain a
DISADVANTAGE of using this method. (4 marks)
b.
i. Identify and explain FOUR KEY CONTROLS in Castle Courier Co's payroll system which the
auditor may seek to place reliance on: and
ii. Describe a TEST OF CONTROL the auditor should perform to assess if each of these key controls
Note: The marks will be split equally between each part. (8 marks)
c. Identify and explain SIX DEFICIENCIES in Castle Courier Co's payroll system and provide a
control recommendation to address each of these deficiencies. (12 marks)
d. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Castle Courier Co's payroll expense. (6 marks)
(30 marks)
Question 2 (15 marks)

You are an audit supervisor of Halley & Co and you are reviewing the documentation describing Comet
Publishing Co’s purchases and payables system in preparation for the interim and final audit for the year
ending 30 September 20X7. The company is a retailer of books and has ten stores and a central
warehouse, which holds the majority of the company’s inventory.
Your firm has audited Comet Publishing Co for a number of years and as such, audit documentation is
available from the previous year’s file, including internal control flowcharts and detailed purchases and
payables system notes. As far as you are aware, Comet Publishing Co’s system of internal control has
not changed in the last year. The audit manager is keen for the team to utilise existing systems
documentation in order to ensure audit efficiency. An extract from the existing systems notes is provided
below.
Extract of purchases and payables system

Store managers are responsible for ordering books for their shop. It is not currently possible for store
managers to request books from any of the other nine stores. Customers who wish to order books, which
are not in stock at the branch visited, are told to contact the other stores directly or visit the company
website. As the inventory levels fall in a store, the store manager raises a purchase requisition form, which

Summary Notes by SK
is sent to the central warehouse. If there is insufficient inventory held, a supplier requisition form is
completed and sent to the purchase order clerk, Oliver Dancer, for processing. He sends any orders above
$1,000 for authorisation from the purchasing director.
Receipts of goods from suppliers are processed by the warehouse team, who agree the delivery to the
purchase order, checking quantity and quality of goods and complete a sequentially numbered goods
received note (GRN). The GRNs are sent to the accounts department every two weeks for processing.
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, Oliver, who processes it for payment. The finance
director is given the total amount of the payments list, which she authorises and then processes the bank
payments. Due to staff shortages in the accounts department, supplier statement reconciliations are no
longer performed.
Other information – conflict of interest

Halley & Co has recently accepted the audit engagement of a new client, Edmond Co, who is the main
competitor of Comet Publishing Co. The finance director of Comet Publishing Co has enquired how
Halley & Co will keep information obtained during the audit confidential.
Required:
a) In respect of the purchases and payables system for Comet Publishing Co:
i. Identify and explain FIVE deficiencies;

ii. Recommend a control to address each of these deficiencies; and
iii. Describe a TEST OF CONTROL the auditor should perform to assess if each of these
controls, if implemented, is operating effectively to reduce the identified deficiency.
Note: Prepare your answer using three columns headed Control deficiency, Control recommendation,
and Test of control respectively. The total marks will be split equally between each part. (15 marks)

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Test of Controls summary (Summary of Extract from CAF-8 Text Book)
The major transaction cycles are:
1. Sales (revenue) cycle

2. Purchase cycle
3. Payroll cycle
4. Bank and cash (both receipt and payment cycle)
5. Inventory cycle and
6. Revenue and capital expenditure (non-current assets)
Tests of control should therefore be seen within the context of:
 Risks (Identification + Impact)

 Control objectives
 Controls
 Tests of those controls --- TOC's (To check whether controls are operating effectively or not)
SALES CYCLE
1. Receiving orders from customers
2. Dispatching the goods and invoicing customers
3. Recording sales and amounts receivable in the accounts
1. Receiving orders Customer orders

Risks
 Orders may be accepted from new customers and new customers may be given credit,
without checking the customer’s references or authorisation.
 Orders may be accepted from existing customers that take them over their credit limit.
 Some orders are overlooked and are not processed. Some orders are processed twice.
 The customer is given a price discount without proper authorisation.
Control objectives
 Giving credit to new customers and existing customers must be controlled, and must be consistent
with company policy.
 All orders from customers are processed correctly. Orders should not be processed if they would
take the customer above his agreed credit limit.
Principal controls
 There should be a segregation of duties, and the individuals who process orders from customers
should not also carry out credit reference checks on new customers or credit limit checks on existing
customers.
 All new customer accounts, and their credit limit, should be authorized.
 Orders should be recorded on sequentially-numbered documents.
 For every sales order, a despatch note should be produced (manually, or generated by the system
from the order details). Goods should not be dispatched to customers without a despatch note.

Summary Notes by SK
Tests of control
 The auditor can establish which individuals take orders and process them, and which individuals
carry out credit reference checks on new customers and credit limit.
In an IT system he could use test data to check that orders which would take a customer over his
credit limit ....... would be rejected by the system.
 Auditor to verify that credit checks have been carried out by looking at the signatures or initials of
credit checking staff on customer orders or by using test data as described above.
 Evidence that new customer accounts have been approved should be checked by looking for the
signature of the manager giving the authorisation on the approval document.
 The auditor can look at lists of customer orders, sequentially numbered, and confirm that for every
customer order there is a despatch note number.
2. Despatch of goods and invoicing
Risks
 For some customer orders, goods are not despatched, or the goods are despatched twice.
 Goods are despatched to customers who do not have sufficient credit (either because no credit terms
have been agreed, in the case of a new customer, or because the order takes an existing customer
above his credit limit).
 Invoices are not produced for goods that have been despatched to some customers.
 Customers may claim that they did not receive the goods that have actually been delivered to them.
 Returns from customers are not properly recorded.
Control objectives
 Goods should be despatched for every authorised customer order.
 Goods should not be despatched twice, for the same sales order.
 Customers should acknowledge the receipt of goods.
 For every despatch note, there must be an invoice.
 Invoices should be for the correct amount.
Principal controls
 Despatch notes or Goods Delivery Notes (GDNs) should be numbered sequentially, and should be
attached to a copy of a specific customer order. The GDN should be signed by an authorised
member.
 Sequential numbering of GDNs ensures completeness of all deliveries.
 Customers should sign a delivery note for the receipt of goods, as confirmation of receipt.
 The signed delivery note should be attached to a copy of the customer order. Copies of these
documents should be transferred to the accounts department after despatch, so that a sales invoice
can be produced.
 Sales invoices should be sequentially numbered.
 There should be a segregation of duties, and the individuals who despatch goods should not be the
same as those who prepare sales invoices or process the customer orders.

Summary Notes by SK
Tests of control
 Some delivery notes should be checked to confirm that customers do sign them.
 The auditor can check that the segregation of duties does exist.
 There should be a check to ensure that all GDNs have been sequentially numbered, and that if there
is any non-sequential numbering of GDNs an error report has been produced by the system to
explain the reason for the error.
 The auditor should check that (sequential) lists of invoices show a customer order number and a
despatch note number.
 The auditor can observe the despatch process in operation.
Remember that for each test of control, there should be a purpose. In other words, what control is
being tested and how does the test succeed in doing this? For example:
Test of control Reason for the control

Review error reports on non-numerical Test to ensure that all GDNs have been in
sequencing of GDNs and ask about action numerical sequence, and if not that errors can be
taken to investigate or deal with the error. satisfactorily explained.
Test a sample of GDNs for the customer’s To ensure that the customer did receive the
signature goods and has acknowledged receipt.
Observe the despatch process To check that goods are despatched only where
a GDN exists and that the goods actually
despatched correspond with the details on the
GDN.
3. Recording sales and accounting
Risks and control objectives
 There is a risk that invoices and credit notes may not be recorded in the accounting system. A control
objective is to ensure that they are all recorded.
 There is a risk that invoices and credit notes are recorded in the wrong customer accounts.
A control objective is to prevent this from happening, or to detect errors when they do occur.
 There is a risk that debts may be written off as uncollectable (‘bad’) without proper consideration.
A control objective is to make sure that this does not happen.
Principal controls
 Invoices and credit notes should be sequentially numbered.
 Regular statements should be sent to customers.
 Control account reconciliations should be carried out on trade receivables.
 Bad debts must be approved
 There are procedures for identification and follow-up of overdue accounts and unpaid invoices.
Tests of control
 Lists of invoices and credit notes can be checked to make sure that there is sequential numbering or
documents can be viewed on screen.
 There should be a segregation of duties between the individuals who prepare and send out invoices,
and individuals who collect payments, and individuals who follow up late payments.
 The auditor can check that statements are produced and despatched to customers.

Summary Notes by SK
 The auditor can look for documentary evidence that control total checks have been made.
 There should be documentary evidence that proper authorisation is given for a debt to be written off
as bad.
The purchases and expenses system

Elements of the purchases and expenses system….
1. Placing orders
2. Receiving goods (or services) and receiving invoices
3. Recording and accounting for purchases and expenses.
1. Placing orders
Risks
 Orders for goods or services are made without approval or authorisation.
 Orders may be placed with suppliers who are not on the ‘approved list’.
 For large orders, suppliers are not asked to submit tenders. When suppliers are asked to tender, the
order might not be given to the supplier quoting the lowest price.
Control objectives
Suitable control objectives may therefore be as follows:
 All purchase orders must be properly authorized.
 Orders should not be placed with ‘non-approved’ suppliers.
 Competitive price quotations should be obtained for all large orders.
Principal controls
 There should be a segregation of duties. Individuals who make a requisition for new supplies of
inventory should not be the individuals who place the order with the supplier.
 Purchase orders should be sequentially numbered.
 All orders must be placed with suppliers on an approved list (approved Supplier list). The purchase
order may include an ‘approved supplier reference number’.
 Orders above a certain value must be authorized by a senior manager.
Tests of control
 The auditor can look at lists of sequentially-numbered purchase orders or view documents on screen.
 The auditor should ask management to provide documentary evidence that the procedure for placing
suppliers on the approved list operates as intended.
 Purchase orders can be checked to make sure that they contain an approved supplier reference
number.
 Large orders can be checked for management authorisation.
2. Receiving goods and invoices

There is a risk that goods may be accepted from a supplier without having been ordered. Or suppliers
may claim to have delivered goods, but may actually not have done so. A control objective is
therefore to make sure that all receipts of goods are recorded and checked against a purchase order.
 There is a risk that the company may fail to claim discounts from suppliers for orders above a certain
size, or as regular customers of the supplier.
A control objective should be that discounts are given by suppliers where these are available.

Summary Notes by SK
There is a risk that suppliers may invoice for goods that have not actually been provided. A control
objective is to prevent this from happening, or detect when it does happen.
Principal controls
 A copy of all delivery notes should be retained, with a signature of the member of staff who took
receipt and checked the goods.
 Goods received notes should be produced for each delivery.
 A member of the accounts staff or purchasing staff must be responsible for checking discounts
allowed by suppliers.
 All purchase invoices should be checked against a purchase order and a goods received note.
Tests of control
 The auditor should check that delivery notes, goods received notes and purchase invoices are
matched with each other.
 The auditor should look for any evidence that invoices, purchase orders or goods received notes
cannot be properly matched.
 The auditor should check that the segregation of duties does exist.
3. Recording and accounting for purchases and expenses
 There is a risk that purchase invoices will be recorded for goods or services that were not provided.
A control objective is to make sure that this does not happen.
 There is a risk that purchase invoices will be incorrectly recorded in the accounts of suppliers.
A control objective is to identify and correct any such errors that may occur.
 There is a risk that credit will not be claimed from suppliers for goods returned.
A control objective is to make sure that credit is taken for purchase returns.
Principal controls
 Purchase invoices must be checked against purchase orders before they are recorded in the accounts.
 Regular statements should be received from suppliers, and the balance on the statement should be
checked against the account balance in the trade payables ledger.
 There should be regular control account reconciliations for trade payables.
 A debit note should be created each time that goods are returned to a supplier.
Tests of control
 The auditor should look for evidence that purchase invoices are matched against purchase orders.
Evidence may be provided by a signature or initials on the purchase invoice of the individual making
the check or by checking references on screen.
 There should be evidence that statements from suppliers are checked and approved. Again,
evidence may be provided by a signature or initials on statements..
 The auditor should look for documentary evidence of control account reconciliations.
 The auditor should be able to check a list of sequentially-numbered debit notes, cross-
referenced to a supplier’s credit note.

Summary Notes by SK
The Payroll System
Elements of the payroll system
1. Calculating gross wages and salaries
2. Recording wages and salaries payable in the accounts
3. The calculation of tax and other deductions from wages and salaries
4. The payment of wages and salaries.
1. Calculating gross wages and salaries
Risks
 Wages and salaries may be paid to individuals who are not employees.
 Employees may be paid for work they have not done.
 Gross wages /salaries, taxation and other deductions could be calculated incorrectly.
Control objectives
 Ensure that only ‘real’ employees are paid: for example wages or salaries should not continue
to be paid to former employees who have now left, or that payments are not made to ‘phantom’
employees.
 Ensure that employees are paid only for work they have done: for example to make sure that
employees are not paid for overtime work if they have not done it.
 Ensure that gross pay, deductions (tax and other deductions) and net pay are calculated
correctly.
Examples of control objectives Examples of principal controls Tests of control

Taxation and other deductions Payroll procedures (IT or The auditor can review any
from pay should be calculated manual) should provide for manual procedures for
correctly. the deduction of all calculating deductions, and the
appropriate deductions, using tax rates used. In an IT system,
up-to-date rates of tax. general IT controls will be
important to check that the
system was properly developed,
tested and implemented.
Voluntary deductions from pay Senior management should The auditor can check that a senior
(for example, for pension check the total amount of manager has approved total
contributions) should only be deductions each week or deductions, evidenced by his or
made with the consent of the month. her signature
employee.
All voluntary deductions The payroll file can be checked
must be authorised in writing against the calculation of
by the employee, and this deductions in employee wagesto
written authorisation should confirm that voluntary deductions
be kept in the payroll file. are authorised.
Recording wages and salaries payable in the accounts

Risk and control objective
The principal risk is that gross pay, deductions and net pay may not be properly recorded in the accounts.
The control objective should therefore be to ensure that gross pay, deductions and net pay are all
properly and accurately recorded in the accounts.

Summary Notes by SK
Gross pay, deductions and net The accounts are prepared from There should be evidence that
pay should be properly and payroll data that has been the payroll has been formally
accurately recorded in the approved by a senior manager. approved. (In an integrated IT
accounts. system, the nominal ledger
accounts will be
automatically updated.)
Accounting for payroll should be There should be checks on the
completed within a strict procedures for recording
timescale payroll and the time within
which the work is done.
There should be control There should be documentary
accounts for payroll, with evidence of control account
regular reconciliations between reconciliations and review of
control totals and the payroll these reconciliations.
records of all individual
employees.
Payment of wages and salaries

Risks
 Incorrect amounts of net pay could be paid over to employees.
 Incorrect amounts of deductions could be paid over to the authorities.
 Payment could be made to the wrong employee.

The correct amounts of net pay When wages and salaries are Authorised lists of payments
should be paid to employees. paid by automated bank transfer, can be checked.
the list of payments should be
authorised.
The correct amount of There should be formal The procedures for payments
deductions is paid to the procedures and a formal of deductions and manual
appropriate authority (for timetable for the payment of recording of payments in the
example, the tax authority). deductions, and recording accounts can be checked.
payments in the accounts.
Payments of net wages and Bank statements should be used Evidence of bank
salaries are made only to the to check that payments have reconciliation checks can be
proper person (the employee). been properly recorded in the obtained.
accounts.
Payments are correctly There should be controls within The accounts can be checked
recorded in the accounts. the accounting system to ensure to confirm that payrolls each
that there is reconciliation week or month (total payable
between total amounts payable and total paid) are reconciled.
and total paid.

Summary Notes by SK
Possible control weaknesses in a payroll system
The following are possible weaknesses that may exist.
 Weaknesses in the system for recording time spent at work. The risk is that employees will ‘clock
on’ on behalf of a colleague, using the identity card that the colleague has given him.
 Overtime payments may not be properly authorized. Is the overtime authorized? If so, has the
amount of the payment been checked and authorized?
 Responsibility for making the payroll payments. The actual payments of wages and salaries (often
direct payments through the banking system) may be made by a junior person in the accounts
department without proper authorisation.
 The payroll lists for each department may not be properly authorized.
 Some weaknesses in a payroll system may be risks that are common to other types of I.T system
too, for example:
 Weaknesses in the use of passwords.
 Weaknesses in the use of e-mails. Important information may be sent by e-mail.
The bank and cash system

Some control objectives for cash might therefore be as follows:
 All money received is recorded.
 All money received is banked.
 All money held as cheques, notes is properly safeguarded.
 All payments are properly authorised.
Principal controls and tests of control
Some of the principal controls for cash, and tests of those controls, are
suggested below
Control objectives Principal controls Tests of control
All money received is There should be segregation Check that segregation of duties
recorded of duties. The handling of does exist.
cash should be kept separate
from other accounting
functions.
Controls over receipts by post Controls over receipts by post
There should be supervision of the Observe that mail opening and
opening of mail. cash handling procedures are
being followed.
There should be a listing of all Check amounts recorded as
money received. receipts from customers against
the remittance advices (document
from the customer confirming the
amount paid).
Cash sales Cash sales
Only a restricted number of Check amounts in receipt books or
employees should be authorised to on till rolls to paying-in slips, the
receive cash. cash book and bank statements.

Summary Notes by SK
Check whether bankings are made
Cash tills and till rolls should be daily.
used to record cash sales.
Check for evidence that till roll
Another person should check the totals or receipts totals are checked
actual cash received against the till against cash received by an
roll total. authorised person.
Restrict the employees who are
able to receive cash
Receipts should be sequentially
numbered.
All money received is There should be daily banking, if Check the frequency of banking
banked possible. receipts.
The amount of cash payments Check that receipts are recorded
received should be recorded, and in the cash book and that the bank
subsequently checked against the statement matches the cash
amount banked. receipts recorded on a daily basis.
Proper safeguards should Bank Bank
exist over money held There should be established Confirm that new bank accounts
procedures for opening new bank have only been opened under
accounts. established procedures.
 restrictions on individuals
authorised to prepare and hold Observe which individuals are
cheques. involved with company cheques.
 safe custody of cheque Enquire as to custody of cheque
books. books and check to see whether
any cheques are blank and pre-
signed.
Cash Cash
Cash should be kept in a secure Review the nature of cash
place, such as a safe. payments made.
Only a very limited number of Observe cash custody procedures.
employees should have access to
the cash.
Receipts of cash and payments of
cash must be recorded.
All payments should be Cheque payments Cheque payments
properly authorised, Cheque requisition forms should Review paid cheques for payee,
made to the correct person be used to request payments, date, amount and signature.
and are properly recorded backed by supporting
documentation.
Petty cash
Control objectives
 To avoid or reduce the risk of petty cash being stolen.
 To ensure that all spending out of petty cash is properly authorised.
 To ensure that petty cash is for business purpose only.
 To ensure that all spending out of petty cash is accounted for.

Summary Notes by SK
The Inventory System And Non-Current Assets
The inventory system
The main risks associated with inventory are as follows:
 Inventory records are inaccurate.
 Inventory may be stolen or damaged.
 Inventory may be valued at incorrect amounts.
 Too little inventory may be held, so that customers’ orders cannot be fulfilled.
 Too much inventory may be held, and therefore too much money tied up.

Recording inventory
Inventory records should be There should be segregation The auditor can look for evidence
complete, accurate and include of duties (ordering inventory, that inventory movements (as
only items belonging to the custody of inventory, recorded in the inventory
company. accounting for inventory). department) agree with despatch
All inventory movements There should be proper documents and goods received
should be recorded and documentation for all issues documents.
authorised. of inventory from the store. The auditor should look for
All goods received should be documentation providing evidence
checked and recorded that inventory movements are
authorised.
Appropriate inventory
records should be properly
maintained.

Physical safeguards There should be restricted The auditor should look for
Inventory is protected against access to storage areas. compliance with access
loss and damage. restrictions.
Regular inventory counts The auditor should obtain
should be performed. confirmation that periodic
inventory counts are performed.
Valuation IAS 2 should be applied. The auditor should ensure
Inventory should be correctly There should be procedures treatment as per IAS 2.
valued at the lower of cost and for identifying obsolete and
net realisable value. slow moving inventory items.
Inventory management There should be maximum The auditor should carry out a
Appropriate levels of inventory and minimum inventory review for excessive inventory
should be held at all times. levels for all inventory items levels.
of value.
There should be appropriate The auditor should also monitor
re-order levels and re-order the frequency of out-of-stock
quantities. situations.
Non-current assets
The main risks associated with non-current assets are as follows:
 Non-current assets which the company does not need ………could be ordered.
 Expenditure on non-current assets may be recorded at incorrect amounts, or incorrectly classified.

Summary Notes by SK
Authorisation
All expenditure on non- Appropriate authorization Many tests of control for the
current assets should be procedures should be in place. purchase of non-current assets are
properly authorised. Documentation should be similar to those for the purchase
produced to support (capital) of inventory items.
expenditure requests.
There should be approval
procedures for the payment of The auditor should also look for
invoices to the suppliers of non- documentary evidence of capital
current assets. expenditure authorisations.
Recording
All expenditure on non- Invoices must be analysed and The auditor should check the
current assets should be account codes entered on the capital/revenue analysis of
properly recorded. invoices. invoices.
Expenditure should be Management should review the The auditor should check that
properly analysed as analysis of purchased items as entries are made in the non-
capital or revenue. capital or revenue items. current asset register.

Summary Notes by SK
CA CAF 8 Practice Questions
S. No. Attempt Marks

1 Q. 4 Sept 2021 6 marks
2 Q. 4 March 2021 12 marks
4 Q. 8d Sept 2018 6 marks

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Substantive Procedures’

Summary Notes by SK
Index of CAF 8 Audit past papers for Substantive Procedures

10
11
12
13
14
15

Summary Notes by SK
‘Financial Statement Assertions’

Summary Notes by SK
REVISED
Financial Statement Assertions (Total 12 Assertions)
Assertions used by the auditor in considering the different types of potential misstatements that may occur
may fall into the following categories:
a. Assertion about classes of transactions, events, and related disclosures, for the period under audit:
(P&L Items)
i. Occurrence------- transactions and events that have been recorded or disclosed, have occurred, and
such transactions and events pertain to the entity.
(eg Sales and Purchases during the year have occurred and that the transactions actually took
place during the year, expenses that are recorded also occurred during the year………)
ii. Completeness------- all transactions and events that should have been recorded have been recorded,
and all related disclosures that should have been included in the financial statements have been
included.
(expenses have been recorded completely and all sales that occurred during the year have been
recorded completely recorded in the F/S )
iii. Accuracy------- amounts relating to recorded transaction and events have been recorded
appropriately.
(Sales, purchases and expenses have been recorded at the accurate amounts & Debtors and
creditors have been accurately recorded in the B/S)
iv. Cutoff------- transactions and events have been recorded in the correct accounting period.
(Sales and purchases have been recorded in the correct accounting period and expenses pertain to
the current year)
v. Classification ------- transactions and events have been recorded in the proper accounts
(Expenses have been classified in the correct G.L and there is no misclassification
Depreciation and Rent expense have been correctly classified in the correct G.L)
vi. Presentation------- transaction and events are appropriately, aggregated or disaggregated and
clearly described and related disclosures are as per the applicable financial reporting framework.

Summary Notes by SK
b. Assertion about account balances, and related disclosures, at the period end: (B/S Items)
i. Existence ------- assets, liabilities and equity interests exist
(Fixed assets and inventory exists in the company’s warehouse and debtors exist at the balance
sheet date.)
ii. Right and obligations ------- the entity holds or controls the rights to assets and liabilities are the
obligation of the entity
(Company has right to use cash, right to use fixed assets, the company has the right to receive
amount from debtors and trade payables and Loans are its obligation to pay)
iii. Completeness------- all assets, liabilities and equity interests that should have been recorded have
been recorded, and all related disclosures that should have been included in the financial
statements have been included.
(All Assets and liabilities have been completely recorded in the F/S)
iv. Accuracy, valuation and allocation ------- assets, liabilities, and equity interests have been included
in the financial statements at appropriate amounts and any resulting valuation or allocation
adjustment have been appropriately recorded, and related disclosures have been appropriately
measured and described
(Debtors and creditors are recorded at accurate closing amounts and valuation or allocation of
any provisions (other adjustments) are also accurately recorded at the b/s date.)
v. Classification------- assets, liabilities and equity interests have been recorded in the proper accounts
(All assets and liabilities have been classified accordingly i.e. between current and non-current
assets and between current and non-current liabilities)
vi. Presentation------- assets, liabilities and equity interests are appropriately aggregated or
disaggregated and clearly described, and related disclosures are as per the requirements of the
applicable financial reporting framework.

Summary Notes by SK
Exam Focused Points

Summary Notes by SK
Exam Focused Points

Summary Notes by SK
ISA 505 – ‘External Confirmation’

Summary Notes by SK
Expected Questions on External Confirmation

Q1. Briefly explain the process to dispatch debtor’s external confirmation and also give examples of
various other types of third party confirmations?
Q2. Explain the TWO methods of External confirmation requests as per ISA 505?
Q3. Under what circumstances the External Auditor may decide NOT to send/dispatch requests for
External confirmation?
Q4. Explain the course of action if management refuses to dispatch external confirmation and also discuss
the alternative procedures / Further Audit Procedures which the
Auditor will now perform under these circumstances?
Q5. Define what do you mean by Non-response & Exception with reference to ISA 505? Briefly discuss
the Reasons for exception?
Q6. Briefly explain the concept of Negative confirmation & under what situations/
circumstances should the Auditor dispatch such negative confirmations?
Q7. Briefly explain what do you mean by positive confirmation and also explain its various types?
Q8. Scenario Based questions on ISA 505 (MOST IMP.)

Summary Notes by SK
External Confirmation
Non – response: A failure of the confirming party to respond, or fully respond, to a positive conformation
request, or a confirmation request returned undelivered.
Sending follow up confirmation: (First Reminder and 2nd Reminder)
Auditor may send additional request when a reply is not received within reasonable time e.g. sending
follow up request if reply not received or resending after re-verification of addresses.
Exception A response that indicates a difference between information requested to be confirmed, or

contained in the entity’s records………….. and information provided by the confirming party. E.g.
----------------------------------------------------------------------------------------------------------
LINKING BTW ISA 505 AND ISA 500
ISA 500“Audit Evidence” states that the reliability of audit evidence is influenced by its source and by its
nature, and is dependent on the individual circumstances under which it is obtained. It lists the following
generalizations about the reliability of audit evidence:
(Rem from ISA 500….!) ____________________________
1. Audit evidence is more reliable when it is obtained from independent

sources outside the entity.
2. Audit evidence obtained directly by the auditor is more reliable than
audit evidence obtained indirectly or by inference.
3. Audit evidence is more reliable when it exists in documentary form.
4. Audit evidence provided by original documents is more reliable than
audit evidence provided by photocopies or facsimiles.
5. Audit evidence from client where internal controls are strong is more reliable
than obtained where controls are weak.
Accordingly, audit evidence in the form of original written responses to confirmation requests, received
directly by the auditor from third parties who are not related to the entity being audited, may assist in
reducing the risk of material misstatement for the related assertions (Existence, rights & obligations) to an
acceptably low level.
External confirmations are frequently used to confirm an account balance i.e A balance or an amount but
need not to be restricted to these items. For example, the auditor may request external confirmation to
verify the terms of agreements or transactions an entity has with third parties. (Customer / supplier
agreements)

Summary Notes by SK
Various TYPES of external confirmations are as follows: Plz learn these…!

 Bank confirmation.( Loan and bank OD details )
 Debtor confirmation.
 Stocks held by third parties at warehouse. ( ___________________________)
 Loan confirmation (also covered via Bank confirmation)
 Tax confirmation
 Lawyer confirmation
 Accounts payable confirmation. (Creditor Confirmation)
 Other confirmation (e.g. to confirm material terms and conditions of a customer
/supplier OR to confirm property documents held by lawyers / bank for safe custody or as
security.
EXAM FOCUS POINT
1. Methods to dispatch External confirmation and types of external confirmations are different.
2. Positive confirmation method has 2 further types.
Audit steps in the Confirmation process…….

Audit procedures relating to confirmation of receivables balances are summarised below:
1. Planning the confirmation exercise
2. Positive or negative confirmation – IMP
3. Sample selection and performing the confirmation exercise
4. Audit procedures following the receipt of replies (with positive confirmation)
5. Preparing a summary and reaching a conclusion
1. Planning the confirmation exercise (Will be discussed after Interim and Final Audit)
 Decide on the timing of the confirmation. Ideally, the confirmation of balances should take place
after the B/S date, and should be based on customers closing balance. However, to reduce the time
pressure at the final audit stage, the confirmation process is often based on balances at an interim date
(i.e. before the end of the B/S date).In this case, the auditor will need to review the changes in the
receivables balances between the confirmation date and the end of the reporting period i.e B/S Date
 Deciding on the number of customer balances to be confirmed. The confirmation
process is normally based on a sampling approach. There are often many customers and the time and
effort required to obtain a confirmation from all of them is not worth the benefit obtained. It’s a matter
of professional judgement.
 Deciding on the confirmation method to be used.
This will be a positive or negative confirmation request. (discussed below)
2. Positive or negative confirmation
Methods to dispatch External Confirmation (M. Imp !!!)
The auditor may use positive or negative external confirmation requests or a combination of both,
where possible during the course of the audit.
POSITIVE CONFIRMATION
A positive external confirmation request asks the respondent (debtor /creditor / bank) to reply to the
auditor in all cases i.e. whether he/she agrees or disagrees with the stated balance or not. Positive

Summary Notes by SK
confirmation requests provides more persuasive and more reliable audit evidence to the external
auditor.
Further 02 Types of + ve confirmation

1) With Balance
It’s the confirmation requests that mentions the balance (receivable or payable) in the confirmation
format to be dispatched.
Advantage
1. The party will reply quickly and immediately
Disadvantage
1. The reply will be inaccurate or incorrect.
2) Without Balance
Sometimes it is possible that the party may reply without verifying the balance mentioned on the confirmation,
the auditor may reduce this risk by using positive confirmation requests that do not state the amount / balance
on the confirmation request, but requests the respondent( debtor / creditor ) to fill in the amount / balance on
the confirmation format request.
Advantage
1. The reply will be accurate and correct.
Disadvantage
1. The party may not reply or may reply late
NEGATIVE CONFIRMATION
A negative external confirmation request asks the respondent to reply ONLY in the event of a
disagreement with the amount / balance provided in the confirmation request.
Accordingly, the use of such requests ordinarily provides LESS reliable audit evidence (less persuasive
audit evidence) than the use of positive confirmation requests, and the auditor considers performing other
substantive procedures via TESTS of DETAILS along with the use of such confirmation requests.
Negative confirmation requests may be used under the following CONDITIONS:

(Conditions must be met ______________________)
(a) The assessed risk of material misstatement is lower;
(b) A large number of small balance is involved;
(c) Auditor has no reason to believe that respondents will disregard these requests.
(d) A very low exception rate is expected.
Combination of BOTH POSITIVE AND NEGATIVE CONFIRMATION requests…

A combination of both positive and negative external confirmations may be used. For example, where
the total accounts receivable balance comprises a small number of large balances and a large number of
small balances, the auditor may decide that it is appropriate to confirm all or a sample of the large balance
with positive confirmation requests and a sample of small balances using negative confirmation requests

Summary Notes by SK
Example: (Refer lecture)
EXAM FOCUS POINT

1.The above concept is to be used in a scenario based question
3. Sample selection and performing the confirmation exercise …IMP

Sample criteria for dispatching Debtor confirmation
1. Highly risky customers.
2. New customers with larger balances.
3. Debtor with negative balances
4. Old outstanding balances.
5. Larger or material balances.
6. Select debtors via sampling technique.
7. Select debtors via selection technique.
8. Debtors with nil balances.
(The above can be asked as part of a scenario along with ISA 530)
After selecting debtors for circularisation, the letter to the customers should be prepared.
The confirmation requests are issued by the auditor, not by the client, and replies are sent directly to the
auditor. However, the request will need to contain management’s authorisation to the customer to
disclose the necessary information.
 PROCEDURE TO DISPATCH DEBTOR CONFIRMATION

(Covered in debtors topic ahead)
4. Audit procedures following the receipt of replies (with positive confirmation requests)
(Answer for Specimen question in the lecture)

On receipt of the replies from customers, the auditor should check that the letters are signed by a
responsible official of the audit client.
Confirmation replies to be classified as follows:
i. Balance agreed. The customer has replied and agrees with the balance in the client entity’s
accounting records (or has provided a balance that corresponds with the entity’s accounting
records – depending on whether type 1 or 2 of positive confirmation is used).

Summary Notes by SK
In this case NO further audit work is required because SAAE has been obtained.
ii. Balance not agreed (EXCEPTION) The customer has replied but does not agree with the balance
in the client entity’s accounting records. The auditor should ask the client to review the replies
and try to reconcile the balance in their records with the balance confirmed by the customer.
Audit Procedures to be performed in the case of an Exception …. (IMP)

In this case the balances disagree & the auditor will request the management to reconcile these
balances And, in this regard, the following procedures to be performed.
i. Discuss the exception with management and inquire the reasons thereof (E.g. whether there
is any possible dispute, timing difference or an internal control weakness.)
ii. In the case of dispute discuss the same with management to identify the need for a provision
or a write off.
iii. In the case of internal control weakness discuss the same with management & rectify
adjustments to be made in the receivable ledger.
iv. Any reconciling errors must be investigated & all errors must be corrected in the client's
accounting records.
v. Review correspondence in case the error is on the part of audit client's customer.
vi. All reconciliations must be reviewed by the external auditor.
vii. If the balances could not be reconciled, this may increase the R.O.M.M & may indicate the
risk of fraud as per ISA 240 and in this situation the auditor may discuss the matter with
TCWG and also consider the impact on the audit report.
iii. No reply received
In this case there is a non-response, therefore follow-up confirmation must be dispatched (1st
reminder & 2nd reminder letters to be dispatched).
Telephones calls can also be made with the consent of audit client and in the case of further non-
response alternative procedures will be performed.
iv. Procedures to be performed in the case Reply is received in the case of Negative Confirmation
In this case the reply indicates that balances do not agrees because in a negative confirmation reply
indicates on exception & now same procedures will be performed as in case no. 2.
5. Preparing a summary and reaching a conclusion

On completion of the confirmation exercise, the auditor should produce a summary of the
confirmation process (prepared in excel sheet called Debtors Confirmation control sheet). This should
clearly indicate the amounts for which the auditor has not been able to obtain supporting evidence.
These amounts may be indicative of misstatement in receivables balances plus the existence of
irrecoverable receivables.
-------------------------------------------------------------------------------------
Management request or refusal to dispatch 3rd Party confirmation ………
(V.IMP!)
When the auditor seeks to confirm certain balance / amount or other information directly from the 3 rd
party via external confirmation, and management requests the auditor not to do so, than the auditor
should consider whether there are valid grounds or justification for such a request and obtain audit
evidence to support the validity of management’s such requests.

Summary Notes by SK
If the auditor agrees to management’s request not to seek external confirmation, than the auditor should
apply/ perform alternative / Further audit procedures to obtain sufficient appropriate audit evidence
regarding that amount / balance.
If there is NO reasonable justification from the management, than auditor to discuss the matter with
Those Charged with Governance and should apply/ perform alternative audit procedures to obtain
sufficient appropriate audit evidence regarding that amount / balance.
If from the above, auditor CANNOT obtain S.A.A.E than there may be an impact on the audit opinion
via Qualified or Disclaimer of opinion. (Modification of Opinion)
EXAM FOCUS POINT

1. Separate Q/S can be asked for Alternative / Further Audit Procedures on debtors
2. Both theoretical and scenario-based question can be asked from the above concept

Summary Notes by SK
Summary Diagram for Managements Refusal to dispatch Confirmation

Summary Notes by SK
Exception…….
An exception is a response that shows a difference between the amount / balance requested to be
confirmed or contained in the entity’s records AND information provided by the confirming party.
Auditors will have to carry out further audit work in relation to receivables who:
 Disagree with the balance stated (positive OR negative confirmation) resulting in an exception.
Possible reasons due to which exceptions can occur are as follows:
REASONS FOR EXCEPTIONS
1. There may be a dispute between both the parties. The reasons for the dispute would have to be
identified, and provision to be made if the amount is not receivable.
2. Cut-off problems exist, because the audit client records the current year’s sale & debtors in the
following year or following year’s sales & debtors in the current year.
3. The customer may have sent the cash before the year-end, but it was not recorded by the audit client
as receipts were received after the year-end. ( cash in transit)
4. Internal control weakness
 Human Error (e.g. Punching Error in the accounting software)
 Mis-posting / Posting in the wrong customer account
5. The difference may be because of netting off the balances in the case if my customer is also my
supplier.
6. The difference might be because of a fraud being taken place. (Via Teeming and lading)
Explanation:
Teeming and lading, stealing monies and incorrectly posting other receipts so that particular customer
is seriously in debt is a fraud that can arise in this area. Teeming and lading involves an employee first
stealing that cash receipts from a receivable (receivable 1) and not recording the receipt against the
customer account. Then the employee receives more cash from another receivable (receivable 2) and
allocates it against receivable 1 in order to conceal the stolen funds. Similarly, he or she then allocates
monies from receivable 3 against amounts owed from receivable 2, and so on. By allocating the funds in
this way, there is only an apparent time lag on posting the receipt of cash, rather than an obvious
uncollected debt. (If auditors suspect teeming and lading has occurred, detailed testing will be required
on cash receipts cycle, particularly on prompt posting of cash receipts while performing tests of controls)
Whether to use External confirmation or NOT to obtain Audit Evidence

Auditor considers the following factors in deciding whether or not to use external confirmation as part of
substantive procedures:
1. Risk of Material Misstatement is low.
2. Materiality of balance/ amount ( its immaterial)
3. Response of confirming parties in the past (i.e. ability or willingness to respond.
4. Concerns over the objectivity of the intended confirming party ( responses not reliable)
5. Whether other substantive procedures provide sufficient appropriate audit evidence (e.g. verify
subsequent receipt from debtors rather than dispatching confirmation).
6. Management’s unwillingness to dispatch external confirmation and the request for the same is
reasonable.

Summary Notes by SK
Add-ons for External Confirmation ….IMP
Decisions to be made when sending debtor confirmation
1. Should the Auditor dispatch positive or negative confirmation.

2. In the case of positive confirmation, should we dispatch with balance or without balance.
3. Which customers to dispatch confirmation.
4. Should we dispatch confirmation at the interim stage or at the final stage.
Difficulties to be faced when s ending Debtor confirmation
1. The audit client is not happy to dispatch debtor confirmation.

2. Lot of customers do not reply to debtor confirmation
3. In case the reply is received there might be an exception.
4. In case of exception, reconciliation is difficult and time-consuming activity.

Summary Notes by SK
CA CAF 8 Practice Questions on

External Confirmation
S. No. Attempt Question Marks
1 March 2016 Q.1 (i) 3 marks
2 Sept 2015 Q.1 (h) 4 marks
3 March 2015 Q.5 12 marks
4 Sept 2014 Q.10 (f) 2 marks
6 Sept 2013 Q.3 10 marks
9 Sept 2016 Q.1 (b) 5 marks
11 Sept 2017 No question
13 Sept 2018 Q.8 (c) 5 marks
14 March 2019 Q.1 (a) 5 marks
17
18
19
20
21
22
23
24
25

Summary Notes by SK
Specimen External Confirmation Format
(TO BE TYPED ON COMPANY’S LETTERHEAD – PSO / Siemens)
Date:
To:
ABC Company
Dear Sir
CLIENT NAME: ____________________________________________ (the company)
FOR THE YEAR ENDED: ____________________________________
Our auditors, xxxx Chartered Accountants, are conducting an audit of our financial statements. In connection therewith, they
desire to confirm the balance due to/from us on your account as at June 30, 2016
Please state in the space below whether or not this is in agreement with your records as at the above date. Please furnish the
information you may have that will assist our auditors in reconciling the differences, if any. After signing, stamping and dating
your reply, please mail or fax the same directly to our auditors.
A stamped, addressed envelope is enclosed for your convenience. (Pre-Addressed

Envelope
Very truly yours
Called Client
attached)
Siemens / PSO (CFO)
Mandate /
Disclosure Authorized authorization
For and on behalf of PSO
To:
ABC . Date:
Chartered Accountants Ref:
Dear Sirs
CLIENT NAME: ____________________________________________ (the company)

FOR THE YEAR ENDED: June 30,20x0
(Amounts in RS)
PARTICULARS AS PER RECORDS OF AS PER OUR

THE COMPANY RECORDS DIFFERENCE
Balance Payable to the company Receivable balance for the co. 50,000
(PSO / siemens) 400,000 (Called Exception)
350,000
Receivable from the company Payable balance for the co.
(PSO / siemens)
Yours sincerely
Customer / Debtor can attach
ABC (CFO) statement in case of any
(Name & Designation) (Company Name and Seal)
difference…..
Details of discrepancies, if any:

____________________________________________________________________________________________________

Summary Notes by SK

Summary Notes by SK
Exam Focused Point
Confirmations being dispatched either BEFORE or AFTER the balance sheet date:
1. Confirmations can be dispatched either before or after the balance sheet date, ideally external
confirmations should be dispatched AFTER the balance sheet date.
a. In case confirmations are dispatched BEFORE the balance sheet date.
Following procedures to be performed by the External Auditor
i. Verify the interim balance from General ledger, trial balance & debtors Control a/c.
ii. Verify the movement of debtor’s balance from interim date to final date and also verify from
subsidiary ledger.
iii. In case of any significant movement, verify supporting documents (Sales invoice, Gate pass,
Delivery Notes, Sales orders etc.)
iv. Compare closing balance from prior year balance & inquire from management in case of any
significant / material variance
v. Obtain a roll forward schedule from interim date to final date & inquire of any unusual
amount /adjustment from the management.
Reliability of External confirmation Process

1. Confirmations must be dispatched by the external auditor himself.
2. External confirmation control sheet must be prepared by the external auditor. (to be filed in the current
years working paper file)
3. The auditor must also make sure that confirmations should be received directly from the third parties
to whom confirmation are dispatched and not from the audit client and any other parties.
4. Confirmations should not be dispatched by the audit client himself nor received by the audit client
himself, as this will create doubt on the reliability of the external confirmation process.
5. Confirmation replies received from the third parties should be in sealed envelopes otherwise there will
be a doubt on the reliability of external confirmation process.

Summary Notes by SK
Exam Focused Points

Summary Notes by SK
Exam Focused Points

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Debtors / Receivables’

Summary Notes by SK
Expected Questions on Debtors / Receivables

1. Explain the relevant financial statement assertions for Receivables/ Debtors.
2. Explain /Describe the audit procedures/ Substantive procedures / Audit tests / Audit work / Audit
program to verify debtors as on Dec 31, 2017.
3. Explain the procedure for dispatching debtor confirmation letter OR steps the Auditor should perform
in undertaking receivables circularization
4. Explain the possible reasons for disagreement (exception) for the balance confirmed by the customers
as on balance sheet date.
5. Explain the Audit procedures / Substantive procedures that the auditor will perform to verify Sales /
Turnover for the year ended Dec 31, 2017.
6. Describe the audit work that the auditor will perform to verify provision for doubtful debts/ bad debts
expense for the year.
7. List the sample criteria for dispatching debtor confirmation as on balance sheet date.
8. Scenario based question on Debtors plus external confirmation.( V.IMP)

Summary Notes by SK
Procedures to dispatch Debtor confirmation / Steps to undertake Receivables
circularization _
1. Obtain consent from the audit client for undertaking / dispatching debtor’s confirmation.
2. Obtain list of debtors from the audit client and obtain business addresses for such debtors from the
audit client.
3. Cast the total of debtors schedule provided by the audit client and agree it to debtors control account
ledger.
4. Select debtors to dispatch confirmation based on the sample criteria, level of materiality and
professional judgment of the external auditor.
5. Prepare debtors confirmation on the client’s letterhead.
6. Obtain client’s approval (normally director finance) on all the confirmation letters (Client Mandate /
signature).
7. Enclose a customer statement with the letter and pre-paid envelope addressed to the auditors so that
all replies are received by the auditors and not the audit client.
8. Auditor to dispatch the confirmation letters or request the client to do the same.
9. In case of non-response follow up confirmations to be dispatched and in case of further non-response,
alternative audit procedures to follow.
10. Prepare debtor confirmation control sheet to keep track / record of all confirmations send and received
from the debtors.
(Summary of confirmations send to debtors)
Substantive Procedures for Trade receivables / Debtors

Existence / Rights & Obligations / Completeness / Valuation
NORMAL PROCEDURES
1. Obtain or prepare a lead schedule of debtors / Trade Receivables and verify its arithmetical accuracy
and trace the total from ac/s receivable control account, G.L and trial balance.
2. Dispatch debtor confirmation on client’s letter head with its approval
(with clients approval) …….Refer confirmation Format

Summary Notes by SK
3. Send reminder letters (___________________________________) in case of non-response from
customers.
4. Call the customers after client’s permission in case of further non-response.
5. In case of any difference in the balance confirmed, inquire from management reasons for such
difference (Refer reasons for exception)
ALTERNATIVE PROCEDURES / _________________________.
6. Verify subsequent receipts (____________________________________) from cashbook, bank

statement and debtors control account.
7. Verify the completeness of debtors by performing sales cutoff test at the B/S Date (discussed later)
8. Verify supporting documents (G.D.N, P.O, sales Invoice, sales order, debtor statement etc) for
material debtor balances on sample basis.
9. Enquire from management, in case of any negative / credit balances that whether these should be
reclassified as payables.
10. Verify credit notes issued after the B/S date to ensure treatment in proper accounting period.
11. Review B.O.D minutes to assess whether there are any material disputed receivables.
12. Inspect financial statements to VERIFY that accounts receivable have been disclosed in accordance
with IAS / relevant framework and comply with statutory requirements.
(Presentation and disclosure)
EXAM FOCUS POINT…IMP
1. Analytical procedures are part of alternative / further audit procedures.

2.Substantive procedures include both Analytical procedures and tests of details
(TODs)
3.Separate question can be asked on alternative / further audit procedures for debtors
4.Scenario based question shall include both substantive procedures for debtors plus concept of
external confirmation (ISA 505)
5. When drafting S.P for debtors, procedures for provision for doubtful debts to be included.
6. Separate question can be asked on steps to be undertaken to dispatch debtor’s confirmation.

Summary Notes by SK
1. Analytical Procedures on debtors
(a) Compare closing balance from Industry Norms (similar industry)

(b) Compare closing balance last year’s debtor balance
(c) Calculate debtor’s turnover and compare from last year and inquire from client in case of
abnormal / significant variance.
(Completeness, accuracy, valuation & allocation)
2. Substantive Procedures to verify Provision for doubtful debts & Bad debts
(Debtors Written off)
F/S Assertion: __________________________
1. Obtain aged trial balance of accounts receivable from the audit client and review to identify any
slow moving or old receivable balance
(Debtors Aging Analysis)
2. Verify arithmetical accuracy of the debtors aging schedule.
3. Re-calculate provision for doubtful debts computed by the client.
4. For any slow-moving balances, review customer correspondence to assess whether there are any
invoices in dispute and that provision is required for the same OR a write down is required.
5. For past due accounts / slow moving debtors, verify subsequent collections, if any, after the B/S
date
6. Re-perform calculation of provision as per the auditors own methodology to assess if the
allowance is adequate.
7. Review debtor confirmation differences for any indication of amounts in dispute or other
indications as to possible uncollectible accounts.( that are not recoverable)
8. Verify / inspect correspondence (Reminder letters/ follow up letters, Emails etc.) with long
outstanding customers to assess the likelihood of payments.
9. Verify B.O.D minutes for the approval of bad debts.
10. Dispatch lawyer confirmation to assess the likelihood of payment in case of disputes with the
customers.
11. Verify post yearend sales returns / credit notes to consider any additional provision for doubtful
debts or allowance.
12. Review B.O.D minutes to review concern in relation to payment by customers or whether there
are any material disputed receivables.
13. Review correspondence with the liquidators and management for the recovery of amounts due
from the customer in the case of winding up.

Summary Notes by SK
3. Carry out CUTOFF tests on SALES to verify the COMPLETENESS of Debtors as of B/S Date:
(a) Select a sample of sales invoices from sales journal / sales day book of last business day before the
year end and select a sample of sales invoices of the first business day after the year-end.
(b) Select a sample of goods dispatch notes (GDNs) of last business day before the year end and select
a sample goods dispatch notes (GDNs) of the first business day after the year-end.
(c) All sales invoices for which goods dispatch notes are dated at or before year end and all goods
dispatch notes which are dated at or before year end, irrespective sales invoices are made after
year end will be recorded in the G.L at the B.S date i.e Debtors and sales will be recorded in the
respective general ledger AT THE B/S DATE ………
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Substantive procedures for Debtors - Assertion wise

Valuation
 Review after date cash receipts/ subsequent cash receipts and trace them back to closing balance.
 Review customer correspondence for any slow-moving balance to determine whether there is any
dispute or otherwise.
 Inspect aged trial balance / aged receivable analysis to identify any slow moving balances and
determine whether any allowance or write off is required or not.
Completeness
 Compare current years debtors listing from prior year and discuss with management any missing
receivables or receivables that normally appear every year.
 Agree the total of debtors control account to the party wise receivables listing & than to the trial
balance.
 Select a sample of GDN's at or before year end and agree these to debtors control account at the year
end.
Rights & Obligations
 For a sample of debtors, agree the amount recorded to the original name of the customer on sales
agreement / contract.
 Review loan agreements/ bank confirmation for any evidence that receivables have been assigned as
security against bank loan.

Summary Notes by SK
ACCA F8 Practice Questions (Debtors)

1 Q.18 Jasmine Co ACCA Sept / Dec 2018 20 marks
2 Q.18 Dashing Co ACCA Sept / Dec 2017 20 marks
3 Q. 4 Rose Club ACCA Dec 2012 20 marks
ACCA F8 Sept / Dec 2018 (20 marks)

Question 18
Jasmine Co manufactures motor vehicle components and its year end was 30 June 20X8. You are an
audit supervisor of Peppermint & Co and the final audit is due to commence shortly. Total assets are $
43·2m and profit before tax is $ 7·2m. The following matters have been brought to your attention:
Trade receivables
Jasmine Co’s trade receivables ledger is comprised of a large number of customers. In previous years, the
audit team has undertaken a positive trade receivables circularisation to confirm year-end balances.
However, the customer response rate has historically been low and so alternative audit procedures have
been undertaken. A decision has been made that for the current year audit a circularisation will not be
performed. The year-end trade receivables balance is $ 3·9m (20X7: $ 2·8m) and the allowance for trade
receivables is $ 410,000 (20X7: $ 300,000).
Bank balances
The bank and cash figure included in Jasmine Co’s draft financial statements is comprised of a number
of bank account balances: an overdraft of $ 5·1m which is the company’s main current account and $0·2m
relating to several savings accounts. The finance director has informed the audit manager that all accounts
have been reconciled as at the year end
The overdraft of $ 5·1m has increased significantly since the prior year (20X7: $ 1·2m). The directors have
informed you that the overdraft facility, which the company requires in order to operate on a daily basis,
is due for renewal in October 20X8 and that they are confident it will be renewed.
Required:
a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Jasmine Co’s trade receivables.
(5 marks)
b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Jasmine Co’s bank balances.
(5 marks)

Summary Notes by SK
Answer a:
Substantive procedures for trade receivables
 Obtain the aged receivables listing and agree to the balance on the sales ledger control account and
trial balance.
 Review the aged trade receivables ledger to identify any slow moving or old balances, discuss the
status of these balances with the credit controller to assess whether they are likely to pay.
 Select a representative sample of trade receivables and review for any after-date cash receipts. Ensure
that a sample of slow moving/old receivable balances is also selected.
 Review customer correspondence to identify any balances which are in dispute or unlikely to be paid
and discuss with management.
 Review board minutes to identify whether there are any significant concerns in relation to payments
by customers.
 Calculate the average receivables collection period and compare this to the prior year and investigate
any significant differences.
 Inspect post year-end sales returns/credit notes and consider whether an additional allowance against
receivables is required.
 Obtain a breakdown of the allowance for trade receivables, recalculate and compare to any potentially
irrecoverable balances to assess if the allowance is adequate.
 Select a sample of goods despatched notes (GDN) immediately before and after the year end and
follow through to the receivables ledger to ensure they are recorded in the correct accounting period.
 Select a sample of year-end receivables balances and agree back to valid supporting documentation of
sales invoices, GDNs and sales orders to ensure existence.
-------------------------------------------------------------------------------------
Question 18
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 recognise 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 circularisation 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:
b) Describe substantive procedures, other than a receivables circularisation, the auditor should
perform to verify EACH of the following assertions in relation to Dashing Co’s receivables:
i. Accuracy, valuation and allocation;

ii. Completeness; and
iii. Rights and obligations.

Summary Notes by SK
c) Describe substantive procedures the auditor should perform to confirm the redundancy
provision at the year end. (5 marks)
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
Required:
d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain
unresolved (5 marks)
Answer 18:
b) Receivables substantive procedures

Accuracy, valuation and allocation
1. Review the after date cash receipts and follow through to pre year-end receivable balances.
2. Inspect the aged receivables report to identify any slow moving balances, discuss these with the
credit control manager to assess whether an allowance or write down is necessary.
3. For any slow moving/aged balances review customer correspondence to assess whether there are
any invoices in dispute.
4. Review board minutes of Dashing Co to assess whether there are any material disputed
receivables.
Completeness
1. Select a sample of goods despatched notes from before the year end, agree to sales invoices and
to inclusion in the sales ledger and year-end receivables ledger.
2. Agree the total of individual sales ledger accounts to the aged receivables listing and to the trial
balance.
3. Obtain the prior year aged receivables listing and for significant balances compare to the current
year receivables listing for inclusion and amount due. Discuss with management any missing
receivables or significantly lower balances.
4. Review the sales ledger for any credit balances and discuss with management whether these
should be reclassified as payables.
Rights and obligations

1. Review bank confirmations and loan agreements for any evidence that receivables have been
assigned as security for amounts owed by Dashing Co.
2. Review board minutes for evidence that legal title to receivables has been sold onto a third party
such as a factor.
3. For a sample of receivables, agree the balance recorded on the sales ledger to the original name of
the customer on a sales order or a contract.
Tutorial note: Marks will be awarded for any other relevant receivables tests.
-------------------------------------------------------------------------------------

Summary Notes by SK
Question 4
b) Identify and explain each of the FIVE fundamental principles contained within ACCA's Code of
Ethics and Conduct (5 marks)
c) Rose Leisure Club Ltd (Rose) 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
three matters have been brought to your attention.
i. Trade payables and accruals

Rose's finance director has notified you that an error occurred in the closing of the purchase ledger at
the year end. Rather than it closing on 1 November, it accidentally closed one week earlier on 25
October. All purchase invoices received between 25 October and the year end have been posted to the
2013 year-end purchase ledger. (6 marks)
ii. Receivables
Rose'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 Rose and hence
the receivables balance is now material. The audit senior has undertaken a receivables circularisation
for the balances at the year end; however, there are a number who have not responded and a number
of responses with differences. (5 marks)
iii. Reorganisation
The company recently announced its plans to reorganise 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. Rose is proposing to make a reorganisation provision in the financial statements.
(4 marks)
Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate audit
evidence in relation to the above three matters.
Note: The mark allocation is shown against each of the three matters above. (20 marks)
Answer b (ii)
Substantive procedures
ii. Receivables
 For non-responses, with the client’s permission, the team should arrange to send a follow up
circularisation.
 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 circularisation
request.
 If there are still non-responses, then the senior should undertake alternative procedures to confirm
receivables.
 For responses with differences, the senior should identify any disputed amounts, and identify whether
these relate to timing differences or whether there are possible errors in the records of Rose.

Summary Notes by SK
 Any differences due to timing, such as cash in transit, should be agreed to post year-end cash receipts
in the cash book.
 The receivables ledger should be reviewed to identify any possible mispostings as this could be a
reason for a response with a difference.
 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.
-------------------------------------------------------------------------------------

Summary Notes by SK
Test Question-Debtors
Question 1
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 recognise 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 circularisation
for Dashing Co. (4 marks)
It is 1 July 20X5. You are an audit supervisor with Velo & Co and you are working on the final audit of
Encore Co for the year ended 30 April 20X5. Encore Co is a waste management company, supplying its
services to a variety of governmental and business organisations. Encore Co's draft profit before tax is
$5.3m (20X4: $4.6m) and total assets are $40.1m (20X4: $33.9m). You have been provided with the
following information regarding the draft financial statements.
Trade receivables
Encore Co's credit controller left the company in January 20X5 and has only recently been replaced. The
trade receivables collection period increased from 49 days as at 31 December 20X4 to 66 days as at 30
April 20X5. Year-end trade receivables amounted to $9.1m (20X4: $7.1m) and an allowance for
irrecoverable receivables of $182,000 (20X4: $142,000) has been made.
audit evidence in relation to the VALUATION of Encore Co's trade receivables.
(5 marks)
(9 marks)

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘
‘Cash in Hand & Cash at Bank’

Summary Notes by SK
Cash and Bank Balance- Substantive Procedures

Expected Questions on Cash in hand & Cash at Bank
1. Explain the Financial Statement Assertions for Cash and Bank & explain the objective for each.
2. Explain the Audit Test/Substantive Procedures that an external auditor will perform to verify cash at
bank at the Balance Sheet Date.
3. Explain the Audit Test/Substantive Procedures that an External Auditor will perform to verify cash
in hand at the Balance Sheet Date.
4. List the contents of Bank Confirmation / bank report.
5. What are the matters that can be requested via bank Report / bank letter by the External Auditor?
6. Explain the procedures to obtain Bank Letter/Report from the clients Bank?
7. Bank confirmation provides more persuasive evidence than the Bank Statement. Kindly comment on
the above statement.
8. Explain the substantive procedures to be performed on Bank reconciliation statement?
9. Explain the substantive procedures to be performed on Bank Confirmation?
Financial Statement Assertions for Cash and Bank
Existence
Rights & Obligation
Accuracy, Valuation /Allocation
Completeness
Classification
Presentation
(Discussed separately in a handout after ALL Substantive Procedures are covered)
Principle Risks of Misstatement

Existence
There is a risk that entity is recording cash and bank balance that does not exist i.e. physical cash does not
exist and cash at bank does not exist.
Rights & Obligations

The company is recording cash that is not the right of the company to use it i.e. it might be stolen cash
and in the case of bank Over Draft there might be no obligation to pay.
Accuracy, valuation and allocation

In the case of foreign currency there is a risk that company has not valued the cash and bank balance at
appropriate carrying amounts and therefore not recorded accurately in the B/S.
Completeness
There is a risk that cash and bank balance is not recorded completely in the B/S.

Summary Notes by SK
Classification
There is a risk that cash and bank balances have not been properly classified in the correct head of accounts
in the balance sheet.
Presentation
There is a risk that cash and bank balances are not presented and disclosed as per the relevant financial
reporting framework / accounting standards.
1. Procedure for dispatching and obtaining bank report / bank confirmation:

 The bank requires explicit written authority from the client to disclose the information requested.
(signature is required by the Audit client)
 The auditor’s request must refer to the client’s letter of authority and the date of this.
(Bank confirmation may be countersigned by the client or to be accompanied by a specific letter of
authority.)
 The request is sent by the external auditor and should reach the branch manager either before or
after the year end (practically its send after the B/S date)
 The bank will complete the bank confirmation letter (fill the contents of the confirmation) and
send it back directly to the external auditor.
 External Auditor will than perform further tests on the reply of those bank confirmations.
2. Audit procedures to be carried out on a Bank report / Bank confirmation:
1. Dispatch bank confirmation with the client’s approval on its letter head.
2. Agree the closing balances of various accounts as per the bank confirmation to the client’s bank
reconciliations.
3. Agree the interest charges in the bank confirmation to the interest amount charged and recorded
in the ledger and financial statements
4. Agree any outstanding loan amounts / Liabilities (Bank over Draft / Short / Long Term loan) to
the liabilities figure in the accounts and verify that all required disclosures have been made as per
the relevant financial reporting framework.
5. Agree all security against any bank loans (charges on assets or other security on loan) as per the
bank letter to the disclosure in the financial statements.
6. Agree the interest accrued (Profit on deposit accounts) to the interest amount recorded in the
financial statements (other Income) and general ledger.
7. Review any unusual items in the reply of bank confirmation.
3. Substantive procedures / Audit Test to verify company’s bank balances:

(This will include both Audit procedures for Bank Confirmation and Bank reconciliation)
4. Substantive procedures / Audit Test to verify bank Reconciliation:
1. Obtain list of bank accounts maintained by the audit client.

2. Obtain bank reconciliations for various accounts maintained by the client.
3. Re-perform arithmetic (casting) of bank reconciliations obtained from client.
4. Agree / Trace the balance as per the bank with bank statement and bank confirmation in the bank
reconciliation.
5. Trace outstanding cheques (un-presented cheques) to after-date bank statements.

Summary Notes by SK
6. Investigate long outstanding items in the bank reconciliation from the client
OR
Examine Old unpresented cheques to assess whether they need to be written off by the Audit
client.
7. Trace un-cleared cheques to after-date bank statements.
8. Obtain explanations for any large or unusual items not cleared at the time of the audit.
OR Review the cash book and Bank statement for any unusual items or large transfers around the
BS date for evidence of window dressing.
9. Confirm that un-cleared banking’s have been paid in prior to the year-end date by examination of
paying-in slips.
10. Review any other reconciling items on the year-end Bank reconciliations and verify from
supporting documents.
11. Agree the bank reconciliation’s closing balance with the closing bal. of cash book (bank bal.)

Summary Notes by SK
Contents of Bank Confirmation ….. (IMP! Please learn…!)

1. Closing balances of various accounts (current / saving) maintained at the year end.
2. Accounts opened during the year by the client
3. Accounts closed during the year by the client
4. Bank overdraft facility given to the client during the year
5. Short-term running finance facilities given to the client during the year
6. Details of any liens (charges) on the assets of the audit client.
7. Loans (short-term and long-term) given to the client during the year
8. Security given to the bank against these facilities e.g. (Mortgage of building documents, pledge of
company inventory and hypothecation of company receivables) (any other right or encumbrance /
charge against bank loan)
9. Interest rate/markup charged on various loans and overdraft facilities during the year
10. Any other loan covenants (conditions) on the facilities given by the bank.
11. Confirmation of securities/ shares / certificates in safe custody of the bank.
12. Details of other bank accounts that are not listed in the bank account list provided by the audit client.
Extra Points:
 Consider whether there is a legal right of set-off of overdrafts against positive bank balance.
 Determine whether the bank accounts are subject to any restrictions by enquiries with management /
TCWG.
Substantive Procedures for Cash in hand
1. Inspect physical cash at the year-end (Petty cash maintained)
a) List all petty cash funds maintained and names of their custodians.
b) Counts cash and cash equivalent items at the B/S date (refer Physical Cash Count Sheet).
c) Obtain signature of cashier on return of cash after the count.
d) The total cash balance counted must be mentioned on the cash count sheet.
e) All cash and cash equivalents also to be counted and mentioned on the cash count sheet.
f) The original cash count sheet is retained by the auditor and copy is given to the audit client.
g) Trace counted cash and cash equivalents from closing balance of petty cash book, general ledger
and draft financial statements to verify completeness of the closing cash and cash equivalent
balance.
(Existence, right and completeness)
2. Verify that foreign currency is converted into Pak rupees at the rate prevailing at the year-end.
(Accuracy, Valuation and Allocation)
3. Analytical procedures
(a) Compare closing cash & bank balance from last year balance and ascertain reasons for any significant
variances from the management.
(b) Compare closing cash balance with the cash budget and ascertain reasons for significant and unusual
variations from the management.

Summary Notes by SK
(Completeness)
Presentation (procedures for both Cash at Bank and Cash in Hand)

1. Review F/S to ensure that disclosures for cash at bank balances are complete and accurate and in
accordance with accounting standards.
2. Verify the cash balances as counted are reflected in the F/S by inspection of financial statements.
Further Points on COMPLETENESS of cash at Bank
Care must be taken to ensure that there is no window dressing, by auditing cut-off carefully. Window
dressing in this context is an attempt to overstate the liquidity of the company by:
a) Keeping the cash book open to take account for Cash actually received after year end, thus increasing
the balance and reducing receivables.
b) Recording cheques paid in the period under review which are not actually given to suppliers until after
the year end, thus decreasing the balance at bank and liabilities.
With the possibility of (a) above in mind, where cheques have not been cleared by the bank until the new
period, the auditors should verify the paying-in slip to ensure that the amounts were actually paid into
the bank on or before the B/S date.
As regards (b) above, where there appears to be a particularly large number of outstanding cheques at
the year end, the auditors should check whether these were cleared within a reasonable time in the new
period. If not, this may indicate that dispatch occurred after the year end.

Summary Notes by SK
ACCA F8 Practice Questions on Cash in hand & Cash at Bank
CA CAF 8 Practice Questions on Cash in hand & Cash at Bank

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Fixed Assets’
Tangible & Intangible Assets

Summary Notes by SK
Tangible FIXED ASSETS – Substantive Procedures

Expected Questions on Fixed Assets
1. Describe the substantive procedures to verify Fixed Assets as of Balance Sheet date.
2. List and explain the F/S assertions for fixed assets.
3. Explain the principle risk of misstatement for fixed assets.
(either valued at cost or at revaluation model)
4. Describe the audit tests to verify Additions & Deletions
(disposals) made during the year.
5. Describe / List the substantive procedures to verify depreciation expense for the year.
6. Describe/ List the substantive procedures to verify revaluation of fixed Assets during the year.
7. Explain the substantive procedures to verify capital expenditure made / subsequent expenditure
incurred during the year.
8. Describe the substantive procedures / audit test to verify research & development expenditure
incurred during the year.
9. Critically appraise or evaluate the audit program for fixed assets / tangible assets.
EXAM FOCUS POINT
(Procedures for fixed assets can be asked Assertion wise)

Summary Notes by SK

Summary Notes by SK
Fixed Asset Lead Schedule/Lead Schedule/Schedule of Non-Current Assets
Opening Acc. Closing

Opening Cost Closing Acc.
Asset Closing Cost as on Depreciation Charge for WDV/Carrying
as on Jan 1, Additions/Deletions Revaluation Surplus (if any) Depreciation as
Description Dec 31, 2019 as on Jan 1, the year Value as on Dec 31,
2019 on Dec 31, 2019
2019 2019
Vehicles XXX XXX XXX XXX XXX XXX XXX XXX
Plant & Machinery
Furniture’s & Fixtures
Equipment

Summary Notes by SK
Substantive Procedures for Fixed Assets (Tangible)

Relevant F.S Assertions: Existence / Rights & Obligations / Completeness / Accuracy,
valuation & allocation / Classification / Presentation
Principal risks of misstatement ………. Drives from F/S Assertions
The principal risks of tangible non-current asset balances are as follows:
a) Completeness assertion. There is a risk that assets owned by the reporting entity have not been
included in the financial statements.
b) Existence assertion. There is a risk that assets reported in the financial statements do not actually
exist (for example, they may have been sold or scrapped).
c) Accuracy, valuation and allocation assertion. There is a risk that the assets have been incorrectly
valued (which could be due to incorrect recording, inappropriate valuations, or incorrect depreciation
calculations).
d) Rights and (obligations) assertion. There is a risk that the reporting entity does not actually own the
assets that are included in the financial statements.
e) Presentation assertion. There is a risk that assets have not been correctly presented in the F/S and
disclosures are not in accordance with the relevant financial reporting framework.
f) Classification assertion. There is a risk that assets have been classified in the wrong head of accounts
in the balance sheet.

Summary Notes by SK
Audit Procedures – Assertion Wise

1. Verify Completeness
(a) Obtain or prepare a lead schedule of fixed assets and accumulated depreciation by major asset
Classification showing balances at beginning and end of period, additions, disposal,
depreciation on assets disposed of, and other adjustments.
(b) Trace last year’s balances with last year’s audited working papers.
(c) Verify arithmetical accuracy of the Fixed asset schedule
(d) Trace totals of the fixed asset schedule to the general ledger control account (FA Control Ac),
TB and balance sheet
2. Verify Existence
Select a sample of assets from the non-current asset register and perform physical verification. During
the physical inspection, also note the physical condition of the asset.
This physical verification can be done from Non-current register to floor and floor to Non-current
asset register
3. Verify Rights
(a) Inspect title/ Sales deeds or other support documents for following :
Land and buildings: Verify legal title to the assets by inspecting appropriate documents (such as legal
documents of ownership, or lease agreements).
Vehicles: Examine vehicle registration documents or similar documentation giving evidence of title.
(Must be in the name of the company)
Other assets: Examine invoices or other documents transferring title.
Review legal documents, bank documents and other documents (e.g. Bank Confirmation) for
evidence of any loans that are secured by charge on assets
4. Verify Accuracy, valuation and Allocation of Fixed Assets
(a) Verify that the cost of fixed assets include: (IAS 16)
- Purchase price, including import duties and relevant purchase taxes
(b) Verify proper classification btw repair and capital expenditure.
(c) Cost to exclude any refundable taxes (Sales Tax paid on asset in the case of import)
(d) Verify fixed assets for any impairment testing - IAS 36
At COST
 Land and buildings: Confirm the figures for cost with the purchase contract for the asset and the
invoices for associated costs (such as professional fees). Verify proper allocation between land,
buildings and equipment.
 Equipment and vehicles: Verify purchase invoices for equipments and vehicles.

Summary Notes by SK
At REVALUED Amount
 Verify amounts in the financial statements with the valuer’s report.

 If assets are revalued, ensure that the entire class of assets to which that asset
belongs is revalued
 Consider the reasonableness of the valuation / Assumptions used for valuation of fixed assets
 Verify valuations are regularly updated as per IAS 16
Evaluate the competence, capability & objectivity of the expert used for valuation.
Depreciation of assets (P&L Assertions will apply here)
i. Verify that depreciable amount of the asset is allocated on a systematic basis to the accounting
period.
ii. Ensure that the depreciation method is applied consistently from period to period
iii. Determine that following factors have been considered in estimating adequacy of depreciation
charge:
 Estimated useful life of asset
 Expected physical wear and tear
 Obsolescence
iv. Re compute depreciation charge for the year
(PLEASE NOTE: If separate question is asked on Depreciation of fixed assets than following answer
to be given)

Summary Notes by SK
Substantive procedures to verify Depreciation expense
(any method)
1. Review the reasonableness of the depreciation rates / useful life applied to the asset. and compare
rates applied and useful life to industry norms /averages.
2. Perform analytical procedures on the overall depreciation.
3. Review the depreciation rates for reasonableness as per the nature of assets and estimated useful life
4. Determine that following factors have been considered in estimating useful life of asset:
 Expected physical wear and tear
 Obsolescence
 Legal or other limits on the use of assets
5. Review the capital expenditure budgets made by management for the next future years to assess any
plans to replace any asset as this would indicate the useful life of the asset.
6. Review profits and losses on disposal of assets sold during the year, to assess the reasonableness of
the depreciation rate and useful life of the asset.
7. Select a sample of assets and recalculate the depreciation charge for the year to ensure that
deprecation charge is accurate and correctly recorded in the accounting period.
8. Perform reasonableness test on the depreciation charged on the asset and discuss with management
in case of any significant variance.
9. Review the disclosure of the depreciation charged and policies in the financial statements to ensure
compliance with IAS 16.
10. Ensure/ verify that fully depreciated assets are not subject to depreciation again.

Summary Notes by SK
Verification for ADDITIONS and DELETIONS / disposals during the year.
ADDITIONS …………..IMP
1. Obtain a breakdown of additions and total the list and agree the amount from the non-current asset
register to confirm completeness of fixed assets.
2. Verify sample of additions of fixed assets from the supporting documents eg Supplier Invoice to
confirm the valuation.
3. Inspect board of directors (B.O.D) minutes for authorization of purchases of fixed assets
4. Trace additions in fixed assets during the year to fixed assets / non-current register.
5. Review additions during the year to ensure that they pertain to capital expenditure and not revenue
expenditure / ( or Repair Maintenance expenses)
6. Confirm right by verifying ownership documents ( eg Title deeds and Sale/purchase deeds)
7. Recalculate the depreciation charge for a sample of additions to confirm the accuracy of calculations
as per the company policy and in accordance with IAS 16.
8. For sample of fixed assets purchased during the year, verify their existence by physical inspection.
9. Review disclosures of the additions in the F/S and ensure compliance with IAS 16.
DISPOSALS………..IMP
 Obtain a breakdown of disposals and total the list and agree that all assets are removed
from the non-current asset register to confirm completeness and existence of fixed
assets.
 For a sample of disposals trace / verify sale proceeds of sales to cash book, bank
statement and sales invoice.
 Re-calculate gain or loss on sale of fixed assets and trace to income statement (P&L
Accuracy) and G.L and Trial balance.
 Verify Non-current asset register to ensure that assets disposed of have been removed
from the same.
 Agree control account (Fixed Asset G.L) with subsidiary records for individual fixed
assets.
 For a sample of disposals verify supporting documents for disposal of fixed assets (eg
Review Newspaper adds and sales invoices)
 Recalculate the depreciation charge for a sample of disposals to confirm the accuracy
of calculations as per the company policy and in accordance with IAS 16.
 Review Presentation (disclosure) of the deletions in the F/S and ensure compliance
with IAS 16.
11. Perform Analytical Procedures (Completeness & Accuracy)
(a) Compare closing balance of Fixed Assets from last year’s balance (B/S to B/S
date comparison)
(b) Compare ratio of depreciation charge to fixed assets and compare from last year.
(c) Compare additions to fixed assets during the year vs capital expenditure budget.
12. Verify Presentation
a) Inspect financial statements to ensure proper disclosure of Tangible non-current assets in

accordance with IAS 16.

Summary Notes by SK
Substantive procedures for Revaluation of Fixed assets
1. Obtain a schedule of assets revalued during year and cast the schedule to confirm completeness and
accuracy of the revaluation adjustment.
2. Verify the revalued amounts for these revalued assets from non-current asset register to ensure correct
amounts.
3. On a sample basis agree the revalued amounts to the valuation schedule provided by the
management/independent valuer.
4. Consider the reasonableness of the valuation and the assumptions used for valuation of assets.
5. Recalculate the total revaluation amount and agree from revaluation surplus and ensure correct
treatment as per IAS 16
6. Recalculate the depreciation charge for the year to ensure that for assets revalued during the year, the
depreciation was charged on the revalued amount.
7. Ensure that the entire class of asset has been revalued.
8. Review the financial statements disclosures for revaluation to ensure compliance with IAS 16
Property, Plant and Equipment.
9. Consider involving auditor’s own expert in case management expert is not objective or competent or
the work is not adequate for the purpose of external audit.
10. Evaluate the competence, capability and objectivity of the expert.(whether management or auditors’
expert)…. To be further covered in ISA 620

Summary Notes by SK
For Scenario
Internal Control Weaknesses relating to Fixed Asset: Based Question!
1. Fixed Assets are not properly insured or under insured. 
2. Fixed Assets are not properly tagged. (No Asset code / unique asset code).
3. Fixed Asset register/ Non-Current Asset register not being maintained and updated.
4. No physical verification of Fixed Assets on periodic basis/timely basis.
5. No reconciliation between physical assets and recorded assets. (General Ledger).
6. Ambiguous classification of Fixed Assets.
7. Improper capitalization policy or no policy of capitalization.
8. No records maintained for Intra Company Fixed Asset transfers.
9. No internal controls on classification & recording of Capital & Revenue Expenditure.
10. Improper physical controls on Fixed Assets. ( No insurance / no CCTV Camera /
No security guards)
11. No controls on surplus fixed assets in the company premises
12. CAPEX budgets not being made.
13. Budgets being maintained BUT not approved by the B.O.D.

Summary Notes by SK

Summary Notes by SK
Substantive Procedures for Intangible assets
Intangible assets that can be recognized in the statement of financial position are:
 Purchased good will (IFRS 3)

 Development costs &
 Research Cost
Tests of detail / Audit Procedures for purchased good will

The tests listed below relate mainly to the valuation of purchased goodwill:
1. Confirm that a business was acquired confirm the consideration paid for the business
acquired.
2. Review the reasonableness of the valuation placed on the net assets required.
3. Check the calculation of the purchased goodwill (as the between the consideration
paid and the fair value of the net assets acquired.
4. Review for the possibility of an impairment having arisen.
5. Ensure that any impairment loss correctly calculated and recorded in the ledger.
6. Tests of detail for other intangibles (excluding develop costs)
7. The auditor should confirm the existence, the cost and the client entity's legal rights
to the acquired assets, by looking at purchased documentation.
8. Check the amortization calculation for accuracy, using the entity's stated policy.
Tests of detail / Audit Procedures for Development Costs

ISA 38 state that intangible asset arising from development (or from the development phase of an internal
project shall be recognized if, and only if, an entity can demonstrate all of the following:
1. The technical feasibility of completing the intangible assets that it will be available for
use or sale.
2. Its intention to complete the intangible assets and use or sell it.
3. It's ability to use or sell intangible assets
4. How the intangible asset q will generate probable future economic benefits
5. The availability of adequate technical, financial and other resources to compete the
development and to use or seem tangible asset
6. Its ability to measure reliably the expenditure attributable to the intangible asset during
its development.
Audit tests /Audit Procedures might include the following:

1. Discuss the development project with management & other relevant senior personnel
to assess the feasibility of the project and product:
2. Review projections and forecasts for using resources and generating future economic
benefits.
 Assess production and marketing plans and whether a market (or use) actually exists.
 Consider funding requirements to completion.
 Whether the entity will actually be able to use or sell the asset.
 Discuss management's intention to complete the asset and either use or sell it.
3. Inspect development contracts and records supporting it.

4. Test a sample of development costs for appropriate capitalisation in the financial
statement.

Summary Notes by SK
5. Obtain written representation (ISA 580) from management as to their commitment to
complete their project and either use or sell the asset(s)
6. Agree the closing balances to the general ledger, trial balance and draft financial
statements.
7. Discuss with the finance director the rationale for the useful life and consider its
reasonableness.
8.
9. Recalculate the amortization charge for a sample of intangible assets which have
commenced production and confirm it is in line with the amortization policy.
10. For the projects in progress, discuss with management the details of each project along
with the stage of development and whether It has been capitalised or expensed.
11. For those capitalised as development, agree costs incurred to invoices and confirm
technically feasible by discussion with development managers or review of feasibility
reports.
12. Review the disclosures for intangible assets in the draft financial statements to verify
that they are in accordance with IAS 38 Intangible Assets.
Audit Procedures for Research Cost
1. For expenses that are charged off as research costs, agree the costs incurred to invoices
& other supporting documents.
2. Discuss with management the details of project long with the stage of development &
that whether it has been charged off or capitalized.
Review market research reports to confirm that audit clients has the ability to sell the
products once complete & there will be probable future economic benefits.

Summary Notes by SK
ACCA F8 Practice Questions on Fixed Assets

1 Q. 18 (a + b) Cranberry Co March / June 2018 10 marks
2 Q. 17 a (i) Elounda Co September 2016 5 marks
3 Q. 4 (i) Kyanite Pizza March / June 2016 6 marks
4 Q. 18 Velo & Co March / June 2020 20 marks
5 Q. 18 Danube Co September / December 2021 20 marks
CA CAF 8 Practice Questions on Fixed Assets
3
4

Summary Notes by SK
ACCA F8 March / June 2018 (5+5 marks)
Question 18 (a & b)
You are an audit manager of Cranberry & Co and you are currently responsible for the audit of
Gooseberry Co, a company which develops and manufactures health and beauty products and distributes
these to wholesale customers. Its draft profit before tax is $6·4m and total assets are $37·2m for the
financial year ended 31 January 20X8. The final audit is due to commence shortly and the following
matters have been brought to your attention:
Research and development

Gooseberry Co spent $1·9m in the current year developing nine new health and beauty products, all of
which are at different stages of development. Once they meet the recognition criteria under IAS 38
Intangible Assets for development expenditure, Gooseberry Co includes the costs incurred within
intangible assets. Once production commences, the intangible assets are amortised on a straight-line basis
over three years. Management believes that this amortisation policy is a reasonable approximation of the
assets’ useful lives, as in this industry there is constant demand for innovative new products.
Depreciation
Gooseberry Co has a large portfolio of property, plant and equipment (PPE). In March 20X7, the
company carried out a full review of all its PPE and updated the useful lives, residual values, depreciation
rates and methods for many categories of asset. The finance director felt the changes were necessary to
better reflect the use of the assets. This resulted in the depreciation charge of some assets changing
significantly for this year.
Required:
a. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Gooseberry Co’s research and development expenditure.
(5 marks)
b. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the matters identified regarding depreciation of property, plant and equipment.
(5 marks)
Answer a & b:
a) Substantive procedures for research and development.
 Obtain and cast a schedule of intangible assets, detailing opening balances, amounts capitalised
in the current year, amortisation and closing balances.
 Agree the closing balances to the general ledger, trial balance and draft financial statements.
 Discuss with the finance director the rationale for the three-year useful life and consider its
reasonableness.
 Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is in line with the amortisation policy of straight line over three years
and that amortisation only commenced from the point of production.
 For the nine new projects, discuss with management the details of each project along with the
stage of development and whether it has been capitalised or expensed.
 For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.

Summary Notes by SK
 For those capitalised as development, agree costs incurred to invoices and confirm technically
feasible by discussion with development managers or review of feasibility reports.
 Review market research reports to confirm Gooseberry Co has the ability to sell the product once
complete and probable future economic benefits will arise.
 Review the disclosures for intangible assets in the draft financial statements to verify that they are
in accordance with IAS 38 Intangible Assets.
b) Substantive procedures for depreciation.

 Discuss with management the rationale for the changes to property, plant and equipment (PPE)
depreciation rates, useful lives, residual values and depreciation methods and ascertain how these
changes were arrived at.
 Confirm the reasonableness of these changes, by comparing the revised depreciation rates, useful
lives and methods applied to PPE to industry averages and knowledge of the business.
 Review the capital expenditure budgets for the next few years to assess whether the revised asset
lives correspond with the planned period until replacement of the relevant asset categories.
 Review the non-current asset register to assess if the revised depreciation rates have been applied.
 Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to assess
the reasonableness of the revised depreciation rates.
 Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current
assets register is correct and ensure that new depreciation rates have been appropriately applied.
 Obtain a breakdown of depreciation by asset categories, compare to prior year; where significant
changes have occurred, discuss with management and assess whether this change is reasonable.
 For asset categories where there have been a minimal number of additions and disposals, perform
a proof in total calculation for the depreciation charged on PPE, discuss with management if
significant fluctuations arise.
 Review the disclosure of the depreciation charges and policies in the draft financial statements
and ensure it is in line with IAS 16 Property, Plant and Equipment.
-------------------------------------------------------------------------------------

Question 17 a (i)
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.
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.
Note: The mark allocation is shown against each of the three matters above.

Summary Notes by SK
Answer a:
i. Substantive procedures for revaluation of property, plant and equipment (PPE)
 Obtain a schedule of all PPE revalued during the year and cast to confirm completeness and
accuracy of the revaluation adjustment and agree to trial balance and financial statements.
 Consider the competence and capability of the valuer, Martin Dullman, by assessing through
enquiry his qualification, membership of a professional body and experience in valuing these
types of assets.
 Consider whether the valuation undertaken provides sufficiently objective audit evidence.
Discuss with management whether Martin Dullman has any financial interest in Elounda Co
which along with the family relationship could have had an impact on his independence.
 Agree the revalued amounts to the valuation statement provided by the valuer. to employee
identification cards/records would confirm the validity of payments.
 Review the valuation report and consider if all assets in the same category have been revalued
in line with IAS 16 Property, Plant and Equipment.
 Agree the revalued amounts for these assets are included correctly in the non-current assets
register.
 Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation
surplus.
 Recalculate the depreciation charge for the year to ensure that for the assets revalued during the
year, the depreciation was based on the correct valuation and was for 12 months.
 Review the financial statements disclosures relating to the revaluation to ensure they comply
with IAS 16.
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ACCA F8 March / June 2016 (6 marks)
Question 4 (i)
Kyanite Pizzas Co (Kyanite) operates a large chain of fast food restaurants. You are an audit supervisor
of Jasper & Co and are currently preparing the audit programmes for the audit of Kyanite’s financial
statements for the year ended 31 March 2016. You are reviewing the notes of last week’s meeting between
the audit manager and finance director where two material issues were discussed.
i. Property, plant and equipment

In the past Kyanite has received negative press reports over the condition of its fast food restaurants,
with comments suggesting they are old fashioned and tired looking. Therefore during the year the
company undertook a full review of all its assets and carried out extensive refurbishments to the
majority of its restaurants. This review resulted in a significant amount of ageing fixtures and fittings
being disposed of and a significant amount of capital expenditure was invested in all remaining
restaurants.
(6 marks)
ii. Equity
The refurbishment was financed via a share issue in April 2015 at a premium of $1·6 million.
(4 marks)
Required: Describe substantive procedures you should perform to obtain sufficient and appropriate
audit evidence in relation to the above two matters.
Note: The mark allocation is shown against each of the two matters above. (10 marks)
(See case i only)

Summary Notes by SK
Answer 4 (i):
Substantive Procedures
i. Property, plant and equipment
 Obtain a breakdown of additions, cast the list and agree included in the non-current assets register
to confirm completeness of fixtures and fittings.
 Select a sample of additions and agree cost to supplier invoice to confirm valuation.
 Verify rights and obligations by agreeing the addition of fixtures and fittings to a supplier invoice
in the name of Kyanite.
 Review the list of additions and confirm that they relate to capital expenditure items rather than
repairs and maintenance.
 For a sample of additions recorded in fixtures and fittings, physically verify them via site visits to
a sample of restaurants to confirm existence.
 Inspect the repairs and maintenance account in the general ledger for items of a capital nature to
confirm completeness of additions.
 Obtain a breakdown of disposals, cast the list and agree all assets removed from the non-current
assets register to confirm existence.
 Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry
sales invoices.
 Recalculate the profit/loss on disposal and agree to the trial balance and statement of profit or
loss.
 Recalculate the depreciation charge for a sample of additions and disposals to confirm the
calculations are correctly applied as per the company policy of a pro rata basis or a full year in
the year of acquisition and none in the year of disposal.
 Review the disclosure of the additions and disposals in the draft financial statements and ensure
it is in line with IAS 16.
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ACCA F8 March / July 2020 (20 marks)
Question 18
It is 1 July 20X5. You are an audit supervisor with Velo & Co and you are working on the final audit of
Encore Co for the year ended 30 April 20X5. Encore Co is a waste management company, supplying its
services to a variety of governmental and business organisations. Encore Co's draft profit before tax is
$5.3m (20X4: $4.6m) and total assets are $40.1m (20X4: $33.9m). You have been provided with the
following information regarding the draft financial statements.
Vehicle additions and disposals

On 1 February 20X5, Encore Co replaced 20 of its recycling vehicles. The old vehicles had a carrying
amount of $1.8m, as recorded in the non-current assets register and were given in part-exchange against
new vehicles costing $4.6m. Cash consideration or $3.9m was also paid.

Summary Notes by SK
Trade receivables
Encore Co's credit controller left the company in January 20X5 and has only recently been replaced.
The trade receivables collection period increased from 49 days as at 31 December 20X4 to 66 days as at
30 April 20X5. Year-end trade receivables amounted to $9.1m (20X4: $7.1m) and an allowance for
irrecoverable receivables of $182,000 (20X4: $142,000) has been made.
Potential breach of transport regulations

In March 20X5, a former employee of Encore Co made a complaint to the transport authority. alleging
that Encore Co has breached the regulations concerning maximum driving hours and compulsory rest
breaks for drivers on a number of occasions. The transport authority has launched an investigation but
the directors of Encore Co are not Intending to disclose this issue or make any provision as they do not
believe that the potential fine, which is $50,000 per breach, is material.
a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Encore Co's vehicle additions and disposals.
(6 marks)
audit evidence in relation to the VALUATION of Encore Co's trade receivables.
…………………………………………………………………… (5 marks)
c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to the potential breach of transport regulations by Encore Co.
(4 marks)
It now 26 August 20X5 and the auditor's report for Encore Co is being finalized. On 12 August 20X5.
the transport authority announced that it was taking legal action against Encore Co in respect of 17
breaches of the regulations Encore Co's lawyers have advised that it is probable Encore Co will be round
guilty of all of the breaches. Encore Co's directors have informed you that no provision will be made in
respect of this matter, as the decision by the authority to take legal action was made after the year end.
but they have agreed to disclose the issue in the notes to the financial statements.
d) Discuss the issue and describe the impact on the auditor's report, if any, should this issue remain
unresolved. (5 marks)
(20 marks)
Answer 18:
Encore Co
(a) Vehicles additions and disposals
 Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note for
property, plant and equipment. Agree the cost of the vehicles given in part-exchange to the
disclosure note to confirm that they have been removed from cost carried forward.
 For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice,
ensuring that the recorded cost includes the cash amount paid plus the trade-in allowance for the
old vehicle. Confirm that the invoice is made out to Encore Co.
 Physically inspect a sample of additions, confirming that the registration number of the vehicle
agrees to that on the non-current assets register.

Summary Notes by SK
 Review the non-current assets register to confirm that the 20 old vehicles were removed and that
the 20 new vehicles were included.
 Recalculate the loss on disposal of $1.1m ($1.8 - ($4.6m - $3.9m) and agree to the trial balance
and statement of profit or loss.
 Agree the cash payment of $3.9m to the cash book and bank statement.
 Recalculate the depreciation expense, confirming that the depreciation expense was based on
the old vehicles until 1 February and on the cost of the new vehicles after that date.
 Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been
removed from accumulated depreciation carried forward.
 In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the
carrying amount of other vehicles may be overstated.
 Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles are
being used for the entire period of their estimated useful life.
 Discuss with management why trade-in allowances were so much lower than the carrying
amounts of the vehicles to provide further evidence as to whether depreciation policies are
reasonable.
 Review the notes to the financial statements to ensure that disclosure of the additions and
disposals is in accordance with IAS 16 Property, Plant and Equipment.
(b) Valuation of trade receivables

 Review the aged receivables listing to identify slow moving or old balances. Discuss the status
of these balances with the credit controller to assess whether the customers are likely to pay or if
an allowance for receivables is required.
 Review whether there are any after-date cash receipts for slow moving/old receivable balances.
 Review correspondence with customers in order to identify any balances which are in dispute or
unlikely to be paid and discuss with management whether any allowance is required.
 Review board minutes to identify whether there are any significant concerns in relation to
outstanding receivables balances and assess whether the allowance is reasonable.
 Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any
potentially irrecoverable balances to assess if the allowance is adequate.
 Review the payment history for evidence of slow paying by any customers who were granted
credit in the period when there was no credit controller and who may not, therefore, have been
properly scrutinised.
 Discuss with the finance director the rationale for maintaining the allowance at the same level
in light of the increase in the receivables collection period and the absence of a credit controller.
 Inspect post year-end sales returns/credit notes and consider whether an additional allowance
against receivables is required.

Summary Notes by SK
(c) Potential breach of regulations
 Review correspondence with the transport authority to establish details of the complaint and the
number of times the breach has allegedly occurred.
 Enquire of the directors why they are unwilling to provide or make disclosure, whether they
accept that any breaches took place but believe that the effect is immaterial or whether they
dispute their occurrence.
 Review Encore Co’s policies and procedures to record driving hours and rest periods and
compare to the regulations to determine the likelihood that breaches have occurred and how
frequently.
 Review correspondence with the transport authority to establish if there have been discussions
about other instances of potential non-compliance.
 Review correspondence with Encore Co’s legal advisers or, with the client’s permission, contact
the lawyers to establish their assessment of the likelihood of the breach being proven and any
fines that would be payable.
 Review the board minutes to ascertain management’s view as to the likelihood of payment to
the transport authority.
 Obtain a written representation to the effect that the directors are not aware of any other breaches
of laws or regulations that would require a provision or disclosure in the financial statements.
 Inspect the post year-end cash book and bank statements to identify whether any fines have been
paid.
(d) Auditor’s report

The breaches in regulations and the initial investigation into the breaches occurred before the year
end. The announcement by the authorities that they are taking legal action provides further evidence
regarding these conditions which existed at the year-end date therefore IAS 10 Events after the
Reporting Period would classify this as an adjusting subsequent event. As it seems probable that the
fine will be payable, a provision must be included rather than merely the disclosure. Failure to make
such a provision will cause profits to be overstated and provisions to be understated.
The potential fine of $850,000 (17 x $50,000) is 16% ($850k/$5.3m) of profit before tax and 2.1%
($850k/$40.1m) of total assets. It is therefore material.
If the directors refuse to make a provision, then Velo & Co should issue a modified opinion on the
grounds that there is a material misstatement of profit and liabilities. As this is material but not
pervasive a qualified opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph. This would
explain the material misstatement in relation to the non-recognition of the provision and the effect
on the financial statements. The opinion paragraph would be qualified ‘except for’.
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Summary Notes by SK
ACCA F8 September / December2021 (20 marks)
Question 18
It is 1 July 20X5. Danube Co is listed on a stock exchange and sells consumer goods to wholesale
customers. The company has a large head office and 18 warehouses. You are an audit supervisor of
Mississippi & Co and the final audit for the year ended 31 March 20X5 is due to commence shortly.
The draft financial statements show total assets of $198.5m and profit before tax of $56.1 m. The
following three matters have been brought to your attention:
Land and buildings

Danube Co historically recorded all property, plant and equipment (PPE) at cost less accumulated
depreciation. However during the year, management decided to change the accounting policy for land
and buildings from the cost model to the revaluation model. The finance director hired an external
independent valuer to undertake the valuation of all land and buildings, and this took place in July
20X4. Depreciation is calculated monthly on a pro rata basis. Danube Co's year-end balance for PPE
includes land and buildings of $79.2m (20X4 : $64m).
Trade receivables circularisation
Danube Co's year-end trade receivables balance of $9.3m (20X4: $7.7m) has significantly increased
compared to the prior year. Danube Co's receivables ledger is made up of a large number of customers
with balances ranging from $15,000 to $150,000. A positive trade receivables circularisation has been
undertaken by the audit team based on the year-end balances. The majority of responses from customers
agreed to the balances as per Danube Co's receivables ledger at 31 March 20X5, however the following
exceptions were noted:
Customer Balance per Danube Co Response from customer

Nile Co $141,102 No response
Congo Co $136,321 $122,189
Provision and receivable arising from the sale of defective goods

In December 20X4 Danube Co sold a number of hoverboards to a customer, Kalama Kids Co. It is
alleged by Kalama Kids Co that these hoverboards are faulty, as there have been a few instances of the
hoverboards overheating and catching fire. As a result, Kalama Kids Co is suing Danube Co for S3.9m.
The court case is due to take place in August 20X5 and management believes that Kalama Kids Co's
claim is likely to be successful. No hoverboards remain in Danube Co's inventory at the year end.
Danube Co purchased the hoverboards from a supplier, Thames Co. In February 20X5 Danube Co
contacted Thames Co and requested that they reimburse Danube Co for damages which may become
payable as a result of the sale of defective hoverboards. Danube Co is requesting a sum of $3.9m from
Thames Co. The draft financial statements contain a provision of $3.9m in respect of the customer's
claim and a receivable of $3.9m in respect of Danube Co's counter-claim against its supplier.
a. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Danube Co's land and buildings. (6 marks)
b. Describe the procedures the auditor should perform in relation to the exceptions noted during the
trade receivables circularisation in respect of Nile Co and Congo Co.
Note: The marks will be split equally between each customer.

(4 marks)

Summary Notes by SK
c. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to the PROVISION and the RECEIVABLE arising from the sale of
defective goods. (5 marks)
The audit engagement partner has determined that the issue relating to the provision and receivable
arising from the sale of defective goods should be communicated as a key audit matter (KAM), in
accordance with ISA 701 Communicating Key Audit Matters in the independent Auditors Report.
d.
i. Describe the factors which the audit engagement partner would have considered in
determining that this issue is a KAM; and
ii. Describe the content of the KAM section of the auditor's report for Danube Co.
(5 marks)
(20 marks)
Answer 18:
Danube Co
a. Land and buildings
 Obtain a schedule of all land and buildings, cast and agree to the trial balance and financial
statements.
 Consider the competence and capability of the valuer, by assessing through enquiry their
qualification, membership of a professional body and experience in valuing these types of assets.
 Review the assumptions and method adopted by the valuer in undertaking the revaluation to
confirm the reasonableness and compliance with principles of IAS 16.
 Agree the schedule of revalued land and buildings to the valuation statement provided by the valuer
and to the non-current assets register.
 Agree all land and buildings on the non-current assets register to the valuation report to ensure
completeness of the land and buildings valued to ensure all assets in the same category have been
revalued in line with IAS 16.
 Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation surplus.
 Recalculate the depreciation charge for the year and confirm that for assets revalued at July 20X4,
the depreciation was based on cost before the revaluation and based on the valuation after on a pro
rata basis.
 For a sample of land and buildings from the non-current assets register, physically verify to confirm
existence.
 For a sample of land and buildings trace back to the non-current assets register and general ledger
to confirm completeness.
 Review the financial statements disclosures relating to land and buildings to ensure they comply
with IAS 16.

Summary Notes by SK
b) Exceptions in the trade receivables circularisation
Nile Co
 For the non-response from Nile Co, with the client’s permission, the team should arrange to
send a follow-up confirmation request.
 If Nile Co does not respond to the follow up, then with the client’s permission, the auditor should
telephone the customer and ask whether they are able to respond in writing to the confirmation
request.
 If there is still no response, then the auditor should undertake alternative procedures to confirm
the balance owing from Nile Co. These would include detailed testing of the balance by a review
of after date cash receipts and agreeing to sales invoices and goods dispatched notes (GDN).
Congo Co
 For the response from Congo Co the auditor should investigate the difference of $14,132, and
identify whether this relates to timing differences or whether there are possible errors in the
records of Danube Co.
 If the difference is due to timing, such as cash in transit, details of the difference should be agreed
to post year-end cash receipts in the cash book.
 If the difference relates to goods in transit, then details should be agreed to a pre year-end GDN.
 The receivables ledger should be reviewed to identify any possible mis-postings as this could be
a reason for the difference with Congo Co.
c) Provision and receivable arising from the sale of defective goods

 Review the correspondence with Kalama Kids Co and establish the details of the claim to assess
whether a present obligation as a result of a past event has occurred.
 Review correspondence with Thames Co, the supplier of the hoverboards, to assess whether
they accept liability for the defect.
 Review correspondence with Danube Co’s legal advisers or, with the client’s permission, contact
the legal advisers to obtain their view as to the probability of either the legal claim from the
customer and the request for reimbursement from the supplier being successful as well as any
likely amounts to be paid or received.
 Discuss with management/enquire of the legal adviser as to whether any other customers of
Danube Co have experienced problems with sales of hoverboards and therefore the likelihood
of any potential future claims
 Review board minutes to establish whether the directors believe that either claim will be
successful or not.
 Review the post year-end cash book to assess whether any payments have been made to the
customer or cash received from the supplier and compare with the amounts recognised in the
 Discuss with management why they have included a receivable for the claim against the supplier
as this is possibly a contingent asset and should only be recognised as an asset if the receipt of
cash is virtually certain.

Summary Notes by SK
 Consider the reasonableness of the proposed treatment.
 Obtain a written representation confirming management’s view that the lawsuit by Kalama Kids
Co is likely to be successful and the claim against Thames Co is virtually certain and hence a
provision and a receivable are required to be included.
 Review the adequacy of the disclosures of the lawsuit and supplier claim in the draft financial
statements to ensure they are in accordance with IAS 37.
d) Key audit matters

(i) Factors to consider
As Danube Co is listed, a Key Audit Matters (KAM) section will be required in the auditor’s
report. The audit partner would have considered whether the matter was communicated to those
charged with governance as KAM are selected from matters communicated with those charged
with governance. The audit partner would also have considered whether the issue relating to the
claims was an area of higher assessed risk of material misstatement or a significant risk and as it
is an accounting estimate the level of judgement involved. The audit partner will have also
considered whether, in their professional judgement, the matters regarding the claim and
counter-claim were of most significance in the audit of Danube Co’s financial statements for the
year ended 31 March 20X5 therefore requiring significant auditor attention.
(ii) Contents of KAM section

The KAM section of the auditor’s report should provide a description of the issue. It should
detail why this issue was considered to be an area of most significance in the audit and therefore
determined to be a KAM. It would include a reference to the audit risk of completeness of the
provision and recognition of the receivable and the level of judgement required in making this
assessment. It should also explain how the matter was addressed in the audit and the auditor
should provide a brief overview of the audit procedures adopted as well as making a reference
to any related disclosures.
-------------------------------------------------------------------------------------

Summary Notes by SK
Test Question - Fixed Asset
Question 1
Jackdaw Motor Cars Co (Jackdaw) manufactures a range of motor cars and its year end is 31 January
2015. You are the audit supervisor of Puffin & Co and are currently preparing the audit programmes for
the year-end audit of Jackdaw. You have had a meeting with your audit manager and he has notified you
of a number of issues identified during the audit risk assessment process.
Land and buildings

Jackdaw have a policy of revaluing land and buildings; this is undertaken on a rolling basis over a five-
year period. During the year Jackdaw requested an external valuer to revalue a number of properties,
including a warehouse purchased in May 2014. Depreciation is charged on a pro rata basis.
Work in progress
Jackdaw undertakes continuous production of cars, 24 hours a day, seven days a week. An inventory
count is to be undertaken at the year end and Puffin & Co will attend. You are responsible for the audit
of work in progress (WIP) and will be part of the team attending the count as well as the final audit. WIP
constitutes the partly assembled cars at the year end and this balance is likely to be material. Jackdaw
values WIP according to percentage of completion, and standard costs are then applied to these
percentages.
Required:
b) Describe the substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to:
i. The revaluation of land and buildings AND the recently purchased warehouse.
(6 marks)
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Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Trade Payables, Accruals, Provisions

& Others’

Summary Notes by SK
Trade Payables, Accruals, Provisions & Others

F/S Assertions – Trade creditors / Accounts Payable.
 Trade payables and accrued liabilities are valid liabilities of the company
(Existence)
 Trade payables and accrued liabilities are the obligations of the company (rights and obligations)
 All liabilities have been recorded completely at the B/S date (completeness)
 All liabilities are included in the accounts at appropriate amounts and any resulting valuation or
allocation adjustment have been appropriately recorded.
(Accuracy Valuation and allocation)
 All liabilities have been recorded in the proper accounts in the B/S (classification)
All liabilities are appropriately disclosed in the financial statements as per the relevant financial
reporting framework (IFRS & IAS) (presentation).
The Principal Risks of Misstatement in respect of TRADE PAYABLES are

therefore due to the following:
 Completeness:
There is a risk that trade payables have not been completely recorded in the F/S.
 Existence: There is a risk that trade creditors do not exist & fake/ fictions payables have been
recorded in the F/S.
 Accuracy ,Valuation and Allocation:

There is a risk that trade payables have been recorded at inappropriate carrying amounts / i.e. not
valued correctly.
 Obligation:
There is a risk that those trade payables have been recorded that are not an obligation of the audit
client to pay.
EXAM FOCUS POINT:
1. Both theoretical and scenario-based questions can be asked from this chapter.
2. Separate question can be asked on the assertion of completeness with respect to
Trade payables.
3. Separate question can be asked on the concept of directional testing.

Summary Notes by SK
Verification /Substantive Procedures – General Accruals
1. External auditor to make sure that accruals pertain to the nature of the business.
2. Verify supporting documents like GRN / Service Entry form / Performa invoices etc.
3. Verify subsequent payments (post balance sheet date payments) to confirm the adequacy of accruals
made at year end.
4. Recalculate calculations of accruals made by the management and also verify from supporting
documents.
5. Compare accruals of current from last year’s balance of accruals & investigate for any significant
variance / difference.
6. Review the list of accruals for completeness, based on the auditor’s knowledge of the business.
Accrual for Income tax payable / Other Taxes Payable

1. Agree the year-end income tax payable accrual to the relevant records / workings to confirm
accuracy.
2. Re-perform the calculation of the accrual to confirm accuracy.
3. Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness at the year end.
4. Review any correspondence with tax authorities to assess whether there are any outstanding
payments due; if yes, they must be included in the accruals at the year end.
5. Review adequacy of disclosures in accordance with accounting standards and legislation.
Substantive Procedures / Audit Test

General Provisions
1. Obtain a listing / breakdown of provisions made during the year and cast its total and agree the
amount from the financial statements.
2. For each item in the listing, confirm that the treatment of IAS 37 or other relevant F.R.F has been
complied with.
3. Review the movement made in the provision during the financial period.
4. Review the measurement / accuracy of the closing balance for each provision and discuss these with
management / TCWG, if appropriate. Consider whether it might be appropriate to take expert
advice on the existence & completeness of a provision.
5. Review the list for possible omissions (provisions not recorded), based on the auditor’s knowledge
of the business.
6. Compare closing provisions for the current year with provisions from industry norms.
7. Compare closing provisions for the current year with previous years closing balance, and investigate
/ inquire any major differences / variances from management.
8. Review the disclosures to ensure compliance with requirements of IAS 37. (Presentation)

Summary Notes by SK
Restructuring Provision (IAS 37)
1. Verify Management’s/ B.O.D’s formal announcement at Year end or before year end to ensure
present obligation exists at year end. (review documentation in this regard)
2. Review the announcement to relevant stakeholders (e.g. employees or shareholders) to ensure it was
made before the B.S date.
3. Recalculate the calculations of redundancy provision via supporting documentation. (payroll
records)
4. Review subsequent payments to ensure that provision was genuine & reasonable and also compare
to amount provided to assess its adequacy.
5. Review the expenditure to confirm that only direct expenditure / directly attributable is included.
6. Cast the breakdown of the provision to ensure that calculation is correct and accurate.
7. Obtain Management Representation (ISA580) to confirm the completeness and Accuracy of
provision / disclosure.
8. Review the disclosures to ensure compliance with requirements of IAS 37. (Presentation)
Redundancy Provision (IAS 37)

1. Discuss with the management and those charged with Governance as to whether they have formally
announced their intention to make the employees redundant, to confirm that a present obligation
exists at the year end.
2. If decision to make redundant was announced before the year end, review supporting documentation
to confirm that the decision has been formally announced before B/S date.
3. Recalculate the redundancy provision to confirm accuracy and agree breakup of the calculation to
supporting documentation.
4. Review subsequent payment to identify whether any redundancy payments have been made.
5. Compare actual payments made to the amounts provided to assess whether the provision is
reasonable at the B/S date.( completeness and accuracy)
6. Obtain written representation (ISA 580) from management to confirm the completeness & accuracy
of the provision.
7. Review the disclosure of the provision to ensure compliance with IAS 37. (Presentation)

Summary Notes by SK
Provision for Law Suit / Court Case ……… (Either filed by customer / supplier
/ or Regulatory body like SECP / Income Tax Tribunal) ……. MOST IMP!
1. Review the correspondence from the customer / party to confirm the present obligation as a result of
past event. (documents for court case )
2. Dispatch lawyer confirmation/Lawyer report to determine the lawyer’s point of view on the case.
3. Enquire about respective laws to which the case pertains (e.g. health & safety laws or environmental
laws etc.)
4. Review subsequent payment to ascertain that whether the provision existed at balance sheet date.
5. Inquire the matter with management to determine whether the adjustment or disclosure will be made
in the F/S.
6. Obtain management representation (ISA 580) to confirm the managements point of view /
management’s assessment of the likely outcome of the case ( either adjustment / or provision )
7. Ensure adequate disclosure is made in the F/S as per the relevant applicable financial reporting
framework.
8. Recalculate the adjustment (Provision) made by the management to ensure it is correctly calculated.
(we can also Re-perform and determine the amount of provision to be recorded in the F/S)
Provision for Warranty

1. External auditor to verify the warranty provision from industry norms.
2. External Auditor will verify subsequent claims from the customer.
3. Via subsequent claim we will ensure the genuineness for warranty provision.
4. Verify the calculation of warranty provision by recalculating.
5. Auditor will verify the assumptions & judgments made by management in this respect.
_______________________________________________________________________
6. Obtain management representation to ensure completeness & accuracy of the warranty provision.
7. Verify past trends of warranty provisions and inquire from management in case of significant
variations.
8. Review the disclosure of the provision to ensure compliance with IAS 37. (Presentation)

Summary Notes by SK
Common Points for Provision
1.
2.
3.
4.
5.
6.
7.
Contingencies
1. Obtain understanding of the approach taken by the client’s management to identify contingencies.
2. Review print media, electronic media and trade journals for areas in which possible industry-wide
contingencies might arise.
3. Review the client’s correspondence with lawyers and invoices for legal services to identify
contingencies that are not disclosed in the F/S.
4. Consider direct confirmation from lawyers of matters handled on behalf of the entity under audit.
(Any letter should be sent by management with an instruction for the reply to be sent directly to the
auditor).
5. Consider whether expert advice may be required from outside sources other than lawyers.
Substantive Procedures / Audit Test on Non-Current Liability/ Bank Loan
1. Verification of B.O.D minutes to confirm the approval of loan.
2. Obtain direct confirmation from the bank /Loan Confirmation to verify the total loan, outstanding
loan and any security provided.
3. Verify loan agreement made with the lender/bank.
4. Verify whether any loan covenants in the lending agreement have been breached resulting in penalties
being charged to P/L a/c as finance charges.
5. Verify interest rate/ security and loan amount from loan agreement and also from bank confirmation.
6. Trace the details in bank loan confirmation from the Accounting Records and inquire from
management for any differences.
7. Recalculate the amount of interest expense and also cross refer from P&L a/c.
8. Ensure proper allocation of current & long-term portion in the balance sheet. (Presentation &
disclosure)

Summary Notes by SK
Substantive Procedures / Audit Work on Trade payables / Trade Creditors
Analytical Procedures
 Perform an analytical review on breakdown of the trade payables figure (Party wise), comparing this
year’s closing balance to the previous year’s closing balance.
Investigate from management if the differences are significant. (A.P)
 Calculate creditors turnover in days and compare from last year and investigate any significant
variance from the management/TCWG
Normal Procedures
 Obtain schedule of trade Payables as on B/S date and perform casting and trace total from trade
payables control account, G.L and trial balance.
 Select a sample of Trade payables balance from the trade payables listing and dispatch trade creditors
confirmation.
(Refer confirmation Format and debtors confirmation lecture)
 Send reminders (First reminders and Second reminders) in case of non-response from suppliers or
call the suppliers after the client’s permission.
 In case of any difference in the reply received from Trade creditors, inquire from management reasons
for such difference.
(Refer reasons for exception – from debtors lecture)
Alternative / Further Audit procedures

 Verify subsequent Payments to verify completeness of trade payables at the B/S date.
 Select a sample of trade payables from the listing and verify the same from supporting documentation
such as (Purchase Orders, GRN, Shipping documents and supplier invoices).
 Obtain supplier statements for a sample of suppliers and reconcile these to trade payables balances
and inquire for any reconciling items.

Summary Notes by SK
Substantive Procedures to be performed on Supplier Statement
1. From the list of suppliers select sample & obtain their supplier statements and agree the balances with
trade payables General ledger.
2. In case there are differences, inquire from management the reasons thereof and in case of no
difference, no further audit work is required.
3. Where difference is due to cash in transit, verify from cash book and bank statement that cash was
sent to supplier pre-yearend.
4. When reconciling differences are adjusted by the client, verify the treatment and verify the closing
balance recorded in trade payables General ledger.
In order to gain additional assurance about the Completeness of trade payables balances, the auditor
should also carry out the following procedures:
(Separate Q.S can be asked for this Assertion) IMP

1. Review the list of balances for any suppliers who are not in the listing of trade payables, but expected
to be in the listing. (These would be regular suppliers of the audit client.)
2. Compare the list of trade payables balances with the listing for the previous year (B/S date to B/S
date comparison). Look for explanations as to why any major balances do not appear on the current
year’s listing when such appeared last year.
3. Compare the closing balance of trade payables with last year's closing balance & in case of any
significant variance, inquire the same from management.
4. Obtain supplier statements and agree the balances from trade payable balances & in case of any
variance, inquire the same from management.
5. Perform trade payable confirmation for a sample of balances and follow up with management, in
case of any exceptions.
6. Perform Directional Testing on trade payables. (explained below)
Exam Focus point:

 Separate qs can be asked on Completeness of trade payables and supplier statement.
 Separate qs can be asked on directional testing
--------------------------------------------------------------------------------------------------------------------
Concept of Directional testing ………. (Test for Unrecorded Liabilities)

These audit procedures are performed to verify the completeness of Balance Sheet & P&L items.
The reason for directional testing is that an auditor will consider it much more likely that an entity will
understate its liabilities (in order to present a better financial position) than overstate its liabilities.
Because auditing liabilities involves testing for completeness, and it is often more difficult than auditing
assets (where the emphasis of audit testing is on overstatement/existence).
The auditor is looking for something that is not recorded, rather than verifying something that has been
recorded. This influences the audit approach and the type of audit work performed. (That’s the reason
why directional testing is performed)
1. Tests to discover error (over/under statement)
2. Tests to discover omissions (understatement)

Summary Notes by SK
Audit test / audit procedures for unrecorded liabilities:
 Verify subsequent payments from cashbook (Bank ledger) and bank statements (More reliable as they
provide 3rd party evidence)
 Trace invoices for those payments to confirm the date of invoice.
 Verify GRNs & service entry forms for the said invoices (Supplier Invoices).
 Verify that whether such invoices are recorded accurately in trade/accrued liability General Ledger
in the correct accounting period.
Additional Procedures:
 Verify Supplier / vendor statement from Trade Creditors
 Verify / Inspect unpaid supplier invoices
 Sending confirmation to Nil or Zero balances
Conclusion: (Imp…!)
 In the case of omission or when there is a risk of understatement, External Auditor will start his
verification from supporting records & trace them back to the Financial Statements.
Since understatements through omission will never be revealed by starting within the accounts itself,
as there is clearly no chance of selecting items that have been omitted from the Financial Statements.
 In the case of overstatement, we will start our verification from the Financial Statements & GL and go
back to the supporting documents to identify/verify that whether the amount is overstated and if yes,
to what extent.
Procedures Irrelevant for Testing the completeness or understatement of Trade Payables

 Sending / dispatching trade creditors confirmation
 Verifying trade payables from supplier ledger
Substantive procedures: Share Capital / Equity
1. Where local law requires that companies should have an authorised share capital, the auditor should
check that the total authorised capital in the financial statements is consistent with the company’s
constitution.
2. The auditor should check the nominal value of shares issued during the year, by reading the
supporting documentation, and should ensure terms of issue were properly complied with.
3. If new shares were issued during the year, verify that cash received has been properly recorded in the
general ledger.
4. Verify that the amount reported as issued share capital agrees with the amount recorded in the register
of members/shareholders.
Substantive procedures: Reserves

1. Obtain an analysis of movements on all reserves during the period.
2. Verify the accuracy of these movements by inspecting supporting documentation.
3. Ensure that any specific legal requirements relating to reserves have been complied with. (For
example, verify that the entity has not breached legal restrictions on use of the share premium
account.)
4. Confirm that dividends have been deducted only from those reserves that are legally distributable
(usually the accumulated profits reserve/retained earnings).

Summary Notes by SK
Substantive procedures: Director’s Emoluments / Directors Remuneration
1. Obtain a schedule of directors’ emoluments with split between salary and other benefits.
2. Verify the casting (addition) in the schedule and agree the totals to the relevant disclosures in the
3. Seek confirmation from each director that the emoluments are complete.
4. Review board meetings minutes for the approval of bonus and other benefits.
5. Agree figures from the director’s remuneration schedule to payroll records.
6. Agree the amount paid to directors from cashbook and bank statements.
7. Inspect and review the directors’ contracts to ensure emoluments are in line with their contracts.
8. Review the adequacy of disclosure of directors’ emoluments that whether they comply with local
laws and regulations.
Substantive procedures to verify share premium account

1. Review movement in share premium account during the year.
2. Verify authorizations for the said movement during the year.
3. Verify supporting documentation.
4. Verify and ensure that all legal requirements have been complied with.

Summary Notes by SK

Summary Notes by SK

Summary Notes by SK

Summary Notes by SK
ACCA F8 Practice Questions on

Trade Payables
1 Q. 17 a & b March / June 2017 4 & 3 marks
2 Q. 17 a September 2016 4 marks
3 Q. 6 b June 2015 3 marks
4 Q.18 c March / June 2021 5 marks
5 Q. 18 b Sept / Dec 2020 10 marks
6 Q. 16 c March / June 2019 4 marks
7
8
9
10

Trade Payables
1
2
3
4
5
6
7
8
9
10

Summary Notes by SK
ACCA F8 March/June 2017 (4 & 3 marks)
Question 17 (a & b)
Airsoft Co is a listed company which manufactures stationery products. The company’s profit before tax
for the year ended 31 December 20X6 is $16·3m and total assets as at that date are $66·8m. You are an
audit supervisor of Biathlon & Co and you are currently finalising the audit programmes for the year-end
audit of your existing client Airsoft Co. You attended a meeting with your audit manager where the
following matters were discussed:
Trade payables and accruals

Airsoft Co purchases its raw materials from a large number of suppliers. The company’s policy is to close
the purchase ledger just after the year end and the financial controller is responsible for identifying goods
which were received pre year-end but for which no invoice has yet been received. An accrual is calculated
for goods received but not yet invoiced (GRNI) and is included within trade payables and accruals. The
audit strategy has identified a risk over the completeness of trade payables and accruals. The audit team
will utilise computer assisted audit techniques (CAATs), in the form of audit software while auditing
trade payables and accruals.
Required:
a. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the COMPLETENESS of Airsoft Co’s trade payables and accruals.
(4 marks)
Answer (a):
a. Trade payables and accruals
 Compare the total trade payables and list of accruals against prior year and investigate any
significant differences.
 Select a sample of post year-end payments from the cash book; if they relate to the current year,
follow through to the purchase ledger or accruals listing to ensure they are recorded in the correct
period.
 Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate
any reconciling items.
 Select a sample of payable balances and perform a trade payables’ circularisation, follow up any
non-replies and any reconciling items between the balance confirmed and the trade payables’
balance.
 Review after date invoices and credit notes to ensure no further items need to be accrued.
 Enquire of management their process for identifying goods received but not invoiced or logged
in the purchase ledger and ensure that it is reasonable to ensure completeness of payables.
------------------------------------------------------------------------------------

Summary Notes by SK
Question 17 (iii) (a)
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.
iii. Bank loan

Elounda Co secured a bank loan of $2·6 million on 1 October 20X4. Repayments of $200,000 are due
quarterly, with a lump sum of $800,000 due for repayment in January 20X7. The company met all loan
payments in 20X5 on time, but was late in paying the April and July 20X6 repayments.
(4 marks)
Required:
b) Describe substantive procedures you should perform to obtain sufficient, appropriate audit
evidence in relation to the above matter.
Answer a (iii):
iii. Substantive procedures for bank loan
 Agree the opening balance of the bank loan to the prior year audit file and financial statements.
 For any loan payments made during the year, agree the cash outflow to the cash book and bank
statements.
 Review bank correspondence to identify whether any late payment penalties have been levied
and agree these have been charged to profit or loss account as a finance charge.
 Obtain direct confirmation at the year end from the loan provider of the outstanding balance and
any security provided; agree confirmed amounts to the loan schedule and financial statements.
 Review the loan agreement for details of covenants and recalculate to identify any breaches in
these.
 Agree closing balance of the loan to the trial balance and draft financial statements and that the
disclosure is adequate, including any security provided, that the loan is disclosed as a current
liability and disclosure is in accordance with accounting standards and local legislation.
-------------------------------------------------------------------------------------
Question 6 b (i)
b. Hawthorn Enterprises Co (Hawthorn) manufactures and distributes fashion clothing to retail

stores. Its year end was 31 March 2015. You are the audit manager and the year-end audit is due
to commence shortly. The following matter has been brought to your attention.
i. Supplier statement reconciliations

Hawthorn receives monthly statements from its main suppliers and although these have been
retained, none have been reconciled to the payables ledger as at 31 March 2015. The engagement
partner has asked the audit senior to recommend the procedures to be performed on supplier
statements. (3 marks)
Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate audit evidence
in relation to the above matter.

Summary Notes by SK
Answer 6 b (i):
Substantive procedures for supplier statement reconciliations
 Select a representative sample of year-end supplier statements and agree the balance to the purchase
ledger of Hawthorn. If the balance agrees, then no further work is required.
 Where differences occur due to invoices in transit, confirm from goods received notes (GRN) whether
the receipt of goods was pre year end, if so confirm that this receipt is included in year-end accruals.
 Where differences occur due to cash in transit from Hawthorn to the supplier, confirm from the
cashbook and bank statements that the cash was sent pre year end.
 Discuss any further adjusting items with the purchase ledger supervisor to understand the nature of
the reconciling item, and whether it has been correctly accounted for.
-------------------------------------------------------------------------------------
Question 18 c
This scenario relates to four requirements.

It is 1 July 20X5 Purrfect Co manufactures and sells a variety of food for dogs and cats. Your firm,
(Kirano & Co, has audited the company for a number of years. You are about to commence the final
audit for the year ended 31 March 20X5 and the draft financial statements show profit before tax of
$23.lm and total assets of $99.2m.
Contamination - legal claims

On 25 February 20X5, it was discovered that a batch of canned cat food had been contaminated with
insecticide, which could be harmful to cats. This batch had been dispatched in November 20X4 to 247
retail stores. By 31 March 20X5, Purrfect Co had received legal claims totalling $1.9m from consumers
whose cats had eaten the contaminated food.
c. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the legal claims following the contamination.
(5 marks)
Answer 18 c:
Contamination – legal claims
 Review customer correspondence to establish the details of the claims and the amounts being
claimed.
 Review correspondence with Purrfect Co’s lawyers or, with the client’s permission, contact the
lawyers to establish the likely outcome of the customer claims made to date.
 Discuss with the lawyers the likelihood and amount of potential future claims.
 Inspect board minutes to establish details of the circumstances of the contamination and to ascertain
management’s view as to the likelihood that the existing claims will be successful and the extent of
possible future claims.
 Compare levels of returns and claims to date against sales volumes of the product to assess the
potential level of future claims.

Summary Notes by SK
 Review post-year end payments for damage settlements and compare with any amounts provided
at the year end to assess the reasonableness of the provision.
 Obtain written representations from management that there have been no other contamination
incidents and no other product liability claims of which management are aware and for which
provision may be required.
 Review the draft financial statements to establish that the legal claims have been appropriately
provided for or disclosed in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent
Assets.
-------------------------------------------------------------------------------------
Question 18 b
It is 1 July 20X5. You are an audit manager of Sagittarii & Co and you are in charge of two final audits
which are due to commence shortly. Vega Vista Co and Canopus Co are both existing clients with a
financial year ended 31 March 20X5. Vega Vista Co is a not-for-profit charitable organization which raises
funds for disadvantaged families and the draft financial statements show revenue of $0.8m. Canopus Co
manufactures paint products in seven factories across the country and the draft financial statements show
total equity and liabilities of $11.6m.
The following matters have been brought to your attention for each company
Vega Vista Co
Income
Vega Vista Co generates income in a number of ways. The main source of income is via an annual food
and music festival held in September every year. Tickets, which cost $35, are sold in the nine-month period
prior to the event and can be purchased in advance online or on the day of the event for cash.
Approximately 15,000 people attended the September 20X4 event and more are anticipated for 20X5. At
the event there are a number of stalls selling food and the charity receives a fixed percentage of these
sundry sales. Also, during the festival, volunteers of the charity sign up individuals to make monthly
donations, and these are paid by bank transfer to the charity. During the audit planning, the completeness
and cut-off of income was flagged as a key audit risk
Canopus Co
Restructuring provision
Canopus Co recently announced plans to fundamentally restructure its production processes due to a
change in the focus of the company's operations. It has included a $2.1m restructuring provision in the
draft financial statements. The restructure involves a refurbishment of the factories, the purchase of new
plant and equipment and retraining of existing staff. These plans were finally agreed at a board meeting
in March 20X5 and announced to shareholders and employees just before the year end.
Bank loans
In readiness for the operational changes, the directors of Canopus Co decided to restructure the company's
bank loans. As a result, several long-term loans were repaid early and a new ten-year bank loan of $4.8m
was taken out on 1 January 20X5. Repayments of $150,000 are due quarterly in arrears which includes
interest.

Summary Notes by SK
Requirements:
a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Canopus Co's restructuring provision. (5 marks)
b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Canopus Co's bank loans. (5 marks)
Answer 18 b:
a) Substantive procedures for Canopus Co's restructuring provision
 Cast the breakdown of the restructuring provision to ensure it is correctly calculated and agree the
total to the trial balance.
 Review the board minutes where the decision to restructure the production process was taken and
confirm the decision was made in March 20X5.
 Review the announcement to shareholders and employees in late March, to confirm that this was
announced before the year end.
 Obtain a breakdown of the restructuring provision and confirm that only direct expenditure relating
to the restructuring is included.
 Review the expenditure to confirm that there are no retraining costs of existing staff included.
 For the costs included within the provision, including acquisitions of plant and machinery, agree to
supporting documentation, such as purchase invoices, to confirm validity and value of items
included.
 Review post year end payments/invoices relating to the expenditure and compare the actual costs
incurred to the amounts provided to assess whether the amount of the provision is reasonable.
 Obtain a written representation confirming management discussions in relation to the announcement
of the restructuring and to confirm the completeness of the provision.
 Review the adequacy of the disclosures of the restructuring provision in the financial statements and
assess whether these are in accordance with IAS 37 Provisions. Contingent Liabilities and Contingent
Assets.
b) Substantive procedures for Canapus Co's bank loans

 Obtain a schedule of opening and closing loans detailing any changes during the year. Cast the
schedule to confirm its accuracy and agree the closing balances to the trial balance and draft financial
statements.
 For the new loan taken out in the year, review the loan agreement to confirm the amount borrowed,
the repayment terms and the interest rate applicable.
 For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan
agreement to the cash book and bank statements.
 For loans repaid, agree the final settlement amount per bank correspondence to payments out during
the year in the cash book and bank statements.
 Agree the quarterly repayment of the new loan of $150,000 paid on 31 March 20X5 to the cash book
and bank statement.
 Recalculate the split of the loan repayment made on 31 March 20X5 between interest and principal,
recalculate interest and agree to inclusion in statement of profit or loss, and outstanding loan balance
reduced by principal amount repaid.
 Review the bank correspondence and loan agreements for confirmation of any early settlement
charges incurred on the loans repaid. Agree that these were charged to the statement of profit or
loss as a finance charge.
 Obtain direct confirmation at the year-end from the loan provider of the outstanding balances and
security provided. Agree confirmed amounts to the loans schedule.

Summary Notes by SK
 Review all loan agreements for details of covenants and recalculate all covenants to identify any
potential or actual breaches.
 Review the disclosure of non-current liabilities in the draft financial statements, including any
security provided and assess whether these are in accordance with accounting standards and local
legislation. Additionally, confirm that the split of current and non-current loans in the financial
statements is correct.
-------------------------------------------------------------------------------------
Question 16 c
Freesia Co deducts employment taxes from its employees’ wages and salaries on a monthly basis and pays
these to the local taxation authorities in the following month. At the year end, the financial statements
will contain an accrual for employment tax payable.
Required:
Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in respect of Freesia Co’s year-end accrual for employment tax payable.
Answer 16 c:
Accrual for employment tax payable
Substantive procedures the auditor should adopt in respect of auditing this accrual include:
 Compare the accrual for employment tax payable to the prior year, investigate any significant
differences.
 Agree the year-end employment tax payable accrual to the payroll records to confirm accuracy.
 Re-perform the calculation of the accrual for a sample of employees to confirm the accuracy.
 Undertake a proof in total test for the employment tax accrual by multiplying the payroll cost for
June 20X9 with the appropriate tax rate. Compare this expectation to the actual accrual and
investigate any significant differences.
 Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.
 Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due. If so, confirm they are included in the year-end accrual.
 Review any disclosures made of the employment tax accrual and assess whether these are in
compliance with accounting standards and legislation.

Summary Notes by SK
Test Questions - Trade Payables
Question 1
Rose Leisure Club Ltd (Rose) 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 three
matters have been brought to your attention.
i. Trade payables and accruals

Rose's finance director has notified you that an error occurred in the closing of the purchase ledger
at the year end. Rather than its closing on 1 November, it accidentally closed one week earlier on 25
October. All purchase invoices received between 25 October and the year end have been posted to
the 2013 year-end purchase ledger.
(6 marks)
ii. Reorganisation
The company recently announced its plans to reorganise 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. Rose is proposing to make a reorganisation provision in the financial statements.
(4 marks)
Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate audit
evidence in relation to the above three matters.
Note: The marks allocation is shown against each of the three matters above. (10 marks)
-------------------------------------------------------------------------------------
Question 2
Pineapple Beach Hotel Ltd (Pineapple) operates a hotel providing accommodation, leisure facilities and
restaurants. Its year end was 30 April 2012. You are the audit senior of Berry & Co and are currently
preparing the audit programmes for the year end audit of Pineapple. 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
Pineapple’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. Pineapple’s lawyers have received the claim and believe that
the lawsuit against the company is unlikely to be successful.
Required:
b) Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to
the above two issues. (4 marks)

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Specimen of Lawyers Confirmation
Sajid & co Lawyer

Karachi
December ___, 20X0
Dear Sirs
ABC & Co. LIMITED
AUDIT OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 20XO
In connection with the audit of financial statements of ABC Co Limited (the Company) for the year
ending December 31, 20X0, we shall be grateful if you would please inform us directly, of any litigation,
existing or anticipated as at the aforementioned date or arising subsequent thereto, involving the
Company and your opinion as to the losses that are likely to arise therefrom.
Yours truly
For and on behalf of Disclosure authorised
XYZ Chartered Accoutants For and on behalf of
ABC & Co. Limited
XYX
Manager [Signature and stamp of the Company’s
authorized personnel]

Summary Notes by SK
Summary Diagram

Summary Notes by SK
‘Inventory / Counting Process’

Summary Notes by SK
1 Internal controls on Inventory counting Process

(for TOC Question)
Please read again and again!
1. Ideally there should be no movement (stock in and stock out) during the stock count.
(Neither within the warehouse nor from one warehouse to another warehouse)
2. Inventory racks / shelves should be properly arranged and tagged.
3. Physical access controls on inventory.
4. Inventory counting must be supervised independently
(Other than the warehouse department)
5. Inventory counting must be performed by independent staff of the company.
(Other than the Warehouse staff and employees)
6. Sequentially pre-numbered inventory count sheets must be used during the count.
7. All inventory sheets must be signed by the respective counter (external auditor or independent stock
counter).
8. All slow moving/obsolete stock must be clearly identified during the stock count and provision (for
obsolete stock) to be made according after discussion with management and these items must be
separately marked.
9. No quantity (volume) must be mentioned on the inventory count sheets.
10. Counting must be in pairs (2 people). One for counting and second for recording & observing.
11. The role of the respective counters must be clarified before the count starts (i.e one person should
count the stock and the other person should observe the process)
12. Inventory count sheets must not be discarded (thrown away) after the stock count rather they should
be retained accordingly to ha````````````ve an audit trail.
13. Inventory counting must be done in a systematic & sequential order so that completeness of the
warehouse / stores can be assured.
14. Bin cards must be signed off by the respective counter. (External Auditor or Client staff).
15. Any additional papers/count sheets must be sequentially pre-numbered and signed-off by the
respective counter.
16. All differences during the stock count (diff btw Book records & physical stock) must be noted &
reconciled after the counting.
17. Expert services (Independent Expert) are recommended for verifying the existence & valuation of
W.I.P as well as specialized raw material. (that requires special technique)
18. Internal Auditors should be involved in supervising the internal controls during the stock counting
process rather than counting the stock itself.
19. Damaged stock / slow moving stock to be clearly identified during the stock count and brought to
a central location / separate place during the audit.
20. Only authorized individuals from the finance dept. to adjust the inventory records in the accounting
records (either provision or write off of inventory)
21. Inventory counting to be done from inventory count sheet to floor and floor to count sheet.
22. During the stock count, pencil should not be used so that audit trail from the stock count sheets
cannot be removed.
23. The inventory counting done by supervisor himself must be reasonable & justifiable in the context
of inventory taken as a whole.
24. In case there is inventory of 3rd party in the warehouse, such inventory must be properly segregated
otherwise 3rd party stock will become part of our audit client’s stock.

Summary Notes by SK
25. In the case of expensive & portable stock, all staff members must not have access of the same
otherwise risk of theft & misappropriation of stock will increase.
26. In the case of inventory bay it must be recounted by another staff of counters to ensure accuracy and
completeness.
27. In case of shortage of staff during the stock count, if external staff (temporary staff) is hired than there
is a risk that inventory will not be counted accurately & risk of theft (misappropriation) will increase.
28.
29.
30.
03 Class Practice Questions for Inventory counting – T.O.C
1. ACCA F8 - Lily window glass - Dec 2012

2. ACCA F8 - Lemon Quartz - March / June 2016
3.ICAP CAF 8 - Sutlaj Limited – March 2014
2 PHASES of Stock Counting

1. Before the stock count: PLANNING stage
2. During the count: observing and counting stage
3. After the count: FOLLOW UP stage / end of the count
2 a Audit work / Audit procedures

BEFORE the count
1. Review the audit files for previous years, to find out whether problems were encountered with the
inventory count on previous audits.
2. Review the instructions for the count that have been prepared by the audit client’s management and
suggest changes, if necessary.
3. Establish the date, time and location of the counts. (may be more than 01 Location)
4. Establish whether any inventory is held by third parties. If so, decide need for external confirmation.
5. Make arrangements with a local firm of auditors to attend a count location if external auditors are
unable to do so.
2b DURING the count:

1. Observe whether or not the count is being conducted in accordance with the written instructions of
the client’s management
2. Observe the condition of the inventory, in order to identify items where NRV might be below cost.
3. Observe whether inventory not owned by the audit client entity is properly identified and labelled in
the stores/ warehouse
4. Observe whether or not, during the count, movement of inventory is controlled and properly
documented.
5. At the end of the count ensure all inventory items have been counted and tagged.
6. The auditor should carry out a sample of test counts. (Few items already counted by the client staff
and few new items on a sample basis.)

Summary Notes by SK
7. Observe the procedure for identifying & segregating damaged / obsolete stock.
8. Observe the procedure carried out by the audit client in assuming the level of W.I.P & also consider
the reasonableness of assumptions used.
9. Identify & make a note of last GRNs & GDNs of B/S date in order to perform cut-off procedures.
(this point will be covered and explained after the concept of Cutoff)
2c AFTER the count

1. Any differences in the inventory records (difference between book records and physical counting)
should be discussed and resolved.
2. Trace items that were test counted from the final inventory count sheets.
3. Observe whether all test counts items have been included in the final inventory sheets.
4. Inspect final inventory count sheets to ensure they are supported by original inventory count records.
5. Ensure that continuous inventory records have been adjusted to the amount physically counted or
measured and that differences have been investigated and reconciled.
6. Perform cut-off testing by using details of last serial number of goods inwards and outwards notes.
(this point will be covered and explained after the concept of Cutoff)
Point 2 and Point 3 can also be drafted as follows
2. Trace inventory items that were test counted in the original inventory count sheets from the final
/ revised inventory count sheets
3. Verify the completeness of revised inventory count sheets by comparing with original inventory
count sheets adjusted by reconciling differences noted during the count.
2d Audit Procedures - Continuous inventory counting / Perpetual stock counting
1. Ensure that all inventory lines are counted at least once a year.
2. Review procedures and instructions for inventory counting and test counts to ensure they are as
rigorous as those for a year-end inventory count.
3. Follow up the inventory counts attended to compare quantities counted by the auditors with the
inventory records.
4. Where differences are found between inventory records and physical inventory, review procedures
for investigating them to ensure all discrepancies are followed-up and resolved and that corrections
are authorized by a manager not taking part in the count.
5. Review the year’s inventory counts to confirm the extent of counting, the treatment of differences
and the overall accuracy of records, and to decide whether a full year and count will be necessary.
6. Perform cut-off testing and analytical review to gain further comfort over the accuracy of the
inventory in the financial statements.
(Separate question can be asked on perpetual inventory counting)
3 Inventory held by Third parties / 3 rd Party Location / stores (Refer ACCA F8 Dec 2011 Qs 3c)
The auditor shall obtain S.A.A.E by performing one or both of the following procedures:
1. Direct confirmation to the Third-parties regarding quantities & condition of Stock held by them at
the B/S date.
2. Inspection or other appropriate audit procedures
(If third party's integrity and objectivity are doubtful)

Summary Notes by SK
Other appropriate audit procedures
2a Attending, or arranging for another auditor to attend, the third party's inventory count.
2b Inspecting documentation in respect of third-party inventory (e.g. warehouse receipts for stock in &
out ….& purchase orders, gate passes etc.)
2c Requesting confirmation from other parties (e.g. Bank) When inventory has been pledged as
collateral ….against Bank Loan)
2d Inspect any reports produced by auditor of the warehouse/ stores with respect to the adequacy of
controls …..over inventory.
Other relevant point:
2e Inventory can be observed via Camera through online technology (Remote access via Internet)
(as was done in the time of COVID 19 by various audit firms)
---------------------------------------------------------------------------

Summary Notes by SK
Closing Stock / Inventory

Inventory
IAS 2 requires that inventory should be valued at the LOWER of cost or net realisable value:
 Cost includes the costs of purchase and all other costs incurred in bringing inventories to their present
location and condition. In the case of work-in-progress and manufactured finished goods, this
includes an amount for production overheads.
 Net realizable value

(NRV) is the estimated selling price of the inventory in the ordinary course of business,
LESS (1) any estimated costs to complete the items (and make them available for sale) and (2) the
estimated costs of making the sale.
F/S Assertions
Closing Stock (B/S Assertions)
Sales / Purchases (P&L assertions)
(Exam Focus Point: Identify and Explain the F/S Assertions for closing stock / Inventory OR Explain
the F/S Assertions for closing stock)
4 Principal risks of misstatement in Inventory (B/S)

The principal risks of inventory being misstated are due to the following:
 Not all inventory that is owned by the reporting entity being included in the financial statements (the
completeness assertion).
 Inventory in the financial statements actually does not exist (the existence assertion).
 Inventory being incorrectly valued (which could be due to incorrect recording of costs, or failing to
value at net realisable value, if lower – as per IAS 2) (valuation and accuracy assertion).
 Inventory is included in the financial statements which actually belongs to third parties
(rights and Obligation assertion).
 Inventory being incorrectly disclosed in the financial statements (the presentation assertion). ……as
per IAS 2
5 The importance of inventory for audit testing

 Inventory is often a material item in the financial statements.
 Inventory may be a high-risk area, involving a high degree of judgement in areas such as valuation.
For example valuation of work in progress.
 Inventory may suffer from deterioration, loss or theft that may not be recorded in the F/S.
 Inventory may be highly technical in nature and in such case the auditor may need to consider the
use of an expert.

Summary Notes by SK
6 Reasons for physical counts of inventory
 Physical counts provide evidence of the actual EXISTENCE of the inventory
 Physical counts can be used to check the accuracy of inventory records, where continuous
inventory records are maintained.
 Where the entity does not have continuous inventory records, a physical count of inventory is
probably the only means of determining qty of stock.
 Discrepancies between the physical count and the inventory records may indicate weaknesses in
physical controls and losses due to theft et c.
7 Responsibilities for the Stock count

 It is the responsibility of management to arrange for physical counts to be made and to establish
appropriate procedures for counting, to ensure that a complete and accurate count is taken at year
end.
 It is the responsibility of the auditor to gather evidence from which he can reach a conclusion on the
figure for inventory in the F/S. Observing and counting performed by the auditor at the inventory
count will provide some of this audit evidence.
(Exam Focus point: Theoretical question can be asked on the above areas)
Factors to consider when PLANNING attendance at the inventory count include the following:
(READ ONLY)
 The risks of material misstatement of inventory PLUS Internal controls related to inventory
 Whether proper instructions issued for counting and these instructions should be reviewed by the
auditor
 The timing of the count
 Locations at which inventory is held (including materiality at different locations)
 Whether the assistance of an auditor's expert is required
8 Further Substantive Procedures for INVENTORIES

1. Verify inventory pricing (Inventory Valuation) Also called NRV testing (ICAP Question)
1) Obtain and cast the inventory listing of company products and agree that total cost from inventory
records.
2) Agree the quantity of company products shown physically at the year end to the year end inventory
count records.
3) Review the information gathered during the Inventory Counting to indicate that NRV may be lower
than cost.
4) Review and test the procedures in place by the client for comparing NRV with cost for each item of
inventory.
5) Compare the inventory pricing with client’s current selling price lists.

Summary Notes by SK
6) Review subsequent selling prices for evidence that NRV is higher than cost (Post balance sheet
Sales Prices)
7) Select material & major items from the stock listing & compare its NRV with cost
8) Review aged inventory records for evidence of slow-moving items, whose selling price might
need to be reduced and whose NRV may therefore be less than cost.
Other Valid Points

9) Verify subsequent credit notes to determine any written down of inventory /stock.
10) In case adjustment is required, verify that the adjustment is made as per the relevant IFRS in the
11) In the case of fall in demand of the product, compare sales price overtime & in the case of
declining trend, discuss with management if any allowance is required for the same.
12) For a sample of goods agree the cost to supporting documents to verify raw material, labour and
overheads.
Points on Standard cost

1) Request a breakup of cost calculated of each unit of the product and discuss with management
how the standard cost was calculated.
2) Recalculate the cost calculation to confirm that the quantity multiplied by the standard cost is
as per G.L / inventory control account.
3) For a sample of inventory items obtain the standard cost breakup & agree raw material cost to
supplier invoices, labour cost to time sheets & overhead allocated (production nature only)
Substantive procedures to verify Standard cost

1. Obtain cost schedule and cast the inventory listing/ break up and compare the total cost to
inventory records.
2. Obtain a breakdown of standard cost of each unit and discuss the basis of the same with
management or how it was derived.
3. Recalculate the cost by multiplying quantity of goods with its standard cost.
4. Verify that whether standard cost is reviewed periodically or not.
2. Analytical Procedures on Inventory

 Compare closing inventory balance from last year’s closing balance.
 Compare closing inventory balance from industry norms. (similar industry)
 Calculate inventory turnover in days for the current year and compare from last year
turnover and inquire from audit client in case of abnormal variance

Summary Notes by SK
3. Substantive Procedures / Audit Test to verify Damaged Stock (Tested in ACCA F8 Dec
2013 Qs 1 (d- iii)
4.Substantive Procedures /Audit Test to verify work in progress (W.I.P)

WIP Inventory (Work-in-Progress) is defined as the goods which are in different stages of production.
Work in Progress (WIP) Inventory includes material that has been released from the inventory for the
process but not yet completed and is waiting for further process or a final inspection.
Work in process, work in progress, goods in process, or in-process inventory are a company's partially
finished goods waiting for completion. These items are either just being fabricated or waiting for further
processing in a queue.
1. Before attending the inventory count, discuss with senior management how the
percentage completions are attributed to the WIP.
2. During the inventory count, observe the procedures carried out by management in
assessing the level of W.I.P and also consider the reasonableness of the assumptions
used by the management.
3. Agree for a sample that the percentage completions calculated / assessed during the
count are in accordance with mgmt. policies.
4. Cast the schedule of total W.I.P and agree the balance to the trial balance and financial
statements.
5. Agree sample of W.I.P assessed during the count to the W.I.P schedule, agree
percentage completion is correct.
6. In the case of material check that the correct quantity of materials has been used in
the valuation.
7. In the case of labour, check pay rates and hrs worked for direct labour cost against
payroll records for the employees’ part of WIP.
8. Production overheads confirm that only production overheads (as opposed to selling
and administration overheads) are included in the valuation.

Summary Notes by SK
4. Audit Procedures to verify Purchase of Raw Material
1. Obtain lead schedule of raw material purchases and perform arithmetical accuracy of the
schedule.
2. Perform physical counting of raw materials at the year end
3. Obtain movement of raw material during the year with value and quantity
4. Verify the cost of inventory by tracing them with prices in purchase invoices or supplier price
lists.
5. Verify that Purchase Price and directly attributable costs have been included appropriately
6. Verify raw material consumed with material / Purchase requisitions
Presentation
1. Inventory is properly classified in the accounts.
2. Disclosures relating to classification and valuation are adequate and in accordance with accounting
standards.
Inventory Cutoff (Sales / Purchase Cutoff)
Explanation and importance of Cut-off Testing
Cutoff is a very material & key issue in the audit of financial statements.
All purchases and sales of inventory must be recorded in the correct accounting period as closing stock
can be a material amount for manufacturing companies.
The point of Sales & Purchase of goods is very important to ensure that correct cutoff has been applied,
similarly the transfer of raw material to W.I.P & W.I.P to finished goods is also very imp for cutoff
purposes.
Incorrect cutoff may result in material misstatement in the F/S as this may be an attempt to manipulate
the F/S especially profits, therefore the auditor must perform adequate cutoff procedures to ensure
accurate movements of inventory especially at year end.
Cut-off is most critical in the following areas

 The point of purchase and receipt of goods.
 The transferring / conversion of raw materials into WIP.
 The transfer of completed work-in-progress into finished goods.
 The sale and dispatch of finished goods to end customers.
IMP
If cutoff procedures are performed properly than sales and purchases will be recorded accurately and
completely in the correct accounting period and at the same time….. receivables, payables and inventory
will also be recorded completely.
Audit procedures to perform Cutoff Testing (IMP)

The auditors should consider whether management has implemented adequate cut-off procedures
intended to ensure that movements within and out of inventories are properly identified and reflected in
the F/S.

Summary Notes by SK
a) Appropriate systems of recording of receipts and dispatches of goods to be in place, and a system
for documenting materials issued for production. Goods received notes (GRNs) and goods
dispatched notes (GDNs) should be sequentially pre-numbered and dated.
b) LAST GRN and GDN numbers of the year (2020) are noted and similarly FIRST GRN and GDN
numbers are noted subsequently (2021). These numbers can then be used to subsequently ( during
the audit ) check that purchases and sales have been recorded in the correct accounting period i.e
Sales and Purchases pertaining to GDNs and GRNs for 2020 must be recorded in the General
Ledger for 2020 and similarly…. Sales and Purchases pertaining to GDNs and GRNs for 2021
must be recorded in the General Ledger for 2021.

Summary Notes by SK
N.R.V = Estimated Selling Price
Less:
Estimated cost to complete +
Estimated cost necessary to make sale
Audit Tests / Audit work to verify N.R.V

Procedure to assess that N.R.V must be equal to or above cost
1. Estimate Selling Price

Verify estimate selling price or actual sales price for the year-end inventory, auditor will verify
 Post year and sales invoices/ subsequent sales price.
 Estimated sales price from approved price list & also compare from industry norms
 Sales price of slow moving or damaged goods and then scrap value, if any
2. Estimated cost of completion (only in the case of W.I.P or raw material)

In the case of goods not yet completed, determine the cost of completion (refer actual records after
the B/S date or budget costs)
3. Estimated cost necessary to make sale

Auditor will also verify directly attributable selling, distribution & marketing costs & reasonableness
of any apportioned costs
 Commission
 Transportation
 Packing costs
 Labor costs
(Combine 2 + 3 and subtract from 1 to arrive at the N.R.V and then compare with cost to ensure proper
accounting treatment as per IAS 2.)

Summary Notes by SK
General controls on inventory (Other than inventory counting process)
(ICAP CAF 8 March 2016 Qs 2 (b)
Advantages of Perpetual Inventory Counting

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
ACCA F8 Practice Questions on Inventory

1 Q.1 ACCA December 2012 18 marks
2 Q.5 a ACCA March / June 2016 15 marks
3 Q.6 b ACCA Sept / Dec 2015 12 marks
CA CAF 8 Practice Questions on Inventory T.O.C + S. Procedures

S. No. Topic Question Attempt Marks
1. S.P valuation Q.2 a 4 marks
March 2017
2.  During the count Q.5 8 marks
 Cutoff
3. T.O.C Q.2 b March 2016 6 marks
4. T.O.C Q.8 Sept 2013 8 marks
5. S. P Q.5 Sept 2012 20 marks
6. S. P Q.4 March 2012 15 marks
7. S. P Q. 6 Sept 2022 8 marks

Summary Notes by SK
ACCA F8 December 2012 (18 marks)
Question 1
Lily Window Glass Ltd Lily is a glass manufacturer, which operates from a large production facility,
where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two
warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31
December.
Lily is finalising the arrangements for the year-end inventory count, which is to be undertaken on 31
December 2012. The finished windows are stored within 20 aisles of the first warehouse. The second
warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following
arrangements have been made for the inventory count:
The warehouse manager will supervise the count as he is most familiar with the inventory. There will be
ten teams of counters and each team will contain two members of staff, one from the finance and one
from the manufacturing department. None of the warehouse staff, other than the manager, will be
involved in the count.
Each team will count an aisle of finished goods by counting up and then down each aisle. As this process
is systematic, it is not felt that the team will need to flag areas once counted. Once the team has finished
counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse. In
addition to the above, to assist with the inventory counting, there will be two teams of counters from the
internal audit department and they will perform inventory counts.
The count sheets are sequentially numbered, and the product codes and descriptions are printed on them
but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter
the item on a separate sheet, which is not numbered. Once all counting is complete, the sequence of the
sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in
ink.
Any damaged goods identified by the counters will be too heavy to move to a central location, hence
they are to be left where they are but the counter is to make a note on the inventory sheets detailing the
level of damage.
As Lily undertakes continuous production, there will continue to be movements of raw materials and
finished goods in and out of the warehouse during the count. These will be kept to a minimum where
possible.
The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It
is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be
approximated by measuring the height and width of the raw material piles. In the past this task has been
undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.
Required:
a. For the inventory count arrangements of Lily Window Glass Ltd:
i. Identify and explain SIX deficiencies; and
ii. Provide a recommendation to address each deficiency.
The total marks will be split equally between each part (12 marks)

Summary Notes by SK
You are the audit senior of Daffodil & Co and are responsible for the audit of inventory for Lily. You
will be attending the year-end inventory count on 31 December 2012.
Required:
a. Describe the procedures to be undertaken by the auditor DURING the inventory count of Lily
Window Glass Ltd in order to gain sufficient appropriate audit evidence.
(6 marks)
Answer 1:
The warehouse manager is planning to supervise An alternative supervisor who is not normally
the inventory count. Whilst he is familiar with involved with the inventory, such as an internal
the inventory, he has overall responsibility for audit manager, should supervise the inventory
the inventory and so is not independent. He may count. The warehouse manager and his team
want to hide inefficiencies and any issues that should not be involved in the count at all.
arise so that his department is not criticized.
There are ten teams of counters, each team Each team should be informed that both members
having two members of staff. However, there is are required to count their assigned inventory
no clear division of responsibilities within the separately. Therefore, one counts and the second
team. Therefore, both members of staff could member checks that the inventory has been
count together rather than checking each other’s counted correctly.
count; and errors in their count may not be
identified.
The internal audit teams are undertaking The internal audit counters should sample check
inventory counts rather than reviewing the the counting undertaken by the ten teams to
controls and performing sample test counts. provide an extra control over the completeness and
Their role should be focused on confirming the accuracy of the count.
accuracy of the inventory counting procedures.
Once areas are counted, the teams are not All aisles should be flagged as completed, once the
flagging the aisles as completed. Therefore there inventory has been counted. In addition, internal
is the risk that some areas of the warehouse audit or the count supervisor should check at the
could be double counted or missed out. end of the count that all 20 aisles have been flagged
as completed.
Inventory not listed on the sheets is to be entered Each team should be given a blank sheet for
onto separate sheets, which are not sequentially entering any inventory count which is not on their
numbered. Therefore the supervisor will be sheets. This blank sheet should be sequentially
unable to ensure the completeness of all inventory numbered, any unused sheets should be returned
sheets. at the end of the count, and the supervisor should
check the sequence of all sheets at the end of the
count.
The sheets are completed in ink and are All inventory sheets should be signed by the
sequentially numbered, however, there is no relevant team upon completion of an aisle. When
indication that they are signed by the counting the sheets are returned, the supervisor should
team. Therefore, if any issues arise with the check that they have been signed.
counting in an aisle, it will be difficult to follow
up as the identity of the counting team will not be
known.

Summary Notes by SK
Damaged goods are not being stored in a central Damaged goods should be clearly flagged by the
area, and instead the counter is just noting on the counting teams and at the end of the count
inventory sheets the level of damage. However, it appropriate machinery should be used to move all
will be difficult for the finance team to decide on damaged windows to a central location. This will
an appropriate level of write down if they are not avoid the risk of selling these goods.
able to see the damaged goods. In addition, if A senior member of the finance team should then
these goods are left in the aisles, they could be inspect these goods to assess the level of any write
inadvertently sold to customers or moved to down or allowance.
another aisle.
Lily Window Glass Ltd Lily undertakes It is not practical to stop all inventory movements
continuous production and so there will be as the production needs to continue. However, any
movements of goods during the count. Inventory raw materials required for 31 December should be
records could be under/overstated if goods are estimated and put to one side. These will not be
missed or double counted due to movements in included as raw materials and instead will be
the warehouse. work-in-progress.
The goods which are manufactured on 31
December should be stored to one side, and at the
end of the count should be counted once and
included within finished goods.
Any goods received from suppliers should be

stored in one location and counted at the end and
included as part of raw materials. Goods to be
despatched to customers should be kept to a
minimum for the day of the count.
The warehouse manager is to assess the level of A specialist should be utilised to assess both work-
work-in-progress and raw materials. In the past, a in-progress and the quantities of raw materials.
specialist has undertaken this role. It is unlikely
that the warehouse manager has the experience to
assess the level of work-in-progress as this is
something that the factory manager would be
more familiar with.
In addition, whilst the warehouse manager is With regards to the warehouse manager, he could
familiar with the raw materials, if he makes a estimate the raw materials and the specialist could
mistake in assessing the quantities then inventory check it. This would give an indication as to
could be materially misstated whether he is able to accurately assess the
quantities for subsequent inventory counts.
b. Procedures during the inventory count

 Observe the counting teams of Lily to confirm whether the inventory count instructions are being
followed correctly.
 Select a sample and perform test counts from inventory sheets to warehouse aisle and from
warehouse aisle to inventory sheets.
 Confirm the procedures for identifying and segregating damaged goods are operating correctly.
 Select a sample of damaged items as noted on the inventory sheets and inspect these windows to
confirm whether the level of damage is correctly noted.

Summary Notes by SK
 Observe the procedures for movements of inventory during the count, to confirm that no raw
materials or finished goods have been omitted or counted twice.
 Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up
testing on the final audit.
 Identify and make a note of the last goods received notes GRNs and goods dispatched notes
GDNs for 31 December in order to perform cut-off procedures.
 Observe the procedures carried out by the warehouse manager in assessing the level of work-in-
progress and consider the reasonableness of any assumptions used.
 Discuss with the warehouse manager how he has estimated the raw materials quantities. To the
extent that it is possible, re-perform the procedures adopted by the warehouse manager.
 Identify and record any inventory held for third parties if any and confirm that it is excluded from
the count.
____________________________________________________________________

Question 5 a
You are an audit senior of Hessonite & Co and are in the process of reviewing the inventory system
documentation for your audit client, Lemon Quartz Co. Quartz which manufactures computer
equipment. The company’s factory and warehouse are based on one large site, and their year end is 30
June 2016. Quartz is planning to undertake a full inventory count at the year end of its raw materials,
work in progress and finished goods and you will be attending this count. In preparation you have been
reviewing the inventory count instructions for finished goods provided by Quartz.
The count will be undertaken by 15 teams of two counters from the warehouse department with Quartz’s
financial controller providing overall supervision. Each team of two is allocated a number of bays within
the warehouse to count and they are provided with sequentially numbered inventory sheets which
contain product codes and quantities extracted from the inventory records. The counters move through
each allocated bay counting the inventory and confirming that it agrees with the inventory sheets. Where
a discrepancy is found, they note this on the sheet.
The warehouse is large and approximately 10% of the bays have been rented out to third parties with
similar operations; these are scattered throughout the warehouse. For completeness, the counters have
been asked to count the inventory for all bays noting the third party inventories on separate blank
inventory sheets, and the finance department will make any necessary adjustments.
Some of Quartz’s finished goods are high in value and are stored in a locked area of the warehouse and
all the counting teams will be given the code to access this area. There will be no despatches of inventory
during the count and it is not anticipated that there will be any deliveries from suppliers.
Each area is counted once by the allocated team; the sheets are completed in ink, signed by the team and
returned after each bay is counted. As no two teams are allocated the same bays, there will be no need to
flag that an area has been counted. On completion of the count, the financial controller will confirm with
each team that they have returned their inventory sheets.
Required:
a. In respect of the inventory count procedures for Lemon Quartz Co:
i. Identify and explain FIVE deficiencies;
ii. Recommend a control to address each of these deficiencies; and

Summary Notes by SK
iii. Describe a TEST OF CONTROL the external auditors would perform to assess if each of
these controls, if implemented, is operating effectively.
Answer 5 a:
Deficiencies Controls Test of controls
The count will be undertaken by The counting teams should Attend the year-end count and
teams of warehouse staff. be independent of the enquire of the counting teams
warehouse; hence members which department they normally
There should be a segregation of of alternative departments work in.
roles between those who have should undertake the
day-to-day responsibility for counting rather than the Inspect the updated inventory
inventory and those who are warehouse staff. count instructions to verify that
checking it. If the same team are they have been communicated to
responsible for maintaining and members of staff outside the
checking inventory, then errors warehouse department.
and fraud could be hidden.
The inventory sheets contain The count sheets should be Inspect a sample of the counting
quantities as per the inventory sequentially numbered and sheets being used by the counting
records. There is a risk that the contain product codes and teams to verify that only the
counting teams may simply descriptions but no inventory product codes and
agree with the pre-printed quantities. description are pre-printed on
quantities rather than counting them.
the balances correctly, resulting
in significant errors in
inventory.
There are 15 teams of counters, Each team should be Observe the counting teams to
each team having two members informed that both members assess if they are counting
of staff. However, there is no are required to count their together or if one counts and the
clear division of responsibilities assigned inventory other then double checks the
within the team. Therefore, both separately. Therefore, one quantities counted.
members of staff could count member counts and the
together rather than checking second member also Review the records of the sample
each other's count; and errors in undertakes a count and then checks undertaken by the
their count may not be records the inventory on the supervisor of the inventory count.
identified. count sheets correctly.
In addition, the financial

controller supervising the
count should undertake
some sample checks of
inventory counted by each
team.
Inventory owned by third All inventories belonging to Enquire of the count supervisor
parties is also being counted by third parties should be where the third party inventory is
the teams with adjustments moved to one location. This to be stored, confirm through
being made by the finance team area should be clearly inspection of the counting sheets
to split these goods out later.

Summary Notes by SK
There does not appear to be a marked and excluded from that these bays are not included
method for counters to identify the counting process on any pre-printed forms.
which items are third party
inventory.
There is a risk that these goods

may not be correctly removed
from the inventory count sheets,
resulting in inventory being
overstated.
High value inventory which is The high value inventory Attempt to access the area where
normally stored in a secure should be kept in the locked the high value inventory is stored;
location will be accessible by all area of the warehouse. this should not be possible
team members as they will be Senior members of the team without the access code.
given the access code. This should be allocated to count At the year-end visit attempt to
significantly increases the risk of these goods, and they access with the code which was
theft as any member of the should be given the access supplied during the inventory
counting team could code to enter the area. count.
subsequently access these
goods. Upon completion of the
count the access code should
be changed.
Each bay of the warehouse is Once all inventories have Observe the counting team
counted once only. If inventory been counted once, each undertake second counts of all
is only checked once, then area should be recounted by areas; confirm that different
counting errors may arise a different team. Any teams undertake this process.
resulting in under or overstated differences on the first count
inventory. should be promptly notified
to the count supervisor and
a third count undertaken if
necessary.
If a full second count would

be too time-consuming for
the company, then sample
checks on the inventory
counted should be
undertaken by a different
counting team.
Once areas are counted, the All bays should be flagged as Physically confirm that the
teams are not marking the bays completed, once the completed bays of the warehouse
as completed. Therefore there is inventory has been counted. have been flagged to indicate that
the risk that some areas of the In addition, the count the goods have been counted.
warehouse could be double supervisor should check at At the end of the count, review
counted or missed out. the end of the count that all any bays containing Quartz's
of the bays with Quartz's goods which have not been
inventory have been flagged flagged.
as completed.

Summary Notes by SK
The inventory sheets are Review the sequence of the
sequentially numbered and at After the counting has
finished, each team should inventory sheets for any gaps in
the end of the count they are the sequence and obtain an
return all of their
given to the count supervisor explanation from the count
who confirms with each team sequentially numbered
sheets and the supervisor supervisor.
that they have returned all
sheets. should check the sequence
of all sheets at the end of the
However, no sequence check of count.
the sheets is performed. If sheets
are missing, then the inventory
records could be understated
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
ACCA F8 Sept/Dec 2015 (12 marks)

Question 6 b
Andromeda Industries Co develops and manufactures a wide range of fast-moving consumer goods. The
company’s year end is 31 December 2015 and the forecast profit before tax is $8·3 million. You are the
audit manager of Neptune & Co and the year-end audit is due to commence in January. The following
information has been gathered during the planning process:
Inventory count
Andromeda’s raw materials and finished goods inventory are stored in 12 warehouses across the country.
Each of these warehouses is expected to contain material levels of inventory at the year end. It is expected
that there will be no significant work in progress held at any of the sites. Each count will be supervised
by a member of Andromeda’s internal audit department and the counts will all take place on 31
December, when all movements of goods in and out of the warehouses will cease.
Required:
b. Describe audit procedures you would perform during the audit of Andromeda Industries Co:
i. BEFORE and DURING the inventory counts; and (8 marks)
Answer 6 b:
i. Inventory count procedures
Before the count

 Review the prior year audit files to identify whether there were any particular warehouses where
significant inventory issues arose last year.
 Discuss with management whether any of the warehouses this year are new, or have experienced
significant control issues.
 Decide which of the 12 warehouses the audit team members will attend, basing this on materiality
and risk of each site.
 Obtain a copy of the proposed inventory count instructions, review them to identify any control
deficiencies and if any are noted, discuss them with management prior to the counts.

Summary Notes by SK
During the count
 Observe the counting teams of Andromeda to confirm whether the inventory count instructions are
being followed correctly.
 Select a sample of inventory and perform test counts from inventory sheets to warehouse aisle and
from warehouse aisle to inventory sheets.
 Confirm the procedures for identifying and segregating damaged goods are operating correctly, and
assess inventory for evidence of any damaged or slow moving items.
 Observe the procedures for movements of inventory during the count, to confirm that all movements
have ceased.
 Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing
on the final audit.
 Identify and make a note of the last goods received notes and goods dispatched notes for 31 December
in order to perform cut-off procedures.
 Discuss with the internal audit supervisor how any raw materials quantities have been estimated.
Where possible, reperform the procedures adopted by the supervisor.
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Summary Notes by SK
ACCA F8 Practice Questions on Substantive Procedures for

Inventory Valuation
1 Q.18 March / June 2019 6 marks
2 Q.18 March / June 2021 6 marks
ACCA March / June 2019 (6 marks)

Question 18:
Hyacinth Co develops and manufactures computer components and its year end was 31 December 20X8.
The company has a large factory, and two warehouses, one of which is off-site. You are an audit
supervisor of Tulip & Co and the final audit is due to commence shortly. Draft financial statements show
total assets of $23·2m and profit before tax of $6·4m. The following three matters have been brought to
your attention:
Inventory valuation
Your firm attended the year-end inventory count for Hyacinth Co and confirmed that the controls and
processes for recording work in progress (WIP) and finished goods were acceptable. WIP and finished
goods are both material to the financial statements and the audit team was able to confirm both the
quantity and stage of completion of WIP.
Before goods are dispatched, they are inspected by the company’s quality control department. Just prior
to the inventory count, it was noted that a batch of product line ‘Crocus’, which had been produced to
meet a customer’s specific technical requirements, did not meet that customer’s quality and technical
standards. This inventory had a production cost of $450,000. Upon discussions with the production
supervisor, the finance director believes that the inventory can still be sold to alternative customers at a
discounted price of $90,000.
Required:
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the VALUATION of Hyacinth Co’s inventory. (6 marks)
Answer:
Inventory valuation:
1. Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to
the WIP schedule, agreeing the percentage completion to that recorded at the inventory count.
2. For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and
agree raw material costs to recent purchase invoices, labour costs to time sheets or payroll records
and confirm overheads allocated are of a production related nature.

Summary Notes by SK
3. Examine post year-end credit notes to determine whether there have been returns which could
signify that a write down is required.
4. Select a sample of year-end finished goods and compare cost with post year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
5. Discuss the basis of WIP valuation with management and assess its reasonableness.
6. Select a sample of items included in WIP at the year end and ascertain the final unit cost price by
verifying costs to be incurred to completion to relevant supporting documentation. Compare to
the unit sales price included in sales invoices post year-end to assess NRV.
7. Review aged inventory reports and identify any slow moving goods, discuss with management
why these items have not been written down or if an allowance is required.
8. For the defective batch of product Crocus, review board minutes and discuss with management
their plans for selling these goods, and why they believe these goods have a NRV of $90,000.
9. If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
10. Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw
material cost, labour cost and any overheads attributed to the cost.
11. Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and
discuss with management if this adjustment has been made. If so, follow through the write down
to confirm.

Question 18:
It is 1 July 20X5 Purrfect Co manufactures and sells a variety of food for dogs and cats. Your firm,
(Kirano & Co, has audited the company for a number of years. You are about to commence the final
audit for the year ended 31 March 20X5 and the draft financial statements show profit before tax of
$23.lm and total assets of $99.2m.
Vego Dog - inventory valuation

Purrfect Co launched a new brand of vegan dog food, Vego Dog, in December 20X4 but sales have
been lower than expected and the directors are considering a discounted sales price. Vego Dog products
are valued using a standard costing method and the standard cost comprises raw materials, labour costs
and production overheads. As at 31 March 20X5, Vego Dog products with a standard cost of $2.4m
were included as finished goods in inventory.
Required:
Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the matters identified regarding the inventory valuation of Vego Dog products.
(6 marks)
Answer:
Purrfect Co
Inventory of Vego Dog
1. Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2·4m to
inventory records.
2. Agree the quantity of Vego Dog products shown as held at the year end to the year-end inventory
count records.
3. Request a breakdown of the cost calculation of each unit of this product and discuss with
management how the standard cost was derived.

Summary Notes by SK
4. Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost is
$2·4m.
5. For a sample of finished goods items, obtain standard cost cards and agree:
 raw material costs to recent purchase invoices;
 labour costs to time sheets or wage records;
 overheads allocated to invoices and that they are of a production nature.
6. Compare sales prices over time to establish if the price has been reduced because of falling demand
to determine whether an allowance is required.
7. Compare actual sales units per month to budgeted sales per month from before and after the year
end to establish how much lower actual sales are than expected and discuss with management.
8. Select a sample of items included in inventory of Vego Dog and review post year-end sales
invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

Summary Notes by SK
Test Questions – Inventory

Your firm is the auditor of Shahzad Limited (SL), a wholesaler of consumable products, for the year
ended 30 June 2021. SL maintains up to date computerized inventory records. The following matters
have been observed during the inventory count:
(i) The inventory count took place on 1 July 2021 under the supervision of the warehouse
manager and his staff, who are responsible for maintaining the inventory. No movement of
inventory took place on that day.
(ii) Four counting teams were formed. Each team comprised of two persons. The floor area was
allocated by the teams among themselves.
(iii) Each team was instructed by the warehouse manager to remember which inventory had been
counted.
(iv) Pre-numbered count sheets were provided to the staff involved in the inventory count. To
facilitate inventory count, inventory belonging to third parties and the inventory ledger
balances were mentioned on the pre-numbered count sheets.
(v) All the cut-off documents were provided to the audit team on the very next day after the
inventory count.
Required: Identify any four weaknesses in the inventory count procedures and state their implications
on the physical count.
------------------------------------------------------------------------------------------------
DinZee Co assembles fridges, microwaves, washing machines and other similar domestic appliances
from parts procured from a large number of suppliers. As part of the interim audit work two weeks prior
to the company year-end, you are testing the procurement and purchases systems and attending the
inventory count.
Required:
a. Explain two audit procedures that an auditor will normally perform prior to attending the clients
premises on the day of the inventory count. (2 marks)
b. On the day of the inventory count, you attended depot nine at DinZee. You observed the following
activities:
1) Pre-numbered count sheets were being issued to client’s staff carrying out the count. The count
sheets showed the inventory ledger balances for checking against physical inventory.
2) All count staff were drawn from the inventory warehouse and were counting in teams of two.
3) Three counting teams were allocated to each area of the stores to count, although the teams
were allowed to decide which pair of staff counted which inventory within each area. Staff were
warned that they had to remember which inventory had been counted.
4) Information was recorded on the count sheets in pencil so amendments could be made easily
as required.
5) Any inventory not located on the pre-numbered inventory sheets was recorded on separate
inventory sheets – which were numbered by staff as they were used.
6) At the end of the count, all count sheets were collected and the numeric sequence of the sheets
checked; the sheets were not signed.

Summary Notes by SK
Required:
i. Identify and explain five deficiencies in the control system for counting inventory at depot nine.
ii. Explain the possible effect of each deficiency
iii. Provide a recommendation to alternative each deficiency. (15 marks)
c.
i. State the aim of a test of control and the aim of Substantive Procedures
ii. In respect of your attendance at Dinzee Co's inventory count state one test of control and one
substantive procedure that you should perform. (3 marks)
-------------------------------------------------------------------------------------------------
Plush Toys Co (Plush), a private company that manufactures toys, has been an audit client of your firm
for several years. As an audit senior, you are involved in the Plush audit for the first time.
The company operates a perpetual inventory counting system. While looking at the prior year audit
files, you note that numerous misstatements were identified by the audit team in respect of purchases
cut-off, prompting adjustments to be made in last year's financial statements.
a. Briefly explain why cut-off is an important issue in the audit inventory (4 marks)
b. Where a company uses a Perpetual inventory counting system, describe the audit work that auditors
would carry out to satisfy themselves that inventory was fairly stated.
(6 marks)
-------------------------------------------------------------------------------------------------
Redburn Co, a publisher specialized in poetry collections, has been a client of your firm of Chartered
Certified Accountants for a number of years.
A material figure in the statement of financial position of Redburn Co is the amount attributed to
inventory of books. Bookshops have the right to returns books which are not selling well, but about 10%
of these are significantly damaged when returned. The company keeps similar records of returns as it
does for sales.
The management of Redburn Co have told you that inventory is correct value at lower of cost and net
realized value. You have already satisfied yourself that cost is correctly determined.
Required:
a) Define the net realizable value. (2 marks)
b) State and explain the purpose of four procedures that you should use to ensure that net realizable
value of the inventory is at or above cost. (8 marks)

Summary Notes by SK

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Sales/ Purchases/ Expenses’

Summary Notes by SK
Substantive Procedures / Audit Test to verify Sales / Turnover
1. Compare current year’s Total sale with last year’s Total sale and investigate any material & significant
difference / variance from the management.
2. Compare current year’s Total sale with budgeted sales and investigate any material & significant
difference / variance from the management.
3. Comparison of current year’s sales from last year’s sales by the following methods and discuss
material fluctuations / significant variances with management.
(Refer A.P from the lecture of ISA 520)
 Product by Product Comparison
 Month by month comparison
 Customer by customer comparison
 Area / Region wise comparison
 Country wise comparison (in the case of Export Sales)
4. Compare Gross Profit margin from last year and also compare from industry norms and investigate
any material & significant difference / variance from the management.
5. Perform predictive test on sales and compare with actual sales recorded in P&L (Predictive Test is
also called________________________________________).
(Covered in ISA 520)
6. Compare actual sales with industry norms (similar industry e.g. Indus Motors vs Honda Atlas )
7. For sample of sample invoices agree the sales price back to the sales price list / sales master records
to ensure the accuracy of invoices.
8. Perform sales cut-off test to ensure completeness and verify cutoff of revenue for the year. (Refer
Cutoff class lecture)
9. Verification of sales invoices of major customers on a sample basis.
10. Verify and trace customer orders from GDN’s, delivery notes and sales invoices and agree these to
the inclusion in the sales ledger to ensure completeness of revenue for the year.
11. Review sample of Credit Notes issued after the Y/End to ensure they were recorded in proper period.
12. Verification of other supporting documents for major customers on a sample basis
(eg ___________________________________________________________)

Summary Notes by SK
Substantive Procedures / Audit Test to verify Purchases
1. Compare current year's Total Purchase with last year's Total Purchase and investigate any material
& significant difference / variance from the management.
2. Comparison of current year's Purchases from last year's Purchases as follows:

Product by Product Comparison (Raw Material / Finished goods)
Month by Month comparison

Supplier by Supplier comparison
Area/ Region wise comparison
Country wise comparison (in the case of import)
3. Review monthly purchases to identify any significant variances & inquire from management.
4. Perform predictive test on purchase and compare with actual purchases recorded in P&L (Called
Predictive Test)
5. Compare actual price for the year with budgeted /forecast purchases estimated by management.
6. Compare actual price for the year with industry norms (similar industry)
7. Perform purchases cut-off tests to ensure completeness and verify cutoff of purchases for the year.
(Refer cutoff class lecture)
8. Trace key suppliers from purchase ledger to assess the completeness of purchases.
9. Verification of purchase supplier invoices of major vendors / suppliers on a sample basis.
10. Select sample of vendors and trace with GRN’s to purchase / suppliers’ invoices to inclusion in
purchases ledger to ensure completeness of purchases.
11. Recalculate the accuracy of purchase invoices on sample basis to assess the completeness of
purchases.
12. Verification of other supporting documents for major suppliers on sample basis.
a. (e.g. _____________________________________).

Summary Notes by SK
Audit Procedures for Operating Expenses

Analytical procedures
1. Compare the total of expenses & its break up from last year & inquire from management in case
of any significant variance.
2. Compare the total of expense from industry norm & inquire from management in case of any
significant or material variance.
3. Review monthly expenses to identify any significant fluctuation and discuss with management
/TGWG.
Test of details
1. Select a sample of transaction from expense G.L account and perform the following procedures:
a. Verify approval and authorizations
b. Verify supporting documentations (e.g. Invoices, Proforma invoices)
c. Verify mathematical accuracy of the invoices.
d. Verify evidence of payments (e.g. payments vouchers, copy of cheque, receiving signatures,
and payments from bank statements)
2. Recalculate the prepayment and accruals charged at the year end to ensure the accuracy of the
expense charged included in the statement of profit and loss.
3. Ensure that period end accruals of expense includes necessary items (e.g. Salaries accrual, Accruals
for utility bills, withholding tax payable, rent payable etc.)
4. Perform cutoff test (i.e. from selected sample of transactions, verify date of acknowledge of receipts
of services or date of expense). (cutoff)
5. Scan expense G.L account to identify any misclassification of expenses. (classification)
6. Review disclosures in the notes to the accounts to ensure compliance with relevant financial
reporting framework. (Presentation)

Summary Notes by SK
Further Explanation on Lawyer Confirmation
Communicate with external legal counsel:
Auditor may communicate with entity's external legal counsel in following manners:
1. Letter of inquiry (either general or specific) prepared by management and sent by the auditor
2. Direct meeting with the lawyer
Letter of general Inquiry:
A letter of general inquiry requests the entity's external legal counsel to inform the auditor of any litigation
and claims that the counsel is aware of, together with an assessment of the outcome of the litigation and
claims, and an estimate of the financial implications (e.g. costs involved).
Letter of specific Inquiry:
A letter of specific inquiry includes:
a) A list of litigation and claims;

b) Where available, management's assessment of the outcome of each of the identified litigation and
claims and its estimate of the financial implications, including costs involved; and
c) A request that the entity's external legal counsel confirms the reasonableness of management's
assessments and provide the auditor with further information if the list is considered by the entity's
external legal counsel to be incomplete or incorrect.
(A letter of specific inquiry is sent if it is unlikely that external legal counsel will respond': appropriately
to a letter of general inquiry).
Direct Meeting:
In certain circumstances, the auditor also may judge it necessary to meet with the entity's external counsel
to discuss the likely outcome of the litigations or claims. This may be the case, for example, where:
a) The auditor determines that the matter is a significant risk.

b) The matter is complex.
c) There is disagreement between management and the entity's external legal counsel.
Ordinarily, such meetings require management's permission and are held with a representative of
management in attendance personnel)
Substantive Procedures / Audit Tests for Payroll / Salary Expense
1. Agree the total wages and salaries recorded in P&L from trial balance and general ledger.
2. For a sample of employee's recalculate the gross & net salary & to verify from payroll records.
3. Compare the current year expense from last year & investigate any significant variance if any.
4. Select the sample of joiners and leavers & trace it from the supporting documentation.
5. Verify subsequent payment & also verify from cash book.
6. Ensure the reasonableness of accruals made from last year & investigate any significant difference.
7. Re-perform the calculation of statutory deductions to confirm whether correct or not.
8. Inspect personal files & agree them to payroll records to confirm salary & wages.

Summary Notes by SK
ACCA F8 Practice Questions on Sales/ Purchases/ Expenses
1 Question 16 (e) Sept / Dec 2018 5 marks
2 Question 16 (d) Sept / Dec 2017 5 marks
CA CAF 8 Practice Questions on Sales/ Purchases/ Expenses


Summary Notes by SK
ACCA F8 September / December 2018 (5 marks)
Question 16 (e)
You are an audit supervisor of Earl & Co and are planning the audit of Darjeeling Co for the year ending
30 September 20X8. The company develops and manufactures specialist paint products and has been a
client of your firm for several years. The audit manager has attended a planning meeting with the finance
director and has provided you with the following notes of the meeting and financial statement extracts.
You have been asked by the audit manager to undertake preliminary analytical procedures using the
financial statement extracts.
Planning meeting notes
During the year Darjeeling Co has spent $0·9m, which is included within intangible assets, on the
development of new product lines, some of which are in the early stages of their development cycle.
Additionally, as the company is looking to expand production, during the year it purchased and installed
a new manufacturing line. All costs, incurred in the purchase and installation of that asset, have been
included within property, plant and equipment. These capitalised costs include the purchase price of
$2·2m, installation costs of $0·4m and a five-year servicing and maintenance plan costing $0·5m. In order
to finance the development projects and the new manufacturing line, the company borrowed $4m from
the bank which is to be repaid in installments over eight years and has an interest rate of 5%. Developing
new products and expanding production is important as the company intends to undertake a stock
exchange listing in the next 12 months.
The company started a number of initiatives during the year in order to boost revenue. It offered extended
credit terms to its customers on the condition that their sales order quantities were increased. In addition,
Darjeeling Co made an announcement in October 20X7 of its ‘price promise’: that it would match the
prices of any competitor for similar products purchased. Customers who are able to prove that they could
purchase the products cheaper elsewhere are asked to claim the difference from Darjeeling Co, within one
month of the date of purchase of goods, via its website. The company intends to include a refund liability
of $0·25m, which is based on the monthly level of claims to date, in the draft financial statements.
The finance director informed the audit manager that a problem arose in June 20X8 in relation to the
mixing of materials within the production process for one particular product line. A number of these faulty
paint products had already been sold and the issue was identified following a number of complaints from
customers about the paint consistency being incorrect. As a precaution, further sales have been stopped
and a product recall has been initiated for any of these specific paint products sold since June. Management
is investigating whether the paint consistency of the faulty products can be rectified and subsequently sold.
Financial statement extracts for year ending 30 September.

Forecast Actual
20X8 20X7
$’000 $’000
Revenue 19,850 16,990
Cost of sales (12,440) (10,800)
Gross profit 7,410 6, 190
Inventory 1,850 1,330
Trade receivables 2,750 1,780
Bank (810) 560
Trade payables 1,970 1,190

Summary Notes by SK
Required:
a. Explain why analytical procedures are used during THREE stages of an audit.
(3 marks)
b. Calculate THREE ratios, for BOTH years, which would assist you in planning the audit of
Darjeeling Co. (3 marks)
c. Using the information provided and the ratios calculated, describe EIGHT audit risks and explain
the auditor’s response to each risk in planning the audit of Darjeeling Co.
Note: Prepare your answer using two columns headed Audit risk and Auditor’s response respectively.
(16 marks)
d. Describe substantive procedures the auditor should perform in relation to the faulty paint
products held in inventory at the year end. (3 marks)
e. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
evidence in relation to Darjeeling Co’s revenue. (5 marks)
(30 marks)
Answer:
Revenue:
1. Compare the overall level of revenue against prior years and budget for the year and investigate
any significant fluctuations.
2. Perform a proof in total calculation for revenue, creating an expectation of the average price for
the main paint products multiplied by the increased sales volumes for this year. This expectation
should be compared to actual revenue and any significant fluctuations should be investigated.
3. Obtain a schedule of sales for the year broken down into the main product categories and compare
this to the prior year breakdown and for any unusual movements, discuss with management.
4. Calculate the final gross profit margin for Darjeeling Co and compare this to the prior year and
investigate any significant fluctuations.
5. Select a sample of sales invoices for customers and agree the sales prices back to the price list or
customer master data information to ensure the accuracy of invoices.
6. For a sample of invoices, recalculate invoice totals including discounts and sales tax.
7. Select a sample of credit notes raised, trace through to the original invoice and ensure the invoice
has been correctly removed from sales.
8. Select a sample of customer orders and agree these to the despatch notes and sales invoices through
to inclusion in the sales ledger and revenue general ledger accounts to ensure completeness of
revenue.
9. Select a sample of despatch notes both pre and post year end and follow these through to sales
invoices in the correct accounting period to ensure that cut-off has been correctly applied.
10. For sales made under the price promise, compare the level of claims made to date with the refund
liability recognised and assess whether it is reasonable.
11. For a sample of sales invoices issued between June and the product recall, trace to subsequent
credit notes to confirm that the sale has been removed from revenue.
--------------------------------------------------------------------------------------------------

Summary Notes by SK
ACCA F8 September / December 2017 (5 marks)
Question 16 (d)
You are an audit supervisor of Halley & Co and you are reviewing the documentation describing Comet
Publishing Co’s purchases and payables system in preparation for the interim and final audit for the year
ending 30 September 20X7. The company is a retailer of books and has ten stores and a central warehouse,
which holds the majority of the company’s inventory.
Your firm has audited Comet Publishing Co for a number of years and as such, audit documentation is
available from the previous year’s file, including internal control flowcharts and detailed purchases and
payables system notes. As far as you are aware, Comet Publishing Co’s system of internal control has not
changed in the last year. The audit manager is keen for the team to utilise existing systems documentation
in order to ensure audit efficiency. An extract from the existing systems notes is provided below.
Extract of purchases and payables system
Store managers are responsible for ordering books for their shop. It is not currently possible for store
managers to request books from any of the other nine stores. Customers who wish to order books, which
are not in stock at the branch visited, are told to contact the other stores directly or visit the company
website. As the inventory levels fall in a store, the store manager raises a purchase requisition form, which
is sent to the central warehouse. If there is insufficient inventory held, a supplier requisition form is
completed and sent to the purchase order clerk, Oliver Dancer, for processing. He sends any orders above
$1,000 for authorisation from the purchasing director.
Receipts of goods from suppliers are processed by the warehouse team, who agree the delivery to the
purchase order, checking quantity and quality of goods and complete a sequentially numbered goods
received note (GRN). The GRNs are sent to the accounts department every two weeks for processing.
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, Oliver, who processes it for payment. The finance director is
given the total amount of the payments list, which she authorises and then processes the bank payments.
Due to staff shortages in the accounts department, supplier statement reconciliations are no longer
performed.
Other information – conflict of interest

Halley & Co has recently accepted the audit engagement of a new client, Edmond Co, who is the main
competitor of Comet Publishing Co. The finance director of Comet Publishing Co has enquired how
Halley & Co will keep information obtained during the audit confidential.
Required:
a) Explain the safeguards which Halley & Co should implement to ensure that the identified conflict
of interest is properly managed. (5 marks)
b) Explain the steps the auditor should take to confirm the accuracy of the purchases and payables
flowcharts and systems notes currently held on file. (5 marks)
c) In respect of the purchases and payables system for Comet Publishing Co:
Identify and explain FIVE deficiencies;
iv. Recommend a control to address each of these deficiencies; and
v. Describe a TEST OF CONTROL the auditor should perform to assess if each of these
controls, if implemented, is operating effectively to reduce the identified deficiency.

Summary Notes by SK
Note: Prepare your answer using three columns headed Control deficiency, Control recommendation,
and Test of control respectively. The total marks will be split equally between each part. (15 marks)
d) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
evidence in relation to Comet Publishing Co’s purchases and other expenses. (5 marks)
(30 marks)
Answer:
Substantive procedures for purchases and other expenses
1. Calculate the operating profit and gross profit margins and compare them to last year and budget
and investigate any significant differences.
2. Review monthly purchases and other expenses to identify any significant fluctuations and discuss
with management.
3. Discuss with management whether there have been any changes in the key suppliers used and
compare this to the purchase ledger to assess completeness and accuracy of purchases.
4. Recalculate the accuracy of a sample of purchase invoice totals and related taxes and ensure
expense has been included in the correct nominal code.
5. Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the
expense charge included in the statement of profit or loss.
6. Select a sample of post year-end expense invoices and ensure that any expenses relating to the
current year have been included.
7. Select a sample of payments from the cash book and trace to expense account to ensure the expense
has been included and classified correctly.
8. Select a sample of goods received notes (GRNs) from throughout the year; agree them to purchase
invoices and the purchase day book to ensure the completeness of purchases.
9. Select a sample of GRNs just before and after the year end; agree to the purchase day book to
ensure the expense is recorded in the correct accounting period.

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
ISA 520 – ‘Analytical Procedure’

Summary Notes by SK

Summary Notes by SK
Expected Questions on ISA 520 (Analytical Procedures)

1. Define Analytical Procedures and explain with examples?
2. Explain the term Analytical Procedures and also explain the different types of Analytical Procedures
available to an External Auditor?
3. What are the factors that an external Auditor needs to consider, when using Analytical Procedures
as substantive procedures?
4. What course of action is available to an External Auditor if the results of A.P identify fluctuations or
inconsistencies?
5. Explain the different stages/situations where A.P can be performed by the External Auditor?
6. As part of auditor’s risk assessment procedures identify unusual changes in the P&L/income
statement and B/S OR identify unexplained fluctuations and inconsistencies in the P&L and B/S
AND provide appropriate response by the External Auditor while planning an Audit? (scenario-
based question) OR
7. Identify and explain the Audit Risk (including risks from accounting ratios) from the given
scenario and the auditors response in this regard.
8. Discuss the reason why does an external Auditor perform A.P at the end of the Audit/when forming
an overall conclusion/ at the overall review stage of an Audit?
-------------------------------------------------------------------- -----------------------------------------
Analytical Procedures
Objectives of the Auditor with respect to Analytical Procedures (Just Read)
(a) To obtain relevant and reliable audit evidence when using substantive analytical procedures: and
(b) To design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall conclusion as to whether the financial statements
are consistent with the auditor’s understanding of the entity.
Definition
It means evaluation of F/S through analysis of plausible relationships among both financial and non-
financial data. It also includes investigations regarding identified fluctuations and inconsistencies
between REPORTED (actual) and REQUIRED/EXPECTED amounts. (i.e. Predicted amounts)

Summary Notes by SK
Please Learn!
(REM! Analytical Procedures are part of CAIRO – ISA 500)
Objectives of Analytical Procedures at different stages of an Audit…
Risk Assessment The objective of A.P here is to identify key risky & material items in the financial
Stage / Start of statements and then those focus on those material items during the audit
the Audit
____________
Performance The objective of A.P here is to identify material misstatement at the assertion
Stage / _______ level (P/L, B/S, P&D) during the audit.
Opinion The objective of Analytical procedure here is to conclude as to whether the

Formation Stage financial statements are consistent with auditor's understanding obtained during
/ __________ the audit & the amount in the financial statements are reasonably & fairly stated.
Factors to be considered when using Analytical Procedures as substantive

procedures
Please Learn Headings
(Very Imp!)
of Factors !
___________________________________________________________________________
Suitability of Analytical Procedures
Factors to be considered Examples
1. Effectiveness of A.P to detect material Large number of Sales Transactions because auditor
misstatement can predict sales with more suitability than other
heads of account.
2. Nature of assertion Suitable for verifying valuation and completeness of
Fixed assets but not its existence in the Co.
Eg.Existence of cash in hand cannot be verified by
A.P
3. Assessed R.O.M.M When controls on sales and purchase cycle are weak
(T.O.Cs) then perform T.O.Ds on receivables and
payables rather than A.P eg Dispatch of 3rd Party
confirmation

Summary Notes by SK
Reliability of Information available
1. Source of Information Information is more reliable when obtained from
independent sources
2. Comparability of information Similar industry / company data must be available

for comparison (E.g. Comparing PSO with Shell and
Toyota with Indus Motors) otherwise.
3. Nature and relevance of information Budgets must not represent wishes… rather they
should represent what actually can be achieved by the
company
4.
Sufficient precision of expectations

(Can the External Auditor identify Material misstatement with Accuracy)
1. Accuracy of predictions Prediction regarding G.P margins is more precise
than discretionary expenses like research and
marketing costs, similarly
predicting sales with accuracy for the next year is
more appropriate than marketing expenses.
2. Degree of disaggregation Cost of Goods Sold can be disaggregated into:
Prime cost, Overheads and similarly SALES can be
broken down into product wise category, customer
wise category, monthly category etc. for reaching the
main reason for variance
3. Availability of financial and non-
Availability of avg. number of units sold and average
financial information price of each unit to calculate an expected amount of
sales and availability of budgets from management to
compare from actual amounts recorded in the P&L

Summary Notes by SK
Acceptable amount of difference

1. Materiality Predicted / Expected Sales: 10,000,000
Actual / Recorded Sales: 12,000,000
Difference: 2000,000
In % ____________________
Desired level of assurance If difference is material then investigate / inquire the
matter further with management.
2. (If difference percentage is below 10 % its If Overall Risk is more = Less Difference will be
immaterial and if the percentage exceeds acceptable.
10 % than further inquiry needs to be If Overall Risk is Less = More difference will be
done from the management) acceptable.
EXAM FOCUSSED POINTS

1. Separate question can be asked on the above factors.
2. Individual factors can also be asked from the above.

Summary Notes by SK
Analytical Procedures that assist when forming an Overall Conclusion
(A.P at the end of the audit OR at the opinion formation stage)
The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor
when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s
understanding of the entity.
The conclusions drawn from the results of analytical procedures are intended to corroborate conclusions
formed during the audit of individual components or elements of the financial statements. This assists the
auditor to draw reasonable conclusions to express an opinion.
The results of such analytical procedures may identify a previously unrecognized risk of material
assessment. In such circumstances, ISA 315 requires the auditor to revise the auditor’s assessment of the
risks of material misstatement and modify the further planned audit procedures accordingly. ( i.e
Extended tests of details will be performed )
Investigating the results of Analytical Procedures (IMP)

If the auditor finds:
 fluctuations (abnormal Sales going UP or Down) or relationships which are inconsistent with other
information (Sales UP and Gross Profit Down_________________________________________), or
 unacceptable levels of differences from expected amounts (difference between Actual and Predicted
Sales)
then ISA 520 requires him to:

 Make enquiries of management for explanation of the unusual/unexpected ratios.
 Verify management’s responses via
 using other audit evidence (by performing Tests of details) to help explain the ratios obtained from
analytical procedures, and their unexpected and unusual values.
Conclusion: (READ ONLY)

The auditor will normally use analytical procedures to obtain supplementary audit evidence. It would
not normally be appropriate to base the audit conclusion on analytical procedures alone.
However, substantive analytical procedures may provide sufficient appropriate audit evidence for a
particular assertion if:
 the assessed risk of material misstatement is insignificant and
 the outcome is sufficiently accurately predictable…. such that audit evidence could be obtained
through the use of substantive analytical procedures alone…..
Analytical procedures are therefore generally designed to provide evidence that supports or corroborates
(or possibly contradicts) the outcome of other, more specific, audit testing procedures. (Tests of details).

Summary Notes by SK
ISA 520 - Analytical Procedures
Areas to be Covered in Analytical Procedures - ISA 520 Action Plan
1 Definition of A. P Learn
2 Different stages where Analytical Procedures can be performed by the External Auditor Learn
3 Examples of Analytical Procedures Learn and understand (SBQ)
4 Factors to be considered when using A.P as Substantive Procedures Learn
5 Analytical procedures at the end of the Audit Learn
6 Investigating the results of Analytical Procedures Learn

Summary Notes by SK
How to attempt scenario-based questions on ISA 520

Summary Notes by SK
CA CAF 8 Practice Questions on Analytical Procedures
S. No Attempt Marks
1 Q.5 Sept 2021 10 marks
3 Q.3 March 2019 11 marks
4 Q.1e March 2015 4 marks

7
8
ACCA F8 Practice Questions on Analytical Procedures
S. No Attempt Marks
Q3 c Dec 2010
1 15 marks
(covered with Audit Risk & Ratios)
2 Q.79 June 2008 20 marks
3 Q.5 a June 2012 3 marks
4 Q.5c Sept/ Dec 2015 3 marks

Summary Notes by SK
ICAP September 2010 (8 marks)
Question 3
The analytical procedures which are carried out near the end of the audit usually assist the auditor in
forming an overall conclusion on the financial statements.
Required:
a. State the objectives which an auditor expects to achieve while applying analytical procedures at the
end of an audit (4 marks)
b. Discuss the course of action an auditor should adopt when results of analytical procedures identify
inconsistent relationships or differ from expected values by significant amounts.
(4 marks)
Answer 3:
a. The auditor should apply analytical procedures at or near the end of the audit in order to
i. From an overall conclusion as to whether the financial statements as a whole are consistent
with the auditor's understanding the entity.
ii. Corroborate the conclusions formed through other procedures performed during the audit of
individual components or elements of the financial statements.
iii. Identify previously unrecognized risk of material misstatement. In such circumstances, the
auditor may:
 revise the auditor's assessment of the risk of material misstatement; and
 modify the further planned audit procedures accordingly.
b. When analytical procedures identify significant fluctuations or relationships, the auditor shall investigate
such differences. Fluctuations can be investigated in the following manner:
i. Inquiring of management and obtaining appropriate audit evidence relevant to management

responses. These audit evidence may be obtained by taking into account:
 the auditor's understanding of the entity ad its environment; and
 with other audit evidence obtained during the course of the audit
ii. Performing other audit procedures when:

 management is unable to provide an explanation or,
 the explanation together with the audit evidence obtained is not considered adequate.
-------------------------------------------------------------------------------------
ACCA F8 December 2010 (15 marks)
Question 3c
You are the audit senior of White & Co and are planning the audit of Redsmith Co for the year ended
30 September 2010. 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.
Redsmith’s management were disappointed with the 2009 results and so in 2010 undertook a number of
strategies to improve the trading results. This included the introduction of a generous sales-related bonus

Summary Notes by SK
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.
The finance director of Redsmith has reviewed the inventory valuation policy and has included additional
overheads incurred this year as he considers them to be production related. He is happy with the 2010
results and feels that they are a good reflection of the improved trading levels.
Financial statement extracts for year ended 30 September
DRAFT ACTUAL
2010 2009
$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:
Using the information above:
i. Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; and
(5 marks)
ii. From a review of the above information and the ratios calculated, explain the audit risks that arise and
describe the appropriate response to these risks. (10 marks)
Answer 3c:
i. Five ratios for 2010 and 2009 to assist in planning
Ratio 2010 2009

Gross margin (gross profit/revenue x 100%) 52.2% 44.4%
Operating margin (PBIT/revenue x 100%) 19.6% 22.2%
Inventory days ([inventory/COS] x365) 70 days 58 days
Receivable days ([receivables/revenue] x 365) 71 days 61 days
Current ratio (Current assets/current liabilities) 2.6 5.8
Top tips: Other ratios you may have used include payable days (53 in 2010, 44 in 2009), the quick ratio (1.8
in 2010, 4.4 in 2009), inventory turnover (5.2 in 2010, 6.3 in 2009) and operating expenses as a percentage
of revenue (33% in 2010, 22% in 2009).

Summary Notes by SK
ii. Audit risks and responses
Audit risks Responses

Redsmith's management may be biased in The audit team must be alert to the increased risk
financial statement areas involving judgement of bias and focus on financial statement
because 2009 results were disappointing. They estimates that require management to exercise
may use accounting estimates to artificially judgement. Careful review must be undertaken
improve presented results. of any such area.
The introduction of a sales related bonus. Increase the sample sizes for any substantive sales
scheme may incentivise employees to push post cut off testing and extend the time period from
year-end sales back into the current year, which the sample is selected.
overstating revenue for 2010.
Receivables balances may not be recoverable A review of aged receivable balances should be
given that receivable days have increased by 10 carried out and there will be an increased focus
days and credit periods for customers have on recoverability through extended post year end
increased. cash receipts testing.
The current ratio decreased by 55%, lack of cash Increased emphasis on a detailed going concern
(an overdraft in 2010) and sales increase review. Discussions with management as to the
indicates potential liquidity problems due to ability of Redsmith to continue as a going
overtrading, which could impact on the concern and careful attention paid to the post
company's ability to continue as a going concern. year end period.
Inventory could be overvalued as a result Review the inventory calculations to identify the
of the new policy to include more overheads in overheads included and ensure they are valid
inventory. This is consistent with the 10 day production overheads. Discuss the reasons for
increase in inventory days. including them with the finance director.
Top tips: Five well explained risks and responses would have been sufficient here, bit you may have
also come up with the following:
Costs of sales may have been omitted or Cost of sales and operating expenses to be
incorrectly included as operating expenses. This compared to prior year and expectations on a line
may be the reason for gross margin increasing by by line basis to identify any instances of change
7.8% but operating margin in classification of expenses.
decreasing by 2.6%.

Summary Notes by SK
Second Answer:
(i) Ratios to assist the audit supervisor in planning the audit
2010 2009
Gross margin 12/23 = 52.2% 8/18 = 44.4%
Operating margin 4.5/23 = 19.6% 4/18 = 22.2%
Inventory days 2.1/11 * 365 = 70 days 1.6/10 * 365 = 58 days
Receivable days 4.5/23 * 365 = 71 days 3.0/18 * 365 = 61 days
Payable days 1.6/11 * 365 = 53 days 1.2/10 * 365 = 44 days
Current ratio 6.6/2.5 = 2.6 6.9/12 = 5.8

(ii)
Quick ratio (6.6 — 2.1) /2.5 = 1.8 (6.9 1.6)/1.2 = 4.4
Audit risk Response to risk

Management were disappointed with 2009 Throughout the audit the team will need to be alert
results and hence undertook strategies to to this risk. They will need to carefully review
improve the 2010 trading results. There is a judgemental decisions and compare treatment
risk that management might feel under against prior years.
pressure to manipulate the results through the
judgements taken or through the use of
provisions.
A generous sales-related bonus scheme has Increased sales cut-off testing will be performed
been introduced in the year, this may lead to along with a review of post year-end sales returns
sales cut-off errors with employees aiming to as they may indicate cut-off errors.
maximise their current year bonus
Revenue has grown by 28% in the year During the audit a detailed breakdown of sales will
however, cost of sales has only increased by be obtained, discussed with management and
10%. This increase in sales may be due to the tested in order to understand the sales increase.
bonus scheme and the advertising however,
this does not explain the increase in gross
margin. There is a risk that sales may be
overstated.
Gross margin has increased from 44·4% to The classification of costs between cost of sales and
52·2%. Operating margin has decreased from operating expenses will be compared with the prior
22·2% to 19·6%. This movement in gross year to ensure consistency.
margin is significant and there is a risk that
costs may have been omitted or included in
operating expenses rather than cost of sales.
There has been a significant increase in
operating expenses which may be due to the
bonus and the advertising campaign but could
be related to the misclassification of costs.

Summary Notes by SK
The finance director has made a change to the The change in the inventory policy will be
inventory valuation in the year with discussed with management and a review of the
additional overheads being included. In additional overheads included performed to ensure
addition inventory days have increased from that these are of a production nature.
58 to 70 days. There is a risk that inventory is
overvalued. Detailed cost and net realisable value testing to be
performed and the aged inventory report to be
reviewed to assess whether inventory requires
writing down.
Receivable days have increased from 61 to 71 Extended post year-end cash receipts testing and a
days and management have extended the review of the aged receivables ledger to be
credit period given to customers. This leads to performed to assess valuation
an increased risk of recoverability of
receivables.
The current and quick ratios have decreased Detailed going concern testing to be performed
from 5·8 to 2·6 and 4·4 to 1·8 respectively. In during the audit and discussed with management
addition the cash balances have decreased to ensure that the going concern basis is
significantly over the year. reasonable.
Although all ratios are above the minimum

levels, this is still a significant decrease and
along with the increase of sales could be
evidence of overtrading which could result in
going concern difficulties.
-------------------------------------------------------------------------------------------------

Question 79
a. With reference to ISA 520 Analytical Procedures and ISA 315 Identifying and assessing the risks of
material misstatement through understanding the entity and its environment explain
i. what is meant by the term ‘analytical procedures’; (2 marks)
ii. the different types of analytical procedures available to the auditor; and (3 marks)
iii. the situations in the audit when analytical procedures can be used. (3 marks)
Zak Co sells garden sheds and furniture from 15 retail outlets. Sales are made to individuals, with income
being in the form of cash and debit cards. All items purchased are delivered to the customer using Zak’s
own delivery vans; most sheds are too big for individuals to transport in their own motor vehicles. The
directors of Zak indicate that the company has had a difficult year, but are pleased to present some
acceptable results to the members.

Summary Notes by SK
The statements of profit or loss for the last two financial years are shown below:
Statement of profit or loss
31 march 2008 31march 2007
Income statement $'000 $'000
revenue 7,482 6364
cost of sales (3,520) (4,253)
Gross Profit 3,962 2,111
Operating expenses (1235) (1320)
Administration (981) (689)
Selling and distribution (101) (105)
Interest payable 145
Investment income 1790 (3)
Profit / (loss) before tax
Financial statement extract 253 (950)
Cash and bank
Required:
b. As part of your risk assessment procedures for Zak Co, identify and provide a possible explanation
for unusual changes in the statement of profit or loss. (9 marks)
c. Confirmation of the end of year bank balances is an important audit procedure.
Required:
Explain the procedures necessary to obtain a bank confirmation letter from Zak's co bank.
Answer 79:
a. Analytical procedures
i. Analytical procedures consist of the analysis of significant ratios and trends including the resulting
investigations of fluctuations and relationships that are inconsistent with other relevant information
or which deviate from predictable amounts.
ii. Types of analytical procedures

 The consideration of comparisons with similar information for prior periods, anticipated results
of the client from budgets or forecasts, predictions prepared by the auditor, and industry
information
 Analytical procedures between elements of financial information that are expected to conform to
a predicted pattern based on the client's experience, such as the relationship of gross profit to sales
 Analytical procedures between financial information and relevant non-financial information,
such as the relationship of payroll costs to the number of employees

Summary Notes by SK
iii. Use of analytical procedures
Analytical procedures can be used at all stages of the audit, and must be used at:
 The planning stage in accordance with ISA 315 identifying and assessing the risks of material
misstatement through understanding the entity and its environment and;
 The final review stage in accordance with ISA 520 Analytical procedures.
During the audit planning stage, analytical procedures are used as a risk assessment procedure to obtain
an understanding of the entity and its environment and to help determine the nature, timing and extent
of audit procedures.
Analytical procedures can be used as substantive audit procedures during audit fieldwork when their use
can be more effective or efficient than tests of details in reducing the risk of material misstatement at the
assertion level to an acceptably low level.
Analytical procedures must be used at the final review stage of the audit where they assist the auditor in
forming an overall conclusion as to whether the accounts are consistent with his understanding of the
entity.
b) Zak Co Revenue
Revenue
Although the directors have indicated that the company has had a difficult year, revenue has increased
from the previous year by 18%. The auditors need to establish the reason for this increase as it does not
correlate with the directors' comments.
Cost of sales
Cost of sales has fallen by 17% in comparison to the previous year- this is strange given that revenue has
increased, as one would expect cost of sales to similarly increase. The reason for this decrease needs to
be ascertained. It could be as a result of closing inventory being undervalued.
Gross profit
Gross profit has increased dramatically by 88% in comparison to the previous year. The reason for this
needs to be examined, given that revenue has increased but cost of sales has decreased.
Administration costs
Administration costs have fallen slightly by 6%.This appears unusual given that revenue has increased
from the previous year, as one would expect the increased revenue to lead to increased administration
costs. Expenditure in this area may be understated perhaps as a result of incorrect cut-off being applied.
Selling and distribution costs

Selling and distribution costs have increased significantly by 42%. An increase is expected given that
revenue has also increased, however the increase is not comparable. There may have been a misallocation
between administration and selling and distribution costs - again this will need to be investigated
thoroughly.
Interest payable
It is surprising that Zak has a reasonable cash surplus this year but still continues to pay a similar level of
interest. The interest payable may be overstated and the reasons for interest payments not decreasing
despite the absence of the large overdrawn balance seen last year must be established. One explanation
for this might be a cash injection immediately prior to the year end.

Summary Notes by SK
Question 5a
a) Explain the three stages of an audit when analytical procedures can be used by the
auditor. (3 marks)
Answer 5 a:
Analytical procedures
Analytical procedures can be used at all stages of an audit; however, ISA 315 Identifying and assessing the risks
of material misstatement through understanding the entity and its environment andISA 520 Analytical procedures
identify three particular stages.
During the planning stage analytical procedures must be used as risk assessment procedures in order to help
the auditor to obtain an understanding of the entity and assess the risk of material misstatement.
During the final audit analytical procedures can be used to obtain sufficient appropriate evidence.
Substantive procedures can either be tests of detail or substantive analytical procedures.
At the final review stage the auditor must design and perform analytical procedures that assist him when
forming an overall conclusion as to whether the financial statements are consistent with the auditor’s
-------------------------------------------------------------------------------------
ACCA F8 September/ December 2015 (3 marks)
Question 5 c
You are an audit senior of Scarlet & Co and are in the process of reviewing the systems testing completed
on the payroll cycle of Bronze Industries Co (Bronze), as well as preparing the audit programmes for the
final audit.
Bronze operate several chemical processing factories across the country, it manufactures 24 hours a day,
seven days a week and employees work a standard shift of eight hours and are paid for hours worked at an
hourly rate. Factory employees are paid weekly, with approximately 80% being paid by bank transfer and
20% in cash; the different payment methods are due to employee preferences and Bronze has no plans to
change these methods. The administration and sales teams are paid monthly by bank transfer.
Factory staff are each issued a sequentially numbered clock card which details their employee number and
name. Employees swipe their cards at the beginning and end of the eight-hour shift and this process is not
supervised. During the shift employees are entitled to a 30-minute paid break and employees do not need
to clock out to access the dining area. Clock card data links into the payroll system, which automatically
calculates gross and net pay along with any statutory deductions. The payroll supervisor for each
payment run checks on a sample basis some of these calculations to ensure the system is operating
effectively.
Bronze has a human resources department which is responsible for setting up new permanent employees
and leavers. Appointments of temporary staff are made by factory production supervisors. Occasionally
overtime is required of factory staff, usually to fill gaps caused by staff holidays. Overtime reports which

Summary Notes by SK
detail the amount of overtime worked are sent out quarterly by the payroll department to production
supervisors for their review.
To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six months
to factory staff; the production supervisors determine the amounts to be paid. This is communicated in
writing by the production supervisors to the payroll department and the bonus is input by a clerk into the
system.
For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to
the payroll records prior to authorising the bank payment. If any changes are required, the payroll manager
amends the records. For employees paid in cash, the pay packets are prepared in the payroll department
and a clerk distributes them to employees; as she knows most of these individuals, she does not require proof
of identity.
Required:
a. Identify and explain FIVE internal control STRENGTHS in Bronze Industries
Co’s payroll system. (5 marks)
b. Identify and explain SIX internal control DEFICIENCIES in Bronze Industries Co’s payroll system
and provide a RECOMMENDATION to address each of these deficiencies.
(12 marks)
c. Describe substantive ANALYTICAL PROCEDURES you should perform to confirm Bronze
Industries Co’s payroll expense. (3 marks)
Answer 5:
c. Substantive analytical procedures to confirm payroll expense
 Compare the total payroll expense to the prior year and investigate any significant differences.
 Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management any significant variances.
 Compare overtime pay as a percentage of factory normal hours pay to investigate whether it is at
a similar level to the prior year and within an acceptable range. Investigate any significant
differences.
 Perform a proof in total of total wages and salaries, incorporating joiners and leavers and any pay
increase. Compare this to the actual wages and salaries in the financial statements and investigate
any significant differences.
-------------------------------------------------------------------------------------

Summary Notes by SK
Further Practice Questions on ISA – 520
Q. 1 With reference to ISA 520 Analytical Procedures explain

i. hat is meant by the term 'analytical procedures'; (02)
ii. the different types of analytical procedures available to the auditor; and (03)
iii. the situations in the audit when analytical procedures can be used. (03)
(ACCA, Fundamentals Level F8 - June 2008)
Q. 2 An auditor has to rely on various kinds of data while performing analytical procedures. The reliability
of data is influenced by a number of factors. List out the main factors with examples.
(04)
(ICAP, CAF 08 Level - Spring 2007, Q. # 8b)
Q. 3 Mr. Mubarak is the audit senior on the audit of Sky Blue Limited. While comparing the draft financial
statements with the previous year, he noted many unusual fluctuations. Briefly explain the procedure
he should follow, in the above situation. (03)
(ICAP, CAF 08 Level - Autumn 2008, Q. # 5)

Summary Notes by SK
Test Questions - Analytical Procedures
Question 1
Analytical procedures are an important part of the audit process and a tool which the auditor uses
during the various phases of an audit.
Required:
i. Describe the nature and purpose of analytical procedures used during an audit. (6 marks)
ii. Describe the factors that the auditor needs to consider while designing and performing analytical
procedures as substantive procedures. (4 marks)
iii. Describe the objectives which an auditor expects to achieve while applying analytical procedures
at the overall review stage of an audit. (4 marks)
(14 marks)
-------------------------------------------------------------------------------------------------------------------------
Question 2
You are an audit supervisor of Earl & Co and are planning the audit of Darjeeling Co for the year ending
30 September 20X8. The company develops and manufactures specialist paint products and has been a
client of your firm for several years. The audit manager has attended a planning meeting with the finance
director and has provided you with the following notes of the meeting and financial statement extracts. You
have been asked by the audit manager to undertake preliminary analytical procedures using the financial
statement extracts.
Planning meeting notes

During the year Darjeeling Co has spent $0·9m, which is included within intangible assets, on the
development of new product lines, some of which are in the early stages of their development cycle.
Additionally, as the company is looking to expand production, during the year it purchased and installed
a new manufacturing line. All costs, incurred in the purchase and installation of that asset, have been
included within property, plant and equipment. These capitalised costs include the purchase price of
$2·2m, installation costs of $0·4m and a five-year servicing and maintenance plan costing $0·5m. In order to
finance the development projects and the new manufacturing line, the company borrowed $4m from the
bank which is to be repaid in installments over eight years and has an interest rate of 5%. Developing new
products and expanding production is important as the company intends to undertake a stock exchange
listing in the next 12 months.
The company started a number of initiatives during the year in order to boost revenue. It offered extended
credit terms to its customers on the condition that their sales order quantities were increased. In addition,
Darjeeling Co made an announcement in October 20X7 of its ‘price promise’: that it would match the
prices of any competitor for similar products purchased. Customers who are able to prove that they could
purchase the products cheaper elsewhere are asked to claim the difference from Darjeeling Co, within one
month of the date of purchase of goods, via its website. The company intends to include a refund liability
of $0·25m, which is based on the monthly level of claims to date, in the draft financial statements.
The finance director informed the audit manager that a problem arose in June 20X8 in relation to the mixing
of materials within the production process for one particular product line. A number of these faulty paint

Summary Notes by SK
products had already been sold and the issue was identified following a number of complaints from
customers about the paint consistency being incorrect. As a precaution, further sales have been stopped and
a product recall has been initiated for any of these specific paint products sold since June. Management is
investigating whether the paint consistency of the faulty products can be rectified and subsequently sold.
Financial statement extracts for year ending 30 September.
Forecast Actual
20X8 20X7
$’000 $’000
Revenue 19,850 16,990
Cost of sales (12,440) (10,800)
Gross profit 7,410 6,190
---------- ----------
Inventory 1,850 1,330
Trade receivables 2,750 1,780
Bank (810) 560
Trade payables 1,970 1,190
Required:
a. Explain why analytical procedures are used during THREE stages of an audit.
(3 marks)
b. Calculate THREE ratios, for BOTH years, which would assist you in planning the audit of
Darjeeling Co. (3 marks)
c. Using the information provided and the ratios calculated, describe EIGHT audit risks and explain
the auditor’s response to each risk in planning the audit of Darjeeling Co.
Note: Prepare your answer using two columns headed Audit risk and Auditor’s response

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
ISA 580 – ‘Written Representation’

Summary Notes by SK
Written Representation / Management Representation

Expected Questions
1. Briefly explain the importance of management representation as per ISA 580
2. Briefly state the course of action by the external auditor when management does not provide
the requested management representation. (Scenario based Question)
3. Along with requirement no.2, explain the impact on the audit report.
4. In a given scenario discuss whether it would be appropriate to obtain management
representation from the audit client or not. (IMP)
5. Briefly list the contents of management representation letter.
6. Scenario based question (IMP)
a. Evaluate/ comment on the above situation
b. Explain the course of action including the impact on the audit report.
7. Explain the course of action in the event there is inconsistency of management representation
with other audit evidence.
8. Explain the course of action in the event there is doubt as to reliability of management
representation.

Summary Notes by SK
Written Representation
The auditor obtains written representations from management concerning its responsibilities and to
support other audit evidence where necessary.
Written representations are written statements by management provided to the auditor to confirm certain
matters or to support other audit evidence. They do not include the financial statements, assertions or
supporting books and records.
There are three areas in which written representations are necessary – to confirms management’s
responsibilities, where they are required by other ISAs and to support other audit evidence (Other than those).
Although written representations are a form of audit evidence, they are from an internal source and on
their own they do not provide sufficient appropriate audit evidence about the issues they relate to
(P&L or B/S Item).
Written representations are requested from those responsible for the preparation of the financial
statements – (management is usually the responsible party). These representations can therefore be
requested from the chief executive officer and chief financial officer.
Various Types of Written Representations ……….. (03 Types)
Written representations about management’s responsibilities ….TYPE 01
Summarized version
(2 important Things) IMP
The auditor shall request management to provide written representations on the following matters:
1. That management has fulfilled its responsibility for the preparation and presentation of the financial
statements as set out in the terms of the audit engagement and whether the financial statements are
prepared and presented in accordance with the applicable financial reporting framework.
2. That management has provided the auditor with all relevant information agreed in the terms of the audit
engagement and that all transactions have been recorded and are reflected in the financial statements.

Summary Notes by SK
Other ISA’s / Chapters …..TYPE 02
 Subsequent Events (ISA 560)

 Fraud (ISA 240)
 Non-compliance with Laws and Regulations (ISA 250)
 Related Parties (ISA 550)
 Going Concern (ISA 570)
 Evaluation of misstatements identified during the audit (ISA 450)
Other written representations (TYPE 03) Can be obtained __________________
1. Whether the selection and application of accounting policies are appropriate
2. Plans or intentions that may affect the carrying value or classification of assets
and liabilities
3. Title to, or control over, assets, liens / charge on assets and assets
pledged as collateral
4. Written representations may also be used to obtain confirmation regarding more general
matters from management. ( Eg Internal Controls of the Audit Client.)
(Other than the Above)
‘All deficiencies in internal control that management is aware of have been
communicated to the auditor’
5. Written representations about specific assertions (Any P&L or B/S Item) in the
Financial statements eg Provision for Warranty & Provision for restructuring,
6.
Throughout the course of the audit, the auditors will determine those items on which written
representations are required and will be seeking written representations from mgmnt and TCWG.
Procedures for obtaining Written Representation:

The written representations are usually obtained in the form of a representation letter (discussed later)
addressed to the External auditor after all evidence has been obtained and before signing the audit report.
At the finalization and review stage (_______________________________) the auditors will provide
management with a draft representation letter containing the necessary representations. The auditors will
then ask management to print the letter on their headed paper, review the representations and sign the
document to confirm them.
Purpose of Written Representations: (IMP)

The purpose of written representation is to improve the reliability of audit evidence when the auditor
wants to place some reliance on oral representation. This is appropriate when it is material to the financial
statements and:
i. The matter is subjective (principally one of judgment e.g. Provisions)
ii. Knowledge of fact is confined to management.
Written Representations are NOT a substitute for other evidence and any contradictions between the
written representations and other evidence must be investigated by the External auditor.
Written Representation should NOT however, be a substitute for other independent evidence.

Summary Notes by SK
FORMAT OF MANAGEMENT REPRESENTATION LETTER
Entity letterhead
Addressed to
(To the auditor
Normally, the date of
(Date) audit report
This representing letter is provided in connection with your audit of the financial statements of ABC
Company for the year ended December 31, 20xx for the purpose of expressing an opinion ……..We
confirm that, (to the best of our knowledge and belief, having made such as we considered necessary for
the purpose of appropriately information ourselves):
Financial Statements………….Type 01
 We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [ date of
engagement letter], for the preparation of the financial statements with International Financial
Reporting Standards; (Type 01)
 All events subsequent to the date of the Financial statements and for which International Financial
Reporting Standards require adjustment or disclosures, have been adjusted or disclosed. (ISA 560
)………Type 02
Plz Note:
Information provided & completeness of transaction ……..Type 01
We have provided you with:

 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;
 Additional information that you have requested from us for the purpose of the audit; and
 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.

Summary Notes by SK
FRAUD (ISA 240)
 We have disclosed to you the results of our assessments of the risk that the financial statements may
be materially misstated as a result of fraud. (ISA 240) ch 3
 We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of
and and involves:
 Management;
 Employees who have significant roles in the internal control; or
 Other where fraud should have a material effect on the financial statements. (ISA 240)
 We have disclosed to you all information in relation to allegation of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by employees or others. (ISA 240)
NON-COMPLIANCE (ISA 250)
 We have disclosed all known instances of non-compliance or suspected / possible non-compliance
with laws and regulations whose effects should be considered when preparing financial statements
have been disclosed to the auditor. (ISA 250)
Plz Note:
 RELATED PARTIES (ISA 550)

We have disclosed to the auditor the identity of the entity's related parties and all the related party
relationships and transactions of which they are aware; and
e have appropriately accounted for and disclosed such relationships and transactions in accordance
with the requirements of the framework.
 Going Concern (ISA 570)

We have disclosed to the auditor plans regarding our future actions and the feasibility of these plans
with respect to Going concern of the company.
 Evaluating the effect of uncorrected misstatements (ISA 450)
Signed by Management Signed by senior management /

CFO

Summary Notes by SK
Matters that need to be considered, while assessing the reliability of representation made by
Management. ( READ ONLY)
 Whether the representations are reasonable & consistent with other Audit Evidence.
 Individual making the representation must be well informed of the matters.
 Reliability of representation made in the past.
 Verify audit evidence in Management representation from sources within and outside the entity.
 Ensure the integrity of people/staff making those representations.
-------------------------------------------------------------------------------------------------------------
Linking of ISA 580 and ISA 500
Appropriateness of Audit Evidence
Quality = RELEVANCE AND RELIABLITY OF MANAGEMENT REPRESENTATION
When Independent and reliable 3rd party evidence is available i.e. the auditor can verify balances directly
from the 3rd party than in this case, management representation is not reliable evidence and is not
appropriate will provide a weak form of evidence.
When Independent and reliable 3rd party evidence is not available directly from 3rd parties than
management representation provided by management, though being internally generated, is more
reliable and is appropriate in this case and will provide a strong form of evidence to the external auditor.
------------------------------------------------------------------------------------------------------------------------

Summary Notes by SK
Examples of Situations where Management Representation can be AND cannot be
obtained from an Audit Client …………. (IMP)

Summary Notes by SK
Exam Focused Points + How to Attempt scenario-based Questions

Summary Notes by SK
Exam Focused Points + How to Attempt scenario-based Questions

Summary Notes by SK
Summary Diagram of Management Representation

Summary Notes by SK
ISA 580 - Management Representation
If Management DOES
Inability to obtain S.A.A.E
NOT provide W.R
External Auditor
Shall:
1) Discuss the matter with Management & those charged with Governance as to why
they are refusing to provide Mgmt. rep.
2) Re-evaluate the integrity of Management & evaluate its effects on the reliability of other
Representations. (Oral & written)
3) Evaluate that whether S.A.A.E can be obtained from other sources
4) Reconsider the continuation of engagement with the Audit Client for the next year.
5) Take Actions - including the possible impact on the Audit opinion
Qualify/ Disclaimer of Opinion Disclaimer of Opinion
Because of Inability to obtain If it pertains to TYPE - 1

SAAE
If it pertains to Type – 2 & 3

Summary Notes by SK
Written Representations
Contents of Written /Management Representation …………(Now Made Easy 😊)
1. That management has fulfilled its responsibility for the preparation and presentation of the financial
statements and whether they are prepared and presented in accordance with the applicable financial
reporting framework.
2. That management has provided the auditor with all relevant information and that all transactions
have been recorded and are reflected in the financial statements.
3. Plans or intentions that may affect the carrying value or classification of assets and liabilities
4. All events subsequent to the date of the Financial statements and for which International Financial
Reporting Standards require adjustment or disclosures, have been adjusted or disclosed. (ISA 560)
5. Management has disclosed the results of their assessment of the risk that the financial statements may
be materially misstated as a result of fraud. (ISA 240)
6. Management has disclosed all information in relation to fraud or suspected fraud that they are aware
of and involves:
 Management;
 Employees who have significant roles in the internal control; or
 Other where fraud should have a material effect on the financial statements. (ISA 240)
7. Management has disclosed all known instances of non-compliance or suspected / possible non-
compliance with laws and regulations whose effects should be considered when preparing financial
statements, to the auditor. (ISA 250)
8. Management has disclosed to the auditor the identity of the entity's related parties and all the related
party relationships and transactions of which they are aware; and have appropriately accounted for
and disclosed such relationships and transactions in accordance with the requirements of the
framework.

Summary Notes by SK
SK Drafting of ISA 580 Past Papers
2 Q.1 (b) March 2019 7 marks
4 Q.4 (b) Sept 2016 6 marks

Summary Notes by SK
March 2021 Answer of Question 7 (6 marks)
Comment on each option
Option # 1
(Management representation / written representation)
Management Representations will be signed on 4th March OR 16th March 2021 as the company CEO is
not available from March 5 to 15th 2021.As per ISA 580 management representation is to be dated as
near as practicable but not AFTER the date of report on the financial statement similarly representation
on Match 5th is also not acceptable as we will also need written representation for the intervening period,
therefore management representation dated 4th March and 16th March should not be acceptable to the
external Auditor.
Please note that Audit report cannot be dated (Signed before the date of management representation)
If management DOES NOT provide the required written representations then this will result in an
inability to obtain sufficient and appropriate Audit evidence and may have an impact on the audit report
as per ISA 705.
Option # 2
The CEO’s verbal confirmation of all representation is not a strong piece of evidence and will not enable
the external auditor to obtain sufficient and appropriate Audit evidence as per ISA 500, therefore all
representations should be confirmed in written and approved by TCWG.
Suggestion of best source of action

As per the given scenario the following could be the best course of action:
 Either the audit report to be signed on March 16th 2021.

Or
 The CEO may delegate his signing Authority to some other person like CFO / TCWG
and the report can be signed on 10th March 2021.
-------------------------------------------------------------------------------------
March 2019 Answer of Question 1 (b) (7 marks)
As per the given scenario the client is in dispute with one of his suppliers and is claiming Rs. 10 million,
however as per the negotiations our client will receive Rs. 7 million in this regard. Our client has agreed
to provide a written representation to confirm the said receivable but has precluded from sending a third-
party confirmation.
As per ISA 580, Management Representation supports the other Audit Evidence and on their own they
do NOT provide sufficient appropriate Audit Evidence about the issues they relate to.
In the given scenario, as third-party evidence can be obtained therefore, Management Representation is
NOT a reliable piece of evidence and is NOT appropriate and will provide a weak form of evidence as
per ISA 580.

Summary Notes by SK
The Auditor also needs to consider the following:
 The external auditor must evaluate the implications of the managements refusal on
the:
 Auditors assessment of ROMM
 The risk of fraud and
 On the nature timing and extent of other Audit procedures.
If management has valid grounds not to dispatch confirmation than the auditor must perform alternative
/ further audit procedures and if there is no reasonable justification than in this case the matter should
also be discussed with those charged with governance.
If the auditor concludes that sufficient and appropriate audit evidence cannot be obtained than in this
case there may be an impact on the Audit opinion as per ISA 705.
-------------------------------------------------------------------------------------
Sept 2019 Question 1 (8 marks)
Case 1
Management representation is required as per ISA 560, clearly stating ‘All events subsequent to the date
of the Financial statements and for which International Financial Reporting Standards require
adjustment or disclosures, have been adjusted or disclosed.
Case 2
In this case management representation is not required as per ISA 580 because the auditor can obtain
audit evidence by performing various other procedures. For example dispatching 3rd party confirmation,
sales agreement and correspondence with the customer.
After obtaining this evidence the auditor may as per his professional judgment obtain corroborative audit
evidence and obtain management representation in this regard.
Case 3
In this case management representation is not required as per ISA 580 because the auditor can obtain
audit evidence by performing other audit procedures. In this case the auditor must discuss the matter
with management and TCWG and also dispatch 3rd party confirmation and verify other correspondence
from the customer.
Case 4
In this case the auditor must obtain management representation letter as per ISA 250 stating that ‘we
have disclosed all known instances of non-compliance or suspected non-compliance with law and
regulations, whose effect should be considered when preparing financial statements, to the auditor.
-------------------------------------------------------------------------------------

Summary Notes by SK
Sept 2016 Question 4b (6 marks)
Evaluation of the given situation and comment on the management's instance
In the given scenario, the issue pertains to related party transaction. The management is of the view that
as the auditors have conducted detailed procedures, a written representation is not required in this regard.
The external auditor is required to obtain written representation as per ISA 550 which is as follows:
 We have disclosed to the auditor the identity of the entity's related parties and all related party
relationships and transaction of which they are aware; and
 We have appropriately accounted for and disclosed such relationships in accordance with the
requirement of the framework.
Therefore, if management denies or refuses to provide the said representation as per ISA 550, this will
result in an inability to obtain sufficient appropriate audit evidence as per ISA 500.
Course of action by the external auditor
The following Course of action /steps may be performed by the external auditor.
1. Discuss the matter with management and TCWG as to why they are refusing to provide management
representation.
2. Re-evaluate the integrity of management and evaluate its effects on the reliability of other
representations (oral and written)
3. Take actions including the possible impact on the audit opinion. ( explain further depending upon
the number of marks)
-------------------------------------------------------------------------------------
Sept 2017 Question 10 (11 marks)
Case (a)
Explanation of above matter
In the given case, the date of report is September 29th 2017, however management representation letter
is dated September 20th, 2017 which is before the date of audit report.
As per the ISA 580, management is responsible for providing all information up to the date of report and
the auditor is concerned with events occurring up to the date of audit report, therefore management
representations are dated as near as practicable to but NOT after the date of audit report on the financial
statements
Therefore, in the given case the representation letter dated September 20th, 2017 is not acceptable as it
should be dated 29th September and if the CEO is not available it can be signed by other equivalent
person in the entity e.g. Director Finance or C.O.O / TCWG( as per the signature mandate of the
company)

Summary Notes by SK
Case (b)
Explanation of above matter
A written representation that has been modified from that requested by the External auditor does not
necessarily means that management did not provide the written representation and cannot be accepted
by External auditor i.e. Auditor may still conclude that it is a reliable written representation for audit
purposes.
However, the auditor is required to consider the effects of the pervasiveness of the information destroyed
in the fire on the financial statements & the effect therefore on the opinion in the auditor’s report in
accordance with ISA 705.
If information has been given & effect has been incorporated in the financial statements then management
representation can be accepted by the external auditor.
Case (c)
Explanation of above matter (Refer revision lecture of ISA 580)
The aggregate of uncorrected misstatements / adjustments are included as part of the management
representation letter as per ISA 450 only if they are considered to be immaterial, individually and in
aggregate to the FS taken as a whole as per management and also at the same time the external auditor
concludes that these misstatements if not adjusted by the management won’t have an impact on the audit
opinion.
The decision of amount/adjustment being material or immaterial is taken as per the professional
judgment of the external auditor in the light of ISA 320 and not as per the judgment of management and
TCWG.
Similarly, any impact on the audit opinion is to be considered by the external auditor as per his
professional judgment in light of ISA 705 and not on the basis of management comments or their
judgement.
Therefore, if the external auditor concludes that adjustments are required in the accounts and they are
material as per ISA 320 then obtaining management representation will not be sufficient / enough and
therefore, this may have an impact on the audit opinion a per ISA 705

Summary Notes by SK
CA CAF 8 Practice Questions on Management Representation

1
2
3
4 Qs. 1 September 2019 8 marks
5 Qs. 3 (b) September 2018 5 marks
6 Qs. 6 (c) March 2018 4 marks
7 Qs. 10 Sept 2017 11 marks
8 Qs.8 March 2017 8 marks
9 Q.4 (b) (ISA 580 + 550) Sept 2016 6 marks
10 Q.1 (f) March 2015 3 marks
12 Q.5 (ISA 580 + 550) March 2013 9 marks
13 Q.4 (b) Sept 2012 5 marks

Management Representation
1 Q.5 Dec 2012 11 marks
2 Q.5 Dec 2010 20 marks

Summary Notes by SK
Question 5
a) Explain the purpose of, and procedures for, obtaining written representations.
(5 marks)
b) 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.
Required:
Describe the relevance and reliability of this oral representation as a source of evidence to confirm
the completeness of the bank overdraft balances. (3 marks)
Written representations
Written representations are necessary information that the auditor requires in connection with the audit
of the entity's financial statements. Accordingly, similar to responses to inquiries, written representations
are audit evidence.
The auditor needs to obtain written representations from management and, where appropriate, those
charged with governance that they believe they have fulfilled their responsibility for the preparation of
the financial statements and for the completeness of the information provided to the auditor.
Written representations are needed to support other audit evidence relevant to the financial statements
or specific assertions in the financial statements, if determined necessary by the auditor or required by
other international Standards on Auditing. This may be necessary for judgmental areas where the auditor
has to rely on management explanations.
Written representations can be used to confirm that management have communicated to the auditor all
deficiencies in internal controls of which management are aware.
Written representations are normally in the form of a letter, written by the company's management and
addressed to the auditor. The letter is usually requested from management but can also be requested from
the chief operating officer or chief financial officer. Throughout the fieldwork, the audit team will note
any areas where representations may be required.
During the final review stage, the auditors will produce a draft representation letter. The directors will
review this and then produce it on their letterhead.
It will be signed by the directors and dated as at the data the audit report is signed, but not after.
b. Oral representation
A representation from management confirming that overdrafts are complete would be relevant evidence.
Overdrafts are liabilities and therefore the main focus for the auditor is completeness.
With regards to reliability, the evidence is oral rather than written and so this reduces its reliability. The
directors could in the future deny having given this representation, and the auditors would have no
documentary evidence to prove what the directors had said.
This evidence is obtained from management rather than being auditor generated, and is therefore less
reliable. Management may wish to provide biased evidence in order to reduce the amount of liabilities in

Summary Notes by SK
the financial statements. The auditors are unbiased and so evidence generated directly by them will be
better.
External evidence obtained from the company's banks could be used to confirm the bank overdraft
balances and this would he more independent than relying on management's internal confirmations.
-------------------------------------------------------------------------------------
Question 5
Greenfields Co specialises in manufacturing equipment which can help to reduce toxic emissions in the
production of chemicals. The company has grown rapidly over the past eight years and this is due partly
to the warranties that the company gives to its customers. It guarantees its products for five years and if
problems arise in this period it undertakes to fix them, or provide a replacement product.
You are the manager responsible for the audit of Greenfields and you are performing the final review
stage of the audit and have come across the following two issues.
Receivable balance owing from Yellowmix Co.
Greenfields has a material receivable balance owing from its customer, Yellowmix Co. During the year-
end audit, your team reviewed the ageing of this balance and found that no payments had been received
from Yellowmix for over six months, and Greenfields would not allow this balance to be circularised.
Instead management has assured your team that they will provide a written representation confirming
that the balance is recoverable.
Warranty provision
The warranty provision included within the statement of financial position is material. The audit team
has performed testing over the calculations and assumptions which are consistent with prior years. The
team has requested a written representation from management confirming the basis and amount of the
provision are reasonable. Management has yet to confirm acceptance of this representation.
Required:
a. Describe the audit procedures required in respect of accounting estimates. (5 marks)
b. For each of the two issues above:
i. Discuss the appropriateness of written representations as a form of audit evidence; and

(4 marks)
ii. Describe additional procedures the auditor should now perform in order to reach a conclusion
on the balance to be included in the financial statements. (6 marks)
Note: The total marks will be split equally between each issue.
c. The directors of Greenfields have decided not to provide the audit firm with the written representation
for the warranty provision as they feel that it is unnecessary.
Required:
Explain the steps the auditor of Greenfields Co should now take and the impact on the audit report in
relation to the refusal to provide the written representation. (5 marks)
(20 marks)

Summary Notes by SK
Answer:
a. Procedures the auditor should adopt in respect of auditing accounting estimates include:
 Enquire of management how the accounting estimate is made and the data on which it is based.
 Determine whether events occurring up to the date of the auditor’s report (after the reporting
period) provide audit evidence regarding the accounting estimate.
 Review the method of measurement used and assess the reasonableness of assumptions made.
 Test the operating effectiveness of the controls over how management made the accounting
estimate.
 Develop an expectation of the possible estimate (point estimate) or a range of amounts to evaluate
management’s estimate.
 Review the judgments and decisions made by management in the making of accounting estimates
to identify whether there are indicators of possible management bias.
 Evaluate overall whether the accounting estimates in the financial statements are either
reasonable or misstated.
 Obtain sufficient appropriate audit evidence about whether the disclosures in the financial
statements related to accounting estimates and estimation uncertainty are reasonable.
 Obtain written representations from management and, where appropriate, those charged with
governance whether they believe significant assumptions used in making accounting estimates
are reasonable.
b. Receivables balance owing from Yellowmix Co
i. The written representation proposed by management is intended to verify valuation, existence and
rights and obligations of a material receivables balance. As management has refused to allow the
auditor to circularise the balance and there has been little activity on the account for the past six
months then there is very little evidence that has been obtained by the auditor.
This representation would constitute entity generated evidence and this is less reliable than auditor
generated evidence or evidence from an external source. If related control systems operate
effectively then this evidence becomes more reliable. In addition, if the representation is written as
opposed to oral then this will increase the reliability as an evidence source.
Overall, this representation is a weak form of evidence, as there were more reliable evidence options
available, such as the circularisation but this was not undertaken.
ii. In order to reach a conclusion on the balance the following procedures should be performed:
 Discuss with management the reasons as to why a circularisation request was refused.
 Review the post year-end period to identify whether any cash has now been received from Yellowmix
Co.
 Review correspondence with Yellowmix Co to assess reasons for the continued non-payment.
 Review board minutes and legal correspondence to assess whether any legal action is being taken to
recover the amounts due.
 Discuss with management whether a provision or write down is now required.
 Consider impact on audit opinion if balance is considered to be materially misstated.

Summary Notes by SK
Warranty provision
i. In this case the auditor has performed some testing of the provision in order to obtain auditor generated
evidence. The team has tested the calculations and assumptions. None of this is evidence from an
external source.
The very nature of this provision means that it is difficult for the auditor to obtain a significant amount
of reliable evidence as to the level of future warranty claims. Hence the written representation, whilst
being an entity generated source of evidence, would still be useful as there are few other alternatives.
ii. In order to reach a conclusion on the balance the following procedures should be performed:
 Review the post year-end period to compare the level of claims actually made against the amounts
provided.
 Review the level of prior year provisions with the amounts claimed to assess the reasonableness
of management’s forecasting.
 Review board minutes to assess whether any changes are required to the level of the provision as
a result of an increased or decreased level of claims by customers.
c. Steps to take if written representation on warranty provision is not provided

ISA 580 Written Representations provides guidance to the auditor in the case where written representations
are requested from management but they refuse to provide.
If management does not provide the requested written representation on the warranty provision the
auditor of Greenfields should discuss the matter with management to understand why they are refusing.
In addition, the auditor should re-evaluate the integrity of Greenfields’ management and consider the
effect that this may have on the reliability of other representations (oral or written) and audit evidence in
general.
The auditor should then take appropriate actions, including determining the possible effect on the audit
opinion.
Impact on audit report

As the auditor is unable to obtain sufficient appropriate evidence to conclude that the warranty provision
is free from material misstatement then a modified audit opinion will be required.
The warranty provision is material but not pervasive and therefore a qualified opinion would be
appropriate.
The audit report will require an additional paragraph before the opinion which will describe the reason
for the modification; namely that management refused to provide a written representation in relation to
the warranty provision and hence we are unable to form an opinion on this balance. The opinion
paragraph will be amended to state ‘except for’.

Summary Notes by SK
ISA 580 - Written Representation
Areas to be Covered in - ISA 580 Action Plan
1 Management Representation (Importance / Purpose) Learn

2 Management Representation (Explanation) Learn
3 Types of Management Representation (Type 1 ,2 and 3 ) Learn & Understand (Scenario based Question)
4 Examples of Situations where Mgmnt Rep can be / cannot be obtained Learn & Understand (Scenario based Question)
5 Written Representation not provided by Mgmnt Learn & Understand (Scenario based Question)
6 Doubt as to reliability of written representation Learn & Understand (Scenario based Question)
7 Linking of ISA 580 and ISA 550 (Related Parties) Learn & Understand (Scenario based Question)
7 Linking of ISA 580 and ISA 500 (Audit Evidence) Learn & Understand (Scenario based Question)
7 Linking of ISA 580, ISA 320 and ISA 450 Learn & Understand (Scenario based Question)

Summary Notes by SK
Test Questions – Written Representation

Question 1
You are the audit partner of XYZ & Company, Chartered Accountants. The following matters are under
your consideration
a) Asif Limited has made certain investments and has classified them as long-term investments. The
management has also provided written representation in this regard. However, before the finalization
of financial statements the company disposed of some of the said investments. (4 marks)
b) Mansoor Limited has entered into significant related party transactions during the year which are
approved by the Board of Directors and appropriately disclosed. The management has also agreed to
provide a written representation but you have not received it yet. (3 marks)
Required:
Analyze the above situations and explain how you would proceed in the above matters. (7 marks)
-----------------------------------------------------------------------------------------------------------------
Question 2
Hashim Industries Limited (HIL) is a manufacturer of household appliances. Its products are popular in
the market mainly because the company provides a replacement warranty for three years.
HIL's auditor has verified that the basis of arriving at the warranty provision is same as in the previous
year. However, the auditor has requested a written representation from the management that there is no
significant change in circumstances necessitating a change in the basis of arriving at the amount of
warranty provision. The management has yet to confirm acceptance of this representation.
Required:
Discuss the importance of written representation in the above situation and list steps that the auditor
should take and the possible impact on the audit report, if the management is not willing to provide the
required written representation. (11 marks)

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
ISA 550 – ‘Related Parties’

Summary Notes by SK
Summary Diagram
Related Party ISA 550
Risk Assessment Completion of OMC

What are Responsibility of Procedures R.P & R.P
Related Party
Transactions
Transactions
Management External Auditor
Responses to the Risks of Written Representation from

Material Misstatement management in respect of R.P. T
General ISA 550 & Impact on the Audit Report

Transactions outside the ISA 580
Normal course of Business

Summary Notes by SK
Expected Questions on ISA 550

1. What Audit Test /Substantive procedures will be performed by the Auditor in relation to
Related Parties at the planning stage / of the audit.
2. What S.P/A.T will be performed by the auditor to ensure completeness of R.P.T during the
audit / list provided by the auditors.
3. Explain /list the actions that need to be performed by the auditor in the case of identification
of R.P.T/ or in response to the risk of Material Misstatement of R.P? /or not identified and
disclosed by management.
4. What Audit Tests will be performed by the auditors in the case of significant R.P.T outside
the normal course of Business.
5. Briefly explain the R.O.M.M in the case of R.P.T.
6. Scenario based questions along with the concept of management representation

letter.
(ISA 550 & 580)

Summary Notes by SK
Related parties and related party transactions
Related party transactions are material transactions between the client company and a related party of the
company.
It is the responsibility of the client company’s management to record and disclose all material related party
transactions, because these transactions may be carried out on more favourable terms than similar
transactions with an independent third party.
Risk of Fraud in Related party Transactions

There is an increased risk of fraud in this area as related party relationships may present a greateropportunity
for collusion, concealment or manipulation by management. It is therefore particularly important that
the auditor approaches this area of the audit with professional scepticism.
If any fraud risk factors are found these must be taken into account when the auditor identifies and assesses
the risks of material misstatement due to fraud in accordance with ISA 240. A key fraud risk factor identified
by ISA 550 is the existence of a party who exerts dominant influenceover the entity.
Indicators that a person or entity might be a dominant party include:

 significant transactions being referred to the party for final approval
 transactions involving the party (or its close family members) are rarely independently reviewed or
approved.
Risk of Material Misstatement (R.O.M.M) in the case of Related Party Transactions

1.
2.
3.
4.
5.
6.

Summary Notes by SK
9 Baten
Risk assessment procedures ………Shortcut - OMC
As part of the risk assessment procedures required by ISAs 240 and 315 the auditor is required toperform the
following procedures in order to understand the entity’s related party relationships and transactions:
 Consider the risk of material misstatement due to fraud or error arising from related party relationships
and transactions.
 Make inquiries of management in respect of:

i. the identity of related parties
ii. the nature of relationships with those related parties
iii. the nature of any transactions entered into with those parties during the period.
 Obtain an understanding of the internal controls in operation over:

i. the identification of, accounting for and disclosure of related party relationships and transactions
ii. the authorisation and approval of significant related party transactions
iii. the authorisation and approval of significant transactions outside the normal course of business.
Other Activities at the Risk Assessment stage (dictated in the class)
Identifying related parties and related party transactions
In making inquiries of management in respect of the identity of related parties, the auditor will obtain a list of
related parties from the directors, and consider if this list is complete. Tests for completeness could
include the following:
1. Review working papers for previous years, to look for names of known related parties.
2. Review the company’s procedures for identifying related parties.
3. Review shareholder records for the names of major shareholders.
4. Review minutes of shareholder meetings (general meetings of the company).
5. Any bank and legal confirmations obtained as part of his substantive procedures
6. Inspect agreements and contracts not in the ordinary course of business
7. Review internal audit reports
8. Review material contracts re-negotiated by the entity during the year.
Response to the risks of material misstatement

If the auditor discovers previously unidentified or undisclosed related parties or (significant)related party
transactions he must:
1. Determine whether the underlying circumstances confirm the existence of thoserelationships or

transactions.
2. Communicate the relevant information to the audit team.
3. Request management to identify all transactions with the newly identified related parties.

Summary Notes by SK
4. Inquire as to why the entity’s system failed to identify or disclose these related party
relationships or transactions.
5. Perform appropriate substantive procedures on the newly identified related parties orsignificant
related party transactions.
6. Reconsider the risk of there being unidentified or undisclosed related parties or transactions and
perform additional procedures as necessary.
7. If the non-disclosure appears intentional, evaluate the implications for the audit.
8. Re-evaluate the reliability of managements response
Other Procedures
1. The audit team should obtain an understanding of the controls, if any, that management
has established to:
 identify, account for, and disclose related party relationships and transactions;
 authorize and approve significant transactions and arrangements with related parties;
 authorize and approve significant transactions and arrangements outside the normal
course of business.
2. The audit team should inquire of management regarding:

 the identity of related parties including changes from prior period;
 the nature of the relationships between the entity and its related parties; and
 whether any transactions occurred between these related parties during the period
and, if so, the type and purpose of the transactions.
 what controls the entity has to identify, account for and disclose relating to related
party relationships and transactions.
3. The audit team’s discussion on risk shall include specific consideration of susceptibility of
financial statements to material misstatement due to fraud or error through related parties
and their transactions.
If the auditor discovers significant related party transactions outside the entity’s
Normal Course of Business……….. (IMP)
If the auditor identifies significant transactions outside the entity’s normal course of business he must
inquire as to the nature of these transactions and whether related parties could be involved. This is because
these carry a higher risk of involving related parties who have previously been unidentified or
undisclosed.
In this regard External Auditor must perform the following procedures:

 Inspect the underlying contracts or agreements to evaluate whether:
 the contracts etc. were entered into in order to engage in fraudulent financial reporting or to hide
the misappropriation of assets (a lack of business rationale might indicate this)
 the terms of the contracts etc. are consistent with management’s
 explanations, and
 the transactions have been properly accounted for and disclosed in the F/S
 Obtain evidence that the transactions were properly authorised by responsible official

Summary Notes by SK
If management has made a statement in the notes to the financial statements that related party transactions
were made on the same terms as an arm’s length transaction, the auditor must obtainevidence to support this
assertion / statement.
(V.IMP) - - - - ISA 580
Written representations must always be obtained by the auditor from the directors about related parties and
related party transactions. The directors are in the best position to know the identities of any related parties. The
written representationfrom the directors must cover:
 the completeness of the information that has been provided about the identity ofrelated parties and related
party relationships and transactions, and
 the adequacy of accounting for and disclosure of such related party relationshipsand transactions in the

Summary Notes by SK

Related Parties
1 March 2019 No Question
2 Sept 2018 Q/s 6 11 marks
3 March 2018 Q/s 6 (b) 3 marks
5 Sept 2016 Q/s 4 (a) & (b) 12 marks
6 March 2016 Q/s 8 (b) 3 marks
7 Sept 2015 Q/s 1 ( c ) 4 marks
8 March 2015 Q/s 6 7 marks

Summary Notes by SK
Test Question – Related Parties

Question 1
You are the manager responsible for the audit of Zebra Limited (ZL). ZL normally has significant sale and
purchase transactions with its related parties.
Guide your audit team regarding the audit procedures and related activities that should be performed for
obtaining information relevant to identifying the risks of material misstatements associated with related
party relationships and transactions. (8 marks)

Summary Notes by SK
ISA 550 - Related Parties

Risk of Material Misstatement (R.O.M.M) in the case of Related Party
1 Learn
Transactions
2 Risk assessment procedures Learn
Identifying related parties and related party transactions (Completeness of RP &
3 Learn
RPT)
4 Responses to the risks of material misstatement (after risk identification) Learn
If the auditor discovers significant related party transactions outside the entity’s
5 Learn
Normal
6 Course of Business
(Scenario based
Learn and Question along with
7 Written Representation
Understand ISA 580 and Audit
Report)

Summary Notes by SK
Student Notings

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Student Notings

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Student Notings

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ISA 240 – ‘Fraud & Error’

Summary Notes by SK

Summary Notes by SK
FRAUD and ERROR

ERROR:
Fraud is distinguished from an ERROR as error results from a genuine mistake or omission, and is not
an Intentional act.
Eg. Wrong posting in the G.L and posting with the wrong amount.
Unintentional wrong classification between revenue and capital expenditure and research and
development cost.
Hints in the case of an Error

1. Error will normally be of small amounts.
2. Error will normally have supporting evidence & documentation.
3. In the case of an error there will be justification from management.
4. Error will be recurring in nature
5. Error will normally not involve top management
FRAUD:
The term fraud refers to an intentional act by one or more individuals among management, Those
charged with governance, employees or third parties involving the use of deception to obtain an unjust
or illegal advantage.
Examples and Indicators of FRAUD (Few Basic examples)

1. Fraud will be of material amounts.
2. Fraud will not have supporting evidence & documentation.
3. There will be no justification from management.
4. Fraud will be of one-time event i.e Not recurring in nature
5. Fraud will mostly involve TOP management and TCWG
General Fraud Risk Factors

Rapid growth of the company
Proposed takeover of the company
Abnormal sales at the year end
Lack of segregation of duties
High tech industry (e.g. Cellular industry)

Summary Notes by SK
FRAUD RISK FACTORS: (CAN ALSO BE CALLED AS - INDICATORS OF FRAUD)

They are events / conditions that indicate an incentive or pressure to commit fraud or one commits
fraud because of his attitude or rationalization (self-justification)
1.
2.
3.
Types / Categories of Fraud: Please Learn…!
 Misstatement resulting from Misappropriation of assets (M.O.A)

 Misstatement resulting from Fraudulent financial reporting (F.F.R)
EXAMPLES OF MISAPPROPRIATION OF ASSETS (M.O.A)
1. Embezzling Receipts e.g. (Diverting business receipts into personnel bank accounts).
2. Stealing physical assets or intellectual property of the company e.g. stealing inventory
for use or sale, stealing scrap material etc. )
3. Causing an entity to pay for goods or services not received e.g. (payments to fictitious vendors,
payment to fictitious employees / __________________________ )
4. Using an entity’s assets for personnel use e.g. (using company cars & computers e.g.)
Misappropriation of assets is often accompanied by false or misleading records or documents in

order to conceal the fact that the assets are missing / stolen.
EXAMPLES OF FRAUDULENT FINANCIAL REPORTING (F.F.R)

1. Manipulation, falsification or alteration of accounting records or supporting documentation.
2. Misrepresentation or intentional omission from the financial statements of events,
transactions or other significant information.
3. Intentional misapplication of accounting principles in the F/S.
Fraudulent Financial reporting ALSO involves Management Override of Controls. Such fraud can be
committed by management overriding controls using TECHNIQUES such
as:
(IMP)
1. Recording fictitious general entries.
2. Inappropriate adjusting assumptions used to estimate account balances.
3. Omitting, advancing or delaying recognition in the F/S of events & transactions.
4. Concealing or not disclosing facts that could effect the amount recorded in the financial statement.
5. Altering records and terms & conditions related to significant & unusual transactions.
6. Intentional misapplication of accounting policies.
7. Engaging in complex transactions in order to misrepresent the financial statements.

Summary Notes by SK
RESPONSIBILITY OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR
THE PREVENTION & DETECTION OF FRAUD
The primary responsibility for the prevention and detection of fraud rests with both those charged with
Governance and the management.
It is the responsibility of management to establish systems and controls to prevent or detect fraud (and
errors). These systems and controls may then be monitored by internal audit.
It is important that management with the oversight of those charged with governance place a strong
emphasis on fraud prevention, which may reduce opportunities for fraud to take place and fraud
deterrence, which will persuade individuals not to commit fraud because of the likelihood of detection
and punishment.
This involves a commitment to creating a culture of honesty and ethical behavior which can be reinforced
by an active oversight by those charged with governance.
RESPONSIBILITY OF EXTERNAL AUDITOR FOR DETECTING MATERIAL

MISSTATEMENT DUE TO FRAUD
The objective of a statutory audit (an external audit) is to express an opinion on the truth and fairness of
the view presented by the financial statements. Its objective is not primarily the prevention or detection
of fraud.
An External auditor conducting an audit in accordance with ISAs obtains reasonable assurance that the financial
statements taken as a whole are free from material misstatement, whether caused by fraud or error .An auditor
CANNOT obtain absolute assurance that material misstatements in the financial statements will be detected because
of such factors as the use of judgment (____________________________________________________) ,the
use of testing
( ___________________),the inherent limitations of internal control
(e.g____________________________ )and the fact that much of the audit evidence available to the
auditor is persuasive rather than conclusive in nature.(_______________________________________)
Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even though the audit is properly
planned and performed in accordance with the ISA
When obtaining reasonable assurance, an auditor maintains an attitude of professional skepticism

throughout the audit (_____________________________________________), considers the potential for
management override of controls and recognizes the fact that audit procedures that are effective for
detecting error may not be appropriate in the context of an identified risk of material misstatement
due to fraud.
The auditor should maintain an attitude of Professional Skepticism throughout the audit, recognizing
the possibility that a material misstatement due to fraud could exist, notwithstanding the auditors past
experience with the entity about the honesty and integrity of management and those charged with
governance.
It is particularly important in relation to fraud that the auditor maintains an attitude of professional
scepticism as required. ISA 240 states that:
 unless the auditor has reason to believe the contrary, he may accept records and documents as genuine

Summary Notes by SK
 where responses to inquiries of management are inconsistent, the auditor shall investigate the
inconsistencies (as this could indicate potential fraud).
EXTERNAL AUDITOR’S PROCEDURES WITH RESPECT TO PREVENTION AND DETECTION

OF FRAUD
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
1.Professional Skepticism
Due professional care requires the auditor to exercise professional skepticism. Professional skepticism is
an attitude that includes a questioning mind and a critical assessment of audit evidence.
2.Discussion among the Engagement Team
The engagement partner and the other senior team members must discuss with the team members/
engagement team the possibility of misstatement in the financial statements due to fraud.
3.Inquiry from Management
The auditor shall make inquiries of management regarding its:
a) Assessment of the risk of fraud in the financial statements
b) Process for identifying and responding to the risks of fraud
c) Communication to BOD for its processes for identifying and responding to the risks of
fraud and
d) Communication to employees regarding ethical matters
Enquiries from others within the Entity:

i. Personnel not involved in the F.R Process
ii. In-house Legal counsel
iii. Chief Ethics officer / Compliance Officer
iv. Fraud Manager / Similar designated person
v. Internal Audit department (to be covered in ISA 610)
4.Discussion with Those charged with Governance
The auditor to obtain understanding from those charged with governance with respect to the review of
managements process for identifying and responding to the risks of fraud and internal controls in place
to address such risks.
5.Unusual or Unexpected Relations Identified within the F/S

(Covered in ISA 520 – Analytical Procedures
Basic examples:

Summary Notes by SK
6.Evaluation of Fraud Risk Factors
Events or conditions that may indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud or one commits fraud because of his attitude.
(discussed Later)
COMMUNICATION WITH MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE

If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the
auditor shall:
Communicate these matters on a timely basis to the appropriate level of management.
And TCWG
If auditor has identified fraud involving a) Management b) ees having role in internal control c) others
where fraud results in MM in FS …
The auditor to communicate on a timely basis. In exceptional cases where there are doubts about the
integrity or honesty of management /those charged with governance, the auditor may consider taking
legal advice.
COMMUNICATIONS TO REGULATORY AND ENFORCEMENT AUTHORITIES

If the auditor has identified or suspects a fraud, the auditor shall determine whether there is a
responsibility to report the occurrence or suspicion to a party outside the entity. Although the auditor’s
professional duty to maintain the confidentiality of client information may preclude such reporting, the
auditor’s legal responsibilities may override the duty of confidentiality in some circumstances.
The auditor may consider it appropriate to obtain legal advice to determine the appropriate course of action in the
circumstances.
FRAUD RISK FACTORS RELATING TO MISSTATEMENTS ARISING FROM

FRAUDULENT FINANCIAL REPORTING
ISA 240 states that fraud involves:
The following are examples of risk factors relating to misstatements arising from fraudulent financial
reporting.
Incentives/Pressures
 High degree of competition (Tough competition) or market saturation, accompanied by declining
margins.
 Significant declines in customer demand and increasing business failures in either the industry or
overall economy.
 Recurring negative cash flows from operations or an inability to generate cash flows from operations
while reporting earnings and earnings growth.
 Rapid growth or unusual profitability especially compared to that of other companies in the same
industry.
 Sales of shares (either by the Company or by any individual director or any major shareholder)
 Operating losses making the threat of bankruptcy.

Summary Notes by SK
 Because of rapid change in technology, product or other factors the company may be under pressure
to manipulate the accounts.
 Excessive pressure exists for management to meet the requirements or expectations of third parties
due to following:
 Need to obtain additional debt or enquiry financing to stay competitive including financing of major
research and development or capital expenditures.
 Profitability or trend level expectations of investment analysts, institutional investors significant
creditors or other external parties (particularly expectations that are unduly aggressive or unrealistic)
, including expectations created by management in, for example, overly optimistic press releases or
annual report messages.
 Abnormal or material sales near the B/S date and subsequently goods have been returned
Opportunities
The nature of the industry or the entity’s operations provides opportunities to engage in fraudulent
financial reporting that can arise from the following:
 A strong financial presence or ability to dominate a certain industry sector that allows the entity to
dictate terms or conditions to suppliers or customers that may result in inappropriate or non-arm’s-
length transactions.
 Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective
judgments or uncertainties that are difficult to corroborate.
 Management bonus is based on total assets or profitability.
 There is a complex or unstable organizational structure, as evidenced by the following:
 Overly complex organizational structure involving unusual legal entities or managerial lines of
authority.
 High turnover of senior management, legal counsel, or those charged with governance.
e.g: (Significant related party transactions)

Attitudes/Rationalizations
 Communication, implementation or enforcement of the entity’s values by management, or the
communication of inappropriate values or ethical standards, that are not effective.
 Known history of violations of securities laws or other laws and regulations, or claims against the
entity, management, or those charged with governance alleging fraud or violations of laws and
regulations.
 Management failing to remedy known significant deficiencies in internal control on a timely basis.
 (Not giving importance to management letter and the recommendations of the external auditor)
 Low morale among senior mgmt.
 No distinction btw personal and business transactions
 Domineering mgmt. behaviour in dealing with auditor

Summary Notes by SK
RISK FACTORS ARISING FROM MISSTATEMENTS ARISING FROM MISAPPROPRIATION
OF ASSETS
The following are examples of risk factors related to misstatements arising from misappropriation of
assets.
Incentives/Pressures
Personal financial obligations may create pressure on management or employees with access to cash or
other assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other assets susceptible to
theft may motivate those employees to misappropriate those assets. For example, adverse relationships
may be created by the following:
 Known or anticipated future employee layoffs.

 Recent or anticipated changes to employee benefit plans.
 Promotions, compensation, or other rewards inconsistent with expectations.
Opportunities
For example, opportunities to misappropriate assets increase when there are the following:
 Large amounts of cash in hand
 Inventory items that are small in size, of high value, or in high demand.
 Fixed assets which are small in size and easy to steal away from the company
Inadequate internal control over assets may increase the susceptibility of misappropriation of those
assets. For example,
 Inadequate segregation of duties
 Inadequate management oversight of employees responsible for assets, for example,
inadequate supervision of remote locations.
 Inadequate job applicant screening of employees with access to assets.
Attitudes/Rationalizations
 Disregard for the need for monitoring related to misappropriations of assets.
 Disregard for internal control over misappropriation of assets by overriding existing controls OR
 Failing to take actions on known deficiencies
 Changes in behaviour or lifestyle that may indicate assets have been misappropriated.
 Tolerance of petty theft.
EXAMPLES OF CIRCUMSTANCES THAT INDICATE THE POSSIBILITY OF FRAUD
(These are also indicators of Fraud without the classification of FFR and MOA)
The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatement resulting from fraud.
Discrepancies in the accounting records, including:

 Transactions that are not recorded in a complete or timely manner or are improperly recorded as to
amount, accounting period, classification, or entity policy.
 Unsupported or unauthorized balances or transactions.

Summary Notes by SK
 Evidence of employees’ access to systems and records inconsistent with that necessary to perform
their authorized duties.
 Tips or complaints to the auditor about alleged fraud.
Conflicting or missing evidence, including:

 Missing documents.
 Documents that appear to have been altered.
 Unusual discrepancies between the entity's records and confirmation replies.
 Missing inventory or physical assets of significant magnitude.
Problematic or unusual relationships between the auditor and management, including Management
attitude towards auditors
 Denial of access to records, facilities, certain employees, customers, vendors, or others from whom
audit evidence might be sought.
 Undue time pressures imposed by management to resolve complex or contentious issues.
 Unusual delays by the entity in providing requested information.
 An unwillingness to address identified deficiencies in internal control on a timely basis.
Other
 Unwillingness by management to permit the auditor to meet privately with those charged with
governance.
 Tolerance of violations of the entity’s code of conduct.
---------------------------------------------------------------------------------------------------------
Response to the Assessed Risk of Fraud at the F/S Level

1. Assign more experienced and trained audit staff at the client and more supervision required by senior
and experienced audit staff.
E.g. Posting more senior individuals at the client and more supervision by the Job in Charge and
audit supervisor during the audit.
2. Emphasize to the audit team the need to maintain and exercise attitude of professional skepticism
during the audit.
3. Evaluate whether the selection and application of accounting policies by the entity, particularly those
related to subjective measurements (E.g. Revenue in construction contracts) and complex
transactions (proportion of sale of goods and services in a contract) may be indicative of fraudulent
financial reporting resulting from management’s effort to manage earnings.
E.g. Manipulation of Sales/ Revenue via Fictitious Sales invoices
4. Design and perform further audit procedures that are responsive to the assessed R.O.M.M.
5. Incorporate an element of unpredictability in the selection of the nature, timing and extent of audit
procedures to be performed.

Summary Notes by SK
Explanation:
Incorporating an element of unpredictability in the audit procedures to be performed is important as
individuals within entity who are familiar with the audit procedures normally performed on engagements
may be more able to conceal fraudulent financial reporting.
This can be achieved by, for example.
 Performing substantive procedures on selected account balances assertions not otherwise tested due
to their materiality or risk.
(Example: verification of Rent expense or Short-term loan or Marketing expenses.)
 Adjusting the timings of audit procedures from that otherwise expected
(Example: Dispatching debtor and creditors confirmation before the balance sheet date or counting
stock before the B/S date)
 Using different sampling methods.
(Using statistical sampling Method rather than Non-statistical method or using random method
rather than haphazard method)
 Performing audit procedures at different locations or at locations on an unannounced basis.

(Counting inventory in stores / warehouses on locations not counted previously or informing the
audit client on the very last moment or Counting physical cash on different branches for the current
year audit)
Difference between Risk Assessment procedures and Response to the Assessed risks of material
misstatement Due to Fraud
Question reference for Response to the Assessed risk of Fraud
March 2018 Qs 8 (b) 5 Marks

Summary Notes by SK
Response to the Assessed Risk of Fraud at the Assertion Level
(READ ONLY)
Consideration at the Assertion Level

 Visiting locations or performing certain tests on a surprise unannounced basis.
For example, observing inventory at locations where auditor attendance has not been previously
announced or counting cash at a particular date on a surprised basis.
 Altering the audit approach in the current year. For example, contacting major customers and
suppliers orally in addition to sending written confirmations, sending confirmation requests to a
specific party within an organization, or seeking more or different information.
 For significant and unusual transactions, particularly those occurring at or near year-end
investigation the possibility of related parties and the sources of financial resources supporting the
transactions.
 Conducting interviews of personnel involved in areas where a risk of material misstatement due to
fraud has been identified, to obtain their insights about the risk and whether, or how, control address
the risk.
 If the work of an expert becomes particularly significant with respect to a financial statement item for
which the assessed risk of misstatement due to fraud is high, performing additional procedures
relating to some or all of the expert's assumptions, methods or findings to determine that the findings
are not unreasonable, or engaging another expert for that purpose.
 Performing procedures on account or other reconciliations prepared by the entity.
 Seeking additional audit evidences form sources of the entity being audited.
Specific Responses Misstatement Resulting from Fraudulent Financial Reporting.

 Conducting inventory counts at or near the end of reporting period to minimize the risk of
inappropriate manipulation during the period between the count and the end of the reporting period.
Specific Responses __ Misstatement Due to Misappropriation of Assets.

Example of responses to the auditor's assessment of the risk of material misstatement due to
misappropriation of assets are as follow
 Counting cash or securities at or near year-end.
 Confirmation directly with customers the account activity for the period under audit.
 Analyzing recoveries of written off accounts.
 Analyzing inventory shortages by location or product type.
 Comparing keys inventory rations to industry norms.
 Confirming specific terms of contracts with third parties.
 Obtaining evidence that contracts are being carried out in accordance with their terms

Summary Notes by SK
Audit Procedures to TEST / Verify Management Override of Controls - IMP
Irrespective of the auditor's assessment of the risks of management override of controls, the auditor shall
design and perform audit procedures to:
a) Test the appropriateness of journal entries recorded in the general ledger and other adjustments made
in the preparation of the F/S. For such tests,
the auditor shall:
i. Make inquiries of individuals involved in the financial reporting process about inappropriate or
unusual activity in relation to journal entries
ii. Select journal entries and other adjustments made at the end of a reporting period; and
iii. Consider the need to test journal entries and other adjustments throughout the period.
b) Review accounting estimates for biases and evaluate whether they represent a risk of material
misstatements due to fraud. In performing this review, the auditor shall:
i. Evaluate whether the judgments and decisions made by management in making the accounting
estimates included in the financial statements, indicate a possible bias on the part of the entity's
management that may represent a risk of fraud. If so, the auditor shall re-evaluate the accounting
estimates and
ii. Perform a retrospective review of management judgments and assumptions related to significant
accounting estimates reflected in the financial statements of the prior year.
c) for significant transactions that are outside the normal course of business for the entity, or that
otherwise appear to be unusual the auditor shall evaluate whether the business rationale (or the lack
thereof) of the transactions suggests that they may have been entered into to engage in fraudulent
financial reporting or to conceal misappropriation of assets.

Summary Notes by SK

Fraud & Error
ICAP Questions
1 Sept 2011 Q/s 7 (a) & (b) 5 & 6 marks
5 March 2016 Q/s 3 (a) & (b) 11 marks
8 Sept 2017 Q/s 6 (b) 7 marks
10 Sept 2018 Q/s 8 (a) 4 marks
11 Sept 2019 Q/s 2 (c) 5 marks
14 Sept 2021 Q/s 9 (c) 4 marks
15

Summary Notes by SK
Test Question - Fraud & Error
Question 1
Your firm is the external auditor of Avian Limited (AL), a listed company, for the year ending 31 March
2020. AL is engaged in the business of construction and selling of construction material.
During the planning stage, the audit team has noted the following points for your consideration:
(i) AL’s CEO aggressively follows up with the departmental heads for meeting the financial targets
established by the directors. Performance of senior management at AL is measured in terms of year-
on-year profit growth. There is an internal audit division of AL and it reports directly to the CEO.
(ii) AL is facing difficulties in fulfilling its contracts for supply of building blocks due to a sudden rise in
the cost of raw material, however no provision has been made in the financial statements. AL’s CFO
explained that provision has not been made as amount cannot be determined with certainty now
and therefore provision will be made next year, if required. Audit team was of the view that the
provision has not been made because it would significantly affect the profitability of the company.
Required:
Briefly discuss the possible ‘fraud risk factors’ from the above scenario. (9 marks)

Summary Notes by SK
Key sentences for Students
Responsibility of External auditor for the prevention and detection of fraud

1. External auditor is responsible for obtaining reasonable assurance.
2. The objective of an external auditor is to express an opinion on the financial
statements.
3. External auditor cannot obtain an absolute level of assurance because there are inherent
limitations of an audit.
4. There is an unavoidable risk that some material misstatements may not be detected even
though the audit is properly planned and performed.
5. The external auditor should maintain an attitude of professional skepticism throughout the
audit.
6. The risk of not detecting a material misstatement from fraud is higher than detecting error.
7. Audit procedures that are effective for detecting errors may not be appropriate for detecting
fraud.
8. ISA 240 is designed to assist the auditor in identifying and assessing the risk of material
misstatement due to fraud.

Summary Notes by SK

1 Fraud & Error Definition Learn
2 Examples and Indicators of Fraud (Few Basic examples) Read & Understand
3 Examples of Misappropriation Of Assets (M.O.A) Learn
4 Examples of Fraudulent Financial Reporting (F.F.R) Learn
5 Responsibility of Management and Those Charged With Governance for the prevention & detection of fraud Learn
6 Responsibility of external auditor for detecting Material Misstatement due to fraud Learn
7 External auditor's procedures with respect to Prevention and detection of fraud Learn
8 External auditor unable to continue the engagement Read Only
9 Communication with Management and Those Charged With Governance Read Only
10 Communications to Regulatory and Enforcement Authorities Read Only
11 Fraud Risk Factors Read & Understand (V.IMP)
12 Examples of circumstances that indicate the possibility of FRAUD Read, Learn & Understand
13 Response to the Assessed Risk of Fraud at the F/S Level Learn
14 Response to the Assessed Risk of Fraud at the Assertion Level Read only
15 Audit Procedures to TEST / Verify Management Override of Controls Learn

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
ISA 210 – ‘Engagement Letter’

Summary Notes by SK Summary Diagram of Engagement Letter

Summary Notes by SK
Engagement Letter (ISA 210)
PURPOSE OF ENGAGEMENT LETTER (Importance / Benefits)
Engagement letter is a formal written agreement of the terms and conditions between the external auditor
and the client.
The auditor and the client should agree on the terms of the engagement before the audit commences.
It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before
the commencement of the engagement, to help in avoiding misunderstanding/potential for argument
with respect to the engagement.
The engagement letter documents and confirms the auditor’s acceptance of the appointment, the
objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of
any reports.
The agreed terms must be in writing and will take the form of a Formal engagement letter
(it is written on Audit firm’s letter head duly acknowledged by Client as a confirmation to their understanding
of the same …..)
CONTENTS OF an ENGAGEMENT LETTER Please
1. The objective of the audit of financial statements. Learn!
2. Scope of an External audit.
3. Management’s responsibility for the preparation financial statements
4. Management’s responsibility for making judgments and estimates that are reasonable and prudent so
as to give a true and fair view of the entities state of affairs and working results.
5. External auditors’ responsibility for expressing reasonable assurance. (Already covered)
6. The fact that because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of an internal control, there is an unavoidable risk that even some material
misstatement may remain undiscovered.
7. Unrestricted access to whatever records, documentation and other information requested by the
auditor.
8. Description of any other letters/reports the auditor expects to issue to the audit client. (Management
Letter – M.L or any other report as agreed by the audit client)
____________________________________________________________________________________
9. Basis on which audit fees will be determined. (based on the number of hours to be worked at the audit
client)
____________________________________________________________________________________
10. Arrangements regarding the planning and performance of the audit. (will be covered in ISA 300)
11. Arrangements concerning the involvement of internal auditors and other client staff.
12. Arrangements to be made with the predecessor auditor, in the case of an initial audit
(initial audit means where last year audit was conducted by another auditor / audit firm)
Example from video lecture
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Summary Notes by SK
13. Any restriction of the auditor’s liability when such possibility exists.
______________________________________________________________________________________
Extra Point:
Provision of all necessary information to be provided by Management including management
representations (ISA 580 – will be discussed later)
RECURRING AUDITS (The audit that is done year after year)
In the case of recurring audits, the auditor should consider whether circumstances require the terms of
the engagement to be revised and whether there is a need to remind the client of the existing terms of the
engagement. The auditor may decide not to send a new engagement letter every year.
However, under the following circumstances, a new/revised engagement letter MAY be appropriate:
i. Any indication that the client misunderstands the objective and scope of the engagement.
ii. Any revision of terms of the engagement or introduction of special terms.
iii. (scope widened or any special requests by the client increasing the audit work)
iv. A recent change of senior management or board of directors, or in ownership. (New CFO)
v. A significant change in the nature or size of the client’s business.
vi. (Subsidiary acquired)
vii. Any new significant legal/regulatory/Financial reporting framework/other requirement
(Engagement letter required every year)
viii. Change in ownership. (Takeover by Parent company)

Summary Notes by SK
Engagement Letter (ISA 210) ….Extra Discussion
Content of the engagement letter
The engagement letter should include details of the following:
 The objective and scope of the audit.
 The responsibilities of the external auditor.
 The responsibilities of management and TCWG.
 Identification of the underlying financial reporting framework.
 Reference to the expected form and content of any reports to be issued (normally audit report and
Management letter)
In addition to the above, the auditor may feel that it is appropriate to include additional points in the
engagement letter, such as:
 more details on the scope of the audit, such as reference to applicable legislation, regulations, ISAs,
ethical requirements.
 the form of any other communication of results of audit engagement. (Other deliverables)
 the requirement for the auditor to communicate key audit matters in the auditor’s report in
accordance with ISA 701
 the fact that because of the inherent limitations of an audit, and the inherent limitations of internal
control, there is an unavoidable risk that some material misstatements may not be detected even
though the audit was properly planned and performed in accordance with ISAs; E.g.:
 arrangements regarding the planning and performance of the audit, including the composition of the
audit team;
 the expectation that management will provide written representations;(ISA 580)
 the expectation that management will provide access to all information that is relevant to the
preparation of the financial statements and its disclosures
 The agreement of management to make available to the auditor draft financial statements, including
all information relevant to their preparation, whether obtained from within or outside of the general
and subsidiary ledgers (including all information relevant to the preparation of disclosures), and the
other information if any, in time to allow the auditor to complete the audit in accordance with the
proposed timetable. Eg:
 the basis on which fees are computed and any billing arrangements;
 a request for management to acknowledge receipt of the engagement letter and to agree to its terms;
 arrangements concerning the involvement of other auditors, predecessor auditor, experts (ISA 620)
or internal auditors (or other staff of the entity) Eg:
 any restriction of the auditor’s liability when such possibility exists (where our
liability is excluded)
 Any obligations to provide audit working papers to other parties. (keeping in view
the requirements of confidentiality

Summary Notes by SK
Summary Diagram Preconditions for an Audit
Whether the F.R.F is acceptable or Not

Preconditions for an Audit
Obtain Management's Agreement that it acknowledges &
understands its responsibilities for:
Preparation of F/S as per IFRS
Internal Controls to prepare these F/S
Present Providing Information as follows:
Yes No All Information
Any Additional Information

Sign the
Engagement Letter Refuse to
continue Un Restricted access to entity staff
(where Auditor thinks necessary)
(Unless required by law or regulation to do so.)

Summary Notes by SK
Preconditions for an External Audit
The objective of the auditor, as per ISA 210 is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed. This is done by:
 Establishing whether the preconditions for an audit are present; and
 Confirming that there is a common understanding between the external auditor and management.
Preconditions are: 8 Baten!

1. Whether the financial reporting framework to be used in the preparation of the F/S is acceptable, for example
IFRS & IAS and
2. Obtain the agreement of management that it acknowledges & understands its responsibility for: (This is the
PREMISE of an Audit)
 For the preparation of the financial statements;
 For internal controls to ensure that the financial statements are not materially misstated; and
 To provide the auditor with information as follows:
i. All information
ii. Any relevant and additional information (for the purpose of the audit) and
iii. Unrestricted access to all personnel. (where auditor deems necessary)
(Please learn the above 8 points)

Summary Notes by SK
Response if preconditions are NOT present
If the preconditions for an audit are not present, the auditor shall discuss the matter with management. The auditor
should explain what the preconditions are and request to comply with ISA 210.
The auditor should also explain that one of the purposes of the preconditions is to avoid misunderstanding about
the respective responsibilities of management and the EXTERNAL auditor.
Unless required by law or regulation to do so, the auditor shall NOT accept the proposed audit engagement
where:
1. the financial reporting framework to be used is unacceptable, or
2. management do not agree to the above responsibilities (the ‘premise’) stated in the preconditions.
3. There is a limitation on scope by the mgmt. such that the auditor would not be able to express an opinion on
the FS and the auditor concludes that the possible effect on the FS of undetected misstatements cud be both
material and pervasive (i.e Withdrawal in this case if allowed by local laws & regulations)
(The only exception allowed by ISA 210 for accepting or continuing the engagement to the above is when law or
regulation requires the auditor to do so.)
Acceptance of change in the terms of engagement

The entity might, in certain circumstances, ask the auditor to change the terms of the audit engagement. This
might result from a genuine …….change in circumstances affecting the need for the service………… from a
misunderstanding as to the nature of an audit as originally requested and …………..a Restriction on the scope of
an audit engagement.
(Restriction on scope of the External Auditor)
(The entity might then ask for the audit engagement to be changed to a review engagement to avoid a qualified
opinion or a disclaimer of opinion.)
Factors to be considered by the Auditor before accepting the change in terms of engagement
1. Contractual and legal implications of the change
2. Justification by mgmt. / otherwise for changing the terms of the engagement.
3. The information given by mgmt. / TCWG for the change
ISA 210 requires the auditor to consider the justification for the request and whether it is “reasonable”.
1. If the auditor considers that it is a reasonable request from the management / circumstances then revised
terms should be agreed and recorded by both the parties.
Steps that the auditor can take, if he is unable to agree to a change in terms of engagement letter.
2. External auditor to discuss the matter with management and explain the circumstances with respect to change
in terms
3. If the auditor is unable to agree to a change of terms he should withdraw (i.e. Resign) from the engagement
(where possible under applicable law) and
4. Consider whether there is any obligation (contractual or otherwise) to report the circumstances to other parties
such as those charged with governance, owners or regulators (SECP & ICAP)

Summary Notes by SK

Preconditions
1 Q.1 (a & b) March 2011 10 marks
2 Q.2 September 2015 9 marks
4 Q.1 (a) September 2013 6 marks
7 Q.6 (a) March 2017 4 marks
8 Q.6 (a) March 2019 4 marks

Summary Notes by SK
Test Questions - Preconditions
Question 1
List the important matters that are required to b included in an audit engagement letter.
(6 marks)
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Question 2
State the matters which an auditor should consider to establish whether the pre-conditions for an audit are
present. (5 marks)

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
ISA 530 – ‘Sampling’

Summary Notes by SK
Meaning and Explanation of SAMPLING
External auditors do not normally check 100% of transactions and balances that go into the financial statements.
For example, they do not count every item of inventory and do not check 100 % of customer balances in the
trade receivable ledger or creditor’s ledger. Instead, they select a sample of items for testing, and test the sample
for accuracy.
However, sampling is not always appropriate for auditing. For example, if a population consists of a small
number of large items, it may well be appropriate to apply audit tests to the entire population. Also, sampling
is only appropriate where the population is homogeneous (i.e. where all the items in the population share
common characteristics e.g. Stock of Jeans or stock of air-conditions).
If this condition is not satisfied, it may be necessary for the auditor to test the entire population.
It is therefore important that the sample chosen should be representative of the population, and should reflect
the characteristics of the population as a whole.
Need for sampling (Why Sampling is done?)

Plz Learn
1. !
2.
3.
4.
Factors to be considered when using sampling technique and designing sample size or design.
Statistical or non-statistical method to be used.
1. Sample selection method
2. The level of audit risk for the auditor.
3. The purpose of audit procedure to be performed.
4. Level of sampling risk to be reduced.
5. The population from which the sample will be drawn.
6. The sample design to be such that every sampling unit has an equal chance of being selected.
Population:
The entire set of data from which a sample is selected & about which the auditor wishes to draw conclusions is
known as the population.

Summary Notes by SK
Essential for selecting a population:
Population should be appropriate & should be complete.
(E.g. when testing Receivables, the population is the list of Receivables Balances for each customer…..i.e. all
Trade receivable balances as on B/S date.).
Each individual item in the population (Party wise balances) is referred to as a sampling unit. It is important that
all sampling units should be homogeneous, (same or have the same characteristics).
In applying audit procedures the auditor has following choices:

(a) Selecting all items (100% examination)
(b) Selecting specific items (it’s not sampling)
(c) Audit Sampling
Selecting 100% items: (100 % Testing) Plz Learn!

100% examination of population is not done in Test of Controls but may be done in Test of details when: (Under
the following situations)
1. Population consist of small number of large values / balances or
2. There is a significant risk which cannot be reduced by other means or
3. 100% examination becomes cost effective (e.g. when a repetitive calculation is performed automatically by
computer. (e.g. verifying Provision for doubtful debts)
4. Very significant balance is involved in either P&L or B/S
Examples: (Where 100 % Testing can be done)
Selecting Specific Items :……………….( Selection Techniques)

Selecting specific items for testing does not constitute audit sampling and at the same time the results cannot be
projected to the entire population. In the case of selection technique, external auditor uses his professional
judgement to test P&L and B/S items.
Some instances of how specific items may be selected are as follows:

i. High value, key items or unusual items
(Verifying most risky debtors e.g. In Karachi region OR New Customers Only…
Or items that are suspicious, unusual or have history of errors verifying purchases of government contractors
only)

Summary Notes by SK
ii. All items over a certain amount (E.g. all debtors over Rs.100,000, all trade suppliers above 50,000 or repair
expenses over Rs.10,000)
iii. Obtaining information about some specific items (E.g. Memorandum/Articles/or items that are suspicious
or unusual…. OR Key Agreements with suppliers and customers) OR certain nature of transactions eg
Verifying lease transactions
iv. Performing Tests of Controls only for few transactions on selected cycles (E.g. Testing Sales & Purchase
System only…. being most risky)
Plz Learn!
Factor to be considered in this respect:
Audit Sampling:
Audit sampling involves the application of audit procedures to less than 100% of items with in a class of
transactions or account balance such that all sampling units have a fair chance of selection.
 Whenever an auditor applies audit tests to few cases and draws conclusions about the whole it is said that
sampling is done.
Sampling is used in audit in performing following audit procedures

 Test of controls
 Substantive Procedures (T.O.D)
a) Statistical Sampling
Characteristics are:
i. Random selection of sample items
ii. Each sampling unit has a fair chance of being selected
iii. Use of probability theory to evaluate sample results

Summary Notes by SK
Advantages
 It provides an objective, mathematically precise basis for the sampling process.
 The required sample size can be calculated precisely
 There may be circumstances where statistical sampling is the only means of
auditing efficiently (for example, in the case of very large ‘populations’ of items).
Disadvantages
 A degree of training and technical expertise is required for the audit team.
 This requires an investment in the necessary training for audit staff.
 Sample sizes may be larger thus increasing the time (and the cost) involved in the
audit.
 Statistical model of sampling will undermine the skill and Professional judgement of the auditor.
b) Non-Statistical Sampling: (also termed as Judgmental sampling)

Sampling approach that does not have the characteristics of statistical sampling i.e
this technique is not based on probability theory, instead it is based on judgmental opinion by the auditor
about the sample selection and the results of the sample.
i.e Auditor uses his professional judgement based on his past experience and the risk assessed during the audit.
Methods in Non-Statistical sampling:

1. Systematic Selection (e.g. selecting every 50th item)
With systematic sampling a random starting point is chosen from the population and then items are selected
with standard gaps between them.
A systematic sample would be to select one of the first 15 items in the list at random, and then to select every
15th item in the list for testing in order to obtain the 15% sample.
2. Haphazard Selection (auditor select sample without a structured technique, however whole population
is considered by auditor in a sample selection)
This is not a scientifically valid method and the resulting sample may contain a degree of bias. It is therefore
not recommended for use with statistical sampling techniques.
This is based on arbitrary or autocratic judgment.
e.g Selecting 50 sales invoices or purchase orders which are placed on top of the file or are nearest to the
auditor.
3. Block selection
Auditor selects a complete block of sampling units from the population. (It involves selection from population
in the form of blocks of contiguous items i.e. Adjacent items.)
E.g

Summary Notes by SK
4. Random sampling
All items in the population have an equal chance of selection and the auditor uses his professional judgement
rather than using statistical methods. This method uses computerized random number generators or random
number tables to select items.
Auditors Detection risk can be further classified into 02 Risks: Sampling Risks and Non-Sampling risks.
1) Sampling Risk:
Sampling Risk is the risk that auditor’s conclusions based on sampling might be different from the conclusion if
entire population would have been tested or subjected to the same audit procedure.
This will happen if the sample is not representative of the population as a whole. If an auditor uses a sample that
is not representative of the entire population, he will reach an unjustified and an incorrect conclusion.
Sample size Sampling Risk = Sampling Risk can NEVER be zero
Sampling Risk can be reduced by:
 Increase in sample size
 Stratification (it reduces variation of population and increase efficiency of audit)
Stratification:
Population is divided/ stratified based on certain common features.
Stratification is the process of dividing a population into subpopulation, each of which a group of sampling units have similar
characteristics. These sub-populations are termed as stratum.
Precaution
Examples of Stratification
Further Examples
Eg 1
Total Inventory Value at the B/S date is 1000,000
Let’s Stratify this Inventory Location wise (Inventory has been stratified Location wise)
Karachi 750,000
Lahore 50,000
Islamabad 200,000
(Auditor will now focus only on Karachi Location and will draw sample from Karachi Location)
Please note any conclusion drawn on Karachi Location will be for Karachi location only

Summary Notes by SK
Eg2
Total Sales Value at the B/S date is 5000,000
Let’s Stratify this Sales …product wise (Sales has been Stratified Product Wise)
Product A – 4000,000
Product B – 700,000
Product C – 300,000
(Auditor will now focus only on Product A being more material and more risk)
Please note any conclusion drawn on Product A will be for Product A only)
Advantages of Stratification:
Helps in improving the efficiency and effectiveness of the audit

Sampling risk can be reduced
Audit procedures can be reduced
Time and Cost of Audit can be reduced
Sampling Risk can lead to two types of erroneous conclusions:
 Risk of over reliance/incorrect acceptance (Risk of Over Optimism)

o In test of controls, controls are operating effectively, when they are not.
o In test of details. Material misstatement does not exist when it EXISTs
(Effects: affects effectiveness leading to inappropriate opinion)
 Risk of under reliance/incorrect rejection (Risk of Over Pessimism)
o In test of controls, controls are not operating effectively, when they are operating effectively.
o In test of details….That Material misstatement exist when it does not exist.
(Effects: affects effectiveness leading to additional work)
Non-Sampling Risk:
Non-sampling Risk is the risk that auditor’s conclusions may be wrong for any reason/errors other than sampling
risk e.g. (not relate to sampling and it’s on the part of the external auditor)
 Not designing Audit Procedures appropriately

 Not performing Audit procedures appropriately,
 Misinterpretation of Audit Evidence in making conclusions,
 Failures to recognize a misstatement or deviation, & no proper supervision or reviews.
 Need to work on very tight deadlines
(Note: This risk depends on competence, capability and objectivity of External auditor).

Summary Notes by SK
Non sampling Risk can be reduced by:
 Adequate planning
 Application of professional skepticism.
 Proper assignment of personal to the engagement team
 Supervision & review of audit work performed. (By Seniors / Supervisor)
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Summary Notes by SK
Sampling Advance Concepts
Basic Concepts
For Tests of Controls, auditor shall determine Expected Rate of Deviation and Tolerable rate of deviation. For
Tests of Details, auditors shall determine projected / Expected misstatement and Tolerable Misstatement (can
also be the same as Performance Materiality)
Tolerable Rate of Deviation: (also called acceptable rate of deviation)
It is the rate of deviation from internal controls, set by auditor in respect of which auditor obtains assurance that
actual rate of deviation in population does not exceed the tolerable rate of deviation.
Expected Rate of Deviations:
Determination of Expected rate of deviation is based on following factors:

i. Rate of Deviations in Prior Period Audits
ii. Risk Assessment Procedures
iii. Understanding of business
iv. Understanding of Internal Control
Tolerable Misstatement: (also called acceptable misstatement)

It is the amounts / monetary amount set by the auditor in respect of which auditor obtains assurance that actual misstatements
in population does not exceed by this set-amount.
(To put it simple, Tolerable misstatement means Performance Materiality)
Expected / Projected Misstatements

It is based on following factors:
i. Misstatements in Prior Period Audits
ii. Risk Assessment Procedures & its conclusions
iii. Understanding of business
.
iv. Results of Tests of Controls
v. Subjectivity involved
Performing audit procedures on the sample

When designing a sample, the auditor is required by ISA 530 to:
 perform appropriate audit procedures on each item selected
 if the audit procedure is not applicable to the selected item, the auditor must perform the procedure on a
replacement item. For example, the auditor might select a sample of cheques to test for evidence of
authorization. One of these might be a cheque which has been cancelled or sales invoice that was corrected
or was cancelled.
 if the auditor is unable to apply the procedure (or a suitable alterative) to the selected item (for example, because a
document has been lost), that item must be treated as a misstatement/deviation. The auditor shall treat that item as
deviation (in case of test of controls) or a misstatement (in case of tests of details)

Summary Notes by SK
Concept of Anomaly
The auditor shall investigate the nature and cause of deviations or misstatements identified e.g. some of them
may be anomalous (i.e. a misstatement or deviation that is demonstrably not representative of misstatements
or deviations in a population)
An anomaly is defined “as a misstatement or deviation that is demonstrably not

representative of misstatements or deviations in a population.”
Eg : Cancelled cheque or a cancelled Purchase Order
Projecting misstatements and evaluating the results of audit sampling
Auditor is required to project misstatements for the population. (This projection shall Exclude 'anomalous
misstatement')
For tests of details this will include projecting the misstatements found in the sample to the entire population.
This will provide a reasonable basis for conclusions about the population that has been tested. If the conclusion is
not satisfactory, it means that the overall risk is high, in which case the external auditor will have to increase the
sample size i.e Perform more audit procedures.
Projecting Deviation (For Tests of Controls):
No explicit projection is made for deviations in tests of controls, because sample deviation rate is always the
projected deviation rate for population.
Evaluating results of the Tests of controls:
C
Tolerable Rate of Deviation
B
Expected Rate of Deviation
A
If the projection Deviation Rate is at  Control Risk is low,

Point A  Auditor can rely on internal control.
If the projection Deviation Rate is at  Control Risk is increased

Point B  Auditor places less reliance on internal control.
If the projection Deviation Rate is at  Control Risk is high,

Point C  Auditor places no reliance on internal control.

Summary Notes by SK
Example 1
Performance Materiality for Sales 12,500

(T.M)
Population:
Total Value of Population 2,500,000
Sample:
Value of items selected 300,000
Sampling Method Random Selection
Results of Audit Procedures

Misstatement identified in sample 1,125
Projected Misstatement 9,375
(1,125/300,000*2,500,000)
Conclusion
As Projected Misstatement is less than Performance Materiality, hence it is concluded that population is not
materially misstated
Tests of details:
Projected Misstatement in Population = Misstatement in Sample / value of sample selected x Total Value of
population
For Anomaly:
Projected Misstatement = [(Misstatement in Sample - Anomaly) / value of sample selected x total value of
population] + Anomaly (not part of projection)
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Example 2
The results of tests of detail on a sample of receivables balances recorded as Rs.2,000,000
indicate that the correct balances should be Rs.1,950,000.
The total of balances for similar items has been recorded as Rs.10,000,000.
Required
Explain:
a. what the auditors might conclude about the projected misstatement in the population of trade receivables
b. the relevance of the concept of tolerable misstatement in this situation.

Summary Notes by SK
Answer:
The misstatement in the sample is Rs.50,000 (Rs.2,000,000 - Rs.1,950,000).
The misstatement rate in the sample is 2.5% (50,000/2,000,000). Extrapolating this over the population as a
whole, the projected misstatement is that total trade receivables contain errors of Rs.250,000 (Rs.10,000,000 ×
2.5%) and trade receivables should therefore be stated at Rs.9,750,000 (Rs.10,000,000 – Rs.250,000).
The auditor will compare the projected misstatement in the population to his pre-set tolerable misstatement.
If the tolerable misstatement in the population is for e.g. Rs.300,000 then the error is, in effect, not material and
could be ignored by the auditor.
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Procedures when an error is identified by the external auditor OR Determine the course of action OR How
the external auditor will resolve the issue (without the impact on the Audit Report)
1. Discuss the error with management & TCWG.
2. Determine the nature of misstatement or inability to obtain SAAE and also consider its materiality in the
context of financial statement taken as a whole.
3. The audit team should determine / asses that whether the issue indicative of control weakness in the system
or is indicative of risk of fraud & evaluate the overall Audit risk.
4. Determine whether the error is recurrent in nature or it's an anomaly (one-time error)
5. The audit team must determine that the misstatement or inability is not a representation of the population &
if this is the case than extrapolate the error and calculate projected error (excepted misstatement in the
population) and then compare with Tolerable Misstatement or performance materiality to assess the audit risk
& to determine the sample size / extent of substantive procedures.
6. Record the errors in the schedule of uncorrected misstatements.
7. Compare the aggregate of uncorrected misstatements with planning materiality as per ISA 320.

Summary Notes by SK
Exam Focused Points for ISA 530

Summary Notes by SK

Audit Sampling
1 Q.2 c ACCA June 2014 3 marks
2 Q.2 b ACCA June 2012 3 marks

Audit Sampling

2 Q.1 (g) March 2015 3 marks
3 Q.10 (e) Sept 2014 1 mark
5 Q.3 Sept 2012 06 + 08 marks
7 Q.3 (a) Sept 2009 14 marks
8 Q.2 (a) Sept 2018 10 marks
9 Q.4 Sept 2019 marks
10 Q. 2 (b) Sept 2020 marks
11
12
13

Summary Notes by SK
Question 2 c
ISA 530 Audit Sampling applies when the auditor has decided to use sampling to obtain sufficient and appropriate
audit evidence.
Required:
Define what is meant by ‘audit sampling’ and explain the need for this.
Answer 2 c:
Audit sampling
Audit sampling is the application of audit procedures to less than 100% of items within a population of audit
relevance, such that all sampling units have a chance of selection in order to provide the auditor with a reasonable
basis on which to draw conclusions about the entire population.
Audit sampling can be applied using either a statistical or a non-statistical approach. It involves testing a smaller
number of items and using the results to draw a conclusion about the whole balance or class of transactions. It is
necessary for auditors to sample as it is impossible to select all items for testing as this would take the audit team
too long and it would cost too much.
In addition, auditors do not provide 100% assurance in their audit report about the financial statements, they only
provide reasonable assurance and hence it is not necessary to test every item within a population.
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Question 2 b
ISA 530 Audit Sampling provides guidance on methods for selecting a sample of items for testing.
Required:
Identify and explain THREE methods of selecting a sample.
Answer 2 b:
Sampling methods
Methods of sampling in accordance with ISA 530 Audit Sampling:
Random selection – Ensures each item in a population has an equal chance of selection, for example, by using
random number generators or tables.
Systematic selection – This involves having a constant sampling interval, such as every 40th item being selected,
the starting point for testing is determined randomly.

Summary Notes by SK
Haphazard selection – Here the auditor selects the sample without following a structured technique. The auditor
must ensure that no conscious bias or predictability arises and this method is not appropriate when using statistical
sampling.
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.
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ICAP Sept 2009 (14 marks)
Question 3
You are the audit manager on a client where an annual sale is Rs 640 million. During the course of annual
audit, the following table was developed by an audit team member, to categorize the annual sales:
Rs.
Category A 50 sales transactions to different customers 300 million
Category B 100 transactions to different customers 200 million
Category C 500 transactions to different customers 140 million
Total 640 million
Sohail, a team member, is of the view that if verification of all the transactions in, category A is carrie d out,
there is no need to perform further procedures. However, other team members do not agree and consider that
proper sampling should be carried out from the total population and categorization should be ignored.
Required:
As an audit manager of the job, you are required to:
i. Explain how audit efficiency could be improved by using the above table.
ii. List other ways, in which the sales population may be categorized and what precautions should be taken
while carrying out such categorization.
iii. Give your opinion on the views expressed by
 Sohail
 Other audit team members. (11 marks)
b. Describe the circumstances in which an auditor may decide to examine entire population of items that make
up an account balance (3 marks)
Answer 3:
a.
i. Audit efficiency may be improved as the auditor has stratified a population by dividing it into discrete sub-
populations which have an identifying characteristic. The stratification reduces the variability of items within
each stratum and therefore allow sample size to be reduced with a proportional increase in sampling risk.
ii. Other ways by which sales population may be stratified are as under:
 By product
 By customers or category of customer;
 Geographically
 Terms of sales such as credit cash, advance etc.

Summary Notes by SK
Precaution: sub-categorization/subpopulations need to be carefully defined such that sampling unit can only
belong to one stratum.
iii. Views expressed by Sohail

His view that if verification of total transaction of category A is carried out than there is no need to perform
further procedures is not correct due to the following reasons:
 The results of audit procedures applied to all the items within category a can only provide evidence about
the items that make up that category (stratum).
 The auditor should obtain sufficient appropriate audit evidence regarding Items in Categories B & C
these are also material.
Views expressed by other audit team members:

Their view that proper sampling should be carried out from the total population of 640 million and
categorization should be ignored altogether is not correct because stratification helps in improving the
efficiency of the audit
b. Circumstances in which an auditor may decide to examine entire population of
items that make up an account balance.
The auditor may decide to examine the entire population in following circumstances:
When the population constitutes a small number of large value items.
When there is significant risk and other means do not provide sufficient appropriate audit evidence; or
When the repetitive nature of a calculations or other process performed automatically by an information
system makes a 100% examination cost effective.

Summary Notes by SK
SK Drafting of ISA 530 Answers
1 Q. 3 (b) March 2011 8 marks
2 Q.2 (a) Sept 2018 10 marks
3 Q.2 (b) Sept 2020 7 marks

Summary Notes by SK
March 2011 (8 marks)
Question 3b
Comment on the sampling approach plus suggestions for an alternative means of

selecting a sample
1. Out of 50 large customers, only 10 debtors have been selected as the sample size, in the absence of any specific
method given it can be assured that the 10 selected debtors were the most risky ones.
The approach seems incorrect as the sample size selected is very low being there were 50 largest debtors.
Statistical sampling should have been used via random sampling method as there is a fair chance of items
being selected from the population.
2. 90 debtors have been selected via haphazard sampling which is a type of non-statistical sampling, it is the most
unstructured approach of sampling & its sampling results may be biased as compared to other selection
methods.
Under haphazard method all items in the population have a chance of selection but not an equal and a fair
chance of selection.
Category 3 & 4 (discussed together)

Category 3 & 4 have been totally ignored, which is not the correct approach by the external auditor.
This is not an appropriate approach as few debtors may be very risky, therefore for this category of debtors,
further stratification may also be performed & then a random sample may be drawn from the population.
Ignoring balance from Govt. customers and related parties is also not the correct approach as an adequate
sample may also be drawn from the same. Auditors should further stratify this population & draw a sample
based on random basis as govt. customers and related parties, at times, also carry a very significant risk.
However, please note that in the case of stratification the conclusions drawn will only be valid for that stratum
only i.e. the conclusion cannot be drawn on other sub-categories / stratum.

Summary Notes by SK
September 2018 (10 marks)
Question 2a
Identification of weakness in the Suggestion/Recommendation

sampling approach
1. The Audit team has used the figure of net 1. Rather than net sales the figure of gross sales
sales for determining the sample size which should be used for drawing the sample size as the
is a wrong approach. population must be
completed when drawing a sample.
2. From the category of super stores all invoices 2. If 2 months are selected & verified then the
of June & Dec have been selected and rest result of these 2 months cannot be projected to
of the months have been completely the rest of the months. Therefore, it is
ignored. This is a selection technique & not recommended that from 12 months random
a sampling technique, therefore not a sampling under the statistical sampling method
correct approach. should be used so that accurate projection of
errors can be done on the category of super stores.
(To address the risk of overstatement of revenue
near the year end ,cutoff procedures on sales may
be performed)
3. From the category of Distributors and 3. As Distributors/ Wholesalers comprise 60% of

Wholesalers 100 invoices are selected via sales figure, therefore, it carries high risk &
haphazard selection method This method therefore random sampling should be used under
carries risk of biasness & it's based on the category of statistical sampling in which items
autocratic judgment and under this method have an equal and fair chance of being selected as
all items have a chance of selection but not well as accurate projection can be done from the
an equal & fair chance. population.
4. Invoices of Distributors/ Wholesalers have 4. The sample size should be drawn not from the
been selected from invoices files which is sales invoice files but it should be drawn from
not the correct approach as the invoices for supporting documents like Gate pass, Delivery
which goods are dispatched but not filed note & posting in the sales ledger, as this will verify
have clearly no chance of being selected in the assertions for occurrence, completeness,
the sample. accuracy and cut-off.
5. Sample size has been drawn from the 5. As both categories have distinctive features /
category of Distributors and Wholesalers by characteristics & both are different stratums
clubbing both categories together. This is not therefore conclusion drawn from one stratum
the correct approach cannot be projected to another stratum so
different samples should be drawn each from both
categories.

Summary Notes by SK
6. The sample size to verify sales invoices has 6. As the figure of sales is material & carries an
been determined on the basis of expected inherent risk of misstatement because of its
rate of deviation which is based on the subjectivity therefore its sample size cannot be
overall audit risk being lower. This is not the based on the overall audit risk being lower,
correct approach. rather it should be based on the comparison of
projected misstatements with tolerable
misstatement and then deciding about the
sample size of sales invoices.
Factors to be considered for assessing projected

misstatements are as follows:
1)Risk assessment from prior years
2)Result of other substantive procedures &
3)Subjectivity involved
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September 2020 (7 marks)

Q. 2 (b)
B (i)
 Discussion on conclusion made by the Audit junior
The conclusion drawn by the Auditor junior by comparing a single misstatement with overall materiality is
not correct as there may be other misstatements in the population which need to be aggregated and then
compared with planning materiality as per ISA 320.
Similarly, the accounting treatment suggested by the management is also not correct because the adjustment
pertains to June 30th 2020, therefore if not done, payable to FBR and receivable from employees will be
understated as at year-end.
 Other matters to be considered to be Auditor are as follows:
1. The Audit team should determine / asses that whether the issue is indicative of control weakness in the
system or is indicative of risk of fraud and evaluate the overall Audit risk.
2. Determine whether the error is recurrent in nature or it’s an anomaly (one-time error).
3. Determine / investigate whether the issue is in one transaction only or it has affected multiple transactions.
 Additional steps to be performed by the Audit team

1. Discuss this misstatement with management and TCWG.
2. Consider whether any resulting fines / penalties need to be accounted for in the accounts.
3. Consider involving an expert / I.T specialist to verify controls on the 3 rd party payroll software.
4. Request the management to adjust the accounts (i.e. record receivable from employees and payable to
FBR) for the year ended June 30th, 2020.
Note:
(If the question would have mentioned performance materiality / tolerable misstatement than we would have
compared the projected misstatement with tolerable / performance materiality and then drawn conclusion on the
population)

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Small Concepts’

Summary Notes by SK
Index of Small Concepts
1 IFAC & IAASB

2 Interim and Final Audit
3 Statutory Non-Statutory Audit
4 Audit Related Services
5 Concept of Relevance - ISA 500
6 Flow charts / system flow charts
7 Difference Between E.A & I.A
8 Expectation Gap
9 General Purpose framework
10 Difference between ISA 700 and Local Law Audit Report
11 Material Misstatement (M.M)
12 Review Engagement

Summary Notes by SK
IFAC & IAASB
Expected Questions
1.
2.
The role of auditing standards

The role of the audit is to provide a high level of assurance to the users of the financial statements.This assurance will
be of greater value to users if they know that the audit has been carried out in accordance with established standards
of practice e.g ISA
International Standards on Auditing (known as ISAs) apply primarily to the external audit process. However,
their provisions can also often be seen as good practice for relevant areas of thework of the internal auditor when
conducting internal audits.
The process of issuing auditing standards

IFAC
Definition: IFAC (International Federation of Accountants)
IFAC is the global organization for the accountancy profession. It is dedicated to serving the public
interest by strengthening the profession and contributing to the development of strong international economies.
IFAC has167 members and associates in 127 countries around the world, representing approximately 2.5
million accountants in public practice, education, government service, industry, and commerce.
IFAC provides the structures and processes that support the development, adoption, and
implementation of high-quality international standards. The standards IFAC supports—in the
areas of auditing, assurance, and quality control; public sector accounting; accounting
education; and ethics—are an important part of the global financial infrastructure and contribute
to economic stability around the world. In addition, working closely with its member bodies,
IFAC provides tools and guidance to support professional accountants in business and small and
medium practices.
IFAC supports the development of the accountancy profession in emerging economies, and speaks out
on public interest issues where the profession’s voice is most relevant.
ICAP is a member of IFAC.
IFAC includes four boards:

-IAASB: The International Auditing and Assurance Standards Board (see below)
-IAESB: The International Accounting Education Standards Board
-IESBA: The International Ethics Standards Board for Accountants
-IPSASB: The International Public Sector Accounting Standards Board

Summary Notes by SK
The IAASB
Definition: IAASB (International Auditing and Assurance Standards Board)

The IAASB is one of the boards within IFAC. It is an independent standard-setting body that serves the public
interest by setting high-quality international standards for auditing, assurance, and other related standards,
and by facilitating the convergence of international and national auditing and assurance standards. In doing so,
the IAASB enhances the quality and consistency of practice throughout the world and strengthens public
confidence in the global auditing and assurance profession.
Producing a new ISA

The process of producing an ISA is as follow
 A subject is selected for detailed study, with a view to eventually issuing an ISA.
 After a period of study and research, if there is agreement to proceed, an exposure draft isproduced. The
exposure draft is approved by the IAASB and then distributed widely amongst the profession and others for
comment.
 Comments and proposed amendments are considered by the IAASB. The draft standard isthen modified
and approved by the IAASB.
 The new ISA is then published.
Type of standard When applied
International Standards on Auditing (ISAs) In the audit of historical financial information
International Standards on Review Engagements In the review of historical financial information
(ISREs)
International Standards on Assurance Engagements In assurance engagements other than audits or
(ISAEs) reviews of historical financial information
International Standards on Related Services (ISRSs) On compilation engagements, engagements to
apply agreed upon procedures to information
and other related services engagements
International Standards on Quality Control (ISQCs) For all the above services
International Standards on Auditing (ISAs)

ISAs are written in the context of an audit of financial statements by an independent auditor. Theyare to be adapted
as necessary when applied to audits of other historical financial statements.
Each ISA contains:
 an introduction (Scope of ISA, Basic explanations, Responsibilities and effective date)
 objectives (of that respective ISA)
 definitions (if necessary)
 requirements (Risk assessment procedures, additional procedures, a u di t conclusions, a u d i t reporting)
 application and other explanatory material (which is for guidance purpose only

Summary Notes by SK
Expected Questions on Interim & Final Audit

Summary Notes by SK
Introduction & Explanation
Mostly large audits (Listed companies) are split into two phases. i.e. Interim and Final Phase or say interim
and final stage of an audit.
Interim Audit
Audit that starts before the B/S date is termed as an Interim audit. Let’s say November 30th orOctober 31st 2019
for the year ended Dec31st 2019.
Benefits of Interim Audit (Or say Interim Sitting)
1. More flexible resource planning within the firm – the timing of interim audit is typically more flexible than
the timing of final audit. This helps reduce demand for audit staff during ‘busy season’
2. Earlier identification of significant matters OR key risky areas can be highlighted in the F/S at an early stage
3. Shareholders and other users (stakeholders) receive audited accounts earlier than expected.
4. Increased audit efficiency (All audit procedures are performed as per ISA and professional judgement of the
auditor and quality of audit is not compromised)
5.
6.
Final audit – Audit that starts after the year-end (B/S date) when the final financialstatements are
available and includes full-year balances. (i.e. 12 months)
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Typical interim audit procedures include:
1. Understanding of the entity & its environment as per ISA 315, assessment of inherent riskand identification
of significant matters before the final audit starts.
2. Documentation of the entity’s system of internal control. (E.g. Sales and purchase systemetc.)
3. Performing walk thru tests.
4. Performing TOC’s for the interim period. (i.e. Transactions for the interim period)
5. Assessment of control risk
6. Preparation of Audit Strategy document
7. Determination of materiality level
8. Performing analytical procedures and ratio analysis for the interim balances
9. Performing substantive testing to verify interim balances. (e.g. Balances as on Sept 30)
Typical final audit procedures include:

1. Substantive testing. Note that where substantive testing was performed at the interim phase
…………auditors typically test the subsequent period between interim audit and period end(e.g. Movement
of debtors from Nov 30th to Dec 31st)
2. Audit procedures to ensure conclusions formed at interim stage remain valid at the finalstage of the audit.

Summary Notes by SK
3. Obtaining third party confirmations such as bank letters and trade receivables confirmationsfor closing balances
and performing other substantive procedures.
4. Reassessment of materiality level
5. Analytical procedures (comparison of closing balances from last year balances)
6. Subsequent events testing (ISA 560)
7. Obtaining written / management representations (ISA 580)
8. Going concern assessment
ISA 330 specifically states that the following procedures can only be performed at or after the period end:
 Agreeing the financial statements to the accounting records (G.L and Trial Balance)
 Examining adjustments made during the course of preparing the financial statements (e . g . Depreciation
and various accruals)
 Procedures to respond to a risk at the period end, for e.g. Revenue recognition.
ISA 330 also states:

“The higher the risk of material misstatement, the more likely it is that the auditor may decide it is
more effective to perform substantive procedures nearer to, or at, the period end rather than at an
earlier date”.
Summary
Interim audit procedure may include: Final audit procedures include:
 Inherent risk assessment and gaining an  Substantive procedures involving verification of
understanding of the entity & its environment B/S and P&L on closing numbers / balances
as per ISA 315
 Recording the entity’s system of internal  Obtaining third-party confirmations e.g. Debtors
control (Documentation of I.C System via 04 and Creditors confirmation
methods)
 Evaluating the design of internal control by  Analytical procedures on closing balances in the
performing walk through tests. financial statements
 Carrying out Tests of Controls for the interim  Subsequent events review eg Decisions of court on
period, on the company’s internal controls to pending law suits or any Out of court settlements
ensure they are operating as expected and then
assessment of control risk (C.R)
 Assessment of R.O.M.M as per ISA 315  Agreeing the financial statements to the
accounting records.
 Preparation of Audit strategy Document  Performance of detailed audit plan
 Perform substantive testing on  Examining adjustments made during the process
transactions/balances of interim balances to of preparing the financial statements (eg Accruals,
gain evidence that the books and records are a Depreciation and Provisions)
reliable basis for the preparation of financial
statement for the year.
 Identification of accounting issues that may  Consideration of the going concern status of the
have an impact on work to take place at the entity (ISA 570) (by performing
final audit stage. ___________________)

Summary Notes by SK
 Performing tests to ensure that the
 conclusions formed at the interim audit are still
valid
 Obtaining written/ management representations
(ISA 580)
Notings from Class Lectures

Summary Notes by SK
Interim & Final audit Questions
An audit is often carried out in more than one sitting, especially when there are tight reporting deadlines. The
auditors will carry out an interim audit during the period under review followed by a final audit shortly after the
year end.
Required:
a) Explain the types of audit procedures which are likely to be carried out during an Interim audit.
(4 marks)
b) Describe the impact of the work done at the interim on the final audit. (2 marks)
c) Assuming an interim audit has taken place and work on internal contrail was carried out, list the factors the
auditor should consider when deciding how much more work is needed at the final audit l relation to internal
controls. (4 marks)
(Total =10 marks)
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Answer:
a) During the interim audit the auditor may conduct the following audit procedures.
Detailed testing on the elements of the entity's Internal control system which are relevant to the audit.
Analytical procedures such as variance analysis and ratio analysis on the entity's performance to date and
any key ratios/trends.
Review of any reports produced by the internal audit department which are relevant to the audit.
Detailed substantive procedures on transactions which have occurred during the first part of the year.
b) Impact of interim audit work on internal controls on the final audit
If the auditors are to place reliance on internal controls they must obtain evidence that controls have
operated effectively throughout the period.
If the auditor obtains audit evidence about the operating effectiveness of controls at the interim audit, when
it comes to the final audit, instead of having to gain evidence over controls covering the whole year the
auditor can focus on obtaining audit evidence about significant changes to those controls subsequent to the
interim period.
The auditor will need to determine the extent of the additional audit evidence to be obtained for the
remaining period.
c) Factors to consider when determining the extent of further work on Internal controls
At the final audit at the final audit the auditor will need to gain additional audit evidence about controls
that were operating during the period between the interim audit and the year end. When determining the
extent of the additional work needed the auditor will take into account:
 The significance of the assessed risks of material misstatement at the assertion level.
 The specific controls that were tested during the interim period, and significant changes to them since
they were tested, including changes in the information system, processes, and personnel.
 The degree to which audit evidence about the operating effectiveness of those controls was obtained.

Summary Notes by SK
 The length of the remaining period.

 The extent to which the auditor intends to reduce further substantive procedures based on the reliance
of controls.
 The strength of the control environment.
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ACCA Dec 2004

The external audit process for the audit of large entities generally involves two or more recognizable stages. One
stage involves understanding the business and risk assessment, determining the response to assessed risk, testing
of controls and a limited amount of substantive procedures. This stage is sometimes known as the interim audit.
Another stage involves further tests of controls and substantive procedures and audit finalization procedures.
This stage is sometimes known as the final audit.
Required:
Describe and explain the main audit procedures and processes that take place during the interim and final audits
of a large entity. (10 marks)
Main audit procedures and practices during the interim audit.

1. The auditor will obtain a thorough knowledge of the business discussion client management reading relevant
trade publications.
2. Preliminary analytical procedures will be performed on interim accounts in order to identify any major
changes in the business or unexpected trends.
3. The client’s accounting systems will be documented, or documentation prepared in prior year audits will be
updated.
4. An assessment will be made of inherent risk and control risk
5. Appropriate materiality levels will be estimated.
6. The information obtained during the planning stage will be documented along with an outline of the audit
strategy to be followed.
7. If control risk has been assessed is low in particular areas, then controls testing will need to be performed on
the controls to confirm the initial assessment of the risk. These tests of controls will be started at the interim
audit although they will generally need to be performed on a sample of items extending right over the
accounting period so may need to be completed at the final audit.
8. The detailed audit approach should be prepared. Programmes of audit procedures, both tests of controls and
substantive procedures, will be designed to show the work that needs to be done and to enable subsequent
review of audit completion
9. If substantive procedures are to be performed that involve auditing a sample of transactions selected to cover
the whole accounting period, it is likely that some of these procedures will also be started at the interim
audit these will again be completed at the final audit.

Summary Notes by SK
Main audit procedures and practices the final audit
1. The tests that were started at the interim visit, both tests of controls and substantive procedures should be
completed.
2. Year-end balances may be verified through confirmations obtained from third parties such as:
 Receivables
 Payables
 Banks
3. If the client has carried out a year-end inventory count detailed procedure will be carried out to verify the
compilation of the year-end inventory listing and also to follow up any evidence gathered by the auditor
when attending the inventory count.
4. Detailed calculations will need to be obtained of any estimates the client has made at the year-end such as
allowances for receivables, depreciation and provisions. Procedures will heed to be performed to:
 Assess: the reasonableness of the methods used to make the estimates;
 Re-perform the calculations; or
 Develop point estimates to evaluate management's point estimates.
5. Analytical procedures will be performed on the draft accounts to consider whether the view given by the
financial statements is in line with the auditor's understanding of the business.
6. The auditor must review the director’s assessment of whether the business is a going concern. The auditor
must consider whether the assumptions made by the directors are reasonable and whether it is appropriate
to prepare the accounts on the going concern basis

Summary Notes by SK
Statutory and Non-Statutory Audit
Statutory Audit:
It is the audit which is required by Law or Statute and is mandatory. Guidance has to be sought from local laws
where required. (Remember! Local laws vary from country to country).
Non-Statutory Audit:
 It is conducted because the owners want it to be conducted e.g. Trustees of an NGO. Properties, owners etc.
 It is not required by law i.e. it is not mandatory audit.
 In these kinds of audits the auditor must take into account the internal regulations, internal rules or
constitutions of the undertaking of the organization e.g. Partnership deed, Trust deed, other basis of
information of the Company etc.
Examples of such Organizations are:

 Clubs (Karachi Club etc.)
 Societies (Defense Housing Society)
 NGO’S
 Welfare organizations (Edhi Foundation)
 Charities and partnership associations
Advantages of Non-Statutory Audit .... No Audit Required by Law

 Increases credibility of financial statements.
 It provides easy means of settling accounts and related matters between partners.
 Taxation authorities and similar govt. organizations have more confidence and trust on accounts that are
audited by independent auditors.
 Banks have more confidence to lend loans to such organizations having published F/S.
 Sale of business becomes easy when there are published F/S.
 Audit provides feedback to management on the effectiveness of internal controls via Management Letter
(M.L).
(Where internal controls are weak or inadequate, the auditor will give recommendations for improvement via
M.L. This will assist management in reducing risk and improving the performance of the company in the future)
Advantages of Statutory Audit

 Increases credibility of financial statements in the eyes of shareholders and stakeholders.
 It confirms to management that they have performed their statutory duties / responsibilities correctly.
 It provides assurance to management that they have compiled with other statutory requirements, such as
corporate governance requirements (in case of listed companies only)
 Audit provides feedback to management on the effectiveness of internal controls via Management Letter
(M.L).

Summary Notes by SK
(Where internal controls are weak or inadequate, the auditor will give recommendations for
improvement via M.L. This will assist management in reducing risk and improving the performance of
the company in the future)
 It establishes accountability of management (Those charged with Governance) as they manage / operate
the organization.
 Enables the management to have an independent/ expert view on the F/S prepared by them.
CA CAF 8 Practice Questions on Statutory & Non-statutory Audit

Summary Notes by SK

Summary Notes by SK
Audit Evidence – Relevance (ISA 500)
Sufficient and Appropriate Audit Evidence

By appropriateness we mean Relevance and Reliability………………
Concept of Relevance (Ch. # 4 Para 1.3)
By Relevance we mean the logical connection of an Audit Procedure with the relevant Financial Statement
Assertion to be verified by the external auditor.
For e.g.
1. Inspection of Fixed Assets at the Balance Sheet Date is a Relevant Procedure for the verification of
existence of Fixed Assets & similarly verification of ownership documents is a Relevant Procedure for
the verification of Right of Fixed Assets.
2. Directional testing is a Relevant Procedure for the verification of completeness of trade payables at the
Balance Sheet Date.
3. 3rd party confirmation is a relevant audit procedure to verify existence of debtors and creditors.
Audit Procedure Financial Statement Assertion

Recalculation Existence
Inspection of Assets Rights
Confirmation Valuation
Analytical Procedure Accuracy
Inspection of Records Completeness
Q/S: Briefly explain the concept of Relevance as per ISA 500.
Q/S: Briefly explain the concept of Sufficient and appropriate audit evidence.
Q/S: Conceptual question along with substantive procedures.

Summary Notes by SK
Flow charts / system flow charts
Flowcharts provide a representation of an accounting and internal control system of any business process
or department in the form of a diagram. For each process / transaction flowcharts identify the system flow,
documents generated, decisions involved and various departments involved.
It’s a method to document the auditors understanding of the internal controls and system flow of various
processes.as they are in a diagram form they represent an immediate visual impact of the system.
Types of flowchart: linear, deployment and opportunity flowcharts.

There are three main types of flowchart, each of which can be made at the macro, mini and micro levels.
Linear
A linear flowchart displays the sequence of work steps that make up a process. Linear flow charts are made
in one column only.
(e.g. Sales and Purchase system in an organization)
Deployment
A deployment flowchart shows the actual process flow and identifies the people or groups / departments
involved in each step. It shows where the people or groups/ dept’s fit into the process sequence and how
they relate to one another throughout the process.it always has more than one column.
Opportunity
The opportunity flowchart differentiates between:
Process activities that add VALUE – these are essential for producing the required product or service.
Without them the output / service cannot be produced or provided
Process activities that add COST only – these are not essential for producing the required product or service,
for example waiting for an approval or for some equipment to become available or waiting time for the
customer to get the documents or waiting time for an approval of the customer from the credit department.
Levels of Flowchart
Macro
The macro level flowchart is the ‘big-picture’ executive summary of the system.
The macro flowchart would be more useful to senior management who need to know broadly what the
system does and how it works. Lower level employees would need much more details than provided at the
macro level.
Macro level flowcharts typically have fewer than six steps or max 5 to 6 steps.
Mini
The mini level (also called ‘midi) falls somewhere between big picture of macro and detailed micro.
A mini level flowchart typically focuses on just one part from the macro-level flowchart.
Micro
A micro level flowchart provides the most detail and is useful for analyzing the way processes operate and
work. Also called ‘ground level’, the micro view provided a highly detailed picture of a specific portion of

Summary Notes by SK
the process by documenting every action and decision.
The micro level flowchart explains how a particular task is performed in detail.
Benefits of flowcharts
1. Flowcharts present an immediate visual impact of the system. Therefore, it more easily provides a view
of the system in its entirety.
2. Can help the auditor to identify weakness in controls and reports more easily than by reading narrative
notes.
3. They ensure that a system is recorded in its entirety as all documents have to be traced from beginning
to end.
4. Flowcharts are better way of communication the logic of a system to all concerned.
Limitations of flowcharts
5. Flowcharts are not appropriate for recording systems with further classifications of subsystems.
6. Construction of flowcharts is a time-consuming process.
7. Although flowcharts work well with standard accounting systems and transactions, they may not be
appropriate for documenting specialized areas of accounting OR for recording systems with various
unusual transactions.
8. Major amendment is not normally possible without redrawing the flowchart.
9. The re-drawing of flowcharts is even more difficult and time consuming.
Steps in drawing a Flow chart
1. Identify which type of flowchart and at which level is to be made.

2. Understand the process and identify the areas where decisions are required
3. Arrange the steps / processes in sequence.
4. Draw / construct the flowchart

Summary Notes by SK
Symbols for Flow charts (IMP)
CAF 9 Past Papers

Sept 2017 Qs 7 (d)
March 2015 Qs 1 (d)
Sept 2014 Qs 8

Summary Notes by SK
Flow Charts – Practice Questions
Question 1
Mr. Hunain approached an UBL Bank ATM machine to draw an amount of Rs.10, 000/-.
He inserted his ATM card into the machine and entered his pin code on request of machine. He also entered
his choice of getting only Rs. 500 currency notes. The machine served the request.
Draw a program flow chart of the ATM machine for completing the above task.
Question 2
The ATM machine of United Bank Limited (UBL) contains both biometric security features besides
conventional PIN code control. The customers of UBL have a choice either to use Card OR Biometric option.
Customers of other banks can also withdraw cash from UBL’s ATM; however, they can only use Card system.
A customer’s ATM card is captured by the ATM machine after three consecutive unsuccessful attempts.
Draw a program flow chart of the ATM machine for completing the above task.
CA CAF 09 – Sept 2014

Question 3
Deehan Super Stores has launched a sales promotion scheme. Accordingly, the customers who purchase a
loyalty card gain reward points on every purchase. The points may be redeemed by adjusting the value of the
available points in any subsequent purchase.
Required:
Draw a flow chart showing the payment process including point accumulation and point redemption. (9 marks)

Summary Notes by SK

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Types at 3 Different Levels

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Difference between an Internal & External Auditor
Internal Auditor
 Has no responsibility for expressing an opinion on the financial statements of the company.
 Internal Auditors are employees of the company as compared to External Auditors who are acting as an
agent of shareholders for a short period of time. (normally 1 to 3 months)
 They are appointed and dismissed by the management/ those charged with governance of the company.
 Their remuneration is fixed by the management or Board of Directors.
 The scope of an Internal Auditor is determined by TCWG (BOD) – in the case of listed company – Audit
committee
 They assist/guide management in the following functions
 Operational Audits
 Special Fraud investigations
 Value for money audits
 I.T audits
 They report to the management, (mostly chief internal auditor) who then reports to the Audit Committee.
(Which is part of the B.O.D).
 They don’t have any statutory powers as compared to an External Auditor.
 They can perform testing or can examine any department/Business Cycle/Business Unit of the
Organization. (Its Management discretion).
 Their approach is to ensure that the financial reporting system is efficient, effective and provides
management with accurate and material information.
 Their deliverable is in the form of an internal audit report addressed to the Management or to Board of
Directors.
 No prescribed qualification is required for being an internal auditor of the company (however there are
special qualifications like CIA – Certified Internal Auditor)
External auditor
 Has the responsibility for expressing an independent opinion on the financial statements of the
company.
 The scope of an External Auditor is determined by International Standards of Auditing (ISAs),
statute/Governing Law.
 His scope/ objective is to make sure that whether the financial statements present/ give a true and fair
view or not.

Summary Notes by SK
 They are appointed/ removed by the shareholders/members of the company in AGM.
 Their remuneration is determined and approved by the shareholders of the company (there are
exceptions in the case of appointment of first auditors).
 They have a right to speak at the AGM where their audited accounts are being discussed or any other
matter, where it pertains to the financial statements being audited.
 Their deliverable is in the form of an Audit Report which is addressed to the shareholders/members of
the company.
 They have statutory rights (powers) and duties to perform their audit work.
 They perform audit work on the financial statements taken as a whole (i.e. Balance sheet, Profit and
loss account, statement of comprehensive income, cash flows statements, statements of changes in
equity plus notes to the accounts)
 In Pakistan, only a Chartered Accountant can sign an audit report as per the company’s act 2017.
(section 247)

Summary Notes by SK
Expectations Gap ….. (IMP)
This difference between the actual and the public perception is part of what is called the ‘expectations gap‘,
defined as the difference between the apparent public perceptions
(Shareholders and stakeholders) of the responsibilities of auditors on one hand and the legal and professional
reality and responsibilities on the other hand.
The question remains: how can we make the meaning of an unmodified auditor's report clear to the users
(shareholders and stakeholders)?
What are these expectations gaps?
a) Misunderstandings of the nature of audited financial statements, for example that:

 The statement of financial position provides a fair valuation of the reporting entity.
 The amounts in the financial statements are stated precisely.
 The audited financial statements will guarantee that the entity concerned will continue to exist in future.
b) Misunderstanding as to the type and extent of work undertaken by auditors
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c) Misunderstanding about the level of assurance provided by auditors, for example that:
 An unmodified opinion means that no frauds have occurred in the period.

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 The auditors provide absolute assurance that the figures in the financial statements are correct (ignoring the
concept of materiality and inherent limitations).
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Summary Notes by SK
CA CAF 8 Practice Questions on Expectation Gap
S. No Question Attempt Marks
2 Q.1 a September 2015 4 marks

Summary Notes by SK
General Purpose Framework
It’s a Financial reporting framework designed to meet the common financial information needs of a wide range
of users
E.g. Shareholders, bankers, investors and Government agencies and dept’s
The Financial reporting framework may be a Fair Presentation Framework or a Compliance Framework.
Fair Presentation Framework (e.g. IFRS &IAS)
‘In our opinion, the accompanying financial statement present fairly in all material respects (or give a true &
fair view) of the financial position of the company…..’
(we commonly see F/S prepared as per F.P.F i.e. Prepared on the basis of IFRS and IAS)
Compliance framework:
‘In our opinion, the accompanying financial statement of the company are prepared in allmaterial respects in
accordance with ABC law of jurisdiction X’
(Refer Handout of local law Report)
Special Purpose framework
It’s a Financial reporting framework designed to meet the common financial information needs of specific
category of users / stakeholders
E.g.
 Cash basis reporting framework for Govt. public sector.
 Tax basis framework for Tax Dept.
 Regulatory basis framework for SECP.
 Other specific framework for Parent company.
The Financial reporting framework may be a Fair Presentation Framework or a Compliance Framework.

Summary Notes by SK
.
Audit Report – Difference between ISA 700 and Local Law Audit Report
Few points of differentiation in the audit report as per Local Law

Opinion Paragraph
As per Local laws the first paragraph to state that "we state that we have obtained all the information & explanations
which to the best of our knowledge & belief were necessary for the purposes of the audit.
In the second paragraph of the opinion paragraph the wording as follows to be inserted that F/S confirm with the
accounting and reporting standards as per applicable in Pakistan and give the information required by the Companies
Act, 2017, in the manner so required and respectively give a true and fair view of the state of the Company's affair as
at 30th June 2018 and of the profit, comprehensive income, the change in equity and its cash flows for the year then
ended.
Basis for Opinion Paragraph

Basis for Opinion Paragraph to mention that audit has been conducted in accordance with ISA as applicable in
Pakistan.
This paragraph will also mention regarding Code of Ethics for professional accountants as adopted by ICAP.
KAM
A per local laws KAM is presented in column format where, on the left side Key Audit Matter is explained & on the
right side, how the auditor has addressed the matter during the audit (audit procedures are performed), is/are
explained.
Responsibility of management & Board of Directors

This paragraph to mention the accounts are prepared as per reporting standards as applicable in Pakistan & the
requirements of Companies Act, 2017.
Report on other legal & regulatory requirements

As per local law, in this paragraph four opinion are given as follows:
 First opinion is on proper books of accounts.
 Second opinion pertains to preparation of account in confirmatory with CompaniesAct, 2017 and
further in agreement with the book of account & returns.
 The third opinion is on investments made, expenditure incurred & guaranteesextended during the
year.
 The fourth opinion is on Zakat deductible at source under the Zakat & Usherordinance.
E.O.M and O.M Para

As per local laws EOM is given after the Basis for Opinion Paragraph & before KAM para & other matter para is
given after the opinions on local laws and before the name of the engagement partner.

Summary Notes by SK
Illustration 4 — Auditor's Report on Financial Statements of an Entity Other than a Listed Entity Prepared
in Accordance with a General-Purpose Compliance Framework
For purposes of this illustrative auditor's report, the following circumstances are assumed:
 Audit of a complete set of financial statements of an entity other than a listed entity required by law or
regulation. The audit is not a group audit (i.e., ISA 600 does not apply).
 The financial statements are prepared by management of the entity in accordance with the Financial
Reporting Framework (XYZ Law) of Jurisdiction X (that is, a financial reporting framework,
encompassing law or regulation, designed to meet the common financial information needs of a wide range
of users, but which is not a fair presentation framework).
 The terms of the audit engagement reflect the description of management's responsibility for the financial
statements in ISA 210.
 The auditor has concluded an unmodified (i.e. “clean") opinion is appropriate based on the audit evidence
obtained.
 The relevant ethical requirements that apply to the audit are those of the jurisdiction.
 Based on the audit evidence obtained, the auditor has concluded that a material uncertainty does not exist
related to events or conditions that may cast significant doubt on the entity's ability to continue as a going
concern in accordance with ISA 570 (Revised).
 The auditor is not required, and has otherwise not decided, to communicate key audit matters in
accordance with ISA 701.
 The auditor has obtained all of the other information prior to the date of the auditor's report and has not
identified a material misstatement of the other information.
 Those responsible for oversight of the financial statements differ from those responsible for the preparation
of the financial statements.
 The auditor has no other reporting responsibilities required under local law.
INDEPENDENT AUDITOR'S REPORT

[Appropriate Addressee]
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the balance sheet
as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement
for the year then ended, and notes to the financial statements, including a summary of significant accounting
policies.
In our opinion, the accompanying financial statements of the Company are prepared, in all material respects,
in accordance with XYZ Law of Jurisdiction X.
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 Responsibilities for the Audit of the 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 the financial statements in [jurisdiction], and we have fulfilled our other 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.

Summary Notes by SK
Other Information [or another title if appropriate such as "Information Other than the Financial Statements
and Auditor's Report Thereon"'
[Reporting in accordance with the reporting requirements in ISA 720 (Revised) — see Illustration I in Appendix 2 of ISA
720 (Revised).]
Responsibilities of Management and Those Charged with Governance for the Financial Statements"
Management is responsible for the preparation of the financial statements in accordance with XYZ Law of
Jurisdiction X,t2 and for such internal control as management determines is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company's ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis
of accounting unless management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these financial statements.
Paragraph 41(b) of this ISA explains that the shaded material below can be located in an Appendix to the
auditor's report. Paragraph 41(c) explains di when law, regulation or national auditing standards expressly
permit, reference can be made to a website of an appropriate authority that contains the description of the
auditor's responsibilities, rather than including this material in the auditor's report, provided that the
description on the website addresses, and is not inconsistent with, the description of the auditor's
responsibilities below.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
 Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company's internal control."
 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
 Conclude on the appropriateness of management's use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that

Summary Notes by SK
may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor's report to the related
disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor's report. However,
future events or conditions may cause the Company to cease to continue as a going concern.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit
[Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the particular jurisdiction]
[Auditor Address]
[Date]

Summary Notes by SK
Material Misstatement (M.M)
Definitions and types of misstatement:
M.M is defined as the difference between the amounts, classification presentation or disclosure of an item which is
reported in financial statements ……and what was required to be reported in the F/S in accordance with
Applicable F.R.F.
Types / categories of Misstatement:
A. Identified Misstatements (02 Types)
i. Corrected Misstatements.
1. Factual Misstatements (misstatements about which there is no doubt e.g. Inaccurate processing of data,
incorrect posting of sales invoices or purchase invoices).
(These are corrected in the F/S)
ii. Uncorrected Misstatements
1. Judgmental Misstatements (difference, because judgments of management are inappropriate in the

auditor’s professional judgement or auditor thinks are unreasonable e.g. E.g. Difference in the amount
of Provision recorded for Law suit OR provision for warranty)
2. Immaterial Misstatements (little Impact on the F/S – and have no impact on the Audit Report / audit opinion)
B. Projected Misstatements are the auditor’s best estimate of misstatements in population that involves the
projections of misstatement to the entire population from which the samples were drawn. (ISA 530 – Sampling)
(Refer Sampling H.O)
Concept of ISA 450, ISA 320 and ISA 580

ISA 450 Evaluation of misstatements identified during the audit requires the auditor to accumulate
misstatements identified during the audit, other than those that are clearly immaterial.
ISA 450 requires the auditor to communicate all such misstatements with the appropriate level of management
on a timely basis and to request management to correct those misstatements.
If management refuses, the auditor must establish the reasons why and consider its impact on the F/S as a
whole.
At the end of the audit, auditors shall consider whether the aggregate of uncorrected misstatements in the
financial statements is material, having first reassessed materiality in accordance with ISA 320 Materiality to
confirm that it is still appropriate.
When determining whether uncorrected misstatements are material (individually or in aggregate), the auditor
shall consider the size, nature of the misstatements and the effect of uncorrected misstatements on F/S taken as
a whole.

Summary Notes by SK
Communication of uncorrected misstatements
ISA 450 requires the auditor to communicate uncorrected misstatements and their effect to those charged with
governance, with material uncorrected misstatements being identified individually.
The auditor shall request uncorrected misstatements to be corrected in the F/S.
The auditor shall request a written representation from management and those charged with governance
whether they believe the effects of uncorrected misstatements are immaterial (individually or in aggregate) to the
financial statements as a whole.
A summary of these items shall be attached to the representation letter obtained from management at the end of
the audit.
(Refer ACCA June 2011 Qs 5 (a) & ICAP Q/S --------------------------------------)

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Accordingly, a material misstatement of the financial statements may arise in relation to:
a) The appropriateness of the selected accounting policies;
b) The application (Treatment) of the selected accounting policies; or
c) The appropriateness or adequacy of disclosures in the FS.
a) Appropriateness of the selected Accounting Policies

Material misstatement in F.S may arise when:
i. The selected accounting policies are not consistent with the IFRS; or
ii. The selected accounting policy in not relevant to the transaction / event
b) Application of the Selected Accounting Policies

Material misstatements of the financial statements may arise:
i. Due to the method of application of the selected accounting policies (such as an unintentional error in
application).
E.g. Borrowing Cost not capitalized
Incorrect deprecation on revalued amount
Recording of provisions when criteria not fulfilled as per ISA 37 Wrongly capitalized Research Cost
(IAS 38)
c) Appropriateness or Adequacy of disclosures in the Financial Statements
M.M may arise when:
a) The FS do not include all the disclosure required by the IFRS
b) The disclosures are not adequate as per IFRS or do not achieve Fair presentation

Summary Notes by SK

Summary Notes by SK
Review Engagement (ISRE 2400)

 The objective of review of Financial statements is to enable the External auditor to state whether on the basis of
procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditors
attention that causes the auditor to believe that the F/S are not prepared in all material respects, in accordance
with an identified financial reporting framework.
Key Features:
 Review Engagement requires less Evidence than an audit engagement

 Conclusion expressed in the review engagement is expressed negatively in the review report.
 Review engagement provides moderate level of assurance
 Review engagement is termed as an assurance engagement, but as it’s not an audit, its termed as an audit related
service. (because certain fact-finding techniques are similar to Audit)
 Review engagement provides a Moderate level of assurance as compared to an audit in which an auditor
expresses a Reasonable assurance.
 Opinion expressed in a review engagement is termed a Negative Assurance which states that ‘Nothing has
come to the auditor’s attention that causes the auditor to believe that F/S do not give a true
and fair view in accordance with the identified financial reporting framework.
 For the purpose of expressing a negative assurance in the review report, the auditor obtains sufficient
 appropriate audit evidence through Enquiry and Analytical Procedures., to be able to drawconclusions.
 Review engagements can be mandatory depending upon the local rules and regulations of the country(For e.g. Its
mandatory in Pakistan for all public listed companies to conduct review engagement for a period of 06 months)
 E.g’s for Procedures for review of F/S will ordinarily include the following:
 Obtaining an understanding of the entity

 Agree and reconcile interim financial information with the accounting records.
 Enquiring about the entity’s accounting principles and practices
 Inquiries concerning all material assertions in the financial statements.
 Comparison of F/S with statements of prior periods.
 Comparing the F/S with the anticipated results of the entity.
 Obtain the trial balance and determine whether it agrees with the general ledger and the financial
statements.
 Inquire whether there have been any significant changes in the entity from the previous year.
 Read the minutes of the meeting of shareholders, the board of directors and other appropriatecommittees
in order to identify any imp. matter.
 Inquiries of persons having responsibility for financial and accounting matters concerning for example:
 Whether all transactions have been recorded
 Changes in the entities business activities and accounting principles if any
 Compare results with those of prior periods and those expected for the current period and discuss
significant variations with management.

Summary Notes by SK
Contents of an Engagement letter in a Review engagement (Summarized)
(please learn 6 to 7 points)
1. The intended use and distribution of the financial statements,

2. Identification of the applicable financial reporting framework;
3. The objective and scope of the review engagement;
4. The responsibilities of the practitioner (Auditor)
5. The responsibilities of management.
6. A statement that the engagement is not an audit, and that the practitioner will notexpress an audit opinion on
the financial statements and
7. Reference to the expected form and content of the report to be issued by the practitioner.
Types of Review Engagement

Attestation Engagement
In an attestation engagement, a practitioner is engaged to attest something prepared by theclient / management.
(For example, review of half yearly financial statements & review on the statement of codeof corporate governance.)
Financial statements are prepared by the mgmt. …auditor simply conducts reviewengagement and attests the F/S
to express a moderate level of assurance.
Direct Reporting Engagement:

In a direct reporting engagement, a practitioner is engaged to provide a special report onsome aspects of the client's
affair which are prepared by the external auditor himself
(For example, providing report on the due diligence assignment in the case of a merger andacquisition)
E.g. ABC & co wants to acquire XYZ & Co …to determine the share valuation of the target company plus to
know how operationally and financially sound XYZ & co is…ABC & Co will request E&Y to conduct a due
diligence assignment on XYZ & Co and then report to management / B.O.D of ABC & Co who will than decide
to acquire XYZ & Co or not .

Summary Notes by SK
Engagements to review historical financial statements
INDEPENDENT PRACTITIONER'S REVIEW 'REPORT
Report on the Financial Statements
We have reviewed the accompanying financial statements of ABC Company, which comprise the statement of
financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity
and statement of cash flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.
Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with
the international Financial Reporting Standard for Small andMedium-sized Entities,3 and for such internal control
as management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Practitioner's Responsibility
Our responsibility is to express a conclusion on the accompanying financialstatements. We conducted our review
in accordance with International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review
Historical Financial Statements. ISRE 2400 (Revised) requires us to conclude whether anything has come to our
attention that causes us to believe that the financial statements, taken as a whole, are not prepared in all material
respects in accordance with the applicable financial reporting framework. This Standard also requires us to comply
with relevant ethical requirements.
A review of financial statements in accordance with ISRE 2400 (Revised) is a limited assurance
engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and
others within the entity, as appropriate, -and applying analytical procedures, and evaluates the evidence obtained.
The procedures performed in a review are substantially less than those performedin an audit conducted
in accordance with International Standards on Auditing. Accordingly, we do not express an audit
opinion on these financial statements.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that these financial. statements do not
present fairly, in all material respects, (or do not give a true and fair view of) the financial position of ABC Company as at
December 31, 20X1, and (of) its financial performance and cash flows for the year then ended, in accordance with
the International Financial Reporting Standard for Small and Medium-sized Entities.

Summary Notes by SK
Report on Other Legal and Regulatory Requirements
[Form and content of this, section of the practitioner's report will vary depending on thenature of the practitioner's
other reporting responsibilities.]
[Practitioner's signature]
[Date of the practitioner's report]
[Practitioner's address]
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Example of Qualified Review Report (Because of Material Misstatement)

ENGAGEMENTS TO REVIEW HISTORICAL FINANCIAL STATEMENTS
INDEPENDENT PRACTITIONER'S REVIEW 'REPORT

Report on the Financial Statements
We have reviewed the accompanying financial statements of ABC Company, which comprise the statement of
financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and
other explanatory information.
Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with
XYZ Law of jurisdiction X, for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Practitioner's Responsibility
Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in
accordance with International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review
Historical Financial Statements. ISRE 2400 (Revised) requires us to conclude whether anything has come to our attention
that causes usto believe that the financial statements, taken as a whole, are not prepared in all material respects in
accordance with the applicable financial reporting framework. This Standard alsorequires us to comply with relevant
ethical requirements.
A review of financial statements in accordance with ISRE 2400 (Revised) is a limited assurance engagement. The
practitioner performs procedures, primarily consisting of making inquiries of management and others within the
entity, as appropriate, -and applying analytical procedures, and evaluates the evidence obtained.
The procedures performed in a review are substantially less than those performed in an auditconducted in accordance
with International Standards on Auditing. Accordingly, we do not express an audit opinion on these financial
statements.

Summary Notes by SK
Basis for Qualified Conclusion
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 realizable value but has stated them solely at cost, which constitutes a
departure from the requirements of the Financial Reporting Framework (XYZ Law) of Jurisdiction X. The
company's records indicate that, had management stated the inventories at the lower of cost and net realizable value,
an amount of xxx would have been required to write the inventories down to their net realizable value. Accordingly,
cost of sales would have been increased by xxx, and incometax, net income and shareholders' equity would have
been reduced by xxx, xxx and xxx, respectively.
Qualified Conclusion
Based on our review, except for the effects of the matter described in the Basis for Qualified Conclusion
paragraph, nothing has come to our attention that causes us to believe that the financial statements of ABC
Company are not prepared, in all material respects, in accordance with the Financial Reporting Framework
(XYZ Law) of Jurisdiction X.
Report on Other Legal and Regulatory Requirements
[Form and content of this, section of the practitioner's report will vary depending on the nature
of the practitioner's other reporting responsibilities.]

Summary Notes by SK
Example of Qualified Review Report (Because of Inability)
Extracts of Relevant paragraph only…
Basis for Qualified Conclusion

ABC Company's investment in XYZ Company, a foreign associate acquired dining the year and accounted for by the
equity method, is carried at xxx on the statement of financial position as at December 31, 20X1, and ABC's share
of XYZ's net income of xxx is includedin ABC's income for the year then ended. We were unable to obtain access
to the relevantfinancial information of XYZ concerning the carrying amount of ABC's investment in XYZas at
December 31, 20X1 and ABC's share of XYZ's net income for the year. Consequently,we were unable to perform
the procedures we considered necessary.
Qualified Conclusion
Based on our review, except for the possible effects of the matter described in the Basis for Qualified
Conclusion paragraph, nothing has come to our attention that causes us to believe that the accompanying financial
statements do not present fairly, in all materialrespects, (or do not give a true and fair view of) the financial position
of ABC Company asat December 31, 20X1, and (of) its financial performance and cash flows for the year then
ended in accordance with [name of applicable financial reporting framework, including a reference to the jurisdiction
or country of origin of the financial reporting framework when the financial reporting framework used is not
International Financial Reporting Standards].

Summary Notes by SK
CA CAF 8 Practice Questions on of Review Engagement
1 Q.1 (d) ICAP Sept 2015 3 marks
2 Q. 10 (g) ICAP Sept 2014 2 marks
ACCA F8 Practice Questions on of Review Engagement

1 Q5 c Maple & Co ACCA June 2015 4 marks
2 Q1 c Pear Intl. Co ACCA June 2012 3 marks
ACCA June 2015

Question 5c
You are the audit supervisor of Maple & Co and are currently planning the audit of an existingclient, Sycamore Science
Co (Sycamore), whose year end was 30 April 2015. Sycamore is apharmaceutical company, which manufactures
and supplies a wide range of medical supplies.The draft financial statements show revenue of $35·6 million and profit
before tax of $5·9 million.
Sycamore’s previous finance director left the company in December 2014 after it was discovered that he had been
claiming fraudulent expenses from the company for a significantperiod of time. A new finance director was appointed
in January 2015 who was previously a financial controller of a bank, and she has expressed surprise that Maple &
Co had not uncovered the fraud during last year’s audit.
During the year Sycamore has spent $1·8 million on developing several new products. These projects are at different
stages of development and the draft financial statements show the fullamount of $1·8 million within intangible assets.
In order to fund this development, $2·0 million was borrowed from the bank and is due for repayment over a ten-
year period. Thebank has attached minimum profit targets as part of the loan covenants.
The new finance director has informed the audit partner that since the year end there has been an increased number of
sales returns and that in the month of May over $0·5 million of goodssold in April were returned.
Maple & Co attended the year-end inventory count at Sycamore’s warehouse. The auditorpresent raised concerns
that during the count there were movements of goods in and out the warehouse and this process did not seem well
controlled.
During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold,
resulting in a profit on disposal of $210,000.

Summary Notes by SK
Required:
c. Sycamore’s new finance director has read about review engagements and is interested in the possibility of Maple
& Co undertaking these in the future. However, she is unsure howthese engagements differ from an external audit
and how much assurance would be gainedfrom this type of engagement.
Required:
i. Explain the purpose of review engagements and how these differ from external audits; and
(2 marks)
ii. Describe the level of assurance provided by external audits and review engagements. (2 marks)
Answer c:
i. Review engagements
Review engagements are often undertaken as an alternative to an audit, and involve a practitioner
reviewing financial data, such as six-monthly figures. 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.
A review engagement differs to an external audit in that the procedures undertaken are not nearly as
comprehensive as those in an audit, with procedures such as analytical review and enquiry used
extensively. In addition, the practitioner does not need to complywith ISAs as these only relate to external
audits.
ii. Levels of assurance
The level of assurance provided by audit and review engagements is as follows:
External audit – A high but not absolute level of assurance is provided; this is known as reasonable
assurance. This provides comfort that the financial statements present fairly inall material respects (or are true
and fair) and are free of material misstatements.
Review engagements – where an opinion is being provided, the practitioner gathers sufficient evidence
to be satisfied that the subject matter is plausible; in this case negative assurance is given whereby the
practitioner confirms that nothing has come to their attention which indicates that the subject matter
contains material misstatements.

Question c
Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country and
its customer base includes retailers as well as individuals, to whom direct sales are made through their website.
The company’s year end is 30 September 2012. You are an audit supervisor of Apple & Co and are currently
reviewing documentation of Pear’s internal control in preparation for the interim audit.
Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the
website is not integrated into the inventory system and inventory levelsare not checked at the time when orders are
placed.

Summary Notes by SK
Goods are despatched via local couriers; however, they do not always record customer signatures as proof that
the customer has received the goods. Over the past 12 months there have been customer complaints about the delay
between sales orders and receipt of goods. Pear has investigated these and found that, in each case, the sales order had
been entered intothe sales system correctly but was not forwarded to the despatch department for fulfilling.
Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales
ledger clerks. These customers place their orders through one of the salesteam, who decides on sales discount levels.
Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of
staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed.
Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger
clerks as well as supervisors.
In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has been
purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement.
Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done
to reducethe surplus of old equipment.
Required:
c. Pear’s finance director has expressed an interest in Apple & Co performing other reviewengagements in addition
to the external audit; however, he is unsure how much assurancewould be gained via these engagements and how
this differs to the assurance provided by an external audit.
Required:
Identify and explain the level of assurance provided by an external audit and other reviewengagements.
(3 marks)
Answer:
c) Levels of assurance
The level of assurance provided by audit and other review engagements is as follows:
Audit
External Audit – A high but not absolute level of assurance is provided, this is known as reasonable assurance.
This provides comfort that the financial statements are true and fair and are free of material misstatements.
Other review engagements

Other review engagements where an opinion is being provided, the practitioner gathers sufficient evidence to be
satisfied that the subject matter is plausible; in this case negative assurance is given whereby the practitioner confirms
that nothing has come to his attention which indicates that the subject matter contains material misstatements.

Summary Notes by SK
Contents of Review Report

The Practitioner’s Report
The practitioners report for the review engagement shall be in writing, and shall contain the following elements:
a) A title of report
b) The addressee(s),
c) An introductory paragraph that:
i. Identifies the financial statements reviewed, including Identification of the title of each of the statements
contained;
ii. Refers to the summary of significant accounting policies and other explanatory information; and
iii. States that the financial statements have been reviewed;
d) A description of the responsibility of management for the preparation of the financial statements.
e) A description of the practitioner's responsibility to express a conclusion on the financial statements including
reference to this ISRE and, where relevant, applicable law or regulation;
f) A description of a review of financial statements and its limitations, and the following statements:
i. A review engagement under this ISRE is a limited assurance engagement
ii. The practitioner performs procedures, primarily consisting of making inquiries of management and
others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence
obtained; and
iii. The procedures performed in a review are substantially less than those performed in an audit conducted
in accordance with international Standards on Auditing (ISAs), and, accordingly, the practitioner does
not express an audit option on the financial statements;
g) A paragraph under the heading “Conclusion” that contains:
i. The practitioner conclusion on the financial statements as a whole
ii. A reference to the applicable financial reporting framework used to prepare the financial statements,
iii. When the practitioner’s conclusion on the financial statements is modified:
h) A paragraph under the appropriate heading that contains the practitioners modified conclusion
i) A paragraph, under an appropriate heading, that provides a description of the matter(s) giving rise to the
modification
j) A reference to the practitioners obligation under this ISRE to comply with relevant ethical requirements;
i. The date of the practitioners report
ii. The practitioner's signature; and
iii. The location in the jurisdiction where the practitioner practices.
Emphasis of Matter Paragraphs

The practitioner may consider it necessary to draw users' attention to a matter presented or disclosed in the financial
statements. In such uses, the practitioner shall include an Emphasis of Matter paragraph in the practitioner's report.

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘ICAP - Code of Ethics’

Summary Notes by SK
Expected Questions on ICAP Code of Ethics

1. List & explain the Fundamental Principles /Ethical guidelines/ as per ICAP Code of
conduct for chartered accountants?
2. Explain the ethical threats faced by an external auditor and list TWO examples for
each threat?
3. Explain the various threats to independence & objectivity and give one example for each?
4. Scenario based question:

 Identification of ethical threats (or RISKS) / Fundamental Principles
 Safeguards to be exercised / Course of action by the external auditor
5. Briefly discuss the concept of confidentiality & also elaborate the recognized
exceptions as per ICAP Code of Conduct. OR
Explain the circumstances where a member may be required to disclose the

information obtained during the course of the audit
6. Appointment Ethics …………..

 Theoretical question
 Scenario based question
7. Quality control for an Audit of F/S

Summary Notes by SK

Summary Notes by SK
Fundamental Principles / ICAP Code of Conduct / Ethical

guidelines for C.A
Accountants/auditors have a set of multiple ethical responsibilities. They are required to act ethically towards
and in the best interest of the following three groups:
 Their Audit client / employer
 Within Audit Firm
 The public at large
Remember that IFAC has an Ethics standard Board for Accountants (IESBA) to develop and issue, underits own
authority, high quality ethical standards and other pronouncements for professional accountants foruse around the
world.
Chartered Accountants should comply with the code of ethics for professional accountants issued by IFAC.
All chartered accountants are required to comply with the code of ethics. There might be circumstances where laws or
regulations preclude an accountant from complying with certain parts of the Code. Insuch circumstances, those laws
and regulations prevail, and the accountant shall comply with all other parts of the Code.
A chartered accountant might encounter unusual circumstances in which the accountant believes that the result of
applying a specific requirement of the Code would be disproportionate or might not be inthe public interest. In those
circumstances, the accountant is encouraged to consult with a professional or regulatory body.
Ethical principles governing the auditor’s professional responsibilities are as follows:
 INDEPENDENCE (Now Part of Objectivity)
1. INTEGRITY
2. OBJECTIVITY
3. PROFESSIONAL COMPTENECE AND DUE CARE
4. CONFIDENTIALITY
5. PROFESSIONAL BEHAVIOR
2
(I-P OC) 5 Baten
A chartered accountant might face a situation in which complying with one fundamental principle conflicts
with complying with one or more other fundamental principles. In such a situation, the accountant might
consider consulting, on an anonymous basis, if necessary, with:
 Others within the firm or the employing organization
 Those charged with governance
 A professional body
 A regulatory body
 Legal counsel
However, such consultation does not relieve the accountant from the responsibility to exercise professional
judgement to resolve the conflict or, if necessary, and unless prohibited by law or regulation, disassociate from
the matter creating the conflict.
----------------------------------------------------------------------------------------------------------------------------

Summary Notes by SK
1. INDEPENDENCE:
The code stresses that member’s objectivity must be beyond question if he/she is to report as auditor That
objectivity can only be assured if the member is............................... and is to be seen independent during
the audit. Independence requires:
 Independence of mind: (Actual Independence)

The state of mind of an Auditor that permits (allows) the provision of an opinion without being affected
by influences that compromise professional judgment and allowing him to act with integrity, exercise
objectivity and apply professional skepticism during the audit.
 Independence in appearance: (PERCIEVED INDEPENDENCE)

The avoidance of facts and circumstances that are so significant that a reasonable and informed party
(shareholder) having knowledge of all relevant information including all safe guards applied, would
reasonably conclude………….. that audit firms or a member’s integrity, objectivity or professional
skepticism has been compromised.
2. INTEGRITY:
All members should behave with integrity in all their dealings: professional and other business
relationships. The principle of integrity imposes an obligation on members to be straight forward and honest in
all professional and business relationships. Integrity also implies fair dealings andtruthfulness.
Or say that this principle requires members to be straight forward and honest in all professional and business
relationships and should refrain from being associated with information that is
Materially false or misleading or furnished recklessly.
When a chartered accountant becomes aware of having been associated with information described above, the
accountant shall take steps to be disassociated from that information.
There are two courses of actions available when a chartered accountant becomes aware that he has been associated
with wrongful or false information:
First: Take steps to be disassociated from that information.
Second: Provides a modified report in respect of that information.
A chartered accountant should test his integrity by asking these two questions:
i. Am I doing the right thing in the given situation that a person with integrity would do?
ii. Am I retaining my integrity after making a decision in a particular situation?
3. OBJECTIVITY: (Now Independence is a part of Objectivity)

The principle of objectivity imposes an obligation on all chartered accountants not to compromise their
professional or business judgment because of bias, conflict of interest or the undue influence of others.
Objectivity means that the auditor has the state of mind and interest towards his work only i.e. expressing an
independent audit opinion on the financial statements and should have no other interest other than this.
C.A’s / members are always expected to keep any personal bias or conflict of interest out of their work

Summary Notes by SK
therefore all of their findings and judgments should be based solely upon sound rationale (Underlying reason)
so that they can express an independent and Unbiased Opinion to the shareholders.
A chartered accountant shall not undertake a professional activity if a circumstance or relationship unduly
influences the accountant's professional judgment regarding that activity.
Practical considerations
A chartered accountant should test his objectivity by asking these two questions:
1. What would be the decision of another equally experienced chartered accountant under the
similar circumstances with access to the same information, but without the other relationships
or influences that have put my objectivity at risk?
2. After making the decision, have I retained my objectivity?
(Further examples to be discussed ahead)
4. PROFESSIONAL COMPETENCE & DUE CARE:
Competent professional service requires the exercise of sound judgment in applying professional knowledge and
skill in the performance of such service. Professional competence may be divided into two separate phases:
 Attainment of professional competence; and
 Maintenance of professional competence.
Members should perform professional services with due care, competence and diligence (attentively) and have a
continuing duty to maintain professional knowledge and skill at a level required to ensure that a client receives
competent professional service based on current developments (New IFRS & ISA’s) in practice.
Maintaining professional competence requires a continuing awareness and an understanding of relevant technical,
professional and business developments.
Continuing professional development (CPD) enables a member to develop and maintain the capabilities to
perform competently.
Diligence encompasses the responsibility to act in accordance with the requirements of an assignment.
A chartered accountant shall take reasonable steps to ensure that those working in a professional capacity under
the accountants have appropriate training and supervision. (Members sub-ordinate)
A chartered accountant should test his professional competence by asking these two questions:
1. Am I competent and qualified to perform this work?
2. Can I obtain expert advice or assistance to enable me to perform thiswork competently?

Summary Notes by SK
5. CONFIDENTIALITY (Sub section 114)
Members should respect the confidentiality of information acquired during the course of performing professional
services and should neither use nor appear to use that information or disclose any such information without
proper and specific authority to any third party.
A chartered accountant shall maintain confidentiality of information disclosed by a prospective client, within the
firm or employing organization. (Remember that the Duty of Confidentiality continues even after the end of the
relationship between the member and the audit client.)
6. PROFESSIONAL BEHAVIOUR:
C.A’s should behave professionally with everybody whom they deal in different respects and should behave with
courtesy and consideration (You attitude) towards all with whom they come into contact during the course of
performing their work and should refrain from any conduct which might bring discredit or would conclude
negatively to the accountancy & audit profession and to their audit firm / organization.
Conduct that might discredit the profession includes conduct that a reasonable and informed third party
would likely to conclude adversely affects the good reputation of the profession.
A member to comply with relevant laws and regulations and avoid any conduct that the accountant knows or
should know might discredit the profession. Also, shall not knowingly engage in any business, occupation or
activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result
would be incompatible with the fundamental principles.
A chartered accountant should check whether his actions depicts professional behavior by asking these two
questions:
1. How would I react if I was the client (or other party) and a chartered accountant behaved like this
towards me?
2. Have I behaved professionally in any given situation?
--------------------------------------------------------------------------------------------------------------------------------------------------------------
Principle of Confidentiality (subsection 114) ……………..
A chartered accountant shall comply with the principle of confidentiality, which requires an accountant to respect
the confidentiality of information acquired as a result of professional and business relationships.
An accountant shall:
(a) be alert to the possibility of inadvertent disclosure, including in a social environment
(b) maintain confidentiality of information within the firm or employing organization.
(c) maintain confidentiality of information disclosed by a prospective client or employing organization.
(d) not disclose confidential information acquired as a result of professional and business relationships outside
the firm or employing organizations without proper and specific authority, unless there is a legal or
professional duty to disclose. not use confidential information for the personal advantage of the accountant
or for the advantage of a third party.

Summary Notes by SK
(e) not use or disclose any confidential information after the relationship has ended; and
(f) take reasonable steps to ensure that personnel under the accountant’s control, and individuals from whom
advice is taken respect the same principle.
Confidentiality serves the public interest because it facilitates the free flow of information from the chartered
accountant’s client or employing organization to the accountant in the knowledge that the information will not be
disclosed to a third party.
Nevertheless, the following are circumstances where chartered accountants are or might be required to disclose
confidential information or when such disclosure may be appropriate:
 Disclosure is permitted by law and is authorized by the client or the employer e.g. sharing client information
(with their permission) with the Stock Exchange ahead of a proposed listing
 Disclosure is required by law, for example:
 Production of documents or other provision of evidence in the course of legal proceedings; or
 Disclosure to the appropriate public authorities of violations of the law that come to light e.g. when
suspicion of money laundering exists
 There is a professional duty or right to disclose, when not prohibited by law:

 To comply with the Quality Control Review (QCR) program of the Institute;
 To respond to an inquiry or investigation by the Institute or other regulatory body;
 To protect the professional interests of a chartered accountant in legal proceedings; or
 To comply with technical standards and ethics requirements.
Plz Note:
Factors to be considered before making disclosure

In deciding whether to disclose confidential information, chartered accountants should consider the following:
 Whether the interests of all parties, including third parties whose interests may be affected, could be harmed
if the client / employer consents to the disclosure of information.
 Whether all the relevant information is known and substantiated, to the extent it is practicable; when the
situation involves unsubstantiated facts or incomplete information professional judgment should be used; and
 The type of communication that is expected and to whom it is addressed (must be appropriate recipients)

Summary Notes by SK
A chartered accountant shall continue to comply with the principle of confidentiality even after the end
of the relationship between the accountant and a client or employing organization.
When changing employment or acquiring a new client, the accountant is entitled to use prior experience
but shall not use or disclose any confidential information acquired or received as a result of a professional
or business relationship.
A chartered accountant should check whether he is disclosing confidential information by asking these two
questions:
1. Whether the interest of the party subject to the confidential information could be harmed if the information
is disclosed?
2. Whether all the relevant facts are known and substantiated before the information is disclosed?
Conceptual Framework Approach applicable to all chartered

ACCOUNTANTS (S120)
Introduction
The circumstances in which chartered accountants operate might create specific threats to compliance with the
fundamental principles.
The conceptual framework specifies an approach for a chartered accountant to:
a. Identify threats to compliance with the fundamental principles;
b. Evaluate the threats identified; and
c. Address the threats by eliminating or reducing them to an acceptable level
When applying the conceptual framework, the chartered accountant shall:

a) Exercise professional judgment;
b) Remain alert for new information and to changes in facts and circumstances; and
c) Use the reasonable and informed third party test.

Summary Notes by SK
Threats and Safeguards

Identifying Threats
The chartered accountants shall identify threats to compliance with the fundamental principles.
Threats to compliance with the fundamental principles fall into one or more of the following categories:
(a) Self-interest threat - the threat that a financial or other interest will inappropriately influence a chartered
accountant's judgment or behavior;
(b) Self-review threat - the threat that a chartered accountant will not appropriately evaluate the results of a
previous judgment made; or an activity performed by the accountant, or by another individual within the
accountant's firm or employing organization, on which the accountant will rely when forming a judgment
as part of performing a current service;
(c) Advocacy threat - the threat that a chartered accountant will promote a client's or employing organization’s
position to the point that the accountant's objectivity is compromised;
(d) Familiarity threat - the threat that due to a long or close relationship with a client, or employing
organization, a chartered accountant will be too sympathetic to their interests or too accepting of their work;
and
(e) Intimidation threat - the threat that a chartered accountant will be deterred from acting objectively because
of actual or perceived pressures, including attempts to exercise undue influence over the accountant.
A circumstance might create more than one threat, and a threat might affect compliance with more than one
fundamental principle.
Evaluating Threats
The accountant shall evaluate whether such a threat is at an acceptable level.
Factors relevant in evaluating the level of threats.
The following are general examples of factors, including conditions, policies and procedures relevant in
evaluating the level of threats:
 Corporate governance requirements
 Educational, training and experience requirements for the profession
 Effective complaint systems which enable the chartered accountant and the general public to draw
attention to unethical behavior
 An explicitly stated duty to report breaches of ethics requirements
 Professional or regulatory monitoring and disciplinary procedures
Consideration of new information or changes in facts and circumstances

If the chartered accountant becomes aware of new information or changes in facts and circumstances that might
impact whether a threat has been eliminated or reduced to an acceptable level, the accountant shall re-evaluate
and address that threat accordingly.

Summary Notes by SK
Remaining alert throughout the professional activity assists in evaluating the:
(a) Impact the level of a threat; or
(b) Affect the accountant’s conclusions about whether safeguards applied continue to be appropriate.
If new information results in the identification of a new threat, it must be addressed.
Addressing Threats
If the chartered accountant determines that the identified threats to compliance with the fundamental
principles are not at an acceptable level, the accountant shall address the threats by eliminating them or
reducing them to an acceptable level. He shall do so by:
a) Eliminating the circumstances, including interests or relationships, that are creating the threats;
b) Applying the safeguards, where available and capable of being applied, to reduce the threats to
an acceptable level; or
c) Declining or ending the specific professional activity
Actions to eliminate threats

Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating
the threat. However, there are some situations in which threats can only be addressed by declining or ending the
specific professional activity.
This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable
of being applied to reduce the threat to an acceptable level.
Safeguards
Safeguards are actions, individually or in combination that effectively reduce threats to compliance with the
fundamental principles to an acceptable level.
Acceptable level is a level at which a chartered accountant would conclude that the accountant complies with
the fundamental principles by using the reasonable and informed third party test.
The reasonable and informed third party test is a consideration by the chartered accountant about whether the
same conclusion would likely be reached by another party.
Consideration of significant judgements made and overall conclusions reached

In forming the overall conclusion, the accountant shall:
(a) review any significant judgments made or conclusions reached; and
(b) use the reasonable and informed third party test.

Summary Notes by SK
Professional Skepticism
Professional skepticism and fundamental principles are inter-related concepts.
In an audit of financial statements, compliance with the fundamental principles, individually and collectively,
supports the exercise of professional skepticism, as shown in the following examples:
 Integrity requires the chartered accountant to be straight forward and honest. For example, the
accountant complies with the principle of integrity by:
a) Being straightforward and honest when raising concerns about a position taken by a client; and
b) Pursuing inquiries about inconsistent information and seeking further evidence to address concerns
about statements that might be materially false or misleading in order to make informed decisions about
the appropriate course of action in the circumstances
In doing so, the accountant demonstrates the critical assessment of audit evidence that contributes to the exercise
of professional skepticism.
 Objectivity requires not to compromise professional or business judgement because of bias, conflict of
interest or the undue influence of others. For example, the accountant complies with the principle of
objectivity by:
a) Recognizing circumstances or relationships such as familiarity with the client, that might compromise
the accountant’s professional or business judgment; and
b) Considering the impact of such circumstances and relationship on the accountant’s judgement
In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism.
 Professional competence and due care require the chartered accountant to have professional
knowledge and skill at the level required to ensure the provision of competent professional service
and to act diligently in accordance with applicable standards, laws and regulations.
For example, the accountant complies with the principle of professional competence and due care by:
 Applying knowledge that is relevant to a particular client’s industry and business activities in order to
properly identify risks of material misstatements;
 Designing and performing appropriate audit procedures; and
 Applying relevant knowledge when critically assessing whether audit evidence has been obtained
In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism.

Summary Notes by SK
Threats to Independence & Objectivity

Few Basic concepts
Close Family Relation
Immediate Family Relation
D.F.I and I.F.I.
Threats to independence and objectivity (…IMP...)

Compliance with the fundamental principles of professional ethics may potentially be threatened by
following:
 Self-interest
 Self-review SAIF ____________
 Advocacy
 Familiarity
 Intimidation
a) Self-interest threat–This threat is created when a financial or other interest will inappropriately influence
or affect the independence and objectivity of the chartered accountant's judgment or behavior:
b) Self-review threat-the threat that a chartered accountant will not appropriately evaluate the results of a
previous judgment made or activity or service performed by himself, or by another individual within the
chartered accountant's firm on which the accountant will rely when forming a judgment as part of providing
a current service;
(i.e. will be commenting or reviewing is or her own work)
c) Advocacy threat-the threat that a chartered accountant / member will promote a client's position to the
point that the chartered accountant's objectivity is compromised and he does not act objectively or
independently.

Summary Notes by SK
d) Familiarity threat-the threat that due to a long or close relationship with a client a chartered accountant
will be too sympathetic to their interests or too accepting of their work; i.e by becoming over familiar with
the audit client.
e) Intimidation threat-the threat that a chartered accountant will be deterred from acting objectively or
independently because of actual or perceived pressures, including attempts to exercise undue influence over
the audit firm / audit team member.
1) Self-interest threat
Circumstances which may give rise to self-interest threats for members include:
1. Financial interests
2. Loans or guarantees
3. Incentive-based fee arrangements (Contingent Fee Arrangements)
4. Family and Personnel relationships
5. Undue dependence on fees from a client. (High Perc of Audit Fees)
6. Temporary Staff Assignments
7. Overdue Fees
8. Gifts and Hospitality
9. Employment with the Audit Client (E&Y ……. joins P.S.O)
10. Low Balling
11. Recruitment services.
12. Compensation and evaluation Policies
13. Close Business relationships with the Audit Client.
Financial Interest
A financial interest in an assurance client may create a self-interest threat. Factors in this regard are:
 evaluation of the role of the person holding the financial interest
 the materiality of the financial interest and
 the type of financial interest (direct or indirect).
In evaluating the significance of any threat to independence, it is important to consider the degree of control or
interest held. When control exists, the financial interest should be considered direct. Conversely, when the holder
of the financial interest has no ability to exercise such control the financial interest should be considered indirect.
Provisions Applicable to ALL Assurance Clients
If a member of the assurance team, or their immediate family member, has a direct financial interest, or a
material indirect financial interest, in the assurance client, the available safeguards available are:
a) Dispose of the direct financial interest prior to the individual becoming a member of the assurance team;
b) Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the remaining
interest is no longer material prior to the individual becoming a member of the assurance team; or
c) Remove the member from the assurance engagement.

Summary Notes by SK
Loans and Guarantees (Plus ___________________________________)
A loan, or a guarantee of a loan,
1. to a member of the audit team,
2. or a member of that individual’s immediate family, or
3. the firm
From an audit client that is a bank or a similar institution may create a threat to independence.
Accordingly, neither a member of the audit team, or members immediate family member, nor a firm shall
ACCEPT such a loan or guarantee.
CASES
1. If a loan to a FIRM from an audit client that is bank or similar institution is made under normal lending
procedures, terms and conditions and it is MATERIAL to the audit client or firm receiving the loan, it may
be possible to apply safeguards to reduce the self-interest threat to an acceptable level.
Safeguard: Work to be reviewed by a chartered accountant from a network firm that is neither involved with
the audit nor received the loan.
2. A loan from an audit client that is a bank or a similar institution to a member of the audit team, or a member
of that individual’s immediate family, does not create a threat to independence if such is made under normal
lending procedures, terms and conditions. Still it will create a self-interest threat if its material for both parties.
Example of such loans include housing loan, car loans and credit card balances.
NOT A BANK
3. If the firm or member of the audit team, or a member of that individual’s immediate family, accepts a loan
from an audit client that is not a bank or similar institution, the self-interest threat created would be so
significant that no safeguards could reduce the threat to an acceptable level, unless the loan is immaterial to
both the parties.
General Safeguards

Summary Notes by SK
HINT for Exam Question
___________________________________________________________________________________________
Contingent Fees
External auditor should not ACCEPT contingent fee arrangement for both assurance and non-assurance work.
This creates both self-interest and advocacy threat.
E.g. Fee is dependent upon Gross profit or Net profit exceeding X amount or fees is dependent upon the value
of total assets for the year…
Rather, the audit fees should be dependent / based upon the number of hours worked/ spend on the audit job/
other assignment i.e. the actual time spent on the audit job/ assignment at the audit client.
Family and personal relationships

(Self Interest + Familiarity OR Intimidation Threat)
Family or close personal relationships between audit firm and client staff could seriously threaten independence.
When an immediate family member OR close family member of a member of the audit team is a director, an
officer or an employee of the audit client in a position to exert direct and significant influence over the
subject matter information of the audit engagement, the individual should be removed from the audit team.
Safeguards
 Removing the individual from the audit team; or
 Independent review of the work performed by an affected person
High Percentage of Fees (Undue dependence on an Audit Client)

When a firm receives a high proportion of its fee income from just one audit client, there is a self-interest /
intimidation threat, as the firm will be concerned about losing the client.
Safeguards
Taking Steps in reducing the dependency on the client; (_________________________)
 External quality control reviews; or
 Consulting a third party such as a professional regulatory body
 Disclose to those charged with governance. (TCWG)
Temporary Staff assignments (Self Interest + Self Review Threat, Advocacy or Familiarity threat)
Audit staff / members may be loaned (__________) to an audit client, but only for a short period of time. Staff
must not assume management responsibilities and the audit client must be responsible for directing and
supervising such audit staff.

Summary Notes by SK
Safeguards
 Independent review of the work performed by the loaned audit staff
 Not giving the loaned staff audit responsibility for any function or activity on the audit, that they performed
during that period or
 Not including the loaned staff in the audit team.
Overdue fees
A self-interest threat arises if fees due from an audit client remain unpaid for a long time, especially if a significant
part is not paid before the issue of the audit report for the following year. Firm will require payment of such fees
before such audit report is issued.
Safeguards
 Discuss the matter with those charged with Governance
 Independent review by person who did not took part in the assurance engagement
 Withdraw from the engagement
Gifts and Hospitality (Self Interest + Familiarity Threat…OR…Initimidation)

Unless the value of the gift/hospitality is trivial and inconsequential, a firm or a member of an audit team should
not accept.
Exam Focused Point


Expensive Meals (Lunches & dinners)

Expensive gifts (or company products that are expensive)
Luxury trips for the entire audit team
Dinner and or lunch before the audit start or after the completion of audit.
Discount vouchers/ coupons for entire audit team
Discounted company products
Any gift & hospitality i.e. beyond or above the market norms
OR
Providing any kind of favor to the audit team members
Safeguards
Employment with an Audit Client (Self Interest + Familiarity + Intimidation)

1. It is possible that audit staff / audit team members might be offered a job at the audit client, or interviews to
facilitate such movement might take place. Both situations are a threat to independence
Safeguard
1. Removing the ind. from the audit team
2. Review significant judgements made by Ind. on the audit team
3. Notify the Audit firm when entering into employment negotiations with the assurance client.
4. A former audit partner / senior member joining as senior (D.F, CFO, SMF etc.) at the client will have too
much knowledge of the audit firm’s system and procedures and will bring the audit firm in a compromising
position.

Summary Notes by SK
There may be familiarity and intimidation threats when a member of the audit team joins an audit client. There
should be no significant connection once he has left the audit firm.
Safeguards
1) Modifying the audit strategy after that staff member leaves
2) Assigning individuals to the audit team who have sufficient experience in relation to the individual who has
joined the client
3) Independent review of the work performed by Ex-staff member/partner
Low balling
(charging Lower Fees than the market Rate)
There is a self-interest threat if an audit firm charges audit fees lower than the market norms i.e. Audit fees is
lower than what the other firms are charging for the similar client.
This reduced audit fees might be in return to get profitable lucrative consultancy assignments (E.g. Agreed upon
Procedures or compilation engagements) from the audit client which is clearly a self-interest threat.
Recruitment Services (Self Interest + Familiarity OR Intimidation Threat)

Recruiting senior management for an audit client, particularly those able to affect the subject matter of an audit
engagement (senior manager Finance / Financial controller) creates a self-interest threat
for the audit firm.
Do’s:
 Advising on Professional qualification
 Advice on suitability of posts or job descriptions
 interviewing candidates & advice on candidate’s competence
Don’t’s:
 Searching for Candidates
 Reference checks of senior mgmt.
 Determination of Salary
 Hiring of Senior Positions (Like Director Finance and CFO)
Compensation and Evaluation Policies

Self-interest threat arises when a member of audit team is evaluated on selling non-assurance services to the client.
The firm should either revise the compensation plan, or put in place appropriate safeguards.
 Removing the member from the audit team
 Independent partner/ member review.
Close Business Relationships with Audit Client

(Self Interest or Intimidation Threat)
Close business relationships between a firm
or an audit team member
or a member of that individual’s immediate family,
AND the audit client (or its management), arise from common financial interests / commercial interests.

Summary Notes by SK
Examples include:
 Having a financial interest / or a joint venture with the client
 Arrangements to combine services of both firm and client.
 Distribution or marketing arrangements together
 Purchasing goods / services from the Audit Client (other than the arm’s length price) …... IMP
 Joint sessions / seminars
Other Aspects
If a member of the audit team has a business relationship that is material, the individual shall be removed from
the team.
If the business relationship is between an immediate family member of a member of the audit team and the audit
client, the significance must be evaluated and safeguards applied.
Safeguards
 End the assurance provision
 Terminate the (other) business relationship.
 Individual member of an audit team having such an interest should be removed from the audit team.
 Reduce the magnitude of the relationship so that F.I is immaterial and the relationship is clearly
insignificant
Purchasing goods and services from an audit client on an arm's length basis does not constitute a threat to
independence. However, they should not be of significant magnitude.
Self-review threat
Circumstances which may give rise to self-review threats for members include:
a) being in a position to exert direct and significant influence over an entity’s financial reports
b) the discovery of a significant error during a re-evaluation of the work undertaken by the member
c) reporting on the operation/ internal controls of financial systems after being involved in their design or
implementation (implementing accounting system)
d) performing a service for a client that directly affects the subject matter (F/S) of an assurance engagement.
e) A firm having prepared the original data (Sales Report, Fixed Asset register etc.) used to generate records,
that are the subject matter of the assurance engagement.
Recent Service with the Audit Client
(Discussed ahead)
Preparing accounting records and financial statements

There is clearly a significant risk of self-review if a firm prepares accounting records and financial statements and
then audits them. Audit firms must therefore analyse the risks arising and put safeguards in place to ensure that
the risk is at an acceptable level.
Safeguards include:
 Using staff members other than audit team members to carry out work.
 If non-audit services are performed by a member of the audit team, using an independent partner or
senior staff member (not part of the audit team) to review work performed
 Obtaining client approval for work undertaken during accountancy services.

Summary Notes by SK
Valuation services
If an audit firm performs a valuation which will be included in financial statements audited by the firm, a self-
review threat arises.
Audit firms should not carry out valuations on material matters to the financial statements and which involve
a significant degree of subjectivity.
Safeguards include:
 Confirming that the client understands the valuation and the assumptions used
 Ensuring that the client acknowledges responsibility for the valuation
 Using separate personnel for the valuation and the audit
Taxation Services
The Code divides taxation services into four categories.
ii. Tax return preparation
iii. Tax calculations for the purpose of preparing the accounting entries
iv. Tax planning and other tax advisory services
v. Assistance in the resolution of tax disputes
Guidance in respect of each of these categories is as follows:

i. Tax return preparation generally does not threaten Independence, as long as management takes
responsibility for the returns.
ii. Tax calculations for the purpose of preparing the accounting entities may not be prepared for Listed co,
except in emergency situations.
For non-listed, it is acceptable to do so provided that safeguards are applied.
iii. Tax planning may be acceptable in certain circumstances, e.g. where the advice is clearly supported by tax
authority but if it depends on a particular accounting treatment and the audit team has reasonable doubt and
the consequences of the tax advice would be material, then the service should not be provided.
iv. Assistance In the resolution of tax disputes may be provided in some cases. However, if the firm is acting
as an advocate of the client and the effect is material to the financial statements to be audited the firm is not
permitted to act. Also to be taken into consideration is whether the firm itself provided the service, as this
will increase the threat. If it is appropriate to provide the service, the safeguards include using independent
professionals and obtaining advice on the service from an external tax professional or advise from
internal tax professional
(Above creates both Advocacy and self-review threat)

Summary Notes by SK
Internal audit services
A firm may provide certain internal audit services for an audit client depending on the nature of the services and
the type of entity being audited.
An audit firm's personnel must not assume a management responsibility as a result of providing internal audit
services. Internal audit services where management responsibilities would be assumed include:
i. Setting internal audit policies or the strategic direction of the internal audit department.
ii. Directing and taking responsibility for the actions of the entity's internal audit employees.
iii. Deciding which recommendations resulting from internal audit activities are implemented.
iv. Taking responsibility for designing, implementing and maintaining internal control
Other services
The audit firm might sell a variety of other services to audit clients, such as:
 Legal support/ services
 Corporate finance
 I.T services
(Corporate finance services involve overseeing financial activities and capital investment decisions. Such
decisions include whether to pursue a proposed investment and whether to pay for the investment with equity,
debt, or both; it also includes whether shareholders should receive dividends
The audit firm should consider whether there are any barriers to independence and consider whether the threat
to independence could be reduced to an acceptable level by appropriate safeguards.
Safeguards
Advocacy Threat
Advocacy threat arises when an Audit Firm:
1. Favors an Audit client
2. Promotes an opinion of the Audit client
3. Comments publicly for an Audit client
4. Acts as an advocate of audit client in Litigation or dispute with third parties & amount is material.
5. Markets share campaign OR underwrites shares
6. Participates in social meetings/Dinners with the client for promoting shares of client
Safeguards:
 Apply Chinese wall concept
 Independent Partner review.
 Discussion with TCWG

Summary Notes by SK
Intimidation Threat
Intimidation threat occurs when a member’s conduct is influenced by fear or threats (actual or perceived) during
the audit.
Examples
1. Family and personal relationships. (Self Interest)
2. Threatened litigation by client which results in bad publicity of the Audit Firm + also risk of losing client +
also risk of audit firm being proved negligent. (also Creates Self Interest)
3. Joint venture/close business relations with the audit client (Self Interest)
4. An aggressive and dominating individual at an Audit client
5. Audit client will not award a non-assurance contract to the firm if firm continues to disagree with the
accounting treatments.
6. Being threatened to reduce the no. of hours to reduce the audit fees OR other pressure to reduce the fees.
7. Being threatened to issue a clean report
8. Being threatened to dismiss or replace the audit firm.
9. A member feeling pressure to agree with the judgment of an audit client because of more technical
knowledge.
Extra Point
A chartered accountant / member being informed by a partner of the firm that a planned promotion will not
occur unless he/she agrees with an audit client’s inappropriate accounting treatment.
Safeguards:
 Independent partner review (Ethics Partner or QCR partner)
 Remove affected person from the audit Team
 Disclosure to Audit Committee + those charged with governance
Familiarity threat
Familiarity threats occurs because of
1. Close or Immediate family relationship – with Director / officer or employee in a position to exert significant
and direct influence over the subject matter.
2. Recent service with the audit Client
3. Employment with the audit client
4. Long association with the audit client (Most Imp)
5. Because of gifts and preferential treatments from the audit client.
Recent Service with an Audit Client

(Self Interest + Self Review + Familiarity)
Self-interest, self-review or familiarity threats may be created if a member of the audit team has recently served
as a director, officer, or employee of the audit client. This would be the case when, for example, a member of the
audit team has to evaluate F/S for which the member of the audit team had prepared the accounting records
previously.

Summary Notes by SK
Safeguards
Long association with the Audit Client (in the case of Recurring Audits)
(Self Interest plus familiarity threat)
Long association with the Audit Client occurs when a senior member of the audit team (such as the audit
engagement partner) has worked on the same audit for several years.
There is a risk that the individual will become too familiar with the audit client and its management, and may
then be unable to take an objective/ independent decision during the audit.
Safeguards:
 Rotating the senior personnel off the audit team
 Independent Partner Review
 Removing the individual from the engagement team
 Regular independent internal or external quality review

Summary Notes by SK
Examples of Professional ethics and codes of conduct
Example 01:
You are the audit partner of ABC & Co a listed entity on Karachi and Lahore stock exchanges. Your team has
recently finished the audit field work and you have issued the audit opinion. ABC & Co also issues an unaudited
summary annual report to its members. As a good practice, the Company Secretary has provided you with a draft
copy of the summary annual report before issuing it to the members. During your reading, you noted that a
material information regarding the recent announcement of staff restructuring has been inadvertently omitted
from the Chairman’s report.
As per the guidelines of the Code of Ethics, you should act with integrity and inform the Company
Secretary about the error. The Chairman’s report and the summary annual report is not subject to the
audit but because there is an error known to you it is important that you highlight this error and request
it to be fixed before the annual report is issued to the members. If management decides to ignore this
error, you should ensure that your name/ or firm’s name is not associated with the summary annual
report.
(Chartered accountant should not be part of any misleading or incorrect information or information that’s
prepared carelessly or uncertain or unverified information.)
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Example 02:
Mr. Hashaam is the sole audit partner in the firm “XYZ”. The firm has have been offered to act as the auditors
of Zee Limited for the year ending 31 December 2019. Zee Limited previously employed Mr. Hashaam’s father
who retired from the company two years ago.
However, his father is receiving monthly post-employment payments from funds kept aside for these payments,as
part of his post-retirement benefits. The monthly payments vary depending on the investment returns. The fund’s
liability and investments are managed by Zee Limited and is required to be consolidated in the group financial
statements.
This case brings in question Mr. Hashaam’s objectivity to act as the auditor of Zee Limited. The fact that his
father is receiving monthly payments and the amounts vary depending on the investment returns creates conflict
of interest for Mr. Hashaam to act the auditor.
XYZ Chartered Accountants should reject the offer to act as the auditor of the company.
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Example 03: (Professional Competence and Due Care)
FNZ is a firm of chartered accountants with officers in Karachi, Lahore and Islamabad. FNZ’s main clients are
tier1 listed entities in the oil and gas and mining sectors. The release of IFRS 15 has impacted almost all of FNZ’s
audit clients for recognition and disclosure in the way the revenue is recognized and disclosed.
FNZ has not yet devised a strategy to deal with the training and client advisory requirements. They have
approached you, as the audit manager responsible for ethics and training, to draft a three key agenda points for
the next partners and managers meeting on 21 February 2019 and to discuss the recommendations.
---------------------------------------------------------------------------------------------------------------------------------

Summary Notes by SK
Agenda for the partners/managers meeting
21 February 2019
Attendees: All partners and managers
Subject: IFRS 15 three key considerations
As per your request, I have drafted the three key considerations with regards to training and advisory
requirements for IFRS 15:
First: Develop two training sessions to upskill the management group and audit staff on the requirements of IFRS
15. A one-day course for the partners and managers to learn how to review the contracts under the new revenue
standard to be able to provide guidance to the wider audit team. We have an obligation to maintain our technical
knowledge and continue to upskill ourselves as the new standards are implemented. Ensure that the training is
completed before any work is performed.
Second: Ensure that all staff in the firm directly involved in auditing revenue recognition account balances and
disclosures attend the two days’ extensive training on how to audit revenue accounts under IFRS 15. It is our
responsibility to ensure the staff reporting to us are well trained to perform the professional services. We cannot
simply rely that the staff will find their own way of learning.
Third: Monthly staff updates and monitoring should be put in place to discuss ongoing issues the auditors see
the way IFRS 15 has been implemented by the clients and form a best practice to ensure continuing improvement
process. We have an obligation to maintain our knowledge.
Where appropriate, a chartered accountant shall make clients, employers or other users of the accountant's
professional services aware of the limitations inherent in the services or activities.
In practical world, it is a common practice in the audit firms to add disclaimers and inherent limitations of
providing audit services, such as inherent limitations due to fraud or sample- based approach. The disclaimers
are provided in various communications to management or those charged with governance. These
communications include, audit engagement letter, management reports on internal control findings and audit
close presentations.
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Example 04: Confidentiality (a)

Two audit associates in your team are on the audit of SK & Co Limited, a listed entity with a market capitalisation
of over 10% of total stock exchange. Due to this, the entity’s performance results are sensitive to the investors.
The audit fieldwork is almost completed, and the audit report is due next week. You become aware of an issue
where a key piece of confidential information was breached and leaked from your team before the conclusion of
the audit. However, in this situation it was only leaked to the tax partner in your firm who promptly advised you
of the breach.
Upon inquiry of the two associates, you become aware that one of the associates was talking about a material
restatement with the other associate in a public lift. In this instance the only other person in the lift was the tax
partner (who was also on the engagement tax auditing tax calculations).

Summary Notes by SK
Please Note:
Even though the confidential information was not released to a third party on purpose, this discussion
rendered breach of confidentiality for the firm and could have serious consequences. Any confidential
information or discussion should be avoided at all costs in public places, home or even outside the
engagement team within the firm.
Example 05: Confidentiality (b)

In example 04, let’s assume that an advisory partner (another service line in your firm who provide valuation
services to non-audit clients) has requested to see the draft annual report of SK & Co Limited before the audit is
completed. He has requested this information to be able to write his proposal in order to add some credentials on
the size of the company.
The proposal he is writing is for another entity’s valuation services who also operate in the same business. As per
the rules of confidentiality, you should not send the draft annual report to the advisory partner as the information
is not yet available to the public. The advisory partner is not part of the engagement team and hence sharing the
information would be breach of confidentiality.
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Example 06: Confidentiality (c)
Your firm has recently completed the audit of Khalil & Co. financial statements for the year ended 31 December
2018. Two months after issuing the audit report, you have received a notice from the High Court to disclose the
information on the manufacturing process costing system notes. The court needs this information as a law suit
has just been filed against Khalil & Co. regarding a flaw in their automated system and manufacturing practices.
Can you disclose the confidential information to the court?
In this instance, you should inform Khalil & Co. that the High Court has requested to disclose the confidential
information, and request in writing clients permission to disclose the information. If the permission is granted,
you should disclose the information to the Court. If the permission is not granted, you should seek legal advice
on the matter and notify this fact to the court.
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Example 07:
Mr. Aslam is an audit partner in the firm Aslam Associates. He is preparing to submit a proposal to act as the
auditor of National Oil Marketing Company. In the proposal, Mr. Aslam included three points of differentiation
to ensure his chances of success:
i. His audit services will be far efficient and timely compared to any other chartered accountant firm in the
town
ii. He will beat the audit fee to be quoted by other firms by 10%
iii. Aslam Associates has always received excellent feedback, which no other firms have achieved
Please discuss whether the above points of differentiation are acceptable to act in the light of the Code of Ethics?
The proposal document prepared by Aslam does not meet the requirements of professional behaviour as per the
requirements of the Code of Ethics for Chartered Accountants.

Summary Notes by SK
 Aslam should not compare his services with other members/firms as it denigrates the work of other
chartered accountants.
 Aslam is not allowed to undercut the fee charged by other accountants. In this claim he is guaranteeing to
beat the fee proposed by others by 10%. Aslam should quote a fixed fee representative of hours and staff
efforts required to carry out the audit in accordance with the auditing standards.
(Concept of lowballing)
 Comparing his firm’s feedback with other firms is discrediting the profession. There is no harm on adding
specific recommendations as long as these do not belittle the work of other chartered accountants.
-----------------------------------------------------------------------------------------------------------------------
Example 08:
Review the 04 situations below and comment which threat(s) arises in the circumstances
1. Haleeb Processing Plant Limited has been a long standing tax client of your firm. They have outsourced tax
preparation and compliance services to your firm. Due to the good relationship they have also requested
your firm to act as the auditor for the upcoming financial year. They intend to keep the tax outsourcing with
your firm.
2. KnS Institute has been facing a litigation with tax authorities. They have offered your firm to act as a tax
representative on their behalf and have offered a material amount in commission if the outcome is in their
favour.
3. Mr. Munir Shafi is the audit partner of J&J Limited for the last 10 years.
4. Unilevers Pakistan limited accounts for 40% of the total audit fee of SK & Co Chartered accountants.
Threats to the fundamental principles:

1. Self-review threat – because your firm prepares the tax calculations you should not be auditing the work
prepared by your own firm.
2. Self-interest Threat – the fee is offered on a commission basis therefore it may impact your judgement as
the focus will be on winning the dispute.
(Relevant examples are Contingent fees and may also affect High percentage of fees)
3. Advocacy threat – the firm is acting as an advocate on behalf of the audit client.
4. Familiarity threat - due to long standing relationship acting as the audit partner as Mr. Munir may be too
sympathetic to the errors in J&J’s internal controls or financial statements
5. Self Interest or intimidation threat – 40% fee is material to the total fee which renders SK & Co interest
in keeping the client. There is also intimidation threat as the firm may not want to lose the client and may
compromise on his own judgement in case of any issues or weaknesses. (as per study Text)
-------------------------------------------------------------------------------------------------------------------------------

Summary Notes by SK
Example 9:
Your assurance firm is auditor of Siemens Pakistan. The audit manager Mr.Sajid has just become engaged to the
managing director’s daughter Zarina The managing director (MD) owns 51% of the shares in Siemens.
Required.
List the threats to independence which might arise as a result of the above, explaining clearly why these are
threats.
An intimidation threat might arise because the MD could exert influence over the audit manager via any
influence he might have over his daughter. Alternatively, as the relationship between the audit manager and his
future father-in-law develops, direct intimidation might be possible.
A familiarity threat might arise, again, as the relationship between the audit manager and the MD develops. The
audit manager may become less critical of the reporting or operational practices at this client.
A self-interest threat might arise because the MD owns a majority shareholding in Siemens and his daughter
(who may well inherit the shares at some point in the future) therefore has a vested interest in the performance
of the organization as will her husband (i.e. this threat is probably greater once the marriage has taken place).

Summary Notes by SK
Section 330
Fees and Other Types of Remuneration
Introduction
The level and nature of fee and other remuneration arrangements might create a self-interest threat to compliance
with one or more of the fundamental principles.
Level of Fees
The level of fees quoted might impact a chartered accountant’s ability to perform professional services in
accordance with professional standards.
When entering into negotiations regarding professional services, a chartered accountant in practice may quote
whatever fee is deemed to be appropriate commensurate (in proportion) with the nature and service to be rendered
as undercutting.
However, in such cases, chartered accountants in practice should be careful not to quote fee lower than that
charged by the chartered accountants in practice previously carrying out the audit unless scope and quantum of
work materially differs from the scope and quantum of work carried out by the previous auditor, as it could then
be regarded as undercutting.
Factors that are relevant in evaluating the level of such a threat include:
 Whether the client is aware of the terms of the engagement and, in particular, the basis on which fees are
charged and which professional services, the quoted fee covers.
 Whether the level of the fee is set by an independent third party such as a regulatory body.
Examples of actions that might be safeguards to address such a self-interest threat include:
 Adjusting the level of fees or the scope of the engagement.
 Having an appropriate reviewer review the work performed. (E.g. QCR or Ethics Partner)
Referral Fees or Commissions

A self-interest threat to compliance with the principles of objectivity and professional competence and due care
is created if a chartered accountant pays or receives a referral fee or receives a commission relating to a client.
Such referral fees or commissions include, for example:
 A fee paid to another chartered accountant for the purposes of obtaining new client work when the client
continues as a client of the existing accountant but requires specialist services not offered by that
accountant.
 A fee received for referring a continuing client to another chartered accountant or other expert where the
existing accountant does not provide the specific professional service required by the client.
 A commission received from a third party (for example, a software vendor) in connection with the sale of
goods or services to a client.
 Obtaining an advance agreement from the client for commission arrangements in connection with the sale
by another party of goods or services (external party arranged by the firm) to the client might address a
self-interest threat.
 Disclosing to clients any referral fees or commission arrangements paid to, or received from, another
chartered accountant or third party for recommending services or products might address a self-interest
threat.

Summary Notes by SK
Obtaining and Accepting a New Audit Engagement
Introduction
Several commercial and ethical matters should be considered by an external auditor when considering the
acceptance of a new audit engagement. Auditors and clients must also follow the legal requirements set out in
the Companies Act, 2017.
Audit practices are a business, and their objective is to make a profit. However, this does not mean that the
practice should automatically accept every audit engagement that is offered to it, in order to maximize profit.
Circumstances may arise where it is appropriate to decline the offer of an audit appointment, for either
commercial or ethical reasons.
Accepting an audit appointment: ethical matters

The ICAP Code of Ethics includes procedures that auditors must follow to assure that their appointment is valid.
Client and Engagement Acceptance

Threats to compliance with the principles of integrity or professional behavior might be created, for example,
from questionable issues associated with the client (its owners, management or activities).
Issues that, if known, might create such a threat include client involvement in illegal activities, dishonesty,
questionable financial reporting practices or other unethical behavior.
Factors that are relevant in evaluating the level of such a threat include:
 Knowledge and understanding of the client, its owners, management and those charged with governance
and business activities.
 The client’s commitment to address the questionable issues, for example, through improving corporate
governance practices or internal controls.
A self-interest threat to compliance with the principle of professional competence and due care is created if the
engagement team does not possess, or cannot acquire, the competencies to perform the professional services.
Factors that are relevant in evaluating the level of such a threat include
 An appropriate understanding of:
 The nature of the client’s business;
 The complexity of its operations;
 The requirements of the engagement; and
 The purpose, nature and scope of the work to be performed.
 Knowledge of relevant industries or subject matter.

 Experience with relevant regulatory or reporting requirements.
 The existence of quality control policies and procedures designed to provide reasonable assurance that
engagements are accepted only when they can be performed competently.

Summary Notes by SK
Examples of actions that might be safeguards to address a self-interest threat include
 Assigning sufficient engagement personnel with the necessary competencies.
 Agreeing on a realistic time frame for the performance of the engagement.
 Using experts where necessary.
Note that the accountant has an obligation to comply with ethical requirements continuously throughout the
period of engagement. They should also review their acceptance decisions for recurring clients.
Changes in professional appointment

There might be reasons for not accepting an engagement. One such reason might be if a threat created by the
facts and circumstances cannot be addressed by applying safeguards.
For example, there might be a self-interest threat to compliance with the principle of professional competence
and due care if a chartered accountant accepts the engagement before knowing all the relevant facts.
Communicating with the existing or predecessor accountant

A proposed accountant (incoming auditor) will usually need the client’s permission, preferably in writing, to
initiate discussions with the existing (E.A) or outgoing accountant.
If unable to communicate with the existing or outgoing accountant, the proposed accountant shall take other
reasonable steps to obtain information about any possible threats.
Communicating with the Proposed Accountant
When an E.A is asked to respond to a communication from a proposed accountant, E.A shall:
a. Comply with relevant laws and regulations governing the request; and
b. Provide any information honestly and unambiguously.
An E.A is bound by confidentiality. Whether the E.A is permitted or required to discuss the affairs of a client
with a proposed accountant will depend on the nature of the engagement and:
a. Whether the E.A has permission from the client for the discussion; and
b. The legal and ethics requirements relating to such communications and disclosure, which might vary by
jurisdiction. (may vary from country to country)
Additional work
A chartered accountant in practice may be asked to undertake work that is complementary or additional to the
work of the existing accountant. Such circumstances may give rise to potential threats to professional competence
and due care resulting from, for example, a lack of or incomplete information.
 Asking the existing or predecessor accountant to provide any known information of which, in the E.A’s
opinion, the proposed accountant needs to be aware of before deciding whether to accept the engagement.
For example, inquiry might reveal previously undisclosed pertinent facts and might indicate disagreements
with the E.A that might influence the decision to accept the appointment.
 Obtaining information from other sources such as through inquiries of third parties or background
investigations regarding senior management or those charged with governance of the client.

Summary Notes by SK
Quality control for an audit of financial statements (ISA 220)
Objective
The objective of the auditor is to implement quality control procedures at the engagement level that provide the
auditor with reasonable assurance that:
 The audit complies with professional standards and applicable legal and regulatory requirements; and
 The auditor’s report issued is appropriate in the circumstances.
Requirements
1. Leadership Responsibilities for Quality on Audits

The engagement partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned.
2. Relevant Ethical Requirements

Throughout the audit engagement, the engagement partner shall remain alert, through observation and
making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by members
of the engagement team.
If matters come to the engagement partner’s attention through the firm’s system of quality control or otherwise
that indicate that members of the engagement team have not complied with relevant ethical requirements, the
engagement partner, in consultation with others in the firm, shall determine the appropriate action.
Independence
The engagement partner shall form a conclusion on compliance with independence requirements that apply to
the audit engagement. In doing so, the engagement partner shall:
 Obtain relevant information from the firm to identify and evaluate circumstances and relationships that
create threats to independence;
 Evaluate information on identified breaches, if any, of the firm’s independence policies to determine whether
they create a threat to independence and
 Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying
safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is
possible under applicable laws. The engagement partner shall promptly report to the firm any inability to
resolve the matter for appropriate action.
3. Acceptance and Continuance of Client Relationships and Audit Engagements

The partner is required to ensure that appropriate procedures in respect of accepting and continuing with the
audit are followed. If the engagement partner obtains information that would have caused them to decline the
audit in the first place (audit client involved in money laundering or drug trafficking etc.) they should
communicate that information to the firm so that swift action may be taken. (Covered in appointment ethics)
ISQC 1 requires the firm to obtain information considered necessary in the circumstances before accepting an
engagement with a new client, when deciding whether to continue an existing engagement, and when

Summary Notes by SK
considering acceptance of a new engagement with an existing client. Information such as the following assists
the engagement partner in reaching an appropriate conclusion:
 The integrity of the principal owners, key management and those charged with governance of the entity;
 Whether the engagement team is competent to perform the audit engagement and has adequate resources;
 Whether the firm and the engagement team can comply with relevant ethical requirements; and
Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship
4. Assignment of Engagement Teams
The engagement partner must ensure that the audit team as a whole, as well as any auditor’s is experts, has
the appropriate competence to:
 Perform the audit in accordance with professional standards, laws and regulations; and
 Ensure that the auditor’s report issued is appropriate to the circumstances.
5. Engagement Performance
Direction, Supervision and Performance
The engagement partner shall take responsibility for:
 The direction, supervision and performance of the audit engagement in compliance with professional
standards and applicable laws; and
 The auditor’s report being appropriate in the circumstances.
Direction
The partner directs the audit. They are required by other auditing standards to hold a meeting with the audit team
to discuss the audit, in particular the risks associated with the audit.
Direction involves:
a) Their responsibilities (including objectivity of mind and professional skepticism)
b) The objectives of the work to be performed
c) The nature of the entity's business
d) The detailed approach to the performance of the engagement’
Supervision
The audit is supervised overall by the engagement partner, but more practical supervision is given
within the audit team by senior staff to more junior staff, as is also the case with reviews. It includes:
a) Tracking the progress of the audit engagement
b) Considering the capabilities and competence of individual members of the team, and whether they have
sufficient time and understanding to carry out their work
c) Addressing significant issues arising during the audit engagement and modifying the planned approach
appropriately.
Review
Review includes consideration of whether:
a) The work has been performed in accordance with professional standards and regulatory and legal
requirements
b) Significant matters have been raised for further consideration

Summary Notes by SK
c) Appropriate consultations have taken place and documented
d) The work performed supports the conclusions reached and is documented
The evidence obtained is sufficient and appropriate to support the auditor‘s report
Before the auditor’s report is issued, the engagement partner must be sure that audit evidence has been obtained
to support the audit opinion. Reviews should be carried out at the appropriate stage of the audit to ensure that
any significant matters are resolved on timely basis.
The A.E.P should review critical areas of judgment, significant risks and other imp. matters.
Consultation
The engagement partner shall:
 Take responsibility for the engagement team undertaking appropriate consultation on difficult or
contentious matters;
 Be satisfied that engagement team have undertaken appropriate consultation during the course of the
engagement;
 Be satisfied that conclusions resulting from, such consultations are agreed with the party consulted; and
 that conclusions resulting from such consultations have been implemented.
Engagement Quality Control Review (EQCR)

For audits of financial statements of listed entities, and those other audit engagements, if any, for which the firm
has determined that an engagement quality control review is required, the engagement partner shall:
 Determine that an engagement quality control reviewer has been appointed;
 Discuss significant matters arising during the audit engagement with the engagement quality control
reviewer; and
 Not date the auditor’s report until the completion of the EQCR
The engagement quality control reviewer shall perform an objective evaluation of the significant judgments made
by the engagement team, and the conclusions reached. This evaluation shall involve:
 Discussion of significant matters with the engagement partner;
 Review of the financial statements and the proposed auditor’s report;
 Review of selected audit documentation relating to the significant judgments
 Evaluation of the conclusions reached in formulating the auditor’s report
For audits of financial statements of listed entities, the engagement quality control reviewer, shall also consider
the following:
 The engagement team’s evaluation of the firm’s independence in relation to the audit
 Whether appropriate consultation has taken place on matters involving differences of opinion or other
difficult or contentious matters

Summary Notes by SK
Differences of Opinion
If differences of opinion arise within the engagement team, with those consulted or, where applicable, between
the engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm’s
policies and procedures for dealing with and resolving differences of opinion.
6. Monitoring
An effective system of quality control includes a monitoring process designed to provide the firm with reasonable
assurance that its policies and procedures relating to the system of quality control are relevant, adequate, and
---------------------------------------------------------------------------------------------------------------------------------
Documentation (ISA 230)

The auditor shall include in the audit documentation:
 Issues identified with respect to compliance with relevant ethical requirements and how they were resolved.
 Conclusions on compliance with independence requirements that apply to the audit engagement.
 Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
 Conclusions resulting from, consultations undertaken during the course of the audit engagement.
The engagement quality control reviewer shall document that:

 The procedures required by the firm’s policies on engagement quality control review have been performed;
 The engagement quality control review has been completed on or before the date of the auditor’s report;
and
 The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the
significant judgments and the conclusions reached were not appropriate.

Summary Notes by SK
………………………………………………………………………………
……………Quality control at a FIRM level (ISQC -1)
Quality control at the Firm Level encompasses the following areas.

1. Firm and leadership responsibilities for quality within the firm: promoting a culture where quality is
regarded as essential, and providing training to ensure all staff understand quality objectives and procedures.
2. Ethical requirements (already covered in Code of Ethics)
3. Acceptance & continuance of client relationships

(Should the audit firm retain an audit client or not bec of firm wide decisions)
4. Human resources: recruiting and retaining staff with the right capabilities, competence and commitment to
ethical principles to perform engagements in accordance with professional standards and regulatory
requirements.
5. Engagement performance: implementing policies and procedures to ensure quality control at the individual
engagement level.
6. Monitoring: effective quality control procedures to ensure that they remain relevant, adequate and effective
and are complied with.

Summary Notes by SK
Drafting of Ethics Answer for CA CAF 8 Students

a) Identification and explanation of threat
(IF A GIVEN SCANERIO or PARAGRAPH… HAS ONE OR MORE THREATS …. Drafting will be as
follows)
Based on the facts given in the above scenario, it creates the following threats:
JUST an EXAMPLE 
1) Family and Personal Relationship
Because of close friendship with the audit manager / team / audit partner, this results in self-interest threat and
familiarity threat for the audit firm.
Because of this friendship, the audit manager / team / audit partner would be in a compromising position and
will be too sympathetic towards the audit client and its objectivity will be impaired.
Safeguards
(2 to 3 points depending upon the scenario)
i)
ii)
2) Gift and Hospitality
The audit client is offering discounted products or services to the audit team / manager / audit partner OR is
giving free company products / free gift vouchers to the audit team and as the value of gifts / free company
products is material This creates self-interest and familiarity threat for the audit team.
The audit team’s objectivity may be compromised and they would be giving the audit client undue favors or say
would be less challenging during the audit work.
Safeguards
(2 to 3 points depending upon the scenario)
i)
ii)

Summary Notes by SK
ACCA F8 Practice Questions on Code of Ethics

1 Q. 16 c March / June 2017 10 marks
2 Q. 1 Sep / Dec 2015 10 marks
3 Q. 1 June 2015 10 marks
4 Q. 2 a June 2013 5 marks
5 Q. 4 a Dec 2012 5 marks
6 Objective Questions March / June 2019 10 marks
CA CAF 8 Practice Questions on Code of Ethics

2 Q. 9 (a) Sep 2020 3 marks
3 Q. 8 Sep2020 12 marks

Summary Notes by SK
ACCA F8 March/ June 2017 (2 marks)
Question 16 c
You are an audit supervisor of Caving & Co and you are planning the audit of Hurling Co, a listed company, for
the year ending 31 March 20X7. The company manufactures computer components and forecast profit before
tax is $33·6m and total assets are $79·3m.
Hurling Co distributes its products through wholesalers as well as via its own website. The website was upgraded
during the year at a cost of $1·1m. Additionally, the company entered into a transaction in February to purchase
a new warehouse which will cost $3·2m. Hurling Co’s legal advisers are working to ensure that the legal process
will be completed by the year end. The company issued $5m of irredeemable preference shares to finance the
warehouse purchase.
During the year the finance director has increased the useful economic lives of fixtures and fittings from three to
four years as he felt this was a more appropriate period. The finance director has informed the engagement partner
that a revised credit period has been agreed with one of its wholesale customers, as they have been experiencing
difficulties with repaying the balance of $1·2m owing to Hurling Co. In January 20X7, Hurling Co introduced a
new bonus based on sales targets for its sales staff. This has resulted in a significant number of new wholesale
customer accounts being opened by sales staff. The new customers have been given favourable credit terms as an
introductory offer, provided goods are purchased within a two-month period. As a result, revenue has increased
by 5% on the prior year.
The company has launched several new products this year and all but one of these new launches have been
successful. Feedback on product Luge, launched four months ago, has been mixed, and the company has just
received notice from one of their customers, Petanque Co, of intended legal action. They are alleging the product
sold to them was faulty, resulting in a significant loss of information and an ongoing detrimental impact on
profits. As a precaution, sales of the Luge product have been halted and a product recall has been initiated for
any Luge products sold in the last four months.
The finance director is keen to announce the company’s financial results to the stock market earlier than last year
and in order to facilitate this, he has asked if the audit could be completed in a shorter timescale. In addition, the
company is intending to propose a final dividend once the financial statements are finalized.
Hurling Co’s finance director has informed the audit engagement partner that one of the company’s non-
executive directors (NEDs) has just resigned, and he has enquired if the partners at Caving & Co can help Hurling
Co in recruiting a new NED. Specifically, he has requested the engagement quality control reviewer, who was
until last year the audit engagement partner on Hurling Co, assist the company in this recruitment. Caving & Co
also provides taxation services for Hurling Co in the form of tax return preparation along with some tax planning
advice. The finance director has recommended to the audit committee of Hurling Co that this year’s audit fee
should be based on the company’s profit before tax. At today’s date, 20% of last year’s audit fee is still outstanding
and was due to be paid three months ago.

Summary Notes by SK
Required:
b. Describe EIGHT audit risks, and explain the auditor’s response to each risk, in planning the audit of Hurling
Co.
Note: Prepare your answer using two columns headed Audit risk and Auditor’s response respectively.
(16 marks)
c. Identify and explain FIVE ethical threats which may affect the independence of Caving & Co’s audit of
Hurling Co; and
For each threat, suggest a safeguard to reduce the risk to an acceptable level.
Note: The total marks will be split equally between each part. Prepare your answer using two columns headed
Ethical threat and Possible Safeguard respectively. (10 marks)
Answer 16 c:
Ethical threats and safeguards
(i) Ethical threat (ii) Possible safeguard
The finance director is keen to report Hurling Co’s The engagement partner should discuss the timing of
financial results earlier than normal and has asked if the audit with the finance director to understand if the
the audit can be completed in a shorter time frame. audit can commence earlier, so as to ensure adequate
time for the team to gather evidence.
This may create an intimidation threat on the team If this is not possible, the partner should politely inform
as they may feel under pressure to cut corners and the finance director that the team will undertake the
not raise issues in order to satisfy the deadlines and audit in accordance with all relevant ISAs and quality
this could compromise the objectivity of the audit control procedures. Therefore, the audit is unlikely to
team and quality of audit performed. be completed earlier.
If any residual concerns remain or the intimidation
threat continues, then Caving & Co may need to
consider resigning from the engagement
A non-executive director (NED) of Hurling Co has Caving & Co is able to assist Hurling Co in that they
just resigned and the directors have asked whether can undertake roles such as reviewing a shortlist of
the partners of Caving & Co can assist them in candidates and reviewing qualifications and
recruiting to fill this vacancy. suitability. However, the firm must ensure that they are
not seen to undertake management decisions and so
This represents a self-interest threat as the audit firm
must not seek out candidates for the position or make
cannot undertake the recruitment of members of the
the final decision on who is appointed.
board of Hurling Co, especially a NED who will
have a key role in overseeing the audit process and
audit firm.
The engagement quality control reviewer (EQCR) As Hurling Co is a listed company, then the previous
assigned to Hurling Co was until last year the audit audit engagement partner should not be involved in the
engagement partner. audit for at least a period of two years. An alternative
This represents a familiarity threat as the partner EQCR should be appointed instead.
will have been associated with Hurling Co for a long
period of time and so
may not retain professional skepticism and
objectivity.

Summary Notes by SK
Caving & Co provides taxation services, the audit Caving & Co should assess whether audit,
engagement and possibly services related to the recruitment and taxation fees would represent more
recruitment of the NED. than 15% of gross practice income for two consecutive
years.
There is a potential self-interest or intimidation
threat as the total fees could represent a significant If the recurring fees are likely to exceed 15% of annual
proportion of Caving & Co’s income and the firm practice income this year, additional consideration
could become overly reliant on Hurling Co, should be given as to whether the recruitment and
resulting in the firm being less challenging or taxation services should be undertaken by the firm.
objective due to fear of losing such a significant
client. In addition, if the fees do exceed 15%, then this should
be disclosed to those charged with governance at
Hurling Co.
If the firm retains all work, it should arrange for a pre-
issuance (before the audit opinion is issued) or post-
issuance (after the opinion has been issued) review to
be undertaken by an external accountant or by a
regulatory body.
The finance director has suggested that the audit Caving & Co will not be able to accept contingent fees
fee is based on the profit before tax of Hurling Co and should communicate to those charged with
which constitutes a contingent fee. governance at Hurling Co that the external audit fee
needs to be based on the time spent and levels of skill
Contingent fees give rise to a self-interest threat and and experience of the required audit team members.
are prohibited under ACCA’s Code of Ethics and
Conduct. If the audit fee is based on profit, the
team may be inclined to ignore audit adjustments
which could lead to a reduction in profit.
At today’s date, 20% of last year’s audit fee is still Caving & Co should discuss with those charged with
outstanding and was due for payment three months governance the reasons why the final 20% of last
ago. year’s fee has not been paid. They should agree a
revised payment schedule which will result in the fees
A self-interest threat can arise if the fees remain being settled before much more work is performed for
outstanding, as Caving & Co may feel pressure to the current year audit.
agree to certain accounting adjustments in order to
have the previous year and this year’s audit fee
paid.
In addition, outstanding fees could be perceived as

a loan to a client which is strictly prohibited.
-----------------------------------------------------------------------------------------------------

Summary Notes by SK
ACCA September / December 2015 (10 marks)
Question 1
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 yearend is 30 September 2015.
At the end of August, Golden’s 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:
(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.
Answer 1:
Ethical threats and managing these risks
(i) Ethical threat (ii) Managing these risks

The finance director is the sister-in-law of the Although the family relationship is only established
audit engagement partner and hence there is a by marriage, as it is a sister-in- law, it would be
family relationship. advisable for the audit engagement partner to be
removed and an alternative partner appointed.
There is a familiarity and self-interest threat as
the audit partner and the finance director both
hold senior positions and therefore are in a
position to influence the outcome of the audit.

Summary Notes by SK
There is a concern that they may place their
family relationship above the needs of the users
of the financial statements.
Golden Finance Co’s (Golden) finance director Pink Partners & Co (Pink) should clarify exactly
has asked if a member of the audit team can be which areas the seconded team member would assist
seconded to fill the role of financial controller. Golden on. Though it is likely that as the financial
controller, the team member will be directly involved
A self-review risk arises if the team member in dealing with items related to the financial
prepares records and schedules which support statements.
the financial statements and is then part of the
audit team responsible for auditing these. As such, the request from the finance director should
be politely declined, or the team member should be
removed from the audit of Golden.
Two members of the audit team have The terms of the loans should be reviewed to
significant loans owing to the company. ascertain whether they are in any way preferential. If
Golden is a banking institution and hence the not, no further action is required.
provision of a loan is within the normal course
of business. However, if the terms are preferential then either the
terms should be amended or these two members
However, if either of the loans has any should be removed from the audit team.
preferential terms, such as rates or repayment
periods, then this would represent a self-interest
threat.
Golden has requested that Pink’s taxation Due to the likelihood of these issues having a material
department represents them in negotiations to impact on the financial statements and the advocacy
resolve some outstanding issues with the threat, it is advisable that the firm politely declines this
taxation authorities. request
There is a potential advocacy threat where the

firm may promote an opinion on behalf of
Golden, such that the independence of the firm
is compromised.
In addition, the outcome of these issues may

have a material impact on the financial
statements, resulting in a self-review threat.
The taxation fees being quoted to Golden are Pink should assess whether audit, non-audit and total
substantial. taxation fees would represent a significant
proportion of recurring fee income.
There is a potential self-interest threat as the
total fees could represent a significant If the recurring fees are likely to be significant,
proportion of Pink’s income and the firm could additional consideration should be given as to
become overly reliant on Golden. whether the taxation and/or non-audit assignments
should be undertaken by the firm.

Summary Notes by SK
The finance director has invited the whole team As it is unlikely the football tickets and luxury meal
to attend an evening out watching the national for the whole team has an insignificant value, then
football team play a match followed by a luxury this offer should be politely declined.
meal.
This represents a self-interest and familiarity

threat as the acceptance of goods and services,
unless insignificant in value, is not permitted.
-------------------------------------------------------------------------------------------------------------------------------

Question 1
You are an audit senior of Beech & Co and have been allocated to the audit of Willow Wands Co (Willow), a
listed company which has been an audit client for eight years and specialises in manufacturing musical
instruments.
Bethan Oak was the audit engagement partner for Willow and as she had completed seven years as the audit
engagement partner, she has recently been rotated off the audit engagement. The current audit partner, Sandeep
Pine, has suggested that in order to maintain a close relationship with Willow, Bethan should undertake the role
of independent review partner this year. In addition, Willow has requested that Bethan assist them by attending
their audit committee meetings, as a non-executive director has recently left the company.
Willow has also asked Sandeep and the other partners at Beech & Co to help them in recruiting a new non-
executive director.
The total fees received by Beech & Co for last year equated to 16% of the firm’s total fee income. The current
year’s audit fee has not yet been confirmed, but along with taxation and other possible non-audit fees the total
income from Willow this year could be greater than for last year. Last year’s audit fee was being paid monthly
by Willow but no payments have been made for the last three months.
The audit manager for Willow has just announced that he is leaving Beech & Co to join Willow as the financial
controller.
Required:
i. Identify and explain FIVE ethical threats which may affect the independence of Beech & Co’s audit of
Willow Wands Co; and
ii. For each threat explain how it might be reduced to an acceptable level.

Summary Notes by SK
Answer:
Ethical threats and managing these risks
(i) Ethical threat (ii) Managing these risks

Bethan Oak was the audit engagement partner of As Willow is a listed company, then Bethan Oak
Willow Wands Co (Willow) for the last seven years should not serve as the independent review
and has recently rotated off the audit. partner for a period of two years. An alternative
review partner should be appointed instead.
It has been proposed that she should now become
the independent review partner. This represents a
familiarity threat as the partner will have been
associated with Willow for a long period of time
and so may not retain professional scepticism and
objectivity.
Willow has requested the previous engagement The firm should politely decline this request from
partner, Bethan Oak, attend audit committee Willow, as it represents too great a threat to
meetings as a non-executive director of Willow has independence.
recently left.
This represents a self-interest threat as the audit

firm may be perceived as performing the role of
management by attending these meetings and this
threatens objectivity.
A non-executive director of Willow has recently left Beech & Co is able to assist Willow in that they
and the management of Willow have asked can undertake roles such as reviewing a shortlist
whether the partners of Beech & Co can assist them of candidates. However, they must ensure that
in recruiting to fill this vacancy. they are not seen to undertake management
decisions and so must not make the final decision
This represents a self-interest threat as the audit on who is appointed.
firm cannot undertake the recruitment of senior
management of Willow, especially as non-
executive directors have a key responsibility in
appointing the audit firm.
The total fees received from Willow for last year Beech & Co should assess whether audit and non-
equated to 16% of the firm’s total income. The fees audit fees would represent more than 15% of gross
for this year have not been finalised, but it is practice income for two consecutive years.
anticipated that they could be greater than 16%.
If the recurring fees are likely to exceed 15% of
There is a potential self-interest threat as the total annual practice income this year, additional
fees could represent a significant proportion of consideration should be given as to whether the
Beech & Co’s income. taxation and non-audit assignments should be
undertaken by the firm.

Summary Notes by SK
In addition, if the fees do exceed 15% then this
should be disclosed to those charged with
governance at Willow.
Last year’s audit fee was being paid monthly, Beech & Co should discuss with those charged
however; the last three months’ payments are with governance the reasons why the last three
outstanding. months’ payments have not been made. They
should agree a revised payment schedule which
A self-interest threat can arise if the fees remain will result in the fees being settled before much
outstanding, as Beech & Co may feel pressure to more work is performed for the current year audit.
agree to certain accounting adjustments in order to
have the previous year and this year’s audit fee
paid.
In addition, outstanding fees could be perceived as

a loan to a client which is strictly prohibited.
The audit manager of Willow is leaving Beech & A new audit manager should be appointed to
Co to become the financial controller at Willow. Willow and any work already undertaken by the
This represents a self- interest and familiarity threat previous manager should be independently
as the audit manager is familiar with the audit plan reviewed.
which is to be adopted at Willow and he may also
have commenced work on this year’s audit In addition, it would be advisable to modify the
audit plan so that the manager would not
be overly familiar with the approach to be
adopted.
-------------------------------------------------------------------------------------------------------------------------------

Question 2 a
Compliance with the fundamental principles in ACCA’s Code of Ethics and Conduct canbe threatened in a
number of ways.
Required:
List the FIVE ethical threats to independence and objectivity and for EACH threat identify ONE example of a
circumstance that may create the threat. (5 marks)
Answer:
Ethical threats
The five categories of threats as per the Revised ICPAS Code of Professional Conduct and Ethics along with an
example of each threat are:
(i) Self-interest
 Undue dependence on fee income from one client.
 Close business relationships.
 Direct financial interest in a client.
 Concern over loss of significant client.

Summary Notes by SK
 Contingent fee arrangements.
 Member of audit team entering into employment negotiations with client.
 The discovery of a significant error during a re-evaluation of the work undertaken by the member.
(ii) Self-review
 Member of assurance team being or recently having been employed by the client in a position to
influence the subject matter being reviewed.
 Involvement in implementation of financial system and subsequently reporting on the operation of
said system.
 Firm having prepared the original data used to generate records that are the subject matter of the
assurance engagement, for example, preparing clients’ financial statements.
 Performing a service for a client that directly affects the subject matter of an assurance engagement.
(iii) Advocacy
 Acting as an advocate on behalf of a client in litigation or disputes.
 Promoting shares in a listed audit client.
(iv)Familiarity
 Long association with a client.
 Acceptance of gifts or preferential treatment (significant value).
 Former partner of firm being employed by client.
 A person in a position to influence financial or non-financial reporting or business decisions having
an immediate or close family member who is in a position to benefit from that influence.
(v) Intimidation
 Threat of litigation.
 Threat of removal as assurance firm.
 Threat of not being awarded non-audit engagements if disagree with directors’ accounting treatment.
 Accountant threatened by audit partner of not being promoted within the firm if disagree with client.
 Dominant personality of client director attempting to influence decisions.
 Pressure to reduce inappropriately the extent of work performed in order to reduce fees.
Tutorial note: Only one example per threat is required, credit will be awarded for other relevant examples of
threats.
-------------------------------------------------------------------------------------------------------------------------------

Question 4 a
Identify and explain each of the FIVE fundamental principles contained within ACCA's Code of Ethics and
Conduct

Summary Notes by SK
Answer:
Fundamental principles
Integrity – to be straightforward and honest in all professional and business relationships.

Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business
judgements.
Professional Competence and Due Care – to maintain professional knowledge and skill at the level required to
ensure that a client receives competent professional services, and to act diligently and in accordance with
applicable technical and professional standards.
Confidentiality – to respect the confidentiality of information acquired as a result of professional and business
relationships and, therefore, not to disclose any such information to third parties without proper authority, nor
use the information for personal advantage.
Professional Behavior – to comply with relevant laws and regulations and avoid any action that discredits the
profession.
-------------------------------------------------------------------------------------------------------------------------------

Summary Notes by SK

Objective Questions
The following scenario relates to questions 1–5

You are an audit manager at Horti & Co and you are considering a number of ethical issues which have arisen
on some of the firm’s long-standing audit clients.
Tree Co
Horti & Co is planning its external audit of Tree Co. Yesterday, the audit engagement partner, Charlie Thrower,
discovered that a significant fee for information security services, which were provided to Tree Co by Horti &
Co, is overdue. Charlie hopes to be able to resolve the dispute amicably and has confirmed that he will discuss
the matter with the finance director, Percy Marsh, at the weekend, as they are both attending a party to celebrate
the engagement of Charlie’s daughter and Percy’s son.
Bush Co
Horti & Co is the external auditor of Bush Co and also provides other non-audit services to the company. While
performing the audit for the year ended 31 October 20X8, the audit engagement partner was taken ill and took
an indefinite leave of absence from the firm. The ethics partner has identified the following potential replacements
and is keen that independence is maintained to the highest level:
Brian Smith who is also the partner in charge of the tax services provided to Bush Co
Monty Nod who was the audit engagement partner for the ten years ended 31
October 20X7
Cassie Dixon who introduced Bush Co as a client when she joined the firm as an audit
partner five years ago
Pete Russo who is also the partner in charge of the payroll services provided to Bush Co
Plant Co
Plant Co is a large private company, with a financial year to 30 June, and has been an audit client of Horti & Co
for several years. Alan Marshlow, a partner of Horti & Co, has acted as the engagement quality control reviewer
(EQCR) on the last two audits to the year ended 30 June 20X8. At a recent meeting, he advised that he can no
longer be EQCR on the engagement as he is considering accepting appointment as a non-executive director and
will sit on the audit committee of Plant Co.
The board of directors has also asked Horti & Co if they would be able to provide internal audit services to the
company.
Weed Co
Weed Co, a listed company, is one of Horti & Co’s largest clients. Last year the fee for auditand other services was
$1·2m and this year it is expected to be $1·3m which represents 16·6% and 18.1% of Horti & Co’s total income
respectively.

Summary Notes by SK
1) Which of the following statements correctly explains the possible threats to Horti & Co’s independence and
recommends an appropriate safeguard in relation to their audit of Tree Co?
1. An intimidation threat exists due to the overdue fee and Tree Co should be advised that all fees must
be paid prior to the auditor’s report being signed
2. A self-review threat exists due to the nature of the non-audit work which has been performed and an
engagement quality control review should be carried out
3. A self-interest threat exists due to the relationship between Charlie and Percy and Charlie should be
removed as audit partner
A. 1, 2 and 3
B. 1 and 2 only
C. 2 only
D. 3 only
2) Taking into account the concern of the ethics partner, which of the partners identified as potential
replacements should take over the audit of Bush Co for the year ended 31 October 20X8?
A. Brian Smith
B. Monty Nod
C. Cassie Dixon
D. Pete Russo
3) Which of the following correctly identifies the threats to Horti & Co's independence and proposes an
appropriate course of action for the firm if Alan Marshlow accepts appointment as a non-executive director
of Plant Co?
Threats Course of action

A. Self-interest and familiarity Can continue with appropriate safeguards
B. Self-interest and self-review Must resign as auditor
C. Self-review and familiarity Must resign as auditor
D. Familiarity only Can continue with appropriate safeguards
4) You are separately considering Plant Co's request to provide internal audit services and the remit of these
services if they are accepted.
Which of the following would result in Horti & Co assuming a management responsibility in relation to the
internal audit services?
1. Taking responsibility for designing and maintaining internal control systems

2. Determining which recommendations should take priority and be implemented
3. Determining the reliance which can be placed on the work of internal audit for the external audit
4. Setting the scope of the internal audit work to be carried out

Summary Notes by SK
A. 1 and 3
B. 2, 3 and 4
C. 1, 2 and 4
D. 3 and 4 only
5) Which of the following actions should Horti & Co take to maintain their objectivity in relation to the level
of fee income from Weed Co?
1. The level of fee income should be communicated to those charged with governance
2. Separate teams should be used for the audit and non-audit work
3. Request payment of the current year's audit fee in advance of any work being performed
4. Request a pre-issuance review be conducted by an external accountant
A. 1 and 4 only
B. 3 and 4 only
C. 2 and 3 only
D. 1, 2, 3 and 4

Summary Notes by SK
ACCA March / June 2019
Answers of Objective Questions: (1-5)
1. D
In line with ACCA’s Code of Ethics and Conduct, a self-interest threat would arise due to the personal
relationship between the audit engagement partner and finance director.
A self-interest threat, not intimidation threat, would arise as a result of the overdue fee and due to the nature of
the non-audit work, it is unlikely that a self-review threat would arise. 2
2. C
In order to maintain independence, Cassie Dixon would be the most appropriate replacement as audit
engagement partner as she has no ongoing relationship with Bush Co. Appointing any of the other potential
replacements would give rise to self-review or familiarity threats to independence.
3. B
If Alan Marshlow accepts the position as a non-executive director for Plant Co, self-interest and self-review
threats are created which are so significant that no safeguards can be implemented. Further as per ACCA’s
Code of Ethics and Conduct, no partner of the firm should serve as a director of an audit client and as such,
Horti & Co would need to resign as auditor.
4. C
Assuming a management responsibility is when the auditor is involved in leading or directing the company
or making decisions which are the remit of management.
Designing and maintaining internal controls, determining which recommendations to implement and setting
the scope of work are all decisions which should be taken by management.
5. A
Weed Co is a listed company and the fees received by Horti & Co from the company have exceeded 15% of
the firm’s total fees for two years. As per ACCA’s Code of Ethics and Conduct, this should be disclosed to
those charged with governance and an appropriate safeguard should be implemented. In this case, it would
be appropriate to have a pre- issuance review carried out prior to issuing the audit opinion for the current
year.

Summary Notes by SK
Student Notings

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Company Law’

Summary Notes by SK
SUMMARY OF AUDIT SECTIONS - Companies Act 2017
A. Appointment and remuneration of auditors - Sec 246

(Previously sec 252 & 253)
1. First Audit by the B.O.D within 90 days of incorporation . Retire on first AGM.
2. Every company shall at each annual meeting appoint an auditor, on the recommendation of the board to
hold of office from the conclusion of that meeting until the conclusion of the next AGM.
3. A member or members having MIN 10% percent shareholding of the company

 shall also be entitled to propose any auditor or auditors for appointment
 whose consent has been obtained by him and
 a notice in this regard has been given to the company not less than
seven days before the date of the annual general meeting.
 The company shall forthwith send a copy of such notice to the retiring auditor and shall also
be posted on its website. (by BOD)
Where an auditor, other than the retiring auditor is proposed, the retiring shall have a right to make representation
in writing at least two days before the date of general meeting and be read
out in the presence of the retiring auditor at the AGM . (By B.O.D)
Company Shall, within fourteen days (14 days) from the date of any appointment of an auditor, send to the
registrar intimation together with the consent in writing . (By B.O.D)

Summary Notes by SK
Appointment by the B.O.D
REMOVAL
4. Auditors appointed in a general meeting or by the board may be removed before conclusion of the next AGM
through a special resolution.
In this case BOD to appoint auditors with prior approval of Commission.
Special Resolution
(Passed by 3/4 majority of the members present at of the meeting & 21 days' notice is required)
CASUAL VACANACY
5. The directors may fill any casual vacancy in the office of an auditor WITHIN 30DAYS, but, while any such
vacancy continues, the surviving auditors, if any, may act.
6. Any auditor appointed to fill in any casual vacancy shall hold office till next annual general meeting
7. Appointment by COMMISSION
(when)
 the first auditors are not appointed within 90 days of the date of incorporation of the company, or
 where at an annual general meeting no auditors are appointed, or
 where auditors appointed are unwilling to act as auditors of the company, or
 where a casual vacancy in the office of an auditor is not filled within thirty days after the occurrence of
the vacancy.
8. The remuneration of the auditors shall be fixed:
 by the company in the general meeting;
 by the board or by the Commission, if appointed by the board or the Commission.
B Qualification and disqualification of auditors (MOST IMP)

(Revised 247-Old 254)
1. A person shall not be qualified for appointment as an auditor:
in the case of a public company or a private company which is subsidiary of a public company unless he
is a Chartered Accountant
(Practicing Member)
2. in the case of a private company having paid up capital of three million rupees (Rs3000,000) or more
unless he is a Chartered Accountant
3. In any other case

Summary Notes by SK
unless he is a Chartered Accountant or cost and management accountant (ICMAP)
1. A firm where of all the partners practicing are qualified for appointment shall be appointed
by its firm name as auditors of a company
2. Where a partnership firm is appointed as auditor of a company, only the partners who meet the
qualification requirements, shall be authorized to act and sign.
3. The following shall NOT be appointed as auditor................

a) a person who is, or at any time during the preceding three years was, a director, other officer or
employee of the company;
b) a person who is a partner of, OR in the employment of, a director, officer or employee of the
company;
c) the spouse of a director of the company;
Class Examples…….
e. a person who is indebted to the company other than in ordinary course of business;

Summary Notes by SK
For the purposes of above clause, a person who owes:
a) a sum of money not exceeding one million rupees to a credit card issuer; or
b) a sum to a utility company in the form of un paid dues for a period not exceeding ninety days;
shall NOT be deemed to be indebted to the company
f. a person who has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company other than in the ordinary course of business of
such entities.
g. a person or a firm who, whether directly or indirectly, has business relationship with the company other
than in the ordinary course of business of such entities
h. a person who has been convicted by a court of an offence involving fraud and a period of ten years has
note lapsed from the date of such conviction
i. a body corporate;
j. a person who is not eligible to act as an auditor under the code of Ethics as adopted by ICAP and the
ICMAP.
VERY IMP
k. a person or his spouse or minor children, or in case of a firm, all partners of such firm who holds any
shares of an audit client or any of its associated companies:
Provided that if such a person holds shares prior to his appointment as auditor, whether as an individual or a
partner in a firm the fact shall be disclosed on his appointment as auditor and such person shall disinvest such
shares within ninety days (90) of such appointment .
5. A person shall also not be qualified for appointment as auditor of a company if he is disqualified for
appointment as auditor of any other company......which is that company's subsidiary or holding
company......... or a subsidiary of that holding company.

Summary Notes by SK
6. If, after his appointment, an auditor becomes subject to any of the disqualifications specified in this
section, he shall be deemed to have vacated his office as auditor with effect from the date on which he
becomes so disqualified.
7. An unqualified person acted as auditor shall be liable to level 2 penalty.

8. The appointment as auditor of a company of an unqualified person shall be void, and in such a case the
Commission may appoint a qualified person in place.
C. Right to information and duties of auditors

(Revised sec 248 & sec 249) Old sec 255
Auditor Right to information

1. Every auditor of a company shall have a RIGHT
i. of access at all times to the books, papers, accounts and vouchers of the company
ii. of access to such copies of, extracts from, the books and accounts of the branches
iii. have been transmitted to the principal office of the company
iv. to require any of the following persons to provide him with such information or explanations as
he thinks necessary for the performance of his duties as auditor
 any director, officer or employee of the company
 any person holding or accountable for any of tile company's books, accounts or vouchers
 any subsidiary undertaking of the company or any officer, employee or auditor.
D. DUTIES (Section 249)

1. Auditor shall conduct the audit and prepare his report incompliance with the requirements of ISA as
adopted by the ICAP.
2. The auditor shall make a report to the members of the company on the accounts and books of accounts
of the company and on every financial statement other document forming part financial statements,
including notes, which are laid before the company-in general meeting and the report shall state:
a) whether or not they have obtained all the information and explanations which to the best of their
knowledge and belief were necessary for the purposes of the audit and if not, the effect of such
information on the financial statements;
b) whether or not in their opinion proper books of accounts as required by this Act have been kept by
the company;
c) whether or not in their opinion the financial statement have been drawn up inconformity with the
requirements of accounting and reporting standards as notified under this Act and are in agreement
with the books of accounts and returns;
d) whether the said accounts give the information required by this Act in the manner so required and
give a true and fair view:
i. in the case of the statement of financial position, of the state of affairs of the company as at
the end of the financial year;
ii. in the case of the profit and loss account and other comprehensive income or the income and
expenditure account, of the profit or loss and other comprehensive income or surplus or
deficit, as the case may be, for its financial year; and

Summary Notes by SK
iii. in the case of statement of cash flows, of the generation and utilization of the cash and cash
equivalents of the company for its financial year;
e. whether or not in their opinion

i. investments made, expenditure incurred and guarantees extended, during the year, were for
the purpose of company's business; and
ii. zakat deductible at source under the Zakat and Usher Ordinance was deducted by the
company and deposited in the Central Zakat Fund.
3. Where any of the above matters is answered in the negative or with a qualification, the report shall state
the reason for such answer a long with the factual position to the best of the auditor's information.
4. The auditor shall express unmodified or modified opinion in his report in compliance with the
requirements of ISA as adopted by the ICAP.
5. The auditor of a company shall be entitled to attend any general meeting of the company, and to receive
all notices of such and also to be heard at any general meeting.
6. In the case of a listed company, the auditor or a person authorized by him in writing shall be present in
the general meeting.
E. Signature on audit report (Revised sec 251)

1. The auditor's report must state the name of the auditor, engagement partner, be signed, dated and indicate
the place at which it is signed.
2. Where the auditor is an individual, the report must be signed by him.
3. Where the auditor is a firm, the report must be signed by the partnership firm with the name of the
engagement partner.
F. Audit of cost accounts (section 250)

Where any company or class of companies is required under the Act to include in its books of account the
particulars referred to therein, the Commission may direct that an audit of cost accounts of the company should
be conducted by an auditor who is a chartered accountant or a cost and management accountant and such auditor
will have the same powers, duties and liabilities as an auditor of a company.
The audit of cost accounts of the company under the circumstances mentioned above will be directed by the
Commission subject to the recommendation of the regulatory authority
Section 252.Penalty for non-compliance with provisions by companies

Any default in complying with requirements of section 246 (Appointment), 247 (qualification and
disqualification), 248 (rights) and 250 (audit of cost accounts) shall be an offence liable to a penalty of level 3
on the standard scale.

Summary Notes by SK
Section 253.Penalty for non-compliance with provisions by auditor
If any auditor's report is made, or any document of the company is signed or authenticated otherwise than in
conformity of sections 249 (duties of auditor) and 251( signature of audit report) or is otherwise untrue or fails to
bring out material facts about the affairs of the company the auditor concerned and in the case of a firm all
partners of the firm, shall be liable to a penalty of level 2 on the standard scale.
If the auditor's report as above is made with the intent to profit such auditor or any other person or to put another
to a disadvantage or loss or for a material consideration, the auditor shall, in addition to the penalty provided by
that sub-section, be punishable with imprisonment for a term which may extend to two years and with penalty
which may extend to one million rupees.
PENALTIES (Sec 479.Standard Scale)
Standard scale of consists of:

Level Limit of penalty Per day penalty during which the default continues.
1 Upto Rs. 25,000 Upto Rs. 500

2 Upto Rs. 500,000 Upto Rs. 1,000
3 Upto Rs. 100 million Upto Rs. 500,000

Summary Notes by SK
CA CAF 8 Practice Questions on Company Law



Summary Notes by SK
‘Computer Assisted Audit Techniques’

(C.A.A.T)

Summary Notes by SK
Computer Assisted Audit Techniques (C.A.A.T)

Expected Questions on CAAT
1. Define C.A.A.T & explain types of C.A.A.T
2. Briefly explain the term Audit Software & Test Data.
3. Define Audit Software & list the various types of Audit software.
4. List few Advantages & Disadvantages of CAAT.
5. List few Advantages & Disadvantages of using Audit software.
CAATs (Computer Assisted Audit Techniques):

Where audit clients accounting and internal control systems are I.T based specialized techniques of obtaining
audit evidence may be required. These are known as computer- assisted audit techniques (CAATs). CAATs can
be defined as any technique that enablesthe auditor to use I.T systems as a source of generating audit evidence
during the audit.
In computerized environment, processing is ‘invisible’ because it is electronic, therefore there may not be an
adequate ‘AUDIT TRAIL’ Therefore, the auditor needs to ‘get inside thecomputer’ to check the completeness and
accuracy of the data processing through which F/S are prepared.
Two types of CAATs are:

1. Test data (For Test of Controls)
2. Audit software (For Substantive Procedures)
It is test data which is of most relevance to tests of control. The technique provides evidence of the operation of
internal controls in a given accounting system of the audit client.Audit software is more relevant and useful for
substantive testing e.g. Verification of Debtorsand Creditors etc.
1. Test data
The use of test data involves the auditor processing a sample of data through the I.T systemand comparing the
results obtained from the processing with pre-determined results in the F/S.
Test data involves the auditor submitting 'dummy' data into the client's system to ensure thatthe system correctly
processes it and that it prevents or detects and corrects misstatements.The objective of this is to test the operation
of application controls within the system.
To be successful, test data should include both, data with errors built into it and data withouterrors

Summary Notes by SK
Examples of Test Data
 Codes that do not exist, e.g. customer, supplier and employee.
 Transactions above predetermined limits, e.g. salaries above contractedamounts, credit above limits agreed
with customer.
 Invoices with arithmetical errors.
 Submitting data with incorrect batch control totals.
A potential problem with using test data is that it will only give audit evidence at the time thattest data is processed.
There are 2 environments for testing (LIVE and DEAD environment).
 Live tests could interfere with the operation of the system or corrupt master files/standing data.
 Dead testing avoids this issue but only gives assurance that the system works when not operating live.
This may not be reflective of the strains the system is put under in normal conditions.
One way of achieving results and verifying controls without corrupting the client’s data files / accounting
application with the test data is to test data in ‘dead environment’.
Advantages and disadvantages of test data
Advantages
 Enables the auditor to test programmed controls which wouldn't otherwise be able tobe tested.
 Once designed, costs incurred will be minimal unless the programmed controls arechanged requiring
the test data to be redesigned.
Disadvantages
 Risk of corrupting the client's systems.
 Requires time to be spent on the client's system if used in a live environment which may not be
convenient for the client.
2. Audit software
 Audit software is primarily used for substantive testing.
 Audit software can be both Bespoke and off the shelf.
 Audit software is computer programs used by the auditor to extract information froma computer-based
information system, for use in the audit.
 Audit software is used to interrogate a client's system.
 The main advantage of these programs is that they can be used to scrutinise largevolumes of data, which
it would be inefficient to do manually.
 These programs can then present the results so that they can be investigated further.

Summary Notes by SK
Specific procedures they can perform include:
 Extracting samples according to specified criteria, such as:
– random
– over a certain amount e.g. individually material balances or expenses
– below a certain amount e.g. debit balances on a payables ledger or credit balanceson a receivables
ledger
– at certain dates e.g. receivables or inventory over a certain age
 Calculating ratios, carrying out comparison with different periods and select indicatorsthat fail to meet
certain predefined criteria (i.e. benchmarking)
 Compare data elements / numbers / values in different files of the accounting softwareand identifying
changes to standing data (E.g. prices on sales invoices to authorized prices in master file, employee or
supplier bank data).
 Casting ledgers and schedules
 Recalculation of amounts such as depreciation
 Preparing reports (budget vs actual)
 Stratification of data (such as invoices by customer or age)
 Produce letters to send out to customers and suppliers.
These procedures can simplify the auditor's task by selecting samples for testing, identifying risk areas and by
performing certain substantive procedures.
The software does not, however, replace the need for the auditor's own procedures.
The main types of audit software include:
 interrogation programs, to access the client’s files and records and extract data (G.L andTrial balance) for
verification
 interactive software, for use in interrogation / verification of on-line I.T systems e.g ATMSand online
application
 ‘resident code’ or ‘embedded’ software, to monitor and review transactions as they are being processed
by the client’s programs. This type of software is called ‘embedded audit facilities.
Embedded audit facilities (or software)
Embedded audit facilities may also be called ‘resident audit software’. It is audit software that is built /
installed into the client’s I.T system, either temporarily or permanently.
The purpose of embedded audit facilities is to allow the audit to carry out tests at the time that transactions
are being processed, in ‘real time’ in the accounting application of the auditclient.
This can be very useful for the audit of online systems where:
 data is continually processed and master files are being continually updated, and/or
 it is difficult for the system to provide a satisfactory audit trail for following transactions through the
system.

Summary Notes by SK
Benefits of the use of Audit Software
 Calculations and casting of reports will be quicker.
 More transactions can be tested as compared with manual testing.
 The computer files are tested rather than printouts.
 Once set up can be a cost-effective means of testing.
Difficulties of using audit software

 The costs of designing/developing audit software can be very substantial (especially bespoke software
specific to one client).
 Lot of planning time will be needed in order to gain an in-depth understanding of theclient’s accounting
systems so that appropriate software can be produced.
 The audit costs may increase as experienced and specially trained staff will be required.
 If errors are made in the design of the audit software, issues may go undetected,moreover audit time
and hence costs can be wasted.
 If audit software has been designed to carry out procedures during live running of theclient’s system, there
is a risk that this disrupts the client’s systems and its operations.
General advantages of CAATs
 Enables the auditor to test more items more quickly.
 The auditor is able to test the system rather than printouts.
 Obtain greater evidence as the results of CAATs can be compared with other tests toincrease audit confidence.
 Perform audit tests more cost effectively.
Disadvantages of CAATs
 CAATs can be expensive and time consuming to set up.
 Client permission and cooperation may be difficult to obtain.
 Potential incompatibility with the client's computer system.
 The audit team may not have sufficient IT skills and knowledge to create the complexdata extracts and
programming required.
 The audit team may not have the knowledge or training needed to understand theresults of the CAATs.
 Data may be corrupted or lost during the application of CAATs.
Auditing around the computer

With auditing around the computer, the client’s internal accounting software is not audited. Instead, inputs to the
system are checked and agreed with the outputs from the system. Theauditor looks at input to the system, and
compares the actual output with the output…… thatshould be expected.
Auditing around the computer has greater audit risk because:
If the actual files or programs are not tested, there will be no audit evidence that the programs are functioning
properly, as documented
Where the auditor finds discrepancies between the input to the system and the output from the system, there is no
way of finding out how the discrepancy has occurred.

Summary Notes by SK
Auditing Through the Computer
 When auditing through the computer auditors follow the audit trail through the internal computer
operations in order to verify that the processing controls that areincorporated in the Accounting Information
System programs are functioningproperly.
 Additionally, it attempts to validate the accounting data being processed.
 The auditor assumes that the CPU and additional hardware are functioningproperly.
Example (Using Audit Software):

 using audit software to test the receivables balance Audit software may be used in several ways to help with
testing the receivables balance, where the client operates a computerised sales and receivables accounting
system.
 Software can be used to total the balances on the accounts in the receivables ledger, for comparison with the
balance on the receivables control account.
 Software can also be used to check the balance on each account in the receivables ledger with the credit limit
for that customer, to check that credit limits have not been exceeded.
 There may also be a computerised reasonableness check on the balances in each customer account in the
receivables ledger. This check looks for unusually high or low balances in individual accounts, given the
total volume and value of transactions in the account.
 Software can be used to prepare an aged receivables list, if these are not already produced by the client as a
matter of operational routine. The audit software can interrogate the trade receivables file, and produce a
list and analysis in date order of unpaid invoices. This listing can be used by the auditor to make an
assessment of the receivables that may be irrecoverable.
 Software can be used to select the sample of receivables ledger balances for substantive testing in the audit.
 Software can also be used to calculate ratios (analytical procedures): for example, an analysis of ‘average
days to pay’ and changes in this ratio over time may help the auditor with an assessment of likely
irrecoverable debts and possibly also the going concern assumption for the client.
Test Your Understanding!

You have been put in charge of the audit of inventory at Kitchen Magic, a wholesaler ofkitchen goods.
Kitchen Magic keeps a permanent record of inventory on its IT system and carries out a rolling programme of
inventory counts to check that the record on the system is reflectedby actual goods held.
The year-end inventory will be listed for you, showing for each product: date of last purchase, date of last sale,
cost, selling price, quantity and year-end valuation. Thisschedule will be available on the last day of the year.
Required
List the tests which could be performed by audit software which will assist you in your audit of inventory. You
will need to use your knowledge of IAS 2 Inventories from Paper CAF5.

Summary Notes by SK
General I.T Controls & Application Controls
The Five elements of internal control system
ISA 315 identifies five elements which together make up the internal control system.These are:
 The control environment
 The entity’s risk assessment process
 The information system
 Control activities (internal controls)
 Monitoring of controls
Internal Controls in I.T system: General controls and application controls
General I.T controls:

 They aim to establish a framework of overall control over the computer informationsystem's activities to provide
a reasonable level of assurance that the overall objectives of internal control are achieved. They support the effective
functioning of application controls by ensuring the continued proper operation of I.T system.
OR
 General I.T controls aim to establish policies and procedures for overall control over the computer information
system’s activities such as development, changes in program and data files. It provides a reasonable level of
assurance that the overall objectives of internal controls are achieved.
OR
 General IT controls are policies and procedures that relate to many different applications (Such as revenue,
purchases and payroll). They support the effectivefunctioning of application controls by ensuring the continued
proper operation of ITsystems.
Because these general IT controls will apply to most or all of the entity's IT applications, if General IT controls
are weak, it is unlikely that the processing undertaken by the systemwill be complete and accurate.
If control risk is assessed as low he will then test application controls, in order to decide if he can rely on specific
systems and reduce his substantive testing.
Examples of General I.T controls
a) Segregation of duties
b) Data centre and network operations e.g. not allowing non-company issued laptops to connect to the
network
c) Backup power supply
d) Access security – passwords, door locks, swipe cards.
e) Virus checks
f) Backup copies (Preventive and corrective control)
g) Controls over the development of new computer information systems
h) The prevention or detection of unauthorized changes to programs
i) Ensuring continuity of operations (Disaster Recovery Plan)
(g) and (h) will be discussed in further detail later in this handout.

Summary Notes by SK
Application controls:
Application controls are the specific controls over the relevant applications maintained by the computer. The
purpose of application controls is to establish specific control procedures over a particular application (E.g. Oracle, SAP
or Sage).
In order to provide a reasonable assurance that all transactions are authorized andrecorded, and are processed completely,
accurately and on a timely basis.
Application controls apply to the processing of individual applications (such as revenue, purchases or payroll
application).
Examples of Application controls

 All significant transactions being authorized at an appropriate level (authorization controls).
 Checking the arithmetic accuracy of records. These are often referred to as
 arithmetic controls.
 Maintaining and reviewing accounts and trial balances. These are often referred to as accounting controls.
These are controls that are provided within accounting procedures to ensure the accuracy or completeness
of records. An example is the use of control account reconciliations to check the accuracy of total trade
receivablesor total trade payables.
 Numerical Sequence Checks
 I.T controls (explained below)
 Manual follow up of exception reports
Application I.T controls
 Input controls (controls over input data);

 Processing controls;
 Data file controls; and
 Controls over the output from the system (output controls).
Each of these areas is considered in turn below.
Control Area Controls

1. Input Application controls should place a high degree of emphasis oncontrols over
input.
a) Authorization controls
 Data for input is authorized
 Data is input only by authorized personnel

Summary Notes by SK
b) Completeness controls
 Document count (for example, a physical count of the number of
invoices input for processing)
 Controls totals
 Review of output against expected values: check for the
reasonableness (For example; total payroll cost broadlyin line with
expectations?)
 Completeness Check: A filed should always contain adata rather than
zero or blank
c) Accuracy controls
 Check digits
(Check digits are checks within a computer program onthe validity of
key numerical codes, such as customer codes, supplier codes and
employee identification numbers)
 When check digits are used, every code is given an extra digit, the
check digit. This is a unique digit obtainedfrom the other digits in the
code)
 Range checks (Data should be within a predetermined range of
values)
 Existence checks (does a customer reference number exist?)
 Duplicate check: New transactions are matched to those previously
input to ensure that they have not already been entered
2. ProcessingControls These are controls to check that the correct number of transactions have been
processed and that they have all beenfully processed
 Control totals
 Batch totals
(- Verification that total of values, items or documents of outputmatched
with the total of values, items or documents of input.
- A batch total is a form of control total. Transaction data is input tothe
computer system in batches, and a control total is calculated. It may
simply be a total of the number of transactions in the batch.
- The batch total is input to the computer system for processing, and the
computer program will check the batch total that has been input with its
own batch total count.
- The program will report any discrepancy between batch total and its
own batch total, as an error report.
Batch totals can be useful in helping to make sure that every transaction
in a batch is actually input for processing and is actuallyprocessed)

Summary Notes by SK
 Manual review (Manual review of the documents to check for any
errors)
 Screen warning (‘screen prompts’) during the processingthat whether
there are any errors or not …..OR cannot be completely processed. e.g.
Printing error message orFile delete message.
These are controls to check that data held on master files andstanding data is
3. Controls overmaster
correct.
files & standing data For example
 There should no unauthorized access to master data.
 Managements regular review of master files andstanding data.
 Regular updates of master files
 Record counts
 Only authorized personnel should have access to outputfrom the system

4.Output
(for example, SALES REPORT or MONTHLY payroll details)
 Output can be verified visually for reasonableness and completeness.
(Reviewing Monthly payroll or monthlysales and comparing from last
month)
Examples of general
General I.T controls
controls
1. Development New computer systems may be designed and developed for a 'computer user'
of computer-based (the client company) by an in-house IT department or by an external software
Information systems company.
and applications
 Appropriate I.T Standards should be used when designing,
developing, programming and documenting a new computer system.
 There should be controls to ensure that tests are carried out on new
systems before they are introduced.
 A new computer system design should be formally approved by the

system 'users'.
 There should be a segregation of duties between the designers and

testers.
 Staff should be given proper training

Summary Notes by SK
2. Documentation  When a computer system is operational, it may be necessary to update
and testing of and amend some of the programs in the system.
program changes
 There should be suitable general controls over the development of new
versions of programs.
All new versions of programs must be dulyauthorized.

 Staff should be given training, before they use it for'live' operations.
 No change to be made in the live environment, first changes to be

made and tested in the offline environment.
3. Prevention or  There should be a segregation between the tasks ofprogrammers (who

detection of write new programs) andcomputer operators (who use the programs).
unauthorized
program changes  There should be full documentation of all program changes.
 There should be restricted access to programs (program files), and only

authorized programmers should have access to them. (Changes not be
madewithout proper authorization)
 Program logs should be maintained, to record which programs and

which versions are used.
 There should be virus protection for programs (using anti-virus

software) and there should be back-up copies of all programs (in the
event of 'malicious' changes to programs used
4. Prevention of theuse  Computer operating staff should be suitably trained,and should follow
of Incorrect standard operating procedures forchecking the version of the program
programs or data they are using.
flies
 Supervision. Supervisors should monitor the activities of operating
staff.
 Reviews by management. Management should carry out periodic

reviews, to make sure that the correct versions of programs are being
used.
 Physical access to computer terminals may berestricted to authorised
5. Prevention of employees.
unauthorised
amendments to data
 Access to programs and data files may be restricted using passwords.
files.
There should be rigorous checks by management to ensure that a
password system is being used effectively by employees (so that
passwords are not easy to

Summary Notes by SK
•guess')
 Firewalls (software and hardware) can be used toprevent unauthorised

external access via the internet.
Ensuring continuity of When problems occur in a computer system, the system may be at risk of
operations ceasing to function. This could happen ifthere is physical damage to computer
equipment or files, or if program files or data files are 'corrupted' or altered.
 There should be controls over maintaining securesecond copies of all

programs and data files ('back-up copies') and these backups must be
restored om timely basis to assess their effectiveness.
 There should be measures for the protection ofequipment against fire,

power failure and otherhazards.
 The company should have disaster recovery plans, such as an

agreement with another entity to make use of its computer centre in
the event of a disaster such as a fire or flood.
The company should make service agreements with software companies, to

provide 'technical/ support' in the event of operating difficulties withthe system.

Summary Notes by SK
CA CAF 8 Practice Questions (C.A.A.T)

2 Q. 8 September 2021 9 marks

6 Q.10(b) March 2020 6 marks
9 Q7. September 2018 15 marks
10 Q7. March 2018 9 marks
15 Q10 March 2016 7 marks

Summary Notes by SK
Student Notings

Summary Notes by SK
‘Last Class Handouts / Summaries’

Summary Notes by SK
Index of Last Class Handouts / Summaries
S. No. Name of Handout

1 Audit Jargons
2 Audit Risk and Responses
3 Drafting of the Audit Report Answer
4 Ethical Threat - Drafting of Answer
5 Small Concepts to be covered
6 Explanation of the logic relating to the Audit Risks and Responses
7 Summary of Going Concerns Indicators
8 Verbs / Starting words for Substantive Procedures
9 Test of Controls - summary of few Key Controls
10 CA CAF 8 Study Plan
11 Important Tips for CA CAF 8 students
12 ICAP CAF 8 Past Paper Questions (Not to be Attempted)

Summary Notes by SK
Dear Students please remember to use key audit words (audit

jargons) while drafting your answer…
E.g.…Auditor to obtain S.A.A.E during the audit…it will increase the Risk of M.M in the
F/S..…Audit risk can never be zero……Auditor t o e x e r c i s e p r o f e s s i o n a l
s k e p t i c i s m a n d p r o f e s s i o n a l j u d g m e n t throughout t h e a u d i t ……..
...Audit opinion may be modified by expressing a QUALIFED

Opinion..…External auditor is not responsible for the prevention and
detection of fraud as per ISA 240…..External auditor’s independence &
objectivity might impair as a result of this….There are inherent
limitations of an audit….. Audit risk can never be eliminated it can only
be minimized to an acceptably low level by the auditor …………The
objective of an External audit is to reduce the Audit risk to an acceptably
low level….The audit opinion may be modified as the matter is
material but not Pervasive…..The auditor must maintain
independence and objectivity throughout the audit……E.O.M will
modify the audit report and not the opinion..…KAM is given for
MOST significant matters for the current period only….external
auditor to obtain S.A.A.E to express an audit
opinion……….Auditor cannot control both inherent and control risk
at the audit client, he can only assess these risks……As a result of
this there is a risk of debtors being Over-valued……If the treatment is
not correct than there is a risk of ….if the adjustment is not done by
the audit client than the financial statements will be materially
misstated…The given evidence is not reliable as per ISA
500…..External Auditor needs to document this as per ISA 230
….External auditor has to obtain management representation as per
ISA 580 and ISA 550…..This results in an inability to obtain
S.A.A.E…etc.…..

Summary Notes by SK
Audit Risk and Responses
Audit Risk Auditor’s Response

1. Expenditure on updating fixed asset, or Review breakdown of total cost incurred, ensure
subsequent expenditure incurred on P.P.E and proper classification between revenue and capital
non-current assets. Risk of Incorrect expenditure and its recording in the F/S as per
classification between revenue & capital criteria of IAS 16.
expenditure as per IAS 16, over /
Understatement of both profit and PPE.
2. Expenditure on developing Brand, expenditure Review breakup of cost, ensure proper classification
incorrectly classified under Research and under Research and development costs i.e Research
development as per IAS 38, Risk of over/ under costs to be charged to P&L and expenses that meet
statement of profit and intangible assets. the criteria for capitalization to be included as
intangible asset in the B/S.
3. Inventory counts taking place at all warehouses Determine which locations to be covered for
at the same time/ Not possible to attend inventory counts and obtain SAAE.
all counts or cover all locations. Risk of not The auditor should visit and count at those locations
verifying existence and completeness of where there are material balances or where is known
inventory not counted. history of fraud and errors or other counting issues.
4. Inventory warehouse owned and rented out. Review ownership and rental documents of
Risk of capitalizing all the warehouse, over/ warehouse/ stores to ensure rights to ownership and
under statements of Rental Expenditure/ PPE. obligation to rentals.
5. Introduction/ Adoption/ implementation Conduct detailed testing to ensure complete opening

new accounting software. Risk of errors balances transfer to the new system.
occurring in data transfer/ not transferring
completely, resulting errors.
6. Releasing/ not making an allowance for Review subsequent/ post Y/E Receipts, if received,
receivables. Balance may remain irrecoverable, assess the need of any allowance for receivable.
under/ overstatement of receivable & profit.
7. Disposal of NCA/PPE/ property. Risk of not Obtain list of Assets disposed / sold during the year
removing them from non-current asset register and review N.C.A register to ensure complete/
and G.L resulting in the over statement of N.C proper removal from G.L and non-current asset
Assets. register.
8. Loan taken/ amount borrowed from bank to Confirm total loan amount received and review
finance project or decision. Risk of Incorrect between current and non-current portion along with
split/ classification between current and non- disclosures as per the requirements of relevant
current liabilities portion in the B/S. Accounting Standard

Summary Notes by SK
9. Loan taken/ amount borrowed may be given Review Bank confirmation/ bank agreement to
against a bank charge over company assets as assess whether any security is given and verify
security. disclosures in the F/S to ensure adequate disclosure
as per relevant IFRS
Risk \ of Incomplete disclosure in the FS of
security against loan.
10. Inventory /stock valued at policy of other Auditor perform NRV testing on each type of stock
valuing methods except IAS 2. Risk of Under/ as per IAS 2 to ensure correct / accurate valuation.
over statement s of inventories.
11. Senior finance director/ professional leaving Team should remain alert to the risk of fraud and
the company near year end. Increase work load errors in finance department and F/S and should
on finance team, resulting in inherent risk and exercise professional skepticism during the audit.
control risk of errors being made in F/S.
12. New client/ first year of audit so audit team was Ensure team has suitably experienced staff, and
not so familiar with transactions, balances and adequate time allocated to obtain understanding of
accounting policies. Risk of increased detection entity and assessment of risk of M.M.
risk.
13. Goods/ purchases in transit. Risk of inaccurate Undertake detailed cut off testing at year end and
cut off of inventory, purchases and payables at review supporting documents to ensure accuracy
Y/E resulting in overstatement of inventory/ and completeness.
purchases and payables at year end.
14. Sale/ profit-based bonus policies for directors or Maintaining professional skepticism throughout the
sales team. Sales cutoff error aiming to audit and being alert to risk of overstatement in
maximize/ achieve current year bonus. profit/sales. Perform sales cutoff tests and review
post year end cancellations of contracts
Or +
Profits/ sales figure deliberately manipulated Verifying judgements and revenue recognition
to meet bonus criteria. Risk of sales and profits criteria in more detail as per relevant accounting
being over-stated. framework.
15. High/increase in levels of receivables, it raises Review receivables aged analysis and trace post
credit concerns. Risk of debtors being over- year end receipts to ensure or assess whether a need
valued in the F/S. to make an Allowance is required or not.
16. Director’s pay/ bonus disclosures not provided Discuss with mgt, review the disclosure to ensure
as per legislation/ Accounting Standard. Risk of compliance with legislation/ Accounting
incorrect or inadequate disclosures in the F/S. Standards.
17. F.D/ F.C left/ fired from company after Discuss with mgt, what procedures have been taken
discovery of fraud. He / she might have to identify any possible further frauds. Maintain
undertaken other fraudulent transactions also professional skepticism and remain alert to risk of
which needs to be written off otherwise F/S fraud & error throughout the audit.
includes errors and will me materially
misstated.

Summary Notes by SK
18. F.D/F.C appointed with different industry Pay close attention to changes in accounting
experience. Judgments of new F.D/F.C could policies and review judgments taken by new F.D/
be incorrect in preparing the F/S leading to F.C during the year.
overall ROMM in the F/S.
19. Loan Covenants attached to the loan obtained Identify whether any breach to covenants have
from bank. F/S figures (eg Profit) might be occurred / breached and assess the effect of that
manipulated to meet bank covenant breach on the company e.g. going concern
requirements. implications.
20. Director reviewing the useful lives and Discuss with directors their rationale for any
depreciation rates of N.C Assets. Assets might extensions in assets lives and depreciation rates
not be reviewed as per IAS 16, Risk of
over/understatement of N.C Assets and
depreciation charges.
21. Damage of inventory / assets due to fire/ Discuss with Mgmnt the basis for calculating /
natural disaster. Writing down of inventory / determining the amount of write-down
Assets not charged to P&L. Risk of Fixed assets Inquire if any goods were sold after B/S date, this
and inventory being overvalued. would provide evidence of reasonableness of
written down amount and ensure treatment as per
relevant accounting framework.
22. Insurance claims included in insurance proceed Discuss with MGT the basis of the same and verify
within Contingent Assets before receiving / correspondence from insurance company to assess
hearing from insurance co. receipts only reasonableness of treatment, if receipt is not
included when virtually certain under IAS 37, if virtually certain, the treatment is wrong.
not the case receivables will be overvalued.
23. No bank reconciliations were performed, which Discuss with management reasons for the same.
might contain unreconciled items & could Auditor should also be alert to the risk of fraud
include large errors, which if not corrected will throughout Audit in case of non-reconciliations.
result in under or overstatement of bank
balances.
24. F.D/F.C/CEO requires commencing and If timetable is to be reduced then consideration
finishing Audit early.Increase in detection risk should be given to performing an interim Audit to
due to shortage of time and increase in inherent reduce pressure on final Audit so that quality of
& control risk due to pressure on finance team audit is not compromised.
as well.
25. Decrease in the selling price of inventory during Conduct detailed cost and NRV testing subsequent
year. Inventory not valued at NRV as per IAS- to year end and assess accurate valuation of
2, Risk of overvalued inventory. inventory as per IAS-2.
26. Key customer facing financial difficulties. Risk Review subsequent receipts, discuss with
of Receivables being overvalued. management/ directors the need for an allowance
of bad debts.
27. Reduction in S. Price + key customer facing Conduct detailed going concern testing to assess if
financial difficulties. Increased risk of going the going concern assumption is valid/ reasonable.
concern not valid.

Summary Notes by SK
28. Old employee threatening to sue for dismissal. Write to company lawyers to enquire of the
If payment is possible contingent liability existence and likelihood of Charges being successful
disclosure is required. If payment is probable or not.
provision for unfair dismissal is required if
above two not done… Risk of inadequate or Review disclosures and recalculate the amount of
non- disclosure or provision being over/ under provision.
valued.
29. Increase work load on finance department team Team should remain alert throughout the audit for
due to absence of F.C/ F.D/CFO. Inherent and significant errors in the F/S and exercise
control risk within the F/S will increase, as professional Skepticism throughout the audit.
errors will be made in accounting records in the
absence of supervisory body /personnel.
30. Significant fall in admin/ Management Review supporting documents of current and
Expenses. Mgt/Admin expenses are fixed cost, previous year admin expenses and discuss with
need not to fall suddenly, and risk of being management to investigate the significant fall.
understated.
31. Level of work in progress expected at year end. Discuss with management the process to be
Cutoff of WIP not calculated correctly. Risk of undertaken to assess cut off for WIP. Consideration
W.I.P being under/overvalued. should be given as to whether an independent
Valuer/ expert is required.
32. Purchase of intangible assets and not correctly Review supporting documents to confirm useful
recorded as per IAS38, Risk of intangible assets life, Amortization charge being accurate and
& profits being under/ overstated. intangible assets being correctly valued as per IAS
38
33. Special disclosure required by IFRS / local laws Discuss the matter with mgmt. and review
for a specific expense or asset in the F.S.Risk of disclosure in the F/S to ensure compliance with
incorrect or inaccurate disclosure. IFRS and local laws.
34. Increased / higher receivables at year end as Review subsequent receipts, discuss with Mgt /
compared to last year. Receivables may not be directors for making an allowance of receivables if
recoverable hence Risk of receivables being necessary.
overvalued.
35. Company planning to make employees, Discuss with Mgt the announcement time, if made
redundant because of branch closure. If before year end than review and recalculate basis for
announced prior year end provision for provision made at the B/S date
redundancy as per IAS 37 to be made and if not,
and provision made than Risk of profit being Verify subsequent payments made after the B/S
understated and provision being overvalued. date.
36. Increase in customer warranty claims. Review the level of warranty provision against
Warranty provision may not have increased actual customer claims to ensure accuracy and
thus understating profits. completeness of warranty provision at year end.

Summary Notes by SK
37. Reductions in cash balance and adverse current Conduct detailed going concern testing (performing
ratio and quick ratio. Increase in payable days specific procedures) to assess whether going
(delay in payments to supplier) Risk of going concern basis is valid or not.
concern assumption not being valid.
38. Significant finance / loan obtained during the Confirm the receipt of loan via Bank agreement and
year. Risk of incorrect disclosure (correct split) bank statement. Review disclosure to ensure correct
between current and non-current liability plus split between current and non-current portion and
risk of finance charges being overstated and compliance with relevant acct stnds. Recalculate
profit being over stated to meet profit targets finance costs and agree the rate to bank
(Bank covenants) documentation / bank agreement.
Confirm payment of interest from cashbook and

bank statement.
39. Part time working directors OR absence of Evaluate/ assess the internal controls, if weak the
finance director. Weak control environment level of substantive testing will be increased. Plus
resulting in errors & frauds in F/S. Risk of more senior audit team to be deployed and exercise
ROMM in the F/S. professional skepticism.
40. Delay in receiving supplier invoices, company Review sample of supplier invoices received after
not recording the same. Risk of liabilities / year end that pertain to pre year end to make sure
accruals not being recorded and understated in they are incorporated in the correct accounting
the F/S. period.

Summary Notes by SK
DRAFTING OF THE AUDIT REPORT ANSWER

1) Explanation of the Issue / Matter
a. What has happened in the scenario– reproduce here (including the amount)
b. Refer to relevant IFRS/ IAS where possible or else mention the word relevant financial reporting
framework
c. Discuss the case/issue ….. pertains to M.M or an Inability to obtain SAAE
d. If M.M …. mention the example (treatment or disclosure)
e. If inability to obtain SAAE … mention the example
f. In the case of M.M plz mention the impact on F/S if the adjustment is not done
g. i.e. Profit will be over stated or understated OR Asset will be overvalued or undervalued
2) Calculation of Materiality
a. Calculate materiality based on the variables given in the question…. E.g. Profit before Tax or
Revenue
b. Show the complete working of materiality (XX/XX)
c. In case of any assumption, please mention the same
d. Do not mention the opinion here …. just mention that the issue is material or not with respect
to PBT/Revenue or total assets
e. If planning materiality is given in the question than ignore other variables and make decision
based on P.M
3) Audit Procedures / Audit Tests

1. Only mention when question asks to do so OR depending upon the number of marks (already covered
in class lectures)
2. State the audit procedures in numbered bullet points only (mention complete procedures)
3. Link the audit procedures with the given scenario (where possible)
4) Impact on the Audit Report / Audit Opinion

1. Drafting as per class lecture
2. Summarize the drafting para as per the number of marks
3. Please mention about the basis for modification paragraph and its placement in the audit report
4. Do not draft the complete audit opinion paragraph…just mention the key words from the opinion
para. (Unless question specifically requires to do so)
(Please remember that headings and explanation will be written depending upon the number
of marks.)

Summary Notes by SK
.
Ethical Threat – Drafting of Answer
Self Interest Threat
1. Gifts & Hospitality
Explanation and Significance
Safeguards / Course of Action
(In points)
2. Temporary staff assignment
Explanation and Significance
Safeguards / Course of Action
(In points)

Summary Notes by SK
Index of Small Concepts to be covered

1.Concept of Expectation Gap (IMP)
2.Concept of Statutory & Non-statutory audit (IMP)
3.Difference between External and Internal Auditor
4.External auditor rights and duties
5.Concept of IFAC & IAASB
6.Concept of Material Misstatement
7.Concept of nature, timing, and extent of audit procedures
8.Concept of relevance and reliability (ISA 500)
9.Concept of General-Purpose Framework and Special Purpose
Framework
10.Interim and Final audit (IMP)
11.Review engagement (IMP)

Summary Notes by SK
Explanation of the logic relating to Audit risks and Auditor’s responses…by the
External Auditor. (As per video lecture)
Audit risk Auditor’s Response

(i) During the year, ABC Co has spent $0·9m on (Audit Procedures to be performed by the
developing new product lines, some of which are External Auditor)
in the early stages of their development cycle. This
expenditure is classed as research and Obtain a breakdown of the expenditure and verify
development under IAS 38 Intangible Assets. The that it relates to the development of the new
standard requires research costs to be expensed to products. Review expenditure documentation to
profit or loss and only development costs to be determine whether the costs relate to the research
capitalised as an intangible asset. or development stage.
The company has included all of this expenditure Discuss the accounting treatment with the finance
as an intangible asset. If research costs have been director and ensure it is in accordance with IAS
incorrectly classified as development expenditure, 38.
there is a risk that intangible assets could be over-
valued and expenses understated. Or Profit over
stated
(ii) ABC & Co purchased and installed a new Review the purchase documentation for the new
manufacturing line. The costs include purchase manufacturing line to confirm the exact cost of
price ($2·2m), installation costs ($0·4m) and a the servicing and that it does relate to a five-year
five-year servicing and maintenance plan ($0·5m). period.
As per IAS 16 Property, Plant and Equipment, the

cost of an asset includes its purchase price and Discuss the accounting treatment with the finance
directly attributable costs only. IAS 16 does not director and the level of any necessary adjustment
allow servicing and maintenance costs to be to ensure treatment is in accordance with IAS 16
capitalized as part of the cost of a non-current
asset, as they are not directly related to the cost of
bringing the asset to its working condition.
There is a risk that if these servicing costs are
capitalized than PPE will be over-valued and
profit will be over-stated.
(iii) The receivables collection period has increased Review and test the controls surrounding how
from 38 to 51 days and management has extended ABC & Co identifies receivables balances which
the credit terms given to customers on the may not be recoverable and procedures around
condition that sales order quantities were credit control to ensure that controls are
increased. The increase in receivable days could operating effectively.
be solely due to these increased credit terms.
However, it could also be due to an increased risk Extended post year-end cash receipts testing /
over recoverability of receivables and therefore if subsequent receipts testing and review of the
adequate provision is not made than there is a risk aged receivables ledger to be performed to assess
that debtors may be overvalued and expenses valuation. Also consider the adequacy of any
understated. provision.

Summary Notes by SK
(iv) ABC & Co values its inventory at the lower of cost Discuss with management the nature of the
and net realisable value. Cost includes both overheads included in inventory valuation. If
production and general overheads. general overheads are included, request
management to remove them from the valuation
IAS 2 Inventories requires that costs included in to be included in the draft financial statements.
valuing goods and services should only be those
incurred in bringing inventory to its present Review supporting documentation to verify
location and condition. Although production those overheads deemed to be of a production
overheads meet these criteria, general overheads nature are valid.
do not. If these are included in inventory cost,
then this will result in over-valued inventory or
there is a risk of inventory being over-valued.
(v) A current asset of $360,000 has been included Discuss with management whether any
within the statement of profit or loss and assets. It notification of payment has been received from
represents an anticipated pay out from liquidators the liquidators and review the related
handling the bankruptcy of a customer who owed correspondence. If virtually certain, the
ABC & co $0·9m. The sum of $0·9m was written treatment adopted is correct. If payment has
off in the prior year accounts. been received, agree to post-year end cash book.
However, the company has not received a formal

notification from the liquidators confirming the If receipt is not virtually certain, management
payment and this would therefore represent a should be requested to remove it from profit and
possible contingent asset. To comply with IAS 37, receivables. If the receipt is probable, the auditor
this should not be recognized until the receipt is should request management to include a
virtually certain. With no firm response to date, contingent asset disclosure note.
the inclusion of this sum overstates profit and
current assets.
(vi) ABC & Co is a new client for XYZ & Co. As the XYZ & Co should ensure they have a suitably
team is not familiar with the accounting policies, experienced team. In addition, adequate time
transactions and balances of the company, there should be allocated for team members to obtain
will be an increased detection risk on the audit an understanding of the company and the risks
of material misstatement including a detailed
team briefing to cover the key areas of risk.
(vii) At the year-end there will be inventory counts The auditor should assess for which of the
undertaken at all 11 of the building sites in building sites they will attend the counts. This
progress. will be those with the most material inventory or
which according to management have the most
It is unlikely that the auditor will be able to significant risk of misstatement.
attend all of these inventory counts, increasing
detection risk, and therefore they need to ensure For those not visited, the auditor will need to
that they obtain sufficient evidence over the review the level of exceptions noted during the
inventory counting controls, and completeness count and discuss with management any
and existence of inventory for any sites not issues, which arose during the count
visited.

Summary Notes by SK
(viii) A customer of ABC & Co has been Review the revised credit terms and identify if
encountering difficulties paying their any after date cash receipts for this customer
outstanding balance of $1·2m and ABC & Co have been made.
has agreed to a revised credit period.
Discuss with the finance director whether he
If the customer is experiencing difficulties, there intends to make an allowance for this
is an increased risk that the receivable is not receivable. If not, review whether any existing
recoverable and hence is overvalued. allowance for uncollectable accounts is
sufficient to cover the amount of this
receivable.

Summary Notes by SK
Summary of G.C Indicators and its impact on the company.
ISA 570 - Going Concern – Cheetahpun ….. 
Going concern indicators Impact of Going Concern

New competitor entering market / increased Losing market share, future impact on Cashflows
competition for the company and revenue and profits.
Loss of market share / sales have gone down Reduced profits and revenues and future cashflows
of the company.
Reduction in Sales Price due to increased Reduced profits and revenues and future cashflows
competition of the company.
Key employee has left/ resigned/ or joined a Lack of product/ business development or delay in
competitor of your company. such leading to decrease in future sales.
Shareholders not willing to invest further in the Shareholders are perceiving company to be risky to
company invest plus will result in negative image for the
company in the market.
Lack of finance to develop products and finance Due to unavailability of finance….. development of
business operations. product/ business will become impossible…reduced
future sales
Increase in Bank over draft amount during the year. Sign of cash flow problem + overreliance on bank
O.D, bank may not renew over draft facility, leading
to operational issues (insufficient fund for working
capital) because of unavailability of cash.
Current Cashflows are negative as well as cashflow Company may eventually run out of available cash
forecast also showing negative cashflow forecast or in future resulting in further cash flow and
cash outflows. operational problems
Threat of legal case/ 3rd parties have sued the Increased legal costs + further pressure on cash flows
company/ or there is a pending legal case against plus negative image of the company in the market.
the company.
Major customer seizes to do business OR faces Significant of loss of future revenue and profit ….
going concern issues or shifts to your competitor ultimately future cash flows unless replaced with a
new customer
Delay in paying to suppliers / vendors Supplier may stop supplies or impose cash on
delivery terms this will put additional pressure on the
cashflows of the company also disrupting sales of the
company.
Breach in bank loan covenant resulting in Company does not have enough cash to pay the loan
repayment of entire loan Amount immediately. amount immediately OR have alternative finance /
assets to sell leading to winding up of the company
Delaying or not paying dividends to shareholders Disappointment to shareholders. Shareholders may
due to pressure on cashflows. not be interested to invest further in future plus sell
their shares leading to lack of finance for multiple
payments of the Company.

Summary Notes by SK
Liquidity ratios have declined or gone negative as This indicates worsening liquidity position of the
compared to last year. (E.g. Current Ratio is company leading to further operational problems.
negative)
Suppliers / vendors are threatening legal case Increased legal costs leading to further pressure on
against the company cashflows plus will result in negative goodwill for the
company.
Possible change in legislation / law resulting in top Inventory may have to be scrapped resulting in
earning product becoming obsolete or cannot be material write offs and will lead to reduced sales,
sold in future because of legal restrictions. profits and will create future cashflow problems for
the company.
2.

Summary Notes by SK
Substantive Procedures – Keywords for students

Verbs / Starting words for Substantive Procedures
1. Calculate / recalculate the working for sales discount / depreciation for the year ……..
2. Select / verify a sample of payment vouchers / sales invoices / purchase orders…. / Select a sample of
credit notes/ P.O /S.O & agree these ….or ….Trace these from XYZ document.
3. Recalculate the accuracy of……………………
4. Discuss/ Inquire from Management/ Directors.
5. Inspect / review / verify supporting documentation …
6. Obtain the Breakdown of payment ….. / obtain listing of y from the audit client ………
7. Review the post year end cash books/ receipts/payments.
8. Obtain a written representation from Management…..
9. Obtain / Dispatch a Bank confirmation letter/ Debtor confirmation/ Creditors confirmation on audit
clients / audit firms letter head ….
10. Review the F/S to ensure that the disclosure is complete & accurate as per the relevant financial reporting
framework ……. Review the disclosures in the F/S as per the …………
11. Whenever we are verifying a number / value from a list /schedule/another document we use the word
Trace / Verify / or Examine from XYZ document …
E.g.
 Trace unpresented cheques from post year end Bank statement. OR
 Verify sales price from the master records
 Verify negative balances from the General ledger
 Agree the balance as per X document from Y document.
12. Compare the X amount with last year’s Y amount and inquire from management in case of any significant
variance ….
13. Obtain the schedule of Fixed Assets /sales etc. and perform casting of the schedule ………. And verify
from G/L and TB …..
(Please refer Summary Notes for Substantive Procedures)

Summary Notes by SK
Test of Controls – Summary of few Key Controls
Control Test of controls

Segregation of Duties in any given process Review the job descriptions (J.D) and
Discuss with members of the Dept to inquire about
their responsibilities or J.D
Documents are made e.g. Prenumbered invoice or Select a sample of documents OR
purchase Order or Gate pass or pre-printed forms Review the documents on sample basis
or Overtime sheets or goods received note
Data in input by the person into master records Observe the process and
Review evidence of signatures in case any document
is signed off by authorized personnel OR
Ask another person to attempt to input the data and
the system should reject this input / attempt
Document is authorized by few personnel Select a sample of documents and review the
evidence for authorization e.g. Signature of
authorized person
In case of an automated system i.e Time clock card Insert Test data / Dummy data and verify the result
or attendance system or Bar code reader with predetermined results or to verify the updated
master records.
In case of any instructions given Inspect the document or review the document to
verify the instructions given
In case of any calculations being done e.g. Sales Review OR verify a sample of calculations for
discount or Wages calculation OR Totaling of sales evidence that they are correctly calculated
invoices
In case the control is reflected by an email from one Review a sample of emails done or received to verify
dept to another or an email from one person to responses
another within departments
In case systems are integrated eg Online ordering Insert test data / dummy data to review the response
system with inventory system of the system with pre-determined results.
In case reconciliations are performed e.g. stock Review reconciliations on a sample basis to ensure
reconciliation, bank reconciliation and are they are properly made and also obtain evidence of
approved by responsible person. approval by review of signatures of authorized
personnel

CA CAF 8 - Audit & Assurance
Summary Notes by S.K

IMP tips and closing remarks for CA CAF 8

Students…………………………
When you are revising a topic, try recalling its main points and most importantly EXAM
FOCUSSED POINTS and its drafting techniques (as drafting varies from Topic to
Topic)…………… Refer to my handouts, class lectures & summary diagrams whenever you feel
that you are not able to recall the topic properly…………
Do attempt 20 – 25 questions (minimum) via typing (attempt 65 % - 70 % of the q/s) of key topics
/ Imp areas ...after you have read the question properly…. Please note that the suggested
solutions of ICAP are just for guideline purpose and students are not supposed/expected to
reproduce exactly the same in the exam…….!!
What to do ???
Please follow the drafting techniques / guidelines as explained
via EXAM FOCUSSED POINTS in the class lectures topic wise
………..
If you understand the suggested answer around 85 % - 95 % and you are able to write the same as
per the drafting guidelines told in the class lectures, you are in SAFE zone ................
ALWAYS REMEMBER …………….

…These professional exams are a game of NERVES …. THE
more patience and calmness and positivity …you display
throughout your preparation …. the best you will perform in the
examination ………………..I.A
BEST OF LUCK ………LOADS OF WISHES and PRAYERS ……….
M. Sajid Kapadia

Attempts covered (Sept 2020 -- March 2011)
Index of ICAP CAF 8 Past Paper Questions (Not to be Attempted)

‘Solutions of Test Questions’

Test Questions Solution of TOC
Answer 1:
Castle Courier Co
a) Methods for documenting internal control systems
Method Explanation Disadvantage

Narrative notes Narrative notes consist of a They may prove to be time-
written description of the consuming and cumbersome if the
internal control system. internal control system is
complex.
They detail what occurs in the
system at each stage including It may make it more difficult to
related controls which identify if any internal controls are
operate at each stage missing in narrative notes.
Internal control Internal control questionnaires Internal controls may be
questionnaires contain a list of questions for overstated if the
each major transaction cycle. client is aware that the auditor is
They use questions designed to looking for a particular answer.
assess whether internal controls
exist. Unusual controls may not be
included on a standard
questionnaire and hence may not
be identified.
b) Key controls and tests of control
Key control Test of control
All staff members are issued with a sequentially For a sample of key cards and data recorded in the
numbered key card. Sequence checks and checks on clocking‑in system, carry out a sequence check to
the data recorded are carried out by the human identify if there are any gaps in the sequence.
resources (HR) supervisor.
Review details of checks carried out by the HR
This ensures that payroll records are complete, that supervisor to identify any gaps in the sequence and
employees are paid for hours worked and that all check they have evidenced their review by way of
hours are signature.
recorded.
The clocking-in process is monitored by a camera For a sample of weeks, review the log of the
on entry to the distribution centre and video footage recordings to identify who reviewed that week’s
is reviewed by HR every week. footage to ensure it has been reviewed by a member
of the HR department.
This will prevent staff members fraudulently
clocking-in for other employees and hence

employees will only be paid for actual hours Review the log for any gaps in the review process
worked. and discuss these findings with HR.
The payroll clerk confirms the transfer of hours andFor a sample of months, review the calculations of
calculations has been done accurately by gross
recalculating, for a sample of employees, their gross
to net pay for evidence that the calculations have
to net pay. This check is also reviewed by the been
payroll supervisor who evidences their review. performed. Confirm the signature of the payroll
supervisor as evidence that they have reviewed the
This reduces the risk that errors occur in the report. For any anomalies, enquire of the reasons
automated transfer and calculations during the and what action was taken to resolve the issue.
payroll processing. Any errors would be identified
on a timely basis to prevent salaries being over or For a sample of months, reperform the gross to net
under paid. pay calculations and compare to the payroll system
and the calculations prepared by the payroll clerk.
Discuss any discrepancies with the payroll
supervisor.
The payroll system is password-protected and the Attempt to login to the payroll system using a
payroll manager changes the password on a password which should be out of date. Confirm that
monthly basis using a random password generator. the system has rejected access.
This reduces the risk of fraud by preventing

unauthorized changes being made to the standing
data and unauthorised Reperform a sample of control account
access to sensitive payroll information. reconciliations and compare results with those
prepared by the finance director.
Each month, the finance director carries out a For a sample of months, review the control account
payroll control account reconciliation and reconciliations and make enquiries of the finance
investigates any differences. director of any errors on the control account, how
they arose and what action was taken to ensure they
This will ensure the payroll expense and do not arise in the future.
employment tax liability is accurate and is not
misstated in the year-end financial statements. Reperform a sample of control account
reconciliations and compare results with those
prepared by the finance director. Discuss any
discrepancies with the finance director.
The amount due to the tax authority is calculated Review a sample of calculations of the monthly
by the payroll supervisor who then passes it to the employment tax liability for evidence of review by
financial controller for review. the financial controller confirming the calculation
is correct and that payment can be made.
This ensures that the amount paid to the tax
authority is correct. It also creates segregation of
duties between the payroll supervisor calculating
the liability and the financial controller reviewing
the calculation which reduces the risk of error.

c. Deficiencies and recommendations
Department managers are required to approve all Employees should receive written confirmation
employees’ holiday forms, however, this does not when their holiday has been approved and should be
always occur. informed that they will not be able to take holiday
without this notification.
This could result in employees taking
unauthorised leave which could lead to Any payments for unused holiday should be
operational difficulties if there are shortages of staff authorised by department managers prior to
at critical periods. In addition, payments for payment.
untaken holiday may be made in error as holiday
records may be incorrect.
The financial controller prepares the bank transfers Once the bank transfer has been prepared by the
for the payroll and also authorises these to be paid. financial controller, it should be passed to the
finance director to be reviewed and authorised for
This lack of segregation of duties increases the risk payment. The review and authorisation should be
of fraud/error as the financial controller could pay evidenced by the finance director.
themselves or certain employees more than they
are due without this being detected.
The payroll clerk amends the payroll and an edit The payroll supervisor or a member of the finance
report of changes is produced but this report is not team should review all edit reports and agree
reviewed. changes made to the details on the joiner/leavers
forms. Any discrepancies should be investigated
As the edit report is not checked, errors made by promptly and the payroll system updated for any
the payroll clerk when updating the system will not errors or omissions.
be identified promptly. This may result in new
employees not being paid at all, errors being made The payroll supervisor should evidence their review
in payments to new employees or leavers being on the edit report with their signature.
paid after they have left the company. This would
lead to loss of employee goodwill and errors in
accounting records for wages and salaries.
It could also result in an increased risk of fraud as

fictitious employees could be added by the payroll
clerk.

The HR department is responsible for processing All staff appointments, including temporary staff,
joiners and leavers, but due to staff illness, the should only be processed by the HR department to
operations manager has processed temporary new ensure that correct procedures are followed.
drivers and notified payroll.
If it is not possible for the HR department to carry
The operations manager may not carry out all the out all of the detailed processing due to staff
required procedures for processing temporary new shortages, a member of the HR team should review
drivers as the manager may not be using the leaver/joiner form and authorise it before it is
appropriate documentation. sent to the payroll department.
This could result in temporary employees not The payroll department should be notified not to
being set up in the payroll records correctly, accept any new joiner information unless approved
resulting in the late payment of wages, incorrect by a member of HR.
statutory deductions being calculated and
incomplete payroll records.
Only overtime in excess of five hours per week All overtime, including that below five hours, should
needs authorisation by the operations manager. be authorised by a responsible official before being
processed in the payroll.
This means that employees could claim to have
worked up to five hours overtime without This authorisation should be evidenced by way of
authorisation resulting in payments being made to signature.
employees for hours not worked and additional
payroll costs.
Where cash wages are paid, the driver is only All drivers collecting cash pay packets should
required to provide their name to collect their pay provide a form of identification to the finance staff
packet. member before the pay packet is handed to them.
The driver should also be required to sign for their
Payment of wages without proof of identity or pay packet.
signature increases the risk that wages could be
paid to incorrect employees either in error or due
to fraud resulting in a loss of cash.
The operations manager decides on the bonus to Approved bonus parameters should be established by
be paid to delivery drivers each quarter and there the board. All bonuses should be determined by a
are no approved parameters for the bonus levels. senior official, such as the sales director, in line with
these parameters, who should communicate the
Without approved parameters, the operations bonus in writing to the payroll department.
manager may award excessive bonuses or pay
additional sums to friends and family members
resulting in additional payroll costs.
Delivery drivers must take breaks throughout the The company should monitor the activity of the
day which are not monitored. delivery drivers through electronic means, for
example, by using tracking devices attached to their
Drivers could take longer breaks than those vehicles to ensure that the prescribed breaks are taken
authorized resulting in payments being made to by the employees.

employees for time not worked. Conversely, if
drivers do not take the required breaks, they may Data should be downloaded and reviewed by a
be in breach of law and regulations which require responsible official on a regular basis.
drivers to take regular breaks, hence the company
is at risk of fines.
d) Substantive procedures on payroll expense

 Cast a sample of payroll records to confirm completeness and accuracy and agree the total wages and
salaries expense per the payroll system to the trial balance.
 Recalculate the gross and net pay figures for a sample of employees and agree to the payroll records.
 For a sample of wage payments, agree the total net pay per the payroll records to the bank transfer
listing and to the cash book.
 Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay
increase/bonuses. Compare this to the actual wages and salaries expense in the financial statements
and investigate any significant differences.
 Compare the total payroll figure this year to the prior year, identify any significant differences and
discuss with management.
 Review monthly payroll charges, compare this to the prior year and budgets and discuss any
significant differences with management.
 Calculate overtime costs as a percentage of total wages. Compare this to the prior year and discuss
any significant differences with management.
 Agree a sample of individual wages and salaries per the payroll to personnel records and records of
hours worked per the clocking-in system.
 Reperform the calculation of statutory deductions and agree to supporting documentation to
confirm whether correct deductions for this year have been made in the payroll.
 Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation,
recalculate their first/last salary to ensure it is accurate.
 Recalculate holiday pay for a sample of employees and agree to holiday records and daily rate
applied.
 Select a sample of employees from HR records and agree salaries per HR records to the payroll
records to confirm the accuracy of the payroll expense.
 Agree the payroll control account reconciliation to accounting records and investigate any
differences
Answer 2:
c) Control deficiencies, control recommendations and tests of control
Control deficiency Control recommendation Test of Controls
It is not possible for a store to An inter-branch transfer system During the interim audit, arrange
order goods from other local should be established between to visit a number of the stores,
stores for customers who stores, with inter-branch discuss with the store manager
request them. Instead, inventory forms being the process for ordering of
customers are told to contact completed (or store transfers. inventory items, in particular
the other stores or use the whether it is possible to order
company website. from other branches.

This should help stores whose
Customers are less likely to inventory levels are low but are At each store, inspect a sample of
contact individual stores awaiting their deliveries from completed inter-branch inventory
themselves and this could result the suppliers. forms (or confirmation the
in the company losing valuable control is operating.
sales.
In addition, some goods which

are slow moving in one store
may be out of stock at another;
if goods could be transferred
between stores, then overall
sales may be maximized.
Purchase orders below $1,000 All purchase orders should be Select a sample of purchase
are not authorized and are authorized by a responsible orders and review for evidence of
processed solely by the official. authorisation, agree this to the
purchase order clerk who is appropriate signature on the
also responsible for processing Authorized signatories should approved signatories list
invoices. be established with varying
levels of purchase order
This could result in non- authorisation.
business related purchases and
there is an increased fraud risk
as the clerk could place orders
for personal goods up
to the value of $1,000, which is
significant.
Goods received notes (GRNs) A copy of the GRNs should be Enquire of the accounts clerk as
are sent to the accounts sent to the accounts to the frequency of when GRNs
department every two weeks. department on a more regular are received to assess if they are
basis, such as daily. being sent promptly.
This could result in delays in
suppliers being paid as the The accounts department Undertake a sequence check of
purchase invoices could not be should undertake a sequence GRNs held by the accounts
agreed to a GRN and also check of the GRNs to ensure department, discuss any missing
recorded liabilities being none are missing for items with the accounts clerk.
understated. Additionally, any processing.
prompt payment discounts
offered by suppliers may be
missed due to delayed
payments.
GRNs are only sent to the The GRN should be created in Review the file of copy GRNs
accounts department. Failing three parts and a copy of the held by the purchase ordering
to send a copy to the ordering GRN should be sent to the clerk, Oliver Dancer, and review
department could result in a purchase order clerk, Oliver for evidence that these are
significant level of unfulfilled Dancer, who should agree this

orders leading to a loss of sales to the order and change the matched to orders and flagged as
and stock-outs. order status to complete. On a complete.
regular basis he should then
review for all unfulfilled orders Review the file of unfulfilled
and chase these with the purchase orders for any overdue
relevant supplier. items and discuss their status with
Oliver Dancer.
The purchase ordering clerk, The roles of purchase ordering Observe which member of staff
Oliver Dancer, has and processing of the related undertakes the processing of
responsibility (or supplier invoices should be purchase invoices and confirm
ordering goods below $1,000 allocated to separate members this is not the purchase ordering
and for processing all purchase of staff. clerk, Oliver Dancer.
invoices (or payment. There is
a lack of segregation of duties Inspect a copy of the company's
and this increases the risk organisation chart to identify if
of fraud and non-business these tasks have now been
related purchases being made. allocated to different roles.
The finance director authorises The finance director should Review the payments list for
the bank transfer payment list review the whole payments list evidence of review by the finance
(or suppliers; prior to authorising. director.
however, she only views the As part of this, she should agree Enquire of accounts staff what
total amount of payments to be the amounts to be paid to supporting documentation the
made supporting. finance director requests when
undertaking this review.
Without looking at the As part of this, she should
detail of the payments list, agree the amounts to be
as well as supporting paid to supporting
documentation, there is a risk documentation, as well as
that suppliers could be being reviewing the supplier names to
paid an incorrect amount, or identify any duplicates or any
that sums are being paid to unfamiliar names. She should
fictitious suppliers. evidence her review by signing
the bank transfer list.
Supplier statement Supplier statement Review the file of reconciliations
reconciliations are no longer reconciliations should be to ensure that they are being
performed. This may result in performed on a monthly basis performed on a regular basis and
errors in the recording of for all suppliers and these that they have been reviewed by a
purchases and payables not should be reviewed by a responsible official.
being identified in a timely responsible official.
manner. Re-perform a sample of the
reconciliations to ensure that they
have been carried out
appropriately.

Test Question Solution of Debtors:
Answer 1:
a) Steps in undertaking a positive receivables circularisation for Dashing Co
The following steps should be undertaken in carrying out a positive receivables circularisation:
 Obtain consent from the finance director of Dashing Co in advance of undertaking the
circularisation.
 Obtain a list of trade receivables at the year end, cast this and agree it to the sales ledger control
account total.
 Select a sample from the receivables list ensuring that a number of nil, old, credit and large balances
are selected.
 Circularisation letters should be prepared on Dashing Co's letterhead paper, requesting a
confirmation of the year-end receivables balance, and for replies to be sent directly to the audit
team using a pre-paid envelope.
 The finance director of Dashing Co should be requested to sign all the letters prior to them being
sent out by a member of the audit team.
 Where no response is received, follow this up with another letter or a phone call and where
necessary alternative procedures should be performed
 When replies are received, they should be reconciled to Dashing Co's receivables records, any
differences such as cash or goods in transit should be investigated further.
b) Valuation of trade receivables
 Review the aged receivables listing to identify slow moving or old balances. Discuss the status of
these balances with the credit controller to assess whether the customers are likely to pay or if an
allowance for receivables is required.
 Review whether there are any after-date cash receipts for slow moving/old receivable balances.
 Review correspondence with customers in order to identify any balances which are in dispute or
unlikely to be paid and discuss with management whether any allowance is required.
 Review board minutes to identify whether there are any significant concerns in relation to
outstanding receivables balances and assess whether the allowance is reasonable.
 Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any
potentially irrecoverable balances to assess if the allowance is adequate.
 Review the payment history for evidence of slow paying by any customers who were granted credit
in the period when there was no credit controller and who may not, therefore, have been properly
scrutinised.
 Discuss with the finance director the rationale for maintaining the allowance at the same level in
light of the increase in the receivables collection period and the absence of a credit controller.
 Inspect post year-end sales returns/credit notes and consider whether an additional allowance
against receivables is required.
-------------------------------------------------------------------------------------------------------------------------

Test Question Solution of Fixed Assets:
Answer 1:
b)
i) Substantive procedures for land and buildings
 Obtain a schedule of land and buildings revalued this year and cast to confirm completeness
and accuracy of the revaluation adjustment.
 On a sample basis agree the revalued amounts to the valuation statement provided by the valuer.
 Agree the revalued amounts for these assets are included correctly in the non-current assets register.
 Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation surplus.
 Agree the initial cost for the warehouse addition to supporting documentation such as invoices to
confirm cost.
 Confirm through a review of the title deeds that the warehouse is owned by Jackdaw.
 Recalculate the depreciation charge for the year to ensure that for assets revalued during the year, the
depreciation was based on the correct valuation and for the warehouse addition that the charge was
for nine months only.
 Review the financial statements disclosures of the revaluation to ensure they comply with IAS 16
Property, Plant and Equipment.
------------------------------------------------------------------------------------------------------------------------
Test Question Solutions of Trade Payables

Answer 1:
Substantive procedures
(i) Trade payables and accruals
 Calculate the trade payable days for Rose Leisure Clubs Ltd (Rose) and compare to prior years,
investigate any significant difference, in particular any decrease for this year.
 Compare the total trade payables and list of accruals against prior year and investigate any
significant differences.
 Discuss with management the process they have undertaken to quantify the understatement of
trade payables due to the cut-off error and consider the materiality of the error.
 Discuss with management whether any correcting journal entry has been included for the
understatement.
 Select a sample of purchase invoices received between the period of 25 October and the year end
and follow them through to inclusion within accruals or as part of the trade payables journal
adjustment.
 Review after date payments; if they relate to the current year, then follow through to the purchase
ledger or accrual listing to ensure they are recorded in the correct period.
 Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any
reconciling items.

 Select a sample of payable balances and perform a trade payables’ circularisation, follow up any
non-replies and any reconciling items between the balance confirmed and the trade payables’
balance.
 Select a sample of goods received notes before the year end and after the year end and follow
through to inclusion in the correct period’s payables balance, to ensure correct cut-off.
(iii) Reorganisation
 Review the board minutes where the decision to reorganise the business was taken, ascertain if this
decision was made pre year end.
 Review the announcement to shareholders in late October, to confirm that this was announced before
the year end.
 Obtain a breakdown of the reorganisation provision and confirm that only direct expenditure from
restructuring is included.
 Review the expenditure to confirm that there are no retraining costs included.
 Cast the breakdown of the reorganisation provision to ensure correctly calculated.
 For the costs included within the provision, agree to supporting documentation to confirm validity
of items included.
 Obtain a written representation confirming management discussions in relation to the announcement
of the reorganisation.
 Review the adequacy of the disclosures of the reorganisation in the financial statements to ensure
they are in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Answer 2:
b) Substantive procedures
Depreciation
 Review the reasonableness of the depreciation rates applied to the new leisure facilities and compare
to industry averages.
 Review the capital expenditure budgets for the next few years to assess whether there are any plans
to replace any of the new leisure equipment, as this would indicate that the useful life is less than 10
years.
 Review profits and losses on disposal of assets disposed of in the year, to assess the reasonableness
of the depreciation policies.
 Select a sample of leisure equipment and recalculate the depreciation charge to ensure that the non-
current asset register is correct.
 Perform a proof in total calculation for the depreciation charged on the equipment, discuss with
management if significant fluctuations arise.
 Review the disclosure of the depreciation charges and policies in the draft financial statements.

Food poisoning
 Review the correspondence from the customers claiming food poisoning to assess whether Pineapple
has a present obligation as a result of a past event.
 Send an enquiry letter to the lawyers of Pineapple to obtain their view as to the probability of the
claim being successful.
 Review board minutes to understand whether the directors believe that the claim will be successful
or not. Review the post year-end period to assess whether any payments have been made to any of
the claimants.
 Discuss with management as to whether they propose to include a contingent liability disclosure or
not, consider the reasonableness of this.
 Obtain a written management representation confirming management’s view that the lawsuit is
unlikely to be successful and hence no provision is required.
 Review the adequacy of any disclosures made in the financial statements.
--------------------------------------------------------------------------------------------------------------------------
Test Question Solutions of Inventory
Answer 1:
Weakness Implication
The warehouse manager is supervising the inventory Since there is a lack of segregation of duties, the
count procedure. Warehouse Manager may influence the inventory
count process.
No system of marking on counted items This may lead to double counting or omission
completely and possibility that some items may not
be counted at all.
Perpetual inventory records and third-party The person responsible for counting may try to
inventory records are available on count sheets. match the numbers provided instead of carrying out
an independent count.
The third-party inventory may be made part of the

inventory. Confirm that inventory belonging to
third parties, but on the client’s premises at the date
of the count, is not included in the inventory.
Cut-off documents not obtained during the There is a possibility of recording back dated
inventory count. entries, therefore the cut-off documents should have
been obtained on the date of the inventory count
date.
-------------------------------------------------------------------------------------------------

Answer 2:
a) Audit procedures performed prior to attending the inventory count
 Review prior year working papers and obtain an understanding of the nature and volume of inventory
 Obtain copy of inventory count instructions prepared by the client and discuss any significant issue
arising with these clients.
b)
Deficiency Effects Recommendation
The count sheets show the amount This may encourage the The count sheets should not show
of inventory currently recorded on counters to try to match the the perpetual inventory records
the perpetual inventory records. figure provided rather than to balance. The count staff should
carry out the count as an record the number of items they
independent exercise. have physically counted.
All count staff 2 are drawn from These staff are not independent Count teams should consist of staff
the inventory warehouse. of the count. It would be from other departments
possible for the counters to
disguise errors or to cover up
theft of inventory.
The teams are allowed to choose This lack of detailed Each team of counters should be
which inventory they count within organisation may lead to certain given specific instructions regarding
each area of stores. inventory items being counted which area of the stores they are
more than once whilst some responsible for.
items may not be counted at all.
There is no system for marking Again this increases the risk that All inventory should be marked
items which have been counted. inventory will be double systematically to indicate that it has
counted or omitted completely. been counted e.g. by the use of
tickers.
Information on the count sheets is This increases the risk that the Results of all counts on the count
recorded in pencil. information could be amended sheets should be recorded in ink
after the count without
authorisation, resulting in
inventory being incorrectly
stated
Additional count sheets are not The pre-numbering of the count All count sheets should be pre-
pre-numbered. The pre-numbering sheets allows control over the numbered before they are issued.
of the count sheets allows control completeness of the
over the completeness of the information. If the staff using
information. the separate sheets do not
number them as they are used
there is no means of identifying
that all sheets issued have been
returned. Lost count sheets may
then go unnoticed.
Count sheets are not signed by the It may be difficult to identify All count sheets should be signed by
count teams. who is responsible for the count the members of the count team

of specific items if subsequent °
questions arise. The signature
also encourages the counters to
take responsibility for the
counting they have performed.
-------------------------------------------------------------------------------------------------
Answer 3:
a. Importance of cut-off in the audit of inventory
Cut-off is a key issue in the audit of inventory. All purchases, transfers and sales of inventory must be
recorded in the correct accounting period as inventory can be a material figure for many companies,
particularly those engaged in manufacturing.
The points of purchase and receipt of goods and services are particularly important in order to ensure that
cut-off has been correctly applied. The transfer of completed work-in-progress to finished goods is also
important as is the sale and despatch of such goods.
Incorrect cut-off can result in misstatements in the financial statements at the year-end and this can be of
particular concern where inventory is material. Auditors therefore need to consider whether the
management of the entity being audited have implemented adequate cut-off procedures to ensure that
movements into and out of inventory are properly identified and reflected in the accounting records and
ultimately in the financial statements.
b. Perpetual inventory counting systems

Perpetual inventory counting systems are where an entity uses a system of inventory counting throughout
the year and are commonly used by larger organisations.
Where such a system is in place, the auditors used carry out the following work:
 Talk to management to establish whether all inventory lines are counted at least once a year.
 Inspect inventory records to confirm that adequate inventory records are kept up-to-date.
 Review procedures and instructions for inventory counting and test counts to ensure they are as
rigorous as those for a year-end inventory count.
 Observe inventory counts being carried out during the year to ensure they are carried out properly
and that instructions are followed.
 Where differences are found between inventory records and physical inventory, review procedures for
investigating them to ensure all discrepancies are followed-up and resolved and that corrections are
authorised by a manager not taking part in the count.
 Review the year's inventory counts to confirm the extent of counting, the treatment of differences and
the overall accuracy of records, and to decide whether a full year-end count will be necessary.
 Perform cut-off testing and analytical review to gain further comfort over the accuracy of the year end
figure for inventory in the financial statements.
-------------------------------------------------------------------------------------------------

Answer 4:
a. Definition of NRV
IAS 2 Inventories defines NRV as ‘the estimated selling price in the ordinary course of business, less the
estimated costs of completion and the estimated costs necessary to make the sale’.
b. Procedures
Procedures appropriate to assess that NRV is at or above cost are as follows:
1. Develop an estimate of (or obtain actual) sales prices and proceeds in respect of inventory held at the
year end. This is done to provide the sales price for the NRV calculation and should involve the
following:
 Inspecting post year end sales invoices to obtain actual sales prices for year end inventory
 If there are no sales of the inventory line being tested, obtain management’s estimated sales
price. The auditor should assess the reasonableness of this, for example by inspecting current
price lists or looking at the sales reports from sales staff.
 Having identified slow moving or damaged items from the sales reports and results of inventory
counts, the auditor should ensure that these are assigned a nil value.
2. Establish an estimate of costs to completion (to include in the NRV calculation). This will involve
the following:
 The books may be complete, but if not (for example the books are unbound) the auditor must
determine the cost to completion using actual post year end cost records or budgeted costs. Any
further costs for returned books to make them saleable should also be taken into account.
3. Determine directly attributable selling, distribution and marketing costs (to form part of the NRV
calculation).
 Estimate these costs for the books being tested and whether any apportionment of costs to
inventory lines is reasonable (for example apportionment by weight or size for distribution
costs).
4. Combine the three elements above (1 less 2 and 3) to arrive at NRV and compare with the cost.
Discuss your findings and estimates with management and other informed staff to gain comfort that
conclusions are reasonable.
--------------------------------------------------------------------------------------------------------------------------
Test Question Solution of Analytical Procedures
Answer 2:
a. Analytical procedures
Analytical procedures can be used at all stages of an audit, however, ISA 315 Identifying and Assessing the
Risks of Material Misstatement through Understanding the Entity and Its Environment and ISA 520 Analytical
Procedures identify three particular stages.

During the planning stage, analytical procedures must be used as risk assessment procedures in order to help
the auditor to obtain an understanding of the entity and assess the risk of material misstatement.
During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence.
Substantive procedures can either be tests of detail or substantive analytical procedures.
At the final review stage, the auditor must design and perform analytical procedures which assist them when
forming an overall conclusion as to whether the financial statements are consistent with the auditor’s
b. Ratios
Ratios to assist the audit supervisor in planning the audit:
20X8 20X7
Gross margin 7,410/19,850 = 37.3% 6,190/16,990 = 36.4%
Inventory holding period 1,850/12,440 * 365 = 54 days 1,330/10,800 * 365 = 45 days
OR
Inventory turnover 12,440/1,850 = 6.7 10,800/1,330 = 8.1
Receivables collection period 2,750/19,850 * 365 = 51 days 1,780/16,990 * 365 = 38 days
Payables payment period 1,970/12,440 * 365 = 58 days 1,190/10,800 * 365 = 40 days
Current ratio 4,600/(1,970 + 810) = 1.65 3,670/1,190 = 3.08
Quick ratio 2,750/(1,970 + 810) = 0.99 (3,670 - 1,330)/1,190 = 1.97
C. Audit risks and auditor’s response
Audit risks Auditor’s response

During the year, Darjeeling Co has spent $0·9m Obtain a breakdown of the expenditure and
on developing new product lines, some of which verify that it relates to the development of the
are in the early stages of their development cycle. new products. Review expenditure
This expenditure is classed as research and documentation to determine whether the costs
development under IAS® 38 Intangible Assets. relate to the research or development stage.
The standard requires research costs to be Discuss the accounting treatment with the
expensed to profit or loss and only development finance director and ensure it is in accordance
costs to be capitalised as an intangible asset. with IAS 38.

The company has included all of this expenditure
as an intangible asset. If research costs have been
incorrectly classified as development
expenditure, there is a risk that intangible assets
could be overstated and expenses understated.
Darjeeling Co purchased and installed a new Review the purchase documentation for the new
manufacturing line. The costs include purchase manufacturing line to confirm the exact cost of
price ($2·2m), installation costs ($0·4m) and a the servicing and that it does relate to a five-year
five-year servicing and maintenance plan period.
($0·5m).
As per IAS 16 Property, Plant and Equipment, the

cost of an asset includes its purchase price and Discuss the accounting treatment with the
directly attributable costs only. IAS 16 does not finance director and the level of any necessary
allow servicing and maintenance costs to be adjustment to ensure
capitalized as part of the cost of a non-current treatment is in accordance with IAS 16.
asset, as they are not directly related to the cost of
bringing the asset to its working condition.
The servicing costs relate to a five-year period and

so should be charged to profit or loss over this
time. The upfront payment represents a
prepayment for five years; as the services are
received, the relevant proportion of the cost
should be charged to profit or loss. If the service
for 20X8 has been carried out, then $0·1m
($0·5m/5) should be charged to profit or loss.
Therefore property, plant and equipment (PPE)
and profits are overstated and prepayments are
understated.
The company has borrowed $4m from the bank via During the audit, the team would need to
an eight-year loan. This loan needs to be correctly confirm that the $4 million loan finance was
split between current and non-current liabilities in received. In addition, the split between current
order to ensure correct disclosure. and non-current liabilities and the disclosures
for this loan should be reviewed in detail to
ensure compliance with relevant accounting
standards and local legislation.
Details of security should be agreed to the bank

confirmation letter.
As the level of debt has increased, there should be The finance costs should be recalculated and any
additional finance costs as the loan has an interest increase agreed to the loan documentation for
rate of 5%. There is a risk that this has been confirmation of the 5% interest rate. Interest
payments should be agreed to the cash book and

omitted from the statement of profit or loss leading bank statements to confirm the amount was paid
to understated finance costs and overstated profit. and is not therefore a year-end payable.
Earl & Co should ensure that there is a suitably

experienced audit team. Also, adequate time
Darjeeling Co intends to undertake a stock should be allocated for team members to obtain
exchange listing in the next 12 months. an understanding of the company and the
significant risks of overstatement of revenue,
In order to maximise the success of the potential profits and assets, including attendance at an
listing, Darjeeling Co will need to present financial audit team briefing.
statements which show the best possible position
and performance. The team needs to maintain professional
The directors therefore have an incentive to skepticism and be alert to the increased risk of
manipulate the financial statements, by overstating manipulation.
revenue, profits and assets.
Significant estimates and judgments should be
carefully reviewed in light of the
misstatement risk.
The receivables collection period has increased Review and test the controls surrounding how
from 38 to 51 days and management has extended Darjeeling Co identifies receivables balances
the credit terms given to customers on the which may not be recoverable and procedures
condition that sales order quantities were around credit control to ensure that they are
increased. The increase in receivable days could operating effectively.
be s o le ly due to these increased credit terms.
However, it could also be due to an increased risk Extended post year-end cash receipts testing and
over recoverability of receivables as they may be a review of the aged receivables ledger to be
overvalued and expenses understated. performed to assess valuation. Also consider the
adequacy of any allowance for receivables.
This year the company made a ‘price promise’ to Discuss with management the basis of the
match the price of its competitors for similar refund liability of $0·25m and obtain supporting
products. Customers are able to claim the documentation to confirm the reasonableness of
difference from the company for one month after the assumptions and calculations.
the date of purchase of goods.
The company should account for the price

promise in accordance with IFRS® 15 Revenue
from Contracts with Customers. As the company
may be required to provide a refund, the
anticipated refund amount should not be initially
recognised as revenue but instead as a refund
liability until the one- month price promise period
has Ended.

This is a highly subjective area, with many
judgements required with regards to the level of
likely refund due. As this is a new liability, the
directors may not have correctly accounted for
this sum resulting in overstated revenue,
under/overstated profits and liabilities.
Darjeeling Co has stopped further sales of one of Review the list of sales of the paint product
its paint products and a product recall has been made between June and the date of the recall,
initiated for any goods sold since June. agree that the sales have been removed from
revenue and the inventory included. If the
This product recall will result in Darjeeling Co refunds have not been paid before the year end,
paying refunds to customers. The sales will need review the draft financial statements to confirm
to be removed from the 20X8 financial statements that it is included within current liabilities.
and a refund liability recognised. Also, inventory
will need to be reinstated, albeit at a possibly
written down value. Failing to account for this
correctly could result in overstated
revenue, understated liabilities and misstated
inventory.
The company is holding a number of damaged Discuss with the finance director whether any
paint products in inventory and overall the write downs will be made to this product, and
inventory holding period has increased from 45 what, if any, modifications will be required to
days to 54 days. rectify the quality of the product.
Due to the issue with the paint consistency, the Testing should be undertaken to confirm cost
quality of these products is questionable and and NRV of the affected paint products held in
management is investigating whether these inventory and that on a line by line basis the
products can be rectified. There is a risk that this goods are valued correctly.
inventory may be overvalued as its net realisable
value may be below cost.
Revenue has increased by 16·8% in the year; and During the audit a detailed breakdown of sales
the gross margin has increased slightly from 36·4% will be obtained, discussed with management
to 37·3%. and tested in order to understand the sales
This is a significant increase in revenue and, along increase. Also increased cut-off testing should be
with the increase in gross margin, may be related undertaken to verify that revenue is recorded in
to the increased credit period and price promise the right period and is not overstated.
promotion or could be due to an
overstatement of revenue.
The payables payment period has increased from Detailed going concern testing to be performed
40 to 58 days. The current ratio has decreased from during the audit, including the review of cash
3·08 to 1·65. The quick ratio has also decreased flow forecasts and the underlying assumptions.
from 1·97 to 0·99. These should be discussed with management to

In addition, the bank balance has moved from ensure that the going concern basis is
$0·56m to an overdraft of $0·81m. reasonable.
These are all indicators that the company could

be experiencing a reduction in its cash flow which
could result in going concern difficulties or
uncertainties. These uncertainties may not be
adequately disclosed in the financial statements.
--------------------------------------------------------------------------------------------------------------------------
Test Question Solutions of Written Representation
Answer 1:
a) In this case, the representation provided by the management contradicts with the audit evidence obtained
later and therefore we should:
 consider whether his risk assessment of that area is still appropriate
 consider whether additional audit procedures are needed
 assess the impact on auditors assessment of management’s integrity, document those concerns and
consider withdrawing from the audit.
b) The written representation from the management must cover:

 the completeness of the information that has been provided about the identity of related parties and
related party relationships and transactions, and
 the adequacy of accounting for and disclosure of such related party relationships and transactions in
the financial statements.
The audit report should not be signed unless the written representation has been received.
If management does not provide the written representation, it will result in limitation of scope and we
would take appropriate actions, including determining the possible effect on the opinion in the auditor’s
report.
--------------------------------------------------------------------------------------------------------------------------
Answer 2:
a) The Auditor is generally not in a position to obtain evidence from an external source in relation to
warranty provisions.
Hence the written representation, whilst being an entity generated source of evidence, would still be
useful as there are few other alternatives.
Steps to take if written representation on warranty provision is not provided
 If management does not provide the requested written representation on the warranty provision the
auditor should discuss the matter with management to understand why they are refusing.

 In addition, the auditor should re-evaluate the integrity of management and consider the effect that
this may have on the reliability of other representations (oral or written) and audit evidence in
general.
 The auditor should then take appropriate actions, including determining the possible effect on the
audit opinion.
Impact on audit report

Unless the auditor is able to obtain sufficient appropriate evidence* to conclude that the warranty
provision is free from material misstatement, a modified audit opinion will be required, as discussed
below:
 If the warranty provision is material but not pervasive then a qualified opinion would be
appropriate, a disclaimer of opinion would be appropriate if the effect of misstatement is both
material and pervasive.
-------------------------------------------------------------------------------------------------------------------------
Test Question Solution of Related Parties

Answer 1:
I would suggest the following activities/procedures to my team, in respect of identification of risks of material
misstatement related parties:
 The audit team’s discussion on risk shall include specific consideration of susceptibility of financial
statements to material misstatement due to fraud or error through related parties and their transactions.
 The audit team should inquire of management regarding:
 the identity of related parties including changes from prior period;
 the nature of the relationships between the entity and its related parties; and
 whether any transactions occurred between these related parties during the period and, if so, the
type and purpose of the transactions.
 what controls the entity has to identify, account for and disclose relating to related party
relationships and transactions.
 The audit team should obtain an understanding of the controls, if any, that management has established
to:
 identify, account for, and disclose related party relationships and transactions;
 authorize and approve significant transactions and arrangements with related parties;
 authorize and approve significant transactions and arrangements outside the normal course of
business.
 The audit team should maintain alertness for evidence of related party information when obtaining
other audit evidence, in particular, when scrutinizing bank and legal confirmations and minutes of
meetings.
 If significant transactions outside the normal course of business are discovered, the audit team should
inquire management the nature of the transactions and whether related parties could be involved.

 The audit team should share relevant information obtained about the entity’s related parties with other
members of the engagement team.
--------------------------------------------------------------------------------------------------------------------------
Test Question Solution of Fraud & Error

Answer 1:
Aggressive targets for departmental heads
CEO aggressively follows up with the departmental heads for achieving the targets set by those charged with
governance. It seems that there is an excessive pressure on management to meet financial targets established by
the directors therefore they may be under undue pressure to misstate the financial statements.
Performance measurement of senior management
Since the performance of the senior management is measured in terms of year-on-year profit growth they would
have an incentive to fraudulently misstate the financial statements to obtain bonuses or increments.
Internal audit department reports to CEO
Reporting of internal audit department to the CEO will impair their independence. Therefore this deficiency in
internal control structure would give an opportunity for fraudulent financial reporting.
Significant subjective judgements

Determination of the provision required for onerous contract may require significant subjective judgements on
part of the management. There is an opportunity for the management to misstate the recognition of expenses
and liabilities. Furthermore, since the performance is measured in terms of year-on-year profit growth,
management would have an opportunity to achieve those targets by not recording the required provision.
-------------------------------------------------------------------------------------------------------------------------------
Test Question Solutions of Preconditions

Answer 1:
Key Components of Audit engagement letter:
 The objective and scope of the audit of financial statements;
 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the applicable financial reporting framework for the preparation of the financial
statements;
 Reference to the expected form and content of any reports to be issued by the auditor and;
 A statement that there may be circumstances in which a report may differ from its expected form and
content.
-------------------------------------------------------------------------------------------------------------------------------

Answer 2:
To establish if the preconditions for an audit are present, the auditor shall:
 establish if the financial reporting framework to be used in the preparation of the financial statements is
acceptable; and
 obtain the agreement of management that it acknowledges and understands its responsibility (the
‘premise’)
 for the preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation;
 for internal controls to ensure that the financial statements are not materially misstated; and
to provide the auditor with all relevant and requested information and unrestricted access to all
personnel.

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KnS School of Business Studies

CA CAF- 8 Audit & Assurance

 S. Description Page No.

2 Financial Statement Assertions (Total 12 Assertions) 106

3 ISA 505 - External Confirmation 111

4 Debtors / Receivables 130

5 Cash in Hand & Cash at Bank - Substantive Procedures 145

6 Tangible & Intangible Fixed Assets - Substantive Procedures 155

7 Trade Payables, Accruals, Provisions & Others 185

8 Inventory / Counting Process 211

9 Sales/ Purchases/ Expenses 243

10 ISA 520 - Analytical Procedures 255

11 ISA 580 - Written Representation 279

12 ISA 550 - Related Parties 306

13 ISA 240 - Fraud & Error 319

14 ISA 210 - Engagement Letter 339

15 ISA 530 - Sampling 351

16 Small Concepts 374

17 ICAP Code of Ethics 427

18 Company Law 481

20 Last Class Handouts / Summaries 504

21 Solutions of Test Questions 525

Page 1 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Test of Controls (T.O.C’s)

Page 2 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

1. Expected questions on T.O.Cs

2. General Internal control weaknesses

7. The Sales System: Control Objectives

10. Purchase Cycle Kay Summarized Points

11. Payroll Cycle Kay Summarized Points

12. Constructing T.O.C’s from Controls ………. (Few Examples)

13. ACCA F8 T.O.C Practice Questions

14. Test of Controls summary

15. CA CAF 8 T.O.C Practice Questions

Page 3 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 4 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 5 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

(For MY CAF 8 Cheetahs to start with…  )

Page 6 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Sales cycle / system

Every customer has a Customer approaches the By Independent credit agency or by

Credit terms &

Credit limit & terms must

Via online SALES ordering system Credit worthiness of customer

Manual Quotation by sales staff Refuse the

Page 7 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Sales department to inform This intimation to

Delivery Note (D.N) is signed by It's an acknowledgement that the

Sales invoice must be

Page 8 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 9 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Purchase cycle / system

Material Requisition (MR) Request from user department

1) Quotation to be obtained from No

Invoice received from supplier/

Page 10 of 549 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Common points for both Purchase and Payment Cycle