AUDIT NOTES

Chapter 1: Audit Evidence and Procedure (Substantive Procedure)

Analytical procedures include:

(a) The consideration of comparisons with:

(i) Similar information for prior period

(ii) Anticipated 预期 results of the entity, from budgets or forecasts
(iii) Predictions prepared by the auditors
(iv) Industry information, such as a comparison of the client's ratio of sales to trade
receivables with industry averages, or with the ratios relating to other entities of
comparable size in the same industry.

(b) Those between elements of financial information that are expected to conform to a
predicted pattern based on the entity's experience, such as the relationship of gross profit to
sales.

(c) Those between financial information and relevant non-financial information, such as the
relationship of payroll costs to number of employees.

3.0 Accounting Estimates (Substantive procedures)

An accounting estimate is an approximation of the monetary amount of an item in the

absence of a precise means of measurement. 没有精确计量方法的情况下

Examples of accounting estimates include.

• Allowances to reduce inventories and receivables to their estimated realisable value

• Provision for a loss from a lawsuit
• Provision to meet warranty claims

These estimates are often made in conditions of uncertainty regarding the outcome of
events and involve the use of judgement.
3.1 Review and testing the process/ substantive procedures performed by auditors

 Consider whether data is accurate, complete, and reliable

 Evaluate whether assumptions appropriate, reasonable, and consistent.
 Consider whether expert opinion is required if estimates are complex
(Lawyer, tax expert)
 Test calculation
 Compare previous estimates with actual results.
 The auditors should review transactions or events after the reporting period

CHAPTER 2: INVENTORIES
If, closing inventory – overstated COS – decrease; Profit - increase

If, opening inventory – overstated COS – increase; Profit - decrease

The four main elements of the audit of inventories:

(a) Existence and apparent ownership will be verified by observing the physical inventory
count (whether year-end or continuous). (The physical inventory count may also help with
cut-off, confirming that purchases and sales of inventory have been recorded in the
correct period.)
(b) Raw material costs and further comfort on ownership will be verified by checking
invoice
prices (cost ascertainment may require evaluation of a standard costing system). Cost in
the case of work in progress and finished goods will involve consideration of overhead
absorption bases.
(c) Completeness is checked by observing the physical inventory count, checking that count
records are correctly processed, applying analytical procedures and occasionally relying
on inventory records where internal control has been evaluated and tested as strong.
(d) Valuation is checked by comparing cost with net realisable value. A working knowledge
of IAS 2 is necessary here.
3.1 Methods of inventory counts
(a) Physical inventory counts at the end of the financial year (31/12)

(b) Physical inventory counts before or after the end of the financial year

(But need to +/- purchases or sales)

Reliability of audit evidence:

i. the greater the time period, the less the value of audit evidence （相差的时间太长，

越不准确）
ii. The business's system of internal controls

3.3 Audit procedures

3.3.1 Before the count (planning)
Planning Inventory Control
Gain understanding Review previous year's arrangements

Perform analytical procedures

Discuss with management Inventory count

arrangements and significant changes
Assess key factors The nature and volume of the inventory

 Palm oil Risks relating to inventory

 Flour The identification of high value items
 Metal （避免高价钱的产品遗失导致高亏本）
 Roof truss
Method of accounting for inventory

Location of inventory and how it affects inventory

control and recording

Plan procedures Ensure a representative selection of locations,

inventory and procedures are covered（尝试去不同
的地方进行 STOCK COUNT）

Ensure sufficient attention is given to high value

items

Arrange to obtain from third parties’ confirmation of

 inventory they hold Consider the need for expert
help
3.3.2 Review of count instructions
- count instruction is prepared by management, so that the staff know what to do
- as an auditor need to make sure and view the instructions clear
Organisation of count Supervision by senior staff including senior staff not
normally involved with inventory

Tidying and marking inventory to help counting'

Restriction and control of the production process and

inventory movements during the count

Identification of damaged, obsolete, slow-moving, third

party and returnable inventory
Counting Systematic counting to ensure all inventory is counted

Teams of two counters, with one counting and the other

checking or two independent counts
Recording Serial numbering, control and return of all inventory
sheets

Recording of quantity, conditions, and stage of

production of work-in-progress

***During & after the count refer to notes

4.0 Cut-Off (make sure sales/purchases record in the correct accounting period)
Before… talk to the management
During…. Observe
After…. Match GRN & GDN

5.0 Inventory Valuation Process

5.2 Cost
5.2.1 Valuation of raw materials
How to determine the value / raw material purchase price….??

5.2.2 Valuation of labour costs

5.2.3 Overhead allocation
The basis of overhead allocation should be:
• Consistent with prior years
• Calculated on the normal level of production activity
General guidance on the allocation of overheads which the auditors should follow:

i. All abnormal conversion costs (such as idle capacity) must be excluded.

ii. The costs of general management, as distinct from functional management, are not
directly related to current production and are, therefore, excluded

5.4 Net Realisable Value

(NRV= Estimated selling price – estimated cost of completion – estimated costs necessary to
make the sale – marketing, advertisement….)
Net realisable value is likely to be less than cost when there has been:
• An increase in costs or a fall in selling price

• Physical deterioration (质量不好) Reason of the

company may need
• Obsolescence of products
to sell below the
• A marketing decision to manufacture and sell products at a loss cost of the product

• Errors in production or purchasing

CHAPTER 3: NON -CURRENT ASSETS

Objectives of particular significance for tangible non-current assets are rights and obligations
(i.e., ownership), existence and valuation. It is generally necessary to carry out different tests
on ownership and existence.

 COMPLETENESS, RIGHTS AND OBLIGATIONS, VALUATION,

EXISTENCE

Non-Current Asset Register

The non-current asset register is a very important aspect of the internal control system. It
enables assets to be identified, and comparisons between the general ledger, non-current asset
register and the assets themselves provide evidence that the assets are completely recorded.

1.2 Audit procedures

Completeness (and cut-off) *recorded

• Obtain or prepare a summary of tangible non-current assets showing how (NCA Register):

- Gross book value, Accumulated depreciation, NBV

• Compare non-current assets in the general ledger with the non-current assets register

and obtain explanations for differences.

• Match a sample of assets which physically exist to the non-current asset register and

general ledger.

• If a non-current asset register is not kept, obtain schedule showing the original costs and

a present depreciated value of major non-current assets.

Existence
• Confirm that the company physically inspects all items in the non-current asset register
each year.
• Physically inspect assets recorded in non-current asset register, concentrating on high
value items and additions in year. Confirm items inspected exist, are in use and in good
condition. (auditor)
• Review records of income yielding assets (rental income)
• Reconcile opening and closing vehicles by numbers (quantity) as well as amounts

Rights and obligations

• Verity title to land and buildings by inspection of:
- Title deeds (refer)
- Land registry certificates
• Obtain a certificate from solicitors/ bankers :
- Stating purpose for which the deeds are being held (custody only)
• Inspect registration documents for vehicles held checking that they are in the client's name.
• Confirm all vehicles used for the client’s business.
• Examine documents of title for other assets (including purchase invoices, architects
certificates, contracts, hire purchase or lease agreements)

Valuation (Land and Building)

• Verify valuation to valuation certificate/report by expert

• Consider reasonableness of valuation, reviewing:
- Experience of valuer
- Scope of work
• Check revaluation surplus has been correctly calculated by recalculating it.
• Consider whether permanent diminution in value of assets has occurred.
• Review Insurance policies in force for all categories of tangible non-current assets and
consider the adequacy of their insured values and check expiry dates.

Additions/Purchases of new assets (to confirm rights and obligations, valuation, and
completeness)
• Verify additions by inspection of architect’s certificates, lawyers’ completion statements,
vendors' invoices etc.
• Check capitalisation of expenditure is correct by considering for non-current assets
additions and items in relevant expense categories (repairs, motor expenses, sundry
expenses) whether:
- Capital/revenue distinction (asset/expenses) correctly drawn
- Capitalisation in line with consistently applied company policy
• Check purchases have been properly allocated to correct non-current asset accounts by
inspecting a sample.
• Check purchases have been authorised by directors/senior management by inspecting
Board minutes
• Check additions have been recorded in non-current asset register and general ledger for a
sample additions the year.

Self-constructed assets (to confirm valuation and completeness)

- one that a business elects to build under its own management.
• Verify material and labour costs and overheads to invoices, wage records etc
• Ensure expenditure has been analysed correctly and properly charged to capital
• Check no profit element has been included in costs.
• Check finance costs have been capitalised or not capitalised on a consistent basis, and
costs capitalised in period do not exceed total finance costs or period

DISPOSALS & DEPRECIATION, REFER TO NOTES….

CHAPTER 4: ACCOUNT RECEIVABLE, BANK, CASH AND PREPAYMENT
The following substantive procedures* are necessary to check the completeness and accuracy
of a client prepared list.
• Agree the balances from the individual receivable ledger accounts to the list of balances

and vice versa. 1

• Match the total of the list to the receivable ledger control account. 2

• Cast the list of balances and the receivable ledger control account. 3

AGREE WITH THE TOTAL - 4

1.1 The accounts receivable circularization* (another substantive procedures) 5

Meaning of circularization:
 A technique used by an auditor in which all debtors to a company are asked to
confirm the amounts outstanding (positive circularization) or to reply if the amount
stated is incorrect or in dispute (negative circularization).

EXAMPLE:
Request for confirmation
Vinnion
Sunway
- Agree that RM50000
Owe ...RM50000
C R E exist but V not
- Do not agree (further
work done)
- Do not reply (other work
done)

1.1.2 Positive v negative circularisation

When circularisation is undertaken the method of requesting information from the customer
may be either positive or negative.
• Under the positive method the customer is requested to confirm the accuracy of the balance
shown or state in what respect he is in disagreement. The positive method is generally
preferable as it is designed to encourage definite replies from those contacted. (What
situation also reply)
• Under the negative method the customer is requested to reply only if the amount stated is
disputed. The negative method may be used if the client has good internal control, with a
large number of small accounts. In some circumstances, say where there is a small number of
large and a large number of small accounts, a combination of both methods, as noted above,
may be appropriate. (Reply only if they do not agree the amount)

2.1.5 Follow up procedure

Auditor will have to carry out further work in relation to those accounts receivable who:

• Respond and agree with the balance. File in the reply in current audit file.

• Respond and disagree with the balance stated (positive and negative confirmation)

• Do not respond (positive confirmation only)

In the case of disagreements, the confirmation response should have identified specific
amounts which are disputed

➢ Disagreements can arise for the following reasons:

(a) There is a dispute between the client and the customer. The reasons for the dispute would
have to be identified, and provision made if appropriate against the debt.

(b) Cut off problems exist - company records the following year’s sales in the current period
or because goods returned by the customer in the current period are not recorded in current
period. Cut-off testing may have to be extended.

(c) Cut off problems exist - customer may have sent the monies before the period end, but the
monies were not recorded by the client as receipts until after the period end. Detailed cut-off
work may be required on receipts.

(d) Monies received may have been posted to the wrong account.

(e) Customers who are also suppliers may net-off balances owed and owing. Auditors should
check that this is allowed.

(f) Teeming and lading, stealing monies and incorrectly posting other receipts so that no
particular customer is seriously in debt is a fraud that can arise in this area. If auditors suspect
teeming and lading have occurred, detailed testing will be required on cash receipts,
particular on prompt posting of cash receipts.

DO NOT RESPONSE

….

Alternative procedures if client do not response.

If it proves impossible to get confirmations from individual customers, alternative procedures

include the following:

• Check receipt of cash after-date

• Verify valid purchase orders if any

• Examine the account to see if the balance outstanding represents specific invoices and
confirm their validity.

• Obtain explanations for invoices remaining unpaid after subsequent ones have been paid

• Test company’s control over the issue of credit notes and the write-off of bad debts

2.2 Irrecoverable Receivables

The following substantive procedures* will be important to check for bad and doubtful debt
thus confirm valuation.

• Review the after-date cash receipts and follow through to pre-year-end receivable balances.

• Calculate average receivable days and compare this to prior year, investigate any significant
differences.

• Confirm necessity/adequacy write-offs of specific receivables by review of correspondence

(letter) with customers or lawyers

• Examine customer files on overdue receivables, and assess whether allowance is required in
the circumstances
• Confirm allowance against receivables, considering

- How well previous year's allowance has predicted actual receivables which have

not been paid

- Whether formula used reasonable and consistent with previous years

• Examine credit notes issued after the year-end for allowances that should be made against
current period balances

• Check accuracy of aged receivable analysis by comparing analysis with date on invoices

• Review board minutes to assess whether there is any material disputed receivables

Other substantive procedures* for receivables –

• Select a sample of goods despatched notes (GDN) before and just after the year end and
follow through to the sales invoice to ensure they are recorded in the correct accounting
period

• Select a sample of year-end receivable balances and agree back to valid supporting
documentation of GDN and sales order to ensure existence

• Discuss with management to consider reclassifying credit balance to current liability.

Summary
Substantive procedure
1. Get the listing and agree to GL
2. Receivable ledgers check until listing
3. Perform casting on the total
4. Ensure receivable ledgers and receivable ledgers control agree with the total
5. Circularisation
Type Basis of selection by auditors Response
Positive Old & unpaid Agree – C, R, E
Negative Dormant Do not agree - reason
negative balance Do not reply – 2nd
-over payment reminder, telephone call
-error (alternative workdone)
-Advance payment
Chapter 6: Final Review Procedure
4.0 Going concern
The following list gives examples of possible indicators of going concern problems

（可不可以继续营业）:

(a) Financial indications

i. Net liabilities or net current liability position where the company has more liabilities
than assets
ii. The company needs borrowing facilities which have not been agreed
iii. Relying too heavily on short-term borrowing
iv. Negative operating cash flow in budgets or financial statements
v. Key financial ratio showing adverse results. For example, if ratio such as the current
ratio and the acid test indicate poor liquidity this could suggest going concern issues.
vi. The company stopped paying dividends or falling behind in paying them

(b) Operating indications

i. Loss of key management without replacement

ii. Loss of key staff without replacement
iii. Loss of a major market, franchises, license, or principal supplier

(c) Other indications

i. Non-compliance with capital or other statutory requirements

ii. Pending legal proceedings against the entity that may, if successful. Result in
judgements that could not be met
iii. Changes in legislation or government policy
iv. Issues which involve a range of possible outcomes so wide that an unfavourable result
could affect the appropriateness of the going concern basis
Auditor’s Responsibility

Auditors are responsible for considering:

• obtain sufficient appropriate audit evidence about the appropriateness of management’s use
of the going concern assumption in the preparation and presentation of the financial
statements

• to conclude whether there is a material uncertainty (pending legal case, pending loan
approval, pending agreement by key management) about the entity's ability to continue as
a going concern.

The auditors should evaluate management’s assessment by considering:

• Budget/forecast information and the quality of the systems responsible for producing this
information

• Assumptions underlying the budgets/forecasts

• Sensitivity of budgets/forecasts

• Existence/adequacy/terms of borrowing facilities

• The period used by those charged with governance in assessing going concern

AUDIT PROCEDURE….

4.3 Audit conclusions (on going concern)

➢ Material Uncertainty Exist and disclose in the notes - True and Fair view (Modified
report but unmodified opinion – true and fair view)

An uncertainty will be material if it has so great a potential impact as to require clear

disclosure of its nature and implications, the financial statements.
➢ Multiple Material Uncertainties Exist (Disclaimer of Opinion – NO OPINION)

The auditors may express a disclaimer of opinion (on going concern) if for example there are
multiple material uncertainties

➢ Material Uncertainty Exist but No disclosure (Qualified – Except for… or Adverse

Opinion – NOT TRUE & FAIR)

➢ GC assumption not appropriate (Adverse opinion)

5.0 Written representations

Written representations from management (can be person in charge of governance) are
provided to auditors to confirm their responsibilities for the financial statements and their
knowledge of the matters concerned.

When the auditors receive such representations, they should:

• Seek corroborative audit evidence from sources inside or outside the entity

• Evaluate whether the representations made by management appear reasonable and are
consistent with other audit evidence obtained, including other representations

• Consider whether the individuals making the representations can be expected to be well-
informed on the particular matters

5.3 Representation do not agree with other audit evidence

ISA 580.17

If written representations are inconsistent with other audit evidence, the auditor shall perform
audit procedures to attempt to resolve the matter. If the matter remains unresolved, the
auditor shall reconsider the assessment of the competence, integrity, ethical values or
diligence of management, or of its commitment to or enforcement of these, and shall
determine the effect that this may have on the reliability of representations (oral or written)
and audit evidence in general.

5.4 Actions if management refuses to provide representations

ISA 580.19

If management does not provide one or more of the requested written representations the
auditor shall:

(a) discuss the matter with management

(b) re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations and audit evidence in general; and

(c) take appropriate actions, including determining the possible effect on the opinion in the
auditor's report
CHAPTER 7: AUDIT REPORT

Misstatement – a difference between the amount, classification, presentation, or

disclosure of a reported financial statement item and the amount, classification, presentation,
or disclosure that is required for the item to be in accordance with the applicable financial
reporting framework.

A Material misstatement of the financial statements may arise in relation to

• The appropriateness of the selected accounting policies.

• The application of the selected accounting policies; or

• The appropriateness or adequacy of disclosures in the financial

➢ Pervasive’ – Pervasive effects on the financial statements are those that, in the auditor's

judgement. （到处都是 misstatement）

(a) Are not confined 不集中 to specific elements, accounts, or items of the financial
statements

(b) If so confined, represent or could represent a substantial proportion of the financial

statements, or

(c) In relation to disclosures, are fundamental to users' understanding of the financial

statements.