LECTURE NOTE STUDENT AutoRecovered

ADVANCE AUDIT OF FINANCIAL STATEMENT 2
ADVANCE AUDIT OF FINANCIAL

STATEMENT 2
DINH THI THU HA PHD, ACCA
DINH THI THU HA PHD,ACCA 1

MODULE: ADVANCED AUDIT AND ASSURANCE 2
Time:
Test: ONLINE
Syllabus
CHAPTER 1: PLANNING RISK ASSESSMENT

NON CURRENT ASSET
PROCEDURES
FINANCIAL STATEMENTS
CYCLE
DESIGN AUDIT PROCEDURES

CHAPTER 2:
CASH AND CASH
EQUIVELENTS CYCLE
CHAPTER 3:
TEST OF CONTROL (TOC)
CAPITAL ACQUISITION IMPLEMENTING
AND REPAYMENT
CYCLE
SUBSTANTIVE ANALYTICAL
CHAPTER 4:
PROCEDURES (SAP)
INVESTMENT CYCLE
TEST OF DETAIL (TOD)
CHAPTER 5: OTHER
FINANCIAL INFORMATION
FINALIZING AUDIT OPINION

CHAPTER 1: NON CURRENT ASSET
(IAS 16 PROPERTIES, PLANT AND EQUIPMENT)
RECOGNITION
CRITERIA
REVALUATION
Meet definition Costs can Probable
of PPE be that the
measured future INITIAL
reliably economic
benefits
RECOGNITION FAIR VALUE
Used Use in will flow
for production , to entity SUBSEQUENT
more
than 1
for rental, for
administrative
INITIAL COST SURPLUS DEFICIT
year maintenance COST

pủpose
Other Write off Set off
Purchased Self-constructed Write-off Capitalized comprehensive Income as SURPLUS
as expense as PPE income EXPENSE
DISCLOSURE All expense Include all Exclude

that is direct and abnormal Meet Generate
necessary to indirect cost loss Recognized as If there is a
general EXTRA
bring assets related to income in P/L If revaluation
recognition future
into working construction deficit is reserve from
criteria economic
• Depreciation method condition recognized previous
benefit
• Useful life, depreciation rate previously revaluation of
used the PPE
• Total depreciation allocated
for the period Cost of assets
• Net book value at beginning Reduce incidental
and end of period income from pre-
Pre-production costs production testing
Example Dr Non-current Dr Expense
e Trade discount or rebates Cash discount is
assets
Cr Revaluation Cr NCA
ignored, it is
reserve
income items
Installation costs
Dr Revaluation
reserve
Cr Retained
earing

EXAMPLE 1: REVALUATION SURPLUS
EXAMPLE 2: REVALUATION DECREASE
EXAMPLE 3: REVALUATION AND DEPRECIATION
REVIEW QUESTION
Question 1

Question 2
Question 3

CHAPTER 1: IAS 38 INTANGIBLE NON-CURRENT ASSETS
WHAT TYPES AMORTIZATION

? System allocation of the depreciation
amount of an intangible asset over its
R&D COST useful life
Non-current asset with
no physical substance
EXPEN
SE in the RESEARCH DEVELOPMENT NCA with finite useful life NCA with indefinite
period useful life
Future economic Cost can
benefit be reliably
measured
Original and planned Application
investigation undertaken of research Amortized over its useful life No Amortization
with the prospect of finding to
gaining new scientific plan or
knowledge and design
understanding Impairment review Impairment review
- Revenue from the annually
sale of products,
services or Recognition
processes OR criteria
- Cost savings or
other benefits from
use of an asset
MIRATE
Example: not IA Existence of Intentio Available Ability Technica Expense

the market n to resource to use or l measure
+ Customer list or use complete to sell the feasibilit reliably
internally of and use complete the asset y of
+ Mast head the asset or sell develop complete
the asset
+…
Example:
+Pilot plant
+ Working version of new machine
+ Specialised tooling
IAS 38 INTANGIBLE ASSETS
MEASUREMENT
DISPOSAL DISCLOSURE
COST MODEL REVALUATION MODEL Gain or loss >> P/L • Method of

amortization
Cost less any accumulated REVALUED AMOUNT being its FV at the • Useful life
amortization and any date of the revaluation less any • Gross carrying
accumulated impairment subsequent accumulated amortization amount
losses and any subsequent accumulated • Accumulated
impairment losses, depreciation
• Accumulated
Only allowed IF ACTIVE MARKET exists impairment loss
• Carrying amount
of internal-
MEET all the following conditions: generated intangible
• The items traded within the market asset
are homogeneous • Reconciliation of
• Willing buyers and sellers can the carrying amount
normally be found at any time, and
• Prices are available to the public
TREATMENT
SIMILAR TO IAS 16

Question 4
Question 5
Question 6

IVESTMENT
PROPERTY
MEASUREMENT
DEFINITION RECOGNITION INITIAL AFTER
TRANSFER
MEASUREMENT RECOGNITION
At cost (directly attribute MODEL 1: FAIR VALUE When: Change in use +

Property (land or 1. Probable future
expenditure and transactions MODEL Evidence of the change in
building or both) economic benefit
costs) >> similar to IAS 16 1. Change in FV report in use
Held to earn rentals or 2. Cost measured reliably
P&L IAS 40 >> IAS
for capital appreciation 2. Not Depreciation 16/IAS02/IFRS 16
or both MODEL 2: COST 1. FV at date of change of
MODEL use
Similar to IAS 16 2. Apply IAS 16, IAS 2,
Not Investment
IFRS 16 = date of change of
Property
use
- Held for sale
IAS 16/IFRS 16 >> IAS 40
- Owner occupied
property
- Property leased to
another under financial
lease

ADVANCE AUDIT OF FINANCIAL STATEMENT 2 WHAT? HOW?
(INFORMATION) (PROCEDURES)
Understanding the entity Inquiries

Risk assessment and its environment Observation
procedures
Understanding the internal
Audit planning
control system COSO

Risk of material
misstatement Inspection
Design audit procedures Changes in NCA Preliminary analytical

procedures
NON CURRENT ASSET

Test of control WHERE? (SOURCE OF INFORMATION)
Audit implementing
- Regulations about ICs (addition and disposals)

Substantive analytical
- FSs
procedure
- Documents: PO, I, C, NCA register…
Test of detail - Nominal ledger relevant to NCA:
…
Audit objective
Audit finalizing
Adjustment
Recommendations DINH THI THU HA PHD,ACCA 10

UNDERSTANDING THE ENTITY AND ITS ENVIROMENT
- Type of PPE
- Characteristics of PPE
- Technology
- Supplier
- Accounting treatment
…
CHANGES IN NCA
- Comparison of PPE in the current year to the prior year
Question 7
You are an audit supervisor of Moon & Co and are currently planning the audit of
your client, Aquamarine Co (Aquamarine) which manufactures elevators. Its year
end is 31 July 2016 and the forecast profit before tax is $15·2 million.
The company undertakes continuous production in its factory, therefore at the year-
end it is anticipated that work in progress will be approximately $950,000. In order
to improve the manufacturing process, Aquamarine placed an order in April for
$720,000 of new plant and machinery; one third of this order was received in May
with the remainder expected to be delivered by the supplier in late July or early
August.
At the beginning of the year, Aquamarine purchased a patent for $1·3 million which
gives them the exclusive right to manufacture specialised elevator equipment for
five years. In order to finance this purchase, Aquamarine borrowed $1·2 million
from the bank which is repayable over five years.

The company has a policy of revaluing land and buildings and the finance director
has announced that all land and buildings will be revalued at the year end. During a
review of the management accounts for the month of May 2016, you have noticed
that receivables have increased significantly on the previous year end and against
May 2015.
Required:(b) Describe SIX audit risks, and explain the auditor’s response to
each risk, in planning the audit of Aquamarine Co. (12 marks)
Question 8
You are the manager responsible for the audit of Sun Co, a listed company, which
operates a chain of supermarkets, with a year ending 31 December 20X9.
The following information was provided during a recent meeting held with the finance director of Sun
Notes from meeting held 29 November 20X9

The property market has slumped this year, and significant losses were made on the sale of some plots
of land which were originally acquired for development potential. The decision to sell the land was made
as it is becoming increasingly difficult for the company to receive planning permission to build
supermarkets on the land. Land is recognised at cost in the statement of financial position.
Sun Co has 35 warehouses which store non-perishable items of inventory. Due to new regulation,
each warehouse is required to undergo a major health and safety inspection every three years. All
warehouses were inspected in January 20X9, at a cost of $25,000 for each inspection.
Sun Co. All of the matters outlined in the notes below are potentially material to the financial
statements.
Required
Using the specific information provided in respect of Sun Co:
(a) Assess the risks of material misstatement to be addressed when planning the final audit for the year
ending 31 December 20X9, producing your answer in the form of briefing notes to be used at the audit

planning meeting.
UNDESTANDING INTERNAL CONTROL
Figure 1.1

CHAPTER 1: NON CURRENT ASSET
FIGURE 1.1: INTERNAL CONTROL OVER THE NON-CURRENT ASSETS

NON-CURRENT ASSETS – ACQUISITION
User department Management Purchasing Receiving Account payable Fixed assets General
ledger
Reject request Receive invoice

Receive and from vendor
inspect fixed
Select
assets
vendor
Prepare Update fixed Update

purchase Need Reconcil assets subsidiary general
Reject Documen
requisition justified Accept? e with ledger ledger
fixed ts match
? vendor
Prepare purchase assets
order and send
to vendor
Prepare
depreciation
schedule
Authorize Update accounts
purchase Prepare payable records
requisition receiving
records
Non current Purchase day

asset register book/Cash
book

KEY CONTROLS RELATED TO NON-CURRENT ASSETS
• The NON-CURRENT ASSET REGISTER enables assets to be identified,

and COMPARISONS with the general ledger, non-current assets subsidiary
ledger and the assets themselves provide evidence that the assets are
completely recorded.
• The procedures over acquisitions and disposals are another significant
controls. It should ensure acquisitions are PROPERLY AUTHORIZED,
disposals are authorized and accounted for.
• Non-current assets are maintained properly.
• Depreciation is REVIEWED every year.
• …
TEST OF CONTROL
+ INQUIRY management about control activities relating to NCA (such as:

authorization, segregation of duties, physical control, etc).
+ Checking the SIGNALS OF CONTROLLING on documents (e.g.

Approval, signature on procurement requisition/ requisition plan, order, etc) and
checking the control activities;
+ OBSERVE the actual addition process of tangible non-current asset from

starting to completing.
+ Inquiry management to check annual review non-current assets.
+ REVIEW the work of expert relating to revaluation of tangible non-current

assets (main aspects: objectivity/independence; capability and qualification of
expert;

+ Communicate with those charge with governance (TCWG)/ board of manager how
management handling the difference or abnormal of depreciation expenditures in the
period, etc.
Question 9
Banana International Co (Banana) 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 Banana’s internal control in preparation for
the interim audit.
In the past six months Banana 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 Banana International Co:

(i) Identify and explain TWO deficiencies;
(ii) Describe a test of control Apple & Co would perform to assess if each
of these controls is operating effectively.
(b) Describe substantive procedures you should perform at the year end to confirm
each of the following for plant and equipment:
(i) Addition
(ii) Disposals

KEY ASSERTION RELATION TO NON CURRENT ASSET

Existence Recorded assets represent those PHYSICALLY exist and in
use at the year end
Completeness ALL additions and disposals that occurred in the year have
been RECORDED
Balances represent assets in use at the year end
Rights and The entity has RIGHTS to the assets purchased and those
obligations recorded at the year end
Valuation Non-current assets are CORRECTLY stated at cost less

accumulated depreciation
Additions and disposals are correctly recorded
Any assets that have impairment will have to be written down
Presentation Disclosures relating to cost, additions and disposals,

and depreciation policies, useful lives are adequate and IN
disclosure ACCORDANCE WITH accounting standards
Question 10
Which of the following assertions are relevant to the auditor of tangible non current asset?
(1) Existence
(2) Occurrence
(3) Classification
(4) Presentation
A. 1 Only
B. 1,3 and 4
C. 2,3 and 4
D. 1,2,3 and 4
SUBSTANTIVE ANALYTICAL PROCEDURES (SAP)
et 19-3 Substantive Analytical Procedures for Equipment
Substantive Analytical Procedure Possible Misstatement
Compare depreciation expense divided by gross Misstatement in depreciation expense and accumulated
equipment cost with previous years. depreciation
Compare accumulated depreciation divided by Misstatement in accumulated depreciation.

gross equipment cost with previous years.
Compare monthly or annual repairs and maintenance, Expensing amounts that should be capitalized.
supplies expense, small tools expense, and similar
accounts with previous years.
Compare gross manufacturing cost divided by Idle equipment or equipment that was disposed of but not
some measure of production with previous written off.
years.
TEST OF DETAIL
Tests of detail
Transactions Disclosures
Account balance
Disposals Self-constructed
Additions
assets
AUDIT PROCEDURES FOR AUDITING ACCOUNT BALANCE



ASSESSING THE RESULT OF AUDITING NON-CURRENT ASSETS
(1) The conclusion about audit objectives

(2) Request the adjusting entries (if any)
(3) Suggest recommendations to improve internal control system
(4) Problems need to continue to monitor in the next audit (if any)
(5) Opinion of the audited entity’s board of director
Question 11
Which of the following procedures will provide appropriate audit evidence in

respect of the completeness of non-current asset?
a. For a sample of assets selected by physical inspection, agree that they are
listed on the NCA register
b. For a sample of non-current assets listed on the NCA register, physically
inspect the asset
c. For a sample of assets on the asset register, recalculate the net book values
in accordance with the entity’s accounting policy
d. For a sample of assets on the assets register, inspect relevant purchase
invoices or deeds

Question 12
You are the manager responsible for the audit of Fish Co. The company's principal
activity is wholesaling frozen fish. The draft consolidated financial statements for the year
ended 31 March 20X8 show revenue of $67.0 million (20X7 – $62.3 million), profit before
taxation of $11.9 million (20X7 – $14.2 million) and total assets of $48.0 million (20X7 –
$36.4 million).
In early 20X8 a chemical leakage from refrigeration units owned by Fish caused
contamination of some of its property. Fish has incurred $0.3 million in clean-up costs, $0.6
million in modernisation of the units to prevent future leakage and a $30,000 fine to a regulatory
agency. Apart from the fine, which has been expensed, these costs have been capitalised as
improvements. (7 marks)
Required
In undertaking your review of the audit working papers and financial statements of Fish
Co for the year ended 31 March 20X8, for each of the above issues:
(i) Comment on the matters that you should consider; and
- The clean-up cost
(ii) State the audit evidence that you should expect to find.

CHAPTER 2: CASH AND CASH EQUIVALENT CYCLE

Relationship between cash and the various transaction cycles
Capital Cycle Purchase cycle

Cash account
Account payable
Dividend payable
Payment
Payment of
dividends
Payroll cycle
Capital shares
Salaries, bonus,
Issue shares
commissions
Capital premium Payment
Issue shares
Deductions
Sales cycle
Payment
Sales Accrued payroll tax

expense
Cash sales
Payment
Cash discount
Cash discount
taken
Receivables
Cash receipts

ACCOUNTS:
+ Cash
+ Cash equivalent

WHAT? HOW?
Nature of business: Inquiries

Risk assessment
procedures
Understanding the internal Observation
Audit planning
control system over C-CE
CASH AND CASH EQUIVELENT CYCLES

Risk of material cycle
Design audit procedures Changes in Cash and Cash Preliminary analytical

equivalent procedures
Test of control
Audit implementing
Substantive analytical
procedure
TOD
Audit objective
Finalizinga
Adjustment DINH THI THU HA PHD,ACCA 26
Recommendations
NATURE OF BUSINESS
- Cash flow characteristics of the business
- Cash in hand vs Cash in bank
- Accounting treatment for cash and cash equivalent
CHANGES IN CASH AND CASH EQUIVALENT
- Compare balance on the bank reconciliation, deposit in transit, outstanding
checks and other reconciling items with the prior year reconciliation.
-
UNDERSTANDING INTERNAL CONTROL OVER CASH
+ STEP IN CASH AND CASH EQUIVALENT CYCLE
Stage 1 Request for payment
Stage 2 Payment authorization
Stage 3 Payment made Receipt
Stage 4 Payment and receipt

recorded
CONTROLS OVER CASH CYCLE VAND TEST OF CONTROL
+ Common controls:
- Separation of duties: People responsible for handling cash should not be

responsible for maintaining cash records.
- Timely deposit of cheques preferably on a daily basis

- Payments made using non cash means: Cheques or electronic funds transfer
(EFT)
- Periodic bank reconciliations prepared by an independent accounting staff
- Authorisation: Cash receipt journal vouchers prepared from cheque listing an
pay-in slips and approved by senior accounting staff before input into cash
book or only authorized staff can make electronic cash payments and issue
cheques.
- Performance review: independent review of bank reconciliation
+ Test Of Control
a. CASH DISBURMENT
Control Controls Tests of controls

objectives
• To ensure that • Separate responsibilities • OBSERVE the processing of

only VALID for the recording, payment, cash and review the entity's
CASH and reconciliation of cash. policies to evaluate whether
PAYMENTS are proper SEGREGATION OF
• Supplier statements are
made. DUTIES is operating.
independently reviewed
and reconciled to trade • REVIEW procedures for
payable records. reconciling supplier statements.
• Monthly bank • Review reconciliations to
reconciliations prepared confirm whether undertaken
and reviewed. and reviewed.
• Only authorized staff can • Review delegated list of
make electronic cash authority for cash payments.
payments and issue
• INSPECT relevant
cheques.
documentation for evidence of
• Electronic cash payments approval by senior personnel.
1 PROCEDURE
and cheques prepared only

after all source documents

• Have been independently

approved.
• To ensure that • Separate responsibilities • OBSERVE the processing of

ALL cash for the recording, handling, cash and review the entity's
payments that and reconciliation of cash. policies to evaluate whether
occurred are proper SEGREGATION OF
RECORDED. DUTIES is operating.
• Supplier statements are •
independently reviewed
• Review reconciliations to
and reconciled to trade
confirm whether undertaken
payable records.
and independently reviewed.
• Monthly bank
• Inspect a sample of listings for
reconciliations prepared
evidence of senior review.
and reviewed.
• Review a sample of
• Review of cash payments
reconciliations for evidence that
by the manager before
they have been done.
release.
• Examine evidence of the use of
• Daily cash payments
pre-numbered cheques.
reconciled to posting to
payable accounts.
• Use of pre-numbered
cheques.

• To ensure that • RECONCILIATION of • REVIEW

cash payments are daily payments reports to RECONCILIATION, to
recorded correctly electronic cash payment ensure performed, reviewed
in the ledger. transfers and cheques and any discrepancies followed
issued. up on a timely basis.
• Supplier statements •
reconciled to payable
• Review bank reconciliation for
accounts regularly.
evidence it was done and
• Monthly bank independently reviewed. Re-
reconciliations of bank perform a sample of bank
statements to the ledger reconciliations.
account.
• To ensure that • Supplier statements • Review reconciliations for a
cash payments are reconciled to payable sample of accounts.
posted to the accounts regularly.
• Review postings from journal
correct payable
• Agreement of monthly to general ledger.
accounts and the
cash payments journal to
general ledger.
general ledger posting.
• Payable accounts • Review reconciliation, to
reconciled to the general ensure performed, reviewed
ledger control account. and any discrepancies followed
up on a timely basis.
• To ensure that • Reconciliation of • Review reconciliation and
cash payments are electronic funds transfers check whether it is carried out
recorded in the and cheques issued with regularly.
correct accounting postings to cash payments
period. journal and payable
accounts.
• To ensure that • Chart of accounts. • Review cash payments journal
cash payments are to assess the reasonableness of
• Independent approval and
charged to the charging of accounts.
review of general ledger
correct accounts.
account assignment. • Review assignment of the
general ledger account.

b. CASH RECEIPTS
Control Controls Tests of controls

objectives
• To ensure that all •Separate responsibilities for • Observe the processing of cash
valid CASH the recording, receipt, and and review the entity's policies
receipts are reconciliation of cash. to evaluate whether proper
RECEIVED and segregation of duties is
•Use of electronic cash
DEPOSITED. operating.
receipts transfers not
received or deposited. • Examine application controls
for ELECTRONIC CASH
• Monthly bank
RECEIPTS TRANSFER.
reconciliations performed
and independently • Review monthly bank
reviewed. reconciliations to confirm
performed and reviewed.
• Use of cash registers or
point-of-sale devices. • Observe cash sales procedures.
• Periodic inspections of cash • Enquire of managers about
sales procedures. results of inspections.
• Restrictive endorsement of • Observe mail opening,
cheques immediately on including an endorsement of
receipt. cheques.
• Mail opened by two staff •
members.
• Observe preparation of cash
• Immediate preparation of receipts' records.
cash book or list of mail
• Review documentation for
receipts.
evidence of independent
• Independent check of check.
agreement of cash/cheques
•
to be deposited at the bank
with register totals and
receipts listing.

• Independent check of
agreement of bank deposit
slip with daily cash
summary.
• To ensure that all • Separate responsibilities for • Observe the processing of cash
cash receipts are the recording, receipt, and and review the entity's policies
recorded. reconciliation of cash. to evaluate whether proper
segregation of duties is
• Use of electronic cash
operating.
receipts transfers not
received or deposited. • Examine application controls
for electronic cash receipts
• Monthly bank
transfer.
reconciliations performed
and independently • Review monthly bank
reviewed. reconciliations to confirm
performed and reviewed.
• Daily cash receipts listing
reconciled with posting to • Re- perform a sample of the
customer accounts. reconciliations.
• Review reconciliation.
• Customer statements are • Inquire management about the
prepared and sent out on a handling of customer
regular basis. statements.

• Examine a sample of
customers and note the
frequency of statements.
• To ensure that • Daily remittance report • Review reconciliations.

cash receipts are reconciled to control listing
• Review reconciliations for
recorded correct of the remittance advice.
evidence were performed and
amounts.
• Monthly bank statement independently reviewed.
performed and reviewed
independently.
• To ensure that • Daily remittance report • Review reconciliations.
cash receipts are reconciled daily with
• Review entity's procedures for
posted to correct postings to cash receipts
sending out statements.
receivables journal and customer
accounts and to accounts. • Review journal and posting to
the general ledger. the general ledger.
• Monthly customer
statements sent out. •
• Monthly cash receipts

journal agreed to general
ledger posting.
• Receivables' ledger
reconciled to control
account.
• To ensure that • Review and test reconciliation.
cash receipts are • Bank reconciliation at
recorded in the period end.
correct
accounting
period.
• To ensure that • Chart of Accounts (COA) in • Inspect any documentary
cash receipts are place and is regularly evidence of review (such as
charged to the reviewed for emails requesting an update to
correct accounts. COA as a result of review).

appropriateness and updated

• Test application controls for
where necessary.
proper codes.
• Codes in place for different
types of receipts.
ANALYTICAL PROCEDURES
+ Current ratio (Current Asset/Current Liabilities)
+ Quick ratio (CA-inventory/Current liabilities)

MAIN ASSERTIONS
- Existence: Management asserts that the cash account balance

presented in the statement of financial position exists at the reporting date.
- Completeness: Management asserts that recorded cash balances
include the effects of all transactions that have occurred.
- Valuation and allocation: Management also asserts that the cash
account balances are valued properly according to the rules of the applicable
financial reporting framework at year-end.
- Right and obligations: Management asserts that the company has the
legal title to all cash balances presented in the statement of financial position
at the reporting date.
- Presentation and disclosure: Management asserts that disclosures
relating to cash are adequate and in accordance with accounting standards and
legislation.
TEST OF DETAIL
+ FOR TRANSACTION
Audit Objectives Substantive Procedures

Occurrence ▪ Select samples of cash receipts from cash
book and trace to remittance advices, pay-in
slips, and bank statement.
▪ Select samples of cash payments from cash
book and trace to payment vouchers (with
supporting documents) and bank statements.
▪ Scan through the entries and trace all
the unusual items, like contra
items, stopped payment items and cancelled
cheques, to support documents and
authorization.
Completeness ▪ Trace a sample of remittance advices and

pay-in slip to cash receipt journal.

▪ Trace a sample of payment vouchers (with

supporting documents) to cash book.
Accuracy ▪ Agree the total of cash receipts and payments

to general
Valuation ▪ Compare a sample of remittance advices

with amount in cash receipts recorded in the
cash book.
▪ Compare a sample of (cancelled)
cheques with amounts in cash recorded in the
cash book.
Cut-off ▪ Compare the dates for recording a sample of

cash transactions with the dates of cash
deposited in bank or cheques sent.
Classification ▪ Examine a sample of cash receipts and

payments transactions for proper
classification.
+ FOR ACCOUNT BALANCE
Audit Objectives Substantive Procedures

Existence, completeness and ▪ Agree balance on bank confirmation with
valuation bank reconciliation and cash book.
▪ Trace deposits in transits, outstanding
cheques and other reconciling items to cut-off
bank statements.
Accuracy ▪ Check calculation of bank

reconciliation and agree with book balance
on cash book and general ledger.
Cut-off ▪ For cash receipts, observe cash count for the

last day of the year end and trace deposits to

cash receipts journal and cut-off banks

statement.
▪ For cash disbursement, record the last
cheque issued at the year end date and trace to
cash payments in the cash book; and trace
outstanding cheques on bank reconciliation
and investigate any cheque clearing after a
long delay.
Classification, presentation ▪ Review board of directors’ minutes, bank

and disclosure letter, loan agreement or other documents for
any restrictions on cash.
▪ Ensure bank loans and overdrafts are not offset
against positive bank balances in the financial
statements.
RISK OF MISSTATEMENTS FOR BANK RECONCILIATION

- Failing to include a check that has not cleared the bank on the outstanding
checklist, still it has been recorded in cash book
- Record cash receipt while amount received after year ended.
- Payment on note payable debited directly to the bank balance but not entered
in the cash book.
- Theft of cash
- Duplicate payment of a vendor’s invoice
- Payment to an employee for more hour than actually he work
- …
ASSESSING THE RESULT OF AUDITING CASH AND CASH

EQUIVALENT
+ The conclusion about audit objectives
+ Request the adjusting entries
+ Suggest recommendations to improve internal control system
+ Problems need to continue to monitor in the next audit

Question 1
The audit junior has been assigned to the audit of the bank and cash balances
of True Co. He has noted down the audit evidence he plans to obtain in respect of
the bank and cash balances:
1. Bank reconciliation carried out by the cashier
2. Bank confirmation report from True Co’s Bank
3. Verbal confirmation from the directors that the overdraft limit
is to be increased
4. Cash count carried out by the audit junior himself
What is the order of reliability of the audit evidence, starting with the most reliable
first?
a. 4,2,1 and 3
b. 2,1,4 and 3
c. 4, 3,2 and 1
d. 2,4,1 and 3
Question 2
The audit team has started to perform audit fieldwork on ABC Co. In order to
gain assurance over the company’s bank balance, you have asked Julie to arrange
for a bank confirmation letter to be sent to ABC’s bank. Which of the following
summarises the step to take in preparing the bank confirmation letter:
a. Written on the audit firm’s headed paper; information requested to be
sent directly to the auditor
b. Written on the client’s headed paper; information requested to be sent
directly to the auditor
c. Written on the audit firm’s headed paper; information requested to be
sent directly to the client
d. Written on the client’s headed paper; information requested to be sent
directly to the client.

Question 3: Describe the purpose of bank confirmation, bank reconciliations.

What evidence does the auditor gain from these documents?
Question 4: Describe management’s assertions for the cash process. Which
are the most important for the cash process? Explain why this is so.
Question 5: Describe the substantive tests of balances for the cash process.
Identify the assertions associated with each test.
Question 6
Cash confirmations: Consider the audit procedure referred to as "confirm cash
balances at year-end"
a. How does the auditor perform this procedure? What are the auditor’s
responsibilities for this procedure?
b. When is the procedure performed?
c. What is the purpose of external bank confirmation
d. Describe the assertions associated with a bank confirmation. Explain why they
are important to the cash process
e. Identify the accounts that may be misstated if cash confirmations are not done
f. If these accounts are misstated, how will outsiders be affected? Explain your
answer.
Question 7
The following audit procedure are concerned with the test of detaild of cash
balance:
1. Obtain a standard bank confirmation from each bank with which the
company do business
2. Compare the balance on the bank reconciliation obtained from the
client with the bank confirmation.
3. Compare the checks returned along with the cutoff bank statement
with the list of outstanding checks on the bank reconciliation.
4. List the check number, payee, and amount of all material checks not
returned with the cutoff bank statement.

5. Review minutes of the board of directors meetings, loan agreement,

and bank confirmation for interest-bearing deposits, restrictions on the
withdrawal of cash, and compensating balance agreement.
6. Compare the bank cancellation date with the date on the cancelled
check for checks dated on or shortly before the balance sheet date.
7. Trace deposits in transit on the bank reconciliations to the cuttoff bank
statement and the current year cash receipts journal.
Question 8
ABB Co (ABB) manufactures in the pharmaceutical industry. Its year-end was 31

December 20X1. You are the audit manager and the following matter has been
brought to your attention.
Bank reconciliation
During last year's audit of ABB's bank and cash, the auditor has discovered that there
were significant cut-off errors with a number of post-year-end cheques being
processed prior to the year-end to reduce payables. The finance director has assured
the audit engagement partner that this error has not occurred again this year and that
the bank reconciliation has been carefully prepared. The audit engagement partner
has asked that the bank reconciliation is comprehensively audited.
Required:
Describe substantive procedures you would perform to obtain sufficient and
appropriate audit evidence in relation to the above matter.
Question 9
For the company’s day to day payments and deposits, ROSE open a bank account at
HAYBANK. Ms Huyen, the accountant of ROSE, is in charge for preparation a bank
reconciliation on this account for the month of June 202X. The following
information is available:

- The positive balance per the cash book at 31/06/202X was 195400.
- There were 15 cheques issued during the month of June 202X from number
0098 to 0112 which was accounted for in the cash book.
- Deposits to the value of 467 000 were accounted for in the cash book of June
202X.
- No other transactions were accounted for in the cash book.
Copy of the bank statement for the month of June 202X:
HAYBANK
ACCOUNT STATEMENT
ACCOUNT HOLDER: ROSE LTD
PERIOD: 1 JUNE 202X TO 31 JUNE 202X
TRANSACTIONS DEBIT CREDIT BALANCE
Balance at 1/6/202X 0 0
Cheque number 0098 on 3/6/202X 15400 (15400)
Deposit on 8/6/202X 120800 68500
Cheque number 0102 on 10/6/202X 8900 59600
New cheque book requested 120 57980
Debit order-yearly insurance 5400 52580
Deposit on 23/6/202X 260000 264980


Bank charges 780 213000
Deposit on 30/6/202X 56500 190000
YOU ARE REQUIRED TO:
a) As the accountant of ROSE prepare the bank reconciliation for the month of
June 202X starting with the balance per the cash book.
b) As the external auditor of ROSE list the audit procedures that you will
perform on the above reconciliation.
Question 10
You are auditing general cash for the Funny Game Company for the fiscal year
ended July 31,2011. The client has not prepared the July 31 bank reconciliation.
After a brief discussion with the owner, you agree to prepare the reconciliation, with
assistance from one of Funny Game’s clerk. You obtain the following information:
General ledger Bank Statement
Beginning balance 12/31/202X $6,400 $8,378
Deposit 25,474
Cash receipts journal 26,874
Checks cleared (25,307)
Cash disbursements journal (23,171)
July bank service charge (107)
Note paid directly (6,400)
NSF check (516)
Ending balance 12/31/202X $10,103 $1,522
November 30 Bank reconciliation

Information in General ledger and Bank statement

Balance per bank $8,378
Deposits in transit 600
Outstanding checks 2,578
Balance per books 6,400
Addition information obtained is as follows:

1. Checks clearing that were outstanding on November 30 totaled $2,411
2. Checks clearing that were recorded in the July disbursements journal totaled
$21,120.
3. A check for $1,130 cleared the bank but had not been recored in the cash
disbursement journal. It was for an acquisition for inventory. Funny Game uses the
periodic-inventory method.
4. A check for $646 was charged to Funny Game but had been written on a different
company’s bank account.
5. Deposits included $600 from November and $24,875 for December.
6. The bank charged Funny Game’s account for a nonsufficient check totaling $516.
The credit manager concluded that the customer intentionally closed its account and
the owner left the city. The check was turned over to a collection agency
7. A note for $6,000, plus interest, was paid directly to the bank under an agreement
signed 4 months ago. The note payable was recorded at $6,000 on Funny Game
books.
Required:
a. Prepare a bank reconciliation that shows both the unadjusted and adjusted balance
per books.
b. Prepare all adjusting entries
c. What audit procedures would you use to verify each item in the bank
reconciliation?

d. What is the cash balance that should appear on the December 31, 202X, financial
statements?

CHAPTER 3: CAPITAL ACQUISITION AND

CHAP
REPAYMENT CYCLE
IFRS 9 FINANCIAL INSTRUMENTS
AN ENTITY CONTRACT ANOTHER ENTITY BUY

SELL
Debt instrument:
Financial liability Financial asset
Bond, loan notes,
redeemable
preference share
Held to maturity Amortized cost
Amortized cost (2)
(1)
Available for sale Fair value through Other
comprehensive income (OCI)
(2)
Equity Equity instrument: Fair value through Other

+ Ordinary share, non- comprehensive income (OCI)
redeemable preference (4)
Initial cost (3)
share
+ Right issue, bonus issue
Compound instrument: Debt component:

+ Debt component Amortized cost
+ Equity component DINH THIEquity
THU HA PHD,ACCA
component = 45
Compound – Debt
Convertible bond component
(5)


Question 1
Question 2
Question 3
Question 4
Question 5.
Question 6.
Question 7

Question 8. Information relevant to question 8 to 12
Question 9.
Question 10
Question 11.

Question12
Question 13
Laxman raises finance by issuing zero coupon bonds at par on the first day of the
current accounting period with a nominal value of $10,000. The bonds will be
redeemed after two years at a premium of $1,449. The effective rate of interest is
7%.
Question 14
Broad raises finance by issuing $20,000 6% four-year loan notes on the first day of
the current accounting period. The loan notes are issued at a discount of 10%, and
will be redeemed after three years at a premium of $1,015. The effective rate of
interest is 12%. The issue costs were $1,000.

WHAT? HOW?
New share issue Inquiries

Risk assessment Loans…
procedures
CAPITAL ACQUISITION AND REPAYMENT CYCLE

Audit planning
control system over CA-P

Risk of material cycle
Design audit procedures Changes in Loans, Equity Preliminary analytical

procedures
TOC SOURCE OF DOCUMENT:

Audit implementing
- Financial policy, regulation for issuing loan note

SAP or share..
- FS: Note payable, Equity, Notes to FS…
- General ledgers and detail account books…
TOD
- Documents: Debit/Credit note, stockholder
records, security certificates, custody of certificate,
Audit objective agreement
- Other documents: Cash inflow/outflow planning;
Finalizing
minutes of BOD…
Adjustment
Recommendations
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
- New listing on stock exchange

- Increase or Decrease in capital
- Debt or equity instrument
- ….
UNDERSTANDING ABOUT IC OVER CAPITAL ACQUISITION AND

REPAYMENT CYCLE
Selecting
Preparing Recording
Cash flow the most
for capital in
planning appropriate
raising plan accounting
plan
books
KEY CONTROLS
* Note payable
+ Proper authorization for the issue of new notes: BOD or high level management
personnel
+ Adequate controls over the repayment of principal and interest.
+ Proper documents and records

+ Periodic independent verification
* Capital stock
+ Proper authorization of transactions (Issuance, repurchase of capital stock,

declaration of dividend)
+ Proper record keeping and Segregation of Duties: Capital stock certificate record
vs Shareholder’s capital stock master file
+ Independent registrar and Stock Transfer Agent
SAP
TOD
Balance-related audit Common test of detail of Notes

objective balance procedures
Notes payable in the schedule Confirm note payable The existence objective is
exist (existence) Examine duplicate copies of NOT as important as
NOTES FOR completeness or accuracy
AUTHORIZATION
Examine corporate minutes
for loan approval
Existing notes payable are Examine notes paid after year- This objective is
included in the notes payable end to determine whether they IMPORTANT for

schedule were liabilities at the balance uncovering both errors and

(COMPLETENESS) sheet date. fraud. These three procedures
Obtain a standard BANK are done on most audits.
CONFIRMATION that Additional procedures to
includes specific reference to search for omitted liabilities
the existence of notes payable may be necessary if internal
from all banks with which controls are deficient.
client does business.
Review the BANK
RECONCILIATION for
new notes credited directly to
the bank account by the bank.
Notes payable and accrued Examine duplicate copies of In some cases, it may be
interest on schedule are notes for principal and interest necessary to calculate, using
accurate (accuracy) rate. present value techniques, the
Confirm notes payable, imputed interest rate or the
INTEREST RATES, and last principle amount of the note.
date for which interest has An example is when
been paid with holders of equipment is acquired for a
notes. note.
RECALCULATE accrued
interest
Notes payable in the schedule Examine DUE DATES on
are correctly classified duplicate copies of notes to
(Classification) determine whether all or part
of the notes are a noncurrent
liability.
Review notes to determine
whether any are related party
notes or accounts payable

Notes payable are included in Examine duplicate copies of Notes should be included as
the proper period (cut-off) notes to determine whether current period liabilities when
notes were dated on or before dated on or before the balance
the balance sheet date sheet date
The company has an Examine notes to determine
obligation to pay the notes whether the company has
payable (obligation) obligations for payment
Notes payable in the notes Foot the notes payable list for These are often done on a 100
payable schedule agree with notes payable and accrued PERCENT BASIS because
the client’s notes payable interest of the small population size or
register or master file, and the TRACE the totals to the done by using audit software
total is correctly added and general ledger when there is a large volume
agrees with the general ledger Trace the individual notes of notes
payable to the master file
ASSESSING THE RESULT OF CAPITAL ACQUISITION AND
REPAYMENT CYCLE
+ Summarize the audit results of the cycle
+ Conclude whether the audit objective has been achieved or not.

+ Issue should be continuously monitored in the next audit
+ Make recommendations to the company on internal controls over equity and loans
REVIEW QUESTIONS
Question 1
Why is it more important to search for unrecorded note payable than for unrecorded
note receivable? Suggest audit procedures that the auditor can use to uncover note
payable.
Question 2
What are the major internal controls over owner’s equity?

Question 3
What kind of information can be confirmed with a transfer agent?
Question 4
Forever Alone (FA) company sells handmade jewelry to customer. This

product is largely sold through retail outlets but approximately 27% of FA’s revenue
is generated through sale made on the company website. A new listing on Singapore
stock exchange is planned for the next year. For this reason, management would like
the audit completed by 31 December 202X
A loan of $ 40 million was taken out on 1 March 202X to fund upgrading
outlets in 202X. The loan carries an annual interest rate of 6%, with interest
payments made annually in arrears. The loan will be repaid in 5 years at a premium
of $5 million. The accountant recognizes it as trade payable and explain that it is a
liability for bank.
Required:
a. Evaluate the risk of material misstatement to be considered in the audit
planning of FA company.
b. Recommend the principle audit procedures to be performed in respect of
the loan.
Question 5
1. You are the auditor responsible for the audit of Batman, a listed company,
specialize in food and drinks production.
(a) Share issue
In January 202X, the company's board of directors decided to issue more shares
to raise capital to build a new factory in Thai Nguyen with a par value of $10 per
share. Market investors have high expectations for this development of the company,

so the share price has increased to $12 per share. All cash received is record in paid-
in capital (common stock).
(b) Government Grant

The company received a grant of $25 million on 1 April 202X in relation to
redevelopment of its main manufacturing site. The government is providing grants
to companies for capital expenditure on environmentally friendly asset. The
accountant credit on capital account and spent $20million of the amount received on
solar panels which generate electricity, and intends to spend the remaining $5million
on upgrading its production and packing lines.
Required
(a) Comment on the matters to be considered. And
(b) How does the auditor find out the share issues described above?
Question 6
The ending general ledger balance of $186,000 in notes payable for the
IloveU is made up of 20 notes to eight different payees. The notes vary in duration
anywhere from 30 days to 2 years, and in amounts from $1,000 to $10,000. In
some cases, the notes were issued for cash loans; in other cases, the notes were
issued directly to vendors for the acquisition of inventory or equipment. The use of
relatively short-term financing is necessary because all existing properties are
pledged for mortgages. Nevertheless, there is still a serious cash shortage.
Record-keeping procedures for notes payable are not good, considering the large
number of loan transactions. There is no notes payable master file or independent
verification of ending balances; however, the notes payable records are maintained
by a secretary who does not have access to cash.

The audit has been done by the same audit firm for several years. In the current
year, the following procedures were performed to verify notes payable:
1. Obtain a list of notes payable from the client, foot the notes payable balances on
the list, and trace the total to the general ledger.
2. Examine duplicate copies of notes for all outstanding notes included on the
listing. Compare the name of the lender, amount, and due date on the duplicate
copy with the list.
3. Obtain a confirmation from lenders for all listed notes payable. The
confirmation should include the due date of the loan, the amount, and interest
payable at the balance sheet date.
4. Recompute accrued interest on the list for all notes. The information for
determining the correct accrued interest is to be obtained from the duplicate copy
of the note. Foot the accrued interest amounts and trace the balance to the general
ledger.
a. What should be the emphasis in the verification of notes payable in this
situation? Explain.
b. State the purpose of each of the four audit procedures listed.
c. Evaluate whether each of the four audit procedures was necessary.
d. List other audit procedures that should be performed in the audit of notes
payable in these circumstances.
Question 7
Items 1 through 6 are common questions found in internal control

questionnaires used by auditors to obtain an understanding of internal control for
owners’ equity. In using the questionnaire for a client, a “yes” response indicates a
possible internal control, whereas a “no” indicates a potential deficiency.

1. Does the company use the services of an independent registrar or transfer agent?
2. If an independent registrar and transfer agent are not used:
(a) Are unissued certificates properly controlled?
(b) Are cancelled certificates mutilated to prevent their reuse?
3. Are common stock master files and stock certificate books periodically
reconciled with the general ledger by an independent person?
4. Is an independent transfer agent used for disbursing dividends? If not, is an
imprest dividend account maintained?
5. Are issues and retirements of stock authorized by the board of directors?
6. Are all entries in the owners’ equity accounts authorized at the proper level in
the organization?
a. For each of the preceding questions, state the purpose of the control.
b. For each of the preceding questions, identify the type of potential financial
statement misstatements if the control is not in effect.
c. For each of the potential misstatements in part b, list an audit procedure that the
auditor can use to determine whether a material misstatement exists.
Question 8
You are engaged in the audit of a corporation whose records have not
previously been audited by you. The corporation has both an independent transfer
agent and a registrar for its capital stock. The transfer agent maintains the record of
stockholders and the registrar checks that there is no overissue of stock. Signatures
of both are required to validate certificates.
It has been proposed that confirmations be obtained from both the transfer
agent and the registrar as to the stock outstanding at the balance sheet date. If such
confirmations agree with the books, no additional work is to be performed as to

capital stock.
If you agree that obtaining the confirmations as suggested will be sufficient in this
case, give the justification for your position. If you do not agree, state specifically
all additional steps you would take and explain your reasons for taking them.

CHAPTER 5 INVESTMENT CYCLE
IFRS 9 FINANCIAL INSTRUMENTS
AN ENTITY CONTRACT ANOTHER ENTITY BUY

SELL
Debt instrument:
Financial liability Financial asset
Bond, loan notes,
redeemable
preference share
Held to maturity Amortized cost
Amortized cost (2)
(1)
Available for sale Fair value through Other
comprehensive income (OCI)
(2)
Equity Equity instrument: Fair value through Other

+ Ordinary share, non- comprehensive income (OCI)
redeemable preference (4)
Initial cost (3)
share
+ Right issue, bonus issue
Compound instrument: Debt component:

+ Debt component Amortized cost
+ Equity component DINH THI THU=HA PHD,ACCA
Equity component 62
Compound – Debt
Convertible bond component
(5)
Criteria Financial assets Financial liabilities

Initial Fair value of the consideration Fair value of the consideration
recognition given. received.
Measurement - Amortized cost, or - Fair value through profit or
- Fair value through other loss (FVTPL) if it is held for
comprehensive income trading, or upon initial
(FVTOCI), or recognition at FVTPL, or
- Fair value through profit or - Amortized cost.
loss (FVTPL).
Disclosure - The significance of the financial instrument, and
- The nature and extent of risk arising from the financial
instruments.
Presentation - Interest, dividends, losses, and gains relating to a financial
instrument or a component that is a financial liability shall be
recognized in profit or loss.
- A financial asset and a financial liability shall be offset, and the
net amount presented in the SOFP according to certain condition.
ACCOUNTS

Accounting method for investments
n estments
otin po er
ost
ontro po er
accountin
met od and
e uit
accountin
i nificant
met od
nf uence
ost
ot si nificant
accountin
inf uence
met od
Question 1
On 1 January 20X1 ABC Co purchased a debt instrument for its fair value of $1,000.
The debt instrument is due to mature on 31 December 20X5. The instrument has a
principal amount of $1,250 and the instrument carries fixed interest at 4.72% that is
paid annually. The effective rate of interest is 10%.
How should ABC Co account for the debt instrument over its five-year term?
Question 2
In February 20X8 a company purchased 20,000 $1 listed equity shares at a price of

$4 per share.
Transaction costs were $2,000. At the year end of 31 December 20X8, these shares
were trading at $5.50.
A dividend of 20c per share was received on 30 September 20X8.

Show the financial statement extracts at 31 December 20X8 relating to this

investment on the basis that:
(a) The shares were bought for trading (conditions for FVTOCI have not been
met)>> FVTPL
(b) Conditions for FVTOCI have been met
Question 3
Question 4
Question 5
Question 6

Question 7
Question 8

Question 9

WHAT? HOW?
Nature of business: Inquiries

Risk assessment
procedures
Audit planning
control system over

Risk of material Investment cycle
INVESTMENT CYCLES
Design audit procedures Changes in Investment Preliminary analytical
procedures
Test of control WHERE?

Audit implementing
- Nominal ledgers and detail investment accounts books,

securities certificate book; sales journals, purchase journals,
Substantive analytical payroll journals…
- I, CN, DB, securities count, stockholder records, security
procedure
certificates, custody of certificates and agreements, …
- Bank reconciliation, investors statement reconciliations;
TOD loan/ market security agreements; investments portfolio;
marketable security registration statements, …
- Client’s IC policies: regulations of Financial Institutions and
Public Securities Market, approval of investing documents, …
Audit objective - Other documents: management’s judgement/ assumption
about FV or impairment of FA or FL, collateral documents,
Finalizing
cash inflows or outflows planning; capital budget plans;

Adjustment financing and investing plans; investor’s business plans;
of BOD/
minutesDINH finance
THI THUcommittee
HA PHD,ACCA meetings…68
Recommendations
BUSINESS FUNCTION
KEY CONTROLS OF IC
+ Adequate Separation of Duties
+ Proper Authorization
+ Adequate documents and records
+ Prenumbered documents and internal verification procedures

TOC
- Observations the client’s performance.
- Make inquiries the accountant how to account for types of investment; how to
recognize, measure, present and disclosure the investments.
- Make inquiries management about the need for proper investment accounting

estimates/ assumption; how to prepare estimates; what data are used and who
reviews and approves the estimates in the period.
- Inspect investment documents supporting controls to gain audit evidence that
internal controls have operated properly, e.g., verifying that an acquisition
transaction has been authorized appropriately.
- Reperform control procedures, e.g., reconciliation of bank accounts to ensure
they were correctly performed by the entity.
- Inspection of documents, primarily looking for proper authorizations, and a
walkthrough of controls over the determination of the fair value of assets should be
performed.
- Review minutes of the board of directors’ meetings, finance committee meetings, or
other appropriate committee meetings for the authorization of significant investment
transactions.
TOD
Table 4.1: Specific assertions in the investment cycle
Assertions Content
Occurrence Investment transactions and events that have been

recorded have occurred and pertain to the entity. Alternative
way is that investments are not overstated.
Assertions
Completeness Investment transactions that should have been
about classes
recorded and disclosed have not been omitted.
of investment
transactions Accuracy and valuation Amount and other data relating to
and events for recorded investment transactions have been recorded and valued
the period appropriately, and related disclosures have been appropriately
measured and described.

Cutoff Investment transactions are recorded in the correct

accounting period.
Classification Investment transactions recorded in the

appropriate accounts, amount.1
Presentation Investment transactions and events are clearly

described, and related disclosures are relevant and
understandable with the applicable financial reporting
framework. 2
Existence: Items in investment account exit.
Rights and obligations The entity holds or controls the rights to

investment assets and investment liabilities are the obligations
of the entity.
Assertions
about Valuation and allocations Investments are included in the FSs
investment at appropriate amounts and any resulting valuation adjustments
account are properly recorded.
balances at the Completeness All investment activities have been recorded.

period-end
Presentation and disclosure Investment accounts are accurately
described and classified as current or noncurrent and as trading,
available for sale, or held to maturity. Hedging term are properly
disclosed in footnote.
1
Short term investments include all securities that have already market, and that management intends to convert to
cash in a short period of time. They generally are classified as a current asset. Long term investments are held for
either long term capital or to influence or control another company and are classified as a noncurrent asset.
2
The disclosures of investments in the investor’s separate financial statements including a) an appropriate listing and
description of investment; and (b) the methods used to account for such investments.

Occurrence and rights and obligations: disclosed events,

transactions and other matters have occurred and pertain to the
entity.
Completeness: all investment disclosures that should have been

Assertions included in the financial statements have been included.
about
Classification and understandability: investment information is
presentation
appropriately presented and described, and disclosures are clearly
and disclosure
expressed.
Accuracy and valuation: investment and other information are

disclosed fairly and at appropriate amounts.
Table 4.2: Substantive procedures for investment transactions, balances

and disclosures
Assertions Audit procedures
- Reviewing reconciliation the investments in marketable

securities in the ledger and count of securities certificates to
Occurrence/
confirm that the investments occur in the period.
Existence
- Inspection securities checklists including a record of the name
of the company represented by the certificate, the interest rate for
bonds, the dividend rate for preferred stocks, the due date for
bonds, the serial numbers on the certificates, the face value of
bonds, the number of stock shares or face amount of bonds and
notes on the name of the owner shown on the face of the
certificate or on the endorsements on the back.

- External confirmation of trustees/ brokers/ investees to assure

the existence of investments and make physical inspection
investment assets or securities by the auditors (for investments
held by the client); or confirmation of the issuer/or holder
investments.
- Vouch new purchases and disposals of investments in the period

to supporting documents.
Rights and Examine related documents to determine the origin of investments

obligations in the period and inquire management about any restrictions
placed on investments (if have).
Completeness - Inspection of source documents and tracing to investments on

the financial statements.
- Trace the amounts of investment sales to gain or loss accounts,

and the amounts of sales prices and proceeds should be vouched
to the brokers’ statements and the cash receipts journal.
- Obtain an analysis in the securities portfolio separated by

classification type: trading (if applicable), held-to-maturity, or
available for sale; and trace the opening balances to the adjusted
prior-year working trial balance and the ending balances to the
current-year working trial balance; Review any reconciliation to
the general ledger and investigate any unusual reconciling items.
- Reviewing master netting arrangements to identify unrecorded

financial securities or investments in other entities.

Accuracy - Reconcile the investments beginning balance in the schedule to

the previous year audited balance.
- Request the schedule of all investments from the client and

verify the arithmetic accuracy of the schedule by footing and
cross-footing.
- Computation the cost of investments including inspection of

documentation of the purchase price, confirmation with the issuer
or holder, and testing discount or premium amortization (for
initial recognition).
- Recalculate market values and determine whether investments

should be written down in value. Any difference could indicate a
cut-off error, misclassification, defalcation, or failure to record a
dividend receivable.
- Recalculate investment income based on balances, rates, and

investigate significant differences between the calculated and
recorded amounts; determine (i) whether there are dividends or
interest that should be accrued and (ii) whether amortization of
discounts or premiums on bonds should be recorded.
- Analyze the rates of return on major classes of securities and

compare with those of prior periods, budgets, or other
expectations and obtain explanations for any unusual variations.
Valuation In order to determine that investments are valued in accordance

with appropriate accounting policy, auditor ordinarily review the
entity's overall investment policies and strategies, including
procedures for classifying securities because of classification

impact on the valuation methodology used to value securities.
Also, auditor should determine whether there have been sales or

transfers from and to any of the valuation categories during the
period or subsequent to year-end through the report date which
have been accounted for in accordance with appropriate
accounting policy.
- For investments accounted for using the cost method, compare

the investment and, if applicable, related earnings balances with
prior period amounts or other expectations.
- For investments accounted for using the equity method, review

the latest financial statements of the investee to evaluate the
reasonableness of the investment carrying value; determine if
there has been any other-than-temporary decline in value of the
investment.
- Observe market-based values and make assumptions that would

have been used by the marketplace.
- Recalculate amounts of judgment and estimates fair market

value of assets and liabilities.
- Vouch the investment balances to the actual market value at

year-end; determine whether gains or losses, because of changes
in market value, have been properly recorded.
- Measure of financial assets at fair value and subsequent

measurement is at amortized cost, fair value through other
comprehensive income, or fair value through profit or loss.

- Test how management made the accounting estimate and the

data used. Check that fair value is arrived at in accordance with
fair value - financial reporting standard.
- Develop a point estimate and evaluate the management’s point

estimate of the fair value of investments.
- Auditors should determine accounting method was used and

judge market valuation of securities is required for securities
classified in trading portfolios and available-for-sale portfolios.
- Review significant investment transactions after the balance-

sheet date for this kind of evidence about value impairment.
Auditor should consider the following among potential
indications of impairment including: significant financial
difficulty of the issuer; a probability that the investee will enter
bankruptcy or other financial reorganization; a decrease in
estimated future cash flows; a late decrease in the value of the
investments for a significant period of time; and national or local
economic conditions that correlate with defaults on the assets in
the group.
Classification - Perform periodic reconciliation of securities certificates in a

portfolio with the amounts and descriptions recorded in the
accounts.
- Inspection the classification of marketable securities as trading

securities, net income includes unrealized gains, of securities
from non-current to current.

Cut-off - Examine the investment transactions around year-end to ensure

all investments have been recorded in the correct accounting
period.
- Review general ledger activity for purchases and sales of
investments recorded around year-end for proper testing cut off.
- Inspecting investments supporting documentation for

subsequent realization or settlement after the end of the reporting
period.
- Evaluate whether the disclosures of investments are in

conformity with financial reporting standards. These additional
disclosure requirements increase the risk for assets and liabilities
Disclosures
measured at fair value.
- Inspection the disclosure of financial instruments satisfying fair

value measurement. The two main categories of disclosures
required by financial reporting standard are (i) information about
the significance of financial instruments and (ii) information
about the nature and extent of risk arising from financial
instruments.
ASSESSING THE RESULT OF AUDITING INVESTMENT CYCLE

a. Recommendations for adjustment individual entries (if any) or additional
explanations, clearly stating the reason for the adjustment and the amount.
b. Evaluating the effect of misstatements
Evaluating the effect of identified misstatements on the audit of investment
cycle and the effect of uncorrected misstatements, if any.
Aggregating Identified Misstatements

Significant findings and issues: The final step in the evaluation process is to
record all the significant findings or issues in completion document.
c. Conclusion on audit objectives: The auditor gives conclusions about the

audit objectives of the investment cycle.
d. Suggestions to improve the internal control weaknesses and deficiencies in
the investment cycle.
REVIEW QUESTIONS
I. Theory questions
Question 10
Define the overall and specific audit objectives in the investment cycle.
Question 11
Describe the three board objectives management has when designing effective
internal control for investment cycle.
Question 12
You are the manager responsible for the new audit client named Green Ltd, a
handicraft manufacturing company with a year ended 31 December 20X0. Some
issues are identified in the planning phase as follows:
- Green Ltd made its first acquisition by purchasing 100% of the share capital of
Yellow Ltd – an old famous company specializing in decoration products serving for
foreign markets on 1 February 20X0. There is a change in Green’s structure due to
the acquisition of Yellow Ltd. To help finance the acquisition, Green issued loan
stock, raising cash of £80 million. The loan has a four-year term and will be repaid
at a premium of £20 million. 5% interest is payable annually in arrears.
- Green Ltd disposed of its wholly owned subsidiary, White Ltd, for proceeds of
£ 60 million and a profit of a disposal of £ 6 million.

- On 1 January 20X1, a new IT system was introduced to Green Ltd with the aim of
improving financial reporting controls, but the Green’s chief accountant left the
company last month. The projected total assets in Green’s Balance Sheet on 31
December 20X0 is £ 500 million and profit before tax for the year is £ 40 million.
- Audit tests on investment sales indicate a weakness in internal control system,
with a potential, understatement of income in the region of $300,000. The weakness
occurred because sales invoices are not sequentially numbered, allowing one of the
directors to remove cash sales prior to recording in the sales daybook. This was
identified by audit senior when performing analytical procedures of sales.
Required:
1. Identify and explain the implications of the acquisition of Yellow Ltd for the
audit planning of the Green’s individual financial statements.
2. Evaluate the risks of material misstatement to be considered in the audit
planning of the Green’s individual financial statements.
3. Suggest the principal audit procedures to be performed in respect of the disposal of
White Ltd.
4. For audit test on investment sales, list the audit procedures you should conduct to
reach a conclusion and if you have performed all the audit procedures that you can,
but the issue is still unresolved, explain the potential effect (if any) on the audit
opinion about investment cycle.
Question 13
Gold Co is a company which manufactures tractors and other machinery to be used

in the agricultural industry. You are the manager responsible for the audit of Gold
Co, and you are reviewing the audit working papers for the year ended 31 December
20X1. The draft financial statements show revenue of $8.5 million, profit before tax

of $2.2 million, and total assets of $30 million.

Two matters have been brought to your attention by the audit senior, both of which
relate to assets recognized in the statement of financial position for the first time this
year:
Financial assets
Non-current assets include financial assets recognized at $1.06 million. A note to the
financial statements describes these financial assets as investments classified as ‘fair
value through profit or losses, and the investments are described in the note as ‘held
for trading’. The investments are all shares in listed companies. A gain of $250,000
has been recognized in net profit in respect of the revaluation of these investments.
Required: In your review of the audit working papers, comment on the matters you
should consider, and state the audit evidence you should expect to find in respect of
the financial assets.

CHAPTER 5 AUDITING OTHER FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNT
- Selling Expense
- Administration Expense
- Financial income
- Financial expense
- Other income
- Other expense
2. SOURCE OF INFORMATION
▪ The Financial Statements: The comprehensive income statements and Notes
to the FSs (detail disclosure about each type of expenses);
▪ Trial balance;
▪ Nominal ledgers, general ledger, ledger control account of Selling and
administrative expenses; financial income and expenses; other income and
expenses;
▪ Sub-ledger or breakdown expenses;
▪ Accounting documents such as: contracts, liquidation, invoices, depreciation
sheet, allocated sheet of depreciation expense, salary distribution table,
material distribution table, supporting documents and other documents;
▪ Regulations about internal control system relating to Selling, administrative
expense and other expenses such as spending regulation, regulations on
approval of expenses and etc.
3. RISK ASSESSMENT PROCEDURES

4. KEY CONTROLS AND TOC

4.1. KEY CONTROLS
(1) Issue internal spending rules and approve spending levels;
(2) Segregation of duties: assigning different individuals the responsibilities

of authorising transactions, recording transactions and maintaining custody of
assets;
(3) Controls to check the accuracy, completeness and authorisation of
transactions relating to types of expenses;
(4) Review and analysis of actual performance versus budgets, forecasts and
prior period performance.
4.2. TOC
• Inquiry management about control activities relating to above financial
information (such as: authorization, segregation of duties, physical control,
etc.);
• Checking the signals of controlling on documents (e.g., Approval, signature
on payment request documents, procurement requisition/ requisition plan,
etc.) and checking the control activities;

• Observe the actual process of checking and approving the happened expenses
from starting to completing;
• Review for the signal of overstated expenses;
• Inquiry management to check annual review relating to expenditure level in
quota;
• Communicate with those charged with governance (TCWG)/ board of
manager how management handling the difference or abnormal operating
expenses/ financial expenses in the period, etc.
5. SAP
* Operating expense
(1) Aggregate expenses by each month and amount of operating transaction per
month to draw graphs and analysis the fluctuation
(2) Require audited entity provide the notes of operating expenses which classify
expenses into categories and compare each category this year with last year after
that consider reasonableness of selling and administrative expenses by category
Administrative expense by category
(3) Comparison of actual or anticipated results of the entity with budgets
and/or forecasts, or the expectations of the auditor in order to determine the
appropriateness of the happened expenses in the period;
(4) Comparison to industry information either for the industry as a whole or
by comparison to entities of similar size to the client to determine whether the
amount of incurred costs are reasonable;
(5) Investigate significant unexpected differences.
* Financial income and expense

(1) Analyse the fluctuation of financial income/expenses this year with last
year;
(2) Require audited entity provide the notes of operating financial income and
expenses which classify expenses into categories (for example: interest paid,
payment discount, realized foreign exchange loss) and compare each category this
year with last year after that consider reasonableness of financial expenses by
category;
(3) Comparison of actual or anticipated results of the entity with budgets
and/or forecasts, or the expectations of the auditor in order to determine the
appropriateness of the happened financial income and expenses in the period.
>> Thirdly, for other income and expenses, auditor implements SAP rarely.
Auditor often focuses on test of detail for other transactions and events.
6. TOD
• For Selling and Administrative expense
Audit objectives The popular audit procedures
Occurrence - Compare between nominal ledgers, ledger control account and
detailed accounting books of each type of expense;
- Inspect operating expenses, concentrating on high value
transactions and unusual transactions;
- For a sample of operating expenses transactions recorded in the
ledger, vouch the invoices back to supporting documents, invoice
listing; agree total of invoice listing to nominal ledger;
Completeness - Review operating expense accounts to determine whether a year
end accrual is appropriate and, if so, determine whether it has
been recorded. Cross reference expense account balances to the

appropriate analyses of balance sheet accounts (e.g. rent

expense to accrued rent, etc.)
- Investigate material discrepancies.
- Trace a sample of supporting documents to invoices and into the
operating expenses ledger.
Accuracy - Break-down selling and administrative expense; Reconcile
depreciation expense, staff expense, prepaid expenses… with the
relevant sections;
- For a sample of expenses, check quality, prices on invoices and
other supporting documents and recalculation operating expenses,
after that compare with bookkeeping value on ledgers and ledgers
control account.
- Reviewing and summarizing business administration expenses that
do not qualify as deductible expenses when calculating CIT (in
coordination with tax administration and state payables).
- Consider reasonableness of professional fee (if any), reviewing:
+ Experience of expert
+ Scope of work
+ Methods and assumptions used.
Cut-off - For a sample of suppliers ’s invoices around the year end (before and
after 15 days around the year end), inspect the dates on invoices and
compare with the dates on supporting documents and dates recorded
in the ledger for application of correct cut-off;
Classification and - Review disclosures of operating expenses on the notes to the
disclosure financial statements to ensure that the disclosure requirements
relating to operating expenses have been met.
- Select a sample of invoices and examine for proper
classification into operating expenses accounts.

* For financial income and expense

Occurrence - Compare between nominal ledgers, ledger control account and
detailed accounting books of each type of financial income and
expense;
- Obtain breakdown of financial income and expenditure transactions
and select a sample. Document basis for sample size and selection.
- Verify transaction to supporting documentation.
Completeness - Trace a sample of supporting documents to loan contracts and
into the financial expenses ledger.
Accuracy - Obtain a breakdown of the general ledger accounts forming the
reported figures in the financial statements and:
+ Investigate any significant amounts in such accounts;
+ Consider whether costs are appropriately classified and are correctly
treated as revenue costs in nature;
+ Compare amounts with those of preceding period and our own
expectations. Obtain explanations for significant movements with
corroborative explanations/evidence;
(Appendix 5.4: WPs- Breakdown Financial Expenses & Income to
review the nature)
- Test translation of foreign currency accounts. Obtain reconciled
payables, cash on hand and cash in bank listing, identify balances not
denominated in the functional currency and, on a sample basis, test
translation of currencies.
- Unrealized exchange gain/loss:
+ Verify unrealized exchange gain or loss by test translation of
foreign currency accounts;

+ Revaluation test is perform in each individual sections such as bank

and cash, AR, AP, other payables whether there are denominated in
foreign currency;
+ We reconcile unrealized exchange gain/loss with revaluation
amount in those sections.
Cut-off - For a sample of financial income and expenses around the year end
(before and after 15 days around the year end), inspect the dates on
loan contract, terms of contract and compare with the dates on
supporting documents and dates recorded in the ledger for application
of correct cut-off;
Classification and - Review ending schedules with general ledger details to ensure
Disclosure proper presentation;
- Review disclosures of financial income and expenses on the
notes to the financial statements to ensure that the disclosure
requirements relating to financial income and expenses have
been met.
• For other income and expense

Occurrence - Compare between nominal ledgers, general ledger, ledger control
account and detailed accounting books of each type of other income
and expense;
- Inspect other income and expenses, concentrating on high value
transactions and unusual transactions;
- Test 100% transactions relating to disposal of non-current assets or
tax fines, tax arrears recorded in the ledger, vouch the invoices,
receipt back to supporting documents such as liquidation decision
of fix assets, contract, compensation decision of tax authority;

- For a sample of other expenditure transactions recorded in the

ledger, vouch the invoices back to supporting documents.
Completeness - Trace a sample of supporting documents to invoices and into the
other expenses ledger;
- Trace a sample of supporting documents to invoices and into the
other income ledger;
Accuracy - Break-down other income and expenses:
+ Reconcile expenses from disposal of non-current assets or tax fines,
tax arrears, other expenses with the relevant sections;
+ Reconcile income from disposal of non-current assets or other
income with the relevant sections;
- For a sample of expenses, check quality, prices, tax rate on invoices
and other supporting documents and recalculation other expenses,
after that compare with bookkeeping value on ledgers and ledgers
control account.
Cut-off - For a sample of invoices/receipts around the year end (before and
after 15 days around the year end), inspect the dates on invoices/
receipts and compare with the dates on supporting documents and
dates recorded in the ledger for application of correct cut-off;
Classification and - Review disclosures of other income and other expenses on the
disclosure notes to the financial statements to ensure that the disclosure
requirements relating to operating expenses have been met.
- Select a sample of invoices and examine for proper
classification into other income or other expenses accounts.
ASSESSING THE RESULT OF AUDITING OTHER FINANCIAL
INFORMATION
(1) The conclusion about audit objectives

(2) Request the adjusting entries (if any)
(3) Suggest recommendations to improve internal control system
(4) Problems need to continue to monitor in the next audit (if any)
(5) Opinion of the audited entity’s board of director
REVIEW QUESTIONS
Question 1
List and explain the key assertions relating to selling and administrative expenses.
Question 2
What are major risks of transactions about selling and administrative expenses?
Question 3
What are significant accounts relating to selling and administrative expenses?
Question 4
What are significant accounts relating to financial income and expenses?
Question 5
Which sources of information about selling and administrative expenses that auditor
can be used to collect audit evidence?
Question 6
Which sources of information about financial income and expenses that auditor can
be used to collect audit evidence?
Question 7
Which audit procedures auditor should use to collect audit evidence about the
effectiveness of internal control relating to selling and administrative expenses?
Question 8
Describe substantive procedures auditor should perform to verify assertion

“Occurrence” and “Completeness” of selling and administrative expenses.
Question 9
Describe substantive procedures auditor should perform to verify assertion

“Accuracy” of financial income and expenses.
Question 10
Describe substantive procedures auditor should perform to confirm assertion “Cut-

off” of other income and expenses.

LECTURE NOTE STUDENT AutoRecovered

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

LECTURE NOTE STUDENT AutoRecovered

Uploaded by

Copyright:

Available Formats

ADVANCE AUDIT OF FINANCIAL STATEMENT 2

ADVANCE AUDIT OF FINANCIAL

DINH THI THU HA PHD, ACCA

DINH THI THU HA PHD,ACCA 1

MODULE: ADVANCED AUDIT AND ASSURANCE 2

CHAPTER 1: PLANNING RISK ASSESSMENT

DESIGN AUDIT PROCEDURES

DINH THI THU HA PHD,ACCA 2

year maintenance COST

DISCLOSURE All expense Include all Exclude

DINH THI THU HA PHD,ACCA 3

EXAMPLE 1: REVALUATION SURPLUS

EXAMPLE 2: REVALUATION DECREASE

EXAMPLE 3: REVALUATION AND DEPRECIATION

DINH THI THU HA PHD,ACCA 4

DINH THI THU HA PHD,ACCA 5

CHAPTER 1: IAS 38 INTANGIBLE NON-CURRENT ASSETS

WHAT TYPES AMORTIZATION

Example: not IA Existence of Intentio Available Ability Technica Expense

COST MODEL REVALUATION MODEL Gain or loss >> P/L • Method of

DINH THI THU HA PHD,ACCA 7

DINH THI THU HA PHD,ACCA 8

At cost (directly attribute MODEL 1: FAIR VALUE When: Change in use +

DINH THI THU HA PHD,ACCA 9

Understanding the entity Inquiries

control system COSO

Design audit procedures Changes in NCA Preliminary analytical

NON CURRENT ASSET

- Regulations about ICs (addition and disposals)

Recommendations DINH THI THU HA PHD,ACCA 10

UNDERSTANDING THE ENTITY AND ITS ENVIROMENT

- Comparison of PPE in the current year to the prior year

from the bank which is repayable over five years.

Notes from meeting held 29 November 20X9

DINH THI THU HA PHD,ACCA 12

UNDESTANDING INTERNAL CONTROL

DINH THI THU HA PHD,ACCA 13

CHAPTER 1: NON CURRENT ASSET

FIGURE 1.1: INTERNAL CONTROL OVER THE NON-CURRENT ASSETS

Reject request Receive invoice

Prepare Update fixed Update

Non current Purchase day

DINH THI THU HA PHD,ACCA 14

KEY CONTROLS RELATED TO NON-CURRENT ASSETS

• The NON-CURRENT ASSET REGISTER enables assets to be identified,

+ INQUIRY management about control activities relating to NCA (such as:

+ Checking the SIGNALS OF CONTROLLING on documents (e.g.

+ OBSERVE the actual addition process of tangible non-current asset from

+ Inquiry management to check annual review non-current assets.

+ REVIEW the work of expert relating to revaluation of tangible non-current

DINH THI THU HA PHD,ACCA 15

Banana International Co (Banana) is a manufacturer of electrical equipment. It has

(a) In respect of the internal control of Banana International Co:

DINH THI THU HA PHD,ACCA 16

KEY ASSERTION RELATION TO NON CURRENT ASSET

Valuation Non-current assets are CORRECTLY stated at cost less

Presentation Disclosures relating to cost, additions and disposals,

SUBSTANTIVE ANALYTICAL PROCEDURES (SAP)

et 19-3 Substantive Analytical Procedures for Equipment

Substantive Analytical Procedure Possible Misstatement

Compare accumulated depreciation divided by Misstatement in accumulated depreciation.

DINH THI THU HA PHD,ACCA 18

AUDIT PROCEDURES FOR AUDITING ACCOUNT BALANCE