Professional Documents
Culture Documents
Revision Lecture
Learning Outcome
Topic Lecture
Audit Risk, Materiality and 4,6,7
Audit Strategy
Analytical Procedures 5
Going Concerns 6 & 11
Internal Control Weakness and 7
Test of Control
Substantive Test (Assertions 8
and Audit Procedures)
Subsequent Event 10
Audit Opinion 11
Analytical
Procedures
Analytical procedures Learning Outcome
1. Short-term liquidity:
– current ratio (current assets to current liabilities)
– quick asset ratio (liquid assets to current liabilities)
– operating cash flow ratio (cash flow from operations to current
liabilities).
2. Activity:
– receivables turnover/days in receivables (net sales to average
accounts receivable/365 days to receivables turnover)
– inventory turnover/days in inventory (cost of goods sold to
average inventory/365 days to inventory turnover).
Continued
Learning
Ratios commonly used at the planning stage Outcome
(continued)
3. Profitability:
– gross profit and net profit ratio (gross profit or net
profit to net sales)
– return on total assets (net profit before interest and taxes to total
assets)
– return on shareholders’ equity (net profit to ordinary shareholders’
equity).
4. Solvency:
– debt to equity ratio (total liabilities to shareholders’ equity)
– times interest earned (net profit before interest and taxes to annual
interest expense).
Learning Outcome
Subsequent
Event
Learning Outcome
The date of the auditor’s report
11
Learning
Summary of types of subsequent eventsOutcome
12
Learning Outcome
The nature of completion and review procedures
13
Adjusting events Learning Outcome
14
Examples of adjusting events
Learning Outcome
15
Non-adjusting events Learning Outcome
16
Examples of non-adjusting events
Learning Outcome
17
Events between balance date and the dateLearning Outcome
of auditor’s report
18
Learning Outcome
Substantive Testing
(Assertions and
Audit Procedures)
Learning Outcome
Types of audit procedures
Financial report assertions and audit objectives
Learning Outcome
and procedures
Financial report assertions and audit objectives and procedures
21
Financial report assertions and audit objectives and
Learning Outcome
procedures
Assertions about classes of transactions and events for the period under audit:
• Occurrence — transactions and events that have been recorded have occurred and pertain to the
entity.
• Completeness — all transactions and events that should have been recorded have been recorded.
• Accuracy — amounts and other data relating to recorded transactions and events have been
recorded appropriately.
• Cut-off — transactions and events have been recorded in the correct accounting period.
• Classification — transactions and events have been recorded in the proper accounts.
Continued
22
Financial report assertions and audit objectives and procedures
Learning Outcome
Continued
23
Financial report assertions and audit objectives and
procedures Learning Outcome
24
Learning Outcome
Going Concerns
Learning Outcome
Appropriateness of the going concern basis
Continued
Learning Outcome
Appropriateness of the going concern basis (continued)
• Financial indicators:
– high gearing or fixed-term or reliance on short-term borrowings
– withdrawal of financial creditors, inability to pay creditors or denial of trade
credit by suppliers
– negative operating cash flows or adverse key financial ratios
– lack of sustainable operating profits
– dividend arrears
– difficulty in complying with terms of loan agreements
– inability to obtain necessary financing.
Continued
Examples of indications of going concernLearning
problemsOutcome
(continued)
Continued
Examples of indications of going concern problems
Learning Outcome
(continued)
• Other indications:
– non-compliance with capital or statutory requirements
– legal proceedings against the entity
– adverse changes in legislation or government policy
– uninsured or underinsured disasters.
Mitigating factors Learning Outcome
Internal
Control
Weakness and
Test of Control
Learning
Components of internal control (IC)Outcome
Control activities Learning Outcome
• Policies and procedures established by management to
ensure its directives are carried out.
• Can pertain to:
– performance reviews (e.g. comparing actual with budget)
– information processing, in an information technology (IT)
environment comprising general IT controls and application
controls (discussed later this chapter)
– physical controls (e.g. locked storerooms for inventory)
– segregation of duties (the most basic of which is to have
different individuals responsible for handling assets and the
keeping of records relating to those assets).
Segregation of duties related to aLearning Outcome
transaction
• Monitoring of controls:
– A process to assess the effectiveness of the performance of
internal control.
– It involves:
• evaluating the design and operation of controls
• taking corrective action where necessary.
• Management may monitor controls through ongoing
activities such as supervisory activities and/or separate
evaluations.
• In many entities internal auditors contribute
to the monitoring process.
Learning
Steps in the auditor’s consideration of internal Outcome
control
Understanding internal control and risk assessment
Learning Outcome
Procedure
• The auditor obtains an understanding of internal controls to assess control risk and:
– identify the types of potential misstatements that could occur and the factors that
contribute to the risk that they will occur
– understand the accounting system sufficiently to identify the client documents,
etc., That may be available and ascertain what data will be used in audit tests
– determine an efficient and effective approach to the audit.
• Auditor needs to determine how management identifies business risks, estimates
their significance, assesses their likelihood of occurrence and decides upon actions to
manage them.
• Auditor enquires of management about business risks that management have
identified and considers whether they may result in a material misstatement.
• If auditor identifies a risk of material misstatements that management failed to
identify, they need to consider whether management should have identified it and, if
so, why the process failed.
Learning Outcome
Audit Opinion
How different types of modifications affect the auditor’s
Learning opinion
Outcome
Qualified opinion Learning Outcome
How to present
answer in the
exam booklet
Audit Opinion Learning Outcome
Going Concern Factors Auditors to assess the appropriateness of going concern Mitigating The reason for assessing the
Factors probability that any company will
continue as a going concern.
Financial Factors • Review after balance date events Assets Factors The appropriateness of the
Operations Factors • analyse the latest interim financial report, cash flow and profit forecasts Debt Factors presentations of the final report, i.e.
Other Factors • read the minutes of directors meetings for references to financial Cost Factors whether the assets and liabilities
difficulties Other Factors should be valued at fair value or at
• review the terms of venture and loan agreements liquidation values, or
• request information from the entity’s solicitors May motivate management
• consider the effect of unfilled customer orders misrepresentation to hide the
failure by misstating amounts in the
accounts and financial report (In
addition liquidation increases the
possibility that the auditor will have
to defend the quality of the audit in
court and so will want to be sure
that the audit program and working
papers are water tight.