Seminar 14:

1. If an illegal act has or is likely to have occurred FIRST STEP: Determine the effect on f/s or
other aspects of audit (afterwards, communicate with management on timely basis +
consider the need to report to outside authorities, withdraw from engagement, seek legal
advice)

2. Significant risks (SSA 315(27-28), high RMM because they involve significant, non-routine
transactions or judgmental matters, and are less subject to routine controls)

a. Fraud
b. Significant economic, accounting or other developments
c. Complex transactions
d. Significant transactions with related parties
e. Financial info involving high measurement subjectivity or uncertainty
f. Significant transactions outside normal course of business or otherwise appear
unusual

3. Auditors response to overall heightened risk of fraud

a. Maintain professional scepticism throughout the audit, recognising the possibility of
fraud
b. Discuss susceptibility of FS to fraud among engagement team
c. Perform relevant risk assessment procedures, including: Inquiry (on fraud risk
management process, knowledge of actual, suspected or alleged fraud), analytical
procedures (to identify unusual/unexpected r/s that may indicate fraud), evaluate
fraud risk factors (incentive, opportunity, rationalisation pg. 121 of TB)

4. Auditors response to assessed RMM due to fraud

a. F/S level (overall responses) e.g. assignment of more experienced staff or experts
and closer supervision
b. Assertion level N.E.T.

5. Audit procedures to address risk of management override of controls

a. Test appropriateness of JE and other adjustments
b. Review accounting estimates for bias
c. Assess business rationale of significant transactions

6. SSA 550: Related parties

a. Inherent difficulty in identifying undisclosed RPs / RPTs management may not be
aware or disclose
b. Heightened risk of fraud greater opportunities for collusion, concealment or
manipulation by mgmt
c. Risk assessment procedures
 i. Understanding the entitys RP r/s and transactions
ii. Maintaining alertness for RP info while reviewing records or doc meeting
minutes, inquire the nature and the possibility of involvement of RP for
significant transactions outside normal course of business
iii. Inspect the underlying contracts or agreements to evaluate business
rationale, terms, authorization

Outline for Seminar 14

2)

Facts from the Qn (a) How the defalcation (b) Control procedures to
would likely have prevent or detect the
been detected by the defalcation
auditor
Accountant of the Recalculation / Analytical Segregation of duties
company also procedures (since bonds and Segregate recording function
manages the FD have fixed returns which from receiving income and
companys investment are predictable and consistent) authorisation of investment
activities (IMPT: Need to specify how to
Most funds invested in segregate)
bonds and FD
Accountant diverted
substantial amt of
investment earnings
for personal use
Systematically under-
recorded the income
earned to cover up
fraud
Purchasing clerk sets Inventory count observation Need authorisation for
up a fictitious vendor vendor
and periodically Should not have
prepared PO to access to receiving
fictitious vendor reports
Then created bogus
receiving reports,
vendor invoices and
PO to A/P for
processing

3)

a) Facts from the case
Three times the typical
payment period required
a) How the circumstances may b) Audit procedures to
indicate the existence of investigate possibility of
unidentified RP undisclosed RPT
Abnormal term: Overly
favourable term
Payments went directly to the
president of Guanxi, not to the
acct dept
Super Supplier Ltd supplies
over 50% of the raw materials
Guanxi purchases
Provide Guanxi management
assistance at no charge
Disproportionately higher
sales in Dec, the last mth
before the fiscal year end
Management overrides Background search
control May not be helpful
Review minutes
Concentration risk: Over- Inquire the mgmt the
reliance on a particular circumstances
supplier Examine T&C,
Handling of sensitive substances of
information and FOC transactions
Possibility of sales being
overstated: Occurrence/Cut-
off
Seminar 15: Auditing the REVENUE process

1. The major functions:

Credit
Order entry Shipping Billing
authorisation

Accounts
Cash receipts General ledger
receivables

2.

Primary controls Accounts

Segregation of duties Accounts receivable
Control over source documents and Allowance for bad debts
inputs Sales returns and allowances
Checks, approvals and reconciliations Bad debt expenses
Cash

3. CONTROL ACTIVITIES

Occurrence of revenue transactions:

Assertion Possible misstatement E.g. of control activities Test of controls

Occurrence Fictitious revenue Segregation of duties (b/w
order, billing, shipping)
Revenue recorded,
goods not shipped, or Sales recorded only with
services not performed approved customer order
and shipping document
Accounting for numerical
sequences of sales invoices
Observation and
evaluation of proper
SOD
Testing of a sample of
sales invoices for the
presence of
authorised customer
order and shipping
document; if IT
application,
examination of
application controls
Review and testing of
client procedures for
accounting for
numerical sequence of
sales invoices; if IT

Authorisation of revenue transactions:
Assertion Possible misstatement
Authorisation Goods shipped or
services performed for a
customer who has high
credit risk
Shipments made or
services performed at
unauthorised prices or
on unauthorised terms
Other assertions of revenue transaction: Completeness, accuracy, cut-off, classification
Occurrence of cash receipts transactions:
Assertion Possible misstatement
Occurrence Cash receipts recorded
but not received nor
deposited
Completeness of cash receipts transactions:
Monthly customer
statements; complaints
handled independently
E.g. of control activities
Proper clients procedures
for authorising credit and
shipment of goods
Authorised price list and
specified terms of trade
E.g. of control activities
Segregation of duties
Use of electronic cash
receipts transfer
Bank reconciliations
prepared regularly and
independently reviewed
application,
examination of
application controls
Review and
testing
Test of controls
Review of clients
procedures for
granting credit
Examination of sales
orders for evidence of
credit approval; if IT
application,
examination of
application controls
for credit limits
Comparison of prices
and terms on sales
invoices to authorised
price list and terms of
trade; if IT
application
Test of controls
Observation and
evaluation of proper
SOD
Examine application
controls for electronic
cash receipts transfer
Review of bank
reconciliation for
indication of
independent review
 Assertion Possible misstatement E.g. of control activities Test of controls
Completeness Cash or cheques are Proper segregation of Observation and
stolen or lost before duties, a lockbox system evaluation of proper
being recorded in the SOD and physical
cash receipts records controls
Same control activities as for -
Cash receipts received Occurrence assertion
or deposited but not
recorded

Sales return and allowances: All credit memoranda should be properly authorised, and supported
with sales invoices and shipping documents

4. SUBSTANTIVE PROCEDURES

Substantive Analytical Procedures

Trend analysis: Compare sales trends with industry, compare sales across months and
product lines
Ratio analysis: Gross margin by product lines, AR turnover, bad debt expense as a % of
revenue
Reasonableness tests

Tests of Details of Transactions

Occurrence Vouching from a sample of transactions from

Completeness
Authorization and accuracy
Cut-off
Classification
- Identifying and reclassifying any
material credits contained in A/R
- Segregating ST and LT receivables
- Ensuring that different types of
receivables are properly classified
the sales journal to the sales invoice, customer
order and shipping document
Tracing from a sample of shipping documents
to related sales invoices and customers
account
Compare prices and terms for sample of sales
invoices with authorised price list
Select a sample of invoices one month before
and after year-end with the date of shipment
and date when sale was recorded
For a sample of sales invoices, determine that
each is properly classified in the revenue
accounts

Test of Details of Account Balance

Existence Confirmation of selected accounts
receivables
Performance of alternative procedures
for accounts receivable confirmation
exceptions and non-responses
Rights and obligations Review of bank confirmations for any
liens on receivables
Inquiry of management, review of any
loan agreements and review of BOD
minutes for any indication that the A/R
have been sold
Completeness Obtaining of aged trial balance of A/R
and agreeing total to general ledger
control accounts
Tracing of shipping documents into
sales journal and to A/R subsidiary
ledger
Valuation and allocation Examination of the adequacy of the allowance
for uncollectible accounts

5. Confirmations (SSA 505)

Positive confirmations: Requests that customers indicate whether they agree with the
amount due to the client, response is expected
Negative confirmations: Requests that the customers respond only when they disagree with
the amount due to the client, used when the client has many small account balances and
control risk is assessed as low
Should be sent soon after the end of the accounting period to maximize response rate
Mail the confirmation requests outside the clients facilities (second request may be
necessary)
For each exception received examine the reasons for the difference
Does not receive responses alternative procedures (examination of subsequent cash
receipts, customer order + shipping doc + sales invoice)

6. Auditing the general cash account: Copy of bank reconciliation, bank confirmation, cut-off
bank statement (cover 7 to 10 -day period after the date on which the bank account is
reconciled)

7. Test of the bank reconciliation:

 2. Agree the bank
1. Test mathematical 3. Trace the deposits in
balance on the
accuracy and agree the transit on the bank
reconciliation with the
balance per the books to reconciliation to the cut-
balance on the
the general ledger off bank statement
confirmation

4. Compare outstanding 5. Agree any charges

cheques on the bank
reconciliation to the cut-
off bank statement
6. Agree the adjusted
included on the bank
book balance to the cash
statement to the bank
account lead schedule
reconciliation

8. Fraud-related audit procedures

Extended bank reconciliation procedures: To cover cash defalcations, ensure the
reconciling item is included in both prior and current months reconciliations
Proof of cash
Tests for kiting (use interbank transfer schedule)

Outline for Seminar 15

2)

Part Facts from the case + Internal controls / RMM Procedures

(i) IC 1: General manager approves Corporate discount
IC 2: Customers are given 30 days credit terms and scheme with signatures
are granted discounts based on a structured discount by senior management
scheme approved by senior management Recomputation to
ensure discount is within
the limit
(iii) IC 3: All sales are approved by the GM and credit Check for signatures for
invoices are issued approval
IC 4: Indicate the ticket serial number on the form and Review GL and check the
stamped utilised Avoid the possibility of double- tickets to ensure that
counting revenues are only
RMM 1: Post them under the Round-the-world ticket recorded when they are
sales and A/R accounts Possibility of premature utilised
revenue recognition (should only record when flight
takes off) Occurrence of sales
(iv) RMM 2: Cash payment Susceptible to cash theft Examine if the cash
Existence and completeness of cash received for the day
RMM 3: Tour package sales Possibility of tallies the total value of
premature revenue recognition Occurrence of the tickets or packages
sales sold for the day
(v) IC 5: Reconcile all utilised round-the-world tickets Examine reconciliation
against the tickets recorded as sold, which is reviewed and evidence of review
and approval of GM and approval
(vi) IC 6: Tour consultant and cashier countersign the cash TOC: Observation,
takings in the daily receipt book reperformance
IC 7: Banked in by the cashier at the end of each
working day
IC 8: Reconcile the bank statements and credit card
statements with JE
(viii) IC 9: The cashier verifies and acknowledges the amts Observe and review
on the cheque summary listing signatures
(ix) RMM 4: Debt collection is often not prioritised Reperform ageing to
examine the
collectability of accounts
receivables
Assess the adequacy of
the allowance for
uncollectable accounts
(x) IC 10: Sending of customers statements of accounts A/R confirmations
RMM 5: Receptionist handles the sending out of Alternative procedures
statements of accounts and the customers enquiries for subsequent cash
Could easily conceal any complaints and errors in receipts and unpaid
receivable balances Affecting existence of A/R invoices

IMPORTANT!!
NEED TO CALCULATE RATIOS TO
SUBSTANTIATE ANSWERS!
For (b) Current ratio, A/R turnover, gross profit ratio, net profit ratio
Seminar 16: Auditing the PURCHASING process

1. The major functions

Invoice
Requisitioning Purchasing Receiving
processing
(Purchase (Purchase (Receiving
(Vendor
requisition) order) report)
invoice)

Accounts
Disbursements General ledger
payable

2. Audit significance

Valuation issues RMM

Different costing methods Fictitious or overvalued inventory
Provision for inventory obsolescence Inventory pilferage and loss
Lower of cost and NRV Understatement of liabilities

3. Substantive analytical procedures (over- or understated inventory, obsolete, slow-moving or

excess inventory)
Trend analysis: Compare A/P balances and accruals with prior year, compare inventory
balances with prior year
Ratio analysis: Gross margin by product lines, inventory turnover days outstanding in
inventory, A/P turnover days outstanding in payables, compare purchase returns and
allowances as a percentage of revenue or cost of sales to prior years and industry data

4. Inherent risk assessment of inventory

Intense industry competition valuation
Technology changes resulting in obsolescence
Inventory that are small and of high value are more susceptible to theft
Related-party transactions for acquiring raw materials and selling finished goods
Prior-year misstatements

5. Inventory transactions: Accuracy (Correct price? Actual quantity?), Classification (RM, WIP,
FG)

Outline for Seminar 16

1) Stock-take

Auditors need to be present at the beginning (to listen to the briefing and instructions for
stock-take), middle and end (final check) of stock-take
2 days inventory count issue: movement of inventory
Select top 6 outlets with highest inventory / Select material items only / Select items from
display shelf only issue: predictability in audit procedure
Inventory count instructions examine the design of internal controls and see if there is
any loopholes
Inventory count that is further from year-end = higher audit risk
Pledged and inventory gold bar issue: may be mixed
Inventory compilation issue: accuracy (may be tampered) choose a sample and
reperform compilation

2a)

Additional internal controls relating to the Tests of controls

scrap collection process

Proper documentation should be made for the
purchase of items (e.g. mass, rate, total cost) to
ensure the purchase is accurately accounted for
Examine the records of the
documentation and ensure every
necessary detail is properly recorded
Recompute to ensure the amounts (e.g.
total cost) are recorded accurately

There should be reconciliation of amount of Check for proper review and

cash utilised for the day to the amount paid to authorisation of reconciliation
the sellers in the record by the Area Manager Reperform and ensure the amounts
tally

Rotational of staff to prevent collusion Inspect job schedules

Check the reports to see if they are
signed by respective personnel

Issue official numbered receipts with Check if every receipts are numbered in
customers acknowledgment order and differently
Check for the presence of signatures on
every receipt

2b)

Risk of material Assertion Account 2 Audit procedures

misstatements
The fleet of lorries and
equipment loaned to the
agents may be subjected to
wear & tear due to improper
Valuation of PPE Hire an expert to
examine the physical
condition of the fleet
usage by agents who may not
be experienced.
Hence, impairment may be
needed but not made.
Salary expenses may be
recorded too late and in the
wrong period since agents are
only paid after 60 days from
delivery of script.
Due to exports to recycling
centres overseas, the dealing
of different exchange rates
may result in errors in
amounts recorded and
translated.
Due to contracts with several
centres on various shipment
and payment terms, there
may be collectability issues
and inaccurate allowance for
doubtful debts made.
Certain refurbishment costs
may be wrongly expensed off
or capitalised
Completeness / Cutoff of
salaries expenses
(or liabilities to agent)
Accuracy of revenue
Valuation of A/R
Completeness / Occurrence of
refurbishment expenses
Completeness / Valuation of
inventory
and ensure that they
are correctly valued
Check for disposals of
PPE to ensure if P/L on
disposal is not too high
or low
Physical inspection to
examine the physical
condition of the fleet
Examine the
reasonableness of
depreciation policy
Trace a sample of
supporting documents
for salary expenses to
the GL to ensure that
they are recorded in
the correct period
Perform analytical
procedures to check if
the salaries recorded
for the period is
reasonable
Recompute translation
and amount recorded
in GL to ensure that
they are recorded
accurately
Check the exchange
rates used to see if
they are valid
Reperform ageing and
check if the allowance
made is reasonable
Wait for subsequent
payments from
debtors to ascertain
the reasonableness of
the allowance made
Perform analytical
procedures to ensure
that the amount
recorded for
refurbishment
expenses and
inventory are
reasonable
 Examine the
capitalisation policy
and ensure it is in
accordance to FRS
Check subsequent
sales proceeds and
non-moving stock

Possibility of inventory being Existence / Completeness of Stock count

stolen or omitted inventory Physical inspection
Seminar 17: Audit Sampling

SSA530.5 Audit sampling

The application of audit procedures to less than 100% of items within a population of audit
relevance
Such that all sampling units have a chance of selection
In order to provide the auditor with a reasonable basis
On which to draw conclusions about the entire population

2 Types of decision or conclusion errors

1. Risk of incorrect rejection (Type I error)

Test of control:

Auditor wrongly concludes that a control is not effective when it is

Assess control risk too high Do too much substantive testing Audit efficiency decreases

Test of details:

Auditor wrongly concludes that an account balance or class of transaction is materially

misstated when it is not
Auditor may do further testing Audit efficiency decreases

2. Risk of incorrect acceptance (Type II error)

Test of control:

Auditor wrongly concludes that a control is effective when it is not

Assess control risk too low Do too little substantive testing Audit risk (specifically,
detection risk) increases

Test of details:

Auditor wrongly concludes that an account balance or class of transactions is not materially
misstated when it is
Auditor wrongly issues an unmodified audit opinion when the f/s is materially misstated
Audit failure

Sampling risk Non-sampling risk

The risk that the auditors conclusion based on
a sample may be different from the conclusion
if the entire population were subjected to the
same audit procedure
Risk that auditor reaches a wrong conclusion
due to:
Use of inappropriate audit procedures
Misinterpretation of audit evidence
Failure to recognize a misstatement or
deviation

Can be controlled by measures such as:

 Adequate training
Proper planning
Effective supervision

Statistical sampling

A sampling that involves random selection of the sample items and use of probability theory
to evaluate sample results, including measurement of sample risk
E.g. attribute sampling (used for TOC), monetary unit sampling (used for substantive testing)

Key steps in audit sampling

DEFINE
DETERMINE SAMPLE SIZE
- Test objective
- Population Considering:
- Desired level of assurance (confidence
SELECT SAMPLES
- Sampling unit level = 1 - risk of incorrect acceptance) (+)
- Control - Tolerable misstatement or deviation rate
deviation
(-) EVALUATE
- Expected misstatement or population
- Misstatement deviation rate (+)
- Negligible effect of population size
(beyond 500)

Sample selection methods

S: Random selection (e.g. using random number table or generator)

S: Systematic selection (with random start point)
NS: Haphazard (avoid conscious bias or predictability)
Unacceptable: Block selection, judgmental selection

Stratification

When the auditor divides the population into a series of sub-populations

Assist with audit efficiency (reduce the sample size by reducing variability without increasing
the sampling risk)
Direct auditors attention to areas of audit interest, esp risky or material items

Attribute sampling

Used to estimate the prop of a population that possess a certain characteristic (in TOC,
determine operating effectiveness of controls in terms of deviation from prescribed internal
controls
 Test objective Population Sampling unit Control Sample size (pg.
deviation 244, Table 8-5 &
Whether All recorded Sales order conditions 8-6)
control over sales and supporting
credit approval supporting each recorded Sale is not (-) Planned risk
of sales are sales orders sale properly of incorrect
effective from Jan to Sep approved by acceptance
2013 credit dept (Type II error)
(-) Tolerable
deviation rate
(+) Expected
population
deviation rate

Compute sample deviation rate (no. of deviations / sample size) and computed upper
deviation rate (CUDR = sample deviation rate + allowance for sample risk, Table 8-8 & 8-9)
CUDR < TDR: Conclude that control is effective and reduce substantive testing
CUDR > TDR: Conclude that control is not effective and increase substantive testing
(alternatively, increase sample size or test a compensating control)

Monetary-unit sampling (MUS)

Uses attribute sampling theory to express a conclusion in monetary amounts rather than
rate of occurrence
Every dollar in the population (acct bal or class of transaction) is a sampling unit larger bal
are more like to be selected more effective in determining overstatement
Evaluate results:
o Compute projected misstatement and upper misstatement limit (UML = PROJECTED
misstatement + allowance for sampling risk)
o UML < TM: Conclude that AR is not materially misstated
o UML > TM: Conclude that AR is materially misstated

Parameters of MUS
Desired confidence level (given) 95%
Tolerable deviation rate (125,000/2,500,000) 5%
Population deviation rate (25,000/2,500,000) 1%
 Sample size (using Table 8-5) 93

Refer to slides for computation of Upper Misstatement Limit:

o UML if no misstatements are found (sampling interval x misstatement factor from
Table 9-3)
o Calculate tainting factor (BV-AV)/BV
o For balance larger than interval no sampling risk added
o Summation of UML

Notes for Outline for Seminar 17

Confirmations should not go through the client (SSA 505)

Credibility of confirmations is compromised when they are signed by different individuals
like store manager who may not have the required knowledge (SSA 500)
Confirmations received by email / fax need authentication (non-original may be tampered
with)
Should vouch subsequent receipts via bank statement / bank advice
Alternative procedures
Adjusting event for sales return
Seminar 18A: Auditing the HUMAN RESOURCE MANAGEMENT process

1. HRM
Establishment of sound policies for hiring, training, evaluating, counselling, promoting,
compensating and taking remedial actions for employees
Main concern involves payroll transactions once an employee has been hired
Control documents: Approval by supervisors, payroll master file, time sheets
Two types of transactions: Payments to employees for services rendered, accruals

2. Inherent risk assessment

Economic conditions on payroll costs
Supply of skilled workers
Frequency of employee turnover
Regulation

3. Payroll transactions

Assertions Explanation Control procedures E.g. of Test of

Details
Occurrence Ensure payments are Proper SOD Vouch a sample of
made to valid employees Approval of payroll direct
for time actually worked timesheet deposits to the
(not fictitious master employee
employees) list to verify validity
Payment to valid
employees are stopped
once the employee is
terminated
Accuracy Employees gross pay and - Recompute the
payroll deductions may be mathematical
incorrectly computed accuracy of a
sample of direct
deposits
Classification If payroll expenses are not Adequate chart Examine a sample
properly classified b/w direct of account of payroll direct
and indirect labour, inventory Timesheet deposits for proper
and cogs may not be valued function should classification into
properly reveal the expense accounts
payroll category
assigned by the
operating dept
Comparison of
budget

4. Accrued payroll liabilities

 Cut-off
Existence and valuation
Completeness
Presentation and disclosure (completeness) Pensions, post-retirement benefits, profit-
sharing plans

Seminar 18B: Auditing of PPE

Four types of PPE transactions

Acquisition of capital assets for cash or other non-monetary considerations

Disposition of capital assets through sale, exchange, retirement or abandonment
Depreciation over useful economic life
Leasing of capital assets

Inherent risk assessment

Complex accounting issues Lease accounting, self-constructed assets, interest

capitalisation
Difficult-to-audit transactions Donated assets, non-monetary exchanges, self-
constructed assets
Misstatement detected in prior audits

Outline for Seminar 18

2a)

Existing controls

Segregation of duties between employment of staff (HRA) and salary processing (payroll
team)
Approval of new employee report (prepared by ESO) by PS
Data integrity tests performed by PS to verify the mathematical accuracy of the Payroll
Report
The final Payroll Report is approved by PS before being processed for payment
Segregation of duties between recording of payroll (payroll team) and the approval of
payment (Finance Manager)
Corrective control- manually calculate accrued leave and leave balances every month

2b)

Internal control weaknesses

 Lack of segregation in employment of staff whereby HRA handles the recording (recording
their attendances / leaves) and authorisation (hiring staff, signing employment contract) and
authorisation (hiring staff, signing employment contract)
o Consequence: Without independent check and review of employee submission, this
provides opportunity to include and pay non-existent employees [Need to verify
existence of employees, e.g. check with external agency and trace for employees]
Finance Manager relied on PS for accuracies of Payroll Report and did not perform a second
check
o Consequence: Without proper check on supporting documents of payroll, erroneous
payment may be made [hence, should do a random check)
Manual approval documents can be manipulated after approval
Inaccurate annual leave balances indication of deficiencies in (preventive) controls
All 3 payroll staff have access in ERP defeat the purpose of segregation of duties
Seminar 19A: Auditing of Investments, Intangible Assets & Goodwill and Prepaid Expenses

Segregation of duties for investments

The initiation function should be segregated from the final approval function
The valuation-monitoring function should be segregated from the acquisition function
Responsibility for maintaining the securities ledger should be separate from that of making
entries in the G/L
Responsibility for custody of the securities of the securities should be separate from that of
accounting for the securities

Control risk assessment for IA and goodwill

The expertise and experience of those determining the fair value of the assets
Controls over the process used to determine fair value measurements, including controls
over data and segregation of duties between those committing the client to the purchase
and those undertaking the valuation
The extent to which the entity engages or employs valuation experts
The significant management assumptions used in determining fair value
The integrity of change controls and security procedures for valuation models and relevant
information systems, including approval processes

Seminar 19B: Auditing the Financing Process

Auditing long-term debt

Analytical procedures are useful because of the direct r/s between the interest expense and
the amount of long-term debt (e.g. recomputation)

Assertions Control activities Substantive procedures

Occurrence and authorisation Adequate
documentation must
verify that a note or
bond was properly
authorised
Any significant debt
commitments should
be approved by the
BOD or by executives
who have been
delegated by this
authority
Completeness The client should
maintain a subsidiary
ledger that contains
information about all
Examine copies of new
note or bond
agreements
Examine BODs
minutes for approval
of new lending
agreements
Trace large cash
receipts and payments
to source documents
and the general ledger
 the long-term debt
owed by the entity
The debt amount
recorded in the
subsidiary ledger
should be reconciled
to the general ledger
control account
regularly
Valuation Notes and bonds are
recorded at their face
value less any
unamortised discount
or plus any
unamortised premium
Effective interest
method
Disclosure classification Properly classify short-
term liability the
portion of long-term
debt that is due in the
next year
Auditing stockholders equity
Issuance of stock including transactions such as sale of stock for cash, stock splits (SOD:
Individuals responsible for issuing, transferring and cancelling stock certificates should not
have any accounting responsibilities)
Repurchase of stock
Payment of dividends including cash and stock dividends (SOD: Between dividend payments
and recording of dividend payments, authorisation by BOD)
Outline for Seminar 19
2)
Review notes paid or
renewed after the
balance sheet date to
determine if there are
unrecorded liabilities
at year end
Evaluate lease
contracts to determine
if leases are properly
accounted for as an
operating or capital
lease
Obtain a bank
confirmation
requesting specific
information on notes
from banks
Review BOD minutes
Examine new debt
agreements to ensure
that they were
recorded at the proper
value
Bank confirmations
Recompute accrued
interest
Verify computation of
the amortization of
premium or discount
Examine the due dates
on notes or bonds for
proper classification
between current and
LT debt
Risk of Material Misstatement Substantive audit procedures Additional info for (b)
relating to IA to verify future economic
benefits
FRS 38: R&D Examine subsequent Discounted rate,
sales WACC, contract
Analysis and Review the underlying agreement, detailed
Evaluation should be data used to support breakdown of
research cost to be the forecast and its production costs
expensed off supporting document
Production tests and (e.g. management
Simulation tests are calculation)
development costs but Expert help
need to check if they reperform + compare
meet the criteria for
capitalisation of
development cost
Seminar 20: Audit Completion

Clicker questions

Confirmations unable to determine classification of securities (depends on mgmt intent)

Factors that increase uncertainty of estimate judgment, length of forecast, sensitivity to
changes in assumptions

Review for subsequent events

FRS 10: Recognition of the financial effects of certain events that occurred after balance date
and up until the time of completion
SSA 560: Auditor has a responsibility to ensure mgmt discloses events occurring after
balance date but prior to time of completion (the time they sign the audit report)

Types of events subsequent to balance sheet date

Type I event Type II event

Conditions existed at the balance sheet Conditions did not exist at the balance
date and affect estimates that are part sheet date
of f/s Do not affect the accuracy of f/s
Require adjustment of f/s Require f/s disclosure (in material)
Examples Examples:
Subsequent collection of a material A/R Fire or flood loss
that has been treated as uncollectable Raising of additional shares or loan
at balance sheet date capital
A legal determination that establishes M&A
that a claim was in existence but of an
uncertain amount at balance sheet
date
Legislation that retrospectively changes
the company income tax applied prior
to the balance sheet date
Ascertainment subsequent to balance
sheet date of selling prices for
inventory items
Bankruptcy

Events subsequent to the date of audit report

SSA 560:10 auditor has no obligation to perform any audit procedures regarding the f/s
after the date of the auditors report (UNLESS AWARE)
Require mgmt to amend f/s, extend audit work and issue new audit report
If mgmt does not amend f/s, modify the audit opinion
Events subsequent to the issue of the financial report

SSA 560:14 auditor has no obligation to conduct a continuing inquiry of the financial
report after it has been issued (UNLESS AWARE)
Require mgmt to amend f/s, extend audit work and issue new audit report with emphasis of
matter paragraph
If mgmt does not amend f/s, notify those charged with governance and take actions to
prevent future reliance on auditors report

SSA 570 Going concern

GC assumption: Entity will continue in business for the foreseeable future

Unless- trading ceased, operation ceased, no realistic alternative but to close down (e.g.
court order, debt obligation)
Audit implications if GC assumption is not appropriate:

(1) Assets may not be realised at BV

(2) Assets/Liabilities to be reclassified as short-term

(3) Need to provide for costs of business closure

Mgmts responsibility: Assess the entitys ability to continue as a GC

Auditors responsibility:

(1) Obtain sufficient appropriate evidence on appropriateness of managements use of GC

assumption: E.g. financial indicators such as net liability position and operating indicators such as
loss of key mgmt and or customers, mitigating factors like availability of alternative funding and
action plan

(2) Conclude whether a material uncertainty exists that may cast significant doubt about
entitys ability to continue as a GC

(3) Determine implications on auditors report

If GC assumption is appropriate but material uncertainty exists:

(1) Adequate disclosure in f/s: Unqualified opinion with emphasis of matter paragraph
that draws disclosure to the f/s disclosure (Revised SSA 570 Separate section
Material Uncertainty Related to Going Concern)
(2) Inadequate disclosure in f/s: Qualified or adverse opinion
If GC assumption is inappropriate adverse opinion unless f/s is prepared on appropriate
alternative basis

SSA 570:20R Close Call [REVISED]

If events or conditions have been identified that may cast significant doubt on the entitys
ability to continue as a GC (e.g. loss of a key supplier)
BUT, based on the audit evidence obtained the auditor concludes that no material
uncertainty exists (e.g. alternative supplies secured from a few other smaller suppliers)
 Conclusion Mgmt concludes no MU. Auditor needs to evaluate adequacy of disclosures
on judgment that there is no MU

Written representations (SSA 580)

Mgmt responsibility, provision of completeness of info, mgmt intent on classification of

assets and liabilities (matters that audit procedures cannot obtain)
If never get rep letter limitation of scope (SSA) disclaimer

Communication with TCWG (SSA 260)

During audit planning At audit completion or earlier when

appropriate

Auditors responsibilities and Auditors view about significant

compliance with independence
requirements
Planned scope and timing of audit
qualitative aspects of entitys
accounting practices (accounting
policies, estimates and disclosures)
Significant difficulties encountered
during the audit, including any
disagreement with mgmt
Significant deficiencies in IC
Any identified or suspected fraud or
non-compliance with laws and
regulations
Uncorrected misstatements and their
effects
GC issues
Expected modifications to the auditors
report
Seminar 21: Audit of Group Financial Statements

1. Key considerations (where problems can occur)

The consolidation process
Components financial information

2. Significant components
Financially significant to the group, likely to include significant RMM
Important to determine the direction of group audit
15% of a chosen benchmark may be considered significant (SSA 600.A5)

3. Audit of group f/s

Financially significant components
Risk-based significant components (e.g. one acct is very significant)
Other components (use analytical procedures to determine if significant RMM)

4. Other terminologies: Component auditors, materiality (refer to slides)

5. Outline for Seminar 21

1) Presentation qn (additional notes)

Audit procedures Potential misstatements

Investment
Authorisation (board
meeting minutes)
Sight to investment
agreement
Examine the amount
(paid immediately
bank statement)
Remaining $40m
check if time value of
adjustment is made
Step acquisition? (60%
control?)
Goodwill Consolidation of S3
Independent Should not include
assessment of PPA S3s P/L results
Check whether all the (acquisition is done at
unrecognised A/L are year-end)
properly accounted for Need to consider FVA
Verify objectivity and for S3s acquisition
competence of the
existing expert work

2)

Evaluate the client Additional information Identify significant components

acceptance required Understand
considerations the client

Independence Understanding Financially significant components

of the biz Benchmark: Profit before tax (>15%)
 Non-audit Info on Subsi 1 and 3 selected
service in the acquisition of
past? subsidiary (GW, Risk-based significant components
Component FVA, ) Other investments in Subsi 2 need
auditors? Valuation of IP, additional info to understand what it
PPE consists of
Competency Capital reserve Capital reserve in Subsi 2 need
FRS? relating to additional info to understand what it
Nature of the is attributed from
biz? Inventory significant amount (42%
Competence of the group) high RMM need
of mgmt? to examine

Engagement risk Other components

Integrity? Use analytical procedures to
determine if significant RMM
Seminar 22: Audit Judgment and Ethical Dilemmas

1) Auditors judgments could be impaired by

Motivational biases: Resulting from threats to fundamental principles, such as self-interest,
self-review, advocacy, familiarity, intimidation
Cognitive biases: E.g. framing, availability (e.g. recency effect), representativeness (e.g. halo
effect), anchoring and adjustment (opp: think out of the box)
To counter cognitive biases: Decision aids (e.g. checklists), awareness training, justification
of decisions, develop alternative explanations

2) Ethical conflict resolution

Consider:
Relevant facts
Ethical issues involved Determine appropriate course
Fundamental principles Weigh consequences of each of action that is consistent
involved course of action with fundamental principles
involved
Established internal
procedures
Alternative courses of actions

3) Outline for Seminar 22

Step 1: Consider the relevant facts and ethical issues involved

Paula has been spending more time than expected to audit the A/R, often working til late
into the night, in part because the client has not been very cooperative in assisting with her
requests for info
Audit senior Simon said not all steps in the audit program need to be carried out to the letter
(ETHICAL ISSUE: Under pressure to cut corners)
Last years audit team has eaten time (ETHICAL ISSUE)
Step 2: Consider fundamental principles involved

Integrity, due diligence, professional behaviour

Step 3: Consider established internal procedures

Policy, firms stand on these actions, whistle-blowing channel

Step 4: Consider courses of actions and evaluate their pros and cons

DO
Pro: Team player :)
Con: Type II error
(miss a misstatement
that could have been
detected --> audit Complain
failure) (whistle-blow)

Professional DON'T DO
discussion + ask Pro: Ethical
him for help Con: Offend ppl
(poor performance
evaluation,
blacklist)
Outline for Seminar 23: Final Revision

Key audit Deficiencies

areas
Cash and bank Lack of follow-up for non-responses (may not satisfy the level of
loan detection risks to be met)
Agreeing the loan balances to facility letters is inappropriate as the
facility letters does not show the outstanding loan balances

Trade Mgmt has requested that we do not send confirmation requests

receivables results in limitation of scope qualified or disclaimer (depends on
pervasiveness test)
Even though 90% of the o/s balances have been collected after yr end, it
is inappropriate to draw conclusion that remaining balance will be
collected in due course (need to take further actions to verify
collectability of the remaining 10%, especially if it is higher than PM)

Other Need to check for adequacy of presentation and disclosure of the

receivables unusual loan to non-related party
Need to examine the loan in greater details as there is a risk of client
financing terrorism (dealing in military equipment in Afghanistan)

Inventories Majority of the inventories relates to samples used by the Company for
product demonstration at its various road shows and retails booths
need to validate the classification of inventory as these samples may not
constitute inventories
Agreeing the inventory to invoices is insufficient to check their net value
due to impairment

Plant and Long history of profitability is merely one of the impairment indicators.
equipment Other impairment indicators (e.g. changes in external environment-
PEST) need to be considered to determine if there is any impairment
concern
Given that majority of the assets are fully depreciated, there is a need to
check the appropriateness of companys depreciation policy as the
useful lives used may be too short

Investment in Agreeing the investment ownership to original share certificates will only
a foreign show the owner and the number of shares owned, but not the (change
associated in) percentage ownership. Total outstanding shares of the foreign
company associated company is need to compute to see if there is any change in
(include percentage ownership
equity acctng Unsuitable method of impairment testing as it will give the same result
results) as typical accounting (should compare between recoverable amount
(seek experts help for valuation) and carrying amount)
Need to consider the difference in account treatments between
different FRS
Trade payable Sub-sampling is not allowed (cannot test only 50% of the suppliers
outstanding balances)
Unrecorded liabilities should be searched by checking to GRN and
invoices and trace to GL, not only payment vouchers
Checking only to payment vouchers excludes certain populations of
payment
Revenue Sales amount should not only be agreed to sales invoices, but also need
to vouch to delivery order and installation report to determine if sales
recorded have actually occurred
Cut-off testing needs to be performed on both before and after year-end
and hence vouching the sales recorded in the last month of the year is
insufficient to test for proper cut-off
Need to check for allocation of revenue between delivery and
installation