Control Objectives
1. Ordering and granting of credit
a. Goods & services are only supplied to customers with good credit ratings.
b. Customers are encouraged to pay promptly.
c. Orders are recorded correctly.
d. Orders are fulfilled
2. Dispatch and Invoicing
a. All dispatches of goods are recorded.
b. All goods and services sold are correctly invoiced.
c. All invoices raised relate to goods and services that have been supplied by the
business.
d. Credit notes are only given for valid reasons.
3. Recording, accounting and credit control
a. All sales that have been invoiced are recorded in the general and sales ledger.
b. All credit notes that have been issued are recorded in the general ledger & sales
ledger.
c. All entries in the sales ledger are made to the correct sales ledger account.
d. Potentially doubtful debts are identified.
Control Activities
Ordering and credit control process:
1. Segregation of duties
a. Credit control, invoicing and inventory dispatch.
2. Authorization of credit terms to customers
a. References/credit check obtained.
b. Authorization by senior staff.
c. Regular review.
3. Authorization for changes in customer data
a. Change of address supported by letterhead.
b. Requests for deletion supported by evidence balances cleared/ customer in liquidation.
4. Orders only accepted from customers who have no credit problems
5. Sequential numbering of blank order documents
6. Matching of customer orders with production orders & dispatch notes
Test of Controls
Ordering and credit control process
1. Check the references are being obtained for all new customers
2. Check that all new accounts on the sales ledger have been authorized by senior staff
3. Check that orders are only accepted from customers who are within their credit terms
and credit limits
4. Check that customer orders are being matched with production orders and dispatch
notes
A. Checking whether any payments have been made in the post balance sheet period in respect of
the item.
B. Review of correspondence with solicitors, bank, customers, insurance company and suppliers
both pre and post year end.
C. Sending a letter to solicitor to obtain their views.(Where relevant)
D. Discussing the position with similar past provisions with the directors. Were these provisions
eventually settled?
1. Consider the nature of the client’s business. Would you expect to see provisions e.g. warranties.
2. For all material provisions and contingencies obtain a management representation.
3. Check that appropriate disclosures have been made in accordance with IAS 37
# ISA 610: Use of the internal auditors work for the external audit.
Considering the work of internal auditing sets out criteria that auditors should use when
obtaining an understanding and subsequent assessment of the internal audit function.
Where the review and tests the process made use by management, the
following steps would normally be appropriate:
a)Evaluation of data and consideration of the assumption on which the estimate is based
b)Testing of the calculation involved in the estimate
c)Comparison, where possible, of estimate made for prior with actual result of those prior
FINANCIAL STATEMENT ASSERTIONS
Assertions about classes of transactions and events for the period under audit:
COMPLETENESS
All transactions, events, assets, liabilities, equity interests and disclosures that should have been
recorded have been recorded.
OCCURRENCE
Transactions and events that have been recorded have occurred and pertain to the entity.
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.
EXISTENCE
Assets, liabilities and equity interests exist.
RIGHTS & OBLIGATIONS
The entity holds or controls the rights to assets and liabilities are the obligations of the entity.
COMPLETENESS
All assets, liabilities and equity interests that should have been recorded have been recorded.
COMPLETENESS
All disclosures that should have been included in the financial statements have been included.
2. Compare non-current assets in the general ledger with the non-current assets register
and obtain explanations for differences.
3. Match a sample of assets which physically exist to the non-current asset register.
Existence
1. Confirm that company physically inspects all items in the non-current asset register each
year.
2. Inspect assets, concentrating on high value items and additions in year. Confirm items
inspected:
a. Exist
b. Are in use
c. Are in good condition
d. Have correct serial numbers
3. Review records of income yielding assets.
Additions
1. Verify additions by architects certificates, lawyers’ completion statements, vendors’
invoices etc.
2. Check purchases have been authorized by directors/senior management by inspecting
Board minutes
3. Check additions have been recorded in non-current asset register and general ledger for
a sample of additions in the year.
Share Capital
The following features should carry out for substantive procedures:
a. Agree the authorized share capital to the company incorporation document. Agree any
change with properly authorized resolution. File a copy of the relevant certificate on the
permanent file.
b. Verify and issue of share capital or other changes during the year with the minutes and
ensure issue or change is within the terms of the company incorporation.
c. Verify transfer of share by reference to:
1. Correspondence.
2. Completed and stamped transfer forms.
3. Cancelled share certificates.
4. Minutes of directors meeting.
d. Check the balance on the shareholders account in the registers of members and the
total list with the amount of issued share capital in the nominal ledger.
e. Agree dividends paid and declared but not paid to authorities in minute books and
check calculations with share capital issued. (e.g. returned dividends warrants )
Financial statement
Financial statment
approved at general
issued
meeting
Facts discovered after the date of the auditors report but before the financial
statements are issued:
2.3 – When after the date of the auditor’s report but before the financial statements are issued,
the auditor becomes adhere of a fact which may materially affect the financial statements, the
auditor should consider whether the financial statement need amendment, should discuss the
matter with management and should take the action appropriate in the circumstance.
2.4 – When management does not amend the financial statements in circumstances where the
auditor believes they need to be amended (and the audit report has not been released to the
entity) the auditor should express a qualified or adverse opinion.
2.6 – The new auditors report should include an emphasis of matter paragraph referring to a
note in the financial statements that more extensively discusses the reasons for the revision of
the reasons for the revision of the previously issued financial statements and to the earlier
report issued by the auditor.
14.6
Inventories
The audit/review approach must consider:
During
Ensure staffs are following the inventory counting instructions.
1. Test counts from the inventories to the inventory sheets and from the inventory sheets
to the inventories.
2. Note damaged, old or obsolete inventories.
3. Review WIP for stage of completion.
4. Inventories held by client for third parties; ensure excluded from count.
5. Record the number of the last GRN and the last GDN.
6. Form as overall impression of inventory levels.
7. Photocopy inventory sheets.
After
1. Check sequence of inventory sheets.
2. Check client’s computation of final figure.
3. Trace own test count items through to final inventory sheets.
4. Check replies from third parties.
5. Inform management of any problem.
6. Follow up cut-off details.
7. Ensure necessary adjustments to book inventories have been made. (Where records are
maintained)
4.3 - Some businesses keep inventory records and if these are reliable a year end count is not
required. To determine the reliability of the records, it is necessary for the business to count
inventories on a regular basis. This is called continuous inventory counting or perpetual
inventory.
1. Check the selling prices of goods sold after the year end against their purchase
invoices.
2. Review order book to determine at what price the goods are ordered at.
3. Background knowledge
4. Write downs last year – are these items still in Inventory?
14.13
8.2-
19.8
Depreciation rates
The following work would be done to determine whether depreciation rates are reasonable:
3.1 When planning and performing audit procedures and in evaluating the results there of,
the auditor should consider the appropriateness of management’s use of the going
concern assumption underlying the preparation of the financial statements.
3.2 Under the going concern assumption an entity is ordinarily viewed as continuing in
business for the foreseeable future with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection from creditors pursuant to laws or
regulations.
3.3 Management’s assessment of the entity’s ability to continue as a going concern should
cover a period of at least 12 months after period end.
3.4 In obtaining an understanding of the entity, the auditor should consider whether there
are events or conditions and related business risks which may cast significant doubt on
the entity’s ability to continue as a going concern.
3.5 Based on the audit evidence obtained, the auditor should determine if, in his
judgment, a material uncertainty exists related to events or conditions that alone or in
aggregate, may cast significant doubt on the entity’s ability to continue as a going
concern.
3.6 Examples of events or conditions, which may cast significant doubt on the going
concern assumption include:
a. Financial
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayments; or excessive reliance on short-term borrowings to
finance non-current assets.
3. Indications of withdrawal of financial support by debtors and other creditors.
4. Negative operations cash flows indicated by historical or prospective financial
statements.
5. Adverse key financial ratios.
6. Substantial operating losses or significant deterioration in the value of assets
used to generate cash flows.
7. Arrears or discontinuance of dividends.
8. Inability to pay creditors on due dates.
9. Inability to comply with the terms of loan agreements.
10. Change from credit to cash-on-delivery transaction with suppliers.
11. Inability to obtain financing for essential new product development or other
essential investments.
b. Operational
1. Loss of key management without replacement.
2. Loss of a major market, franchise, license or principal supplier.
3. Labour difficulties or shortage of important supplies.
c. Other
1. Non-compliance with capital or other statutory requirements.
2. Pending legal or regulatory proceedings against the entity that may, if
successful, result in claims that are unlikely to be satisfied.
3. Changes in legislation or government policy to adversely affect the entity.
3.8 When analysis of cash flow is a significant factor in considering the future outcome
of events or conditions the auditor considers:
1. The reliability of the entity’s information system for generating such
information, and
2. Whether there is adequate support for the assumptions underlying the forecast
In addition the auditor compares:
a. The prospective financial information for recent prior periods with historical
results. And
b. The prospective financial information for the current period with results
achieved to date.
3.9 The auditor will form his opinion on the going concern status of the company
based on the outcome of the above.
14.9
Cutoff
5.1 Cutoff is a test used to ensure that all of the company’s transactions have been
included in the correct period.
5.2 Purchase Cutoff
All purchases for which goods have been received before the year end must be
included in the financial statements as a liability, expense and closing inventories.
Goods received after the year should not be included in the financial statements.
5.3 Sales cutoff
Sales for which goods have left the warehouse should be included within the sales
and trade receivables at the year end, but not in closing inventories.
Sales made after the year end must not be included in the financial statements but
should be included in closing inventories.
5.4 Cutoff is usually tested by obtaining a sample of GRN and GDN either side of the
year end and then matching them to purchase/sales invoices to ensure they have
been included in the correct account balance(s).
14.10
Receivables
A specific technique used to test for the existence and obligation/rights of receivables as a
direct circularization. This is conducted as follows:
a. Obtain listing of trade receivables as at the confirmation date.
b. Agree total to nominal ledger.
c. Review for any obvious omissions/ misstatements by comparing this year’s list with last
year’s.
d. Select a sample of accounts for confirmation.
Letter should be on the client’s paper, signed by the client with a copy of the current
statement attached. It should request that the reply be sent direct to the auditor and
reply paid envelopes should be sent.
Tests
1. Select a sample of GDNs before the year end and a sample in the following
period.
2. Ensure invoices recorded in the same period as the GDN.
3. Posted to NL/SL in correct period.
4. Review receipts from receivables after the year end to ensure these shouldn’t
have been recorded before year end.
5. Review sales ledger control account around the year end for any unusual items.
6. Review material post-year end invoices to ensure these are properly treated as
next year’s sales.
b. Review receivables analytically
1. Ratios e.g. payment period
2. Compare with previous years/budgets.
B. Rights and obligations
1. Perform a receivables circularization
2. Trace a sample to cash received post year end
3. Discuss with management/review board minutes to establish whether any debts
have been factored.
C. Allocation and valuation
1. Obtain listing of overdue debts and check its extraction.
2. Discuss significant overdue debts with the credit controller.
3. Review correspondence with customers to assess recoverability.
4. Ensure all debts written off were properly authorized.
5. Review payments received after the year end.
D. Presentation and disclosure
1. Ensure receivables appropriately categorized within current assets.
14.12
The key steps to be taken by an auditor in initiating the process are as follows:-
1) A request for a bank confirmation is to b issued on the auditors’ own headed paper &
sent to the bank branch with which the client has the prime business arrangement.
2) The bank confirmation request should specify:-
i) the names of all entities covered by the request;
ii) whether the auditor is requesting ‘standard information’; and where
appropriate, the nature of supplement information required;
iii) details of ‘additional information’ if so required;
iv) the date for which the auditor is requesting confirmation (the audit
confirmation date);
v) a statement that the bank’s response will not create a contractual
relationship between the bank & auditor;
vi) a statement requesting the bank to advise the auditor if the authority is
insufficient to allow the bank to provide full disclosure of the information
requested; and
vii) A contact name & telephone number.
3) The bank confirmation request should reach the branch at least two weeks in advance
of the audit confirmation date.
Page 15.9
ISA 250: Consideration of law & regulations in the audit of financial statements.
5.1 None-compliance with laws & regulations may have a material effect on the financial
statements, e.g. fines which are not been provided for.
5.2 The auditor is required to obtain a general understanding of the legal framework
applicable to the entity & the industry. Then the auditor should:-
I) enquire of management as to whether the entity is in compliance with such laws &
regulations;
The auditor should obtain sufficient appropriate evidence about compliance with those laws &
regulations generally recognized by the auditor to have a material effect on the financial
statements.
5.3 Other than the above, the auditor does not perform other audit procedures on the entity’s
compliance with laws & regulation since this would be outside the scope of an audit of financial
statements.
In the absence of evidence to the contrary, the auditor is entitled to assume the entity is in
compliance with these laws & regulations.
5.4 The auditor should consider the implications of non-compliance in relation to other aspects
of the audit particularly the reliability of management representations.
5.5 Where non-compliance has a material effect on the financial statements, a qualified
(‘except for’) or adverse opinion should b expressed.
If the auditor is precluded from obtaining sufficient appropriate evidence to evaluate whether
non-compliance has occurred or is material to the financial statements, a modified opinion due
to a limitation of scope is issued.
5.6 The auditor’s duty of confidentiality would normally preclude reporting non-compliance to a
third party.
However, the auditor may have a legal duty to report non-compliance to regulatory or
supervisory authorities. The auditor may need to seek legal advice in such circumstances giving
due consideration to the auditor’s responsibility in the public interest.
6.7
7.2 - The auditor should apply analytical procedures as risk assessment procedures and in the
overall review at the end of the audit.
They can also be used as a source of substantive audit evidence when their use is more
effective or efficient than tests of details in reducing detection risk for specific financial
statement assertions.
3. Industry information
4. Predictive estimates
6. Relationship between financial and non financial information e.g. payroll costs to the
number of employees.
Application of analytical procedures may indicate aspects of the entity of which the auditor
unaware and will assist in assessing the risks of material misstatement in order to determine
the nature, timing and extent of further audit procedures.
For example, the auditor could compare gross margin of a company year on year based on
interim or draft financial information. If the gross margin has increased this could indicate a
failure to include all expenses, an increase in the sales price or an error/overstatement of the
closing inventories figure.
2. The reliability of the data, whether internal or external, from which the expectation of
recorded amounts or ratios is developed.
4. The amount of any difference of recorded amounts from expected values that is
acceptable.
7.7 – When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate corroborative audit evidence.
7.8 – Some common analytical review ratios are outlined in the Additional Notes to this
chapter.
6.8
The opening balances do not contain misstatements that materially affect the
current period’s financial statements;
The prior period’s closing balances have been correctly brought forward to the
current period or, when appropriate, have been restated; and
Appropriate accounting policies are consistently applied or changes in
accounting policies have been properly accounted for and adequately presented
and disclosed.
Auditor’s report
8.4 – If the auditor is unable to obtain sufficient appropriate audit evidence concerning the
opening balances a limitation on scope modification is appropriate, either qualified (‘except
for’) or a disclaimer of opinion.
8.5 – If the opening balances do contain material misstatements which affect the current
period are not corrected and adequately presented and disclosed, a disagreement modification
is appropriate, either qualified (‘except for’) or adverse.
FOCUS OF AUDIT
The auditor can look at an operation in different ways. For example the audit can be:
1 transaction oriented
2 systems oriented, or
3 results oriented.
In practice, most audits are a mix of these approaches but the underlying focus of these different ways of
carrying out an audit is worthy of examination, because the approach will have implications on the type of
audit conclusions and on the impact of the audit report.
1. Transaction oriented
Audit objective:
To determine whether the operations are being carried out in compliance with the standards and
procedures as laid out in the Accounting Manual.
Audit approach:
Select a representative sample of transactions and check whether they have been carried out according
to the procedures outlined in the Accounting Manual.
Follow up on any transactions that have not been properly carried out: not properly authorized / errors in
amounts / indicate waste or abuse / not properly recorded / etc.
Determine underlying reasons for observed findings.
Form of report:
Findings: list of transactions that have not been properly carried out or recorded.
Conclusions: certain areas of the Accounting Manual are not being complied with.
Recommendations: correct wrong transactions and increase compliance with certain controls as set out in
the Accounting manual.
Impact of report:
With its predominant emphasis on individual transaction, there is a serious danger that this report does
not get the attention of management. In fact, it can have a negative impact. If when a manager reads it
and finds that the total impact of the weaknesses listed is small, the conclusion derived is that what the
auditor finds is not of significance.
2. Systems oriented
Audit objective:
To determine whether the internal controls are adequate to ensure that operations are being carried out
properly; that assets are safeguarded; and that there is minimal waste, misuse and abuse.
Audit approach:
Examine the controls in place and, on the basis of a risk assessment, professional judgement and
comparison with standards, determine whether these controls are adequate and whether, in the opinion
of the auditor, any controls are missing.
Select a sample of transactions to test whether the controls in place are operating as intended.
Conclude on the adequacy of the internal controls.
Form of report:
Findings: List of inadequate or missing internal controls (illustrated with examples of transactions that
have not been properly carried out).
3. Results oriented
Audit objective:
To determine whether the operations are being carried out economically, efficiently and effectively and
whether the organization’s objectives are being met.
Audit approach:
Identify the major expenditures, revenues, outputs and outcomes of the entity and conduct a risk
assessment.
Assess the appropriateness of management reports on expenditures, revenues and outputs. Review
studies and reports on the effectiveness of the operations and on programme performance.
On the basis of these reports conclude whether managers have appropriate information to know how
economic, efficient and effective are the operations.
If these reports do not contain sufficient information to assess performance properly, the auditor can
decide to conclude on the inadequacy of the measures or to determine directly whether performance is
adequate.
Where the auditor decides to assess performance, this can be done by:
* comparing results against plans and budgets
* performing analysis (such as trends in unit cost or in levels of efficiency), or
* making comparisons with standards or with the performance of other organisations.
Form of report:
Findings: Clarity of objectives and accountability / the extent and quality of the measurement and
reporting of performance / examples of failures in performance / trends in performance.
Conclusions: Appropriateness of the performance framework / adequacy of the measurement and
reporting of performance / adequacy of the internal controls / an assessment of performance or changes
in performance.
Recommendations: Review of programme / improve measurement and reporting of performance /
improve operations / strengthen internal controls.
Impact of report
By focusing on the impact of what the auditor has observed, the message of the audit report is most likely
to capture the attention of senior management.