f8 Revision Essentials - 25

For Examinations to June 2016
Revision Essentials
ACCA
Paper F8 | AUDIT AND ASSURANCE
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ACCA
AUDIT AND ASSURANCE

(INTERNATIONAL)
REVISION ESSENTIALS
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CONTENTS
CONTENTS
Syllabus
Approach to examining
Core topics
Audit and other assurance engagements
External audit
Corporate governance
Professional codes of ethics and conduct
Auditor appointment
Documentation
Audit planning
Understanding the entity
Internal control
Audit materiality
Fraud, Law and Regulations
Tests of control
Communication on internal control
Service organisations
Audit evidence
Analytical procedures
Accounting estimates
Using the work of an expert
2015DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(iii)
(iv)
(v)
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1001
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(i)
CONTENTS
Audit sampling
Written representations
Computer-assisted audit techniques
Non-current assets
Inventory
External confirmations, receivables and sales
Share capital, reserves and directors remuneration
Loans, bank and cash
Liabilities, provisions and contingencies
Small business and not-for-profit organisations
Audit finalisation
The auditors report on financial statements
Going concern
Internal audit
Using the work of internal auditors
Additional reading
Examiners report December 2014
Analysis of specimen and past examinations
Examination technique
Frequently asked questions
CAUTION: These notes offer guidance on key issues.
Reliance on these alone is insufficient to pass the examination
(ii)
1901
2001
2101
2201
2301
2401
2501
2601
2701
2801
2901
3001
3101
3201
3301
3401
3501
3601
3701
3801
SYLLABUS
Aim
Identify and describe the work and evidence obtained

by the auditor and others required to meet the objectives
of audit engagements and the application of the
International Standards on Auditing.
Explain how the consideration of subsequent events and

the going concern principle can inform the conclusions
from audit work are reflected in different types of audit
report, written representations and the final review and
report.
To develop knowledge and understanding of the process of

carrying out the assurance engagement and its application in
the context of the professional regulatory framework.
Main capabilities
On successful completion of this paper, candidates should be
able to:
Explain the concept of audit and assurance and the

functions of audit, corporate governance, including
ethics and professional conduct, describing the scope
and distinguishing between the functions of internal and
external audit.
Demonstrate how the auditor obtains and accepts audit
engagements, obtains an understanding of the entity and
its environment, assesses the risk of material
misstatement (whether arising from fraud or other
irregularities) and plans an audit of financial statements.
Describe and evaluate internal controls, techniques and
audit tests, including IT systems to identify and
communicate control risks and their potential
consequences, making appropriate recommendations.
(iii)
Position within syllabus
CL (F4)
PA (P1)
AAA (P7)
FA (F3)
AA (F8)
APPROACH TO EXAMINING
Approach to examining the syllabus

The syllabus is assessed by a three-hour paper-based
examination. All questions are compulsory.
Section A of the exam comprises 8 two mark questions and
four one mark multiple choice questions giving a total of 20
marks for that section.
Section B of the exam comprises four 10 mark questions and
two 20 mark questions. The 20 mark questions will
predominantly examine one or more aspects of audit and
assurance from planning and risk assessment to internal
control or audit evidence, although topics from other syllabus
areas may also be included.
Additional information
Candidates need to be aware that questions will only be set
on new regulations issued prior to the 31st August 2014 for
examinations in the period September 2015 to June 2016.
(iv)
CORE TOPICS
CORE TOPICS
Tick when completed
Tick when completed
Audit and Other Assurance Engagements
Accounting Estimates
External Audit
Using the Work of an Expert
Corporate Governance
Audit Sampling
Professional Codes of Ethics and Conduct
Written Representations
Auditor Appointment
Computer-Assisted Audit Techniques
Documentation
Non-current Assets
Audit Planning
Inventory
Understanding the Entity
External Confirmations, Receivables and Sales
Internal Control
Audit Materiality
Share Capital, Reserves and

Directors Remuneration
Fraud, Law and Regulations
Loans, Bank and Cash
Tests of Control
Liabilities, Provisions and Contingencies
Communication on Internal Control
Small Business and Not-for-Profit Organisations
Service Organisations
Audit Finalisation
Audit Evidence
The Auditors Report on Financial Statements
Analytical Procedures
Going Concern
Internal Audit/Using the Work of IA
(v)
AUDIT AND OTHER ASSURANCE ENGAGEMENTS
EXTERNAL AUDIT
Auditors responsibility
Provides an external and objective view that enhances

the degree of confidence in the financial statements.
Expressing an opinion on the financial statements based

on the audit.
1.1 As an assurance service
International Standards of Auditing (ISA)
Includes the five elements of an assurance engagement

(see 2.1).
Ethical requirements
1.2 Stewardship, agency and accountability
Stewardship is the practice of managing another

persons property.
Agents are employed by principals to provide a service.
Accountability is where one party is held responsible to

another party for its actions.
Preparing and fairly presenting the financial statements.

Designing, implementing, maintaining internal controls.
Selecting and applying appropriate accounting policies.
Making reasonable accounting estimates.
High, but not absolute, level of assurance that

information subject to audit is free of material
misstatement.
Materiality
Omissions or misstatements of items are material if they
could, individually or collectively, influence the decisions of
users taken on the basis of the financial statements.)
The main communication (deliverable) to the

shareholders of the company.
Management responsibilities
In compliance with the Code of Ethics and Conduct.
Reasonable assurance
1.3 Auditors report
An audit should be conducted in accordance with ISAs.
0101
Relative significance of a matter (quantitative or

qualitative) to the financial statements as a whole.
Professional judgement
1.4 The audit process (audit cycle)
Stages
Applied in all stages of the audit process:
Interpreting ethical requirements;

Appling ISAs;
Understanding the entity and its environment;
Determining audit scope and plan;
Drawing conclusions based on evidence obtained.
Professional scepticism
An attitude that includes a questioning mind and a

critical assessment of evidence.
The auditor should plan and perform an audit with an

attitude of professional scepticism.
True and fair view
The terms in which the auditors opinion is expressed.
Truth relates to factual accuracy (bearing in mind

materiality).
Application to internal audit
Fairness relates to presentation of information and the

view conveyed to the reader.
0102
Many of the methods and procedures used in external

audit also apply to internal audit.
Some differences:
Internal auditors report to those charged with

governance;
Internal audit reports do not express a true and fair

opinion, but relate to the requirement of the task;
Internal auditors focus on enterprise-wide controls

not just financial controls;
Many methods and procedures are expanded to

focus on economy, efficiency and effectiveness of
operations.
ASSURANCE ENGAGEMENTS
An engagement in which a practitioner expresses a

conclusion to enhance the intended users confidence in the
result of an evaluation of a subject matter against criteria.
2.1 Five elements of an assurance engagement
Three-party relationship
Subject matter
Criteria
Evidence
Assurance report
0103
2.2 Types of assurance engagement

Reasonable assurance
Provides a high (but not absolute) level of assurance.
Conclusion is in a positive form (e.g. true and fair).
An audit is a typical example.
Scope of the work carried out is unlimited.

Limited assurance
Provides a low level of assurance.
Conclusion is in a negative form (e.g. nothing came

to our attention that causes us to believe ).
A review engagement is a typical example.
Scope of the work carried out is limited, usually to

enquiry and analytical review.
0104
EXTERNAL AUDIT
INTERNATIONAL FEDERATION OF
ACCOUNTANTS (IFAC)
1.2 Structure
IF A C C o u n cil
1.1 Mission, vision and values

Mission
IF A C B o a rd
To serve the public interest through:
high-quality professional standards;

strong professional accountancy organisations;
speaking out on public interest issues.
In terna tio n a l
A u d itin g a n d
A ssu ra n ce
S ta n d a rd s B o a rd
T ra n sn a tion al
A u d ito rs
C o m m ittee
Vision
Global accountancy profession recognised as a valued

leader in the development of strong and sustainable
organisations, financial markets and economies.
F o ru m of
F irm s
Values
Integrity, expertise and transparency.
0201
In tern a tio n a l E th ics

fo r A cco u n ta n ts
C om p lia n ce
A d v iso ry
P a n el
In terna tio n a l
A cco u n tin g
E d u ca tio n
S m a ll a n d
M ed iu m
P ractices
C o m m ittee
P u b lic In terest
O v ersigh t
B o a rd (P IO B )
In tern a tio n a l P u b lic

S ector A cco u n tin g
P rofessio n a l
A cco u n ta ncy
O rg a n isation
D ev elo p m en t
C o m m ittee
P rofessio n a l
A cco u n ta n ts
in B u sin ess
C om m ittee
EXTERNAL AUDIT
STANDARDS ISSUED BY THE IAASB
2.2 Scope and authority of ISAs
2.1 Structure
IFAC Code of Ethics for Professional Accountants
Provide standards for the auditors work and report.
Professional judgement must be used when applying.
Departures from an ISA can only be made if under

exceptional circumstances:
Services coved by IAASB Pronouncements

ISQCs International Standards on Quality Control
International Framework for Assurance Engagements
Audit and Reviews of

Historical Financial
Information
ISAs 100+
International
Standards on
Auditing
Assurance Engagements
other than Audits or
Reviews of Historical
Financial Information
ISREs 2000+
International
Standards on
Review
Engagements
ISAEs 3000+
International
Standard on
Assurance
Engagements
To achieve more effectively objective of ISA;

Must be explained and justified in working papers.
ISAs do not override local law or regulations.
2.3 Development
Related
Services
Project is proposed and input sought

If approved, project assigned to a Task Force
ISRSs 4000+
International
Standards on
Related Sevices
Research carried out and Exposure Draft prepared

ED placed on IFAC website and widely
Comments received are considered, ED revised and reissued if substantive changes made
Revised ED approved and issued as a Standard
0202
EXTERNAL AUDIT
EXTERNAL AUDIT
3.4 Rights and duties
3.1 Statutory regulation
Rights
Access at all times to the entitys books and records.
To require any information and explanations considered

necessary for the purposes of the audit.
In some jurisdictions small companies may be

exempt an audit; small being determined by:
To attend and be heard at the general meeting of the

company on business which concerns them as auditor.
To receive notice of any intention to remove them.
To bring matters concerning their resignation or

removal to the attention of members and creditors.
Role and duties of the auditor often specifically laid

down in statute, supported by regulation.
3.2 Audit exemption
Turnover;
Statement of financial position total;
Number of employees;
Not listed or a specialised entity (e.g. financial
services) or prohibited exemption by regulation.
Duties
3.3 Eligibility to become an auditor
A member of a professional body:
Depending on the jurisdiction, to report:
Oversight by recognised supervisory body;

Continuous application of ethical criteria.
Appropriately qualified (by exam, continuous

experience and education, and certification).
Continuously fit and proper.
0203
To report to the shareholders.

Directors report is consistent with financial statements;
Proper accounting records have been kept;
Financial statements agree with accounting records;
All information/explanations have been received;
Proper returns received from branches not visited;
Statutorily required information concerning directors
transactions has been disclosed.
EXTERNAL AUDIT
3.5 Appointment of auditors
At the point of re-election
Usually by shareholders.
May be delegated to those charged with governance,

but approved by shareholders in general meeting
(usually annual general meeting AGM).
Resignation during engagement
Appointment is usually for one year. Auditors offer

themselves for re-appointment at AGM.
Remuneration fixed by those who appoint them. If

delegated to directors, shareholders approve at AGM.
Audit Committees often have the role of recommending

auditors and fixing their remuneration.
Reasons include:
By the directors
Must inform the auditors and shareholders in writing.
Voted on by the shareholders, usually at the AGM.
Auditors have right to make representations at meeting.
If removed, directors must inform regulatory

authorities.
The auditors must file a statement of circumstances.
Limitation of audit scope by management;

Loss of trust/work relationship with management;
Regulatory requirement.
Procedures include:
3.6 Removal of auditors
Do not offer themselves for re-election.

Inform shareholders and relevant authorities that there
are no circumstances to be brought to their attention.
Give written notice to client (sent to authorities);

Statement of circumstances distributed.
May have the right to require directors to call a
general meeting to discuss circumstances.
In all situations, auditor must consider:
professional duty to complete the engagement; and

legal implications of resigning.
3.7 Limitations of external audit
Absolute assurance cannot be given due to:
0204
Nature of financial reporting;

Nature of the audit procedures;
Timeliness and cost benefit.
CORPORATE GOVERNANCE
2.1 OECD principles
The system by which business corporations are directed and

controlled. Its structure specifies the distribution of rights
and responsibilities between different participants in the
corporation and spells out the rules and procedures for
making decisions on corporate affairs. It provides the
structure through which the company objectives are set, and
the means of attaining them and monitoring performance.
To increase long-term shareholder value by enhancing

economic performance through:
the ethical and moral behaviour of management;

integrity, transparency and accountability;
compliance with law and regulation, and
securing reputation and confidence in attracting
inward investment.
Leadership
Effectiveness
Accountability
Remuneration
Relations with shareholders
AUDIT COMMITTEES
3.1 UK Corporate Governance Code
Is reflected by how those charged with governance

provide stewardship to:
Controls and systems:
achieve corporate objectives;
balance corporate objectives with societys

expectations; and
provide appropriate accountability to stakeholders.
Rights of shareholders
Equitable treatment of shareholders
The role of stakeholders
Disclosure and transparency
Board responsibilities
1.1 Objective
OECD AND UK CODES
0301
Integrity of the financial statements;

Internal controls and risk management systems;
Annual report is fair, balanced and understandable;
Annual report allows users to assess companys
performance, business model and strategy.
Internal audit:
Disadvantages
Seen as an unnecessary legal/regulatory burden.

Additional cost (not cost effective).
Difficulty in finding appropriate NEDs.
Risks and burdens of responsibility for NEDs.
May not be able to embed (in systems and culture).
AUDITORS COMMUNICATION WITH THOSE

CHARGED WITH GOVERNANCE
External audit:
Effectiveness of internal audit;

Asses work plan and findings;
Monitor managements responsiveness to findings;
Appointment/termination of head of internal audit;
Direct access to board chairman/Audit Committee
and accountable to the Audit Committee.
Appointment, re-appointment and removal;
Remuneration and terms of engagement;
Independence and effectiveness of audit process;
Results of audit process, representation letter,
management letter.
Engagement to supply non-audit services.
Whistle-blowing procedures.
4.1 Two-way communication
Promote effective two-way communication with those

charged with governance.
4.2 Responsibilities
Communicated through the letter of engagement.
4.3 Independence
3.2 Advantages and disadvantages
Statement that auditors are independent.
Advantages
Have identified threats and placed safeguards to

eliminate those threats.
High level, effective and informed oversight.

Enhances market, public and stakeholder confidence.
Composed of independent NEDs using own initiative.
Link for internal/external auditors to NEDs.
Deterrent to fraud.
0302
4.4 Form, timing, content of the audit
Consequences of the auditors work.
Understanding the entity.
Planning, strategy, work programme.
Detection of fraud and breaches of laws and

regulations.
4.5 Significant findings from the audit
Qualitative aspects of accounting policies, estimates

and disclosures.
Difficulties encountered during the audit.
Matters discussed with management.
Management letter, representation letter.
Adjusted and unadjusted errors.
Audit report.
0303
PROFESSIONAL CODES OF ETHICS AND CONDUCT AND PROFESSIONAL APPOINTMENT
ACCA CODE OF ETHICS AND CONTROL
1.1 Fundamental principles
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
1.2 Conceptual framework

Assists professional accountants (through guidance and
illustrative examples) in identifying, evaluating and
responding to threats to compliance with the fundamental
principles, rather than merely following rules).
1.3 Threats
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
1.4 Safeguards
Aim to eliminate or reduce to an acceptable level the

threats faced.
Will vary depending on the circumstances.
Two types
Created by the profession, legislation or regulation.

Within the work environment.
1.5 Ethical conflict resolution
Relevant facts.
Ethical issues involved.
Fundamental principles involved.
Established procedures followed.
The action followed and outcome.
Alternative courses of action and consequences.
Internal and external sources of consultation.
INTEGRITY, OBJECTIVITY AND

INDEPENDENCE
2.1 Principles and threats
Integrity and objectivity must be beyond question.
Independence in mind and independence in appearance.
0401
Threats to integrity and objectivity
Long association (self-interest, familiarity).
Fees and pricing (self-interest, intimidation).
Gifts and hospitality (self-interest, familiarity).
Recent employment with an assurance client (selfinterest, self-review, familiarity).
Financial interests (self-interest):
Future employment with an assurance client

(familiarity, intimidation, self-interest).
Partners;
Employees;
Close family member.
Close business relationships (self-interest, intimidation).
Actual or threatened litigation (self-interest,

intimidation).
Family and other personal relationships (self-interest,

familiarity, intimidation).
Serving on the board of an assurance client (selfinterest, self-review).
Loans and guarantees (self-interest).
Second opinions (professional competence and due care).
Overdue fees (self-interest).
CONFIDENTIALITY
Provision of other services:
3.1 Improper disclosure
Preparing accounting records and financial

statements (self-review).
Internal audit (self-review).
Exceptions
Valuation services (self-review).
With clients permission.
Disclosure is obligatory required (no need for

permission) by a legal, regulatory or professional duty.
Disclosure is made (voluntarily) in the public interest

(auditors right to disclose).
IT systems services (self-review).

Provision of temporary staff self-review).
Recruitment of senior management (self-interest,

familiarity, intimidation).
0402
Information acquired in the course of professional work

should not be disclosed to third parties.
3.2 Improper use
4.2 Client v client
Information acquired in the course of professional work

should not be used (or appear to be used) for personal
advantage.
Avoid the interests of one client adversely affecting

those of another.
If necessary, decline acceptance or discontinue.
Safeguards
Also applies to advantage of a third party.
Experience gained can be used in another employment.
Strict policies, training and disciplinary actions.
Proprietary procedures and systems cannot.
CONFLICTS OF INTEREST
Different assignment teams and regular independent

review.
4.1 Professional accountant v client
Advising clients to seek independent legal advice.
Should place clients interests before own interests.
Disengagement as quickly as clients interests allow.
Should not accept or continue an engagement if there is

or is likely to be a significant conflict of interests.
Any financial gain in excess of normal fees will always

result in a significant conflict.
0403
AUDITOR APPOINTMENT
1.2 Communication with current auditor
NOMINEE
1.1 New professional work
Permission of the potential client required for both

auditors to communicate with each other.
If permission is refused to either, the appointment must

be declined.
Perspective auditor requests information from current

auditor to determine if appointment will be accepted.
If a conflicting view between client and current auditor,

discuss with client to be satisfied that:
Three stages
Client screening
Ability to audit potential client ethical considerations.
Association with the potential client reputational risk.
Financial viability of the potential client fee recovery.
Legal requirements money laundering due diligence.
Is an ongoing procedure.
Engagement acceptance
clients view can be accepted as reasonable; and/or

client will accept that nominee might express a
different opinion.
Competence to perform:
1.3 Unpaid/overdue fees
Understand the entitys business;

Purpose, nature, scope of assignment;
Logistics of the engagement.
Professional appointment
Evaluate threats to fundamental principles.
Communicate with current auditor Any professional

or other reasons not to accept the engagement?
Establish why auditor is being changed.
If current auditor fails to respond, a no matters will be

assumed final letter should be sent.
Reason for fees not being paid should be established.
Not a reason by itself for not accepting appointment.
Not a reason for the current auditor refusing to

cooperate with the prospective auditor.
0501
AUDITOR APPOINTMENT
Transfer information
EXISTING AUDITOR
2.1 Response
Obtain clients permission to discuss with prospective

auditor.
If not obtained, reply that permission not obtained

and cannot discuss.
there are no matters to be aware of; or
give honest and unambiguous details of factors the
prospective auditor needs to be aware of.
2.2 Books, documents and papers
Client and successor auditor usually have no rights of

access to existing auditors working papers:
In some jurisdictions (e.g. UK) it is a legal

requirement to allow access to working papers;
Proprietary documents and audit methodology

cannot be accessed.
Transfer of clients books and papers
Books and papers that belong to the client should be

promptly transferred to the successor auditor.
Professional courtesy, plus clients permission, often

permits reasonable access to key working papers.
Includes completed financial statements, tax

returns etc.
Working papers and drafts are not transferred.
Last financial statements approved by the client;

Detailed trial balance in agreement with the
accounts.
Review of working papers
Reply to enquiries without delay that:
Transfer all reasonable information:
0502
Assists successor auditors work, for example, on

opening balances and comparatives (e.g.
attendance at year-end physical inventory count).
AUDITOR APPOINTMENT
3.2 Engagement letter
TERMS OF AUDIT ENGAGEMENTS
An auditor should accept or continue an audit engagement

only when the basis on which it is to be performed has been
agreed by:
Helps to avoid misunderstanding between the client and

auditor.
Documents and confirms:
establishing that preconditions for an audit are met; and

confirming a common understanding between the
auditor and management (and those charged with
governance) of the terms of the audit engagement.
3.1 Preconditions of an audit

Procedures to establish that these are present
Assess the appropriateness and acceptability of the

financial reporting framework.
Obtain managements agreement that it acknowledges

and understands its responsibilities for:
managements and auditors acceptance of

respective responsibilities;
auditors acceptance of the appointment;
the applicable reporting framework;
objective and scope of the work (audit); and
form and content of reports (including

modifications, limitations and restrictions on use).
May have a separate section dealing with other relevant

details (e.g. fees, timetable, other services, etc).
3.2 Recurring audits
the preparation and fair presentation of the

financial statements (according to the framework);
internal controls (so financial statements are free

from material misstatement);
providing the auditor with unrestricted access to all

relevant information and necessary persons (to
obtain audit evidence).
0503
Should be reviewed pre-audit (and updated if

necessary) to ensure terms are still appropriate:
Revised letter should be approved by client;

If not approved, consider whether appointment can
be continued.
AUDITOR APPOINTMENT
4.3 Lowballing (predatory pricing)
FEES
4.1 Basis of fees
Auditors are in business and expect a reasonable return.
Level of fees charged is a commercial decision (but

should be sustainable):
Seeking to increase market share or retain an audit client by

reducing audit fees to undercut competitors or pre-empt a
possible tender situation.
ACCA Code of Ethics does not specifically prohibit.
Public perception that audit quality is reduced.
Disbursements (travel, accommodation etc) should also

be recovered.
Risk must be managed to ensure integrity and

objectivity (independence) is not seen to be threatened.
Audit quality must not be impaired by reduction in fees.
Basis of fee should be made clear in engagement letter.
REAPPOINTMENT
Fees should take account of changes in circumstances

of the audit (e.g. risk, time, cost effective procedures).
Appointment is usually just for one year, with

reappointment at AGM.
Before reappointment the auditor must:
Time spent;
Skills, experience and level of staff.
4.2 Contingency fees
Strictly prohibited to charge contingency and similar

fees (e.g. opinion modified = no fee; based on a % of
profits; special offers) on assurance engagements.
reassess understanding of the business;
consider effect of prior audit on the purpose,

nature and scope of the next audit;
Risk of bringing the profession into disrepute.
reassess ethical risks;
consider fee levels, availability of staff and timing;
still be fit and proper; and
0504
be willing and able to continue client relationship.
DOCUMENTATION
Purpose
DOCUMENTATION
1.1 Importance, objective, definition, scope and purpose
The objectives and purposes of working papers

encompass their importance.
Objective of auditor
To produce working papers that provide:
a sufficient and appropriate record of the basis for

the audit report; and
evidence that the audit was planned and performed

in accordance with ISAs and other requirements.
Increase economy, efficiency and effectiveness of audit.

Assist in the planning and performance of the audit.
Facilitate the supervision and review of audit work.
Record the audit evidence generated.
Retain a record of matters of continuing significance.
Ensure the audit team can be held accountable.
Enable quality control review procedures.
FORM
2.1 Factors to consider
Scope
Covers all the documentation generated during the

entire audit cycle:
Ethical considerations;
Planning, work programmes, analysis, briefing,

work schedules, reliance on experts;
Significant discussions and other matters,

confirmations, reports to management, reviews,
checklists, written representations;
Other correspondence on all significant matters.
An experienced auditor, having no connection with the

audit, should be able to understand the:
0601
audit process (nature, timing, extent) results;

evidence obtained;
significant matters arising; and
conclusions reached.
DOCUMENTATION
Factors
Examples
Nature of engagement and the nature, size and

complexity of the entity.
The environment, controls and identified risks of

material misstatement in the financial statements.
The reliance to be placed on control effectiveness.
The extent of professional judgement required.
The audit methodology and tools used.
Extent of schedules, analyses and other documentation

prepared by the entity.
The nature and extent of exceptions identified.
The level of audit team direction, supervision and

review.
2.2 Standardisation
Tailored for each client.
Kept up to date (ISA, IFRS, regulations).
Checklists (planning, completion, IFRS, disclosure, etc).

Internal control questionnaires.
Internal control evaluation questionnaires.
Audit programmes.
Specimen letters.
Advantages
Efficient preparation of audit file.

Facilitates direction, supervision and review.
Aids quality control.
Consistent approach to audit functions.
Disadvantages
May lead to a mechanical, tick box approach.

May stifle initiative and use of professional judgement.
Bare minimum approach.
Failure to tailor approach increases audit risk.
2.3 Documentation techniques
Narrative
Graphics
Questionnaire
Electronic
0602
Checklist
DOCUMENTATION
CONTENT
3.1 Permanent v current audit files

Permanent audit file
Contains matters of continuing importance (e.g. legal

documents, control environment).
Provides a history of significant audit matters.
Current audit file
Schedule detailing basis of accounting and accounting

policy used.
The section work programme.
Audit test lead schedule for each test from the work
programme:
Relates primarily to the audit (interim, year end, final)

of the current financial statements (i.e. supports the
audit opinion).
A typical working paper contains:
Client name
Year end (Reporting date)
Subject of working paper
Schedule reference
Date of preparation and preparers identification
Date of review and identification of reviewer
Lead schedule shows breakdown of the audited

financial statement section plus comparatives.
Audit objectives
Significant matters arising
Conclusion
3.2 Audit section structure
Section summary:
0603
Test objective, basis and method of test;

Basis of sample selection;
Work done, matters arising and action taken;
Conclusion (on the test objective).
Audit test supporting schedules:
Identifying characteristics of the specific items or

matters being tested;
Work done on each item or matter.
DOCUMENTATION
3.3 Significant matters and working papers completion
4.2 Retention
All significant matters must be documented.
All matters supporting the audit opinion must be on file

before the opinion is signed.
Administrative matters must be completed within 60

days of the report being signed.
ACCA recommended minimum
CONFIDENTIALITY, SAFE CUSTODY,

RETENTION AND OWNERSHIP
sufficient to meet the needs of the audit practice; and

in accordance with legal and professional
requirements.
4.1 Confidentiality and safe custody

Confidentiality
Confidentiality is fundamental ethical principle.
Working papers are for the eyes of the audit team only.
Access by a third party:
Client permission (e.g. in engagement letter to

enable quality control review);
Legal or regulatory requirement (e.g. court order).
Safe custody
24/7 restrictions and secure access.
Standard data security principles apply for audit
documentation in e-format.
Seven years for audit working papers.

Seven years for tax files (then return to client).
If stored electronically, standard security and backup

procedures plus time locked to prevent early deletion.
4.3 Ownership
For a period:
0604
Working papers are the auditors property and are

confidential.
AUDIT PLANNING
PLANNING
1.2 Scope
To plan to perform the audit in an effective and efficient

manner.
Overall audit strategy sets the scope, timing and

direction of the audit and leads to ..
To obtain reasonable assurance that the financial

statements are free from material misstatement.
A detailed approach for the nature, timing and extent of

audit procedures.
1.3 Planning cycle
1.1 Objectives
To report on the financial statements and communicate

as required by the ISAs.
To devote
appropriate
attention to
important
areas
To identify
potential
problems and
resolve on a
timely basis
To organise and
manage the
engagement in
an effective and
efficient way
To assist in
assigning, directing
supervising and
reviewing audit
work
Appropriate planning reduces audit risk to an

acceptable level.
All aspects of planning (and any changes to it) must be

approved by the partner.
Input from the previous audit;

Current audit (interim, year end, final);
Matters for the attention of the next audit.
PRELIMINARY ENGAGEMENT ACTIVITIES
2.1 Rationale and approach

Rationale
A continuous process:
Need to consider circumstances that may adversely

affect ability to continue to perform the on-going audit
engagement.
Approach
0701
Ethical assessment on re-appointment must include

input from the previous audit and its closedown
procedures.
AUDIT PLANNING
AUDIT STRATEGY
Illustration
3.1 Establishing the overall audit strategy
Characteristics of the engagement.

Reporting objectives.
Timing.
Nature of communications.
Significant factors.
Preliminary activities.
Knowledge gained.
3.2 Nature, timing and extent of resources
4.1 Rational
Ensuring appropriate allocation to high risk areas.

Experienced team members.
Use of auditor and management experts.
Budgeted hours.
Interim, year end and final audit allocation.
Managing, directing and supervising resources.
3.3 Timetable
Interim audit (usually systems based).

Year-end audit (usually inventory count observation).
Final audit (substantive based).
Shows how risk will be reduced to an acceptable level.

Addresses the matters identified by the strategy.
Includes nature, timing and extent of all audit procedures.
4.2 Content
Risk assessment procedures.

Audit procedures at the assertion level.
ISA requirements.
4.3 Changes to planning decisions
AUDIT PLAN
0702
Planning is an on-going, dynamic process.

Current events may affect planning so far (e.g. business
understanding, materiality and risks) and further planning.
AUDIT PLANNING
In Summary
DIRECTION, SUPERVISION AND REVIEW
Inform team members of the key elements of the audit

engagement and their roles:
Direction tells the audit team what to do and why.

Supervision checks that the team is doing as directed.
Review agrees that what was directed has actually been
done. In particular, that all matters and issues raised by
the audit strategy and plan have been acted on.
DOCUMENTATION
The overall audit strategy and the audit plan, including any
significant changes made, must be documented.
Nature, timing and extent of the direction and supervision of

engagement team and review of their work must be planned.
5.1 Direction
Audit team briefing before the audit commences;

Individual briefings on the work to be carried out.
5.2 Supervision
Individual members must:
appropriately applying the detail in the audit

briefings; and
carry out the work effectively and efficiently.
Strong two-way communication should be normal practice

throughout the entire audit.
7.1 At the planning stage
5.3 Review
A continuous process covering the planning, work and

closedown stages of the audit.
Ensures that all processes and work has been carried out
in accordance with ISAs and the firms standards.
Ensures that the end result of an audit, the audit report,

is supported by the audit file.
COMMUNICATION TO THOSE CHARGE WITH

GOVERNANCE AND MANAGEMENT
Ensures auditor understands:

the business environment;
controls; and
business risks.
Helps the auditor to develop the audit strategy.
Consider withdrawing from the assignment if

communication significantly impaired.
0703
UNDERSTANDING THE ENTITY
1.2 Methods
UNDERSTANDING THE ENTITY AND ITS

ENVIRONMENT (ISA 315)
The auditor should identify and assess risks of material

misstatement, whether due to fraud or error, at the financial
statement and assertion levels, through understanding the
entity and its environment, including internal control, in
order to design and implement responses to assessed risks of
material misstatement.
1.1 Steps
1.3 Audit team discussions
Senior and key members of the engagement team.
Susceptibility of the financial statements to material

misstatements including fraud.
Application of professional scepticism.
Inform all other team members.
UNDESTAND THE BUSINESS

ENVIRONMENT
CONTROLS
UNDERSTAND WHAT CAN GO WRONG TO

CREATE MATERIAL ERRORS
FINANCIAL
STATEMENT LEVEL
ASSERTION
LEVEL
1.4 Sources of knowledge
AUDIT STRATEGY AND PLAN

TESTS
RESULTS
CONCLUSIONS
Inquire
Observe
Review
Inspect and analyse
Analytical procedures, benchmarking, KPIs
0801
At the client.
Within the audit firm.
External.
1.5 Using the knowledge
2.3 Selection and application of accounting policies
To provide a framework to:
plan (and set expectations);

exercise professional judgement and scepticism;
assess risk of material misstatement;
respond to those risks;
assess results and feedback
2.4 Updating existing clients
To ensure an effective and efficient audit is carried out.
NEW AND CONTINUING AUDITS
What changes have occurred since the last audit?

How do they affect the next audit?
AUDIT RISK
3.1 Concept
2.1 Matters to consider
Must be appropriate, consistent with the reporting

framework and in-line with industry practice.
Before accepting appointment General understanding

sufficient to make an appropriate tender/proposal.
After accepting appointment Enhanced understanding
sufficient to plan an effective and efficient audit.
The risk that the auditor gives an inappropriate audit opinion

when the financial statements are materially misstated.
A function of the risks of material misstatement and

detection risk.
Needs to be reduced to an acceptable level.
2.2 Information needs
3.2 Assessing the risks of material misstatement
Understand the business, environment and controls.
Consider classes of transactions, account balances and

disclosures.
Can be at the:
General economic factors

Industry
Business
Management and ownership
Financial performance
Reporting environment.
0802
financial statement level; or

assertion level.
Assessment and measuring
3.3 Basic principles

Audit
Risk
Inherent
Risk (IR)
Components
Control
Risk (CR)
Detection
Risk (DR)
Ultimate risk
Auditor reduces to
Risk of material misstatement
acceptable risk
Auditor assesses as entity risks independent of audit
Make preliminary assessment through understanding

the design and implementation of controls.
Test operating effectiveness of key controls where

efficient to do so.
Control risk remains high if:
3.4 Inherent risk

The susceptibility of an assertion to misstatement that could
be material (individually or aggregated) assuming no related
internal controls.
3.5 Control risk
controls are not effective;

inefficient to test; or
substantive procedures alone are sufficient.
3.6 Detection risk

That audit procedures performed to reduce risk to an
acceptably low level will not detect material misstatement,
(individually or aggregated).
Two elements:
That material misstatement at the assertion level (individually

or aggregated) will remain uncorrected due to inappropriate
operation of control procedures (i.e. it will not be prevented
or detected and corrected).
Sampling risk
Consider to be high unless key controls identified and

operating effectiveness successfully tested.
0803
sampling risk; and

non-sampling risk.
Conclusion based on a sample may differ from that if

the whole population was tested.
Non-sampling risk
3.8 Significant risks
Reaching an inappropriate conclusion for any reason

other than sample size. For example:
Risks that require special consideration.
misinterpreting test results:

poor quality control procedures.
Fraud;
Complex (accounting) calculations;
Significant non-routine transactions;
Management intervention and override.
3.7 Application of audit risk model
AR = IR CR DR
Audit
risk
Inherent
risk
Control
risk
Detection
risk
Fixed
Fixed
H
L
H
L
L
H
Detection risk is managed through the nature, timing

and extent of audit work.
Require higher levels of professional judgement and

scepticism:
3.9 Documentation
0804
Audit team discussion.

Key elements of understanding.
Internal control components.
Sources of key information.
Risk assessment procedures.
INTERNAL CONTROL
Audit requirements
INTERNAL CONTROL SYSTEMS
1.1 Overview
Designed and implemented by management, to provide

reasonable assurance about:
reliability of financial reporting;

effectiveness and efficiency of its operations; and
compliance with applicable laws and regulations.
the five internal control components;

the controls relevant to financial reporting; and
how a specific control (or combination) prevents,
detects and corrects material misstatements.
1.2 Control environment
Components
To understand:
Foundation for effective internal control, providing

discipline and structure:
INTERNAL CONTROL
Governance and management functions;

Attitude, awareness and actions of management.
1.3 Risk assessment process

CONTROL
ENVIRONMENT
RISK
ASSESSMENT
PROCESS
INFORMATION
SYSTEMS
CONTROL
ACTIVITIES
Management identifies, assesses and manages events

that may prevent the entity carrying out its strategies
and achieving its objectives.
1.4 Information system

CONTROL
MONITORING
0901
Physical and hardware infrastructure, software, people,

procedures and data.
INTERNAL CONTROL
Procedures and records to:
1.7 Limitations of internal control
Manual v IT controls
initiate;
record;
process;
report; and
maintain accountability.
1.5 Control activities

Policies and procedures that address risks that threaten the
achievement of the entitys objectives.
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Authorisation.
1.6 Monitoring of controls
A management process to assess the effectiveness of

internal control performance over time.
Taking necessary corrective actions for changes in

conditions.
Manual controls considered higher risk than IT controls.

Manual controls can use judgement and discretion.
IT controls are automated.
Inherent limitations
Collusion between those who operate the controls.

Overriding controls by management.
Error, mistakes, poor judgement or breakdown.
Non-routine activities bypassing controls.
Changes in environment resulting in obsolete controls.
Deterioration in compliance.
Lack of maintenance.
Cost benefit.
CORPORATE GOVERNANCE AND INTERNAL

CONTROL
2.1 Introduction
0902
See Session 3.
INTERNAL CONTROL
3.2 Methods for understanding
Turnbull guidance
Control design
A risk-based approach.
Internal control and risk management are inseparable.
Should the control effectively prevent, detect and

correct material errors?
Internal control system must be sound:
Risk assessment procedures include:
facilitate effective and efficient operations;

ensure quality of internal and external reporting;
ensure compliance with laws and regulations.
Review of internal control
Annual review by the board.

Regular reports from management to the board.
Strong emphasis on the role of internal audit.
EVALUATION OF INTERNAL CONTROL

SYSTEMS
Control implementation
Must be shown to operate using combination of:
3.1 Understanding internal control
Understand design and implementation.
Poorly designed and/or weak implementation greater

risk of material misstatement.
Previous experience
Inquiry
Observation
Inspection
Walk-through
0903
Walk-through
CAATs
Re-performance
Observation
Actions taken
Inquiry
INTERNAL CONTROL
3.3 Documentation
3.4 Impact on audit approach
Design and implementation assessed for all clients.
Use professional judgement to decide if reliance can be

placed on control effectiveness.
Identify whether particular internal controls exist:
If to be relied on, obtain audit evidence on

effectiveness.
Inform those charged with governance of significant

deficiencies in design, implementation or operation of
controls.
May be manual (simple systems) or electronic (complex

systems, regular updates required).
Internal control questionnaires (ICQs)
Closed questions;
May not be tailored to the client;
Tick-box exercise.
Internal control evaluation questionnaires (ICEQs)
Designed to assess whether errors or fraud are possible:
Open and principles based questions;

Targeted for each element of client system;
Higher level of understanding required;
Can be incorporated in testing process.
Flowcharts
Symbolic diagrams represent the sequential flow of

authority, processes and documents.
Narrative notes
Describe less complex systems or supplement

flowcharts of complex systems.
0904
AUDIT MATERIALITY
1.4 Performance materiality
MATERIALITY
1.1 Concept
An expression of relative significance of a matter in the

context of the financial statements as a whole.
Information is material if its omission or misstatement could

influence the economic decisions of users taken on the basis
of the financial statements.
Professional judgement used.

Quantitative and qualitative.
Aggregate values considered.
1.3 Levels of materiality

Materiality level for the financial statements as a whole
Set to reduce the risk that the aggregate of uncorrected and

undetected misstatements exceeds materiality for the
financial statements as a whole.
ISA 320
Minimises the risk that the financial statements contain

a material error(s).
1.5 Qualitative materiality
Presentation, form and narrative content.

Often highly subjective because of the judgemental
disclosure narrative required by IFRS.
1.6 Impact
Throughout all stages of the audit.
CONSIDERATIONS
2.1 Professional judgement

Particular classes of transactions, account
balances or disclosures, if considered
appropriate
Performance
materiality for
above, if any
Need to understand the entity and its environment.
What classes of transactions, balances and disclosures

are material?
Performance materiality for assessing

risks and planning further audit
procedures
1001
AUDIT MATERIALITY
2.2 Amount (quantitative materiality)
Understand economic decisions of users.

Factor in critical points.
Financial statement level and assertion level.
Precise determination, opinion, judgement and
estimation.
Form of the misstatement, rather than value.
Higher degree of subjectivity and interpretation.
AUDIT PROCEDURES
Judgements about the size of misstatements that will be

considered material determine performance materiality.
Affects:
nature, timing and extent of risk assessment
procedures;
identifying and assessing risks of material

misstatement; and
nature, timing and extent of further audit

procedures.
All matters identified as material must be tested in

detail.
Use judgement for remaining items.
3.3 Relationship with audit risk
3.1 Planning
5-10% net profit before taxation

1-2% net assets
-1% total assets
-1% revenue.
3.2 Effect on audit work
2.3 Nature (qualitative materiality)
Guidelines
Planning materiality has an inverse relationship with

audit risk.
The lower the materiality level (for a given population)

the higher the number of material items.
3.4 Changing materiality as the audit progresses
1002
Must always be reassessed to reflect progressive audit

findings; planning is affected (see 3.1 above).
FRAUD, LAWS AND REGULATIONS
1.3 Management and auditor responsibilities
FRAUD
Objectives
Those charged with governance and management
To identify and assess risks of material misstatement.

To obtain sufficient appropriate audit evidence.
To respond appropriately to fraud or suspected fraud.
To prevent and detect fraud and error:

Emphasis on prevention and risk management;
Ensure culture of honesty and ethical behaviour.
1.1 Definitions
Auditor
Fraud intentional act involving deception to obtain an

unjust or illegal advantage.
To obtain reasonable assurance that financial statements

are free from material misstatement (fraud or error):
Critical application of professional scepticism;
Consider susceptibility of misstatement due to fraud.
Is not responsible for prevention of fraud and error.
Fraud risk factors events or conditions indicating an

incentive, pressure or opportunity to commit fraud.
Error unintentional mistake in the financial statements
(including omission).
1.4 Risk assessment procedures
1.2 Types of fraud
Fraud control design, implementation and effectiveness.
Fraudulent financial reporting
Inquiries (to identify incentives, opportunity, etc) of:

those charged with governance;
risk management personnel;
internal audit;
direct and indirect operating personnel;
employees who deal with susceptible transactions;
internal and external legal services.
Revenue is always a significant fraud risk.
Misstatements or omissions intended to deceive users:
Accounting records or supporting documents;

Events, transactions balances or other information;
Measurement, recognition and disclosure.
Misappropriation of assets
Theft or misuse (both tangible and intangible).
1101
1.5 Effect on audit strategy and extent of work
1.6 Written representations
Audit strategy
Managements responsibility for design,

implementation and maintenance of internal control to
prevent and detect fraud.
Disclosure to the auditor of:

the results of managements risk assessment; and
knowledge of fraud or suspected fraud.
Increase professional scepticism.

Reassess audit approach.
Nature, timing and extent of substantive procedures.
Procedures to match the risks identified.
Audit team
Specialist skills.
Stronger briefing, supervision and review.
Higher level of experienced staff.
Extent of audit procedures
Should not be predictable.

Use of experts.
Physical inspection of at risk assets.
Targeted CAATs, data-mining, benchmarking.
Targeted analytical procedures.
Specific confirmation requests.
Post prior-year audit transactions.
Override of controls
Journal entries and other adjustments.

Accounting estimates.
Business transaction rationale.
Transactions outside of normal procedures.
1.7 Communication with management and those

charged with governance
If there is doubt on whom to report, auditors must seek

legal advice, or ACCA advice, before taking any action.
Management
Factual findings.
Timely (if verbal, follow up in writing).
Report to management level above those implicated.
Those charged with governance
1102
Communicate all actual, suspicions of, or weaknesses in

controls relating to, fraud.
Communicate concerns (if any) about managements
attitude to managing fraud risk.
Discuss (e.g. with the audit committee) any
implications for further audit procedures.
Regulatory and enforcement authorities
2.2 Types of laws and regulations
Direct affect financial statements (e.g. IFRS).
Indirect affect aspects of the business relevant to the

financial statements (e.g. operating licence).
Duty of confidentiality normally precludes.

If duty can be overridden, seek legal advice.
May be statutory duty without informing the client.
1.8 Withdrawal from the engagement
In exceptional circumstances if unable to continue the

audit.
LAWS AND REGULATIONS
2.3 Management and auditor responsibilities
Auditors objectives
To obtain sufficient appropriate audit evidence about

compliance that directly affects the financial statements.
To perform audit procedures to identify non-compliance

that may have a material effect.
To respond appropriately to actual or suspected noncompliance identified during the audit.
2.1 Non-compliance
Acts of omission or commission (intentional or unintentional)
that are contrary to prevailing laws or regulations.
Management to ensure that operations are conducted

within the laws and regulations applicable to the entity.
Control environment and systems.
Auditors to plan, perform and evaluate the audit

recognising material effects of non-compliance.
Procedures are similar to the audit approach to

fraud.
2.4 Indications that non-compliance may have occurred

Examples
1103
Enquiries or investigations by regulators, authorities, etc.

Fines and penalties.
Indications of fraud.
Media comment.
2.5 Non-compliance discovered

Considerations
Understand nature, circumstances, effect on financial

statements.
Potential consequences include:
fines;
penalties;
damages;
threat of expropriation of assets;
enforced discontinuation of operations; or
litigation.
Implications for the audit report.
Procedures
Document, discuss, consult, consider.
2.6 Reporting non-compliance and withdrawal from

engagement
Essentially the same as for fraud and error.
1104
TESTS OF CONTROL
COMPUTER SYSTEMS CONTROLS
1.2 Application controls
1.1 General controls

Policies and procedures that support the effective functioning
of application controls by ensuring the continued operational
integrity and security of data and information systems.
Manual and automated procedures (typically at business

process level):
Purpose
Aim to establish a framework of overall control.
ORGANISATION
AND
MANAGEMENT
APPLICATION
SYSTEMS
DEVELOPMENT
Purpose
Classifications
COMPUTER
OPERATION
SYSTEMS
SOFTWARE
Provide reasonable assurance that all transactions are:
DATA ENTRY
AND PROGRAM
An alternative classification is administration controls

and systems development controls.
Can be preventative or detective in nature;

Designed to ensure integrity of accounting records;
Relate to initiation, recording, processing and
reporting transactions or other financial data.
authorised;
recorded;
processed completely and accurately;
on a timely basis.
Classifications
Input
Processing
Alternative classification:
transaction controls; and
file controls.
1201
Output
Master file
TESTS OF CONTROL
TESTS OF CONTROL
2.1 Auditors consideration of internal control

Risk assessment and understanding of design
and implementation of internal controls.
Substantive procedures audit procedures designed to

detect material misstatements at the assertion level in
transactions, balances and disclosures.
2.2 Nature, timing and extent of tests of control
Extensive auditor judgement used.
Nature of tests of control

No reliance
to be made
Potential
reliance
Test
effectiveness
Evaluate
Remaining assurance
from substantive
procedures
Not
effective
Report to
management
All assurance from
substantive
procedures
Tests of control audit procedures designed to evaluate the

operating effectiveness of controls in preventing, detecting
and correcting material misstatements at the assertion level.
Inquiry, observation, inspection and reperformance.

Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Authorisation.
Timing of tests of control
Controls throughout the year.

Year-end inventory count exception once only.
Interim audit plus timeframe from interim to year end.
Extent of tests of control
1202
Reliance to be placed on the control.

Frequency of performance of the control.
Results of other tests on same assertion.
Changes made to system of controls.
TESTS OF CONTROL
2.3 Results of tests of control
Errors found during tests of control
3.1 Key skills
Concept of materiality does not apply.

Isolated?
Indicative of the population as a whole?
Controls reliable = reduced substantive procedures.

Controls not reliable = 100% substantive tests.
Report control deficiencies to management.
General
Significant risks
Tested annually.
The higher the risk of material misstatement, the greater

the need to test.
Manual controls generally higher risk than automated.
The higher the control reliance, the greater the need to test.
1203
Inquiry
Observation
Inspection
Reperformance
Identify control weaknesses:
Control environment;
Risk assessment procedures;
Information systems;
Monitoring.
Suggest tests of control:
No changes made in current year.

Individual controls tested at least every three years.
Does not relate to a significant risk.
Does not relate to a key control (high reliance).
To ensure that something good happens (or

something bad does not happen).
Specify control activities:
2.4 Reliance on past results
Specify control objectives:
Conclusions from tests of control
EXAM SKILLS FOR TESTS OF CONTROL
Deficiencies in control components.
Make recommendations:
Who? What? When? Factually correct. Clear.
TESTS OF CONTROL
Control objectives relating to financial statements
4.1 Control objectives
Authorised transactions (valid V)

Promptly recorded (complete C)
Correct amount (accurate A)
Appropriate accounts (A)
Correct accounting period (cut-off C)
Recorded assets exist (existence E)
CAVe
All goods dispatched (services rendered) are correctly

invoiced and recorded.
Customer order
Sales order
Can invoices be raised
when no goods despatched?
3.2 Other considerations
REVENUE CYCLE
Despatch note
Invoice
Key controls often relate to authorisation, pre-numbered

(completeness) and multi-part documents.
Sales day book
Use of CAATs to select sample (may be 100%) and test

controls where system is computerised.
General ledger
Dr SLC a/c
Cr Sales
Can goods be despatched

without authorisation?
Receivables
ledger
Can goods be despatched

but not invoiced?
Can invoices be raised
but not recorded?
Can goods be despatched or
charged to the wrong customer?
Control objectives and activities should ensure that:
customers are credit worthy;

dispatches are valid, complete and recorded;
accurate invoices are raised for all dispatches;
all information is complete, accurate and up to date
(e.g. credit control); and
receipts are recorded/banked promptly and intact
(reduces risk of misappropriation).
1204
TESTS OF CONTROL
4.2 Internal controls and sample tests of controls
Dispatches
Sales orders
Serially numbered (i.e. pre-numbered or generated in

strict numerical sequence) to ensure completeness and
control of dispatch.
Identify outstanding orders and follow up old

items.
Authorised for validation of price, quantity, goods

availability and customer credit.
Re-perform validation.
Agree credit approval.
Test check to sales orders.
Pre-numbered, multi-part and regular sequence check.
Re-perform procedures for completeness.
Open sales order file to enable review to ensure all

orders are completed.
Authorised and matched to sales orders.
Test check for missing dispatch notes

(completeness) and validate reasons.
Proof of delivery.
Test check for proof of delivery.
Sales invoices
Matched to dispatch notes.
1205
Test check invoices to dispatch notes.
Authorised and validated to dispatch note (and

customer order) and authorised internal documentation
(price, quantity, availability, customer creditworthiness,
authorised discounts, arithmetical accuracy).
Re-perform to check authorisation, detail and

arithmetical accuracy, calculation of sales tax.
Sequence check to agree dispatches have been

correctly invoiced.
TESTS OF CONTROL
Recording
Pre-list sales invoices (sales day book).
Agree posting and analysis in day book.

Agree arithmetical accuracy of daybook.
Agree posting of daybook to general ledger and
sales ledger.
General ledger
Dr Purchases
Cr PLCa/c
Monthly statements prepared and sent to customers.

Agree and review procedure.
Review correspondence and ensure customer

queries resolved.
Receivables confirmation at year end.
PURCHASES CYCLE

Payments are only made for goods and services received
and required by the entity.
Invoice
Purchase day book
Re-perform control a/c reconciliation.
Purchase order
Can goods be ordered

GRN
Can goods be received
without a liability
being raised?
Control a/c prepared and reconciled to list of balances.
Purchase requisition
Can goods be received
1206
Payables
ledger
Can a liability be raised for

goods not received?
Can a liability be recorded for
the wrong amount?
Can a liability be raised for
the wrong supplier?
requisitions are for valid business expenses;

ordering is efficient and cost effective;
purchases are made from authorised suppliers;
goods received were ordered and not damaged;
invoices are for goods received at correct price;
expenses are correctly analysed on timely basis; and
payments are made to authorised suppliers for
goods received.
TESTS OF CONTROL
Goods received
Requisitions
Prompt inspection (quality) and agreement to purchase

order (quantity, control).
Serially numbered GRNs (completeness and cut-off).
Accounts and purchase departments notified (e.g. by

copy GRN).
Authorised that procedures completed.

Sequence test GRNs.
Agree authorisation (e.g. to purchase order).
Pre-numbered, multi-part, budgetary control, inventory

levels checked and authorised (by user department).
Verify authorisation.
Completeness check.
Purchase orders (PO)
Raised from purchase requisitions and authorised

(within limits) in separate purchase department.
Placed with approved supplier at agreed price.
Purchase invoices
Verify authorisation to requisition.

Review supplier approval (tender process).
Sequentially numbered (control), analysed, recorded

promptly (e.g. in purchase day book).
Always in writing or electronically initiated.
Details agreed to GRN/PO.
Calculations, cross casting, sales tax agreed.
Serially numbered and sequence checked (completeness).
Authorised that procedures undertaken and completed.
Regular review to identify and explain unfilled orders.
Regular reconciliation of control a/c independently

checked.
Check sequence, review process and agree

appropriate action taken.
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Review and agree authorised. Re-perform.
Regular supplier statement reconciliations (authorised).

Agree process carried out and authorised.
Statement confirmation at year end.
TESTS OF CONTROL
PAYROLL CYCLE
To ensure payments are only made to real employees

for actual work carried out.
Similar to purchase cycle employees provide a

service.
Work recorded
Can work be recorded

that was not carried
out?
Can amendments to
standing data be made
that were not
authorised?
Amendments
Calculations
Payroll
Recording in
ledgers
General ledger
Dr Wage expense
Cr Net wages
Cr Tax deductions
Cr Other deductions
Payments
Can work be recorded by

employees that do not
exist?
Standing data
Can incorrect postings be

made for payroll expense and
liabilities?
Changes to an employee status (standing data) should

be authorised through approved procedures.
Agree changes supported by relevant

documentation and authorised.
For all changes to standing data, reports produced.
Reports independently agreed to originating source and

authorised.
work carried out is accurately recorded;

accurate calculations (gross, deductions, net pay);
amendments (starters/leavers) are authorised;
posting to ledgers are timely and accurate; and
payments are made to those entitled to receive
them on a timely basis.
Can incorrect calculations

and deductions be made?
Can payments be made for

employees not on the payroll?
1208
Review procedures and agree authorisation.
Reconciliation of starters and leavers and existence of

employees.
Re-perform reconciliation and agree to supporting

documentation (e.g. HR records).
Physical verification of existence of employees.
TESTS OF CONTROL
Recording work
Cash payments
Use of clock/swipe cards or similar.
Procedure for clocking in/out to ensure employees

physically present.
Physically/electronically observe procedures.
Review procedures, reconcile issues, physical

inspection of employee and matching card.
Segregation of duties review and confirm appropriate.
Checked, reconciled to work recorded and authorised.
Independent analytical review of key data (e.g. net pay,

overtime, bonuses, tax and other deductions).
Control a/cs for wages/salaries/taxes and other

deductions.
Payments for deductions reconciled to payroll.
Review for evidence of analysis before approval.
Regular checking payroll data to independent sources

(e.g. human resources documentation).
Review control records and agree.
Recording
Check facilities.
Unclaimed wages promptly re-banked.
Review authorisation for work done and overtime.
Payroll preparation
Observe process and agree signatures to employee

contracts.
Safe custody of pay packets until collection.
Checking and authorisation of work done and overtime

claimed.
Observe procedures.
Pay out witnessed and wage receipts evidence.
Independent safe custody and control of unused cards.
Wage packets prepared by two people.
1209
Re-perform reconciliation.
Agree deductions correctly accounted for.
Agree prompt and appropriate payments made.
Review of journal entries for authentication and

approval.
TESTS OF CONTROL
INVENTORY CYCLE
7.2 Internal controls and sample tests of control
Goods receipt/dispatch (see purchase/revenue cycles).
Physical inventory
Security, physical safeguards.

Observe, inspect and test as appropriate.
Physical counting and reconciliation to records.
Physical observation of inventory counting.
Perpetual inventory procedures.
CASH CYCLE
1210
TESTS OF CONTROL
8.2 Internal control examples
Cash payments
Supporting authorised documentation for payment.

Two signatories for large payments.
Pre-numbered and sequentially issued cheques.
Unused money transfer documents securely held.
Spoiled/cancelled documents securely retained.
Cash receipts
Mail opening procedures.

Restrictively endorsing cheques.
Prompt banking on day of receipt.
Regular bank reconciliations.
To ensure that:
All material capital movements are approved by

the board;
Only capital expenditure is recognised as an asset;
Non-current assets are properly depreciated

(amortised);
Impairments are identified and recognised.
9.2 Internal control examples
NON-CURRENT ASSETS CYCLE
1211
Annual capital expenditure budgetary control.

Asset register.
Periodic asset inspection (asset register reconciliation).
Regular review and approval of depreciation rates.
Regular maintenance and servicing.
Adequate and appropriate insurance.
Safekeeping of documents of title.
Appropriate tracking of assets off-site.
COMMUNICATION ON INTERNAL CONTROL
DEFICIENCIES IN INTERNAL CONTROL
COMMUNICATING DEFICIENCIES
1.1 Deficiencies
2.1 Requirement to report
Exist when a control does not prevent, detect and correct

misstatements or a necessary control is missing.
Significant deficiencies
1.2 Significant deficiencies

Of sufficient importance to bring to attention of those
Examples
May lead to a material misstatement.

Susceptibility to loss or fraud.
Subjectivity and complexity of determining estimate.
Importance in financial reporting process.
Cause and frequency of exceptions.
Report in writing to those charged with governance.

Also appropriate level of management.
Directly to regulators if required by regulatory regime.
Other deficiencies
Not significant, but auditor considers they should be

drawn to the attention of management.
2.2 Report to management
Need for explained in engagement letter.
May also be used to:
1301
provide constructive advice (e.g. on risk

management);
indicate where audit efficiency could be improved;
and
protect auditor against potential litigation.
COMMUNICATION ON INTERNAL CONTROL
2.3 Content
2.5 Follow-up
Addressed to those charged with governance.
Clear, concise, constructive and structured.
Response of those charged with governance obtained as

quickly as possible.
Covering letter.
Assessed for implications for next stage of audit.
Prior-year letter should be reviewed as part of planning

for current audit.
Purpose of audit (to express opinion);
Accounting and internal control systems were

considered only to the extent necessary for audit;
2.6 Interested third parties
Only weaknesses identified by audit are discussed;
If more extensive procedures might identify more

deficiencies;
Provided for use in context of audit.
Supporting detail.
2.4 Form and presentation of supporting detail
Explanation/details
Consequence/effect
Recommendation
Management response
1302
Managements permission required.

Disclaimer/caveat normally included.
SERVICE ORGANISATIONS
A third-party organisation that provides services to user

entities that are likely to be relevant to user entities internal
control as it relates to financial reporting.
1.1 Use by client entity
Examples
Payroll
Accounting records
Data entry and information processing
Internet service provider
Application service provider
Identify and assess design and implementation of

relevant controls at the service provider.
Use professional judgement to decide if testing control

effectiveness is necessary.
2.1 Effect of the service organisation

At the client
Relationship between client and service provider.

Nature of services provided.
Nature and materiality of transactions processed.
Controls operated by the client.
At the service provider
Assurance reports from service providers auditor.

Discuss direct with service provider.
Visit service provider.
Use another auditor.
2.2 Assessing risk

Knowledge of the service organisation
Standard approach.
Knowledge of controls in operation at the client
AUDIT PLANNING
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Can sufficient appropriate audit evidence be obtained

solely at the client?
Design and implementation of service providers controls
3.2 Content of type 1 and type 2 reports
Type 1 report
If clients controls do not give the auditor the assurance

required:
Obtain assurance reports (see 3);

Request specific information from service provider;
Visit service provider to test relevant controls;
Use another auditor.
A description of the design and implementation of the

relevant control systems.
Opinion by the service organisations auditor:
SERVICE ORGANISATION ASSURANCE REPORT
Accuracy of the description;

Suitability of design to meet stated objectives;
Whether or not the controls have been implemented.
Type 2 report as Type 1 plus
Assurance report may provide sufficient appropriate

audit evidence.
Factors to consider
Competence and independence of the service providers

auditor.
Adequacy of standards under which the report is issued.
An opinion on the operating effectiveness of the

controls tested.
Details of the system, controls tested and results.
3.3 Substantive procedures
If required by clients auditor:
treat as an agreed upon procedure; or

carry out during a visit to service organisation; or
use another auditor.
3.4 Auditors report on the financial statements
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Standard approach.
No mention of third-party opinions or work should be
mentioned.
AUDIT EVIDENCE
AUDIT EVIDENCE
SUFFICIENT
Sufficient appropriate audit evidence should be obtained,

from which reasonable conclusions can be drawn, as a basis
for the audit opinion.
Nature and level of audit risk.

Nature of internal control.
Reliance on effective controls.
Auditors (cumulative) knowledge and experience.
Materiality of items.
Audit findings (e.g. fraud or error).
Source and reliability of information (i.e.
persuasiveness).
APPROPRIATE
Sufficiency measures quantity of evidence required.
Appropriateness measures quality (relates to relevance

and reliability).
Audit evidence supports the auditors opinion.
1.2 Sources
3.1 Interrelationship
Internal or external.
Oral or written.
Direct or indirect.
Ideas list
3.2 Relevance
Supports financial statement assertions relating to:

recognition;
measurement; and
presentation/disclosure.
Accounting systems
Documentation
Tangible assets
Management and employees
Customers and suppliers
Other third parties
Appropriate = Relevant + Reliable
1501
AUDIT EVIDENCE
Transactions and events (COCOA)
Presentation and disclosure (COCOA)
Completeness all necessary transactions and events

have been recorded.
Completeness all necessary disclosures are included.
Occurrence recorded transactions/events have

occurred and relate to the entity.
Occurrence and rights and obligations (O)

disclosed events and transactions occurred and relate to
the entity.
Classificationtransactions and events have been

correctly categorised.
Cut-off (O) recorded in the correct period.
Classification and understandability financial

information is appropriately presented and disclosures
are clearly expressed.
Accuracy transactions and events have been recorded

appropriately.
Accuracy and valuation financial and other

information is disclosed fairly at appropriate amounts.
3.3 Reliability
Balances (CARE)
Completeness all relevant assets, liabilities and

equity interests been recorded.
Valuation and allocation (A) assets, liabilities, and
equity interests are at appropriate amounts including
valuation or allocation adjustments.
Rights and obligations assets are controlled,

liabilities are obligations.
Existence assets, liabilities, and equity interests exist.
Accuracy and completeness are key assertions.
External (independent) usually more reliable than entity

(internal) sources.
Documentary/written more reliable than verbal/oral.
Auditor obtained more reliable than indirectly obtained.
Information more reliable when related internal controls

are effective.
Original documents more reliable than copies (hard or

electronic).
1502
AUDIT EVIDENCE
3.4 Direction of testing
4.2 Procedures
Overstatement v understatement:
Risk of overstatement (e.g. existence of assets)

test from statements source.
Risk of understatement (e.g. non-recording of

obligations) test from source statements.
Inspection (documents, records, physical assets, etc).

Observation (of procedures and processes).
Inquiry (of other parties both internal and external).
Confirmation (from other parties of inquiries made).
Recalculation (to confirm mathematical accuracy).
Reperformance (to confirmed procedures performed).
Analytical procedures (to establish relationships
between data sets and develop expectations)
Test Dr entries for overstatement (e.g. assets, expenses)

and Cr entries for understatement (e.g. liabilities,
income).
4.3 Examination skills
OBTAINING AUDIT EVIDENCE
4.1 Where evidence is obtained from
UNDERSTANDING
THE ENTITY
TESTS OF
CONTROL
Financial statement assertions:

Direction of testing and assertions:
SUBSTANTIVE
PROCEDURES
1503
Flow of accounting information;

Assertion objectives.
T account:
Relevant audit evidence.
Accounting entries;
Assertion objectives.
Procedures (as above).
AUDIT EVIDENCE
SUBSTANTIVE PROCEDURES
5.1 Aim
Performed to detect material misstatements at the

assertion level and include:
tests of detail of transactions;

tests of detail on account balances;
tests of detail on disclosures; and
substantive analytical procedures.
5.2 Nature, timing and extent

Nature
Tests of detail on transactions:
Obtain audit evidence regarding transaction

assertions.
Based on risk of over or understatement, trace a

transaction through a system.
Primarily for the statement of profit and loss and

other comprehensive income.
Tests primarily on assertions related to statement

of financial position (assets/liabilities/equity).
Tests to ensure disclosure requirements meet.
Substantive analytical procedures:
Usually applicable to larger volumes of

transactions that tend to be predictable over time.
Timing
Normally carried out during the final audit.
May be carried out at an interim stage or year end:
Tests of detail on balances and disclosures:
1504
Usually to be time efficient (tight reporting

deadlines);
Need to ensure any gap period (to year end) for

transaction tests covered at the final audit;
Need to roll forward and reconcile balances at

time of testing to year-end balances.
Audit evidence from prior year substantive tests cannot

be relied on for the current year.
AUDIT EVIDENCE
Extent
Relate to audit risk model (detection risk).
Higher risk, higher sample sizes.

Lower risk, minimum sample sizes.
All (performance) material items must be tested.
5.3 Hybrid approach
Dual purpose testing (control and transaction).
For a given cycle, controls and transactions tested for

the same sample items.
1505
ANALYTICAL PROCEDURES
Nature of tests
MEANING AND NATURE
1.1 Meaning
Trend analysis (income and expenditure analysis).
Evaluations of financial information through analysis of

plausible relationships among both financial and nonfinancial data.
Ratio analysis (both statement of financial position and

statement of comprehensive income).
Reasonableness tests (statement of comprehensive

income analysis).
Includes resulting investigation of fluctuations and

relationships that are inconsistent with other relevant
information or which deviate from predicted amounts.
1.2 Consideration of relationships
Elements of financial information expected to conform

to a predicted pattern.
Financial and relevant non-financial information.
Uses
To perform risk assessment procedures at the planning

stage of an audit.
1.3 Comparisons of financial information
To obtain relevant and reliable audit evidence when

using substantive analytical procedures.
To assist in forming an overall conclusion as to whether

the financial statements are consistent with the auditors
understanding of the entity.
Must use at planning and overall review stages.
1.4 Expectations
Auditor derived from:

understanding of the entity and its environment;
financial and managerial statements.
Differences must be investigated and explained.
May use (professional judgement) to gain audit

assurance as substantive evidence.
Prior periods
Anticipated results (expectations)
Predictive estimates
Sector information
Benchmarks
1601
2.3 Key analytical review ratios
PLANNING STAGE
2.1 Need for
2.3.1 Performance ratios
Help understand the business.

Identify areas of potential material errors.
Help plan nature, timing and extent of audit procedures.
Interim financial and non-financial information.

Budgets/forecasts and management accounts.
Draft financial statements.
Discussions with client.
Internal and external benchmarks.
Developed expectations.
Overall efficiency of company in employing resources

available to it.
Comparison between different companies must take

into account effects of accounting policies (e.g. IAS 16
cost and fair value).
Rapidly declining ratio may indicate potential going

concern.
Detailed analytical review.

Key financial ratios (comparison over at least three
years).
change in sales prices;

change in sales mix;
change in purchase/production costs;
inventory obsolescence; and
errors in inventory counting and valuation.
Return on capital employed (ROCE)
2.2 Typical approach
Explanations for variations may be:
To assess financial condition.

To assess risk of misstatements.
To increase knowledge of the business.
To identify unusual transactions, events, trends and
relationships.
Based on
Gross profit
Uses
Performance, liquidity and efficiency ratios.
1602
2.3.2 Liquidity
Interest cover
Current and quick ratios
Current ratio of 2 to 1.7, quick ratio of 1 to 0.7

reasonable.
Low ratio may indicate liquidity problems;

high ratio may indicate poor use of shareholders funds.
May be difficult to finance debts if profits fall;

As interest must be paid before dividends,
indicates shareholder risk.
2.3.3 Efficiency
Inventory turnover
Link to constituent components of ratio inventory

obsolescence (current ratio), recoverability of
receivables (both ratios).
Window dressing may improve ratios, especially if

ratios linked to bank loans.
Gearing
The more debt relative to equity, the higher the gearing.
Paying interest on fixed return debt may cause a

liquidity crisis if cash flow difficulties.
Raising additional finance may be difficult if gearing

too high.
Asset backing generally loan capital is secured on

suitable assets (e.g. not fast-depreciating).
Less than 2 considered unsatisfactory.
Should be compared against industry averages:
relatively low implies poor sales, inefficient use of

resources and excess inventory (obsolescence);
relatively high implies strong sales but raises risk

of stock-outs.
Ideally should be analysed:
1603
Raw materials to volume of purchases;

WIP to cost of production;
Finished goods to cost of sales.
Receivable days
30 40 days relatively satisfactory.
3.1 Approach
A change in the ratio may indicate:
Suitability (and sufficiency) of substantive analytical

procedures.
Evaluate reliability of data.
Develop expectations.
Determine the amount of any difference that is

acceptable without further investigation.
bad debt/collection problems;

change in nature of customer base;
change in settlement terms.
Need to ensure year-end receivables give reasonable

indication of receivable profile for the year as a whole.
Payable days
3.2 Suitability
Should be broadly consistent with debtor days (e.g. cash

needs to be received to pay creditors).
Increase may indicate liquidity problems:
extended credit terms taken;

threat of payment before delivery from suppliers;
potential appointment of receiver by aggrieved
suppliers.
SUBSTANTIVE ANALYTICAL PROCEDURES
Good where an item can be verified directly by

reference to another (valid, audited) item.
Can provide corroborative evidence.
May be particularly effective in testing for

understatement.
3.3 Reliability of data
Influenced by its source and nature.
Dependent on the circumstances under which it is

obtained.
1604
Factors to consider
OVERALL REVIEW STAGE
To corroborate, or otherwise, conclusions formed

during the audit of the individual elements of the
financial statements.
Based on updated (for discovered errors) planning

analytical review and ratio analysis.
INVESTIGATIONS OF FLUCTUATIONS
3.4 Precision
Inconsistent with other relevant information.
Factors to consider
Differ from expected values by a significant amount.
Investigate through:
Audit objectives and extent of reliance.

Degree of disaggregation of available information.
Availability of financial and non-financial data.
Comparability of information.
Knowledge previously gained.
Nature of enterprise and its operations.
Controls in operation.
Accuracy with which expected results can be predicted.

Degree to which information can be disaggregated.
Availability of information.
3.5 Differences identified
Higher risk requires more persuasive audit evidence.
As assessed risk increases, acceptable difference

(between expected and actual) decreases.
Professional judgement required.
1605
inquiring of management;
obtaining appropriate audit evidence relevant to

managements responses; and
performing other audit procedures as necessary.
ACCOUNTING ESTIMATES
OVERVIEW (ISA 540)
Accounting estimate An approximation of a monetary

amount in the absence of a precise means of measurement.
Estimation uncertainty The susceptibility of an
accounting estimate and related disclosures to an inherent
lack of precision in its measurement.
1.1 Nature
Some financial statement items cannot be measured

precisely. Can only be estimated.
Some estimates have a high degree of estimation

uncertainty:
Risk of material misstatement;

Susceptibility to unintentional or intentional
management bias.
AUDIT PROCEDURES
2.1 Planning
Auditor must understand how management forms estimates
to assess risk of material misstatements.
Applicable financial reporting framework
Requirements of IFRS relevant to accounting estimates

are particularly relevant.
Identification by management
Understand how management identifies transactions,

events and conditions that may require estimation.
Management procedures
How management makes estimates and data on which

they are based. Considerations include:
1.2 Determination
relevant controls;
Routine, non-routine, one-off.
whether management uses an expert;
Simple, easy to audit, low estimation uncertainty.
Relatively complicated, will require professional

judgement, higher estimation uncertainty.
reasonableness of underlying assumptions and

prior year outcomes;
any change in method (and why); and
Complex, will require professional scepticism, very

high estimation uncertainty.
whether and how management assesses the effect

of estimation uncertainty.
1701
ACCOUNTING ESTIMATES
2.2 Estimation uncertainty
2.3 Response
Review and test management's process
Degree of uncertainty must be evaluated.
Factors
Assess appropriateness/consistency of application.
Dependency on management judgment.
Evaluate data and reasonableness of assumptions used.
Sensitivity to changes in assumptions.
Measurement techniques that may reduce uncertainty.
Test operating effectiveness of controls over estimate

being made, including final authorisation.
Forecast period and the relevance of data drawn from

past events to forecast future events.
Substantiate data, calculations, degree of estimation

uncertainty and assumptions.
Availability of appropriate data from external sources.
Compare prior period estimates with actual.
Observable (more precise) or unobservable inputs (less

precise).
Develop auditors estimate and compare.
Use independent estimates
Develop auditors estimate and compare.
Apply professional scepticism when challenging

managements estimation and assumptions.
Review subsequent events
1702
May reduce/remove need for alternative approaches.
USING THE WORK OF AN EXPERT
EXPERTS
2.2 Competence, capabilities and objectivity
Two forms of expert managements expert and the

auditors expert.
Competence
Expertise is other than audit and accounting.
Key difference between the two is who employs them.
Capabilities
Audit approach generally the same.
When relying on the work of an expert the auditor must form

an opinion on the reliability of such work as part of obtaining
sufficient appropriate audit evidence.
2
MANAGEMENTS EXPERT
2.1 Audit evidence
Used by the entity in preparing the financial statements:
Asset valuations;
Assessment of quantities/condition of assets;
Legal services.
Auditor must consider:
competence, capabilities and objectivity;

understandability of the work carried out; and
appropriateness of the work as audit evidence.
Nature and level of experience of the expert.

Qualifications, member of professional body, reputation.
Experts ability to exercise his competence.
Consider effect, if any, of management restrictions.
Objectivity
Professional judgement free from bias, conflict of

interest or influence of others.
Consider threats to experts objectivity (e.g. self-interest).
2.3 Understanding the work of the expert

Field of expertise
1801
Relevance to audit assertions.

Ability to evaluate experts work and findings.
Applicable professional standards or legal requirements.
Assumptions and methods used.
Nature of data used.
Observation.
Need to use auditors expert to corroborate.
Terms of reference
3.1 Need
Nature, scope and objectives of work.

Assumptions and methods to be used.
Access to records and employees.
Respective roles and responsibilities.
Nature, timing and extent of communications.
Form/content of the experts report (in writing)
including limitations of use.
2.4 Evaluation of experts work
Appropriateness with regard to the financial statement

assertions.
Corroborated with and consistency with other sources

of evidence.
AUDITORS EXPERT
To assist the auditor in obtaining sufficient appropriate

audit evidence.
Professional judgement to determine if there is a need

for an auditors expert.
Must obtain sufficient appropriate evidence.
Typically:
a specialist in the audit firm;

similar work as above for managements expert;
used to challenge the managements expert (if he
cannot be relied on).
2.5 Reservations
3.2 Competence, capabilities, objectivity
Same as for any member of the audit team.
If an external agent, still treat as if a member of the

audit team.
Discuss with management and document.

May undertake additional procedures.
Implications for audit report.
1802
3.3 Understanding the expertise of the expert
4.2 Reference to expert
Similar to managements expert.
Prime difference is that the expert is a team member:
No reference to expert in unmodified report, unless

required by law.
If report is modified, reference to the expert may be

needed to clarify position. If so, permission of expert
must be obtained.
audit partner sets nature, timing, scope, extent and

objectives (engagement letter if external agent);
work will be supervised and reviewed.
3.4 Evaluation of experts work
Same approach as audit team.
REPORTING
4.3 Modified opinions

Examples
If management unable/unwilling to obtain expert

evidence insufficient audit evidence.
If management refuses to accept and use expert

evidence (e.g. as above but followed up by auditors
expert) material misstatement.
4.1 Insufficient or inconsistent evidence

Insufficient
Determine reasons and act accordingly.

Obtain sufficient evidence. If not, consider
implications for the report.
Inconsistent evidence
Establish why and take appropriate action.

May call into doubt integrity of management.
If expert refuses, seek legal advice.
1803
AUDIT SAMPLING
Population the entire set of data.
Audit sampling provides a reasonable basis to draw

conclusions about the population.
Sampling risk possibility that auditors conclusion,

based on a sample, is inappropriate.
Confidence level the mathematical complement of

risk (e.g. 5% risk 95% confidence).
Non-sampling risk the risk of an inappropriate

conclusion for any reason not related to sample size.
Sampling unit individual items in a population.
Statistical sampling:
GATHERING AUDIT EVIDENCE
Choose items appropriately to meet test objective.
all items (100%) is not sampling;

specific items (judgemental sampling);
audit sampling (draw conclusion on population as
a whole).
1.2 Terminology
Audit sampling:
applying procedures to less than 100% of items;

all sampling units have equal chance of selection;
forms a conclusion on population as a whole.
Error:
Stratification dividing a population into sub-populations.
Tolerable (substantive) misstatement equates to

performance materiality.
Tolerable rate of deviation (tests of control) the

maximum acceptable failure rate of an internal control
(usually zero).
control deviation (in tests of control); or a

misstatement (in a substantive procedure).
Anomalous error:
arises from an isolated event;

not representative of errors in the population.
random selection of a sample; and

use of probability theory to evaluate.
1901
AUDIT SAMPLING
SAMPLING
Monetary unit sampling (MUS)
2.1 Design
Every $ unit has an equal chance of being selected.
Higher value items have a greater chance of being

selected (value-weighted).
Every item value greater than the sampling interval will

be selected.
Test objective.
Nature of evidence required.
Complete population.
Characteristics of population.
Deviation or misstatement characteristics.
Combination of procedures required.
Haphazard selection **
2.2 Sample size
Random sampling but without use of tables or

generator.
Significant risk of intentional or unintentional bias.
Reduce sampling risk to an acceptable level.

Low sampling risk requires high sample size.
Use of statistical means or professional judgement.
2.3 Selection
Methods marked ** are not suitable for audit sampling as
each item does not have an equal chance of selection.
Block sampling **
All items selected within a given range.

Mainly used to test populations for completeness before
sample selection.
Random selection
2.4 Testing each item
If an item is inappropriate, select another using same

selection criteria.
Systematic/interval sampling
If test cannot be completed, alternative procedures

should be implemented.
If no alternative is available, treat test item as an error.
Random number tables or generator.

Every item has an equal chance of being selected.
Constant selection interval.
Unstructured population must be randomly distributed.
Value-weighted selection.
1902
AUDIT SAMPLING
2.5 Results
Substantive procedures
All errors and deviations must be analysed.
Nature and cause;

Potential effect on test objectives;
Confirm or revise preliminary assessment of the
population characteristics.
Monetary misstatements indicative of the population,

extrapolate to the population.
Isolated misstatements not indicative of the population
should not be extrapolated.
If control risk is higher than originally assessed:
random sample selection; and

probability theory for evaluation of results.
Units have, or have not, an attribute (property).

Driver is event occurrence, not monetary values.
Used in tests of control.
Variables sampling
extend sample size (statistical sampling approach);

test alternative controls; or
extend substantive procedures (judgemental
approach).
Value within a continuous range.

Conclusions based on monetary values.
3.2 Non-statistical sampling
Involves:
Attribute sampling
Tests of control
STATISTICAL v NON-STATISTICAL
2.7 Evaluation of results
management should be requested to adjust;

re-evaluate uncorrected misstatements.
3.1 Statistical sampling
2.6 Error projection
If substantive errors are considered to be material:
1903
Everything else that is not statistical sampling.
WRITTEN REPRESENTATIONS
1.2 Procedure for obtaining
REQUIREMENT (ISA 580)
1.1 Written representations
Auditor prepares on client letterhead.
A written statement by management to confirm certain

matters or to support other audit evidence.
Dated close to (before) the date of the audit report.
Signed by those responsible for the financial statements:
Necessary information that the auditor requires.
Often relate to areas of the audit that are:
subjective; and/or
dependent on managements responsibilities,
judgement and actions (or lack of).
AUDIT EVIDENCE
REPRESENTATIONS
DURING COURSE OF
AUDIT
Do not provide sufficient appropriate audit evidence on

their own.
Audit objectives
CEO
Minuted by the board.
GENERALLY SEEK
CORROBORATIVE
EVIDENCE
To obtain written representations that management

(those charged with governance) has:
REQUIRED IN
SPECIFIC
INSTANCES
2.1 Essential management representations
fulfilled its responsibility for preparing the

financial statements; and
provided the auditor with complete information.
Responsibility for the preparation of the financial

statements following the applicable framework.
To support other audit evidence relevant to assertions if

necessary (or required by ISAs).
Provided all relevant information and access (e.g. to

books, records and personnel).
To respond appropriately where written representations

are not provided.
All transactions have been recorded and are reflected in

the financial statements.
2001
2.2 Other representations
As required by ISAs.
3.1 Reliability of representations
To support audit evidence already gathered.
If in doubt reconsider original risk assessment.
To confirm oral representations made by management:
Where concerns about managements competence,

integrity, ethics or diligence consider reliability of:
Seek corroborative evidence;

Evaluate reasonableness/consistency;
Consider whether individuals adequately informed.
If necessary (material, other evidence cannot reasonably

be expected to exist) obtain in writing. Confirming oral
representations reduces risk of misunderstanding.
representations: and
audit evidence in general.
May be the only audit evidence which can reasonably

be expected to be available (e.g. managements
intention to settle a legal claim out of court).
In areas of understatement (e.g. liabilities, income,
disclosures). Management represents that it is not
aware of any understatement or non-disclosure.
Where contradicted by other audit evidence:
issue a qualified opinion: or

issue a disclaimer: or
in extreme cases, withdraw from the engagement
(if allowed to by law).
3.2 Refusal by management to provide representations
Discuss the reasons why with management and those

Establish if other audit evidence is available.
If no satisfactory solution, consider implications for the

audit report (e.g. disclaimer).
Investigate as doubt must be resolved;

Reliability of other representations may also be
called into doubt.
Auditor may:
2.3 Specific instances
OTHER CONSIDERATIONS
2002
EXAMPLE LETTER
Typical other content
Significant assumptions are reasonable.
All events after the reporting date have been adjusted or

disclosed (IAS 10).
Effects of uncorrected misstatements are immaterial

(individually and in aggregate).
Appropriate selection and application of accounting

policies.
Appropriate classification of assets and liabilities.
Plans or intentions that may affect the carrying amount

or classification of assets and liabilities.
Recognition, measurement and disclosure of all

liabilities (actual and contingent).
Title to assets pledged as security.
Aspects of laws, regulations and contractual agreements

that may affect the financial statements, including noncompliance.
2003
COMPUTER-ASSISTED AUDIT TECHNIQUES
AUDIT APPROACHES
1.1 Auditing around/through the computer
2.1 Possible use
Around the computer
Treat computer as a black box.
Effectively an electronic bookkeeper.
Prepare input batch data.
Compare output with input (batch totals, one-for-one

checking).
Clear (no loss of) audit trail.
Through the computer
Usually fully-integrated systems.
2.2 Considerations affecting use
Processes and controls embedded in the programmes.
IS/IT skills, expertise and experience of auditor.
Substantive procedures on output alone will be

insufficient evidence.
Availability of appropriate CAATs and computer

facilities.
Control effectiveness (within the system) is essential.
Embedded audit trail requires interrogation (CAATs).
Impracticability of manual tests if no visible evidence is

available.
Effectiveness and efficiency.
Timing.
2101
2.3 General advantages
Testing of program/application controls.
3.1 Description
Auditor can test large numbers of items (e.g. 100%)

quickly and accurately.
Auditor-generated data processed through the clients

systems to assess effectiveness of programmed controls.
Effective and efficient:
in-depth analysis of data for analytical review and

trend analysis; and
testing of fully-integrated systems and comparison

of data files.
Test actual accounting system (program functions) and

records (raw data).
Cost effective once established.
TEST DATA
2.4 General difficulties
3.2 Process
Substantial development costs.
Understand the system and control environment.
Test data should include:
Software may produce too much output due to poor

design or using inappropriate parameters on a test.
valid data to test that the system operates as

intended; and
Risk to clients systems or data of live use.
invalid data to ensure error-trapped.
Standard audit software may not be available.
Can be used offline, but must use true copies of live

files.
2102
3.3 Precautions
Disadvantages
May be run:
live (any changes must be reversible); or

on copy programmes and data (copies must be
accurate).
4.3 Bespoke
AUDIT SOFTWARE
4.1 Description
Used to process and analyse the clients data

independently of the clients system.
Effectively a database management system.
Packaged programmes that deal with standard exported

data from the clients system.
Advantages
One size fits all approach therefore relatively

inexpensive.
Can be used on a range of common systems.
Easy to use.
Tailored to the auditors methodology across a range of

systems and platforms.
Disadvantages
4.2 Off-the-shelf
Designed to run on a specific system or with the audit

methodology.
Advantages
Computer audit programmes designed for audit purposes.
Only deals with historic data.

May not have all capabilities required by auditor.
Will only accept specific formats of exported data.
Expensive to develop.
Only deals with historic data.
4.4 Embedded
Audit and monitoring routines within computer system.
Bespoke or specialist functionality that allows

continuous auditing and monitoring:
2103
Snapshots;
System control audit review file (SCARF);
Tagging.
Advantages
Real time activity.

Continuous auditing.
Tests can be carried out without client being aware.
Disadvantages
Access to clients programs required for auditor

embedded systems to be installed.
4.5 Uses
Effectively a database management system.
Any process with and on data.
Selecting data (e.g. samples).

Analysing data (e.g. trend analysis).
Sorting data (e.g. strata).
4.6 Precautions
Data must be complete and accurate when testing.
Must not be corrupted.
Audit software must be updated for client systems

development.
2104
NON-CURRENT ASSETS
TANGIBLE NON-CURRENT ASSETS
1.1 General risks
Overstated:
Not capital expenditure;

Do not exist;
Impairment not recognised.
Useful lives and depreciation rates (unrealistic,

understated).
Ownership or possession does not necessarily indicate

control.
Purchased, misappropriated, sold or scrapped without

authorisation.
Secured assets require disclosure.
1.2 Audit considerations

Completeness
Misposting.
Asset register.
Valuation and allocation
Depreciation.
Revaluation by an expert.
Impairment.
Rights (control)
Purchase invoices.
Title deeds.
Existence.
Existence
Physical inspection.
Disposals.
1.3 Sources of evidence
2201
Systems fixed asset register.

Documents capex authorisation, purchase invoices.
Tangible assets inspection.
Management/employees board minutes.
Customers/suppliers lessor.
Third parties bank.
Analytical procedures depreciation proof in total.
NON-CURRENT ASSETS
1.4 Audit procedures
Revaluations
Recast all schedules and agree to general ledger.
Agree opening balances/comparatives.
Agree consistency and continued appropriateness of

accounting policies.
Additions
List of additions:
Check extraction;
Add it up;
Agree total to general ledger.
Select sample (include all material items):
Authorised purchase;
Delivery record;
Purchase invoice;
Cost analysis for self-constructed;
Asset register.
Review expense accounts.
Cut-off.
Need for revaluation in year.

Recalculate.
IAS 16 requirements (e.g. entire class).
Managements expert.
Rights
Control or ownership.
Corroborative evidence (e.g. income stream).
Existence
Select material items from opening balances plus

additions.
Inspect (consider timing):
Damaged, obsolete;
If not found, check disposals (below).
If inaccessible obtain documentary and other evidence.
Disposals
2202
List as for additions.

Test for understatement as part of existence testing.
Authorised.
Proceeds.
Accounting treatment.
NON-CURRENT ASSETS
Depreciation
Rights (control)
Systematic application.
Review of rates, useful lives, replacement.
Recalculate (analytical review).
Revalued assets.
INTANGIBLE NON-CURRENT ASSETS
2.1 General risks
Generally as for non-current assets.

IAS 38 applies.

Completeness
Existence
Distinction between research and development.

Appropriate valuation model.
Amortisation.
Revaluation basis.
Impairment (IAS 38 development criteria).
Physical inspection not possible.

Supporting documents, legal licenses and legal rights.

Additions
List of additions.
Select sample:
As for non-current assets.

Disposal of intangibles not recorded
Allocation and valuation
Purchase documents and agreements.

Self-developed.
Related income.
Authorised purchase/development.
Supporting documentation.
Cost analysis if self-developed.
Revaluations
Appropriate market must exist.
Rights
2203
Evidence of control.
Income streams.
NON-CURRENT ASSETS
Existence
2.4 Research and development costs
Accounting treatment
Use in business.
External income stream.
Legal agreements.
Disposals
Identify evidence of existence no longer available.

Agree to list of disposals.
Accounting treatment records, proceeds, profit/loss.
Amortisation
Systematic application.
Review of rates, useful lives, replacement.
Recalculate.
Revalued assets.
Criteria (IAS 38):
2204
Technical feasibility.
Intention to complete and use.
Ability to use or sell.
Probable future economic benefits.
Adequate resources.
Reliable measurement.
Amortise on a systematic basis.
INVENTORY
INVENTORY
1.1 Types of inventory
Completeness
Production:
Raw materials;
Work-in-progress;
Finished goods.
Retail goods for resale.
1.2 Materiality
Inventory count and reconciliation to book records.

Cut-off.
Perpetual inventory system.
Cost method in accordance with IAS 2.

Lower of cost and net realisable value.
Rights (control)
Pervasive to financial statements.

Very material for most entities.
High risk and (often) complex audit area.
RISKS
Existence
On-site third party inventory not included.

Client inventory held by third parties verified.
2.1 General risks
Under and overstatement.

Shrinkage.
Management manipulation of quantities and value.
Lack of control over quantities.
Valuation (IAS 2) and obsolescence.
Inaccurate recording and cut-off.
Third party inventory.
2301
Physical count observation.

Systems perpetual inventory.
Documents inventory records, purchase/sales invoices.
Tangible assets inventory elements.
Management/employees procurement, stores.
Customers/suppliers complaints and returns (NRV).
Third parties bank, outsourcing agents.
Analytical procedures inventory turnover, GP%.
INVENTORY
3.3 Perpetual (continuous count) inventory system
ATTENDANCE AT PHYSICAL INVENTORY

COUNT (ISA 501)
3.1 Objectives
Observe and evaluate that managements count

instructions are carried out.
Ascertain existence and evaluate condition of inventory.
Obtain audit evidence on the reliability of

managements count procedures.
Aims to rely on year-end book quantities and values.
Usually supported by integrated electronic systems.
Inventory is counted on a regular basis.
All inventory counted at least once a year.

High risk/value items more often.
A check on accuracy of book records (quantity and

value).
Material differences between book and physical must

be investigated and corrected on each count.
Auditors should attend at least one physical count.
Recorded movements throughout year must be audited:
3.2 Types of inventory counting
2302
Sales and purchase to/from records;

Confirms occurrence and measurement assertions.
INVENTORY
3.4 Procedures
Attendance
Briefing meeting.
Walk-about to ensure pre-count procedures.
Observe count procedures.
Test counts.
Discussions with management on errors found.
Cut-off information.
Count sheet control.
Walk about to ensure completeness.
Planning
Follow-up (final audit)
To identify risks of material misstatement and understand

nature of inventory internal control.
Clear outstanding matters from count.
Agree final detail complete and accurate from original

count sheets.
Discuss any changes made (to count sheets and to

inventory records) with management.
Re-perform calculations.
Agree valuation in accordance with IAS 2.
Obsolete, slow moving, NRV review.
Written representations on completeness and accuracy.
Review prior year inventory count working papers.

Obtain copy of the count instructions.
Agree date, time and location.
Discuss changes that could affect the audit approach.
Review adequacy of clients instructions.
Consider arrangements for any expert.
Preparation (e.g. segregation of third party inventory).
Identification of slow moving and obsolete goods.
Control over issue and return of count sheets.
Staff and management count teams.
Method of counting.
Cut-off arrangements (i.e. limiting movements).
2303
INVENTORY
3.5 Inventory held by third parties
If material, need physical count observed by auditor.

Alternative procedures if access/count not possible.
If not material, confirmation.
Assessment of client controls and reconciliation of
inventory movements.
All cut-off tests must be co-ordinated around the cut-off

date (reporting date).
Cut-off should also be tested where pre-year end testing

made (e.g. receivables confirmation before year end).
CUT-OFF
VALUATION
5.1 IAS 2
4.1 Importance
Valued at the lower of cost and net realisable value (NRV).
Transactions are recognised in the period they occur.

May be window-dressed to manipulate profits.
4.2 Relationships
Purchases and payables
Goods received, inventory, purchase invoices, payables

must all correspond in the appropriate period.
Cash payments, cash book and payables must also

correspond.
Sales and receivables
Goods dispatched, inventory, sales invoices, receivables

must all correspond in the appropriate period.
Cash receipts from customers, cash book and

receivables must also correspond.
Cost includes:
2304
original purchase price;

non--recoverable taxes;
transport, handling, etc;
direct production costs (including overheads); and
other costs that are incurred in bringing the
inventories to their present location and condition.
NRV is the estimated selling price less the costs to sell

and the estimated costs of completion.
INVENTORY
5.2 Cost measurement methods and formula
Actual cost
Specific cost, FIFO or weighted average cost.
Same cost formula should be used for similar items.
For inventories with a different nature or use, different

cost formulas may be justified.
Audit evidence:
Any cost measurement method may be used as long as

it approximates to actual cost.
Standard cost
Common industrial use for cost measure and control.
Controls over establishing, maintaining and updating

standards should be understood and assessed.
Postings to variance accounts should be part of systems

audit.
Make up of standard cost must be audited.
Analyse balance on variance accounts (may need to

adjust standard to actual.
Retail method
Suitable for a large number of high turnover items that

have similar margins.
Inventory count valuation is based on selling price.
Cost is selling price less standard gross profit %.
Auditor should derive best estimate of gross profit.
May also involve checking purchase invoices.
material costs to suppliers invoices;

labour to payroll and time summaries;
basis of unit cost calculations for allocating
overheads.
Review suitability of costing and stage of completion

for work in progress.
5.3 Net realisable value (NRV)

Indicators
2305
Obsolescence, damage, slow-moving, etc.

New competitor products.
Decrease in selling price or demand.
Economic decline.
Rising costs that cannot be passed on to customers.
Rising costs to complete (after year end).
INVENTORY
Audit procedures
5.4 Allowances
Understand nature of business and activity during year

to assess NRV risks.
Accounting estimate.
Simple or complex.
Review inventory observation working papers for NRV

indicators.
Models used must be regularly reviewed by

management.
Discuss with management procedures undertaken to

access NRV.
Understand managements process to estimate

allowance.
Review management reports, sales reports and board

minutes for evidence of NRV risks.
Derive auditors estimate.
Analytical review to assess inventory turnover to

identify at risk items.
Review subsequent events to confirm estimate made.
Slow moving inventory analysis.
Review prior year NRV inventory movements to

provide comparison for likely final selling prices.
Use of CAATS where appropriate:
Inventory count transfers.

Application of costs.
Calculation of values.
Inventory ageing.
Analysing after-date sales.
Predicting NRV.
2306
EXTERNAL CONFIRMATIONS, RECEIVABLES AND SALES
EXTERNAL CONFIRMATIONS (ISA 505)
Negative
1.1 Considerations
Only reply if disagreement.
Need for
Consider when:
Materiality.
Risk of material misstatement.
Effectiveness of controls.
Availability of other evidence to reduce audit risk.
Reliability
Open
External, direct, written.
Confirming party
Knowledge of subject matter.

Ability and willingness to reply.
1.2 Design of request

Positive
Reply is expected.
Preferred when risk is assessed as high.
Balance not shown.

Respondent requested to provide information.
Understatement approach.
Closed
Balance shown.
Overstatement approach.
1.3 Confirmation process
The auditor must control:
Strong internal controls.

Large number of small balances.
Errors not expected.
Expectation that request will not be ignored.
2401
determination of information required;

selection process and who should confirm;
design of request;
sending requests; and
receiving responses.
If management refuses to allow confirmation:
2.1 General risks
Assess reasonableness of refusal;

Re-assess risk of material misstatement;
Perform alternative procedures, if appropriate;
Consider implications for audit report, if any.
Receivables
1.4 Responses
Expected individual and expected means.
Consistency and reliability with other evidence.
Agreement
Risk of tick box approach?
Disagreement
Identify reason.
Increased risk of material misstatement.
Apply further audit procedures to obtain sufficient
reliable audit evidence.
Understatement through teeming and lading fraud.

Cumulative effect of not being recognised and
accounted for.
Sales
Revenue recognition frauds:
Consider use of alternative procedures.

If insufficient, consider implications for audit report.
debt being irrecoverable;

fictitious sales;
loss allowance being under-estimated;
Prepayments
No response
May be overstated due to:
Information given
RISKS
2402
Early recognition;
Keeping books open after year end;
Fictitious sales;
Not recording sales returns;
Cut-off manipulation.
Receivables
Accounting systems sales ledger.
Documents orders, GDNs, invoices, credit notes,

statements.
Tangible assets cash receipts.
Management and employees Sales director, credit

controller, cashier.
Customers and suppliers remittances, correspondence,

confirmation.
Other third parties solicitor, insolvency practitioner.
Analytical procedures debtor days, % bad debts, %

doubtful debts.
Receivables confirmation.
Loss allowance for credit losses.
Cut-off.
Collateral for loans.
Prepayments
Understand nature of business.

Expected prepayments.
Compare with prior year.
Evidence to support material items.
Cash book review for large and unusual items.
Sales
Transaction testing (see Session 15).
Cut-off.
Revenue recognition five steps:

(1)
(2)
(3)
(4)
(5)
Identify the contract

Identify performance obligations
Determine transaction price
Allocate price to obligations
Recognise revenue.
2403
DIRECT CONFIRMATION OF ACCOUNTS

RECEIVABLE
3.1 Confirmation sample selection
3.4 Reconciling confirmation differences

Timing differences
Goods in transit goods dispatch and sales invoice

recorded before year end.
Gross up for credit balances and debit balances from

payables ledger.
Cash in transit cash received and recorded after the

year end.
Sample selection (MUS or judgement)
Misstatements
Discuss with client sample selected.
Standard procedures on listing of balances.
3.2 Confirmation requests
Confirmation letters.
Clients letterhead.
Signed by client.
Posted by auditor external to client.
3.3 Confirmation returns
Returns expected from recipients.

Reconcile differences on disagreements.
No return: second request or alternative procedures.
Potential error or fraud:

Incorrect quantity or price.
Goods or invoices sent to the wrong customer.
Payment misallocated.
Fictitious sales.
Misappropriation of cash.
Disputes discuss with management and review

evidence.
3.5 Alternative procedures
2404
Existence of customer.
Makeup of balance.
After-date cash receipts.
OTHER EVIDENCE
4.1 Control accounts
Reconciliations.
Review for bad debt write-offs, contras and unusual

journal entries.
Discuss differences during the year with management.
4.2 Sales cut-off testing
For transactions made before year end:
Despatch notes to inventory to sales invoices to

day book to sales ledger account before year end
(sales cut-off).
Dr entries in receivables control a/c to sales day

book to invoices, inventory, dispatch notes before
year end (receivables cut-off).
Cash receipts from cash book to receivables

control before year end (receivables cut-off).
4.3 Valuation of accounts receivable
Risk is understatement of loss allowance (overstatement

of receivables).
Terms of payment and managements policy on ageing

debts and loss allowance.
Re-perform year-end age analysis.
For material balances (confirmation sample) agree

after-date cash received through to the bank statements.
Compare to current age analysis to identify year-end

balances not yet paid.
Form opinion on collectability of debts and discuss any

issues with management.
2405
SHARE CAPITAL, RESERVES AND DIRECTORS REMUNERATION
Occurrence
RISKS
1.1 General
Share transactions do not follow statutory requirements.
Distributions may not be approved and/or in accordance

with statutory requirements.
Equity transactions, as recorded or disclosed, occurred

and relate to the entity.
Cut-off
All equity transactions recognised in the appropriate

period.
Statutory documentation and returns not maintained,

made or incorrect (see later).
Ideas list
Equity reserves inappropriately used.
Systems statutory records.
Directors emoluments and transactions may be

suppressed, undervalued or not disclosed.
Documentation statutory returns, memorandum and

articles of association, agreements and contracts.
Management/employees board minutes, remuneration

committee.
Customers/suppliers shareholders, debenture holders.
Third parties solicitors, company secretary.
Analytical procedures proof in total, dividends paid.

Completeness
All equity transactions accounted for and disclosed.
All directors emoluments and other applicable

transactions recorded and disclosed.
Equity transactions correctly recognised, movements

valued and allocated to the appropriate accounts.
Directors emoluments and other transactions correctly

valued.
2501
SHARE CAPITAL
RESERVES
2.1 General
3.1 Types
Equity (share capital, equity interests and reserves) the

residual interest in assets after deducting all liabilities.
Ordinary shares most common.

Redeemable preference shares treated as debt (IFRS).
2.2 Ordinary shares
Share premium
Retained earnings
Asset revaluation
Other statutory reserves
3.2 General
Agree each reserve is appropriate (articles of

association, legal requirements, IFRS).
Understand entitys equity structure (permanent file).
Conduct company search to confirm.
Each reserve has been correctly used.
Review board minutes to identify related matters.
Obtain schedule of categories and movements:
Obtain a reconciliation of the movement on each

reserve agreeing:
Agree opening balances, movements and closing

balances to statutory records, accounting records,
trial balance, financial statements and disclosures.
Review statutory records for changes made and obtain

confirmation from company secretary. Confirm:
Authorised and recorded;
Approved by shareholders;
Legal;
Included in returns to appropriate authorities.
opening balances to the prior year closing balance;

closing balance to financial statements;
movement (analysed as required by IFRS).
Required components supported by audited evidence.
3.3 Statement of changes in equity (SOCIE)
Correct IFRS structure.
Agree opening balances, any adjustments to opening

balances, movements and closing balances to audit
schedules and financial statements.
2502
3.4 Dividends
4.2 Sources
Only made from reserves available for distribution.
Correctly authorised, documented and accounted for.
A dividend declared after year end is not a liability at

the reporting date under IFRS (disclose under IAS 10).
Recalculate dividends.
Agree dividends paid to the shareholders register and

cash book.
4.3 Approach
Confirm correct tax treatment.
Understand the business, its environment and controls.
DIRECTORS EMOLUMENTS
Review directors contracts of employment and service

contracts for content and approval.
4.1 General
Thorough understanding of the legal, regulatory and

other requirements concerning directors emoluments:
Companies legislation;
Regulatory requirements;
Listing rules;
Corporate governance requirements;
IFRS disclosure (e.g. related parties).
Must be considered material (quantitative and

qualitative).
Bonus schemes correctly approved.
Re-perform valuation calculations.
Include (for example):
All compensation correctly recorded in the books.
Fees paid for services rendered as directors;

Basic salary;
Bonuses and performance-related pay;
Expense allowances;
Monetary value of material benefits received;
Pension contributions paid;
Gains made on the exercise of share options.
2503
STATUTORY BOOKS AND RECORDS
5.3 Procedures
5.1 Contents
Maintained in accordance with laws and regulations.
Necessary statutory forms and returns have been made

and contain correct and accurate information.
Stock exchange notifications have been made.
Company meetings correctly convened, conducted and

minuted.
Reconcile directors shareholdings at the beginning/end

of the financial period and disclosure made.
Agree that proper books and records have been kept.
Agree that records stored for the correct time limits.
Past and present directors/company secretaries.

Directors interests.
Shareholders and their shareholdings.
Debenture holders.
Charges.
Minutes of board meetings.
Minutes of shareholder general meetings.
5.2 Audit evidence
Statutory books and records, and the documents which

support the registers.
2504
LOANS, BANK AND CASH
Presentation
RISKS
1.1 General
Highly susceptible to misappropriation (liquid asset).
Teeming and lading and window dressing.
No authorisation for overdrafts and loans.
Breaches of loan agreements.
Loan interest payable or receivable may not be accrued.
Overdraft not separately accounted for.
Secured, unsecured and intra-group loans may not be

separately disclosed
Appropriate disclosures not made.

Completeness, rights:
Analytical procedures on interest payable/

receivable;
Comparison of balances with prior year.
Classification:
2601
Interest expense/income and bank charges in

correct periods.
Accuracy:
Bank letter, loan confirmation, cash balances.
Verify allocations to assets (i.e. capitalised).
Cut-off:
Bank letter.
Completeness and occurrence:
Existence:
IFRS;
Set-off only where legal.
Transactions
Account balances
Disclosures:
Interest rates and interest received.
Accounting systems cash, cash book, imprest.
Documentation payment requisition, remittance

advice, bank statements.
Tangible assets physical cash.
Management and employees board minutes, cashier.
Customers and suppliers direct debit mandates.
Other third parties bank letter.
Analytical procedures proof in total (interest).
AUDIT PROCEDURES
Obtain schedules and reconcile.
Examine loan agreements:
term of the loan;

rate of interest (fixed or variable);
security given; and
repayment terms.
authority;
paid cheques and cash book entries;
accrued interest paid; and
deletions in the register of holders of loans.
Verify new loans/debentures issued during the year:
authority;
receipt of monies in cash book and general ledger;
entries in statutory records.
Obtain direct confirmation from lenders.
Scrutinise statutory books:
2.1 Loans (received)
Confirm redemptions during the year:
charges over assets; and

directors interests.
Re-compute interest charge and interest accrual

calculations.
Agree disclosure of long-term liabilities in accordance

with financial reporting framework.
2602
2.2 Bank reconciliation
Content Issued on auditors letter head
Confirm balance per the bank statement.

Agree cash book balance to the general ledger.
Re-perform additions.
Audit adjusting items.
Agree outstanding deposits and unpresented cheques.
Check presented dates of cheques window dressing.
Reconcile year-end closing balance.
Review each reconciliation during year for unusual
balancing items.
2.3 Petty cash
Simultaneous cash counts.

Imprest system.
Supported authorised petty cash vouchers.
Signed certificate of monies returned to cashier.
Review petty cash book for unusual items.
BANK CONFIRMATION LETTER
3.1 Format
Standing authority (from client to bank) in place and

still relevant.
Bank name and address.

Auditor name and address.
Company name, sort codes and account(s) numbers.
Period year end.
Details of confirmation authority already issued.
Request for acknowledgement.
Any additional information required.
Reply content
Disclaimer by bank.
Balances on all accounts.
Accounts closed during the year.
Facilities loans/overdrafts/guarantees, etc.
Securities (including set-off arrangements).
Custodian arrangements assets held but not charged.
Trade finance letters of credit, guarantees, etc.
Derivatives foreign exchange contracts, etc.
3.2 Planning considerations
2603
Determine date by which the confirmation is required.

Send request at least two weeks before year end.
Level of confirmation required.
Arrange to gather required information (e.g. sort codes.
Bank authority still in place and up to date.
Where to send the request usually central.
LIABILITIES, PROVISIONS AND CONTINGENCIES
ACCOUNTING FOR LIABILITIES, PROVISIONS

AND CONTINGENCIES
1.2 Accounting for provisions and contingencies

Flow of resources
1.1 Terminology
Liability a present obligation arising from a past

event, the settlement of which is expected to result in an
outflow of economic benefits.
Provision a liability of uncertain timing or amount.
Obligating event creates a legal or constructive

obligation (no choice but to settle).
Contingent liability a past events that gives rise to:
a possible obligation existence will be confirmed

by (non-)occurrence of an uncertain future event; or
a present obligation which cannot be recognised

as a liability because settlement:
is not probable; or
cannot be measured reliably (RARE!).
Contingent asset a possible asset arising from past

events to be confirmed by an uncertain future event.
Obligation
Accounting
Remote
No disclosure
No disclosure
Probably not/
Possible
Contingent liability
disclosure
No disclosure
Probable
Provision (if reliable

estimate) otherwise
contingent liability
Disclosure
required
Expected/
virtually certain
Provision
Asset (not
contingent)
RISKS
2.1 Trade payables and accrued expenses
Liabilities incurred may be unrecorded.

Secured liabilities may not be identified/disclosed.
Accrued expenses omitted.
Payments to suppliers made for goods not received.
2.2 Provisions
2701
Uncertainty in estimating amount.

Profit smoothing.
Classification may be inappropriate.
Not reversed when its settlement is no longer probable.
Completeness
Accounting systems purchase day book.

Documentation requisitions, orders, GRNs, invoices.
Tangible assets inventory.
Management and employees buyer, clerks, cashier.
Customers and suppliers monthly supplier statements.
Other third parties warehousing agents.
Analytical procedures payable days, current ratio,
accrued expenses to payables.
AUDIT PROCEDURES
Payable confirmation.
Suppliers statement reconciliations.
Review of after-date invoices, cash payments.
Control a/c reconciliations.
Review correspondence and discuss with management.
Written representations.
Comparison with prior year.
Confirmation from company solicitor.
Valuation
3.1 Control accounts
Discounting long term provisions.

Estimating provisions.
Rights and obligations
After-date settlement.
Legal or constructive.
Existence
Reconciliations.
Review for contras and unusual journal entries.
Discuss differences during the year with management.
3.2 Payable confirmation

Procedures
Similar to receivables confirmation, except:
Payable confirmation, suppliers statement

reconciliations.
2702
Completeness and understatement;

Sample selected from a reciprocal population
(purchases);
Confirmation is positive and closed;
Request a copy of the supplier statement.
Suppliers' statement reconciliations
Cash payments after year end
Where disagreement, identify differences and audit

reconciling items (similar approach to receivables):
3.4 Accruals
Payments made but not received before year end;

Invoices not received before year end;
Inventory not received before year end.
3.3 Search for unrecorded liabilities

Payables control
Cut-off testing:
GRNs before year end, included in inventory and

invoice recorded (Cr entry) before year end.
Cash posted to control a/c before year end (Dr)

agreed to cash book and bank before year end.
Goods/services received but not recorded
Obtain list from client.
Review after-date invoices and payments (as above) to

see if recognised before year end in ledger or on the list.
Income (profits) tax.
Cut-off testing: Dr entries before year end agreed to

daybook entry, invoice and GRN before year end.
Invoices received after year end
Review after-date invoices. If evidence that

good/services received before year end confirm
recognised before year end (e.g. in an accrual).
2703
Recalculate or obtain from tax audit.
Payroll taxes.
Purchase ledger
Review after-date payments for goods/services received

before year end. Confirm recognised before year end.
Agree from wages audit.
3.5 Provisions and contingencies
Understand systems for identifying provisions and

contingent liabilities.
Prior years provisions and contingent liabilities were

outcomes reasonable?
Period and after-date correspondence and board

minutes.
Subsequent events review.
Examine legal expense accounts for indication of higher

than normal costs.
Assess need for continuing provisions.
Discuss managements assessment of the outcome,

estimate of financial implications and costs involved.
Seek confirmation from company lawyers.
Obtain written representations from management.
2704
SMALL BUSINESS AND NOT-FOR-PROFIT ORGANISATIONS
CHARACTERISTICS
AUDIT APPROACH
1.1 Limited segregation of duties
3.1 Risk assessment
Lack of accounting skills.

Insufficient personnel to segregate duties.
Computer facilities increase control risk.
1.2 Domination by senior management or owner

Advantages
Compensate for lack of segregation of duties.
Disadvantages
Override internal controls.

Higher risk of management fraud.
Confusion over business and personal interests.
May not understand audit purpose.
ENGAGEMENT
Difficulty to obtain sufficient appropriate evidence.
owner may exercise effective control ();
owners close involvement may prevent/detect

errors ();
profits may be manipulated ().
Particular difficulties include:
Extent of reliance:
Examples
Operated by the owner;

Established through observation.
3.3 Accountancy work
2.2 Engagement letter

Must be issued prior to commencing work.
Understood by management.
Additional accountancy and tax services.
possible understatement of income;

inclusion of personal expenses.
3.2 Limited formal internal controls
2.1 Considerations
Risk of material misstatements may increase () or

decrease ():
2801
Writing up books.
Drawing up a trial balance.
Ascertaining end of the reporting period adjustments.
Evidence obtained
3.5 Choosing procedures
Invariably unable to place reliance on controls.
Accountancy work can give some assurance, but:
From, for example:

examining prime documents;
calculating balances; and
posting entries.
Accountancy work alone will not provide sufficient

audit evidence.
3.4 Auditing for completeness

Assertion
Understatement of income.
Considerations
Numerically based documentation.

Independently recorded population.
Reconciliations of total goods bought/sold.
Predictive analytical procedures.
Review transactions after the end of reporting period.
Proprietors representations alone are insufficient.
Physical inspection of assets (existence);

Observe physical inventory count (existence);
Third party confirmations (existence, ownership);
Recoverability of receivables (valuation);
Unrecorded liabilities (completeness);
Confirmation of terms of material loans;
Income (completeness).
3.6 Management representations
Important:
2802
auditors role being misunderstood; and

to remind management of its responsivities.
Auditor cannot rely on solely in relation to the

completeness of the accounting records.
NOT-FOR-PROFIT ORGANISATIONS (NFP)
4.1 Types of NFP organisation
Government departments, local authorities, agencies.

Educational establishments.
Hospitals.
Charities.
Pressure and lobby groups.
Clubs and mutual societies.
4.2 Audit work
Particular emphasis on cash.
Key controls
Risk
Appropriate financial reporting framework.

Regulatory and reporting requirements.
Constitution and rules of entity.
Less formal management structures.
Greater emphasis on volunteers.
Multi sources of income and forms of expenditure.
Control environment may be informal.
High inherent risk:
Understand the entity, its environment and internal control
Assets
Recording transactions and maintaining records
Completeness of income
Authorisation of expenditure
Donations
Compliance with donor requirements
Reporting requirements.
High control risk because of nature of the entity and

operations.
Detection risk must be rendered low:
Experience of management and key workers;

Susceptibility to fraud;
Donations dependent on economy;
Obligations to comply with regulations;
Public interest.
2803
Extensive analytical review;

Large samples of transactions.
Materiality
Most likely to be based on income.

Qualitative judgements.
Proof in total for subscription income.

Controlled usage of equipment and facilities.
Fixed percentage mark ups.
Pre-numbered ticketing for events.
Reconciliations.
Prior period key comparisons.
Reliance on experts
Inventory counting and valuation.

Asset valuations.
Cash
Attend fund raising events.

Observe collection procedures.
Segregation of collection, counting and recording.
Regular cash counts.
Regular rotation of cash handling staff.
Strong control over access to cash and rotation of
access staff.
2804
AUDIT FINALISATION
AUDIT COMPLETION REVIEW
Principal review techniques
Part of quality control process.
Helps to ensure:
Discussion between reviewers and others involved in

the audit.
Review of documentation.
Checklists.
Analytical procedures.
Above provide reasonable assurance that audit has been

conducted in accordance with:
all work was carried out according to audit plan;

all material and contentious issues dealt with;
the audit report is consistent with work performed;
audit work supports the audit opinion; and
ethical matters have been considered for audit reacceptance.
Provides opportunity to assess how audits are

conducted.
1.1 Overall review of financial statements
To assess whether:
evidence obtained provides a reasonable basis for

the audit opinion;
auditing standards;
other regulatory requirements; and
the firms own standards.
1.2 Types of review
Day-to-day review and discussion of the work done:
senior audit members (on assistants work); and

audit managers (on work of seniors).
information presented in the financial statements

meets statutory requirements;
appropriate accounting policies are properly

disclosed and consistently applied; and
Engagement partners review prior to the signing of the

audit report.
Independent second partner review for high risk clients

(hot review before signing audit report).
financial statements are consistent with auditors

knowledge and results of audit procedures.
2901
AUDIT FINALISATION
1.3 Documentation
1.6 Other tools
All critical matters, particularly matters of judgement:
Points for partner
uncorrected misstatements;
going concern;
provisions and contingencies;
subsequent events;
compliance with reporting framework;
written representations; and
communications to those charged with governance.
Checks that all relevant audit procedures have been

completed before the audit opinion is signed.
Normally includes an overall conclusion that

paraphrases the audit opinion.
Significant points and issues from the audit;

How they have been dealt with;
Matters for final discussion with the client.
All matters that the audit partner needs to be aware of.
Enables a final decision to be taken on:
1.4 Completion checklists
A completion summary:
the adequacy of action taken; or

what still needs to done.
Disclosure checklists
Review the final accounts for full and accurate IFRS

and regulatory disclosure and presentation.
1.5 Analytical procedures
UNCORRECTED MISSTATEMENTS
Mandatory to corroborate (or not), audit conclusions

on individual elements of the financial statements.
2.1 Misstatements
Use updated (for discovered errors) planning analytical

review and ratio analysis.
Ratio trend analysis (3 years minimum).
Can arise from error or fraud.
Refine expectations made at planning stage (as more

up-to-date information is available).
Uncorrected misstatements accumulated and

considered (collectively) not to be material.
Difference between a reported item and what it should be in

accordance with the financial reporting framework.
2902
AUDIT FINALISATION
Three categories
Factual there are no doubts.
Judgemental differences of opinion about estimates or

application of accounting policies.
Other information presented with audited financial

statements that could undermine their credibility and the
audit report thereon.
Projected extrapolated best estimate of misstatements

in populations.
2.2 Essential procedures
OTHER INFORMATION (ISA 720)
3.1 Procedures
Obtain and read the other information to identify any

material inconsistencies or misstatement of facts.
Discuss all misstatements with management.
Inconsistency
If the aggregate of uncorrected misstatements is

material, consider:
Information contained in the financial statements is

contradicted by the other information.
If in financial statements and management refuses to

change qualify audit opinion.
If in other information and management refuses to

change:
further adjustments made by management;

effect on critical points; and
extending procedures to reduce projected errors.
2.3 Evaluating misstatements
Apply planning materiality levels as basis for

evaluation.
Qualitative evaluation if misstatement:
may be due to fraud;

affects regulatory requirements;
may affect future periods;
affect key ratios, operations or cash flows;
2903
discuss with those charged with governance;

other matters paragraph;
withhold auditors report;
consider withdrawal from engagement after
obtaining legal advice.
AUDIT FINALISATION
Misstatement of fact
Discuss with management.

Ask management to consult with an external expert.
Raise issue with those charged with governance.
If no change made, seek legal advice.
SUBSEQUENT EVENTS (ISA 560)
Event
Financial statements
approved by
members.
End of
reporting
period
Two types
4.1 Events after the reporting period
Adjusting
Events (favourable and unfavourable) occurring between the

end of the reporting period and the date the financial
statements are authorised for issue.
IAS 10
Events occurring between the date of the financial statements
and the date of the audit report and facts that become known
after the date of the audit report.
ISA 560
Non-adjusting
Provides further
evidence of conditions
existing at the end of
the reporting period.
Indicative of conditions that

arose after the end of the
reporting period.
Adjust if material.
(a) Nature of event;

(b) Estimate of financial effect
(or state that estimate
cannot be made.
Disclose if material:
Adjusting events examples
Year-end debt deemed irrecoverable after the year end.
Litigation initiated after the year end that relates to an

event that occurred before the year end.
2904
AUDIT FINALISATION
Non-adjusting events examples
After date of audit report before financial statements issued
Changes in fair values of assets (e.g. material damage to

non-current assets that existed at the year end).
Legal claims that relate to post-year end events.
No active audit role would only consider if aware

(e.g. informed by management as required by letter of
engagement).
Issue of share capital.
Auditors should take action appropriate in the

circumstances:
4.2 Audit procedures and effect on report
If financial statements
Understand managements systems for identifying

adjusting and non-adjusting subsequent events.
Amended
Before date of audit report

Withdraw old audit report.
Active responsibility.
Enquire of management, those charged with governance

and other relevant third parties.
Review board minutes/correspondence.
Review of after-date cash books, transactions, journals

and other records for material/unusual items.
Review of budgets, cash flow forecasts and

management reports.
If no change made for material items, qualified or

disagreement audit opinion.
Not amended
(auditor thinks they should be)
Discuss with those charged with
governance.
Extend audit procedures,

including subsequent events
review, to new date.
If no adjustment, withdraw old

audit report.
Issue new report when financial

statements approved.
Issue new report expressing a

qualified or adverse opinion.
2905
If amended financial statements issued, without new

report, seek legal advice how to prevent reliance on
report.
AUDIT FINALISATION
After financial statements issued
If auditor becomes aware of a fact which existed at the

date of the report which, if known at that date, may
have caused a modified report:
Take appropriate action after seeking legal advice.

If financial statements
Amended
Not amended
(auditor thinks they should be)
Withdraw old audit report.
Extend audit procedures,

including further subsequent
events review, up to the date of the

new audit report.
Issue new report (when financial

statements approved with an
emphasis of matter or other matter
paragraph to explain reasons for
amendments.
Review management procedures

to ensure those who received the
old financial statements will
receive the new and are aware of
the circumstances for the change.
Discuss issues with those charged

with governance.
Seek legal advice on how to inform
those who have received the old
financial statements that they
cannot rely on the audit report.
2906
AUDITORS REPORT ON FINANCIAL STATEMENTS
BASIC PRINCIPLES
1.1 Basic elements (ISA 700)
Audit objectives:
to form an opinion; and

express it in a written report.
Considerations
Sufficient appropriate evidence obtained.
Uncorrected misstatements are not material.
Prepared in accordance with financial reporting

framework (e.g. IFRS).
Adequate disclosure of significant accounting policies.
Accounting policies are consistent with the financial

reporting framework and statutory requirements.
Accounting estimates are reasonable.
Information presented is relevant, reliable, comparable

and understandable.
Adequate disclosure of all material matters.
Terminology used is appropriate.
Fair presentation achieved.
Addressee
Opening or introductory paragraph
Statements of responsibility
Scope paragraph
Opinion paragraph
Date of audit completion*
Auditors address
Auditors signature and name
* Never before approval of financial statements.
1.2 Modified opinions
3001
Qualified except for.

Adverse.
Disclaimer of opinion.
UNMODIFIED OPINIONS
INDEPENDENT AUDITORS REPORT TO ...
3.1 Distinction
We have audited ... [financial statements].

Managements Responsibility for the Financial Statements
... for the preparation and fair presentation of these financial
statements in accordance with [financial reporting framework] and
internal control ... [preparation of financial statements that are free
from material misstatement, whether due to fraud or error].
Auditors Responsibility
... to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with ... Those
standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance whether the
financial statements are free from material misstatement.
An audit involves ... [description].
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly [or give a true
and fair view] of the financial position of [Company] as of [date]
and of its financial performance and its cash flows for the year then
ended in accordance with ...
Name and signature
Date
Address
EMPHASIS OF MATTER AND OTHER MATTER

PARAGRAPH
To draw users attention to:
A matter that is fundamental to understanding the

financial statements; or
Any other matter that is relevant to understanding.
Emphasis of matter
Other matter
Immediately after
Auditors Opinion.
Immediately after
Auditors Opinion and
any Emphasis of
Matter paragraph.
Headed Emphasis
of Matter.
Headed Other Matter
Clear reference to
matter emphasised
and where relevant
disclosures can be
found.
State clearly that other

matter is not required
to be presented and
disclosed in the
Indicate that audit

opinion is not
modified in respect
of this matter.
Do not include matters

prohibited by law or
required to be given by
management.
3002
3.2 Circumstances when used
Emphasis of matter
4.1 Circumstances
Financial statements are not free from material

misstatement.
Unable to obtain sufficient appropriate audit evidence.
Material matter regarding a going concern problem.

Significant uncertainty.
Early application of a new accounting standard.
A major catastrophe that has had, or continues to have,
a significant effect on the entitys financial position.
4.2 Basis for modification
In our opinion ... [as for unmodified opinion]

Emphasis of matter
Separate heading and paragraph, before the opinion

paragraph, to explain the reasons for the modification.
4.3 Standard forms summary
Without qualifying our opinion we draw attention to Note X

to the financial statements ... [description].
Material matter that does not affect financial statements

(e.g. material inconsistency in other information).
Where the auditor wishes to withdraw from an

engagement but cannot do so because of law.
To elaborate on matters that provide further explanation

of the auditors responsibilities.
EXPRESSIONS OF
OPINION
GROUNDS FOR
QUALIFICATION
Other matter paragraph
MODIFIED OPINIONS
3003
Misstatement
Inappropriate
accounting
Material and pervasive

qualified opinion is not
adequate
ADVERSE
Lack of evidence
Inadequate disclosure
(e.g. failure to comply
with IFRS)
Material
QUALIFIED
OPINION
Except for
Imposed by entity Imposed by circumstances

(auditor would not (e.g. inadequate records)
normally accept
engagement)
Material and pervasive

unable to express
opinion
DISCLAIMER
Describe in a Basis for paragraph
Material
QUALIFIED
OPINION
Except for
If misstatement basis of opinion should include:
a clear description of the reasons; and

quantification of possible effects, when practicable.
If lack of sufficient appropriate evidence:
Pervasive lack of sufficient appropriate evidence

disclaimer of opinion
We were engaged to audit the accompanying financial
statements . (no change to remaining words)
Managements Responsibility (no change to wording)
describe limitation; and

indicate possible adjustments.
Auditors Responsibility
4.4 Sample standard opinions
Basis for Qualified Opinion
Our responsibility is to express an opinion on these financial

statements based on conducting the audit in accordance with
International Standards on Auditing. Because of the matters
described in the Basis for Disclaimer of Opinion paragraph,
however, we were not able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion.
[Description of items in financial statements affected,

including amounts]
Basis for Disclaimer of Opinion

[Description of circumstances]
We were unable to obtain sufficient appropriate audit

evidence about ... [amounts described above] because
[reason]. Consequently, we were unable to determine
whether any adjustments to these amounts were necessary.
Disclaimer of Opinion
Lack of sufficient appropriate evidence qualified opinion

We have audited ... Management is responsible for Our
responsibility ... [all standard wording].
Qualified Opinion
In our opinion, except for the possible effects of the matter
described in the Basis for Qualified Opinion paragraph, the
financial statements present fairly, in all material respects, ...
Because of the significance of the matters described in the

Basis for Disclaimer of Opinion paragraph, we have not been
able to obtain sufficient appropriate audit evidence to provide
a basis for an audit opinion. Accordingly, we do not express
an opinion on the financial statements.
3004
Materially misleading qualified opinion

We have audited ... Management is responsible for . Our
responsibility is to express an opinion (no change)
[Description of items in financial statements affected,
including amounts]
Qualified Opinion
In our opinion, except for the effects of the matter described
in the Basis for Qualified Opinion paragraph, the financial
statements present fairly, in all material respects .
Materially misleading and pervasive adverse opinion
We have audited ... Management is responsible for . Our
responsibility is to express an opinion .
Basis for Adverse Opinion
[Description]
Adverse Opinion
In our opinion, because of the significance of the matter
discussed in the Basis for Adverse Opinion paragraph, the
financial statements do not present fairly ... .
3005
GOING CONCERN
RESPONSIBILITIES
1.3 Auditors responsibilities (ISA 570 Going Concern)
1.1 Going concern assumption

. . . entity will continue in
operation for the foreseeable
future
Generally a period of at least,

but not limited to, 12 months
from the end of the reporting
period
. . . assume neither intention nor

necessity (eg no realistic
alternative) to liquidate or cease
trading
Management must assess

entitys ability to continue as a
going concern
Obtain sufficient appropriate audit evidence regarding

the managements use of the going concern assumption:
Time period used by management;

Assumptions used;
All relevant information considered;
Plan for future actions;
Plan is feasible.
Conclude, based on audit evidence obtained, whether a

material uncertainty over going concern exists.
If assumption justified
If unjustified
Amounts recorded in respect of

assets may not be realised
Determine implications for the audit report.
PLANNING
Amounts and maturity dates of

liabilities may need adjustment.
2.1 Risk assessment
Assets will be realised and

liabilities discharged in normal
course of business
1.2 Managements responsibility
Understand and assess the process used by management

to assess going concern.
To assess ability to continue as a going concern.
3101
If no formal process, discuss with management

and make appropriate enquiries.
Identify events/conditions that may cast significant

doubt on ability to continue as a going concern.
GOING CONCERN
2.2 Indicators of significant doubt
Other indicators
Financial indicators
Non-compliance with capital, statutory, regulatory

requirements.
Pending legal proceedings that may bankrupt the entity.
Changes in legislation or government policy.
Uninsured/underinsured catastrophes.
Net liability/net current liability position.

Withdrawal of financial support.
Negative operating cash flows.
Adverse key financial ratios.
Substantial operating losses.
Significant deterioration in value of assets.
Arrears or discontinuance of dividends.
Inability to pay creditors on due dates.
Difficulty in complying with terms of loan agreements.
Change from credit to cash-on-delivery transactions
with suppliers.
2.3 Mitigating factors
Operational indicators
Intention to cease operations.

Loss of key management without replacement.
Loss of a major market, license, principal supplier, key
customer (no appropriate alternatives).
Labour difficulties or shortages of key supplies.
Fundamental change to which the entity cannot
adequately respond.
Managements plans:
Disposal of assets;
Debt rescheduling;
Obtaining capital;
Continued support
AUDIT EVIDENCE
Keep alert for events and conditions that affect going

concern. If identified:
3102
perform additional procedures; and

reassess audit risk.
GOING CONCERN
3.1 Sources of information
Third party continued support.
Clients system for timely identification of warnings of

risks/uncertainties.
Order books.
Subsequent events review.
Budgets, forecast information.
Existence, terms and adequacy of borrowing facilities.
Obligations, undertakings, guarantees with lenders,

suppliers.
Obtaining and reviewing reports of regulatory actions.
Bank borrowing facilities and suppliers credit.
Adequacy of any planned disposals of assets.
Managements plans for future action.
General written representation use of going concern

assumption.
Specific written representations plans that might have

a significant effect on solvency in foreseeable future.
3.2 Specific procedures
Analyse managements assessment:
assessment process;
assumptions used;
plan for future action; and
feasible in the circumstances.
3.3 Cash flows

Considerations
Analysing cash flow, profit and other relevant forecasts.
Analysing entitys latest available interim statements.
Breaches of debentures and loan agreements.
Financing difficulties noted in minutes of meetings.
Existence of litigation and claims and the

reasonableness of managements assessments.
3103
Control systems that generate cash flow detail.

Appropriateness of underlying assumptions.
Additional facts/information since forecast prepared.
Comparison to historic budgets, forecasts, etc
Comparison to current period with results achieved to
date.
GOING CONCERN
3.4 Beyond the assessment period
Inquire of management (and obtain a written

representation) if indicators of significant doubt beyond
the period of assessment.
CONCLUSIONS AND REPORTING
The auditor should judge whether material uncertainty

about the going concern assumption exists.
4.2 Requirements
Going concern is appropriate and no uncertainty
Statement that the financial statements have been

prepared on the going concern basis.
No reference made in the auditors report.
Going concern is appropriate, but a material uncertainty exists
Adequate description and disclosure of:
events or conditions giving rise to the doubt;

managements plans to alleviate the uncertainty.
there is material uncertainty;

entity may be unable to realise assets; and
discharge liabilities in normal course of business.
If adequate disclosure:
4.1 Basic principle
Statement that:
express an unmodified opinion; plus

Emphasis of Matter paragraph.
Emphasis of Matter
Without qualifying our opinion we draw attention to Note
X to the financial statements. [Summary of matter]
If clearly inadequate or no disclosure made express an

adverse opinion.
Basis for Adverse Opinion

[Description of events that indicate material uncertainly.]
The financial statements do not disclose this fact.
Adverse Opinion
In our opinion, because of the omission of the information
mentioned in the Basis for Adverse Opinion paragraph, the
financial statements do not give a true and fair view ...
3104
GOING CONCERN
If insufficient detail disclosed, express a qualified

opinion.

[Description] The financial statements fail to fully disclose
this fact.
Qualified Opinion
In our opinion, except for the incomplete disclosure .
Going concern assumption is inappropriate
Adverse audit opinion.
Management is unwilling or unable to assess
Qualified or disclaimer of opinion as insufficient

appropriate audit evidence obtained.
4.3 Communication with those charged with governance
Report any events which may cast doubt on ability to

continue as a going concern:
The event constitutes a material uncertainty;

Appropriate use of the going concern assumption;
Adequacy of the related disclosures.
3105
INTERNAL AUDIT
1.1 Terminology
INTERNAL AUDIT
An independent, objective assurance activity designed to add

value and improve an organisations operations.
It helps achieve organisational objectives by evaluating and
improving the effectiveness of risk management, control, and
governance.
Add value
Risk management
Identify and evaluate significant exposures to risk.

Improve risk management and internal control.
Assist in the detection of fraud.
Internal control
Evaluation of internal control.

Examination of financial and operating information.
Review of the economy, efficiency and effectiveness.
Review of compliance with laws and regulations.
Governance
Through:
development of products and services; and
use of resources to promote products and services.
When gathering data to understand and assess risk,

internal auditors:
gain insight into operations; and

identify opportunities for improvement.
Control
Any action taken by management and/or the board to:
enhance risk management; and

increase the likelihood that objectives and goals
will be achieved.
Adequate control
Assess the governance process in the accomplishment

of its objectives.
Present if reasonable assurance that:
risks have been managed effectively; and

goals will be met efficiently and economically.
Governance process
3201
The procedures used to provide oversight of risk and

control processes administered by management.
INTERNAL AUDIT
1.2 Relationship with external auditors

External auditor
Internal auditor
Provides an independent opinion on

Appraises, examines and evaluates organisational activities.
Required by
Statute.
Best practice and corporate governance.
Appointed by
Shareholders (ultimately).
Those charged with governance.
Reports to
Shareholders.
Those charged with governance.
Reports on
Financial statements.
Internal control, risk management (operational as well as financial).
Forms opinion on
Truth and fairness.
Effectiveness of risk management strategy and operations.
Role
Assists management in discharging its responsibilities.
Operation of corporate governance.

Adequacy and effectiveness of internal control and other business
functions.
Status
Independent of client.
Employee, but must be objective.
Qualification
Usually ACCA, ICAEW, CPA or similar.
IIA or same as external audit. Can be unqualified.
Scope of assignment
Must be unlimited.
Prescribed by those charged with governance and/or management.
Conduct of audit
In accordance with ISAs.
SPPIA, based on ISAs.
3202
INTERNAL AUDIT
1.3 Scope of work
1.4 Limitations of the internal audit function
Understand key business risks.
Assess adequacy of processes by which these risks are

identified, evaluated and managed.
If not fully supported by governance and key

management:
Role not taken seriously;

Not considered key to managing business risk;
Not essential for the control environment;
Not allowed to operate independently;
Inappropriate reporting lines;
Access to key personnel/information denied;
Scope of work dictated/limited by executive
management.
Assess reliability and integrity of key financial and

operating information.
Assess the means used to identify, measure, classify and

report relevant information.
Ensure adherence with policies, plans, procedures, and

relevant laws and regulations.
Review how assets, other key resources and computer

systems are safeguarded.
1.5 Approach to assignments
Review operations or projects to ascertain whether:
1.6 Assessing the need for internal audit
results are consistent with objectives and goals;

they are carried out as planned.
Monitor corrective action plans to ensure management

implements them promptly and effectively.
Advise management on cost effective controls for new

systems and activities.
Liaise with those charged with governance (e.g. the

audit committee) and external auditors.
3203
Skill set inappropriate.

Not dissimilar to that used by external auditors.
Control environment.
Increased risk.
Problems with existing internal control systems.
Scale, diversity, complexity of systems and activities.
Number of employees, size of entity.
Unexplained or unacceptable events.
Cost-benefit.
INTERNAL AUDIT
OUTSOURCING
What to outsource whole/specific elements.
What/who to retain.
Terms of reference:
services provided;
reporting to;
report formats;
action to take on findings; and
fees.
2.2 Benefits
Agreed costs, pay as you use.

Range of general and specialist skills.
Integration of internal and external audit approach.
Effective and efficient use management resources.
Latest technology and techniques.
Contractual relationship.
2.3 Disadvantages
May be unable to match internal specialist skill set.

Possible conflicts of interest and reporting lines.
Potential inflexibility.
Reduction/loss of internal skills base.
Decline of service standard.
Change in corporate culture.
2.4 Service provider issues
Must maintain skills.

Working (effectively/efficiently) with external audit.
Application of ethical code.
Over dependent on specific clients.
Restrictions placed on service provision.
RISK MANAGEMENT
3.1 Assurance role
Assessments of the adequacy and effectiveness of the

processes by which risks are:
3204
identified and prioritised;

managed, controlled and mitigated; and
reported
INTERNAL AUDIT
3.2 Contribution to risk management
Three Es:
Objective assurance on adequacy and effectiveness of

risk management.
Economy achieving necessary quality for lowest

possible cost.
Improves processes by which risks are identified and

managed.
Strengthens risk management systems.
Efficiency either:
maximum output from a given input; or
a given output from minimum input.
Provides advice on design, implementation and

operation of risk management systems.
Effectiveness achieving objectives.
Promotes a risk management culture.
OTHER SERVICES
Evaluation of managements achievements in terms of
economy, efficiency and effectiveness (3 Es).
Objectives
Effectiveness
Economy
Resources
Inputs
Audits ensure that corporate resources, shareholders

funds and taxpayers contributions are not wasted.
Advantages
4.1 Value for money (VFM)
Process
Management attention is focused on economy and

efficiency with the need for effective performance.
Promotes the use of performance indicators.
It should eventually lead to self-measurement.
Also used to identify revenue opportunities.
Outputs
Efficiency
3205
INTERNAL AUDIT
Disadvantages
4.3 IT audits
Economy and effectiveness can be opposed.
Information systems auditing
Savings now may lead to additional costs in future.
Savings in one area may create additional costs in

another.
Systems development project audit
Comparisons between business units may be spurious.
VFM targets may be manipulated by managers.
To review and report on all aspects of IS in the

organisation.
Ensure that adequate and effective controls are built
into the system.
4.4 Financial process audits
4.2 Best value
Traditional role that ensures:
A duty to deliver services to clear standards (cost and

quality) by the most effective, economic and efficient means.
completeness and accuracy of recorded

transactions;
The 4 Cs:
assets are safeguarded;
Challenge why and how a service is provided.
Consult all users and partners in the setting of

new performance targets.
complete, accurate and relevant information is

provided on a timely basis;
Compare with the performance of others across

a range of relevant indicators.
the accounting and finance functions are managed

efficiently.
Compete consider fair competition as a means

of securing efficient and effective services.
3206
INTERNAL AUDIT
4.5 Operational audit
4.6 Other (overview plus additional)
Governance
Ensures that management has adequate:
controls to achieve business objectives

economically and efficiently; and
routine assurances that controls and risk

management measures are effective.
Risk management
Performance based
Processes or activities are evaluated in order to draw

conclusions about:
the adequacy of the products; and

the adequacy and effectiveness of the processes
associated with those products.
Investigation, observation, examination, or evaluation to:
determine the adequacy of, and compliance with,

established procedures; and
the effectiveness of their implementation.
Identify and evaluate significant exposures to risk.

Improve risk management and internal control.
Assist in the detection of fraud.
Internal control
Compliance based
Assess the governance process in the accomplishment

of its objectives.
Evaluation of internal control.

Examination of financial and operating information.
Review of economy, efficiency and effectiveness.
Review of compliance with laws and regulations.
INTERNAL AUDIT REPORTS
5.1 Primary purpose
Provide management with an opinion.
Inform management of significant findings, conclusions

and recommendations.
3207
INTERNAL AUDIT
Aim is to:
5.4 Timing
provide appropriate assurance;

provide recommendations;
prompt management action; and
provide a formal record of matters arising.
5.2 Reporting arrangements
The format and distribution of internal audit reports

should be agreed with management.
Distribution to managers with direct responsibility and

authority to take act on recommendations.
Interim report made where:
Proceedings include:
meeting with management to discuss audit

findings;
including management comments (including

disagreements);
5.3 Structure of the report
Should be clear, constructive and concise.
In typical business report format:
Terms of reference
Executive summary
Key findings and recommendations
Detailed findings and agreed action
Appendices.
immediate action is required;

grounds for suspicion of malpractice;
scope of assignment changes significantly; or
it is desirable to inform management of progress.
Final report presented to management as soon as

possible after completion.
The internal auditor should determine that:
3208
arrangements are made to determine whether

action has been taken on recommendations; or
management has understood and assumed the risk

of not taking action.
USING THE WORK OF INTERNAL AUDITORS
ACTIVITIES OF INTERNAL AUDITING
WHETHER TO USE INTERNAL AUDIT WORK
2.1 Evaluating the internal audit function
External auditors objectives:
Objectivity
to determine whether, and to what extent, to use

work of the internal auditors; and
Not allowing bias, conflict of interest, or undue influence to

override professional judgement.
if using, to determine its adequacy.
External auditor is solely responsible for audit opinion.
1.2 Coordination of work
Reporting to those charged with governance.
Free of conflicting responsibilities.
Employment decisions overseen by those charged with

governance.
Cannot dictate each others work program.
They can:
Free of constraints or restrictions.
Members of a professional body.
share information obtained for planning purposes;

discuss business developments with key personnel;
discuss materiality, risk and audit objectives;
review work plans and programs; and
liaise on timing of internal audit work (so external
auditor can use findings).
Competence
Obtaining/maintaining suitable knowledge and skills.
3301
Sufficient and appropriate resources.

Hiring, training and assigning.
Sufficient technical training and proficiency.
Knowledge of financial reporting.
Members of a professional body.
USING THE WORK OF INTERNAL AUDITORS
Application of a systematic and disciplined approach
3.1 Essential procedures
Planning, performing, supervising, reviewing and

documentation:
Documented internal audit procedures;

Quality control policies and procedures.
2.2 Nature and extent of work to be used
External auditor must make all significant judgements:
Risks of material misstatement;

Sufficiency of tests performed;
Going concern assumption;
Significant estimates;
Adequacy of disclosures;
All matters affecting auditors report.
Consider relevance of the internal audit function.
Matters that reduce reliance on internal audit:
Evaluate and test to confirm adequacy:
Planned, performed, supervised, reviewed and

documented;
Sufficient appropriate audit evidence;
Appropriate conclusions.
3.2 Documentation
higher judgement required;

higher risk of material misstatement;
low objectivity and competence of internal audit.
USING THE WORK OF INTERNAL AUDIT
3302
Organisational status.
Relevant policies and procedures.
Level of competence.
Systematic and disciplined approach.
Nature and extent of work.
Audit procedures used to evaluate internal audit.
ADDITIONAL READING
ARTICLES
The following technical articles written by members of the F8/auditing examining team can be found on the ACCA website at:
http://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technicalarticles.html
Exam technique
Multiple-choice questions
Examiners approach to Paper F8
Answering audit risk questions
Ready to sit F8?
Audit and assurance assistance
Topic specific
The audit of wages
The control environment of a company
Going concern
Audit risk
Audit sampling
Subsequent events
Specific aspects of auditing in a computer based environment
ISA 330
Audit working papers
ISA 240 Auditors and fraud
See also the examiners approach interview
http://examinerinterviews.accaglobal.com/Channel/Examiner%20Interviews/Approach/F8
3401
EXAMINERS REPORT DECEMBER 2014
See http://www.accaglobal.com/content/dam/acca/global/
PDF-students/acca/f8/examinersreports/f8-examreportd14.pdf for the full report.
A
B
C
D
Section A
The majority attempted all questions ...

Some did not (!)
Approach
Assess which two of procedures (1) (4) are tests of control.
The other two are most likely to be substantive procedures.
Section A covers the whole syllabus so candidates are

advised not to try and question spot.
Two specific questions caused difficulty:

Example 1
Which of the following procedures are TESTS OF
CONTROL an auditor should perform in testing the
inventory cycle of their client whilst attending the
inventory count?
(1) Observe whether the clients staff are following the
inventory count instructions
(2) Review inventory present in the warehouse for evidence
of damage or obsolescence
(3) Obtain a sample of the last goods received notes and
goods dispatched notes and follow through to ensure
inclusion in the correct accounting period
(4) Inspect and review managements inventory count
instructions
2 and 3
1 and 4
1 and 2
3 and 4
(1) and (4) concern inventory count instructions:
(1) aims to ensure the counting team followed

instructions (i.e. managements directives were
implemented) a test of control.
the purpose of (4) is to assess the appropriateness

of the count instructions test of control.
Having found the correct answer B there is no need to

consider (2) or (4). However, it is clear that these are
substantive:
3501
(2) concerns damage which relates to valuation;

(3) is a cut-off test.
Example 2
Which of the following statements, relating to the
auditors reporting responsibilities for going concern, if
any, is/are correct?
(1) Where management is unwilling to make their
assessment of the companys ability to continue as a
going concern, the auditor should include an emphasis
of matter paragraph in the audit report
(2) Where the use of the going concern assumption is
inappropriate, the auditor should include a qualified
opinion in the audit report
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 nor 2
This was not well answered by the majority.
In (1) the auditor is unable to obtain sufficient and

appropriate evidence. This must give rise to a modified
opinion.
! Emphasis of matter paragraph cannot modify an opinion.
(2) is also incorrect because if the going concern basis is

inappropriate the effects are pervasive (i.e. throughout the
financial statements) adverse opinion.
As both statements are incorrect the correct answer is D.
! Do not suppose that one statement will be correct.

Section B
Question 1 (10 marks)
This concerned planning and the audit of wages where there
was an increased risk of fraud.
Part (a) explain the importance of audit planning (5 marks).
Candidates performance was satisfactory.
Candidates who focused on the contents of an audit

strategy and plan did not score enough marks to pass.
! Read the question set.

Part (b) describe procedures to be undertaken during the
audit of wages where an increased risk of fraud had been
identified (5 marks).
3502
Candidates performance was unsatisfactory.
Common mistakes:
Listing general payroll substantive procedures (e.g.

recalculate statutory deductions) rather than tailoring
answer to the scenario.
Listing internal controls to prevent future frauds, rather
than audit procedures.
Failing to recognise that procedures could be both

substantive and tests of control.
Missing standard fraud procedures (e.g. discussing

with management how the fraud occurred).
Candidates who scored explained each risk by referring

to the assertion and the account balance affected.
A significant number failed to explain how an audit risk

arose from the facts identified (limiting marks that can
be scored to marks).
Many yet again focused on business risks and how

management should respond to them. This limited their
maximum total mark to just 2 marks.
! Read the question.
! Read the question and use the information provided.
Many gave business advice (e.g. replacing the financial

controller) or inappropriate responses (e.g. attending
inventory counts to address the inventory valuation risk).
This required identification and explanation of five audit

risks from the scenario and the relevant auditors response
for each.
This concerned a retail company planning to obtain a listing

within the next six months.
Performance was mixed (although better than in June 2014).
Part (a) explain the benefits of establishing an audit

committee (4 marks):
The scenario contained significantly more than five risks

only FIVE needed to be identified for the marks available.
Was answered well by the majority of candidates.
Focusing on the role of an audit committee (rather than

benefits) and/or failing to explain the benefits (e.g.
improved public confidence) did not score well.
3503
Part (b) discuss the advantages and disadvantages of

appointing two potential NEDs (6 marks):
Many obtained full marks.
Some compared the two NEDs and made a

recommendation, which was not the requirement.
! Read the question and think before you write.
Some confused advantages/disadvantages and clearly

did not understand their relevance in the scenario.
Many incorrectly stated that 7-year contract was an

advantage (NED would have a long-term
commitment) and failed to understand the effect on
independence
Some stated a disadvantage for one NED (e.g. lack of

independence) and then the converse as an advantage
for the other NED. This approach did not generate
marks as it was not suitably tailored to the scenario.

Part (a) describe FOUR elements of an unmodified audit
report and explain why they are included (4 marks).
Performance on this part of the question was mixed:
Many correctly identified a good number of the

elements.
Some gave headings (e.g. auditors responsibility)

without any description of what would be included.
! Pay attention to the verb used (e.g. describe requires

more depth than state.
The second part was to explain why included.
Majority were not able to do this (did not even attempt).
A minority explained the different types of audit

opinions.
Some explained the elements of an assurance

engagement.
3504
Part (b) described an audit clients customer in financial

difficulties. The question asked (i) whether the 2014
financial statements required amendment; and (ii) audit
procedures to form a conclusion on any required amendment.
Candidates generally identified that amendment was

needed (IAS 10), but ...
Fewer could explain why.
Many responded to (ii) with report implications if the

amendment was not made.
! Deficiencies should be identified from the scenario not a

rote-learned list of generic points for a sales system.
Some recommendations were too brief and did not

demonstrate how the control could be implemented.
Some recommendations failed to address the deficiency

identified or were unrealistic.
As previously reported the recommendation of

sequence checks was not completely answered.
2 marks were available for the covering letter.
Part (a) identify and explain seven deficiencies in the sales

system and provide a recommendation for each. A covering
letter was required. (16 marks)
Part (b) describe substantive procedures to confirm

revenue (4 marks).
This was answered very well.
Some did not adequately explain what the deficiency

meant for the company.
Some did not provide any letter at all.

A significant number provided a memo.
Performance was unsatisfactory.
Many provided:
tests of controls;
receivables or cash receipts tests.
Some deficiencies were incorrect.
! Irrelevant answers score NO marks.
3505
Descriptions were often inadequate (e.g. cut off

testing without any explanation).
Those who attempted to explain cut-off testing chose

invoices rather than dispatch notes. This shows a lack
of understanding of what initiates a sale.
Many considering completeness did not provide a

complete audit trail. Tracing sales to the ledger instead
of the sales day book shows a lack of understanding of
the fundamentals of financial records.
Those who scored well provided a range of tests

including analytical review, detailed tests on sales
invoices and casting of sales day books or invoices.
! Give a breadth of points to maximise marks available.

Part (b) substantive procedures in relation to:
(i)
revaluation of land and buildings and warehouse

addition;
(6 marks)
(ii) valuation of WIP.
(4 marks)
Performance was unsatisfactory.
Many saw items of property plant and equipment and

inventory and listed all possible tests for these areas.
Many could not deal with the specific issues in the

scenario and question requirements.
! Do not knowledge dump this approach scores poorly.
Part (a) explain factors to consider when placing reliance on

the work of an independent valuer (5 marks).
Performance was satisfactory. Many identified relevant

points (qualifications, independence and experience.
The very best candidates discussed the scope of the

work or reasonableness of assumptions used.
Those who did not score well often repeated the same
point (for the same 1 mark).
Many took no notice of the scenario.
As previously reported candidates must strive to understand

substantive procedures.
In (i), some focused on testing the basis of the valuation

report and whether the valuer could be relied on;
unfortunately this was relevant to part (a).
In (ii), many focused on standard attendance at an

inventory count completely ignoring valuation of WIP
issues (standard costs and percentage completion).
3506
Common mistakes:
Giving objectives ensure that ... rather than

procedures. These scored NO marks.
Lack of detail in tests (e.g. check ... without any

explanation how).
Not providing enough tests (assume 1 mark each).
Contradictions (e.g. suggesting that a material

misstatement requires an unmodified report) score no
marks.
As usual many suggested an emphasis of matter

paragraph, despite this being irrelevant to this scenario.
Yet again future candidates are reminded that audit reports is

a highly examinable topic.
Part (c) explain the steps to take and the impact on the audit
report in relation to the directors refusal to amend the
financial statements (5 marks).
Performance on this question was unsatisfactory.
Those who scored well assessed materiality and

discussed with management.
Again, many took a scatter gun approach to impact on

audit report. This approach scores poorly if at all.
Many confused terminology and referred to modified

opinions and qualified reports.
3507
ANALYSIS OF SPECIMEN AND PAST EXAMINATIONS
Analysis of section A
Specimen December
Exam
2014
June
2015
Audit framework and regulation (A)
2 MCQs
4 MCQs
3 MCQs
Planning and Risk Assessment (B)
1 MCQ
2 MCQs
2 MCQs
Internal Control (C)
2 MCQs
2 MCQs
2 MCQs
Audit Evidence (D)
2 MCQs
2 MCQs
3 MCQs
Review and reporting (E)
5 MCQs
2 MCQs
2 MCQs
Analysis of section B
Specimen December
Exam
2014
Review engagements
Non-executive directors
Audit committees
Ethics
Planning
Fraud and error

Audit risk
June
2015
Internal controls
3601
ANALYSIS OF SPECIMEN AND PAST EXAMINATIONS
Analysis of section B (contd)
Specimen December
Exam
2014
June
2015
Deficiencies (sales system)
Deficiencies (purchase system)
Audit evidence
Experts
Non-current assets
Intangible assets
Inventory
Work-in-progress
Receivables
Bank and cash
Payables
Revenue (substantive procedures)
Wages
Audit reports
Going concern
Subsequent events
Internal audit
3602
EXAMINATION TECHNIQUE
KEY POINTS
SECTION A
Understand how the examiner thinks:
Time allocation
20% of the examination time, broadly 35 minutes.
Treat as a block; do not try to allocate time to each

question.
Work through an approved Study System (text);

Read articles written by the examination team;
Read the examiners reports;
Work through past exam questions;
Attempt at least one mock examination and
analyse your attempt to the answer thoroughly.
Approach
Do the easy questions first those that will give you the
marks very quickly.
For the remaining harder questions, if you cannot

determine what you believe is the correct answer within
2 minutes (for a 1-mark question) move on.
For the remaining questions apply standard MCQ

technique:
READING AND PLANNING TIME
Aim is to maximise the marks in the allocated time.
Spend most of the time on Section B.
Of that time, concentrate on the two 20% questions.
3701
Eliminate the choices you believe to be incorrect;

If one left it is the answer;
If two left, toss a coin (notionally);
If three left, best guess.
SECTION B
Others
Time allocation
State express in words. Use one short sentence

(bullet point) to make each answer point.
List make a list of like things.
Justify give reasoning.
Comment make observations, appraise and/or

examine critically.
Suggest propose or put forward.
Standard 1.8 minutes per mark.
Do not overrun the time allocation for each question.
4.2 Understand the requirement verb(s)

Most relevant to F8
Describe set out the characteristics of. Use brief

sentences but give more depth than if the instruction
was state.
4.2 Approach
Explain make plain, clarify, elucidate. For

example, defining a term does not explain it, but
providing an illustration may do so.
Discuss give balanced views on and conclude
where appropriate.
Identify from the scenario. This requirement is
often implied rather than expressly stated. For example,
Describe (or explain) audit risks . requires the risks
to be identified before they can be described (explained).
Read the requirements.
Understand.
Read through the scenario.
Plan an answer to match the requirement(s).
Answer the question set using the scenario.
For example, using the point, explain, example

approach. For each point made, explain why it has
been made and then give example to support.
Ensure you have met the question requirement.
Avoid the profile of a fail script (see later).
3702
Summary
PROFILE OF A FAILED SCRIPT
The key elements to examination technique
Section A
Read:
Think:
Write:
first the requirement(s) to put the scenario

into context, then the main body to provide
the facts to trigger your knowledge.
Section B
without this planning process you will not be

able to convey comprehension, application
and analysis.
concentrate on your style of writing to
address the requirements as directly as
possible. Answer the Q set and think about
the relevance of what you are writing. If it
does not add value, why write it?
Practise: do as many past examination questions as

possible to understand what the examiner
requires and the style of the answer.
Not attempting all questions.
Providing general comments without any regard to the

detail provided in the scenario.
Not thinking whether the procedures given in answers

were actually relevant to the scenario.
Not thinking through and planning the approach to the

answers.
Too many general comments without any specifics.

Why is the test required? What assertion is tested?
Script makes it very clear that:
3703
Parts of the syllabus have either been omitted from

study or only briefly reviewed; and
Lack of individual question practice and

examination practice.
Explanations to support answers are far too short or

non-existent, thus losing the majority of the marks
available for each question.
Failure to give a full answer (e.g. when required to explain

just listing will not obtain a pass mark).
Poor standard of presentation and structure of answers.
Frequent crossing through of points made, thus

indicating a lack of thought and planning.
Failure to analyse a question scenario and apply the

detail from the scenario in forming an answer.
Failure to apply theory to the practical elements of a

scenario (e.g. understanding a theoretical (sales) system
but being unable to deal with a different practical
(sales) system).
Using a scatter gun approach (especially in relation to

impact on audit report).
Failure to read the examiners past exam reports and

articles (evidenced by making the same mistakes).
3704
FREQUENTLY ASKED QUESTIONS
(1)
(2)
(3)
Q:
I passed F7 last session, do I really need to go

back and review all the IFRSs again?
A:
Yes, it will certainly help that you refresh your

memory of the key elements of IFRS covered in
paper F3. You need to understand the
fundamentals of IFRS to be able to audit their
requirements and disclosures.
Q:
As I am an auditor, surely there is no need to do

that much studying?
A:
Do not be lulled into a false sense of security.

Whilst your day-to-day work provides excellent
practical experience in some areas of the syllabus
it is unlikely that your range of work will cover
all the areas that will be examined in sufficient
depth (e.g. professional appointments, internal
audit, corporate governance).
Q:
Are ACCA Approved (e.g. Becker Study System

and Revision Question Bank) sufficient to get me
through? If I learn everything in the Study
System, will I learn enough to pass?
A:
The Study System and Revision Question Bank

are comprehensive.
However, you are strongly advised to supplement
your studies by reading all relevant student
accountant articles and examiners reports.
You cannot simply learn the subject. You have
to be able to apply yourself to the specific
requirements and scenarios on the day, in the
exam room. Practicing questions, especially a
Mock Exam, and thoroughly reviewing your
answers to understand where you earn marks is
vital to your exam preparation.
(4) Q:
How critical are the articles in student accountant

written by the examining team?
(5)
3801
A:
Very! Members of the examining team are, in

general, very busy people. They only write
articles with a purpose (e.g. on topics that
students are not tackling well in the exam).
Q:
Surely I do not have to study everything?
A:
Basically, yes. The examiner has made it clear

that many students fail because they do not study
the whole syllabus. This is particularly relevant
now that Section A includes MCQs.
FREQUENTLY ASKED QUESTIONS
3802
ABOUT BECKER PROFESSIONAL EDUCATION

Becker Professional Education provides a single destination
for candidates and professionals looking to advance their
careers and achieve success in:
Accounting
International Financial Reporting
Project Management
Continuing Professional Education
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For more information on how Becker Professional Education can

support you in your career, visit www.becker.com.
Revision Essentials includes:
ACCA syllabus aim and main capabilities

Core topics checklist
Summary of essential facts and theory
Further reading
Relevant articles
Comprehensive analysis of past examinations
Examiners' feedback for the last exam session
Exam technique
www.becker.com/ACCA | acca@becker.com
2015 DeVry/Becker Educational Development Corp. All rights reserved.
Revision Essentials are not quality assured by ACCA but their content is substantially derived from materials which have been quality assured by ACCA.

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Becker Professional Education's ACCA Study Materials

AUDIT AND ASSURANCE

Identify and describe the work and evidence obtained

Explain how the consideration of subsequent events and

To develop knowledge and understanding of the process of

Explain the concept of audit and assurance and the

Position within syllabus

Approach to examining the syllabus

Tick when completed

Tick when completed

Audit and Other Assurance Engagements

Using the Work of an Expert

Professional Codes of Ethics and Conduct

Computer-Assisted Audit Techniques

Understanding the Entity

External Confirmations, Receivables and Sales

Share Capital, Reserves and

Fraud, Law and Regulations

Loans, Bank and Cash

Liabilities, Provisions and Contingencies

Communication on Internal Control

Small Business and Not-for-Profit Organisations

The Auditors Report on Financial Statements

Internal Audit/Using the Work of IA

AUDIT AND OTHER ASSURANCE ENGAGEMENTS

Provides an external and objective view that enhances

Expressing an opinion on the financial statements based

1.1 As an assurance service

International Standards of Auditing (ISA)

Includes the five elements of an assurance engagement

1.2 Stewardship, agency and accountability

Stewardship is the practice of managing another

Agents are employed by principals to provide a service.

Accountability is where one party is held responsible to

Preparing and fairly presenting the financial statements.

High, but not absolute, level of assurance that

The main communication (deliverable) to the

In compliance with the Code of Ethics and Conduct.

1.3 Auditors report

An audit should be conducted in accordance with ISAs.

Relative significance of a matter (quantitative or

AUDIT AND OTHER ASSURANCE ENGAGEMENTS

1.4 The audit process (audit cycle)

Applied in all stages of the audit process:

Interpreting ethical requirements;

An attitude that includes a questioning mind and a

The auditor should plan and perform an audit with an

True and fair view

The terms in which the auditors opinion is expressed.

Truth relates to factual accuracy (bearing in mind

Application to internal audit

Fairness relates to presentation of information and the

Many of the methods and procedures used in external

AUDIT AND OTHER ASSURANCE ENGAGEMENTS

Internal auditors report to those charged with

Internal audit reports do not express a true and fair

Internal auditors focus on enterprise-wide controls

Many methods and procedures are expanded to

An engagement in which a practitioner expresses a

AUDIT AND OTHER ASSURANCE ENGAGEMENTS

2.2 Types of assurance engagement