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ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

ACCA
Audit and Assurance
(F8)

Revision Notes
By: Arif Javed (FCCA)

1

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Table of contents
Contents
Introduction to audit and assurance
Client acceptance and continuance
Terms of engagement
Audit planning
Audit risk
Analytical procedures
Internal control systems
Computer controls
Test of controls
Substantive procedures
Relying on work of others
Review
Misstatements
Audit opinion
Audit report
Audit sampling
Computer assisted auditing techniques (CAATs)
Audit documentation

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Page number
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ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Introduction to audit and assurance
Audit
Audit is an activity where a practitioner (Auditor) gives his opinion on the reviewed subject
matter (Financial statements) in accordance with some reporting framework (ISAs)
...

Assurance
Assurance is an activity where the practitioner examines the subject matter made available by
the responsible party, matches it to the suitable criteria using evidence and reports to the
intended users
...
An assurance engagement will require a three-party relationship comprising of:
a) The intended user who is the person who requires the assurance report
...

c) The practitioner (i
...
an accountant) who is the professional who will
review the subject matter and provide the assurance
...
A second element which is required for an assurance engagement is suitable subject
matter
...

3
...

4
...

5
...
Reasonable assurance (High level assurance but not absolute or 100%)
 Required in Audit engagement
 More testing required eg
...
Limited assurance (Low level assurance)
 Required in review engagement
 Less testing required eg
...
Positive assurance
 Required in audit engagement
 “In our opinion financial statements give (or don not give) true and fair view of
the state of affairs of the company”
2
...
Agreed-upon procedures
A report on factual findings is given but no assurance expressed
...
Compilation engagement
Users of the compiled information gain benefit from the accountant’s
involvement but no assurance is expressed
...
It means to present data in a manageable and
understandable form
...

- The financial statements comply with all the relevant regulations and statutory
requirements
...

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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Objective of external audit engagements: “Opinion”: The auditor’s report contains a clear
written expression of opinion on the financial statements
...
Compliance with Code of Ethics (IFAC’s)
2
...
Audit with professional scepticism
4
...
Sufficient appropriate audit evidence
True and Fair presentation
Financial statements are produced by management which gives a true and fair view of the
entity’s results
...
Although there is no definition in the International Standards on
auditing of true and fair it is generally considered to have the following meaning:
True – Information is factual and conforms with reality in that there are no factual errors
...
Lastly true includes data being correctly transferred from
accounting records to the financial statements
...

Inherent Limitations of audit/ Reasons why absolute assurance cannot be given
1
...
Therefore,
there could be an error in an item not selected for testing by the auditor
...
Subjectivity – financial statements include judgmental and subjective areas and
therefore the auditor is required to use their judgment in assessing whether the
financial statements are true and fair
...
Inherent limitations of internal control systems – an internal control system is operated
by people and hence is liable to human error
...
It is impossible to remove
all of these inherent limitations and as the auditor relies on the internal control systems,
this can reduce the usefulness of the audit
...
Evidence is persuasive not conclusive – the opinion is based on audit evidence gathered;
however, while this evidence can indicate possible issues affecting the audit opinion,
evidence involves estimates and judgments and hence does not give a definite
conclusion
...
Even if everything reported on was examined and found to be satisfactory, there may be
other items which should have been included– the completeness problem
...
Auditors plan their work to detect material errors and frauds only – so small frauds (or
large frauds split into many small amounts) may go unnoticed
...
Audit report format – the format of the opinion is determined by International
Standards on Auditing
...
This means that users may not actually understand the audit opinion
given
...
Historic information – the audit report is often issued some time after the year end, and
so the financial information can be quite different to the current position
...

3
...
However, auditors cannot become too close to
their clients or their independence will be called into question
...
Where auditors spot errors or fraud, their primary legal responsibility is to report this to
management
...

Duties of the auditors
Fundamental duties are to:
- Form an opinion on whether the financial statements give a true and fair view and
are prepared in accordance with applicable reporting framework
- Issue an audit report
...
Right of access at all times to the company’s books, accounts and vouchers
...
Right to require from an officer of the company such information or
explanations as they think necessary for the performance of their duties as
auditors
...
Right to receive all communications relating to written resolutions
...
Right to receive all notices of, and other communications relating to, any general
meeting which a member of the company is entitled to receive
...
Right to attend any general meeting of the company
...
Right to be heard at any general meeting which an auditor attends on any part of the
business of the meeting which concerns them as auditor
...

The person to be appointed as the auditor is required to hold a professional accountancy
qualification
...
Appointed by shareholders
2
...

3
...
Resignation: Sometimes it is necessary for the auditors to resign
...
Forces removal: Sometimes, the Board of Directors or some shareholders may wish to
remove the auditors
...

3
...
As such, when the board
asks them to accept nomination for the following year, the auditors should politely decline
and issue a Statement of Circumstances
...


Auditors can be removed by a simple majority at a general meeting
...
They
can request an Extraordinary General Meeting (EGM) of the company to explain the
circumstances of the resignation
...


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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Client acceptance and continuance
Outgoing audit
The auditor should
communicate with the
outgoing auditor the
client to assess if there
are any ethical or
professional reasons why
they should not accept
appointment
...


Consider the level of risk attached to
the audit whether this is acceptable
to the firm
...


9

Reputation and integrity of the
client’s management assessed- If
necessary, the firm may want to
obtain references if they do not
formally know the directors

Client screening
The purpose of client screening
procedures is to determine whether
the prospective client is suitable for
the firm
...

When a client is deemed to
represent a high audit risk to the
firm, the firm should carefully
consider the implications arising
should it fail in meeting its objective
of giving an accurate audit opinion?
If the firm is not confident that the
benefit to be derived from accepting
the appointment outweighs the
potential risks (including financial
and reputational risk of being sued),
then the firm should decline the
appointment
...
If issues arise, then
their significance must be
considered
...

 The client’s previous audit history (frequent changes of auditors, and/or qualified
reports, are obviously bad news)
...

 The current operating and financial position of the company
...

 Directors’ understanding of External Auditor’s role and their own responsibilities
...

 Management permission or refusal to allow auditors to examine significant documents,
such as the minutes of directors’ meetings
...
It
sets out a number of processes that the auditor should perform including agreeing whether the
preconditions are present, agreement of audit terms in an engagement letter, recurring audits
and changes in engagement terms
...
Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable
...
Assess the nature of the entity, the nature and purpose of the financial statements and
whether law or regulations prescribes the applicable reporting framework
...
Obtain the agreement of management that it acknowledges and understands its
responsibility for the following:
a
...
For internal controls
c
...
It is
compulsory for every new client
...

It confirms that there is a common understanding between the auditor and management, or
those charged with governance, of the terms of the audit engagement helps to avoid
misunderstandings with respect to the audit
...

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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Changes to the letter of engagement
Engagement letters for recurring/existing clients should be revised if any of the following
factors are present:
 Any indication that the entity misunderstands the objective and scope of the
audit, as this misunderstanding would need to be clarified
...

 A recent change of senior management or significant change in ownership
...

 A significant change in nature or size of the entity’s business
...

 A change in legal or regulatory requirements
...

 A change in the financial reporting framework adopted in the preparation of
the financial statements
...

 A change in other reporting requirements
...

What if management refuses to sign the engagement letter?
1
...

2
...
Refuse the engagement if matter still not resolved

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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Audit planning
Importance of audit planning
1
...

2
...

3
...

4
...

5
...

6
...


Audit plan:

Once the overall strategy has been planned, detailed consideration can
be given to each individual audit objective and how it can be best met
...


To assess whether the team is competent to perform the audit

To understand relevant law and regulations impacting the entity

To consider the reliability of various evidence sources
...

- Nature of the entity and its accounting policies like ownership, legal structure,
governance and sources of finance
...

- Measurement and review of financial performance like KPIs, targets and budgets
...

- Previous auditors
This will provide information on key issues identified during previous audits and audit
approach applied
...

- Client’s accounting system
This will provide information on how each of the key accounting systems operates and
this will be used to identify areas of potential control risk and help determine the audit
approach
...


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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

-

-

-

[AUDIT AND ASSURANCE]

Review of board minutes
This will provide an overview of key issues which have arisen during the year and how
those charged with governance have addressed them
Current year budgets and management accounts
Client’s website
This will provide background knowledge of the business which will help in planning audit
and identifying key audit risks
...
This will be important in assessing the client’s
performance in the year and also when undertaking the going concern review
...

Audit risk is a function of two main components being the risks of material misstatement and
detection risk
...

The formula for the audit risk is
Audit Risk = Risk of material misstatement in the financial statements x Detection Risk
Or
Audit risk = Inherent risk x Control risk x Detection risk
Importance of risk assessment
1
...

2
...

3
...

4
...
The team will only focus
their time and effort on key areas as opposed to balances or transactions that might be
immaterial or unlikely to contain errors
...
In addition assessing risk early should ensure that the most appropriate team is
selected with more experienced staff allocated to higher risk audits and high risk
balances
...
A thorough risk analysis should ultimately reduce the risk of an inappropriate audit
opinion being given
...
It should enable the auditor to have a good understanding of the risks of fraud, money
laundering, etc
...
Assessing risk should enable the auditor to assess whether the client is a going concern
...


Inherent risk
The susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement that could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls
...

Inherent risk is affected by the nature of an entity and factors like:
 Changes in the industry it operates in
...

 Going concern and liquidity issues including loss of significant customers
...

 Expanding into new locations
...

 Accounting measurements that involve complex processes
...

 Pending litigation and contingent liabilities
...

It is the risk that an organization’s internal control systems do not adequately protect the
organization either because they have not been adequately designed and / or
implemented
...

 Changes in key personnel including departure of key management
...

 Changes in the information technology (IT) environment
...

Detection risk
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably
low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements
Detection risk is all down to the auditors and is the risk that the auditor’s procedures fail to
detect a material misstatement
...

 Inappropriate assignment of personnel to the engagement team
...

 Inadequate supervision and review of the audit work performed
...

 Incorrect sample sizes
Detection risk includes sampling risk and non-sampling risk
...

Non sampling risk = auditor’s procedures or the conclusion reached are incorrect
...

Steps involved in analytical procedures
Expectation
This step involves developing an expectation of what the financial information figures should
be
...

Identification
This step involves identification of significant variations between the actual data with the
expected data
...

Performance of alternate procedures
If the auditor or the management does not find the variation reasonable, then they
investigate further and perform analytical procedures to satisfy themselves
...

There are many different analytical procedures including the comparisons listed below
 Year on year (e
...
revenue this year compared to revenue last year)
 To budget or forecast (e
...
actual purchases compared to budgeted purchases);
 To predictions made by the auditors-proof in total (e
...
auditors calculation of
depreciation compared to client’s calculation);
 To industry information (e
...
client’s revenue compared to competitor’s revenue)
...
g
...


20

Analytical procedures at
substantive testing stage
At the detailed testing stage –
in most instances analytical
procedures should be used in
conjunction with tests of
detail to achieve a particular
audit objective in relation to
specific financial statement
assertions
...


ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Ratios
In the Paper F8 exam you may be asked to compute and interpret the key ratios used in
analytical procedures at both the audit planning stage and when collecting audit evidence
...

Calculating a ratio is easy, and usually is little more than dividing one number by another
...
The
real skill comes in interpreting the results and using that information to carry out a better
audit
...

Gross Profit Margin
= (Gross profit/Sales Revenue) x 100
Operating profit margin
= (Operating profit/Sales Revenue) x 100
Return on capital employed = (Operating profit/ Capital employed) x 100
Current Ratio
= Current Assets/Current Liabilities
Quick ratio
= (Current assets minus inventory)/ current liabilities
Inventory days
= (Inventory/Cost of sales) x 365
Receivable days/ Receivables collection period
= Trade receivables/Sales x 365
Trade payable Days/Payables payment period
= Trade payables/Cost of sales x 365
Gearing
= Long-term debt/ Capital employed x 100
Interest cover = Profit before interest/ interest
Response to risk
Having identified the audit risk candidates are often required to identify the relevant response
to these risks
...

In the past exams, in relation to the risk of valuation of receivables if a company has a number
of receivables who were struggling to pay, many candidates suggested that management
needed to chase these outstanding customers
...

Auditor’s responses should focus on how the team will obtain evidence to reduce the risks
identified to an acceptable level
...

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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Responses are not as detailed as audit procedures; instead they relate to the approach the
auditor will adopt to confirm whether the transactions or balances are materially misstated
...

In assessing the level of materiality there are a number of areas that should be considered
...

The quantity of the misstatement refers to the relative size of it and the quality refers to an
amount that might be low in value but due to its prominence could influence the user’s
decision, for example, directors’ transactions
...

The assessment of what is material is ultimately a matter of the auditor’s professional
judgment, and it is affected by the auditor’s perception of the financial information needs of
users of the financial statements and the perceived level of risk; the higher the risk, the lower
the level of overall materiality
...
These values are useful as a starting point for assessing materiality
...

Performance materiality is normally set at a level lower than overall materiality
...
The aim of performance
materiality is to reduce the risk that the total of errors in balances, transactions and disclosures
does not in total exceed overall materiality
...
If applicable, performance materiality
also refers to the amount or amounts set by the auditor at less than the materiality level or
levels for particular classes of transactions, account balances or disclosures
...

Audit planning is a detailed recording of each procedure and process required to perform an
audit
...
Once the audit strategy has been decided,
the next stage is to decide how it is going to be carried out; an audit plan is necessary
...

The audit plan covers:
 Allocation of work and duties to the assistants
 Allocation of time and cost
 Formation of various teams
 Audit tests/procedures
 Data gathering techniques
 Types of audit evidence desired
The audit plan is developed in order to reduce audit risk to an acceptably low level
...
The audit of the remaining part of the year will be done at the end of the
accounting year
...
There is no requirement to undertake an interim
audit; factors to consider when deciding upon whether to have one include the size and
complexity of the company along with the effectiveness of internal controls
...
(Risk would be initially
considered at the planning stage, but is, in fact, reassessed at all audit stages
...

Advantages of interim audit
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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

a) The errors are discovered at early stage
b) As the auditor visits the entity frequently, the chances of fraud being committed reduce
...

d) Most of the time, the audit staff is present at the client’s premises, which acts as a
moral check and result in minimizing the chances of errors or fraud
...

f) As the audit is started earlier, more time is available for a detailed checking of
accounts and hence this allows for a comprehensive audit
...

h) If the auditor plans to rely on the internal controls, some extensive testing may be
done at the interim period only so that the workload at the end of year is reduced
...
That is why ISA 330 states that when audit evidence (relating to the
operating effectiveness of internal controls or the financial statement assertions), is
obtained during the interim period, additional audit evidence (relating to the
effectiveness of internal controls or the financial statement assertions) must also be
obtained for the remaining period
...

c) The cost would be high
...

It is important to note that the final opinion takes account of conclusions formed at both
the interim and final audit
...


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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Internal control systems
Internal controls
Internal control represents the system or policies and procedures implemented by an
organization
...

The objectives of internal controls relevant to audit include:
1
...
Maximum accuracy of all records, data and statements
3
...
This will enable the auditors to assess the correctness, truth and fairness of
the financial statements
...
Informing management about weaknesses detected in internal controls so that
corrective action can be taken
...
Enabling planning of the audit
6
...

 Consider the factors that affect the risk of misstatement
...

Components of internal control systems
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment considers the components of an entity’s internal control
...

2
...

4
...


Control environment
Entity’s risk assessment process
Information system and communication
Control activities
Monitoring of controls

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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

1

Control
environment

The control environment sets the tone of an organization, influencing the
control consciousness of its people
...

The control environment has many elements such as:
a)
Communication and enforcement of integrity and ethical
values – essential elements which influence the effectiveness of the
design, administration and monitoring of controls
...

c)
Management’s philosophy and operating style –
management’s approach to taking and managing business risks, and
management’s attitudes and actions towards financial reporting,
information processing and accounting functions and personnel
...

e)
Assignment of authority and responsibility – how authority
and responsibility for operating activities are assigned and how
reporting relationships and authorization hierarchies are
established
...


2

Entity’s risk
assessment
process

3

For financial reporting purposes, the entity’s risk assessment process
includes:
- How management identifies business risks relevant to the
preparation of financial statements
...

The information system relevant to financial reporting, which includes the
accounting system, consists of the procedures and records designed and
established to initiate, record, process, and report entity transactions (as
well as events and conditions) and to maintain accountability for the related
assets, liabilities, and equity
...
Control activities, whether within
activities

4

information technology or manual systems, have various objectives and are
applied at various organizational and functional levels
...
The concept is that no individual
person should be responsible for more than one of the following duties:
1
...
the recording of the transaction in the accounting records
3
...

Authorization
Approval of transactions by a suitably responsible official to ensure
transactions are genuine
Physical controls
Restricting access to physical assets such as cash, inventory and plant and
equipment, thereby reducing the risk of theft
...

Arithmetical controls
Controls which check the arithmetical accuracy of accounting records
...

It is the process to assess the effectiveness of internal control performance
over time
...
Management accomplishes the
monitoring of controls through ongoing activities, separate evaluations, or a
combination of the two
...
general controls
2
...

 review of the data center or information processing facility should cover the adequacy
of air conditioning (temperature, humidity), power supply (uninterruptible power
supplies, generators) and smoke detectors
Application controls
Application controls are those controls that relate to the transaction and standing data
relating to a computer-based accounting system
...

An effective computer-based system will ensure that there are adequate controls existing at
the point of
1
...
Processing and
3
...

Application controls need to be ascertained, recorded and evaluated by the auditor as part
of the process of determining the risk of material misstatement in the audit client’s
financial statements
...
Examples are given below:
- Format checks: These ensure that information is input in the correct form
...

- Range /Reasonableness checks: These ensure that input data is rejected or
highlighted if it is outside pre-set parameters
...

- Compatibility/dependence checks: These ensure that data input from two or more
fields is compatible
...

- Exception checks: These ensure that an exception report is produced highlighting
unusual situations that have arisen following the input of a specific item
...

- Sequence checks: ensure that sequential input of documentation/data is
maintained
...
For example, where prenumbered goods received notes are issued to acknowledge the receipt of goods
into physical inventory, any input of notes out of sequence should be rejected
...
For
example, the total of all the invoices, such as the gross value, is manually
calculated
...
This helps to ensure
completeness and accuracy of input
...
This helps to ensure
accuracy of input
...
e
...
This process uses
algorithms to ensure that data input is accurate
...
This helps to ensure completeness of input
...
This helps to ensure
completeness and accuracy of input
...

For example, the balance carried forward on the bank account in a company’s general
(nominal) ledger
...

- Formal written instructions notifying data processing personnel of the procedures to
follow with regard to rejected items
...

- Evidence that rejected errors have been corrected and re-input
...
While the degree of output controls will vary from one
organization to another (dependent on the confidentiality of the information and size of the
organization), common controls comprise:
- Appropriate review and follow up of exception report information to ensure
that there are no permanently outstanding exception items
...

- Ongoing monitoring by a responsible official, of the distribution of output, to ensure it is
distributed in accordance with authorized policy
...
It is called
standing data as it tends to change less frequently than other data
...


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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Master file controls
The purpose of master file controls is to ensure the ongoing integrity of the standing data
contained in the master files
...
These include:
- appropriate use of passwords, to restrict access to master file data
- the establishment of adequate procedures over the amendment of data, comprising
appropriate segregation of duties, and authority to amend being restricted to
appropriate responsible individuals
- regular checking of master file data to authorized data, by an independent responsible
official
Limitations of internal control components
The internal control system, even if well-designed and well-implemented, does not
completely eliminate the possibility of fraud or error
...

- Controls are far more expensive compared to the benefits from the system
...

- Control systems are not geared up to cater to non-routine transactions
...

- Possibility of fraud on account of collusion between employees
...

- Obsolescence of controls
...
Check and ensure it is
working effectively on a continuous basis
BOD: ensure that an effective ICS is designed, implemented and monitored by the
management
...

Advantages of this method include:
- They are simple to record; after discussion with staff members of
Oregano, these discussions are easily written up as notes
...

Disadvantages of this method include:
- Narrative notes may prove to be too cumbersome, especially if the
sales and distribution system is complex
...

Flowcharts
Flowcharts are a graphic illustration of the internal control system for the sales
and dispatch system
...

Advantages of this method include:
- It is easy to view the sales system in its entirety as it is all presented
together in one diagram
...

- Information is presented in a logical sequence
...

- Facilitates easy understanding of a system
...

- Serves as a permanent record of a system that can be subject to a minor
amendment on a year-to-year basis
...

Disadvantages of this method include:
- They can sometimes be difficult to amend, as any amendments may require
the whole flowchart to be redrawn
...

- Not generally suitable for recording systems with numerous unusual
transactions
...


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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes
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[AUDIT AND ASSURANCE]

Major amendment is not normally possible without redrawing
...

They are not normally appropriate for recording systems where there are
subsystems or subroutines
...

ICQ( designed to ask if certain controls are present)
ICEQ (designed to ask if certain errors can be prevented-i
...
test the
effectiveness of controls)
An Internal Control Questionnaire (ICQ) normally comprises a checklist of
standard controls that should exist in a specified functional area (for example
sales and trade receivables or purchases and trade payables)
...

A problem associated with ICQs is that whilst they do identify areas where
controls appear to be weak, they do not provide evaluation of those weaknesses
...

Internal Evaluation Questionnaires (ICEQs) provide an alternative and improved
means of evaluating control systems, by asking key questions about those
systems
...
ICEQs are usually designed to include a list of points
that the auditor should consider before answering each key question
...
The feedback on the questionnaire enables the auditor to
assess the inherent limitations in the design of the internal controls
...

They are to be answered by the clients
...

Information relating to the following matters is included the ICQs and ICEQs:
- segregation and rotation of duties
- maintenance of records and documents
- accountability for, and safeguarding of assets
- procedure for authorizations
The feedback received on the questionnaires will then be tested by the auditors and
the weaknesses, if any, will be communicated in the form of a letter of weakness to
the client
...

They ensure that all controls present within the system are considered and
recorded; hence missing controls or deficiencies are clearly highlighted
...

Disadvantages
It can be easy for the company to overstate the level of the controls present as they
are asked a series of questions relating to potential controls
...


Test of controls are performed to obtain audit evidence about 2 things:

Test

1
...
Whether the ICS are operating properly ( test of controls)
Test of controls- examples
 inspection of documents (e
...
authorizations)
 enquiries about internal controls which leave no audit trail ( e
...
is the
person who is SUPPOSED to perform the function actually performing it or is
someone else is doing so)
 Re-performance of control procedures ( e
...
reconciliations)
 examination of evidence of management views(e
...
minutes of meetings)
 Observation of controls
 Using TEST DATA (CAATs)

If controls appear strong, they are tested to ensure they operated as described
throughout the year
...


Report
control
weaknesses
to
management

A letter on internal control (also referred to as a management letter or letter of
weakness) is a letter usually forwarded by an auditor to the senior management of
a company
...

The letter contains weaknesses identified in the entity’s system of internal control
as identified by the auditor when performing tests of control and the purpose of
the letter is to bring these weaknesses to the attention of management
...

- The operation of the systems of accounting and internal control
...

Examples of matters the external auditor should consider in determining whether a
deficiency in internal controls is significant include:
- The likelihood of the deficiencies leading to material misstatements in the
financial statements in the future
...

- The financial statement amounts exposed to the deficiencies
...

- The cause and frequency of the exceptions detected as a result of the
deficiencies in the controls
...

- To ensure that all orders are recorded completely and accurately
...

- To ensure that goods are dispatched for all orders on a timely basis
...

- To ensure that all goods dispatched are correctly invoiced
...

- To ensure that sales discounts are only provided to valid customers
...

 Purchases are made at the most optimum prices and terms
...

 Payments are made according to agreed terms
...

The Payroll System
The main objective of a payroll is to ensure that:
- Wages and salaries are paid at the correct rates
...

- Wages and salaries are paid on time
...

- Update ‘starters and leavers’ details on a timely basis
...


37

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

-

[AUDIT AND ASSURANCE]

All increases of pay should be proposed by the HR department and then formally
agreed by the board of directors
...

 Maintain a log of access attempts (Controls should include a computer log which
registers date and time access to the master file by the various users
...

 Match standing data to the personnel filed periodically

At random intervals a more senior responsible official of the company (for example the
company accountant), should access the wages master file and check its contents to the
manual records maintained, input documentation and notifications from the interviews
manager as appropriate
...

- Head count by area supervisor ( attendance matched to actual employees present)
- Any overtime worked reviewed and then authorized
...

- Periodic verification of staff cards with personal files of employees (to ensure that there
are no ghost employees)
...

 Calculations re-checked on a sample basis- A senior member of the payroll team
should recalculate the gross to net pay workings for a sample of employees and
compare their results to the output from the payroll system
...

 When authorizing the payments, the responsible official should on a
sample basis perform checks from payroll records to payment list and vice
versa to confirm that payments are complete and only made to bona fide
employees
...

 Uncollected wage packets should be kept in a safe place/
deposited in the bank
...

Revenue expenditure is that expenditure which is incurred to maintain the existing capacity of
an asset so that it can do its daily work
...

The main control objectives over revenue and capital expenditure are to ensure that:
 All expenditure is authorized
...

 Expenses are properly accounted for
...

However, certain additional control points, which are to be ensured, are mentioned below:
 Am authorized budget is prepared for all expenditure
...

 Preparation of a periodic variance report of those expenses that do not match the
budget
...

 A document may be prepared for showing the distinction between capital and revenue
expenditure and for providing guidance on which expenses to be capitalized
...

 A senior person should check the accounting treatment for the expenses (especially
repairs and maintenance)
...
Typically, the register
should record cost, depreciation and net book value information of each asset along with
identifying details
...

 The register should be updated by individuals who are separated from the acquisition,
custody and disposal of assets
...

 Preparation of an exception report if the non-current register does not match the noncurrent assets account maintained in accounts
...

 Depreciation rates should be reasonable and authorized
...

Bank and Cash
The main objectives of cash and bank transactions are to ensure that:
- All money received is recorded
...

- Money is properly safeguarded
...

Main controls on bank and cash
o Segregation of duties between the person receiving the money, the person depositing it
in the bank and the one making the payments
...

o Daily cash receipts immediately recorded in the customers’ accounts
...

o Periodical management review of the register is to be conducted to ensure that cheques
are promptly deposited into the bank
...

o Receivables’ ledger reconciled with control account
...
And there should be restricted access to
cashier’s room
...

o Minimum cash balance to be maintained needs to be decided
...

o Surprise cash counts by personnel other that the accounts department
...

o Unused cheques to be kept under lock and key
...


42

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Test of controls
In the F8 exam, you might be asked to:
- Identify and explain deficiencies in the system
- Recommend a control to address each of these deficiencies
- Describe a TEST OF CONTROL the external auditors would perform to assess if each
of these controls, if implemented, is operating effectively
...

Examples of test of controls:
 Inspection of documents (e
...
authorizations)
 Enquiries about internal controls which leave no audit trail ( e
...
is the person who is
SUPPOSED to perform the function actually performing it or is someone else is doing so)
 Re-performance of control procedures ( e
...
reconciliations)
 Examination of evidence of management views(e
...
minutes of meetings)
 Observation of control
 Using TEST DATA(CAATs)

43

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Management assertions, audit procedures and audit evidence
Management is responsible for the preparation of financial statements that give a true and
fair view, but what does this really mean?
For each item in the financial statements, management is making assertions
...

Consequently auditors use these assertions when considering the potential types of
misstatements that may occur and when designing and performing appropriate audit
procedures
...

Account balances include all the asset, liabilities and equity interests included in the
statement of financial position at the period end
...
Assertions about classes of transactions and events and related disclosures for the
period under audit
2
...
The solutions of the past exams may not reflect these
revisions at the moment
...

Assertions related to class of transactions and events and related disclosures for the period
under audit are
 Occurrence
 Completeness
 Accuracy
 Cut-off
 Classification
 Presentation
44

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Assertions related to account balances and related disclosures at the end of period under audit
are
 Existence
 Rights and obligations
 Completeness
 Accuracy
 Classification
 Presentation
Methods for testing these assertions/Procedures to obtain evidence/sources of evidence
Audit evidence verifies the correctness of the assertions contained in the financial statements
...

1
...
Observation
3
...
Inquiry
5
...
Re-calculation
7
...

Audit evidence comprises source documents and accounting records underlying the
financial statements (subject to audit) and corroborating information from other
sources
...


45

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Substantive procedure
Substantive procedure is an audit procedure which is designed to detect material
misstatements at the assertion level
...


Substantive procedures comprise the following
1
...
Tests of details (of classes of transactions, account balances, and related disclosures)
Analytical procedures
Analytical procedures mean the analysis of significant ratios and trends
...

Test of detail
Test of detail is carried out for transactions and balances
...

The tests can be made through tracing and vouching of transactions
...
Positive confirmation: Receivable asked to agree or disagree with the stated
balance or write the balance owing
...
Negative confirmation: Receivable asked to reply only if he disagrees with the
balance
...

o Other good corroborative evidence with regard to the existence of trade
receivables has already been obtained from other tests carried out
...

o A substantial number of errors are not expected
...
Obtain the receivables ledger and reconcile it to the control account
2
...
Inform the client of the intended list
...
Get the details of the debtors and prepare letters on client’s letterhead
...
Get the letter signed by a senior person at the client
...
Record names and amount circularized
7
...

8
...

9
...

o If the receivable does not respond to the follow up, then with the client’s
permission, the senior should telephone the customer and ask whether
they are able to respond in writing to the circularization request
...
These procedures include
verifying post year end receipts from that customer, verifying order
placement and dispatch documentation and carrying out bad debt
procedures
...
For responses with differences:

47

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

o The auditor should identify any disputed amounts, and identify whether these
relate to timing differences or whether there are possible errors in the records of
the client
...

o The receivables ledger should be reviewed to identify any possible misposting as
this could be a reason for a response with a difference
o If any balances have been flagged as disputed by the receivable, then these
should be discussed with management to identify whether a write down is
necessary
Substantive testing- Sales Revenue
1
...
Recalculate discounts to ensure accuracy
3
...

4
...
Select a sample of credit notes raised, trace through to the original invoice and ensure
invoice correctly removed from sales
...
Completeness as above: Select a sample of trade customer orders placed and agree
these to the dispatch notes and sales invoices through to inclusion in the sales
ledger to ensure completeness of revenue
...
Cut-off: Note down the last GDN for the year
...
Review the prior year audit files to identify whether there were any particular
warehouses/areas where significant inventory issues arose last year
2
...

3
...
Ensure all locations are covered OR decide locations the audit
team members will attend, basing this on materiality and risk of each site
...
Obtain a copy of the proposed inventory count instructions, review them to
identify any control deficiencies and if any are noted, discuss them with
management prior to the counts
...
Arrange to verify any inventory held by 3rd party
...
Establish whether expert help is needed
...
If an internal audit department exists, discuss the procedures that they carried out and
review their working papers
...
There should be adequate supervisory controls, with one individual assuming overall
responsibility for the inventory count
...
Employees involved in the inventory count should be independent of those working
in the stores and production areas
3
...

4
...

5
...

6
...

7
...

8
...

49

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

9
...

10
...

During Inventory Count
The purpose of an auditor’s attendance at a client’s year-end inventory count is to assess the
effectiveness of the client’s inventory counting procedures in order to determine whether
reliance can be placed upon them to provide assurance about the existence and condition of
inventory
...
Observe the counting teams to confirm whether the inventory count instructions
mentioned above are being followed correctly
...
Perform a test of controls (i
...
test the system used for recording, issuing inventory etc
...
Confirm the procedures for identifying and segregating damaged goods are
operating correctly, and assess inventory for evidence of any damaged or slow
moving items
...
Test the counts that are being done by the client’s representative- Perform twoway testing: Match physical stock with stock records(completeness) and records
with physical stock(existence
5
...

6
...
Enquire as to the possibility of consignment or third party inventories being held by
the company and record appropriate notes for subsequent follow up
8
...


50

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

After Inventory Count
1
...
Match final inventory sheets with the photocopies that you did at the time of inventory
count- Check to ensure that all sheets and records used at the inventory count are
included in the final inventory count sheets and records
...
Ensure that slow-moving and obsolete inventory lines recorded at the inventory
count are properly highlighted in the sheets and records to be used in the valuation
process
...
Follow-up on any other matters recorded in working papers at time of count
...
Send a letter requesting direct confirmation of inventory balances held at year end from
the third party regarding quantities and condition
...
Attend the inventory count (if one is to be performed) at the third party warehouses to
review the controls in operation to ensure the completeness and existence of inventory
...
Inspecting documentation in respect of third party inventory (eg
...

4
...

Audit procedures for continuous (perpetual) inventory counts
In order that the company’s auditors may rely on the company’s revised continuous inventory
checking system, the auditor should ensure that:
1) Inventory records are kept up to date
...

3) The counting of inventory is carried out by suitably experienced independent
individuals in a systematic and orderly manner
...

5) Any material discrepancies noted between inventory records and physical
quantities are investigated immediately and reported to management for
immediate further follow up as appropriate
...

Procedures
1
...

2
...

3
...

4
...
Discuss with management how they will
ensure that year-end inventory will not be under or overstated
...
Consider attending the inventory count at the year end to undertake test counts of
inventory from records to floor and from floor to records in order to confirm the
existence and completeness of inventory
...
Obtain a schedule of the expenditure and cast to ensure accuracy
...
For those items treated as capital and included with property, plant and equipment,
agree to purchase invoices and ascertain whether they are in fact of a capital nature
...
For capital items, agree to the non-current assets register to ensure that they are
correctly included
...
For capital items, recalculate the depreciation charged to ensure it has been
appropriately time apportioned
...
For items treated as repairs, agree to invoices to ensure they are not of a capital
nature and that they have been correctly expensed to the statement of profit or
loss (income statement)
...
Obtain and cast a schedule of intangible assets, detailing opening balances, amount
capitalized in the current year, amortization and closing balances
...
Agree the opening balances to the prior year financial statements
...
Agree the closing balances to the general ledger, trial balance and draft financial
statements
...
Recalculate the amortization charge for a sample of intangible assets and confirm
it is line with the amortization policy
...
For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss
...
For those capitalized as development, agree costs incurred to invoices and confirm
technically feasible by discussion with development managers or review of feasibility
reports
...
Review market research reports to confirm client has the ability to sell the product
once complete and probable future economic benefits will arise
...
Review the disclosures for intangible assets in the draft financial statements are in
accordance with IAS 38 Intangible Assets
...
Review board minutes for evidence of discussion of the purchase of the
acquired brand, and for its approval
...
Agree the cost to the company’s cash book and bank statement
...
Obtain the purchase agreement and confirm the rights of client in respect of the
brand
...
Discuss with management the estimated useful life of the brand and obtain an
understanding of how the useful life has been determined
...
Recalculate the amortization expense for the year and agree the charge to the financial
statements
6
...

Cash
Generally cash balance is immaterial to the financial statements
...
That is why cash
verification is an important audit procedure for internal auditors
...
That is why
all cash balances need to be counted at the same time
...

Audit procedures for cash
The main audit work involved in verifying cash balances is a physical count
...
(Simultaneous counting is necessary, to prevent the client from
moving cash that has been counted at one location to another location ready for the
next count
...

 The auditor should check the cash balance obtained from the count against the client's
cash records and cash balance in the draft financial statements
...






54

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Substantive testing: Trade Payables (Key risk: understatement)
Substantive procedures for supplier statement reconciliations
1
...
If the balance agrees, then no further work is required
...
Where differences occur due to invoices in transit, confirm from goods received notes
(GRN) whether the receipt of goods was pre year end, if so confirm that this receipt is
included in year-end accruals
...
Where differences occur due to cash in transit from client to the supplier, confirm from
the cashbook and bank statements that the cash was sent per year end
...
Discuss any further adjusting items with the purchase ledger supervisor to understand
the nature of the reconciling item, and whether it has been correctly accounted for
...

A trade payables circularization may however be deemed appropriate where:
 Supplier statements are, for whatever reason, unavailable
...

 The auditor or the company, suspect that fraudulent manipulation with regard to
supplier payments is taking place within the company
...
Obtain or prepare a listing of accruals as at the end of the reporting period
...
If the list is prepared by the client company, check the calculations and additions far
arithmetical accuracy
...

3
...

4
...
Trace these items to the accruals listing
...
Compare the list of accruals to those for the previous period to obtain assurance as to
the completeness of the accruals
...
Review the list of accruals for completeness, based on the auditor's knowledge of the
business
...

7
...

8
...


56

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Substantive testing: Payroll
Substantive Analytical procedures
1
...

2
...

3
...
Compare this to the actual wages and salaries in the
financial statements and investigate any significant differences
...
Cast a sample of payroll records to confirm completeness and accuracy of the payroll
expense
...
For a sample of employees, recalculate the gross and net pay and agree to the payroll
records to confirm accuracy
...
Re-perform the calculation of statutory deductions to confirm whether correct
deductions for this year have been made in the payroll
...
Select a sample of joiners and leavers, agree their start/leaving date to supporting
documentation, recalculate that their first/last pay packet was accurately
calculated and recorded
...
Agree the total net pay per the payroll records to the bank transfer listing of
payments and to the cashbook
...
Agree the individual wages and salaries per the payroll to the personnel records for a
sample to confirm bona fide employees
...
Select a sample of weekly overtime sheets and trace to overtime payment in payroll
records to confirm completeness of overtime paid
...
Agree the year-end income tax payable accrual to the payroll records to confirm
accuracy
...
Re-perform the calculation of the accrual to confirm accuracy
...
Agree the subsequent payment to the post year-end cash book and bank statements to
confirm completeness
...
Agree the yearend tax liability back to the yearend tax computation
...
Agree the yearend tax liability to the post year end payment to the tax authorities
...
Agree the corporation tax liability to the amount owed as per correspondence from the
tax authorities
...
Agree loan balances back to the loan statement from the bank
...
Inspect the bank confirmation letter for details of loans and overdrafts and trace these
amounts to the balance sheet to ensure they have been recorded
...
Review Board minutes for evidence of new loans being taken out in the year and ensure
they have been recorded
...
Inspect the bank statements for the year for evidence of a significant deposit, which may
be proceeds of a loan
...
Recalculate expected interest charges during the year and compare to the client’s figure
...
Verify the amount of the loan outstanding at the balance sheet date and ensure that this
is accurately stated and fully disclosed in the company’s balance sheet
...

7
...

8
...

Substantive testing: Accounting estimates
Accounting estimates are approximations
...

When transactions involve precise amounts and are supported by specific documents,
verification is relatively easier
...
There is greater risk of material misstatement
...

The auditor should adopt one or a combination of the following approaches in the audit of an
estimate:
 Review and test the process used by management to develop the estimate
 Use an independent estimate for comparison with that prepared by management
 Review subsequent events which confirm the estimate made
...

o Enquire of management how the accounting estimate is made and the data on which it
is based-the data used should be accurate, complete and assumptions reasonable
...
Review the judgments and decisions made by management in the
making of accounting estimates to identify whether there are indicators of possible
management bias
...

o Develop an expectation of the possible estimate or a range of amounts to evaluate
management’s estimate
...

o Review expert’s report if applicable
...

o To confirm the probability and amount of a provision(or the need of a contingent
liability disclosure):
 Inspect minutes of board meetings
 Inspect client’s Correspondence with any 3rd party
 Inspect Other documents (copy of claims, copy of laws etc)
 Enquire from a relevant 3rd party
o Ensure disclosures relating to accounting estimates are adequate and complete
o If applicable, compare with last year to evaluate reasonableness of the estimate
...

o Fair Value: Expert’s report

59

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Substantive testing: Capital and Other Issues
Substantive procedures: share capital issued
1
...

2
...
Inspect the cash book and bank statements for evidence of cash receipts from the
share issue
...
Recalculate the split of proceeds between the nominal value of shares and premium on
issue and agree correctly recorded within share capital and share premium account
...
Review the disclosure of the share issue in the draft financial statements and
ensure it is in line with relevant accounting standards and local legislation
...

Check that the amount reported as issued share capital agrees with the amount
recorded in the register of members/shareholders, if the company has such a register
...
)
Substantive procedures: reserves
The auditor-will usually carry out tire following substantive procedures on reserves:
 Obtain an analysis of movements on all reserves during the period
...

 Ensure that any specific legal requirements relating to reserves have been complied with
...
)
 Confirm that dividends have been deducted only from those reserves that are legally
distributable (usually the accumulated profits reserve/retained earnings)
...

 Check the dividend calculations and check that the total dividends paid are consistent with
the amount of issued share capital at the relevant date
...

The various components of emoluments include:
- Basic salary
- Bonuses
- Share options
- Pension contributions
- Other benefits (e
...
provision of a company car, rented accommodation, health
insurance etc
...
Obtain a schedule of the directors’ remuneration including any bonus paid and cast
the addition of the schedule
...
Agree the individual bonus payments to the payroll records
...
Confirm the amount of each bonus paid by agreeing to the cash book and bank
statements
...
Review the board minutes to confirm whether any additional bonus payments relating
to this year have been agreed
...
Obtain a written representation from management confirming the
completeness of directors’ remuneration including the bonus
...

Review any disclosures made of the bonus and assess whether these are in
compliance with local legislation

61

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Other procedures:
- Verify the accuracy of the emoluments recorded by recalculating the amount of
emoluments applicable to the directors with the recommendations of the remuneration
committee
...
e
...

- Loyalty bonuses are given when a person completes a certain number of years in a
company
...

- Verify the directors’ rent accounts for the directors’ accommodation and trace entries
therein with the approvals of the remuneration committee and also confirm the
correctness of the values with the rent agreement
...


62

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Relying on work of others
In certain cases, auditors may rely on the work of third parties when gathering their audit
evidence
...

 Service organization ( who work has been outsourced to by client)
 Another firm of external auditors (who may for example be auditing an overseas
subsidiary of our client)
...

1
...
Do they have the experience?
3
...
The auditor should meet with the expert and discuss with them their relevant
expertise in order to understand their field of expertise
...
Evaluating the Adequacy of the Auditor’s Expert’s Work (the audit procedures
carried out to evaluate the work done by the expert!)
a) the relevance and reasonableness of that expert’s findings or conclusions, and
their consistency with other audit evidence
b) If that expert’s work involves use of significant assumptions and methods,
the relevance and reasonableness of those assumptions and methods in the
circumstances
c) Adequacy and appropriateness of source data
...


63

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

If the auditor concludes that outsourcing to service organization significantly affects the
accounting and / or internal control system of the entity, they should obtain sufficient
understanding of the entity and its environment, including the internal control
...

Factors auditors should consider in relation to client’s use of the service organization include:
1
...

2
...
The team may wish to visit the service organization and undertake tests of
controls to confirm the operating effectiveness of the controls
...
If this is not possible, auditors should contact the service organization’s auditors to
request either a type 1 (report on description and design of controls) or type 2 report
(on description, design and operating effectiveness of controls)
...
The auditor is responsible for obtaining sufficient and appropriate evidence, therefore
no reference may be made in the audit report regarding the use of information from the
service organization’s auditors

64

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Review
Subsequent events
Adjusting event: An event after the reporting period that provides further evidence of
conditions that existed at the end of the reporting period, including an event that indicates
that the going concern assumption in relation to the whole or part of the enterprise is not
appropriate
...

Events after reporting period
Adjusting events
Provide additional evidence of the
conditions existed at reporting date
Adjust the financial statements to reflect
the event

Non adjusting events
No conditions existed at reporting date

Impacts going
concern

Does not impact
going concern

Adjust the
financial
statements to
present an
alternative basis
(break up basis)

Do not adjust
the financial
statements

If important to
users
understanding
disclose in notes:
Nature of event
and its financial
impact
Auditor’s responsibilities-ISA 560
For the purposes of ISA 560, subsequent events are those events that occur between the
reporting date and the date of approval of the financial statements and the signing of the
auditor’s report
...

A
...

B
...

C
...

D
...
g
...
Enquire of the entity’s legal counsel concerning litigation and claims
...
Enquire of management as to whether any subsequent events have occurred which
might affect the financial statements
G
...

Period between the date the auditor’s report is signed and the date the financial statements
are issued
The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report
...

If management amends the financial statements, the auditor shall carry out the necessary
audit procedures, extend the subsequent events testing to the date of the new auditor’s
report, and provide a new auditor’s report on the amended financial statements
...
The auditor should also consider the need to resign from the audit
...

 Discussion with the management (any adjustments to be
made, disclosure to be given, impact on going concern etc
...

 Review: minutes of the board meetings in which the event
and its impact was discussed
...






















67

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Going concern review
Under the ‘going concern assumption’, an entity is ordinarily viewed as continuing in business
for the foreseeable future (being to a date of at least, but not limited to, 12 months from the
end of the reporting period); with neither the intention nor the necessity of liquidation,
cessation of trading or the seeking of protection from creditors pursuant to laws or regulations
...


Management’s responsibility
 assess ability of the company to continue in the foreseeable future
 disclose uncertainties that might affect the going concern status
 adjust F/s and disclose if financial statement not prepared on a going concern basis
 It is the responsibility of management to make an assessment of whether the going
concern presumption is appropriate, or not, when they are preparing the financial
statements
...
In forming the audit opinion, the auditor should consider two
issues: have the financial statements been prepared using the appropriate going
concern assumption, and is there adequate disclosure of any material uncertainty
regarding the going concern status
...

- Fixed term borrowings approaching maturity without realistic prospects of renewal or
repayment, or excessive reliance on short-term borrowings to finance long-term assets
...

- Substantial operating losses
...

- Inability to pay payables on due dates
...

- Change from credit to cash-on-delivery transactions with suppliers
...

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By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Operating Indicators
- Loss of key management without replacement
...

- Labor difficulties or shortages of important supplies
...

 Pending legal proceedings against the entity that may, if successful result in judgements
that could not be met
...

Audit Procedures
DONOT produce a list of generic audit procedures, but instead identify and highlight the
factors from the scenario that may call into question the entity’s ability to continue as a
going concern
...

Evaluate the management’s assessment
 the process followed by management to make its assessment
 the assumptions on which the assessment is based
 management’s plans for future action
 whether management has taken into consideration all the facts that the
auditor is aware of due to their audit procedures
2
...

4
...

6
...

8
...

Confirming the existence, terms and adequacy of borrowing facilities
Review events after the period end to identify those that affect the
entity’s ability to continue as a going concern
Review the terms of loan agreements and determining whether they have
been breached
Requesting written representations from management and, where
appropriate, those charged with governance, regarding their plans for
future action and the feasibility of these plans
...

10
...

12
...

Obtaining and reviewing reports of regulatory action
Other procedures relevant to question given should also be considered
...
It may be the case that candidates are
presented with a situation where the auditor has concluded that there are material
uncertainties relating to going concern and the directors have made appropriate disclosures
in relation to going concern and candidates must understand the new auditor reporting
requirements in this respect
...

The section headed ‘Material Uncertainty Related to Going Concern’ is included immediately
after the Basis for Opinion paragraph but before the KAM section
...
By
their very nature, issues identified relating to going concern are likely to be considered a key
audit matter and hence need to be communicated in the auditor’s report
...
This is
because while the auditor may conclude that no material uncertainty exists, they may
determine that one, or more, matters relating to this conclusion are key audit matters
...

In summary if a confirmed material uncertainty exists it must be disclosed in accordance with
ISA 570 and where there is a ‘close call’ over going concern which has been determined by the
auditor to be a KAM it will be disclosed in line with ISA 701
...

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs)
...
We are
independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Far land, and we have fulfilled our other
ethical responsibilities in accordance with these requirements
...

Material uncertainty related to going concern
We draw attention to Note 6 in the financial statements, which indicates that the Company
incurred a net loss of $125,000 during the year ended 31 December 2015 and, as of that date,
the Company’s current liabilities exceeded its total assets by $106,000
...
Our opinion is not modified in respect of this matter
...
These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters
...
[Include a description of each key audit matter]

72

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Management representations
Written representations/Management representation letter
Written representations are necessary information that the auditor requires in connection
with the audit of the entity’s financial statements
...

The auditor needs to obtain written representations from management and, where
appropriate, those charged with governance that they believe they have fulfilled their
responsibility for the preparation of the financial statements and for the completeness of the
information provided to the auditor
...

This may be necessary for judgmental areas where the auditor has to rely on management
explanations
...

Written representations are normally in the form of a letter, written by the company’s
management and addressed to the auditor
...

Throughout the fieldwork, the audit team will note any areas where representations may be
required
During the final review stage, the auditors will produce a draft representation letter
...

It will be signed by the directors and dated as at the date the audit report is signed, but not
after
...


73

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Purpose of written representation
1
...

Acknowledging responsibility for other matters (ICS, related party transactions
etc)
3
...

Acknowledges representations previously made verbally by management
...

Minimizes misunderstandings between management and auditor
...

 They cannot be used instead of other (better) evidence which the assurance providers
expect to exist
...

 They are relatively unreliable as evidence
...

 If a representation appears to be contradicted by other evidence: the circumstances
should be investigated, and the reliability of other representations made by
management should be reconsidered
...

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ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

SPECIFIC MATTERS
Included here is anything else that the auditor would like a representation on for example:
 That a certain debt is recoverable
 All bank accounts have been disclosed
 Any plans to reorganize the business or discontinue product lines have already been
disclosed
...

If the directors refuse to sign the representation letter, then the auditor has a number of
options available to him:
 The auditor could discuss the matter with the directors and try to resolve their problems
with the letter
...

 If the auditor considers that he has not received all the information and explanations
required for his audit, then the auditor’s report should be qualified
...

 An auditor should reconsider the reliability of other representations
...
For this, the auditor should reassess the
appropriateness of the risk of material misstatement on account of this inconsistency
...


75

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Overall review of financial statements
Procedures an auditor should perform include:
1
...
This is sometimes done via the use
of a disclosure checklist
...
Reviewing the disclosure of the accounting policies to ensure that they are in
accordance with the accounting treatment adopted in the financial statements,
and that they are sufficiently disclosed
...
Reviewing the financial statements to ensure they are consistent with the auditor’s
knowledge of the business and the results of their audit work
...
Reviewing the financial statements to assess whether they adequately reflect the
information and explanations previously obtained and conclusions reached during
the course of the audit
...
Performing analytical procedures of the financial statements, under ISA 520 Analytical
Procedures; this helps the auditor to form an overall conclusion on the financial
statements ( explained separately below)
6
...

7
...

Final analytical procedures
Before the audit report is signed, it is sensible to do some final analysis of the Financial
Statements (e
...
ratio analysis) – just to make sure that the auditor is confident in the audit
opinion
...
The Financial Statements may have been adjusted during the audit as mistakes were
found, so the final figures may never have been analyzed or been subject to ratio
analysis
...
The auditor will have learned more about the company during the audit so is in a
better position at the end of the audit to analyze the figures and understands trends
in ratios
...

The key issue is that, near the end of the audit, the auditor should have sufficient audit
evidence to explain the issues highlighted by analytical procedures, and should therefore be
able to conclude as to the overall reasonableness of the financial statements
...

This means potentially performing further audit procedures in relation to matters that are
identified as high risk
...

Misstatements can arise from error or fraud
...

There are three categories of misstatements:
1
...

2
...

3
...

Identified misstatements should be considered during the course of the audit to assess
whether the audit strategy and plan should be revised
...

The auditor will also request a written representation (including a summary of uncorrected
misstatements) from management and – where appropriate – those charged with governance
as to whether they believe the effects of uncorrected misstatements are immaterial,
individually and in aggregate to the financial statements as a whole
...
Individual material misstatements
2
...
Immaterial misstatements which become material when aggregated
In all 3 cases, they have to be reported to the management
...

Misstatement: Discussed above
Inability to obtain appropriate and sufficient evidence: The auditor was not able to get
sufficient appropriate audit evidence on which to base the opinion
...
g
...
g
...

 Limitations imposed by management (e
...
management prevents the auditor from
requesting external confirmation of specific account balances)
...
e
...
There are three types of pervasive effect:
 Those that are not confined to specific elements, accounts or items in the financial
statements
...

 Those that relate to disclosures which are fundamental to users understanding of the
financial statements
...
Unmodified
2
...

Wording
In our opinion, the financial statements present fairly, in all material respects, (or give a true
and fair view of) the financial position of ABC Company as of December 31, 20X1, and (of) its
financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards
...


Wording:
In our opinion, except for the effects of the matter described in the Basis of Qualified Opinion
paragraph the financial statements present fairly, In all material respects, (or give a true and
fair view of) the financial position of ABC Company as at December 31, 20X1 and (of) its
financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards
...

Disclaimer of opinion
Nature of matter:
Material and pervasive
Reason:
Inability to obtain sufficient and appropriate evidence
Wording
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
...


80

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Emphasis of Matter paragraph
A paragraph included in the auditor’s report that refers to a matter appropriately presented
or disclosed in the financial statements that, in the auditor’s judgment, is of such importance
that it is fundamental to users’ understanding of the financial statements
...

 When facts become known to the auditor after the date of the auditor’s report and the
auditor provides a new or amended auditor’s report (i
...
, subsequent events)
...

 Early application (where permitted) of a new accounting standard that has a material
effect on the financial statements
...
)
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor
shall:
 Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter”;
 Include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial
statements
...


81

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Other Matter paragraph
A paragraph included in the auditor’s report that refers to a matter other than those
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant
to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report
Examples of circumstances in which an Other Matter Paragraph may be necessary
 Prior Period Financial Statements Audited by a Predecessor Auditor
 Prior Period Financial Statements Not Audited
 Restriction on distribution or use of the auditor’s report
 Modification in auditor report for comparative financial statement
...

It cannot be given for a matter determined to be a key audit matter to be communicated in the
auditor’s report
When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall
include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading
...
Title and addressee
2
...
Basis of opinion
4
...
Other information
6
...
Responsibilities of the auditors
8
...
Engagement partner’s name
10
...
Auditor’s address
12
...

Audit sampling can be applied using either a statistical or a non-statistical approach
...

It is necessary for auditors to sample as it is impossible to select all items for testing as this
would take the audit team too long and it would cost too much
...

Audit sampling is also widely known to reduce the risk of ‘over-auditing’ in certain areas,
and enables a much more efficient review of the working papers at the review stage of the
audit
...
If the sample is not representative of the population, the auditor will be unable
to form a conclusion on the entire population
...

ISA 530 recognizes that sampling risk can lead to two types of erroneous conclusions:
 The auditor concludes that controls are operating effectively, when in fact they are not
...
These erroneous conclusions will more than likely lead to an
incorrect opinion being formed by the auditor
...

In terms of substantive testing, the auditor may conclude that a material misstatement
exists when, in fact, it does not
...
An example of such a situation would be where the auditor adopts inappropriate
audit procedures, or does not recognize a control deviation
...
The sampling
units could be physical items, such as sales invoices or monetary units
...
The first item may be selected on a random or haphazard basis, and
thereafter the sampling interval is derived by the auditor, for example, by dividing the
population by the sample size
...

Block selection
This involves selection of a block(s) of contiguous items from within the population
...

Monetary Unit Sampling
This is a type of value-weighted selection in which sample size, selection and evaluation results
in a conclusion in monetary amounts
...


85

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

When might sampling not be appropriate?
A sampling approach to testing would not be appropriate in the following circumstances:
 Where there is a statutory requirement to disclose specific items in the financial
statements, for example directors’ remuneration
...

 Where the population is small in number but comprises material individual balances or
transactions, for example property additions
...

 When the auditor is put ‘on enquiry’ for example when testing for fraud
...


86

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Computer assisted audit techniques (CAAT)
Computer-assisted audit techniques (CAATs) are those featuring the ‘application of auditing
procedures using the computer as an audit tool’
The extent to which an auditor may choose between using CAATs and manual techniques on
a specific audit engagement depends on the following factors:
o the cost effectiveness of using CAATs
o the availability of audit time
o the availability of the audit client’s computer facility
o the level of audit experience and expertise in using a specified CAAT
o the level of CAATs carried out by the audit client’s internal audit function and the
extent to which the external auditor can rely on this work
The advantages of Computer-Assisted Audit Techniques (CAATs) are that they:
1
...

2
...
This will
also increase the overall confidence for the audit opinion
...
Allow the auditor to test the actual accounting system and records rather than
printouts which are only a copy of those records and could be incorrect
...
Are cost effective after they have been setup as long as the company does not change
its systems
...

Allow the results from using CAATs to be compared with ‘traditional’ testing – if the two
sources of evidence agree then this will increase overall audit confidence
...

Professional judgment is subjective
...

Therefore, these matters need to be appropriately documented
...
Provides evidence of the auditor’s basis for a conclusion about the achievement of the
overall objective of the audit
...
Provides evidence that the audit was planned and performed in accordance with
ISAs and applicable legal and regulatory requirements
...
Assists the engagement team to plan and perform the audit
...
Assists members of the engagement team responsible for supervision to direct,
supervise and review the audit work
...
Enables the engagement team to be accountable for its work
...
Retains a record of matters of continuing significance to future audits
...
Name of client – identifies the client being audited
...
Year-end date – identifies the year end to which the audit working papers relate
...

Subject – identifies the area of the financial statements that is being audited, the
topic area of the working paper, such as receivables circularisation
...
Working paper reference – provides a clear reference to identify the number of the
working paper, for example, R12 being the 12th working paper in the audit of
receivables
...
Preparer – identifies the name of the audit team member who prepared the
working paper, so any queries can be directed to the relevant person
...
Date prepared – the date that the audit work was performed by the team member; this
helps to identify what was known at the time and what issues may have occurred
subsequently
...
Reviewer – the name of the audit team member who reviewed the working
paper; this provides evidence that the audit work was reviewed by an
appropriate member of the team
...
Date of review – the date the audit work was reviewed by the senior member of the
team; this should be prior to the date that the audit report was signed
...
Objective of work/test – the aim of the work being performed, could be the related
financial statement assertion; this provides the context for why the audit procedure is
being performed
...
Details of work performed – the audit tests performed along with sufficient detail of
items selected for testing
...
Results of work performed – whether any exceptions arose in the audit work and if
any further work is required
...
Conclusion – the overall conclusion on the audit work performed, whether the area is
true and fair
...

Types of audit files
The files in which all the working papers are put are termed audit files
...
This generally has future or long term use
...
g
...

 Other documents of continuing importance:
o terms of engagement
o minutes of important meetings
o debenture deeds
o title deeds and lease agreements
o Royalty agreements
...

 A list of client's investments (if any)
...

 Main accounting records, showing where kept and of what type (e
...
, handwritten,
computerized)
...

 Previous reports to management (detailing weaknesses found in the accounting system
...

 Client's insurance cover details
...

 Accounting systems descriptions in flow chart and narrative form (see later)
...

89

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Current audit file papers
The current file which is broadly concerned with the accounts being audited
...
It generally contains the following papers:
Examples of the working papers ordinarily contained in a typical current audit file include:
 Evidence of the planning process including audit programmes and any changes thereto
...

 Analyses of transactions and balances
...

 The identified and assessed risks of material misstatements at the financial statement
and assertion level
...

 Evidence that the work performed by assistants was supervised and reviewed
 An indication as to who performed the audit procedures and when they were
performed
...

 Copies of communications with other auditors, experts and other third parties
...

 Letters of representation received from the entity
...

 Copies of the financial statements and auditor’s report
...
A
control in itself which functions by examining and evaluating the adequacy and effectiveness
of other controls
Steps to conduct internal audit
1
...
Identify controls in place
3
...
e
...

4
...

5
...
Reviewing accounting and internal control systems
2
...
Reviewing 3Es (economy, efficiency & effectiveness) of operations
4
...
Review of compliance with laws, regulations and other external requirements and
with management policies and directives and other internal requirements
...
Carrying out special investigations (e
...
into suspected fraud)

Internal audit and risk assessment
Internal audit ensures risk management systems are operating effectively and that the
strategies implemented for business risks are operating effectively
...

- Be alert to suspicious activities
- Report suspicious activities
- Carry out special investigations if asked

91

By: Arif Javed FCCA, 0321- 66 96 281

ACCA F8: Revision Notes

[AUDIT AND ASSURANCE]

Limitations of Internal audit
- Independence issues as employees so may be concerned about job security
- If it is not reporting to the AC, management can influence them (they will be
checking the work of the people they are reporting to)

---