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Audit Exam Review
SCENARIO QUESTIONS
Ethics scenario - Identify threats and suggested safeguards (what, why, and safeguard)
Threat types:
● Self-interest; having financial interest in the client
● Self-review; auditing own work
● Advocacy; representing the client at tribunal
● Familiarity; getting ‘too close’ to the client
● Intimidation threat; bullying by client, threats to withdraw, etc
...
Need to say the impact on the accounts and what the
auditor can do do reduce these risks (example - use a bigger test sample, or change the audit staff)
Detection risk;
- Define: Auditor fails to detect the misstatements or errors in the company’s financial statements
- Response: choose a larger sample size, have more qualified audit staff
Control risk:
- Define: the risk that the accounts could contain an error/misstatement that has gone undetected by the client’s
system of internal controls
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Internal controls scenario - Identify controls weakness/deficiencies and suggest recommendations/controls
*see sample answers
Recommendation:
● What needs to be done; ex
...

● Purchase Invoices/Orders
○ Sequence check / numbering - calculations check, account coding, initials, signed
○ Evidence of approval (signature)
○ Adherence to authority limits
● Sales invoices
○ sequencing/numbering
○ Matching dispatch note and order
○ Initials / signature
● Goods received notes

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○ Sequence check / numbering
○ Check suppliers’ delivery note copies
○ Check delivery notes to purchase ledger (via invoices)
● Credit notes
○ Evidence of goods returned - match to goods returned notes
● Payables ledger
○ Evidence of reconciliation to control account
○ Evidence of reconciliation to supplier’s statements
○ Evidence of an authorisation for adjustments
Remember PACAMACS/ SOAPSPAM

Substantive tests scenario - Suggest audit procedures in a particular situation
a
...
Remember AEIOU, DADA3, CODRACE (financial assertions)
*insert assertions lists

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THEORY QUESTIONS
→ list the benefits / consequences tables for each topic
1-2 sentences per mark
Elements of assurance engagement, level of assurance and limitations of an audit

Types of Assurance Engagement
1
...
)
● The level of assurance given is high

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● E
...
statutory audit
2
...
g
...
g
...
If they were to ask for their own independent audits this
might increase costs to the entity
...


Auditors can help protect creditors
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An audit can reinforce financial discipline
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Banks and other lenders, including suppliers, can
make their own conditions for lending and don’t
There may be shareholders who are not involved in the business
really need historical audited accounts
...

example:
- banks will lend on security and personal
It provides reassurance for directors that the figures they are using
guarantees; they’ll monitor bank a/c
are reliable
...

(i
...
cash before supply) until a depth of
An audit is useful to company management
...
limited disclosure requirements, are of little
Compliance audit - check if rules of an outside regulator followed
...

Audit Issues
● Problems faced by auditors and accountants in producing consolidated financial info in compliance with an
appropriate accounting framework where the component info is prepared under a range of differing standards of
quality and disclosure
...
This creates conflict of interest
...

(ii) Based on test checks: Generally an auditing exercise is based on test checking
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(iii) Insufficient Time: Generally an auditor needs to release the report up to a specified timeline
...
This time constraint may
affect the amount of evidence that can be obtained concerning events and transactions after the balance sheet date that
may have an effect on the financial statements
...
For
example, an architect’s certificate of valuation for a newly constructed building of a client may not be conclusive
evidence of the correct value of building
...
Estimate range from the allowance for doubtful accounts and an inventory
obsolescence reserve to impairment tests of fixed assets and goodwill
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(vi) Based on the Information provided by the Management: The audit opinion is based on the information provided by
the management
...

Auditors rights and duties
Rights
● Information and explanations
● Access to company records
● Receive notice of meetings, attend, and speak
● In case of removal
● Make representations to stay
● Attend meetings

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Duties
Report to shareholders whether accounts show a true and fair view and comply with Companies Act and other relevant
legislation
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Professional Competence and Due Care; A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer receives competent professional services
based on current developments in practice, legislation and techniques
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Confidentiality; A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third parties without proper and
specific authority unless there is a legal or professional right or duty to disclose
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Professional Behavior; A professional accountant should comply with the relevant laws and regulations and should
avoid any action that discredits the profession
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● Fees (15% or 10% for listed companies, no lowballing, no % fees allowed), legal action, conflicts of interest
Acceptance procedures (knowledge of the business, what's included in engagement letters)
If offered an audit role, the auditor should:
- ask the client for permission to contact the outgoing auditor (reject role if client refuses)
- contact the outgoing auditor, asking for any reasons why they should not accept the appointment
...
g
...
If a reply is still not received the prospective auditor may still choose to accept but must proceed with
care
...
g
...

Engagement letters:
● Objective and scope of the audit of the financial statements
● The responsibilities of the auditor
● The responsibilities of management
● Identification of the applicable financial reporting framework for the preparation of the financial statements
● Reference to the expected form and content of any reports to be issued by the auditor
● A disclaimer paragraph that the audit report is for use by shareholders only

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Reasons for planning and typical planning procedures
Reasons for planning:
- Devote appropriate attention to important areas of audit
- Identify and resolve potential problems on a timely basis
- Organise engagement so it is performed in an effective and efficient manner
- assist in staff selection
- facilitates direction supervision of audit work
- Coordinate work done by other auditors
The auditor should undertake the following detailed planning procedures:
● Consider the terms of engagement and reporting timetable
● Consider general economic and industry conditions
● Review previous year’s audit file for background knowledge of the entity’s business, including ‘points forward’
...
) and draft the audit programme
● Determine number, experience, specialist skills, etc
...
The calculation is:
Audit risk = Control risk x Detection risk x Inherent risk
These elements of the audit risk model are noted below
...

Detection Risk
Detection risk is caused by the failure of the auditor to discover a material misstatement in the financial statements
...
This risk is most
common when accounting transactions are quite complex, there is a high degree of judgment involved in accounting for
transactions, or the training level of the accounting staff is low
...
If the risk level is too high, the auditor conducts additional procedures to reduce the risk to an
acceptable level
...
Conversely, when control risk and inherent risk are considered to be low,
it is safe for the auditor to reduce the sample size for auditing testing, which increases detection risk
...
Control Environment: The first component of internal control is control environment
...
Is management committed to an effective system of internal control? Is there some type of team
committed to internal auditing or compliance? How does management implement policies and procedures that
guide the organization? How does management create an atmosphere that addresses integrity, ethics, and
operating effectiveness?
2
...
Does the organization know where
assets live? Does the organization assess risks that are a threat to the achievement of internal control objectives?
Are controls fully understood? Are there tests performed to assess control?

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3
...
When there’s a system change, how does
management communicate that to internal employees and/or external users? What is the effectiveness of that
communication?
4
...
Existing Control Activities: The final component of internal control is existing control activities
...
Does the organization have documented policies and procedures? Is there a business
continuity plan? Is there a change management program?
Limitations of controls
Collusion
Two or more people who are intended by a system of control to keep watch over each other could instead collude to
circumvent the system
...

Human Error
A person involved in a control system could simply make a mistake, perhaps forgetting to use a control step
...
This may be caused by the assignment of the wrong person to a task
...

Missing Segregation of Duties
A control system might have been designed with an insufficient segregation of duties, so that one person can interfere
with its proper operation
...
There is always a way in which it can
fail or be circumvented
...


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The quantity of audit evidence needed is affected by;
- The risk of misstatement (the greater the risk the more evidence is required)
- The quality of such evidence (the higher the quality the less may be required)
This will vary according to the degree of audit risk, considering:
- Nature of the industry
- Past experience of the client
- Source of information
- Nature, materiality or sensitivity of account balances
- Financial position of business
- Quality of their controls
Appropriateness is the measure of the quality of audit evidence
...

Reliability of evidence:
- Auditor generated evidence is the most reliable evidence
- Written evidence is more reliable than oral evidence
- External evidence is more reliable than internally generated evidence
- Consistency of evidence enhances the reliability of all forms of evidence
- Auditors may require evidence from more than one source
- Original documents are more reliable than copies
**auditors need to approach their work with professional scepticism
Obtaining audit evidence
● Inquiry; simply asking questions
...
g
...

● Observation to determine if laid-down procedures are being followed, e
...
stock taking, wages pay-outs
...
g
...

● Computation (Re-calculation/Re-performance) to confirm amounts in accounting records or financial
statements, e
...
checking the calculation of debenture interest, preparing or checking a bank reconciliation
...
Ratio
analysis, benchmarking against prior years, etc
...


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***REVIEW ASSERTIONS
Designing, selecting and evaluating samples
Sampling definition: the application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis
on which to draw conclusions about the entire population
...
Each item in the sample must have an equal chance of being selected from the population
2
...
The population must be homogenous - so all the same type of transaction
4
...
g
...

Set the level of assurance required i
...
95% confidence level
...
e
...

Set the tolerable rate of deviation – rate of deviation from prescribed internal control procedures
...
g
...


Statistical Sampling or Judgement Sampling?
● The auditor faces two problems with sampling:
○ How many items do I test?
○ Which items do I test?
● The auditor can use personal judgement to make these decisions, but must be careful to avoid bias
...

● Statistical sampling is generally more applicable to larger clients with large numbers of transactions
...

Often has the effect of reducing sample sizes e
...
where auditors are concerned with overstatement errors and consider
that the largest monetary errors are likely to occur in the largest individual items they may wish to stratify the
population by value
...


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Random Sampling
Random sampling is a method of selection in which every item in a population has the same statistical probability of
being selected as every other item
...

Random selection Auditor attempts to give all items in a population a chance of being selected by choosing items at
random
...
g
...

Random systematic sample selection The auditor calculates a uniform sampling interval by dividing the population
size by the sample size
...

Value weighted selection Value weighted selection involves using the currency unit value rather than the items as the
sampling population
...

E
...
1 pound is selected out of the first 2,000 and thereafter each two thousandth pound is selected
...
g
...

Can achieve significant cost savings in audit time
...

- In order to minimize costs it is likely that only relatively few blocks of items may be selected
- e
...
a few days transactions may be checked which are not representative of the entire population
...
Audit Software
2
...

They can scrutinise large volumes of data, whose results can be investigated further
The software does not, however, replace the need for the auditor's own procedures

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It can do the following:
●
●
●
●
●

select a sample using different sampling techniques
check calculations
automate the confirmation letter process
produce reports
follow transactions

Test Data
Another method which may be used by the auditor is the use of test data
...
g
...
g
...

Objectives:
- Improve the auditor’s understanding of the enterprise
- To identify areas of potential risk or significant changes

When to use:
● Before the audit - for planning
● During the audit - as part of and to confirm work done (a substantive procedure)
● After the audit - to confirm expectations or indicate areas for further investigation
How to use:
- Comparing information with prior periods
- Comparing with budgets/anticipated results
- Comparing with similar organisations
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Limitations:
- There must be reliable data for comparison
- Consistency is not necessarily conclusive - that which we are comparing with may be wrong
- Good control procedures are necessary if we are to rely on AR as a main audit test
- Material items should not be tested using AR alone
Substantive testing
The three types of substantive tests are analytical procedures, a test of details of transactions, and tests of details of
balances
...
Once they
identify the relationship, auditors can acquire proof that the amounts that appear on financial documents are rational
...
Auditors set their own standards when performing the audit and compare their predictions to
the client's documents
...

Substantive tests of detail
Substantive tests of details is an auditing protocol that's necessary when there's a high chance of material misstatement
...
Professionals gather proof to support their claims on financial statuses
...

Examples:
- Counting inventory
- Monitoring purchases
- Distributing invoices
- Verifying payments
- Corroborating customer orders
- Collecting debt
- Confirming account balances
Inherent risks
Complexity; arising from the information itself or the way the info is prepared
Subjectivity; where the info being prepared includes some element of subjectivity either a judgement or an estimate
Change; where regulatory requirements or rules might change between reporting periods which would affect estimates
Uncertainty; when it's not possible to provide precise info through observation

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Week 8 - Going Concern / Subsequent Events
Going Concern
Going concern means that the entity will continue in operational existence for the foreseeable future without the intention
or the necessity of liquidation or otherwise ceasing trade
...

Responsibilities for going concern
The auditor is responsible for:
- To consider the appropriateness of management’s use of the going concern basis of accounting when preparing the
financial statements
...

- To report to the members in accordance with ISA 570 Going Concern
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- Disclosing material uncertainties relating to going concern in the financial statements
...
Adjusting events
Events which provide additional evidence of something which existed at the balance sheet date
...

- Amounts received or receivable in respect of insurance claims which were being negotiated at the reporting date
...

- Agreement of a tax liability
...

2
...

Examples of non-adjusting events include:
- Issue of new share or loan capital
...

- Losses of non-current assets or inventory as a result of fires or floods
...

- Purchases/sales of significant non-current assets
...
Read minutes of meetings for references to financial difficulties
2
...
Review interim financial statements - confirming that there are no subsequent events requiring
adjustment/disclosure in the financial statements
4
...
Review any correspondence with their bank to see if there are loans due in the next 12 months, and if so discuss
with management
Other:
- Discuss with the directors their view of whether Smithson Co can continue as a going concern
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- Enquire of the directors whether they have considered any other forms of finance for Smithson Co to make up the
cash shortfall identified in the cash flow forecast
...

Review the purchase policy with the directors
...
Ask the HR
department whether the employee will be replaced soon
...

How it can impact the audit report
Where the directors do not make adequate disclosure of the going concern situation then modify the audit opinion due to
material misstatement due to inadequate disclosure
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The 'Basis for Opinion' section will be amended to 'Basis for Adverse Opinion' or 'Basis for Qualified Opinion' to explain
the reason for the modified opinion
...
Management confirms to the best of
their knowledge various facts, including the following:
- That all financial records have been made available
...

- That all related party transactions have been disclosed
- That no events have occurred after the end of the fiscal year about which they should know
...
As long as the person signing the letter
does not know of any conflicting facts, they can sign the letter of representation
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Procedures when the firm is NOT going concern
-

Discuss the situation again with directors
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Explain to the directors that if additional disclosure or restatement of the financial statements is not made then the
auditor will have to modify the audit opinion
...
Where the directors provide adequate disclosure of the going
concern situation of Smithson Co, then a section should be included in the auditor's report headed 'Material
Uncertainty Related to Going Concern' to draw attention to the going concern disclosures
...
The modification will be an 'except for' qualification or
an adverse opinion depending on whether the issue is material or material and pervasive
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Week 9 - Audit Reporting

About
The auditor’s report is the output of the audit
...

Elements of an audit report:
- Title
- Addressee
- Auditor’s opinion
- Basis for opinion
- Key audit matters
- Management responsibilities
- Auditor responsibilities
- Other reporting responsibilities
- Name of the engagement partner
- Signature
- Auditor’s address
- Date
Types of audit opinion
Unmodified - the auditor will give an unmodified opinion when they conclude that the financial statements are prepared,
in all material respects, in accordance with the applicable financial reporting framework
...

The opinion should be modified if:
- The financial statements contain material misstatement, OR
- The auditor was unable to obtain sufficient appropriate evidence
The wording depends on whether the matter is:
- Material but not pervasive (isolated to certain elements of the FSs), OR
- Material and pervasive (affects so much of the FSs that they are unreliable as a whole
*A modified opinion requires an “emphasis of matter” paragraph - this is used to refer to a matter that has been
appropriately presented/disclosed in the FSs by the directors
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“What type of report should you give and why?”
Template;
1
...

3
...


Consider size → immaterial, material, pervasive
Expected accounting treatment / disclosure
Expected audit evidence
Conclude
a
...
Wording
c
...
If it is …
...
but if it is …

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