Revision

Substantive procedure for general

Obtain a written representation from management confirming… (thư giải trình)

Review the disclosures included in the financial statements to verify they are in compliance with requirements of IAS 37 Provisions, Contingent Assets and Contingent Liabilities.

Review the board minutes for evidence of the decision to discontinue the brand of chemicals prior to the year-end.

Review supporting documentation to confirm that the decision to discontinue the brand was notified to the four members of staff prior to the year end.

Fraud responsibility

Auditors conduct an audit ni accordance with ISA 240 The Auditor's Responsibilities Relating ot Fraud ni an Audit of Financial Statements and are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.

nI order to fulfil this responsibility, the auditor si required to identify and assess the risks of material misstatement of the financial statements due to fraud.

The auditor needs to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud through designing and implementing appropriate responses. In addition, the auditor must respond appropriately to fraud or suspected fraud identifies during the audit.

When obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures which are effective in detecting error may not be effective ni detecting fraud.

To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and error, ISA 240 requires that a discussion is held within the team. For members not present at the meeting, the audit engagement partner should determine which matters should be communicated to them.

Engagement letters

Purpose of an engagement letter

The letter of engagement outlines the responsibilities of both the audit firm and the audit client. Its purpose is to:

• minimise the risk of any misunderstanding between the auditor and the client; confirm acceptance of the engagement; and

• forms the basis of the contract by outlining the terms and conditions of the engagement

Items to be included in an engagement letter

the objective and scope of the audit;

the responsibilities of the auditor;

responsibilities of management;

identification of the financial reporting framework used in the preparation of the financial statements;

expected form and content of any reports to be issued;

elaboration of the scope of the audit with reference to legislation;

the form of any other communication of the results of the audit;

the fact that some material misstatements may not be discovered;

any obligations to provide audit working papers to third parties;

any restrictions on the auditor's liability; and

arrangements to make available draft financial statements and any other information.

Preconditions required for an audit

Auditors should only accept a new audit engagement or continue an existing audit engagement if the preconditions for an audit are present.

ISA 210 Agreeing the Terms of Audit Engagements requires the auditor to:

• Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable (for example IFRS® Standards). In considering this, the auditor should have assessed the nature of the entity, the nature and purpose of the financial statements and whether law or regulation prescribes the applicable reporting framework.

• Obtain the agreement of management that it acknowledges and understands its responsibilities for the following:

  • preparing the financial statements in accordance with the applicable financial reporting framework;

  • internal control necessary for the preparation of the financial statements to be free from material misstatement whether due to fraud or error; and

  • providing the auditor with access to information relevant for the audit and access to staff within the entity to obtain audit evidence.

Professional scepticism

Professional scepticism is defined in ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

Revenue recognition

ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements contains a rebuttable presumption that fraud in relation to revenue is high risk and hence the auditor must apply professional scepticism to Corley Appliances Co's revenue recognition policies, especially in relation to the company's returns policy which due to the judgement involved may be used as a way to manipulate revenue.

Warranty provision

Accounting for warranty provisions will include an element of estimation based on previous experiences of the costs incurred by the company to repair defective goods. The auditor should maintain professional scepticism keeping in mind that warranty provisions may include management bias to either deliberately over or understate the provision. Management has reduced the warranty provision in the year on the grounds they feel the goods they sell are built to a high standard. As the company is not involved in the manufacturing of the goods they sell, it may be unreasonable to reduce the warranty provision on this basis.

Fraud

As a fraud has been committed during the year, the auditor must maintain professional scepticism recognising the fact that internal controls may be weak, hence allowing for employee manipulation of such internal control deficiencies. The auditor must also consider the possibility that other frauds may have taken place during the year through management override of the entity's internal controls.

Bank overdraft

The company is reliant on its bank overdraft due to the significant levels of expenditure which it has incurred during the year on the new dispatch system. Management may want to deliberately overstate profit and understate liabilities so that the bank renews the overdraft facility.

Receivables valuation

The receivables collection period has been increasing over the past six months, but the finance director does not envisage that an increase in the allowance for receivables is required. The auditor must apply professional scepticism in considering whether management's assessment of recoverability is reasonable, as any increase in the allowance will reduce profits.

Materiality and performance materiality

Materiality is defined in ISA 320 as follows: 'Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.'

If the financial statements include a material misstatement, then they will not present fairly (give a true and fair view) the position, performance and cash flows of the entity.

A misstatement may be considered material due to its size (quantitative) and/or due to its nature (qualitative) or a combination of both. The quantitative nature of a misstatement refers to its relative size. A misstatement which is material due to its nature refers to an amount which might be low in value but due to its prominence and relevance could influence the user's decision, for example, directors' transactions.

As per ISA 320, materiality is often calculated using benchmarks such as 5% of profit before tax or %1 of total revenue or total assets. These values are useful as a starting point for assessing materiality; however, the assessment of what is material is ultimately a matter of the auditor's professional judgement. It is affected by the auditor's perception of the financial information, the needs of the users of the financial statements and the perceived level of risk; the higher the risk, the lower the level of overall materiality.

In assessing materiality, the auditor must consider that a number of errors each with a low value may, when aggregated, amount to a material misstatement.

Performance materiality

Performance materiality is defined in SIA 320 as follows: 'The amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.'

Hence performance materiality is set at a level lower than overall materiality for the financial statements as a whole. It is used for testing individual transactions, account balances and disclosures. The aim of performance materiality is to reduce the risk that the total of all of the errors in balances, transactions and disclosures exceeds overall materiality.

substantive procedure for accrual for tax payable on employment income

• Compare the accrual for income tax payable to the prior year, investigate any significant differences.

• Agree the year-end income tax payable accrual to the general ledger and payroll records to confirm accuracy.

• Agree the year-end income tax payable accrual to the payroll record or tax reports submitted to the tax authority to confirm accuracy.

• Re-perform the calculation of the accrual to confirm accuracy and discuss any unexpected variances with management.

• Reperform the calculation of the tax payable for a sample of employees to confirm the accuracy.

• Agree the subsequent payment to the post-year-end cash book and bank statements to confirm completeness

• Review any correspondence with tax authorities to assess whether there are any additional outstanding payments due; if so, agree they are included in the year-end accrual.

• Review any disclosures made of the income tax accrual and assess whether these are in compliance with accounting standards and legislation.

Assignments for internal audit department

Value for money review – The IAD could be asked to assess whether Raspberry Co is obtaining value for money in areas such as capital expenditure.

Review of financial/operational controls – The IAD could undertake reviews of controls at head office and the power station and make recommendations to management over such areas as the purchasing process as well as the payroll cycle.

Monitoring asset levels - The IAD could undertake physical verification of property, plant and equipment (PPE) at the production site and head office and compare the assets seen to the PPE register. There is likely to be a significant level of PPE and the asset register

must be kept up to date to ensure continuous production. If significant negative differences occur, this may be due to theft or fraud.

Regulatory compliance – Raspberry Co produces electricity and operates a power station, hence it will be subject to a large number of laws and regulations such as health and safety and environmental legislation. The IAD could help to monitor compliance with these regulations.

IT system reviews – Raspberry Co is likely to have a relatively complex computer system linking production data to head office. The IAD could be asked to perform a review over the computer environment and controls.

Cash controls – Raspberry Co’s internal auditors could undertake controls testing over cash payments. 70% of employees are paid in cash rather than bank transfer, therefore on a weekly basis cash held is likely to be significant, therefore the cash controls in payroll should be tested to reduce the level of errors.

Fraud investigations – The IAD can be asked to investigate any specific cases of suspected fraud as well as review the controls in place to prevent/detect fraud.

Substantive procedures for research and development

− Obtain and cast a schedule of intangible assets and agree the closing balances to the general ledger, trial balance and draft financial statements.

− Discuss with the finance director the rationale for the three-year useful life and consider its reasonableness.

− Review the bugdet in relation to completing the project and the cashflow forecast to confirm that the entity has adequate cash resources to complete the project as at the date of capitalization budget

− Recalculate the amortisation charge for a sample of intangible assets which have commenced production and confirm it is line with the amortisation policy of straight line over three years and that amortisation only commenced from the point of production.

− For the nine new projects, discuss with management the details of each project along with the stage of development and whether it has been capitalized or expensed.

− For those expenses as research, agree the costs incurred to invoices and supporting documentation and to inclusion in profit or loss.

− Review the feasibility report to make sure that the projects are able to technically feasible by that date.

− Discuss with the directors to cost capitalised meet with all of the criteria for capitalization in accordance with IAS

− For those capitalised as development, agree costs incurred to invoices and payroll records, or other source documentation to confirm the amount is recorded correctly

− Select a breakdown of the nature of the cost to confirm that there are no research expenses capitalised

− Review market research reports to confirm the entity has the ability to sell the product once complete and probable future economic benefits will arise/ or there is a market for the product and that the selling price is high enough to generate profit for the business

− Review the disclosures for intangible assets in the draft financial statements to verify that they are in accordance with IAS 38 Intangible Assets

Substantive procedures for depreciation

− Discuss with management the rationale for the changes to property, plant and equipment (PPE) depreciation rates, useful lives, residual values and depreciation methods and ascertain how these changes were arrived at.

− Confirm the reasonableness of these changes, by comparing the revised depreciation rates, useful lives and methods applied to PPE to industry averages and knowledge of the business.

− Review the capital expenditure budgets for the next few years to assess whether the revised asset lives correspond with the planned period until replacement of the relevant asset categories.

− Review the non-current asset register to assess if the revised depreciation rates have been applied.

− Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to assess the reasonableness of the revised depreciation rates.

− Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current assets register is correct and ensure that new depreciation rates have been appropriately applied.

− Obtain a breakdown of depreciation by asset categories, compare to prior year; where significant changes have occurred, discuss with management and assess whether this change is reasonable.

− For asset categories where there have been a minimal number of additions and disposals, perform a proof in total calculation for the depreciation charged on PPE, discuss with management if significant fluctuations arise.

− Review the disclosure of the depreciation charges and policies in the draft financial statements and ensure it is in line with IAS 16 Property, Plant and Equipment.

Substantive procedures for directors’ bonuses

– Obtain a schedule of the directors’ bonus paid in February 20X8 and cast the schedule to ensure accuracy and agree amount disclosed in the financial statements.

– Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end liability.

– Agree on the individual bonus payments to the payroll records.

– Recalculate the bonus payments and agree the criteria, including the exclusion of intangible assets, to supporting documentation and the percentage rates to be paid to the directors’ service contracts.

– Confirm the amount of each bonus paid post year-end by agreeing to the cash book and bank statements.

– Agree the amounts paid per director to board minutes to ensure the sums included in the current year financial statements are fully accrued and disclosed

– Review the board minutes to identify whether any additional payments relating to this year have been agreed for any directors.

– Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus.

– Review the disclosures made regarding the bonus paid to directors and assess whether these are in compliance with local legislation

Issue and impact on auditor's report

According to IAS 37, the possibility of additional claims should be disclosed as a contingent liability as it is possible but not probable and quantifiable.

As the claims may be significant, this issue represents a matter which is fundamental to users' understanding of the financial statements. The impact on the auditor's report depends on whether this matter is deemed to be adequately disclosed in the financial statements.

Adequate disclosure

If Purrfect Co adequately discloses the issue, then an unmodified audit opinion should be given but the auditor's report should include an emphasis of matter paragraph. This would draw attention to the disclosure in the financial statements by cross-referencing the user to the note in the financial statements which discloses the possible claims, emphasising that the audit opinion is unmodified.

Inadequate disclosure

If there is no disclosure in the financial statements or the disclosure is considered to be inadequate, then this indicates that the financial statements are materially misstated. As this lack of adequate disclosure is likely to be material but not pervasive, then a qualified opinion will be given. A basis for qualified opinion paragraph will be added to the auditor's report discussing the matter and the opinion paragraph will be modified to state that 'except for' the failure to adequately disclose the matter, the financial statements give a true and fair view.

Substantive procedures for inventory valuation

Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to the WIP schedule, agreeing the percentage completion to that recorded at the inventory count.

For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and agree raw material costs to recent purchase invoices, labour costs to time sheets or payroll records, and confirm overheads allocated are of a production related nature.

Examine post-year-end credit notes to determine whether there have been returns which could signify that a write-down is required.

Select a sample of year-end finished goods and compare cost with post-year-end sales invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

Discuss the basis of WIP valuation with management and assess its reasonableness.

Select a sample of items included in WIP at the year-end and ascertain the final unit cost price by verifying costs to be incurred to completion to the relevant supporting documentation. Compare to the unit sales price included in sales invoices post year-end to assess NRV.

Review aged inventory reports and identify any slow moving goods, discuss with management why these items have not been written down or if an allowance is required.

For the defective batch of product Crocus, review board minutes and discuss with management their plans for selling these goods, and why they believe these goods have a NRV of $90,000.

If any Crocus products have been sold post-year-end, review the sales invoice to assess NRV.

Agree the cost of $450,000 for product Crocus to support documentation to confirm the raw material cost, labour cost and any overheads attributed to the cost.

Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and discuss with management if this adjustment has been made. If so, follow through the write down to confirm

Substantive procedures for Sales tax liability

– Agree the year-end sales tax liability in the trial balance to the tax return/reconciliation submitted to the tax authority and cast the return/reconciliation.

– Agree the quarterly sales tax charged equates to 15% of the last quarter’s sales as per the sales day book.

– Recalculate the sales tax incurred as per the reconciliation is equal to 15% of the final quarter’s purchases and expenses as per the purchase day book.

– Recalculate the amount payable to the tax authority as being sales tax charged less sales tax incurred.

– Compare the year-end sales tax liability to the prior year balance or budget and investigate any significant differences.

– Agree the subsequent payment to the post-year-end cash book and bank statements to confirm completeness and that it has been paid in line with the terms of the tax authority.

– Review any current and post-year-end correspondence with the tax authority to assess whether there are any additional outstanding payments due. If so, confirm they are included in the year-end liability.

– Review any disclosures made of the sales tax liability to ensure that it is shown as a current liability and assess whether disclosures are in compliance with accounting standards and legislation

Elements of an assurance engagement

There are five elements of an assurance engagement and these are explained below.

• A three-party relationship

The three parties are the intended user, the responsible party and the practitioner. Intended users are the person, persons or class of persons for whom the practitioner prepares the assurance report. The responsible party is the person (or persons) responsible for the subject matter (in a direct engagement) or subject matter information of the assurance engagement.

The practitioner is the individual providing professional services that will review the subject matter and provide the assurance.

• A subject matter

This is the data to be evaluated that has been prepared by the responsible party. It can take many forms, including financial performance (eg historical financial information), non-financial performance (eg key performance indicators), processes (eg internal control) and behaviour (eg compliance with laws and regulations).

• Suitable criteria

The subject matter is evaluated or measured against criteria in order to reach an opinion.

• Evidence

Sufficient appropriate evidence needs to be gathered to support the required level of assurance.

• Assurance report

A report containing the practitioner's opinion is issued to the intended user.

Substantive procedure for Going concern

Obtain the company's cash flow forecast and review the cash in and outflows.

Assess the assumptions for reasonableness and discuss the findings with management to understand if the company will have sufficient cash flows.

Perform a sensitivity analysis on the cash flows to understand the margin of safety the company has in terms of its net cash in/outflow.

Evaluate management's plans for future actions, including their contingency plans in relation to ongoing financing and plans for generating revenue, and consider the feasibility of these plans.

Review the company's post-year-end sales and order book to assess if the levels of trade are likely to increase and if the revenue figures in the cash flow forecast are reasonable.

Review any agreements with the bank to determine whether any covenants have been breached, especially in relation to the overdraft.

Review any bank correspondence to assess the likelihood of the bank renewing the overdraft facility.

Review post year-end correspondence with suppliers to identify if any have threatened legal action or any others have refused to supply goods.

Inspect any contracts or correspondence with suppliers to confirm supply of the company's specialist equipment. If no new supplier has been confirmed, discuss with management their plans to ensure the company can continue to meet customer demand.

Enquire of the lawyers of Marlin Co as to the existence of any litigation.

Perform audit tests in relation to subsequent events to identify any items which might indicate or mitigate the risk of going concern not being appropriate.

Review the post year-end board minutes to identify any other issues which might indicate fur the company.

Review post year-end management accounts to assess fi ni line with cash flow forecast.

Consider whether any additional disclosures as required by IAS 1 Presentation of Financial Statements in relation to material uncertainties over going concern should be made in the financial statements.

Consider whether the going concern basis is appropriate for the preparation of the financial statements.

Obtain a written representation confirming the directors' view that Marlin Co is a going concern.

Substantive procedures for allowance for trade receivables

Discuss with the finance director the rationale for not providing against receivables and consider the reasonableness of the allowance.

Obtain a breakdown of the opening allowance of $125,000 and consider fi the receivables provided for in the prior year have been fully recovered as a result of the additional credit control procedures or fi they have now been fully written off.

Inspect the aged trade receivables ledger to identify any slow moving or old receivable balances and discuss the status of these balances with the credit controllers to assess whether they are likely to be received.

Review whether there are any after any after-date cash receipts for identified slow-moving/old receivables balances.

Review customer correspondence to identify any balances which are in dispute or are unlikely to be paid and confirm if these have been considered when determining the allowance.

Inspect board minutes to identify whether there are any significant concerns in relation to payments by customers and assess if these have been considered when determining the allowance.

Recalculate the potential level of trade receivables which are not recoverable and compare to allowance and discuss differences with management.

Substantive procedures for bank balances

Obtain a bank confirmation letter from Airsoft Co's bankers for all of its bank accounts.

Agree all accounts listed on the bank confirmation letter to Airsoft Co's bank reconciliations and the trial balance to ensure completeness of bank balances.

For all bank accounts, obtain Airsoft Co's bank account reconciliation and cast to ensure arithmetical accuracy.

Agree the balance per the bank reconciliation to an original year-end bank statement and to the bank confirmation letter.

Agree the reconciliations balance per the cash book to the year-end cash book.

Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank statement and also to the paying-in-book pre year end.

Trace all unpresented cheques through to a pre year-end cash book and post year- end statement. For any unusual amounts or significant delays, obtain explanations from management.

Examine any old unpresented cheques to assess fi they need to be written back into the purchase ledger as they are no longer valid to be presented.

Review the cash book and bank statements for any unusual items or large transfers around the year end, as this could be evidence of window dressing.

Examine the bank confirmation letter for details of any security provided by Airsoft Co or any legal right of set-off as this may require disclosure.

Review the financial statements to ensure that the disclosure of bank balances is complete and accurate.

Audit software procedures using computer assisted audit techniques (CAATs)

The audit team can use audit software to calculate payables payment period for the year-to-date to compare against the prior year to identify whether the payables payment period has changed ni line with trading levels and expectations. If the payables payment period has decreased, this may be an indication that payables are understated.

Audit software can be used to cast the payables and accruals listings to confirm the completeness and accuracy of trade payables and accruals.

Audit software can be used to select a representative sample of items for further testing of payables balances.

Audit software can be utilised to recalculate the accruals for goods received not invoiced at the year end.

CAATs can be used to undertake cut-off testing by assessing whether the dates of the last GRNs recorded relate to pre year end; and that any with a date of 1July 20X5 onwards were excluded from trade payables.

substantive procedure for Trade payables and accruals

Compare the total trade payables and list of accruals against prior year and investigate any significant differences.

Select a sample of post year-end payments from the cash book; if they relate to the current year, follow through to the purchase ledger or accruals listing to ensure they are recorded in the correct period.

Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any reconciling items.

Select a sample of payable balances and perform a trade payables' circularisation, follow up any non-replies and any reconciling items between the balance confirmed and the trade payables' balance.

Review after date invoices and credit notes to ensure no further items need to be accrued.

Enquire of management their process for identifying goods received but not invoiced or logged in the purchase ledger and ensure that it is reasonable to ensure completeness of payables.

Substantive procedures for vehicle additions and disposals

Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note for property, plant and equipment. Agree the cost of the vehicles given in part-exchange to the disclosure note to confirm that they have been removed from cost carried forward.

For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice, ensuring that the recorded cost includes the cash amount paid plus the trade-in allowance for the old vehicle. Confirm that the invoice is made out to Encore Co.

Physically inspect a sample of additions, confirming that the registration number of the vehicle agrees to that on the non-current assets register.

Review the non-current assets register to confirm that the 20 old vehicles were removed and that the 20 new vehicles were included.

Recalculate the loss on disposal of $1.1m and agree to the trial balance and statement of profit or loss.

Recalculate the depreciation expense, confirming that the depreciation expense was based on the old vehicles until 1 February and on the cost of the new vehicles after that date.

Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been removed from accumulated depreciation carried forward.

In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the carrying amount of other vehicles may be overstated.

Discuss with management Encore Co's history of vehicle replacement to establish if vehicles are being used for the entire period of their estimated useful life.

Discuss with management why trade-in allowances were so much lower than the carrying amounts of the vehicles to provide further evidence as to whether depreciation policies are reasonable.

Review the notes to the financial statements to ensure that disclosure of the additions and disposals is in accordance with IAS 16 Property, Plant and Equipment.

Substantive procedures for restructuring provision

Cast the breakdown of the restructuring provision to ensure it is correctly calculated and agree the total to the trial balance.

Review the board minutes where the decision to restructure the production process was taken and confirm the decision was made in March 20X5.

Review the announcement to shareholders and employees in late March, to confirm that this was announced before the year end.

Obtain a breakdown of the restructuring provision and confirm that only direct expenditure relating to the restructuring is included.

Review the expenditure to confirm that there are no retraining costs of existing staff included.

For the costs included within the provision, including acquisitions of plant and machinery, agree to supporting documentation, such as purchase invoices, to confirm validity and value of items included.

Review post year end payments/ invoices relating to the expenditure and compare the actual costs incurred ot the amounts provided ot assess whether the amount of the provision is reasonable.

Obtain a written representation confirming management discussions ni relation to the announcement of the restructuring and to confirm the completeness of the provision.in

Review the adequacy of the disclosures of the restructuring provision in the financial statements and assess whether these are in accordance with AIS® 37 Provisions,

Substantive procedures for income

Obtain a schedule of all Vega Vista Co's income and cast to confirm the completeness and accuracy of the balance and agree to the trial balance.

Compare the individual categories of income of festival ticket sales, sundry sales, and donations against prior years and investigate any significant differences.

For the annual festival, construct a proof-in-total calculation of the number of tickets sold, approximately 15,000, multiplied by the ticket price of $35. Compare this to the income recorded and discuss any significant differences with management.

For tickets sold on the day of the festival, reconcile from ticket stubs the number of tickets sold multiplied by $35 and agree these sales to cash banked in the bank statement.

Discuss with management their procedures for ensuring advance ticket sales for the September 20X5 festival are excluded from income and instead recognised as deferred income in the statement of financial position.

Select a sample of advance ticket sales made online, agree that the transaction has been excluded from current year income and follow through to inclusion in deferred income.

Agree journal entry to transfer prior year deferred income relating to the 20X4 festival to current year income to the ledger and agree figures to prior year financial statements.

For sundry sales, obtain a breakdown of the income received per stall and agree to supporting documentation provided by each stall holder. Recalculate the fixed percentage received is as per the agreement/contract made with Vega Vista Co.

Compare sundry sales per stall holder to prior year sales data and investigate any significant differences.

For monthly donations, trace a sample of donations from sign up documentation to the bank statements, cash book and income listing to ensure that they are recorded completely and accurately.

For a sample of new donors in the year, agree the monthly sum and start date from their completed forms and trace to the monthly donations received account and agree to the cash book and bank statements.

Written representations

Written representations are necessary information that the auditor requires in connection with the audit of the entity's financial statements. Accordingly, similar to responses to inquiries, written representations are audit evidence.

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.

Written representations are needed to support other audit evidence relevant to the financial statements or specific assertions ni the financial statements, fi determined necessary by the auditor or required by other ISAs. This may be necessary for judgemental areas where the auditor has to rely on management explanations.

Written representations can be used to confirm that management have communicated to the auditor all deficiencies ni internal controls of which management are aware.

Written representations are normally in the form of a letter, written by the company's

management and addressed to the auditor. The letter si usually requested from management but can also be requested from the chief operating officer or chief financial officer. Throughout the fieldwork, the audit team will note any areas where representations may be required.

During the final review stage, the auditors will produce the written representations which the directors will review and then produce it on their letterhead. It will be signed by the directors and dated as at the date the auditor's report si signed, but not after.

Reorganisation

Verify the announcement to shareholders was actually made in late March by inspecting documentary evidence of the announcement.

Board minutes should also be reviewed to confirm that the decision to reorganise the business was taken pre year end.

Obtain an analysis of the reorganisation provision and confirm that only expenditure attributable to the restructuring is included.

Cast the breakdown of the reorganisation provision to ensure it has been correctly calculated.

Review the expenditure and confirm retraining costs are not included.

Agree costs included within the provision to supporting documentation to confirm the appropriateness and accuracy of items included.

Review the related disclosures in the financial statements to assess whether they comply with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Obtain a written representation confirming management discussions in relation to the announcement of the reorganisation.

Automated tools

Advantages

Automated tools allow the audit team to test a large volume of inventory data more accurately and more quickly than if tested manually.

Automated tools decrease the scope for human error during testing and can provide evidence of a higher quality.

By using automated tools, auditors can test actual inventory transactions within the system rather than working on printouts from spool or previewed files which are dependent on other software (and therefore could contain errors or could have been tampered with following export).

Assuming the inventory system remains unchanged, automated tools used in the audit of Lily year on year should bring time (and therefore cost) savings in the long term, which should more than compensate for any set-up costs.

Auditors can utilise automated tools to test program controls as well as general internal controls associated with computers.

Results from automated tools can be compared with results from traditional testing. If the results correlate, overall confidence is increased.

The use of automated tools allows audit team members more time to focus on

risk areas and issues requiring judgement, rather than performing routine calculations that can be carried out by audit software.

Disadvantages

Setting up the software needed for automated tools in the first year is likely to be time consuming and expensive.

Audit staff working on Lily's audit will need to be trained so they have a sufficient level of IT knowledge to apply automated tools when auditing the inventory system.

If testing is performed on data in the live inventory system, there is a risk that live client data may be corrupted and lost.

If the inventory system at Lily changed then it may be expensive and time consuming to redesign the automated tools.

If the inventory system at Lily is not compatible with Daffodil &Co's automated tools software then they will need to be tailored to Lily's system, which may be costly.

If testing is performed on data from copies of the live files rather than the live data itself, there is the risk that these files have been affected by the copying process or have been tampered with.

If there is not adequate systems documentation available, it will be difficult ot design appropriate techniques due to a lack of understanding of the inventory system at Lily.

Matters to be communicated to those charged with governance

The auditor's responsibilities with regards to providing an opinion on the financial statements and that they have carried out their work in accordance with International Standards on Auditing.

The auditor should explain the planned approach to the audit as well as the audit timetable.

Any key audit risks identified during the planning stage should be communicated.

In addition, any significant difficulties encountered during the audit should be communicated.

Also significant matters arising during the audit, as well as significant accounting adjustments.

During the audit, any significant deficiencies in the internal control system identified should be communicated in writing or verbally.

How the external auditor and internal auditor may work together and any planned use of the work of the internal audit function.

Those charged with governance should be notified of any written representations required by the auditor.

Other matters arising from the audit which are significant to the oversight of the financial reporting process.

If any suspected frauds are identified during the audit, these must be communicated.

If the auditors are intending to make any modifications to the audit opinion, these should be communicated to those charged with governance.

For listed entities, a confirmation that the auditors have complied with ethical standards and appropriate safeguards have been put ni place for any ethical threats identified.

Importance of communicating with those charged with governance

In accordance with SIA 260 Communication with Those Charged with Governance, it is important for the auditors ot report ot those charged with governance as it helps in the following ways:

It assists the auditor and those charged with governance in understanding matters related to the audit, and in developing a constructive working relationship. This relationship is developed while maintaining the auditor's independence and objectivity.

It helps the auditor in obtaining, from those charged with governance, information relevant to the audit. For example, those charged with governance may assist the auditor in understanding the entity and its environment, in identifying appropriate sources of audit evidence and in providing information about specific transactions or events.

It helps those charged with governance in fulfilling their responsibility to oversee the financial reporting process, thereby reducing the risks of material misstatement of the financial statements.

It promotes effective two-way communication between the auditor and those charged with governance.

Safeguards to deal with conflict of interest

Both Comet Publishing Co and its rival competitor, Edmond Co, should be notified that Halley &Co would be acting as auditors for each company and, fi necessary, consent should be obtained from each.

Advising one or both clients to seek additional independent advice.

The use of separate engagement teams, with different engagement partners and team members; once an employee has worked on one audit, such as Comet Publishing Co, then they would be prevented from being on the audit of the competitor for a period of time.

Procedures to prevent access to information, for example, strict physical separation of both teams, confidential and secure data filing.

Clear guidelines for members of each engagement team on issues of security and confidentiality. These guidelines could be included within the audit engagement letters.

Potentially the use of confidentiality agreements signed by employees and partners of the firm.

Regular monitoring of the application of the above safeguards by a senior individual ni Halley &Co not involved ni either audit.

Substantive procedures for purchases and other expenses

• Calculate the operating profit and gross profit margins and compare them to last year and budget and investigate any significant differences.

• Review monthly purchases and other expenses to identify any significant fluctuations and discuss with management.

• Discuss with management whether there have been any changes in the key suppliers used and compare this to the purchase ledger to assess completeness and accuracy of purchases.

• Recalculate the accuracy of a sample of purchase invoice totals and related taxes and ensure expense has been included ni the correct nominal code.in

• Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the expense charge included in the statement of profit or loss.

• Select a sample of post year-end expense invoices and ensure that any expenses relating to the current year have been included.

• Select a sample of payments from the cash book and trace to expense account to ensure the expense has been included and classified correctly.

• Select a sample of goods received notes (GRNs) from throughout the year; agree them to purchase invoices and the purchase day book to ensure the completeness of purchases.

• Select a sample of GRNs just before and after the year end; agree to the purchase day book to ensure the expense is recorded in the correct accounting period.

Steps to confirm prior year flowcharts and system notes

• Obtain the system notes from last year's audit and ensure that the documentation on the purchases and payables system covers all expected stages and is complete.

• Review the audit file for indications of weaknesses in the system and note these for investigation this year.

• Review the prior year report to management to identify any recommendations which were made over controls in this area as this may highlight potential changes which have been made in the current year.

• Obtain system documentation from the client, potentially in the form of a procedure manual. Review this ot identify any changes made in the last 12 months.

• Interview client staff to ascertain whether systems and controls have changed including the stores and warehouse to ensure that the flowcharts and notes produced last year is correct.

• Perform walk-through tests by tracing a sample of transactions through the purchases and payables system ot ensure that the flowcharts and systems notes contained on the audit file are accurate.

• During the walk-through tests, confirm the systems notes and flowcharts accurately reflect the control procedures which are in place and can be used ot identify controls for testing.

Substantive procedures for property, plant and equipment

Valuation

• Recalculate the depreciation charge for a sample of assets and agree the charges to the asset register

• Perform a depreciation proof in total taking into account timing of additions/ disposals and investigate any differences

• Agree the cost of a sample of additions of surgical equipment to purchase invoices

Completeness

• Reconcile the schedule of non-current assets with the general ledger

Review the repairs and maintenance expense account ni the SOCI for capital items

Rights and obligations

• Review new lease agreements to ensure properly classified as a finance lease or an operating lease in accordance with IFSs

• Inspect vehicle registration documents (eg ambulances) to confirm ownership of motor vehicles

Purpose of a value for money (VFM) audit

VFM focuses on the best combination of services for the lowest level of resources. The purpose of a VM audit is to examine the economy, efficiency and effectiveness of the activity or process in question.

Economy: attaining the appropriate quantity and quality of physical, human and financial resources (inputs) at lowest cost

Efficiency: the relationship between goods or services produced (outputs) and the resources used to produce them

Effectiveness: concerned with how well an activity is achieving its policy objectives or other intended effects

Substantive procedures on payroll expense

Cast a sample of payroll records to confirm completeness and accuracy and agree the total wages and salaries expense per the payroll system to the trial balance.

Recalculate the gross and net pay figures for a sample of employees and agree to the payroll records.

For a sample of wage payments, agree the total net pay per the payroll records to the bank transfer listing and to the cash book.

Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay increase/bonuses. Compare this to the actual wages and salaries expense in the financial statements and investigate any significant differences.

Compare the total payroll figure this year to the prior year, identify any significant differences and discuss with management.

Review monthly payroll charges, compare this to the prior year and budgets and discuss any significant differences with management.

Calculate overtime costs as a percentage of total wages. Compare this to the prior year and discuss any significant differences with management.

Agree a sample of individual wages and salaries per the payroll to personnel records and records of hours worked per the clocking-in system.

Reperform the calculation of statutory deductions and agree to supporting documentation 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 their first/last salary to ensure it si accurate.

Recalculate holiday pay for a sample of employees and agree to holiday records and daily rate applied.

Select a sample of employees from HR records and agree salaries per HR records to the payroll records to confirm the accuracy of the payroll expense.

Agree the payroll control account reconciliation to accounting records and investigate any differences.

Methods for documenting internal control systems

workflow

Complete flowcharts and internal control evaluation questionnaires

Perform walkthrough tests

Perform tests of control

Revise the audit strategy and audit plan

Analytical procedures

Analytical procedures can be used at al stages of an audit, however, SIA 315 Identifying and Assessing the Risks of Material Misstatement and ISA 520 Analytical Procedures identify three particular stages.

During the planning stage, analytical procedures must be used as risk assessment procedures ni order to help the auditor to obtain an understanding of the entity and assess the risk of material misstatement.

During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence. Substantive procedures can either be tests of detail or substantive analytical procedures.

At the final review stage, the auditor must design and perform analytical procedures which assist them when forming an overall conclusion as ot whether the financial statements are consistent with the auditor's understanding of the entity.

Areas to be included in the audit strategy document

The audit strategy sets out the scope, timing and direction of the audit and helps the development of the audit plan. The revised ISA 220 Quality Management for an Audit of

Financial Statements understands proper planning to be a key part of providing a high quality audit. ISA 300 Planning an Audit of Financial Statements sets out areas which should be considered and documented as part of the audit strategy document and are as follows:

Main characteristics of the engagement

The audit strategy should consider the main characteristics of the engagement, which define its scope. For Prancer Construction Co, the following are examples of things which should be included:

• Whether the financial information to be audited has been prepared in accordance with the relevant financial reporting framework.

• Whether computer-assisted audit techniques will be used and the effect of TI on audit procedures.

• The availability of key personnel at Prancer Construction Co.

Reporting objectives, timing and nature of communication

It should ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required, such as:

• The audit timetable for reporting including the timing of interim and final stages.

• Organisation of meetings with Prancer Construction Co's management to discuss any audit issues arising.

• Any discussions with management regarding the reports to be issued.

• The timings of the audit team meetings and review of work performed.

Significant factors affecting the audit

The strategy should consider the factors which, in the auditor's professional judgement, are significant in directing Prancer Construction Co's audit team's efforts, such as:

• The determination of materiality for the audit.

• The need to maintain a questioning mind and to exercise professional scepticism in gathering and evaluating audit evidence.

Preliminary engagement activities and knowledge from previous engagements

It should consider the results of preliminary audit planning activities and, where applicable, whether knowledge gained on other engagements for Prancer Construction Co is relevant, such as:

• Results of any tests over the effectiveness of internal controls.

• Evidence of management's commitment to the design, implementation and maintenance of sound internal controls.

• Volume of transactions, which may determine whether it is more efficient for the audit team to rely on internal controls.

• Significant business developments affecting Prancer Construction Co, such as the improvement in building practices and construction quality.

Nature, timing and extent of resources

The audit strategy should ascertain the nature, timing and extent of resources necessary to perform the audit, such as:

• The selection of the audit team with experience of this type of industry Assignment of audit work to the team members.

• Setting the audit budget.

Audit planning

It states that adequate planning benefits the audit of financial statements in several ways: • Helping the auditor to devote appropriate attention to important areas of the audit.

• Helping the auditor to identify and resolve potential problems on a timely basis.

• Helping the auditor to properly organise and manage the audit engagement so that ti is performed in an effective and efficient manner.

• Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks and the proper assignment of work to them.

• Facilitating the direction and supervision of engagement team members and the review of their work.

• Assisting, where applicable, ni coordination of work done by experts.

(d) Substantive procedures for the redundancy costs

Review the board minutes for evidence of the decision to discontinue the brand of chemicals prior to the year-end.

Review supporting documentation to confirm that the decision to discontinue the brand was notified to the four members of staff prior to the year end.

Obtain details of the redundancy calculated by employee, cast the schedule and agree to the trial balance/financial statements.

Recalculate the redundancy provision to confirm completeness and agree components of the cost to supporting documentation such as employee contracts.

Agree the redundancy payments made in July 20X5 to the cash book/payroll records and compare these to the provision in the financial statements.

Obtain a written representation from management confirming the completeness of the costs.

Review the disclosures included in the financial statements to verify they are in compliance with requirements of IAS 37 Provisions, Contingent Assets and Contingent Liabilities.

Items to be included in an engagement letter

 the objective and scope of the audit;

 the responsibilities of the auditor;

 responsibilities of management;

 identification of the financial reporting framework used in the preparation of the financial statements;

 expected form and content of any reports to be issued;

 elaboration of the scope of the audit with reference to legislation;

 the form of any other communication of the results of the audit;

 the fact that some material misstatements may not be discovered;

 arrangements concerning the planning and performance of the audit, including the composition of the audit team;

 the expectation that management will provide written representations;

 the basis on which the audit firm will calculate its fees;

 a request for management to agree to the terms of the audit engagement and acknowledge receipt of the letter of engagement;

 arrangements concerning the involvement of internal audit and other staff employed at the company;

 any obligations to provide audit working papers to third parties;

 any restrictions on the auditor’s liability; and

 arrangements to make available draft financial statements and any other information.

Pre-acceptance factors

• The outgoing auditor’s response

Prior to accepting an audit engagement, the auditor is required to contact the previous auditors, after obtaining permission from Scarlet Co, to ask for all information relevant to the decision as to whether or not the firm should accept appointment. The auditor should consider the outgoing auditor’s response to assess whether there are any ethical or professional reasons why the firm should not accept appointment.

• Management integrity

If Orange & Co’s audit engagement partner has reason to believe that Scarlet Co’s management lack integrity, there is a greater risk of fraud and intimidation. Orange & Co need to consider management integrity because if there are serious concerns regarding this, Orange & Co must not accept the audit engagement.

• Pre-conditions for an audit

Orange & Co can only accept an audit engagement if the preconditions are present. The preconditions confirm that management will use an acceptable financial reporting framework under which they will prepare the financial statements and confirms that management acknowledges and understands its responsibilities for:

 Preparing the financial statements in accordance with the applicable financial reporting framework;

 Internal control necessary for the preparation of the financial statements to be free from material misstatement; and

 Providing the auditor with access to information relevant for the audit and access to staff within the entity to obtain audit evidence.

If the preconditions are not present, Orange & Co cannot accept the audit engagement.

• Independence and objectivity

  The auditor must consider whether there are any threats to independence and objectivity which cannot be reduced to an acceptably low level by the use of appropriate safeguards, such as if any of Orange & Co’s staff have shares in Scarlet Co or are related to staff employed at Scarlet Co. If such threats are present and cannot be sufficiently mitigated, Orange & Co must not accept the audit engagement.

• Resources available at the time of the audit

  Orange & Co must have adequate resources with the relevant experience available at the time the audit of Scarlet Co is likely to be carried out. All audit staff deployed to the audit of Scarlet Co must be capable of carrying out the audit in accordance with International Standards on Auditing (ISAs). If adequate resources will not be available, Orange & Co must not accept the audit engagement.

Professional judgement

Professional judgement is the application of relevant training, knowledge and experience in making informed decisions about the appropriate courses of action in the circumstances of the audit engagement. The auditor must exercise professional judgement when planning an audit of financial statements (ISA 200).

Professional judgement wil be required ni many areas when planning. For example, the determination of materiality for the financial statements as a whole and performance materiality levels wil require professional judgement.

Professional judgement wil also be required when deciding on the nature, timing and extent of audit procedures.

Internal control

(i) Control environment

The control environment includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity. The control environment sets the tone of an organisation, influencing the control consciousness of its people.

The control environment has many elements such as communication and enforcement of integrity and ethical values, commitment to competence, participation of those charged with governance, management’s philosophy and operating style, organisational structure, assignment of authority and responsibility and human resource policies and practices.

(ii) Entity’s risk assessment process

For financial reporting purposes, the entity’s risk assessment process includes how management identifies business risks relevant to the preparation of financial statements in accordance with the entity’s applicable financial reporting framework.

It estimates their significance, assesses the likelihood of their occurrence, and decides upon actions to respond to and manage them and the results thereof.

(iii) Information system, including the related business processes, relevant to financial reporting, and communication

The information system relevant to financial reporting objectives, 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.

(iv) Control activities relevant to the audit

Control activities are the policies and procedures that help ensure that management directives are carried out. Control activities, whether within information technology or manual systems, have various objectives and are applied at various organizational and functional levels.

(v) Monitoring of controls

Monitoring of controls is a process to assess the effectiveness of internal control performance over time. It involves assessing the effectiveness of controls on a timely basis and taking necessary remedial actions.

Management accomplishes the monitoring of controls through ongoing activities, separate evaluations, or a combination of the two. Ongoing monitoring activities are often built into the normal recurring activities of an entity and include regular management and supervisory activities.