F8 checking list

August 12, 2013 [F8 CHECKING LIST] 1 Ⅰ.Basic concept: Objective of FS audit: To obtain reasonable assurance about whether the FS as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the FS are prepared, in all material matters, in accordance with an identified financial reporting framework, and FS comply with relevant statutes or law. Principals of audit engagement: the responsibility of preparing and presenting the FS is that of mgt, the audit of the FS does not relieve the mgt of responsibilities. Accountability: Responfibility of Audits: To plan and perform audit to provide reasonable assurance that FS are free from misstatement and give a true and fair view. Responsibility of mgt: - Keep proper accounting records - Prepare FS comply with legislation and accounting standard - Safegurad company’s assets and prevent fraud and errors - Deliver audited FS to appropriate court or gov agency - Establish IC system and keep it running effectively. Auditors’ rights: - Right of access to the company’s books and records at any reasonable time to collect the evidence necessary to support the audit opinion - Right to require from the conpany’s officers the info and explanations necessary to perform auditor’s duties. - Right to receive notice of and attend meetings of the company in the same way as any member of the company. - Right to speak at GM on any matter affecting the auditor or previous auditor. - Right to receive a copy of written resolution. Interim audit vs Final audit Interim audit procedures may include: - Inherent risk assessment and gaining an understanding of the entity - Recording the entity’s system of internal control August 12, 2013 [F8 CHECKING LIST] 2 - Evaluating the design of internal controls - Carrying out tests of control on the company’s internal controls to ensure they are operating as expected - Performing substantive testing of transaction/balances to gain evidence that the books and records are a reliable basis for the preparation of FS. - Identification of issues that may have an impact on work to take place at the final audit. Ⅱ.Regulatory environment and Corporate governance : Audit committee: a. To monitor the integrity of FS of the company and any formal announcements relating to the company’s financial performance, reviewing significant financial reporting issues and judgement b. To review the company’s internal financial control and company’s control and risk mgt system c. To monitor and review the effectiveness of the company’s internal audit function d. To make recommendations to the board on the appointment, reappointment and removal of the external auditor and approve the remuneration and terms of engagement of them e. To review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process f. To develop and implement policy on the engagement of the external auditor to supply non-audit services, providing ethical guidance and recommendations on improvement, report to the board. Limitation of audit committee: a) The ED may not understand the perpose of an AC and may perceive it as distracts from their authority b) There may be difficult to select sufficient NED with the necessary compentence in auditing matters. c) The formalised reporting provedure may dissuade the auditors from raising matters of judgement and limit them on reporting the matter of fact. Ⅲ. Professional ethics 5 threats to independence: - Interest threat (contingent fee/ recurring fees from the client should not be >15% of practice income (10% for listed company). Review the independence position at 10% /5% respectively. - Self- interest - Advocacy - Familiarity - Intimidation Safeguard to the threats: - Genenral safeguards: created by the profession( education, training and experience); in the working environment( strong IC, disciplinary); created by individuals(comply with professional development requirements) - Specific safeguards: segregation of duties( assign a different team); Review( reviwe by a second partner): rotation( UK: 5 yrs for listed company, 7yrs for private company) August 12, 2013 [F8 CHECKING LIST] 3 - Ceasing to act ( resign or not accept the appointment) Confidentiality: - General rules: Client’s affairs should not be disclosed to a third party without the client’s consent or used by the accountant for personal benefit. - Could disclose without the consent of client: a. in accordance with law b. upon the lawful order of a competent authority. c. Upon the order of the Board or Inquiry committee. - Auditors’ action: a. Raise the matter with the mgt b. If not satisfactory: consider reporting to NED or to the client’s Audit Committee. c. Fails to resolve: making report to a third party - Disclosure to a third party: a. obligation: terrorist offence or drug trafficker or comulsion by court order, laundering b. Voluntary disclosure for public interest: to protect the member’s interest; authorized by an appropriate body; whistle-blowing-last resort after all method. Ⅳ. Internal audit Necessity/Benefits of IA - Effect on audit fee: decrease time and cost of external audit where external auditors can place reliance on the work of internal audit. - Image to clients: highlight the importance on RM, reliable - Corporate govenance: recommend policies for good CG; - Compliance with regulations- Show compliance with the regulatory regime - Monitor effectiveness of IC system- review, make recommendations to mgt for improvement Scope of IA Limitation of IA: - Lack of independence- best practice: dual report - Variation of standards ( not uniform across the profession) - Relatively new profession - Expectation gap - Understanding of internal audit as ‘checking up’ on behalf of boss Pros and cons for outsourcing August 12, 2013 [F8 CHECKING LIST] 4 a) Prons: 3S - Staff recuitment -Skills: Pool of staff available with specilist skills -Set up time -Costs: agreed in advance- easier budgets - Flexibility: rather than full-time employees idle b) Cons: 3C -Staff turnover: company system not fully understood -External auditors: conflict of interest -Cost -Confidentiality: not stop breaches of confidentiality -Control: inhouse-more control over the activities Internal vs External audit: Ⅴ.Audit planning and risk assessment Engagement letter: - Designed to provide written confirmation of auditors’ acceptance of of the oppointment; help reduce misunderstanding - Content: director/auditor’s responsibilities; scope of audit; fee and billing arrangement; any other services that are being performed; terms agreed; report to mgt. The planning process: - Why is important? 3E; appropriate attention to audit; co-ordinate the work; potential problems identified August 12, 2013 [F8 CHECKING LIST] 5 - 4 Stages: 1) Obtain/update knowledge of client (sufficient to enable auditors to idenfify& understand events, transactions) - Sources: visits to client’s premises; previous experience; discussion –BOD, staff; documentation from clients (minutes); publications & legislation -Information: economic factors; condition of industry; management; business nature; financial profitability 2) Prepare the detailed audit approach ( 4 issues need to be considered) a. accounting and control system b. risk c. materiality d. nature, timing and extent of procedures 3) Making administrative decision (staffing and budgets) 4) Preparing planning ducumentation - An audit plan typically contains: term of engagement; outline of background of client; audit risk; estimate of materiality; nature, timing and extend of procedures; timetable; client assistance;use of experts; staffing, time budget and audit fee estimate. Audit strategy vs audit plan: August 12, 2013 [F8 CHECKING LIST] 6 Audit risk - the auditor gives an inappropriate opinion when the FS are materially misstated Audit risk= Inherent risk×control risk×detection risk Inherent risk: susceptibility of an assertion to a misstatement that could be material or aggregated with misstatement, assuming there are no related controls -managerial factors: integrity; pressures;experience; turnover -Accounting function: Staff competence;morale;breakdown in accounting system -Business environment: Nature; location; technical obsolescence Control risk: a material error or misstatement cannot be prevented or detected on a timely basis by the company’s IC system. Detection risk: substantive procedures do not detect material misstatement Risk at FS level and auditor’s response: August 12, 2013 [F8 CHECKING LIST] 7 Risk at assertion level: test of control & substantive procudures Materiality -information is material if its omisstion or misstatement could influence the economic decision of users of the FS. -considered at both overall FS level and individual account balances, classes of transactions and disclosures. -Determined by size&nature. Size: PBT-5% - total assets 1-2%, net assets 2-5%, Turnover/ GP 0.5-1%,PAT-5-10% Nature: items sensitive to the user(e.g. share capital, directors’ remunertion) Ⅵ. Internal control Why auditors need to understand the IC system ICQ & ICEQ August 12, 2013 [F8 CHECKING LIST] 8 General control vs Application control: Mgt’s risk assessment process on IC Responsibility of mgt and auditor on IC system Ⅶ. Audit evidence Assertions: August 12, 2013 [F8 CHECKING LIST] 9 Factors on sufficiency of evidence - The auditor’s knowledge aand experience of the business.( good past knowledge and trusts integrity of staff→less evidence required) -Assessment of risk at FS or individual transaction level.(more risk→more evidence) -Materiality of the item.( moterial items→more evidence) -Nature of the accounting and IC system( place more reliance on a good IC system) -findings of audit procedures -The sourse and reliability of the information.(more reliable sources-written evidences, from 3 rd party→less evidence required) Additional audit procedures if no sufficient evidence - expand the amount of test of controls. Control weakness may not as bad as initially thought. - raised with the mgt, to ensure they are aware of the problem. - Perform additional substantive procudures on the audit area. To quantify the extent of errors -If not resolved, consider a qualified audit report, wording depend on the materiality of the errors. Obtaining a bank confirmation: - Review the need to obtain bank letter from the info obtained from the priliminary risk assessment. - Prepare a standard bank letter - Obtain authorization on the letter form directors of // - Send the letter directly to bank with a request to send the reply directly back to auditors Mgt representation letter: Purpose: source of audit evidence,critical to obtaining sufficient appropriate evidence - To allow directors to acknowledge their collective responsibility for the preparation of FS and to confirm they have approved them - To confirm matters material to the FS Content: - All books of account and supporting documents have been made available to the auditors. - FS are free from meterial misstatements including omissions. August 12, 2013 [F8 CHECKING LIST] 10 -Info and disclosures w.r.t. related parties are complete. -No irregularities involving mgt or employees that could have a material effect on the FS -No non-compliance with any statute or regulatorty authority. -No plans will materially alter the carrying amount or classification of assets or liablities on the FS -No plans to abandon any priduct lines that will result in any excess or obsolete inventory( Going concern) -No events, unless disclosed, after the end of reporting period that need disclosure in the FS. Factors to consider when assessing the competence and objectivity of experts - Expert’s professional qualification (Professional body/license to perform work) -Experience and reputation of experts -The independence of expert from the client company. Sampling: Sampling Methods: a. Random selelction: to ensure each item in the population has an equal chance of selection(random number table) b. Systematic selection: The populatation is devided by sample size to give a sampling interval. c. Haphazard selection: select the sample without following a structured technique-avoid any predicatibility or conscious bias d. Sequence or block: select a blocks of continguous items from the population. e. Monetary unit sampling: Ensure that each individual $1in the population has an equal chance of being selected. f. Judgemental sampling: based on the skills and judgement of the auditor. Ⅷ. Audit procedures Aim of test of control: to check the client’s IC systems are operaring effectively. Aim of substantive control: to ensure there are no material errors at the assertion level in the client’s FS. August 12, 2013 [F8 CHECKING LIST] 11 Procedures to provide sufficient, relevant and reliable audit evidence: - Analytical reviwe: compare financial data to prior yr financial data and investigating flunctuations a. prior yr data, industry info, similar size, actual vs. budgets; b. used at the beginning of the audit: obtain understanding and asses risk of material misstatement c. as substantive procedure: determine the risk of material misstatement d. in the overall review at the end of the audit: to form overall conclusion as to whether FS as a whole are consistent with auditor’s understanding of the entity - Enquiry: seek info from client or external sorces - Inspection: physical review or examination of records, documentation ond tangible assets - Observation: watching a procudure being performed - Computation: checking arithmetic accuracy of documents or accounting records or performing independent calculations - Confirmation: A speific form of enquiry, give good evidence of existence, but not valuation. Test of controls: - Why? The operation of IC system is regarded to be effecitive when assessing the risk of material misstatement at the assertion level; the substantive procedure is limited to provide sufficient appropraite evidence. - Procedures: a. Inspection of documents for evidence of proper approval. b. Observation of procedures to ensure proper procedures ( segregation of duty) are applied. c. Re-performance d. Enquiry to confirm the existence and performance of control procedures e. Computation to ensure the accuracy of calculation f. Application of test data g. Walkthrough test to ensure all IC procedures permormed well h. Examine previous audit working papers Receivables 1) Normal procedures on receivables: - Cast the receivable ledger to ensure it agrees with the total on the receivable control account. - Compare balance on each receivable account (sample) with its credit limit to ensure this has not been limited. - Produce an aged analysis report to assist with the identification of irrecoverable receivables. 2) Receivable circularization/confirmation - Obtain a list of AR balances, cast this and agree it to the recievable control account total . August 12, 2013 [F8 CHECKING LIST] 12 Aging of receivables may also be verified. - Determine an appropriate sampling method ( random, value-weighted selection, cumulative monetary amount).Using materiality for the recievable bal. to determine the sample interval and numbers of receivables included in the sample. - Select the bal. to be tested, refer to the specific categories. -extract details of each recievables selected from the ledger and prepare confirmation letters. -Ask the chief accountant to sign the letters. - Post or fax the letters to the individual receivables. 3) Receivable sample selection: - Large or material items ( to ensure no matirial errors occurred) - Negative bal. (to ensure payments have not been posted to the wrong ledger account) - A relatively higher portion of older debts. ( existence / not overstating sales) - AR with bal. more than two month old. ( indicate provision of irrecoverable receivables) - Random sample of remaining bal.(overall accuracy of receivable bal.) Payables: Normal procedure on payables: - Obtain a sample of GDN and agree to the order database and inventory data base. - Obtain a sample of invoices and agree to the GDN - Using computer-assisted audit technique, cast the purchase day book and agree total of liability incurred to the general ledger. Going concern: 1) Definition: The entity will continue to operte for the foreseeable future withot intention or necessity of liquidation or ceasing trade. 2) Auditor’s responsibility: -to carry out appropriate audit procedures to identify… -to ensure the org’s mgt realistic in their use of going concern assumption -to report to the members where they consider the GC assumption used inappropriate 3) Audit procedures - obtain a cash flow forecast and discuss with the mgt - Discuss with the directors their views and reasons on whether … could continue as a GC. - review mgt’s plan for future actions base on its GC assessment - Review receivables aging analysis to indicate cash flow problems - seek written representation from the mgt confirming the GC - obtain a solicitor’s letter and review any legal claims and consider the financial impact - obtain info from company bankers regarding continuance of loan facilities and repayments due the the next 12 months can be made 4) Audit procedures if not a GC - Discuss with the mgt. consider whether additional disclosures are required or the FS should be prepare on a ‘break up’ basis - Explain to the mgt that if additional disclosures or restatement of the FS is not made, the auditor will modify the audit report. - Consider how the report be modified. Where the directors provide adequate disclosure of the August 12, 2013 [F8 CHECKING LIST] 13 GC situation, an emphasis of matter paragraph is appropriate - Where directors don’t make adequate disclosure, qualify the report with either an except for opinion or an adverse opinion depending on the situation. Ⅸ. Audit reports Types: Uumodified report Unqualified report with an emphasis of matter paragraph Audit reports Modified report with an ‘except for ’opnion Qualified adverse opinion Disclaimer of opinion Unmodified report: opinion expressed by the auditor when the auditor concludes that the FS are prepared, in all material respects, in accordance with the applicable financial reporting framework. Modified report: in any situation where is inappropriate to provide an unmodified report/ Contents: - To whom the report addressed - Opening paragraph- the FS has been audited - Mgt’s responsibility of FS - Auditor’s responsibility - Audit opinion - Auditor signature/ date of report/ address Audit procedures after audit report been signed: a. Discuss the matter with mgt to determine their course of action b. where the directors decides to amend the discosure in FS, audit the amendment and re-draft an d re-date the audit report. c. wher