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    T8 Notes T8 Notes Document Transcript

    • The stages of auditing are as following:<br />Determined the audit approach:<br />
      • The scope of the audit and auditors’ general approach should be determined. Letter of engagement setting out the terms of the audit, audit strategy to be placed on the audit file.
      Understand the entity<br />
      • Obtaining information to assess the risks of material misstatement in the financial statements.
      • Determine the flow of documents and extent of controls
      • Prepare comprehensive record for evaluation of the systems.
      • Confirming on the system record and operation
      Assess the risk of material misstatement<br />
      • Assess the reliability and formulate a basis for testing
      Select audit procedure to respond to risk of material misstatement <br />
      • If controls are assessed ineffectively then auditors should go on to carry out full substantive procedures.
      • Prepare and send a report to management identifying weakness and recommending improvement.
      • Auditor should carry out substantive procedure on material items
      Review the financial statements<br />
      • Determine whether the financial statements are consistent with auditor understanding.
      • Report to member is the end product which auditors express their opinion of the accounts.
      • Report to management is an additional end product of the audit for suggestions of improvements
      The differences between External and Internal Auditors:<br />ExternalInternalIndependenceAppointed by shareholdersAppointed by managementResponsibilitiesFixed by lawSet by managementReportingMember (shareholders and other users)Management (directors)Scope of workExpress an opinion on truth and fairness of accountsConsider whatever financial and operational areas management determines<br />Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.<br />A risk-based approach is taken which involves identifying the risks which may prevent the organization from meeting its objectives.<br />Audit Committees’ responsibilities:<br />
      • To monitor company’s financial statement and performance
      • To review internal financial control
      • To review internal control and risk management systems
      • To monitor and review the effectiveness of internal audit
      • To make recommendation on the appointment of external auditors
      • To approve the remuneration and terms of engagement of external auditors
      • To review and monitor the independence and objectivity of the external auditors and the effectiveness of the audit process.
      • To develop and implement policy on the engagement of the external auditor to supply non-audit services.
      • To report to the board on any matter, improvement, and recommendations.
      236220034290To report on the truth and fairness of financial statement00To report on the truth and fairness of financial statement3143252101215To ensure company has kept adequate accounting record0To ensure company has kept adequate accounting record26860503129915To ensure the underlying records mate with the financial statement00To ensure the underlying records mate with the financial statement51244501939290To ensure branches of company has given sufficient information0To ensure branches of company has given sufficient information5124450691515To ensure the inclusion of director responsibilities in the financial statement0To ensure the inclusion of director responsibilities in the financial statement24098251396365Statutory Duties Statutory Duties <br />2886075572770Main Duty0Main Duty19145252001520349567522491704419600190627042767258870951790700706120200025258445To ensure that director is consistent0To ensure that director is consistent<br />The law gives certain parties some remedies in the event of the auditors making a mistake, and remedies fall into 2 categories:<br />
      • 2409825643255ShareholdersShareholders457200643255CompanyCompanyKey claimant is the company because auditors signed a contract with company
      5248275219710AuditorAuditor<br />369570020320Contract0Contract179070029845<br />
      • 4314825342900004981575400050Individual shareholdersPotential shareholdersThe bankOther lendersIndividual shareholdersPotential shareholdersThe bankOther lenders2781300838200CompanyCompany314325838200AuditorsAuditors4305300160972543910251476375430530012001504391025838200498157567627600The third parties, the auditor can only liable to them, if the auditor is aware of the existence of them, and they were relying on auditor report
      1733550208280Contract00Contract<br />
      • 3257550-19050Directors are required by law to:Select suitable accounting policy and apply it consistentlyMake judgment and estimate reasonable and prudentState in any material departure (change from standard) disclosed and explained in financial statementsPrepare financial statements on the going concern basis.00Directors are required by law to:Select suitable accounting policy and apply it consistentlyMake judgment and estimate reasonable and prudentState in any material departure (change from standard) disclosed and explained in financial statementsPrepare financial statements on the going concern basis.3143254095115Keep proper accounting records0Keep proper accounting records17335504095115Ensure the financial statements comply with law0Ensure the financial statements comply with law714376346646504562475319976538957253247390278130032473901133475319976551720754095115Prevent & Detect fraud and irregularities 0Prevent & Detect fraud and irregularities 36957004095115Safeguard the company’s assets0Safeguard the company’s assets24098252152650Directors’ ResponsibilitiesDirectors’ Responsibilities361950266700Company Law to DirectorsCompany Law to Directors
      2057400266700FraudFraud<br />19812001519555895350151955542005241003302190750100330-19526328673430017907001786255Misstatements resulting from misappropriation of assets0Misstatements resulting from misappropriation of assets-285751786255Fraudulent financial reporting0Fraudulent financial reporting952500728980Intentional misstatement0Intentional misstatement4381500728980Unintentional misstatement0Unintentional misstatement<br />561974226061ForgeryDeliberate failure recordIntentional misrepresentationCollusion00ForgeryDeliberate failure recordIntentional misrepresentationCollusion<br />Requirement to Auditors:<br />
      • Professional skepticism
      • Discussing among the engagement team
      • Risk assessment procedure and related activities
      Auditor should perform some of the following procedures:<br />
      • Make inquiries to management
      • Management’s assessment of risk
      • Management’s identifying and responding to risk
      • Management’s communication to governances and employee
      • Question management if they aware of any actual, suspected or alleged fraud
      • If there are internal auditors, external auditors should ask them if they aware of actual, suspected, or alleged fraud, obtain their view about risk of fraud, and procedures performed
      • Make enquiries to other operating personnel not involving in governance.
      • Obtain an understanding of how those governance oversights the processes of identifying and responding to fraud & internal control in place.
      • Make inquiries to governance if they aware of the actual, suspected, or alleged fraud.
      • Consider unusual or unexpected relationships
      • Consider if other information obtained risks
      • Evaluate the risk assessment procedures and related activities performed indicate risk of fraud.
      Internal Auditors’ responsibilities for fraud:<br />
      • Prevent fraud by assessing the adequacy and effectiveness of control systems
      • Detect fraud by being mindful when carry out work
      • Reporting any suspicions
      Express term in the engagement letter would include:<br />
      • Management’s responsibilities in preparing fair financial statement (IFRSs)
      • Provide auditors with access to all documents
      • Provide auditors with unrestricted access to persons within the entity.
      Implied terms (3R) always exist in the contract:<br />
      • Duty to exercise Reasonable care (means following)
      • use general accept auditing techniques
      • investigate if any suspicious
      • act honestly and carefully when making judgment
      • Duty to carry out the work required with Reasonable expediency (方便)
      • Right to Reasonable remuneration
      Claiming against auditors need 3 things:<br />
      • CompanyThird partiesDuty of care : express in contract & enforce by lawNegligence: judge by the professional standard by dayDamages: client suffered some monetary lossDuty of care : without a contract but in caseNegligence: judge by the professional standard by dayDamages: client suffered some monetary loss
      Eligible as an auditor:<br />
      • Holding appropriate Qualification (individual), or firms controlled by qualified persons
      • Fit (competence and capacity) and proper (character and suitability) persons
      • Works is conducted Properly with professional integrity
      • Technical standards (eg. ISAs)
      • Maintain an appropriate level of Competence (CPD)
      • Prevent individual not holding appropriate Qualification, and not a member of the firm
      The regulatory body should monitor and enforce compliance include provisions relating to:<br />
      • Admission (加入) and expulsion (开除) of members
      • Investigation of complaints against members
      • Compulsory professional indemnity (损害赔偿) insurance In each visit of the regulatory body to monitor the auditors should be as following:
      • Proper structure of audit approach
      • Carefully instituted quality control procedures
      • Ethical guidelines
      • Technical excellence
      • Fit and proper criteria
      • Peer review (audit files are review by another partner in audit firm)
      • Hot review is carried out before report is signed by peer.
      • Cold review is carried out after report is signed by independence person
      • Appropriate fee
      The purpose of review is to ensure that:<br />
      • Audit work is in line
      • Sufficiently documented
      • Issues resolved and reflected in audit conclusion
      • Objectives were achieved
      • Conclusion support audit opinion and reflect finding of the audit
      International Standard on Auditing (ISAs) contains:<br />
      • Basic principle
      • Essential procedures
      • Guidance of explanatory & other material
      ISAs do not override the national regulation:<br />
      • If ISAs conform with local regulation, then it is automatically comply with ISAs
      • If ISAs differ from local regulation, as you are auditor should comply with ISAs but try to encourage changes in local regulation.
      ACCA Code of Ethic and Conduct:<br />
      • Integrity: straightforward and honest
      • Objectivity: unbiased, conflict of interest, undue influence of the others or business judgment.
      • Professional Competence and due care: maintain professional knowledge on current development in practice, legislation, and techniques, act diligently or thoroughly and in accordance with standard.
      • Confidentiality: respect the confidentiality of information, not disclosed information to third parties.
      • Professional behaviors: comply with regulation and law, avoid act that discredits profession.
      Threats to the independence as auditors: (SSAFI)<br />
      • Self-interest eg. Financial interest
      • Self-review eg. Review by the same person
      • Advocacy
      • Familiarity eg. long association, acceptance of gift
      • Intimidation eg. Dismissal
      Other services of Audit firms:<br />
      • Preparing account & financial statement
      • Valuation services
      • Taxation services
      • Internal audit services
      • Corporate finance services
      • IT services
      • Temporary staff cover
      • Recruitment services
      Accountants of Assurance client and Assurance firm are not allowed to:<br />
      • AccountantsAssurance FirmsAuthorize on the transactionImplement any recommendationReporting as management capacityDetermines and change journal entry without approvalAuthorize transactionsPrepare source document
      Information required should be disclosed except where:<br />
      • Consent has been obtained
      • Public duty
      • Legal or professional right or duty
      • Obligatory disclosureVoluntary disclosureTreasonTerrorism or money launderingNoncompliance with law and regulationsMade by memberProtect member’s interestProcess of lawPublic duty
      3810014224000<br />Contrast low and high risk client<br />Client screening <br />1/ factor to consider (MERRA) are following:<br />
      • Management integrity
      • Engagement economic
      • Risk
      • Relationship
      • Ability to perform the work
      2/ Approval<br />Audit Engagement Letter should content of:<br />
      • Objective and scope of audit
      • Auditors’ responsibilities
      • Management’s responsibilities
      • Finance reporting framework management adopted
      • Form of any report to be issued by auditors
      • Inherent limitation of an audit that some material misstatement may remain undiscovered
      • The unrestricted access to all documents and persons within the entity
      New Audit Engagement letter should include factors following:<br />
      • Misunderstand in object and scope of audit
      • Revise or special term of engagement
      • Change of senior management
      • Significant change in the nature or size in client business
      • Legal requirements
      • Change in the financial reporting framework
      • 26955754845685Key ratio/operating statistics, key performance indicators, trend, forecasting, budgets, variance, analyst reports and credit rating report, competitor analysis, financial performance from period to periodEntity’s policies, accounting system00Key ratio/operating statistics, key performance indicators, trend, forecasting, budgets, variance, analyst reports and credit rating report, competitor analysis, financial performance from period to periodEntity’s policies, accounting system4676775397510FFIBFinancingInvestmentsFinancial reportingBusiness operation00FFIBFinancingInvestmentsFinancial reportingBusiness operation34956751797685002667000511810Nature of the entity00Nature of the entity381005350510MECCControl activitiesMonitoring of controlsThe control environmentEntity’s risk assessment process00MECCControl activitiesMonitoring of controlsThe control environmentEntity’s risk assessment process38100349885LMARLLevel of Economic ActivitiesMarketsAccounting policiesRegulatory frameworkLegislation0LMARLLevel of Economic ActivitiesMarketsAccounting policiesRegulatory frameworkLegislation494347533216852EExistence of objectives relating toEffects of implementing strategies002EExistence of objectives relating toEffects of implementing strategies21431254036060006667503826510Internal Control00Internal Control441959939789104381499257873516859252712085045815254641215Measurement and review of the entity’s financial performance00Measurement and review of the entity’s financial performance2190751550034Industry, regulatory and other external factor00Industry, regulatory and other external factor49244251378585Objectives and strategies and relating business risks00Objectives and strategies and relating business risks24193502940685Understanding entity and its environment Understanding entity and its environment Understanding Entity and its environment by MINIO
      800100761365Analytical procedures consist of evaluations of financial information made by a study of plausible (貌似真实的) relationships among both financial and non-financial data, and encompass (包含) the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate (脱离) significantly from predicted amounts. <br />2152650255905Risk of material misstatement0Risk of material misstatementAudit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detect Risk (DR)<br />533400029845Sampling risk is in the detection risk, when auditor cannot detect risk in sampling0Sampling risk is in the detection risk, when auditor cannot detect risk in sampling<br />Audit risk is the risk that auditors give an inappropriate opinion on the financial statement<br />Inherent risk is the susceptibility of an assertion to a misstatement and that could be material individually or when aggregated with other misstatements, assuming there were no related internal controls.<br />Control risk is the risk that a misstatement that could occur in an assertion and that could be material individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity’s internal control.<br />Detect risk is the risk that the auditors’ procedures will not detect a misstatement that exists in an assertion that could be material, individually or when aggregated with other misstatement <br />Business risk is the risk inherent to the company in its operations. It is risks at all levels of the business.<br />Sampling risk arises from the possibility that the auditor’s conclusion based on a sample of a certain size that difference from the entire population.<br />Non-sampling risk arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of the sample.<br />Audit riskBusiness riskIs focus only financial statement and exists only relation to the opinion given by the auditorsIs risk which affect organization directly, arises from operations and present at all time<br />The factors indicate that a risk might be significant risks are:<br />
      • Risk of fraud
      • Relationship with recent developments
      • Degree of subjectivity in financial information
      • Unusual transaction
      • Management intervention
      • Complex accounting principles or calculation
      • Manual intervention
      • Opportunity for control procedures not to be allowed
      • Significant transaction with a related party
      • 3618865163830Detection risk not find by auditor00Detection risk not find by auditorComplexity of the transaction
      6000751355090Inherent risk + Control risk00Inherent risk + Control risk2781300436245Financial Statement0Financial Statement3962400579120Auditors0Auditors-28575579120Company0Company<br />198120032956500022129752241550AffectsValue of inventory00AffectsValue of inventory39230303245485ImpactsImpacts33557072688456AffectsValue of inventory00AffectsValue of inventory12858751200150009048752771775Inherent RiskInherent Risk24193501895474006667500115252426955753743325Control RiskThe internal controls may not detect the error in the inventory figure00Control RiskThe internal controls may not detect the error in the inventory figure57912001219200050292001628775Risk that sales do not recover 00Risk that sales do not recover 48958501000125Sale price of product fall 00Sale price of product fall 5781675657225004762500342900Economic downturn00Economic downturn488632547625Business Risk0Business Risk14573254333875If it doesn’t improve going concern question00If it doesn’t improve going concern question12858753352800001155133790950Inventory maybe overstatedInventory maybe overstated205740010668000018573751200150Financial statement RiskFinancial statements maybe materially misstated00Financial statement RiskFinancial statements maybe materially misstated-285761524000Detection RiskRisk that the auditors do not detect the error in the inventory00Detection RiskRisk that the auditors do not detect the error in the inventory314325-57150Audit Risk If the auditors do not identify the misstatement they could give an incorrect opinion on the financial statement00Audit Risk If the auditors do not identify the misstatement they could give an incorrect opinion on the financial statement40767003248025320040020478750049815753057525Directors set up controls to ensure inventory is valued correctlyDirectors set up controls to ensure inventory is valued correctly191452520097758953501000125<br />Auditors must formulate:<br />
      • Overall responses
      • Emphasizing to audit staff to maintain professional skepticism
      • Assigning additional or more experienced staff to the audit team
      • Using experts
      • Providing more supervision
      • Incorporating more unpredictability into the audit procedures
      • Detailed further audit procedure
      • Tests of controls to obtain sufficient and appropriateness audit evidence
      • Reperformance and inspection are useful procedure
      • Substantive procedures (on material items)
      • Analytical procedures
      • Large volumes of predictable transactions
      • Other procedures (tests of detail)
      • Class of transactions, account balance and disclosure
      • Agreeing FS to the underlying accounting records
      • Examining material journal entries
      • Examining other adjustments made in preparing the financial statements
      • Identifying the significant risks
      Auditors may carry out their audit work for one year in 2 or more sittings (interim audit & final audit)<br />Interim audits are audits undertaken prior to the final audit, often during the period under review and test of control is likely to be carried out at the interim audits.<br />Final audit is the main period of audit testing, when work is focused on the final financial statement<br />Auditors determine the where material misstatements are most likely to arise, and the nature, timing and extent of their testing as following:<br />
      • Obtain an understanding of the entity and its environment
      • Assess the risks of material misstatements
      • Respond to those risks
      Auditors respond to assessed risk through audit strategy (general approach) and audit plan (detailed testing approach)<br />Audit evidence is all of the information used by the auditor in arriving at the conclusion on which the audit opinion is based, and include information contained in the accounting records underlying the financial statements and to the information.<br />Objective of auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion. Sufficient measure quantity of audit evidence, Appropriateness measures quality or relevance and reliability of audit evidence. Audit evidence indicates what is probable (persuasive) rather than definite (conclusive) <br />Auditor just only give a reasonable assurance on the financial statement is free from misstatement for following reason:<br />
      • Auditor do not check very items because too time consuming
      • Limitation of accounting system and internal control (accounting record may not full of detail and accounting system may be operated by person who do not full understand of system)
      • There is collusion which directors and staffs do not tell the true
      • Audit evidence just indicate a probable not a certain.
      • Auditor may need expert’s assistance.
      Factors auditors consider to sufficient and appropriate evidence are:<br />
      • Risk assessment
      • Materiality
      • Past experience
      • Source & reliability of information
      System based approach (Combined approach) is an approach to audit which seeks to place reliance on the accounting systems of an entity. (Test of control + substantive procedures)<br />Direct verification approach (Substantive approach) is an approach which does not place reliance on systems, where the auditor only verifies individual transactions and balances in the financial statements.<br />Balance sheet approach is common substantive approach focus on the statement of financial position<br />Test of controls are test about 2 aspects of accounting system & internal controls<br />
      • Design : capable of preventing and detecting material misstatement
      • Operate : operation’s effectiveness of system
      Substantive procedures are tests to detect material misstatement:<br />
      • Analytical procedures
      • Other procedures (classes, a/c balances, & disclosures)
      Financial statement assertions based on the assets, liabilities and transactions of client, and the event that affect client’s account.<br />Assertions (ACCA-VOCER)Classes of transaction and events for the period under auditAccount balance at the period endPresentation & disclosureOccurrence ExistenceOccurrenceCompletenessRight & obligationsCompletenessAccuracyCompletenessClassificationCut-offValuation & AllocationAccuracy & valuation<br /> ACCA-VOCER <br />Accuracy, Completeness, Classification, Allocation, Valuation, Occurrence, Cut-off, Existence, and Right & obligations. <br />Management’s expertsAudit’s expertsWhose field is used by the entity to assist the entity in preparing the financial statementsWhose works is used by auditors to assist the auditor in obtaining sufficient appropriate audit evidence<br />Reliability of evidenceWODCEExternal sourcesControl system operated effectivelyDirectly by auditorsWritten documents & representationsOriginal documents<br />1609725374015036957003740150517207513284203743325835025155257583058045624751847215InquiryInquiry4562475377825ObservationObservation2419350377825Inspection of documentationInspection of documentation219075375285Inspection of assetsInspection of assets<br />20955033020Analytical proceduresAnalytical procedures<br />80962540005<br />5210175520700<br />4619625101600External confirmationExternal confirmation240030033020RecalculationRecalculation20955033020ReperformanceReperformance<br />Materiality should be calculated at the planning stage of the audit and based on experience and judgment, and should be reviewed during the audit. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic.<br />Performance materiality means the amount set by the auditors at less than materiality for the financial statements as whole to reduce risk to low level.<br />Certain types of error should be investigated even if they are small in monetary terms but they are important for the other reasons:<br />
      • Recurring errors indicate weakness in the accounting system
      • Errors mean breach the statutory requirements
      • Critical point errors (loss in profit)
      • Conceptual errors (breach accounting system)
      Calculation of planning materiality guideline:<br />Revenue: 0.5 – 1 %<br />Gross profit: 0.5 – 1%<br />Profit before tax: 5 – 10% <br />Net assets: 2 – 5%<br />Total assets: 1 – 2%<br />
      • Audit strategyAudit planSets the scope, timing, direction, and guide development to detailed audit planConvert audit strategy into detail plan include nature, timing and extent of audit procedures to reduce risk to accepted low level.Establishment of audit strategy:Characteristics of engagementFrameworkIndustryLocation of componentsObjective of engagementDeadlineExpected communication date with governanceEngagement team’s effortsMateriality levelsHigh risk areasMaterial components & a/c balanceReporting/industry specific developmentResults of preliminary engagementAuditors’ independenceManagement integrity issuesAscertain the nature, timing, and extent of resources to perform engagementResources requiredWhen and where the resources will be deployed & how they are managed, directed, and supervised.Objective of planning:Appropriate attention is devoted to difference areas of auditPotential problems are identifiedWork is completed effectively and efficientlyTasks are proper assigned.Structured approach to planning stages:Updating knowledge of client & assessing risksPreparing the detailed audit approachMaking administrative decision such as staffing & budgets.
      • 3048000226060Engagement partner is to ensure that audit staffs:Are carried out level of professional skepticism.Proper communication for both audit team and audited entity00Engagement partner is to ensure that audit staffs:Are carried out level of professional skepticism.Proper communication for both audit team and audited entity
      3988620230505Nature 00Nature <br />398843554610Scope00Scope<br />5543550269240Audit procedures to performance to obtain00Audit procedures to performance to obtain3981450171450Timing00Timing<br />3990975271780Direction00Direction1285875176530Convert00Convert2343150100330Audit Strategy00Audit Strategy-28575100330Audit plan00Audit plan<br />27146252468245To reduce00To reduce11334752313940Acceptable low level audit risk00Acceptable low level audit risk40862252303144Sufficient and appropriate audit evidence00Sufficient and appropriate audit evidence4018915805815Guides00Guides4000500408305Extend00Extend<br />Expert’s engagement in the auditing as following:<br />
      • Provide specialist advice to client on particular matter
      • Help auditors to obtain sufficient appropriate audit evidence
      The needs of using expert’s work are:<br />
      • Valuation of certain type of assets
      • Actuarial calculation of liabilities associated with insurance contracts or employee benefit plan, environment liabilities, clean-up costs, contracts, laws and regulations
      • Analysis of Complex or unusual tax compliance issues
      Assessment the professional of the expert may as following:<br />
      • Personal experience
      • Discussion with that expert
      • Discussion with other auditors expert familiar with
      • Knowledge of qualifications, membership of professional body or industry association, license to practice, or other form of external recognition
      • Published papers or book written by that expert
      • Expert ‘s firm’s quality control policies and procedure
      Expert’s term of reference may cover by following: <br />
      • The nature, scope and objectives of that expert’s work
      • The roles and responsibilities of auditor and expert
      • The nature, timing and extent of communication between auditors and expert
      • The need of observing confidential requirement
      Assessment of expert’s finding compare to financial statement assertion <br />
      • The source of data
      • Assumption and method used
      • When work is carried out
      • The reason for any changes in assumption and method
      • The result of work in the knowledge of business and other procedures.
      ISA states that “while the objectives of the internal audit function and the external auditor are different, some of the ways in which the internal audit function and the external auditor achieve their respective objectives maybe similar.”<br />Internal auditor operates in one or more of the following area:<br />
      • Review the accounting and internal control system
      • Examine the financial & operational information
      • Review of economy, effectiveness, and efficiency
      • Review of compliance with laws and regulations
      • Special investigations
      Determining adequacy of internal auditors’ work:<br />
      • The objectivity – to whom report
      • Technical competence – technical training
      • Professional due care – properly planned, supervised, reviewed and documented
      • Effective communication between internal and external auditor
      Computer control and auditing:<br />
      • Auditing around computer: A sample of inputs will be checked to outputs, and vice versa. If they prove to be accurate then assumed that system of control is effective and operate properly.
      • Auditing through computer: examine the detail processing routine of control in the system if adequate, and this should use Computer Assisted Audit Technique (CAAT)
      • Auditing with computer: using CAAT (audit software + tests data)
      Audit software: <br />
      • Interrogation software – access client data
      • Comparison programs – compare program’s version
      • Interactive software – online system’s information
      • Resident code software – stay permanently in client system
      Test data:<br />
      • Data processing valid transaction – produce required documentation and update a/c record
      • Data processing invalid for any reason
      Sampling<br />Sample sizes for test of controlSample sizes for substantive procedureTolerable misstatement rateTolerable misstatement rateExpected misstatement rateExpected misstatement ratePopulation value & stratification<br />Misstatement means either control deviations, when performing tests of controls, or misstatements, when performing tests of details.<br />Expected misstatement – the auditor expects to be present in the population.<br />Tolerable misstatement – maximum misstatement in the population auditor would be willing to accept.<br />Anomalous misstatement – arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of misstatements in the population.<br />lefttopThere are 2 types of sampling, statistically based (use techniques from which mathematically constructed conclusions) Non statistical method (auditor draw judgmental opinion about population)<br />Statistical sampling has the following characteristic <br />
      • Random selection
      • Use of probability theory
      Population is entire set of data, sample is selected, and auditor uses to draw conclusion.<br />Sampling units are individual items.<br />The auditors are faced sampling risk in:<br />
      • Test of control, controls are more effective than they actually are or test of details that a material error does not exist when in fact it does – this is risk of Audit effectiveness.
      • Controls are less effective than they actually are or test of details that a material error exists when it does not – this is risk of Audit efficiency.
      • Statistical samplingAdvantagesDisadvantagesDefinite level of confidence at the conclusion of auditors’ test Sample size is objectively determinedClarify their audit objectivesResults of tests can be expressed in mathematical termBias is eliminated The technique may be applied blindlyUnsuspected patterns or bias in sample selection may invalidate the conclusionNeed frequently back-upAt the conclusion of statistical sampling based test the auditors may fail to appreciate the further action necessary based on the results obtained.May be applied carelessly Time consuming on selectionThe degree of tolerance of acceptable error must be predetermined
      3609975417830Audit planning & procedures0Audit planning & procedures2266949171640524384001523365240982582804035052001341755Supervision and reviewSupervision and review35052002263458Audit evidenceAudit evidence<br />-104775159385Working papers0Working papers<br />-28575150495Are prepared by and for, or obtained and retained by, the auditor in connection with performance of the audit. It in the form of data stored on paper, film, electronic media or other media 0Are prepared by and for, or obtained and retained by, the auditor in connection with performance of the audit. It in the form of data stored on paper, film, electronic media or other media <br />The reasons why auditors use working paper to record their works are:<br />
      • Reporting partner needs make sure that work delegated by him has been properly performed.
      • They provide as reference for audit problems encountered.
      • They are invaluable in the event of litigation against them by either the client or some third party.
      • They are not only assisting in the control of current audit but well for planning and control of future audit.
      • Preparation of working papers encourages the auditors to adopt a methodical approach, which to improve the quality of that work.
      The auditor must prepare audit documentation that is sufficient to enable an experienced auditor to understand:<br />
      • The Nature, timing and extent of the audit procedures performed to comply with the ISAs and applicable legal and regulatory requirements.
      • The results of the audit procedures performed, and the audit evidence obtained;
      • Significant matters arising during the audit and significant professional judgments made in reaching those conclusion.
      457200286385Nature of procedure to be performedSize and complexity of the entity00Nature of procedure to be performedSize and complexity of the entity<br />457200191136The identified risks of material misstatementsJudgment on the work and evaluating results0The identified risks of material misstatementsJudgment on the work and evaluating results<br />5067300239395Working paperWorking paper3257550236855Affect to the form and contentAffect to the form and content<br />45720070485The significance of the audit evidence obtainedThe nature and extent of exception identified0The significance of the audit evidence obtainedThe nature and extent of exception identified<br />57245252882904886325273050<br />3800475147955Permanent audit files: contain information of continuing importance to audit.00Permanent audit files: contain information of continuing importance to audit.5553075128905Current audit files: contain information of relevance to current year’s audit.0Current audit files: contain information of relevance to current year’s audit.457200-4445Document a conclusion not readily from work perform or audit evidence obtainedThe audit methodology and tools used0Document a conclusion not readily from work perform or audit evidence obtainedThe audit methodology and tools used<br />
      • Working paper headed with Content of the working paperName of clientBalance sheet dateThe file referencePrepare person name and dateSubject Name of reviewing and dateObjectiveSources of informationHow sample was selected and the sizeThe work doneA key to any ticks or symbolsAppropriate cross referencingThe results obtainedAnalysis of errorsConclusions drawnKey points highlighted
      Automated working paper packages can make the documenting of audit work much easier by automatically cross reference and balanced by the computer.<br />The advantages of automated working papers are as follows:<br />
      • Reduce the error risk
      • It will be neater and easier to review
      • Save time, computer will summarize the key analytical information
      • Standard form can be called up on the screen
      • Audit working paper can be transmitted electronically.
      Setting up internal control in accounting system to assess the following:<br />
      • Transactions are properly authorization
      • They promptly recorded at the correct amount, correct account, and proper accounting period.
      • Access to assets is proper authorized
      • Recorded assets are compared with the existing assets.