Advantages and Disadvantages of an audit

Advantages
Application for loans is easier
Major changes in ownership are easier
Advice is free
Disputes between directors can be resolved

Disadvantages
Disruption to client
Cost

Ethics
Fundamental principle (OPTIC)
Objectivity
Professional behavior
Technical competence
Integrity
Confidentiality

Threats to independence (FULLSTOP)- (Self review, Self interest, Familiarity,

intimidation, Advocacy)
Family and friends
Undue dependence in fee
Loans to and from client
Litigation
Shares in client
Taking gifts from client
Overdue frees
Provision of other services

Pre Appointment (PLACE)-The things we need to do before taking a client.

Professional clearance
Legal Consideration
Auditor consideration
Commercial consideration
Ethical consideration

Engagement Letter (SOFAR)

Scope of work
Other Services
Fee Calculation
Acceptance
Responsibilities

Planning
1. Asses Risk
Analytical procedures
Knowledge of business
Audit risk

2 Audit strategy
a) Risk based b) Procedural based

3 Audit plan
Materiality and tolerate error
Analytical procedures
Risk Audit (IR*Cr*Dr)
Knowledge of business
Staff
Audit approach
Timing

Documentation of planning process

2 Main files
PAF Permanent Audit file
CAF Current audit file

Internal Control
Objective of company
Maximize profit +
Accurate accounting records
Safe guards the assets of company
Prevent fraud and error
Internal policies followed
Efficient running of company

Control System
a) Control environment b) Control
procedures
 General Specific
Overall approach to controls Authorization
Management by example Computer controls
Attitude Comparisons
Awareness Arithmetic/adding
Action Maintain a trail balance
Good Recruitment Accounting reconciliation
Entry e.g. sage Physical Controls
Segregation of duties

Limitations of controls (FAME)

Fraudulent collusion
Abuse of authority
Management override
Error

Control test: Testing (Procedures) that control is working.

Substantive: Testing (Numbers) that a balance in amount is T&F (True & Fair)

Stock Count (PACE)

People
Administration
Counting
End of Count

General Test: (AEIOU) General test for any balance in B/S or P&L

Analytical procedures
Enquiring
Inspection
Observation
U > Re -Calculation
+
Confirmation
Re performance

What the Auditor Needs to Test: (DADA 3)

Documents + records
Assets
Directors + Staff
Accounting Statements
3rd parties (Outside Clients)

Auditor’s objectives/assertions: (V COD RACE) Financial statement Assertions

Valuation
Cut off
Occurrence
Disclosure
Rights and Obligation
Accuracy
Completeness
Existence

Audit Procedures: (A TOAD)

General tests:
Add up
Trail balance
Opening balance
Audit software
Disclosure check

Bank & Cash: (2B’s)

Bank Letter
Bank reconciliation

Receivables: (3C’s)
Circulation
Cash paid after the year end
Cut off

Bad debt provision: ( PAPA )

Prior year comparison + investigate any difference
Ask management about each provision
Post balance sheet events
Analytical procedures
Payables: (CRAP)
Cut off testing
Reconcile
Analytical procedures
Post year end invoice review

Inventory: (STOCK without K)

Sales price at the year end
Trace the cost to the invoice
Observe the stock count
Cut off testing

Subsequent event review: (MAPLE)

Minutes of the board meeting after the year end
Accounts prepared after the year end
Procedures the client has picking up post B/S event
Letter of representation
Enquiry – ask management

Going Concern
The auditor needs to make sure that the right basis has been used. If not, the opinion in the audit
report may be incorrect

Letter of representation
Written confirmation from the directors to the auditors confirming certain matters

Relying on internal auditor/experts: (STRIP)

Scope of work
Technical competence
Report Quality
Independence
Professionalism

Difference between Internal auditors and External auditors: (I SO

REAL)
Independence
Scope of work
Objective
Responsible to
Employed
Appointed by
Legal requirements