Control Procedures F/S Assertions Audit Procedures

a. Personnel 1. Accuracy 1. Analytical Procedures

2. Segregation of duties b. Completeness
3. Supervision 3. Cut Off
4. Authorisation & Approval 4. Allocation
5. Physical control 5. Classification
6. Information Proceeding 6. Occurrence
7. Arithmetical and 7. Valuation
accounting
8. Performance Review 8. Existence
9. Rights & Obligation
10. Understandability
2. Scanning
3. Enquiry/Inquiry
4. Physical inspection of
documents
5. Physical inspection of assets
6. Observation
7. Computation
8. Reperformance
9. Confirmation
10. Walkthrough test

Learning Outcomes:

 Financial Statement Assertions: ACCA Cover + U

 Financial Statement Assertions used by external auditor:

Category 1: Assertions about account balances Category 2: Assertions about Classes of

and related disclosure transactions and events and released
disclosures
7) Existence 1) Occurrence
8) Rights & obligation
- Completeness 2) Completeness
- Accuracy 3) Accuracy
9) Valuation 4) Cut-off
10) Allocation
- Classification 5) Classification
- Understandability => Presentation 6) Understandability =>Presentation

Question 1

a. Bought 10 years ago, the machine still in use in the business.

 Existence of machine
 Implication: If the machine is not exist => Over-stated of NCA => Over-stated of profits.
b. Inventory was stolen, management is not aware.
 Existence of inventory
 Implication: If the machine was stolen=> Over-stated of NCA => Over-stated of profits.

c. Less than supplier statement

 Completeness => No omission of payables
 Accuracy of payables
 Implication: If the payables is under-stated => Under-stated of Purchases => Over-stated of
Gross profit.

d. Selling price wrongly used.

 Accuracy of sales
 Implication: If the selling price is under-stated => Under-stated of Gross Profit =>Under-
stated of Net profit.

e. Maintenance of the building is capitalized in building account.

 Classification of expenses
 Implication: If the maintenance expenses is capitalized as building account => Over-stated
of NCA => Over-stated

f. Sales invoices for the day are not recorded until the following week due to over-
workload.
 Cut off => can result in not recording in the correct accounting period.
 Implication: If Sales is not recorded in correct accounting period => Under-stated of gross
profit => Under-stated

g. Wrongly posted
 Accuracy of sales due to posting error.
 Implication: If Sales Journal is wrongly posted to the credit side of trade receivable control
account => under-stated => Imbalance of SOFP.

h. Occurred in the following year

 Cut-off of sales
  Implication: If the sales for the following years recorded as current year => Over-stated of
gross profit => Over-stated of Net profit.

i. Does not agree

 Completeness/Existence/ Accuracy of receivables
 Implication: If total amount of trade receivables in the listing that has been extracted from
the subsidiary sales ledger does not agree to the trade receivables control account in the
general ledger => under-stated or over-stated of Trade Receivables.

j. Debts not be collectable

 Valuation of receivables
 Implication: Some of the debts as at year-end may not be collectable => Under-stated of
expenses => Over-stated of Net profit.

k. Assets are charged to the bank.

 Rights and obligation of assets.
 Proper disclosure in the notes to F/S.
 Implication: may result wrong decision making especially for bankers.

l. Inventories are not break down.

 Classification & understandability.
 Inventories should be classified according to raw materials, work in process and
manufactured goods.
 Understandability, includes proper presentation and disclosure in the notes to F/S.
 Implication: May result wrong decision making especially when the company carried high
raw materials which refers the internal control system is weak.

Question 2

Audit Procedure:

 Obtained sufficient and appropriate audit evidence

Analytical Procedure

 One of the audit procedures => used during planning procedure, test of control and
substantive procedures.
 I. Planning procedure stage
 Plan the whole audit engagement
 Understand the internal control system of the company.
 Example: Resources involved. How many days for the whole audit engagement etc.
 Review the accounting system.
 Walkthrough all the departments of the company.

II. Test of controls stage

 Test of internal control system of the audit client => Test of controls.
 If internal control system is strong => Reliance Audit Strategy => Restricted/ less
Substantive Procedures => Reduce volume of detail.
 If internal control system is weak => Non-reliance Audit Strategy => more/full Substantial
Procedures => increase volume of detail.
 Example: Purchasing cycle: PR> PO> GRN > Matching PI and GRN > Payment

III. Substantive procedures stage

 Test of transactions => SOPL/SOFP
 Test of details of account balances => SOFP

HOW?

1) Audit procedure
2) Stage of audit
3) How to apply
4) F/S assertion

A. Perform
1. Audit Procedure: Walkthrough test
2. Planning procedure by going through the system step by step in order to confirm whether the
system remains the same.
 Example : Walkthrough all the departments of the company.
3. It enables the auditor to plan the number of days to complete the audit.
 4. Financial statement assertion : It can achieve the objective of Occurrence of Existence of the
internal control system.

B. Inquire internal auditor

1. Audit Procedure: Inquiry
2. Planning procedure that involves inquiry in order to identify business risk that may impact the
financial statements as part of risk assessment procedure.
3. This procedure is important as internal auditor is supposed to be independent and
knowledgeable.
 It enables the audit to be carried out effectively and efficiently.
4. Financial statement assertion : It can achieve the objective of Occurrence and Existence of the
major issues of the audit client.

C. Inspect selected payments

1. Audit Procedure: Analytical Procedure
2. This is at substantive procedures stage ie, test of expenses in SOPL.
3. Analytical procedure to determine if the payroll amount is reasonable.
 If the amount is greatly different from the SOPL figure. It could indicate misstatement.
4. Financial statement assertion : It can achieve the objective of Occurrence of salary expenses.

D. P&L…auditor multiply 100 x $1000.

1. Audit procedure: Analytical procedure
2. This is at substantial procedures stage ,i.e. test of expenses in SOPL.
3. Analytical procedure to determine if the payroll amount is reasonable.
 If the amount is greatly different from the SOPL figure, it could indicate misstatement.
4. Financial statement assertion : it can achieve the objective of Occurrence of salary expenses.

E. Verify reconciliation … payable balance in the payables ledger to the supplier’s statement…
inspection recalculation and analysis
1. Audit procedure: Physical inspection of documents, computation, analytical procedures.
2. Verify reconciliation is a substantive procedures , i.e. to test the payables balance in the SOFP.
3. Involves details checking of payables, i.e. to ensure the proper recording of payables.
4. Financial statement assertion: It can achieve the objective of rights and obligation (Ownership),
cut-off, completeness and accuracy of liability.

F. Review
1. Audit Procedure: Physical inspection of documents-Reading inquiry.
2. Involves planning procedures which requires reading, review and inquiry to obtain an
understanding of the system and identity control that auditor can rely on.
3. This is for purpose of gathering information to design nature and extent of audit procedures.
4. Financial Statement assertion: It can achieve the objective of occurrence and existence of the
computerised system.

G. Text data
1. Audit procedure: Re-performance
2. Involves test of control, i.e. auditor uses data created by auditor to test the program controls.
3. This enable auditor to assets to assess reliability of the computer system.
4. Financial statement assertion : It can achieve the objective of accuracy and completeness of
the programmed controls.

H. Analyse…unusual balances or class of transactions

1. Audit procedure: Analytical procedure.
2. It can be planning procedure if it is part of analysing the financial statements.
3. It can be substantive procedure. This is because auditor can identify possible misstatement if
the balance or transactions are unusual.
4. It is suitable to check for reasonableness of balances or class of transactions.
 If It is not reasonable, higher possible material misstatements.
5. Financial statement assertion : It can achieve the objective of Occurrence of balances or class
of transactions.
Question 3

1. Compute ratios…inquire
 Audit procedures involved:
 Analytical procedure involves computing ratios and variances and establishing trends
and compare with a benchmark.
 It also involves inquiry as auditor needs explanation for better understanding of certain
established relationship or ratios.
 This can be at test of control stage or substantive procedures.
 This evidence is reliable as it is generated by the auditors themselves.
 However, the reliability depends on the strength of internal controls and whether data
is available.
 If the internal control system is strong => information is reliable.
 If the internal control system is weak => information is not reliable because subject to
manipulation.
 It is suitable to check for reasonableness and achieve the objective of Occurrence of
balances or class of transactions.
 If not reasonable, higher possible material misstatements.
 However, this procedure is not able to confirm accuracy and cut off of balance or class of
transactions.

2. Samples…physical sighting on the assets.

 Audit procedure: Physical inspection of tangible assets.
 This is a Substantive procedures stage.
 This involves physical inspection and it is reliable as it is performed by the auditor.
 However, if is only appropriate for checking existence and to a certain extent valuation.
 If the asset can be seen to be used in the business, it exists.
 It is not a suitable evidence to check existence as the asset may physically exists but it may
not be owned by the entity.

3. Vouch…supplier invoice.
 Audit procedure: Physical inspection of documents => Vouching
 Examine in detail, i.e. examine from PPE additions and vouch to the original source
documents, including inspection and recalculation.
 This is Substantive procedures stage.
 Since it is inspected by the auditor and it involved external documents such as supplier
invoice, supplier’s Goods Delivery Notes.
 Thus, it is reliable
 However, the reliability depends on the strength of internal controls.
 IF the internal control system is strong => information is reliable.
 Example: the supplier invoice should be supported by goods delivery note of
the supplier and goods received note and purchase order.
 If the internal control system is weak => information is not reliable because subject to
manipulation.
 Basically, by verifying to the supporting documentations, there is evidence of occurrence
and checking for accuracy proper classification.
 However, it cannot check for completeness of PPE.

4. Go through…scan
 Audit procedure: Walk through test, Analytical procedures and scanning.
 Auditor did not inspect the payments/ journal but going through the journal quickly to
pick up any unusual amount of unusual supplier name or details.
 This is substantive procedures stage.
 Although it can be reliable because it is performed by the auditor himself, it is not easy to
detect if misstatement exist.
 It is suitable to check for reasonableness and achieve the objective of Occurrence of
balances or class of transactions.
 If not reasonable, higher possible material misstatements.
 These procedures are not able to confirm accuracy -> There is a possibility that auditor may
also omit such items that contain material misstatement.

5. See
 Audit procedure: Observation
 The purpose is to observe if the receiving staff carry out procedures in accordance with
requirements.
 This is a test of control.
 Observation although perform by the auditor is not so reliable because the observation is at
a point in time.
 This procedure is to understand the control procedure on how the staff is operate.
 The staff may not comply when they are not being observed.
 Thus, to improve reliability, it is better that the observation is done a surprised basis or
corroborative evidence required.