Audit and assurance

1. Audit and other assurance engagements: Hello and welcome to the F eight. Paper ordered an assurance My name is Robin, and I will be the tutor for this course orders. Another assurance engagements. Now, before we can start the whole thing, we need to determine what the objects of often order it is. The objective of in ordered is to enable the auditor to express an opinion on whether the financial statements are prepared in all material respects in accordance with an appropriate financial reporting framework. So, in other words, it's the opinion of the auditor that really matters. When it comes to financial statements, the auditors need to determine whether or not so they are free from a terrible statements or they're not. And this course is going to take us straight from the planning often ordered right through to the execution of in order to to finalisation and reporting to determine if the financials are fairly stated now, crucial parts orders are appointed by the shareholders and not the directors. Why is that? Well, the shareholder is the one that has thean vested interest in the business. The director has been appointed to make sure the Burstyn starts what is supposed to be doing so. We has auditor's report directly to the shareholder, not the director, if the shareholders and the directors of the same fine. But in most cases, what happens is that they are not, says auditors. We report directly to the shareholder. We have the responsibility for producing a report on the fair presentation off the financial statements. We are governed by the international standards on auditing requirements, and we can resign it any time. However, explanation must be given as to why we resigned. We can be removed, but only by the shareholder. So he ordered itself. The annual financial statement must reflects a fair presentation. Why does the order report never say 100% correct? The reason for that is because we cannot verify every transaction within the accounting records. If you think about a large corporation like a bank, they have large number of transactions on a daily basis. It will be next to impossible and impractical for us to verify every transaction. However, we do need to determine if something is materially misstated and this is performed during the execution phase of the orders. We we gather our ordered evidence. This is why the ordered opinion actually says fairly presented in all material respects, and not that the financial statements are 100% correct. There are still possible areas within this financial statements. However, those areas are regarded as a material. We must conform with the reporting standard and auditing standards in other words, the international standards of auditing as well as if Rhys and international accounting standards. So in order to needs to understand accounting in order to be in order to not so. If you don't understand accounting, how you're going to order the accounting, we can perform certain types of tests during the order to assist fe presentation within the financial statements. Like I said, the annual financial statements must reflect a fair presentation. We will perform certain tests in order to determine whether or not that is, in fact, true materiality. Now, before we begin, let me do a quick experiment with you. If I had to take $1 from your bank account, would you No. Okay, some of you are probably saying Yes, definitely. I would know, and I would care most of you probably not. Let's up it a bit. Let me take $10 from your bank accounts, would you know? And would you care? Some of you again will probably be saying yes, I would know and I would care others No, not so much. Let's up it even further. $10,000. I take $10,000 from your bank accounts. Would you know? Chances are yes, and you'll be straight into that Banks office saying Waited by $10,000 go. However, $10,000 is probably very material when it comes to companies like Coca Cola. So materiality actually depends on the user. Not so. And as auditors, we need to determine who those users are. Users can be anybody from the shareholders, banks, text, authorities, customers, employees. However, materiality is important to auditors as well. Remember that we reports in the fair presentation of the financial statements. In all material respects, the definition of materiality is any a mission or most statement that affects the decisions off the uses of the financial statements, and these can either be quantitatively material and all qualitatively material. So what I mean by quantitative quantitative means value. It's the quantity so something can be material either individually Oh, in aggregates. In other words, the sales account is materially misstated by one value that is, individually, an aggregate means the sales account is misstated by this figure here. It is not material, but if you add another figure to it, and another figure, Tous and another figure to it all of a sudden becomes material. So at the end of the day, it actually becomes material because of the amount qualitatively material is its material because of the nature of the accounts. So things like repairs and maintenance, repairs and maintenance can be a qualitatively material because of what it is. And what some companies will try and do is they were trying expense something rather than capitalize it so that they can show a lower profit at the end of the day and can pay lace text when it comes to something like repairs and maintenance. Remember that if a repair in haunts is an essence and it increases its output capacity as a result, then it should be capitalized to that asset and it shouldn't be expensed, and this is where companies don't follow the framework correctly, Remember writes. In the beginning, I said that the financial statements have to be fairly stated in accordance with an appropriate financial framework, and if they are experiencing something that should be capitalizing, that is no longer the case. So it is now material, even though it might be in material in value. They're different ranges to materiality. You can base materiality on different categories you need to determine as the auditor as to what critical components or what category you're going to bhatia materiality on. And based on that, you will determine the range and any other information that you're going to use. For example, if a company is revenue generating, in other words, they don't really make use of their assets to generate revenue. Then you would use revenue as your critical components, meaning that you'll use nor 0.5% to 1% off total revenue. If it is something like an investment property where you have a property or a building and you are renting it out to somebody that is a capital asset, in other words, without that building, you cannot generate your revenue. Therefore, technically, you should use the building and see total assets, and not just 1 to 2% and determined materiality that way. So how do you determine whether or not to use the higher percentage of the lower percentage . That is all based around risk as well as professional scepticism, and we will cover that in later chapters, So you need to determine as the auditor if it is high risk, I would rather use a lower materiality value in order to make sure that the financial statements are not materially misstated. And how do you determine what to uses your critical components? Look at it in the form of a tree. Without a tree, I would have no fruit. So the tree is the capital asset and is an asset that sits on my balance sheet. No tree, no fruit. But if I can bay fruit without a tree, then I would use the fruit, which is the revenue at the end of the day. And when calculating materiality, you also need to determine whether or not you're going to be using carriages. Preliminary figures, in other words, on audited figures or pry years audited figures. And when it comes to making a decision like that, US in order to need to determine whether or not there's been major adjustments into the accounts, such as little using revenue. They've been major adjustments in the prior to revenue. So I would rather use Prior's final figure. Because I know that aesthetic and it's fixed. Then current. Just figure because probably going to change and the suitors of stars to change. You'll see when we get to finalisation and we get to final materiality, you get actually hit a bit of a problem. If your final materiality is at a different value than your planning materiality, there are other factors to consider as well. If this is the first time that we are performing the orders, we should rather use Prior's audited figures because we don't know there's going to be any change to the preliminary figures, and we need to determine if there's any other qualitative factors that can affect our materiality value things like fraud. So if I think that this fraud going on on the business, I'm not going to trust the carriages figures, and I would rather based on materiality calculation on the prior's audited figures. And remember your final materiality value. The lower your value, the greater assurance you're going to get at the end of the day, and there are different levels off materiality, So you get materiality with material on financial statement level, so it affects everything all together. Do you get performance Materiality, which gives us some kind of guidance as to what to orders and it's based around risk will cover risk. And then you get what's known as clearly trivial and clearly trivial, or amounts that are so small that they would not affect the uses of the financial statements. Now, remember when I said performance materiality has got to do with risk? According to the standard Isil 3 20 performance, materiality means the amount or amounts set by the order at less than materiality to reduce to inappropriately low level the probability that the aggregate or uncorrected and undetected misstatements will exceed materiality. So what does it mean? Executor? It means that if my overall materiality value is a $1,000,000 and revenues a high risk area for me, I would drop that materiality. Barely two, let's say $800,000. So anything that is materially misstated over $800,000 has now become a problem, even if it does not exceed a $1,000,000. This is an example of materiality. Once you can see the slide. Pause the video, calculate the materiality and what you would base your materiality on. Come back to the video and let's discuss it further from there. Right? So here we have a company, its revenue generating and does not making use of its S sister generators revenue. We have the following information available to us. We've got Grocery Avenue. We've got net profit before tax total assets current your figures prior figures. And it states that there are no major changes during the ordered relating to the above accounts in the prior year, and the ordered is considered to be low risk. So as the company's revenue generating doesn't make use of its assets, it would be pointless to use total assets. So we would rather make use of the grocery of. And you figure says that there were no major changes during the order relating to the above account in the prior year. So that means that we can play some form of reliance on current your figures because that doesn't really change. My You can either use current year or prior figures as long as you given explanation as to why. So you can say prior figures because they've been or deterred and everything's fine and we can use carriages. Figures won't and say that. Whoa, You know there's no major changes in the prior, so that's some kind of reliance can be based on that figure. And there's the order to lower risk. We can use 1% off the total revenue, if you again. If you state that you want to use half of percent, you would need to give an explanation as to why. But we reduce 1% and whether you use 1% off the turnover in the current year or prior. Like I've just explained, it depends on your interpretation and your explanation. But what I would do personally, I would use 1% off the currency's figures of 1.9 million rand, and that would give me a materiality figure off $19,000. So anything that is material above $19,000 is now material and the materiality that we've just calculated there. His materiality overall such not performance, materiality, performance, materiality, remember will be set at a lower percentage. So we would say instead of 19,000 would make it 17,000 and again that 17,000 would be based on arm high risk areas, and we will cover risk in later chapters off this course. 2. Statutory audit and regulation: Chapter two statutory orders and regulation. Why would it's necessary? Well order to give greater assures on the FEI presentation. Remember that when we said that the financial statements are fairly presented, we are giving that assurance that the users of the financial statements can actually trust that those are fairly states it it gives an objective view of the financial statements. So as auditors, we are seen as being objective. In other words, we're not employed by the company and work for the company were employed by the shareholders to give our opinion on the fate presentation of the financial statements it is required by law in some countries. In some other countries, such a South Africa, you have to reach a certain criteria in order for you to have a compulsory order. It state owned companies, listed companies. All of those have to be ordered it and we can identify weaknesses within the internal controls. And if we find weaknesses within these internal controls, we would advise management on how they need to implements better procedures in order to make sure that those internal controls are working correctly and we will cover internal controls. In later chapters, they are so its and disadvantages to having in order to as well. One of them is cost orders can become very expensive, and it's but twofold here because it can become expensive if the clients is not giving you . What you need is the auditor, and they're wasting time. And it can be for with very large companies that a lot of time is required by the order team in order to make sure that the financial statements are fairly stated. They could also be a bit of disruption, especially during stock texts we ordered has arrived and we say no stock needs to move now , please, because we need to make sure that we're counting everything correctly as well as actually on the orders were we keep on asking questions all the time, and people have to stop what they're doing in order to assist the auditors with whatever they need. Accommodation might be necessary, especially if the orders are away from the head office off the order departments. So if you are doing an order to that's far away from home, the orders would need accommodation. It's not normally very luxurious accommodation, but yes, it would be another disadvantage as well, because there's a cost element behind that and something else is stuffed perception. Because if the order to keep on asking the same person questions off the question off the question off the question the staff can turn around and say, I wonder if they actually really know what they're doing in their daily working environment and why the auditors are forever at this person's desk and forever asking them questions. Small companies Small companies normally have the following characteristics. Concentration of ownership and management is in a small number of individuals, so not that many people are learning the business. They're uncomplicated transactions. They may have things like depreciation, but they're not gonna have anything too complicated where they have to comply with mess of different rules, etcetera. And they have few business lines so they don't deal with vast amounts off different types of customers. Just a couple a few internal controls, one of them being limited, limited segregation of duties. And we'll cover segregation of duties when we do internal controls, a few levels off management, like I said, that's linked to the ownership and few personal. Not a large staff complements it'll the auditors rights and duties. So if you're an auditor, what do you think your rights and duties are? Well, as faras duties are concerned, it is our duty to report whether or not the financial statements are fairly stated. And in doing so, we need to consider the following whether or not they have complied with the relative legislation, whether or not adequate accounting records have been kept and it turns have been submitted . So things like your company tax return if that has been submitted to the tax authorities on time and things like withdrew, not the adequate disclosures be made in the financial statements for things like directors emoluments. So we share the directors, monuments and each director and what they have been paid in any other benefits that they have received. So then, what are your rights? As you orderto auditors have rights to access the records. So we have the right to go to their clients and say, Please, will you give me X, Y and Zed. I need to very far the falling in order for me to do my real oven testing. Once we've got that information, we have the rights to get explanations on those documents. So why did this happen during the year? We also have a right to attend general meetings and to be heard within those general meetings. And you also have a right to receive any written resolutions, special resolutions or anything of that matter, even minutes. We can request minutes of meetings as mentioned in the first chapter. Auditors are appointed by the shareholders. We can resign it any time, however, but we do need to give explanations as to why we have resigned. And we need to follow the following procedures The order to must give written notice together with what is known as a statement of circumstances. And in that statement of circumstances, we will state as to the reason why we resigned and you'll see later when we get into ordered reports. And we have what's known as a disclaimer. We should technically resign as the auditors because there's a massive problem and it can be anything from fraud to management's integrity, to the company doing something illegal, etcetera. And this notice of resignation should be sent to the company's regulatory authority was known as the company's house. The people that formed the business. We would send the letters through to them to say that we have resigned as the auditors. The auditors can call the directors and say to them, Please, we need to set up another general meeting to discuss the statement off circumstances. And while we have resigned, the directors must then send out notice for the meeting within 21 days of having received the request from the auditors. Auditors can also be removed from office and this can either be done through a special notice, which is must be 28 days. Copy must be sent to the auditor or an elective resolution that's in place. So, in other words, that the directors actually put a resolution in place to terminate services off the auditor . The order to is allowed to make representations that as to why they believe that they should stay in office. But if that's unsuccessful, then the company must notify the regulatory authority that they are new auditors and that the previous ones have bean terminated in the order. Timis then deposit the statement off circumstances at the company's registered office within 14 days off, ceasing its services As the auditor, you cannot just wake up one morning and say, You know, I want to become in orderto I just I've just decided it takes a long time and you have to first determine whether or not eligible in order to become an orderto. And that means that you have to pass relevant examinations in order to say that you are now qualified because you have the knowledge. But knowledge is not enough. You have to go through training as well to see whether or not you can become an orderto and it was known as articles. You have to serve your articles over a period of time to say that yes, I actually am competence and I can have hands on experience in auditing once you've done your training and once you've passed the relevant examinations, then you need to register with the governing body and in South Africa. It's known as the South African Institutes of Chartered Accountants, and there's different names across the world. But you would have to register with them the international standards in order to now. These are the rules that every orderto must follow when performing all audit engagements. They're produced by the International Auditing and Assurance Standards Board, and they set an international standard on all ordered procedures, and you'll see later when it comes to reporting as to why that is so important. So in order to in South Africa, performs work on a client and comes to a certain opinion and an auditor in the U. K and U. S. A different locations full of the same procedures as set by the international standards of auditing should come to the same opinion the following Isis standards are applicable to if eight, we will cover them in later chapters as role in more detail we have. Ah, I would highly recommend that you read these standards. You can download them off the Internet, they're freely available, and they are listed on the slide below. I would also recommend that you download the A. C. C. S code of ethics and conduct. It is examine herbal and you'll see that we'll cover it again in corporate governance and professional ethics. 3. Corporate Governance: corporate governance. Now, what is corporate governance and why is corporate governance so important? Well, let me ask you this. Whose fault is that if the company goes under? And should directors just be paid 85 million rand in bonuses? Just because good governance is essentially about effective leadership? Such leadership is categorized by the ethical values off responsibility, accountability, fairness and transparency and is based on moral duties. So, in essence, corporate governance can be defined as a system whereby entities are managed and controlled . So who is ultimately responsible for corporate governance? The directors, not the shareholders. They is a link between the shareholders and the directors. The shareholders are the ones with the financial interest in the business, but they're not the ones that are running the business. They're full main characteristics off good corporate governance, transparency, accountability, responsibility and famous. And there are nine basic characteristics around corporate governance. One has got to do with ethical leadership. Secondly, the board of directors, third ordered committees. Fourth risk governance. Fifth I t. Governance six compliance with laws and rules, etcetera, seventh internal audits, eight stakeholder relationships and nine reporting and disclosure. And if we look at ethical and corporate leadership, the board of directors must have some kind of ethical foundation behind them. You shouldn't be employing people into your business to run your business. That, ah, unethical amount of fraud off thieves, etcetera. So the people that are at the top that ran the business, the directors should have an ethical foundation and rest. Ensure that the company is and is seen as a responsible corporate citizen. Because you're not gonna get investors that are going to invest in your business if you're seen as unethical. Purchase Bear in mind that corporate governance is not law. It's not legislation. It's a guidance for companies and how they should operate in base practice. So let's take a look at the board of directors. They are the custodians off corporate governance sought to shareholders. They should appreciate that risk, strategy, performance and sustainability are inseparable, and they should ensure that necessary committees are in place. And these committees include ordered committees, remuneration, committees, etcetera. Just one quick thing about a remuneration committee. You cannot have the CEO or non executive chairman in charge off the Remuneration committee . You should have somebody that's independent or separate from the from that whole board structure so that it is seen as Fay. The Border directors must act in the best interests of the company, not the base interest for themselves, and they should appoint an independent non executive director. Now let's just stop there for a second. What is the difference between an end executive director and a non executive director? Well in executive director is involved in the day to day running off the business Non executive director is seen as independent because it's not involved in the day to day running off that company, and they should also appoint a non executive independent chairman, not CEO. There must also be ongoing training and developments Just because you're directs, it doesn't mean that you cannot just stop your training and not develop anymore. You need to go on these courses in order to keep yourself up to date. And remember that auditors are in control off the internal controls, not the auditors. The directors of eight implement and monitor these controls to mitigate any kind of fraud and error with in the financial statements. So if you have somebody who's an ethical on the board of directors, well, guess what he's gonna try and do. He's gonna try and get away with as much as he can ordered committees. The order committee should only consist off. Independent non executive directors and order committees are responsible to ever see finance into no order to risk management. Assisted the external auditors etcetera. And they're quite a few advantages of having an ordered committee, and they can review the financial statements on behalf of the board. They can assist the external auditors. They can review the internal control structure and advised management on any kind of weaknesses within the internal controls. They can strengthen the position off the internal ordered function, and this is done by providing a greater degree of independence from management and think about what's the general public will see. They see a company that's got a board of directors. There's a mixture of independent and non executive directors and executive directors, and they've got an ordered committee, so it would appear that they are doing things correctly and you can base more reliance on that as an external investor and the general public at large risk governance. Now remember say to you that the directors are responsible for the internal controls, and they should govern that risk, and they should determine what the tolerance of risk is in some companies. Also, we'll get zero tolerance for risk. It's it's unrealistic. There will always be something, but it has to be relatively small, related to materiality that can have their own materiality at management level is what, and they should ensure that there is a risk management process. I t government now I t is everywhere these days. Many companies, if not all of them use I t some way and your I T should be aligned with the performance. Sustainability off the objectives off a company. It should be an integral part of the company's risk management and information assets, which should be managed effectively compliance with rules and laws. Director should ensure compliance to pay the tax authorities. When things become Jew, there should be a way off the effect on the entity, different laws. So all of a sudden the text rate goes up, they should say, Well, how does this impact our business? And this is forms part off risk management, the internal orders, an effective risk based internal order it and written assessments of the effectiveness of internal control. So the internal audit departments they take a look at that. They were very closely with the external auditors as well. If need be. And they will say, You've got the following risky areas within your internal controls and we'll report that directly through to management stakeholder relationships Director should consider the stakeholders perceptions off the company's reputation. So if the company is doing something that a stakeholder doesn't like, that stakeholders were just sell its shares and move to a different company altogether and said, Well, you guys are dealing with something that is against my belief against my culture against my vision, whatever it is And the director should take responsibility for that at all times. There should give equal treatment to all shareholders, regardless off the percentage that you own. They should be transparent and effective communication from the board of directors to relevant stakeholders reporting and disclosure. The directors must have the integrity off integrated reporting and not try and hide something off the balance sheet, which is exactly what happened in the Enron saga. They should include sustainability, reporting and disclosure, and they should be independent review. Remember what I said ordered committees can review the financial statements on behalf of the board of directors. External auditors will then come along and see whether or not they are fairly stated. I mentioned in run a little bit earlier. Enron was a company in the United States of America, that adult with energy, and they were doing many illegal things. The board of directors were heavily involved. They knew what was going on and then you that what they were doing was in fact illegal. And at the end of this whole thing, 20,000 employees lost their jobs. The top executives paid bonuses off $55 million employees lost $1.2 billion in retirement funds and retirees lost two billion in pension funds. And Arthur Andersen, who were the independent external auditors, ceased to exist. And those employees lost their jobs, too. So corporate governance is a very important topic, and it's something that you need to understand when it comes to auditing and what happens during an order. It's an external order that is is that we will actually communicate directly with those that are charged with governance. In other words, those that are the directors the management off the business and say to them that you've got the following weaknesses and there's an ISIS statement that surrounds it to Isis to 60 . Communication with those charge of corporate governance and it gives us is the order to his guidance on what we need to communicate with management. I would highly recommend that you read that standard. 4. Ethics: ethics it thinks is actually quite a big topic and not big in this in the form of chapter size. But it's quite a hot topic in auditing. So what? All ethics it thinks, are a set of principles of right conduct and the rules. Will standards governing the conduct of a person or members of a profession and his order to as we need to have good ethical conduct at all times, but it thinks doesn't only apply to orders and things also applies to the directors? Directors should also have good ethics and his auditors. We need to conduct ourselves in an ethical manner at all times, and we need to be seen as ethical because we are independent. Remember, we report to the shareholders, and if we're seen as unethical, well, the shelves on country really trust what we say. And as such, we have the following fundamental principles. We have integrity, objectivity, professional competence and UK confidentiality and professional behavior. How do we remember these didn't exam? They said to us list the fundamental principles, and we seem to forget one or two of them. So if you look about a no eyed man and my no at mine has no eyes, but he does have a face. It's in the circle of a no, which is for my objectivity. He has a nose in the shape of an eye, which is my integrity. Here's a mouth shaped of the sideways see, which is my confidentiality. He hasn't year shaped as a P, which is professional behavior, and his other ear shaped his appeal, which is professional competence and do care. So what does it mean to have integrity? As auditors, we need to be seen as professionals and we should be honest at all times. And we should have that integrity with us at all times. So what about objectivity? Objectivity means that we don't show any kind of bias. We're not in favor of one thing versus another. We avoid conflicts of interest and a pretty much seen a straight arrows. So we not going to sway within the wind. We know what our target is. We know how we need to get there, and we're going to be objective about it. Professional competence and do que Well, as auditors, you should have some kind off professional body that is behind you. And if you're in training, you still be signed under that professional body and we need to acts and with do que and with the necessary competence in order to state with it or not again, the financial statements are fairly stated, and professional competence comes into play with that as well to say, Do you know what the relevant rules and regulations are that will affect the entity? So then, what about confidentiality? The orders must be confidential. We don't go around and say this company made so much profit. This is what they've got in the bank. This is their turnover, etcetera. And we also, if we have clients that are in the same type of industry, we don't go to the client and say, But this is what this company is doing on the turnaround and say, How do you know that will be the order to us? You can't divulge information like that and professional behaviors pretty stock standard. You shouldn't be running around like a lunatic putting into any kind of discredit to your reputation off the firm as well as the profession near various threats. When it comes to ethics as well, these streets are self interest self of you advocacy, familiarity and intimidation. And when we're dealing with finances and we are auditors, the's fits become very real on a day to day basis. So what is meant by self interest? Well, self interest is if, in order, team or a Norden member has some kind of financial interests within the business that there would it and I could be anything from a share certificates. Oh, you can have, ah, partner off the wooded scene that is a part of the board of directors you could even say. Well, we will take a percentage off your turnover and make that our ordered fee, and these are real threats. These threats will affect our view of the financial statements, because if we have some kind of benefit behind what we states in the financial statements, well, then we lose objectivity. We lose our independence as a result. So what are some of the safeguards then? Well, if an ordered partner is part off the board of directors of a company that you're getting, he shouldn't be involved in the orders. And if anybody has some kind of financial interests, such as a shape within the business that the order thing, they should either Selve it. Oh, not be part of the orders. Solve Review three. It's coming to play. We Weah's the auditors that are expressing an opinion with somehow involved within the accounting process. And these types of services can include things like Tex valuations if you're performing internal ordered services and preparing the actual accounting records. So let's say that you prepared all of the accounting records of the company. He did. The techs. You process things from the cash book into the general ledger. You dual the reconciliations, and now you're doing the order to as well. You see the problem with this? It's very difficult to see the wood from the tree at the end of the day. You're so close with it that you don't you can't see exactly what is going wrong, and it is a material era. One of two things can possibly happen either you and see it because you perform the work or you have seen it, and you think maybe I shouldn't say anything about it because I don't want to get into trouble. As a result, this is where auditors can lose their independence in the objectivity and even their integrity, and remember that its management responsibilities prepare the accounting records. It is their responsibility. And it's stated in the director's report of financial statements as well, that it's their responsibility to maintain and prepare the financial statements and the accounting records and the internal controls. It's not our responsibility. Our responsibility is to base an opinion on what we've been given. Evaluations is a common one. What happens with ordered firms the client will approach in order for him. And so please really do the valuation for me, and that's fine. We can do that. They are safeguards to it there. And these safeguards include things like making sure that the client understands that it's just assumption and that they take responsibility for the valuation, not the ordered for him. And if the ordered firm has more than one partner, then one partner can do the valuation and the other partner can be the engagement partner off the orders. Never common one is tax services. They'll say, We'll just do the order to do my texture. Turn as well, please. And that's fine. If the following safeguards are in place as well again, the auditors must have some kind of arrangement with the client to say we can prepare the tax return, but it's ultimately your responsibility to make sure that the information within the texture turn is correct. And many clients, especially smaller companies, don't really know how to calculate tax correctly. So they rely on the auditors as a result. And that's also OK. However again, it must be agreed upon that management is ultimately responsible and things like a management representation letter are very important. When it comes to things like this, we do cover management representation letters in this course is well, it is a general order procedure as well, and you'll see that when we get to procedures. But management has to agree to say that you can do the calculation, Mr Orderto. However, ultimately it is my responsibility as management advocacy. Three. It comes along and it's got to do with things like the client asking us to be part off their litigation process there once has to make a statement on something within the financial statements within the court of law. The problem with things like that is that a We're not lawyers and B, we actually making an opinion on the financial statements. So it's something that we've already said in the financial statements, and they can be a threat as if they want us to start saying that. Please come into the courtroom and we need you to help us with this thing. So what are the safeguards around? Something like that? Well, in order to firm can have various departments that deal with legal issues. And in fact, large order firms have exactly that, so that if the engage in partners is listen, we can help you. But I can't get involved because I've signed off the orders, reports. I'm Sina's independence, but what you can do is go to our legal department and they can assist you with whatever you need. Familiarity, threats, familiarity, threats exist when this some kind off familia relationship between the order team and the clients and it can range to various things such as your parents being in the accounting departments off the orders and you are performing the orders and just having said that, please note that I said the accounting department, if your parent is in the advertising department and doesn't deal with the accounting records at all. There's no real threat. But why would the beer threats if your parent was in the accounting deport? Well, just now there's something that is material or something that is fraudulent within the financial statements and the code of ethics. Turn around and say, But would you really turn around and report something like that, knowing that it is your parents or some kind off family knowing that they might go to jail will be fired, etcetera. So what is the safeguard around something like that? Well, it is a familiarity threat, then the person that has that relationship should not attend that orders. Familiarity threats don't only exist within family members. It can be the same person going to the same clients for years and years and years, and they start to know the client very well. They start to become friends. Actually, at the end of the day, they started inviting me to golf days, weekends away with your partner and their partners, and they become the theater's wall, and it can also lead to an intimidation threats. It's things like that starts. It happened. So what is the safeguard around something like that? Whoa, You can rotate engagement partners, which should happen every few years. You can rotate the senior order personnel, the ordered managers and the supervisors to make sure that they're not with the same clients at all times. Etcetera, intimidation threats, the intimidation threats exactly as their sound. It's some form of intimidation from a client to the auditors and can exist in various forms . So kind can say to us, You will finish this ordered within two weeks. You also won't pay order to be. There is a form of intimidation. It should never be taken lightly. Another form of intimidation can be in the form of gifts. Think about it like this. You go in order to murder tickle manufacturer, and they say to you, if you perform the orders really well, I e. Within a month and we show a profit off $5 million we will give everybody a new with a team , a brand new car with all the bells and whistles from the junior that's on the orders, right up until the engagement partner. Now, let's say you say yes, fine, Let's do that. There is an intimidation thrifty because the client is not said to you. This is what I want, and this is what you will get a za result, and they can use that intimidation in the next year to say we now want to show a profit off $10 million. You said, Whoa, hang on a second. That's not right. What you're doing here is illegal. They can easily turn around and say, But if you don't do it, then I'm going to disclose to your professional body that you've accepted a gift and your little patrol profession into disrepute. And some clients understand, Do give gifts to the order team. You have to disclose thes gifts there and determine the materiality behind these gifts. If they're taking the order team out for lunch, it's not material. It's a lunch. If they're buying you a call, that's something very different. And what happened in that whole Enron saga was Arthur Andersen, the auditors, and Enron was paying them on a weekly basis and saying that you need to disclose X, y and Zed enough financial statements. And at one points, the engagement partner at Arthur Andersen turned around and said, No, this needs to stop and then on casually just turned around and said, You know what? If we go down, you go down with us and that's exactly what happened. Anyone close their doors started off. Anderson. These threats are riel, and you must identify these threats as being real and they happen on a daily basis. And when it comes to things like ethics, ethics is a very personal subject. And it's something that you need to think about it all times when you are in a professional environment. If my uncle was part of a tender process, then I was the auditor within their tender process. Would I disclose the information to him and a nose on his last few pennies? And I know that if he gets the tender, he'll be OK. So I disclose it information to him? Well, no, you cons. It's confidential and think about this scenario your parent comes to you and sees. I'm now on my last day at the office, and I'm going on to pension from here on out, and I'm gonna use all my pension money and I'm going to invest in this company and you happen to be the orderto of that company. And they say to you It's now $500,000 that I'm going to invest and I'm gonna live comfortably florist of my life. But you is the order to know that the company is actually going to go into liquidation and anybody that's going to invest in the money is going to lose it. At the end of the day, what do you do? And you might say, Well, that sounds extreme, But these things happen and you need to think for yourself. You know, do I disclose and say, Whoa, don't invest the money because you're going to lose it. But now I've broken fundamental principles. Or do you say just go for it so that I can keep my integrity, my objectivity and confidentiality, fundamental principles safe at all times? This is where ethics becomes difficult. No, when it comes to the examination, you missed, identify what the risk is and the safeguards behind that risk. And what I would do is I would highlight to say that put their self interest because off whatever and what are the safeguards behind that risk and listed like that and say the following risks are identifiable. In the above scenario, one is self interest and explain it. Been underneath it to say What is the safeguard behind that risk shows the Examiner that you understand firstly, what the risk is and that even though there is a risk, I have a safeguard against that risk, right? So ordered his appointment. First, we get approached by new clients, and we need to determine if it is the first time that they're being orderto. If they say yes, we've never been audited before because we're in new company, then there's no real reason to follow any professional rules, and we can determine whether or not we'll accept or reject the appointments. If it is not the first time that they have bean orderto and they'd be notice it by previous auditors in the past, we would need to determine if the client gives us permission to contact the previous orders . And we do that. You see in a professional letter to the previous auditors to say, is the any professional reason why we should not accept the appointment and the previous order to can say, actually, by the way, what the client is doing is illegal. We had an adverse opinion and we couldn't figure out what was going on financial statements . So we had to give that kind of opinion, and as a result, we got fired. Then that has a huge impact on the new orders. Is we need to not turn around and say, Are we willing to take that kind of risk? What happens if we come up with the same opinion? Cause technically, you'll see when we cover substance of procedures, it's all follows through the international standards of auditing and what we should do. And if we come to the same opinion as the previous order to is what's gonna happen to us or we're gonna get fired as well. And that's why if the clients is no ways you can get hold of the previous auditors, we should decline the appointment, and if they turn around in this is you know where that's fine, you can get all of the previous orders. We got nothing to hide. We will then write all the information, give them a professional letter to say, Is there any professional reason why we should not accept the appointment? Then does the client give the old order to permission to reply again if they say no, we should decline. If they say yes. Of course, you can respond to the new auditors. Old orderto No problem. Then release able old orbiters. Please really give us real even information. And they say, Okay, well, you know what? You don't really want to give you a working papers. Some ordered films are like that. We don't want to give you a working papers. There is no professional reason shouldn't accept the appointment. We just you know, we like to keep our stuff to ourselves. That's fun. And we can accept or reject the appointments accordingly. Some of the factors to consider whether or not we're going to accept or reject an appointment. These things like management integrity. If management doesn't have any kind of integrity where they say we don't really care about the rules and the laws and we don't ever wanna pay tax etcetera, we, as the auditors need to turn around and said, Do we really want to be involved with a company where management is not really taking ownership of things where they're not holding each other accountable, where they don't have integrity, and that brings us to the second point risk The risk is from the order firms point of view there. So what is the risk that we are taking on by accepting the clients? And it normally relates to things like reputation. So if the client is doing something, they shouldn't be doing something that's illegal or have dealings that look a little bit shady and we get involved, then we have a risk of our own reputation where other clients can turn around and say, You know, that firm over there, they're involved with this other clients I don't want to be associated to that ordered from because of the dealings that they have, we also need to determine what our relationship is with the client. If it is somebody's relation within an order firm, we need to say, Hang on a second. Do we have some kind off threat? By accepting this appointment, we also need to determine if we're able to perform the work. It's nice to take on a big client, but can we do it? And you might say, Well, if you're a professional accountants or a chartered accountant or an A C. C. A member or whatever, you should have that ability to perform the work. However, an ordered firm needs to determine things like resource is, Do we have the correct and sufficient number of personnel to perform the orders? And when it comes to obtaining clients in order for mess and go and say we're the best of the best auditors, you should pick us. And if you don't, then you know you going for second best they shouldn't put any kind of other foam into disrepute will say that they are not the base members that you can have you discrediting the membership and they shouldn't be misleading and say that if you accept us, we will be able to perform all of your accounting work as well. We will be able to perform your ordered within a week. We will have the lowest fees ever, etcetera. It's not professional and against the A. C. C. A's code of conduct. Once we have obtained a clients, we need to send an engagement letter to them. The engagement letter is a letter from the ordered firm to the client to make sure that everybody's on the same page of what is expected off, who both being from the auditor and from management and an engagement letter must contain the following. It must include the objective and the scope of the orders. In other words, what we're going to do, how are we going to do it? And that our responsibility is the auditors is to base in opinion on the fair presentation off the financial statements. It's also show management responsibility to, say management. You are in charge of maintaining the accounting records as well as the internal controls. It was also disclose an engagement letter, the applicable financial reporting framer, to be used for the preparation of the financial statements, the expected form and content off any reports to be issued by the auditor. So things like if we're going to make a report to management and reports of those charged with governance, the kind of content that we're going to have within those forms, those are the standard things that oh, within an engagement letter. But it may also contain the following. We may elaborate off the scope of the orders and state that due to the inherent risks, they may be unavoidable risks and some material misstatements may not be detected. We need to get some kind of arrangement regarding the planning and the performance of the orders, and that management must provide written representations to us as well as fees and billing arrangements. The engagement Little must then be signed by the engagement partner and must be accepted and signed by the clients to say yes, we've read it. We understand that we understand your responsibilities as auditors. We understand our responsibilities as management, and we will disclose everything that we need to disclose to you in order to get your scope . And please note that an engagement letters not required every year it's only it is a change or a misunderstanding from a prior engagement later, and all engagement letters must remain in a permanent far. 5. Internal Audit: All right, let's take a look at the internal audit. No internal order to sis management in achieving the entities, corporate objectives, and particularly in establishing good corporate governance. And what is the objective of a company accompanies they to make money. But if you don't have the correct corporate governance, well, they could be a potentially loads of problems, and we've covered that in corporate governance. So internal auditing involves, among other things, the examining, evaluating and reporting to managements and the directors on the adequacy and effectiveness of components of the accounting and internal control systems. So the assist managements and say to them that your internal controls have the following weaknesses. These are the things that you need to implement in order for you to reach your corporate objective. And it will include one or more of the following. The review of the accounting and internal control system, the examination of financial and operating information, the review of the economy, efficiency and effectiveness of operations, including non financial controls. Often, entity there will also review compliance with laws, regulations and with managements. So what do you think of the main differences between an internal and an external orders. The main difference has come into play. When it comes to things like objectivity, they're reporting difference, their scope difference. There's a relationship difference as well as planning in collection off evidence. If we just take a look at the objects of often internal order it, they are they to add value and to improve the organisation's objectives. When it comes to reporting, they report to the board of directors or any other person that is charged with governance, such as an ordered committee. Their scope of work only relates to the operations off the organization. When it comes down to relationship, internal auditors are often the employees off the organization if it has not been outsourced when it comes to planning in collection of evidence, they have long term plans in order to achieve objective of various assignments, and they don't really have a materiality level. When it comes to something like that and that order Tom or procedure, where's external auditors are normally risk based approached. So if we take a look at the external orderto, their objective is to express an opinion on the financial statements when it comes to reporting, they report to the shareholders not the directors. Their scope of work relates to the financial statements relationship. They are independence off the company and its management and are appointed by the shareholders and external auditors. Planning and collection of evidence is carried out to achieve the objective regarding the famous off their cancer. Is it fairly stated? And we set a materiality level during our planning stage, and we follow a risk based approach. So how do we assess whether or not we need an internal audit departments? We need to determine the cost of sitting up off the Internal Order Department. We need to determine the predicted savings in external fees, such as consulting fees. We need to determine the complexity and scale of the organization's activities. We need to determine the ability of existing managers and employees to carry out of silence that an internal auditor can rather do as well as management's perceived need for assessing risks and internal control. We need to determine if it is more cost effective or desirable toe outsource the work when we get to. That's a little bit later in this chapter, as well as pressure from external stakeholders to establish an internal order, departments so all of these things need to be determined first, before you want to set up a internal order department. And remember, an internal order department is they to make sure that the company's risk management system is operating effectively and their strategies that have been implemented in respect of business risks operates effectively. So they take a look at the whole business risk aspect of it. The internal controls, how things work with governments behind the entity. All of those important things. That's what they do. But what about fraud and era? Whose responsibility is it really comes down to that? The external auditors? No, our responsibility is external auditors is not to detect fraud and error. But if we find fraud an era, then it may have an impact on the financial statements fair presentation. And if that fraud is pervasive, in other words, it's overall everything in the financial statements. Then we'll have a disclaimer opinion but recover reports in the last chapter. So whose responsibility is it then? It's that off management and those charged with governance, they are the ones are that are responsible for detecting fraud. It is a control risk, so they need to implement controls management. And it's the implement controls in order to detect material misstatements, one being fraud. So when it comes to the internal ordered function, even though it's a good thing to have, and it's a good control to have in place the all suits and limitations behind it, if the internal auditors are employed by the company, it might impair the independence and objectivity and based practice states that the intern ordered function should have a dual reporting relationship in other words, their reports to management and those charged with governance. Internal auditors also don't need to be professionally qualified, whereas professional accountants and external auditors do need to be professionally qualified so again, even though it's a good function to have the all limitations behind having an internal order department. So what are some of the things that internal auditors do? What are the assignments? One of the things that can do on behalf of management is what's known as a value for money orders, and these types of orders examine the economy, efficiency and effectiveness of the activities and processes. So when it comes to the economy, it's attaining appropriate quality and quantity off physical and human and financial resource is at the lowest possible cost when it comes to efficiency. It's a relationship between the goods and services produced, and the resource is used to produce them. That's efficiency and effectiveness. Is concerned with how well in activity is achieving its policy. The internal auditors can also have the following assignments. They can test operational and financial controls they can before I t system reviews. Like I said, they could do very for many reviews things like fraud investigations, review of compliance with laws and regulations as well as customer service reviews. And they can report based on these types of activities and assignments that they have done . But the reporting is not the same as an external auditor wears an extra in. Orderto will report on the FEI presentation of financial statements. The internal auditors report is very different. They don't report on that. There were reports to management and those charged with governance on weaknesses within internal controls, effectiveness all of those things that have already gone through. Now there's another part with internal auditing as well. You don't necessarily need to employ your employees to become part off your orders into in order to function. You can also outsource that responsibility, and outsourcing means that we're using somebody external to perform that function. However, the store needs to be a degree of control. So a company that's going to add source the internal ordered function has to establish these controls over the at Source Internal Order Department. And they will do this by sitting performance measures in terms off custom areas of the business reviewed and investigating any types of variances. And they need to make sure that is an appropriate ordered methodology. They can also review working papers, select a sample and we'll see whether or not they meet their standards. And if you going to use an ordered company, then you need to make sure that there's a clear distinguishing objectivity and independence policy control that's in place to make sure that the function off the internal orders is separated from the external orders. But again, when it comes to Ansel, sing these advantages and disadvantages as well. Some of the advantages is that you don't need to recruit your own stuff and the external auditors that you're going to get it's part of you into an ordered function probably have the quality staff that we're looking for. And if you're using something like an order foam, they have specialists that can actually help the company with their internal ordered function. It's also a quick fix. It's a very quick thing to do. You can get somebody that's outsourced to do intern ordered function, and it's an immediate thing. You don't have to wait for employees to come into your internal order department. It's effective immediately. It can also be used in the short term. So if you're gonna set up a department but you're at sourcing it, you don't need to use it for years to come. You could just use it for a short term basis. Way is a year to do it in house. Well, then, if you had to go, one of the disadvantages would be that you would lose. Your staff is going to close the department down. So what happens to the staff members? And another disadvantage is that the at so stuff might not necessarily have complete knowledge off the company. Where's the internal stuff? Will and again if you using an outside firm, one of the disadvantages will be independence and objectivity issues. So if they using the same company to do the external and internal orders while they might be in independence and objectivity threat and it can also be very costly. Because if you get asked at sourcing the stuff, then well, you're gonna pay for it, too, and you might end up paying more to an external party than if you had to do it in house. So again, when it comes to internal audits you need to determine is the benefit behind it. What do they do? What is the function of the Internet orders? Do we do it internally, or do we at source it? Those are the things that you need to remember and remember for your exam. 6. Risk Assessment: risk assessments. So what is risk? Well, from an order point of view, the risk is that we as the auditors, are going to produce an inappropriate ordered opinion to state that the financial statements are fairly stated when they're all. In fact, not we can identify these risks that are planning stage. However, we can also identify risks during the orders, and we need to design ordered procedures to mitigate those risks. To identify material misstatements in the eyes, A statements actually help auditors to conduct in order to identify risky areas. Procedures that follow toe identify material misstatements within those high risk areas. Notices can use was known as professional scepticism and professional judgments and birth. Professional scepticism and professional judgment comes from experience. No textbook can tell you how to use professional scepticism and professional judgments in order to must be a way when using professional scepticism. In instances where you inquire about something. When a client, they tell you one thing and you get the ordered evidence and all of a sudden I contradict each other. We also need to be aware at all times that it is possible fraud and various conditions that may indicate fraud. So what kind of conditions would indicate fraud? Well, if somebody is dealing with a lot of cash on a daily basis and there's no real internal control around that cash, our professional scepticism should be raw behind. It's a hedonistic and ding ding ding. The alarm bells are going off. This is a bit of a risky area, and there's a good order to issued usual ears in your eyes at all times. Not just get to a client senator desk. Vouch a few things and everything's okay. You should use it at all times on your way to a client, to their office and you see something, you hear something you need to be alerted all times at possible risks. And even if you on a break and you checked in to the clients and they mentioned something, be aware of certain things, everything so clients is to you know, I'm so tired of my job. I hate it here, a corned way to just get out of here. I forever verifying stupid things. And this person that's in the creditors department is doing silly mistakes and forever having to correct them. And I just don't have time to do it. You should use that information and say, What was that just told, even though it was on a break. So I wasn't the With the order team sitting, inviting what I need to go and vouch, I was told something by the clients. She sounds a bit disgruntled. She sounds like she's overworked and underpaid, and she doesn't have time to go and check that the creditors reconciliations are reconciling correctly. Ding ding ding alarm bells go off again. Maybe there's a problem with the creditors reconciliations. So even when we've identified in the planning stage are risky, areas during the conduct of the orders have now identified another risk, and all I did was gonna break in order to scan also use professional judgment. Now professional judgment can be around things like ordered risk what we believe to be a za risk, and it is a judgment because it might not be a risk. We're assuming it's a risk, its judgment and also around things like materiality member. When I discuss materiality, I said the is judgment behind it with Renato. Use current yes figures or prize figures whether or not I use revenue with or not. I use total assets as well as the percentages that I use. It's all based around judgments, and this is why I said, When it comes to professional scepticism and professional judgment, it comes with experience. You wouldn't expect somebody who's new to auditing to have fantastic professional scepticism and professional judgments. You would also use professional judgment and evaluating the ordered evidence to see Have we actually obtained enough information to base an opinion on the FEI presentation off which ever accounts it is within the financial statements and when it comes to ordered risks ordered. So what known is a risk based approach to so in other words, we take a look at we are our risk areas based on a number of factors that we will go through. And what are we going to do about those risks? What procedures are we gonna put in place to make sure that the financial statements all in fact free from material misstatements and normally what happens in the exams? They give you a scenario and they say to you identify the relevant risks and at what a solution level those risks are at, we will cover research shins as well. So when it's we knew in three ethics are said to you, go through the scenario and see what's our ethical risks. Same thing approach place here with or give your scenario and you need to identify with the ordered rescues and then again to say at what assertion level that risk is that. But how do you identify risks? How do you know that? For example, revenue is high risk? How do you know that inventory is high risk and the rest is not? This is way understanding the entity comes into play. We need to understand exactly the kind of environment that the entity is in and determined , using professional scepticism and professional judgments. What we believe are high risk areas and the impact that those risks will have within the financial statements. Overall ordered risk now ordered risk is the risk that the auditors will express an inappropriate ordered opinion when they is a material misstatements. And there are three types of ordered risks inherent control and detection. And there is an inverse relationship between inherent risk control risk and detection risk before explain what that inverse relationship is. Let's go through what it's main spy, inherent control and detection risks. Non inherent risk is a risk of material misstatement, assuming that they are no related internal controls. In other words, it is beyond the control. Often auditor end off managements that he is going to be a material misstatement, such as what? Well, if the company is prone to strikes, that is out of the control of management, and it's out of the control off the auditor. So the company might not want to disclose that they have strikes. And often so they say, Well, productivity is down. So let's just, you know, make some fictitious journal entries to show that the company's actually doing OK, when in fact that is not the case. So that is an inherent risk. A control risk is the most statement will not be prevented or detected and corrected by the internal controls. So control risk relates to management only, not the auditors. It is beyond the control of the auditor. It is management responsibility to make sure that the internal controls are working effectively. We contest those internal controls, but we cannot implement them, and detection risk is the risk that the order procedures that we conduct will not detect a material misstatement. So let me give you another example. It's going to rain. Is that within your control? No, that's my inherent risk. My control risk was I knew it was going to rain because I saw the weather report. So there's my control. My detection rules could be What's too bad? I didn't bring my umbrella, so that was within my control, is the auditor. There was a control in place. There is an inherent risk, but I didn't really do anything about it when I was talking about an inverse relationship. What I meant was that the higher my control risk, the lower my detection risk and vice versa. So, in my control risk if my control risk is high, that means that my internal control procedures oh, doubtful they might not be effective. And if they're not effective, it means that when it comes to detection risk as the auditor, I might not be able to pick up a material misstatement because that hasn't already been picked up within your internal control structure. And as auditors, we want our overall ordered risk to be at an acceptable level. We're away that they are still possible. Misstatements within the financial statements, however there regarded is immaterial. And if the overall ordered risk is just too high, we shouldn't go forward into the order because we might give an inappropriate ordered opinion. So let's go through a few indicators of risk. 1st 1 being management integrity again if managements are not seen as ethical and they doing whatever they want to do. And look at this corporate governance issues around that as well. Please remember that. But they don't care about looking after the tax authority text meant comes, lost, stalled, come lost creditors Come, lost, we come first. There's a problem with that and that would give me a A rescue orders chances off misrepresentation would probably be high the organization and management structure. So if I take a look at how everything fits together and how the company fits together, if managements are not reporting to the relevant people and the managers are just doing what they want to do, well, that's also another problem. The nature of the business. I would also give me a risk. What does the company do? Remember? Said one of the best ways to identify risk is to have an understanding off the entity. So what does the company do if the company is involved in a mining operation, ends the minds? Or for Yvonne strike? That's the nature of the business. And that's an inherent risk, Like a sit with strike. That's an inherent risk. It is beyond the control of management and be under control of the auditor. But it's what the business is involved in. Financial results can also give me an indicator of a risk if the company has adverse key ratios. So companies insolvent, the trading under insolvency. I have a going concern risk company not might not be able to continue within the foreseeable future, and I need to know that, as the auditors are, make the relevant disclosures within my audit report and that management has made the relevant disclosures within the directors reports. Another thing with financial results can be that the receivables days are extremely high in comparison with industry norms, so the company's making credit sales. But they're not converting those credit cells into cash on time, which can also lead to financial problems. You can't receive the money from your datas. Well, how you gonna pay your creditors. And if you can't pay your creditors, how are you going to get more stock? Remember the working capital cycle from management accounting? All of these things play a part in auditing as well. We also need to consider the tops of relationships that the company has as well as related parties. So if the company is a subsidiary off another company and they share, common shareholders are now it's a related party. But the holding company is doing something illegal. Well, we have a bit of a problem here. We have a bad relationship and a bad related party that can have an impact on our orders. Another thing that can indicate risks is our prior knowledge and experience. We we know that the company has always had a problem with fixed assets. The corn calculate appreciation correctly. They never have supporting documentation for additions, etcetera. We also need to consider the likelihood of intentional misrepresentation, and this can be identified through understanding the entity. So if the company is selling its business to somebody else, they might want to intentionally misrepresented financial statements so that they can get a biggest selling price at the end of the day. Now, when it comes to understanding the entity and its environment, why is it necessary to have that understanding? Well, we as auditors can identify and assess risks off material misstatement within the financials. It will enable us to design and perform further order procedures, and it will provide a frame of reference for exercising order judgment, especially around materiality. So what do we need an understanding off? Well, we need to understand the industry, the regulatory and other external factors, including their applicable financial reporting framework, the nature of the entity, including its operations, its ownership of governance, the entity selection off application of accounting policies, the objects of in strategies and related business risks that might cause a material misstatement within the financials, the measurements and review of the entity's financial performance as well as its internal controls. So how do we obtain this evidence? We can do it through enquiries. We can ask management. What do you involved in? Who are your competitors? What kind of products are you selling? We can do it through analytical review procedures, especially ratios to say well, the company's current ratio is not that great. However, it appears to be within the industry norm, so there's no real risk we can do it through observation and inspection. Walking around using your eyes and ears is the auditor prior knowledge of the clients, as well as order team discussions with order. Team will sit down together and they'll say we believe the following areas are risky based on whatever. Now, Like I said, analytical procedures can be used to identify risks, and it can be done at the planning stage execution stage as well as finalization. But at the planning stage, I will use analytical review procedures toe identify risk, especially around things like ratios. So if my receivable days is really high, I would need to compare those to the industry Norm. And we're not talking about the industry, norm. I'm talking about a company that's in the same industry as the one that I'm auditing. I'm not gonna compay the ratios of a burger joint to clients that is in clothing. It's not the same industry. So after I make this comparison and I say it's actually above industry norm, it shows a lot of risk, and the 1st 1 is that they might be debts that are no longer recoverable. The company doesn't want to provide for those dates because they don't want to have less datas on their balance sheets. And I can tie that ratio up two things like stuck. So if my inventory days is also really high, maybe we're selling inferior goods. So the data's are receiving the stock, but they're turning around and saying your stock quality is so bad that we're not gonna pay you for it. Not only are we not gonna pay for it, we don't want any more of it. So now my inventory days is gonna and that shows another risk, which is going concern. And those two will obviously affect my current racial. And what is my current ratio? It's my current assets vs my current liabilities. So if my dates are really high, in other words, my current liabilities, my trade receivables are really high. My inventory is really high. I'm gonna have ah, very strange looking current racer and it will be out of the industry norm which will show a lot of risk. And this is why analytical review procedures for auditors are very important when it comes to assessing the risk of material misstatement, I said 315 states that the order to shall identify and assess risks off material misstatement at financial statement level and at assertion level for classes, off transactions, account balances and disclosures. Like I said before, you need to in the exam, say what is in the scenario? What is the risk and at what level does it fool? And we will go through assertions a little bit later in this course significant risks. Now, how do we assess a risk being significant or normal? Well, a significant risk is got to do with materiality and likelihood. In other words, if the risk is material and it is likely to occur, it is significant, and we need to pay special attention to that risk during the orders. So what would classify as a significant risk things like fraud? That would be significant if a transaction is really complex and management might not know how to deal with that transaction. Disclosure wise is in the financial statements that could be significant. What about awesome? So there is a risk that somebody is disgruntled and they're gonna burn down the building. Is it a significant risk? Remember We need to look at the likelihood and the materiality behind that. Is it material? If they burned down the entire building? Yes. Is it likely? Probably not. So it's not a significant risk. How do we as auditors respond to risk? If the auditor has identified a potential risk off material, missed Aikman's, then the order term must put procedures in place in order to respond to those risks. And if the risk is at assertion level, we can use tests of control and substance of testing, substance of testing, meaning ticking and bashing. At the end of the day, give me the invoice. Let me see whether or not it's correct, etcetera, test of controls. We will go through tips of controls and later chapters, but test of controls is the order to testing the control around the assertion. So let's go through a few examples of risks and what we can do to respond to those risks. Let's say that we are auditing a jewelry company, and the jewelry company has loads of gold and diamonds all over the place. There's a possible risk off 50 so what do we need to do is order to us we can't really go and do substantive testing cause once the stock is gone, it's gone. It's been stolen. That's it. We would need to test the control behind that stock. Do you have cameras? Do you search your employees upon arrival and when they leave at the end of the day? And that could be another risk with the jewelery company as well. What about the display cases? You need a display case to show off your jewelry to customers, but the management of the jewelery company don't want to show those display cases as assets . They would rather write them off as an expense. Doing so well, increase their loss or decrease their profit, meaning that this text implications because I don't want to pay texts. So these a risk that they're not classifying the capital expenditure correctly, all vice a versa. And what about the risk of people using cash to pay for some kind of jewelry? So somebody walks in with $10,000 and they say, I want those watch Whatever. What is the control around that? I want to see that the receipts have been made properly, that the customer has received the receipt for the correct good that it has come out of the stock system correctly and that that cash has been safeguarded. And it's not just lying around, furthermore, that that cash has been banked properly and promptly, and these are just a few examples of the kinds of risks that can exist. And what you need to do is you need see, re just scenario, say, what does the company do? And if I owned the business, what would be my major risks? And how would I respond to those risks, fraud law and regulations? Now what is fraud and is there a real difference between fraud and era? The answer to that is yes, fraud is an intentional act involving the use of deception to obtain an unjust, illegal advantage. And there are two types of fraud that can cause a material mistaken to them. The financial statements and one is fraudulent financial reporting and the other one is misappropriation of assets. Fraudulent financial reporting is an intentional manipulation or misrepresentation of the figures within the financial statements and includes things like falsifying supporting documentation. Let me show you an example off fraudulent financial reporting. This is a normal journal entry that I've seen on a regular basis. And what I want you to do is just ignore sales text for the purpose of this example. So we sell something. We have a data, and we have sales as a result of Deborah debts accredit cells. We get the money from the data we debit cash, recreated the debtor within, decide we're going to buy the fixed assets. So we David property, plant and equipment. And we created cash normal stuff. Right now, watch this. That data cancels with that data that cash cancels with that cash. And what am I left with? I'm left with a David to properly plants and equipment and a credit to revenue that is fraudulent financial reporting. I've created a fixed asset and revenue through one journal entry, and it's completely false. My casual balance and my data will be correct as well. The data zero in the cash zero. But I've created fixed assets. End of creates a turnover, but doing nothing. It is illegal. It is very difficult to catch. The all order procedures that you need to put into place are especially around things like fixed s. It's where you need to verify additions to supporting documentation, but it is very difficult to catch. And this is why internal controls off so important, especially around journal entries and journal entries for an auditor are always high risk. But whose responsibility is it to detect fraud? Is it the auditors? No, it's actually management's responsibility to detect fraud. However, if we is the auditors find fraud. It is our responsibility to determine the impact on our ordered report, and it depends at which level the fraud has been committed. If it was a disgruntled employee, we will take it directly with those charged with governance and say that this person has been stealing. What they do with the person is at their own good war. If it is at management level, we need to determine the impact on the order to report, because now management integrity is in question and we need to consider a possible resignation. As the auditors, auditors can perform the following procedures to identify risks off material misstatements . We can make enquiries with managements, enquiries with the internal orders, obtaining an understanding of how those charged with governance identify and respond to fraud. Enquiries of those charged with governance, performing analytical review procedures. We can consider other information, like correspondence from tax authorities, to say that you forever late pain you'll relevant Texas to us as well as litigation charges . And we can use this information and we could turn around and say based on the information that we've received, we believe that the following areas are high risk and we need to put procedures in place to mitigate that risk off material misstatement within the financial statements. And if we find a material misstatement and management refused to correct the material misstatements, then we need toe determine the effect on our ordered opinion when it comes to return representations. According toa icer to 40. It requires the order to turn obtain a representation from management whereby they acknowledge responsibility for the design, implementation and maintenance off internal controls, and that they have disclosed to the auditor management assessment of risk off fraud within the financial statements and that they have disclosed to the auditor than knowledge of fraud. The obtaining of a management representation later is not only related to fraud, and it is a general ordered procedure. We get this representation from management's to cover all areas, and it states things like we have given all the accounting records to the auditor. They are complete, and we believe that there are free from material misstatements. It's actually quite an important documents because they are making a representation to us as the auditors to say that we believe that the company is a going concern. That's another one, that there's no fraud, etcetera. And if we find something that is a material misstatements and that does amount to fraud, then that can put management since Tikriti into question when it comes to laws and regulations in order to needs to assess laws and regulations that have a direct effect on the determination off material amounts and disclosures within the financial statements and the order to needs to perform procedures to identify non compliance. And that could be things like reading minutes of meetings, enquiries with management and performing substance of tests. We can identify whether or not a company is complying with the relevant laws and regulations by investigating certain things such as payments off fines and penalties to tax authorities, like I said before, because if they paying interesting penalties to a tax authority for non submission or late submission. They're breaking the law. And also like I said to you before auditors need to use their eyes in their ears at all time. It's not only when you add the client at the desk and you've got a fall that you need to verify. You can also read things in the newspaper, see things in the news and other media reports about the clients where they're saying that this company is involved in illegal trading that will affect our ordered reports as well. And we can invest to get the general ledger, especially the expense accounts, and see something like entertainment. But we find out that it's actually bribes, so if they're paying bribes, that's an illegal act, and we need to take the necessary procedures and put them in place to see whether or not the company is complying with certain things. And if they're paying bribes, well, that's no longer the case. And just when it comes to something like that, if a company is paying bribes, you should resign as the orderto cause they are not complying with the law, says you can see the risk assistant process is actually quite long. And it's something that is so important because if you don't identify what the risks are, especially at the planning stage, then your ordered procedures are not going to meet those risks. And, like I said, are ordered. Risk is the risk that we as the auditors given inappropriate opinion. So we need to identify what these risks all were there Arthur at financial statement level or at assertion level and what procedures were going to put in place in order to see whether or not the financial statements are fairly stated. 7. Audit planning and documentation: ordered planning and documentation. Planning is such an important part of the orders. Without an effective plan, you don't know which of the high risk areas and what to pay attention see. So the importance behind it will help the order to devote appropriate attention to the important areas of the orders that will help the order to identify and resolve potential problem areas on a timely basis and will help the order to organize and manage to order, so that is performed in an effective manner. It will assist us in getting the appropriate staff members because we want people on the orders that know what they're doing and have the sufficient knowledge in order for us to get the order done effectively. There's a question Edison Wonderland, where she's lost in the woods and she comes across the Cheshire cat and she also cats. What road do I take? The cat responds well, where you going? And she responds to say, I don't know maket response. Then it doesn't matter if you don't know where you are going, any road will get you there. The same rule applies to planning if you don't plan, which are high risk areas are and what to pay attention to you, then your execution doesn't really matter and included in our planning. We need to make sure that we have met all the ethical requirements and including that of independence and recovered our ethics before, So we understand what that means Now. We need to ensure that the engagement is understood and that management knows that they are responsible for certain areas and what are responsibilities has ordered his are We need to develop an overall ordered strategy and we need to develop in order plan. Now. The ordered strategy sits at the scope, timing in direction, off in orders. Where is the order plan? Converts the order strategy into a more detailed plan and it includes the nature, timing and extent of the order procedures. The order strategy helps us identify characteristics off engagements such as the location, the financial framework, availability of daughter, etcetera. It also shows us the reporting objective. So where there are deadlines for the orders and other important factors such as materiality and are high risk areas, it will also show us our resource is so ordered staff and the competencies of our staff. We then used the order strategy and we develop our ordered plan. So we say that revenues are high risk area. But then the ordered plan will say, What are we going to do about that high risk area? What are we going to verify? What are we going to obtain and how much do you two tops off orders that can happen? You have a son is an intra mode. It on the final orders and an interim auditors conducted before final orders doesn't always happen. But a company can request that, And an interim order may include inherent risk assessments and gaining an understanding of the entity. Recording the Entity System of Internal Control. Evaluating the design of the internal controls, carrying a test of control on the company's internal controls. Performing substance of testing of transactions. Balances to gain evidence that the books are reliable and identify issues that may impact our final orders. An interim order to assist the company to get things ready and in place before the final orders because you don't want to get to the final orders, and all of a sudden you have all of these problems and yes, you can do substance of testing in an intra moated. You're obviously not going to verify everything because it's before year end, so you will be eliminating a little bit of work during the final order. But the main purpose of an interim ordered is to make sure that the controls are in place and understand the entity and identify risks. And if the order to finds issues with the internal controls, they can advise management on what to do and implement. So that come the final orders. We cannot test those controls and, if they're working effectively, will be complex. Reliance on those controls, so final ordered, may include substantial procedures involving verification off the step in our financial position and the statement of comprehensive income. So we go there in the final orders and we ask for invoices were taken, bash and we get conclusions and see whether or not the financial statements are fairly stated. We can obtain third points of confirmations from the bank and another part of third party confirmations. Our suppliers statements. We were very far this supply a statement to the creditors reconciliation. We'll perform analytical review procedures relating to the figures in the financial statements. We'll do subsequent revenge review will agree the annual financial statements to the accounting records. We will examine adjustments made during the process of preparing the financial statements, consider going concern and obtained management representations. So as you can see the final orders in the interim, orders are very different. Name trim orders. We just want to make sure that everything is a can prepared and ready, so that when comes the final orders, we can, you know, have everything they The final orders is the one that counts. It's almost like taking ah problem test before the final test. The final order. It is the one that matters. That is the one we were gonna base and ordered opinion on. And during the final order two. We obtain our order documentation an order Documentation is necessary for the following reasons. It provides evidence of the auditors basis for conclusion. So we can stated that we found the following errors. And here's the evidence that we've gathered to support that it's an error and why it's an era. It provides evidence that the order it was planned and performed, and according to the international standards of auditing it will assist the engagement team to plan and perform the orders and assist team members responsible for supervision to direct, supervise and review the ordered work. It enables the team to be accountable for its work, allows a record of metres off continued significance to be retained and enables conduct of quality control, reviews and inspections. So what happens is that the order team puts all the order documentation together in the fall. It think it's reviewed. We pick up potential problems and the engagement partner at the end will then review it and see whether or not the ordered opinion is appropriate based on the evidence within the order documentation And this is we review is very important when it comes to managers and supervisors, because the engagement partners not always on the orders. So he's relying on his team that he's put in the based on the plan and the resource is, and do we have the recurrent competency level etcetera and they review it on his behalf first. Any corrections are then made before it goes to the engagement partner. He then looks at the whole file at an overview and sees whether or not the ordered opinion is appropriate and the ordered evidence can also be used in the following year. So if we pick up a problem in the current year, we can say, Well, now we've picked up this problem. We're aware of the problem. Chances are it's gonna happen again next year. So now we have a risk. So when we do the next year's order to me, do our risk assessment. We can use prior knowledge to say we had this problem in the previous year. It's now a risky area. We need to do verification accordingly. What does order documentation look like that? So, on the slide of prepared for you, you'll see that at the top left, you've got your clients have called it. If it's ordered an assurance, Believe your year. End the name of the working paper and on the right who was planned by who it was reviewed by. It's normally the ordered manager who is performed by and who is reviewed by, is normally the engagement partner, with the reference of the working paper underneath that you have your procedure. This is where you'll insert the procedures that is being performed. You love your verification. This is where you will have your sample and you perform your necessary ordered verification . You love your results. We will have an analysis of any errors and determine it. Those areas are tolerable, and your final conclusion will state whether or not the above. Whatever it is that you're verifying is fairly stated. And these documents are important with that ordered documents in our falls. We don't know whether or not re basing our opinion correctly. And remember, when it comes to ordered risk, the risk is that we, as the auditors, are going to base an inappropriate opinion on the financial statements. 8. Introduction to audit evidence: introduction to ordered evidence as discussed in the previous chapter ordered evidence is what auditors use to base an opinion on the financial statements. We put all the evidence together with enough foul, and it forms part of our order documentation. So ordered evidence is all the information used by the auditor in arriving at conclusions on which the ordered opinion is based, and you need to look at it both from the appropriateness and the sufficiency off the ordered evidence. The appropriateness is the measure of the quality of the evidence. So in other words, it's relevance. Reliability in providing support for the conclusions and sufficiency is the measure of the quantity of evidence, and that needs to be a balance between the two. You can't just put everything into a fallen just say, Well, it's got a nice, thick foul. It might not be appropriate. That has to be appropriate. And it has to be sufficient both both ways the hacking, an auditor, facial lines and ordered evidence. What is the base kind of evidence? The base kind of evidence is something that doesn't come from the Kleins. Third party confirmation would be the best top off evidence 1/3 party confirmation are things like credit of statements that comes directly from the creditor bank statements, which comes directly from the bank and bank confirmations. The financial statement assertions. No, you need to know what your assertions are because in the exam will say to you what assertion has a risk, and what procedure do you need to put into place that relates to the relevant decision? And what I've done for you on the slide is off, Breaking it down for you into transactions and account balances transactions. Or you're stepping of comprehensive income assertions in your camp balances, or you're stepping off financial position decisions and given you the acronym Coca and Coups from Coca relates to your stepping off comprehensive income and curve, you're stepping off your financial position. Let's look at our stepping of comprehensive income positions first, and we'll use revenue is an example. We'll start with completeness. Completeness means that all the revenue that should have been recorded have bean recorded, so in other words, they are complete occurrence. Occurrence means that all the revenue included relates to genuine sales. In other words, they're not fictitious entries that actually did occur. Classifications means that the revenue has been recorded in the proper accounts and that you don't have revenue sitting in an expense accounts Cuts off. Cut off means that all the revenue have been recorded in the correct accounting period, and you will see when we get to revenue as ordered procedures that cattle becomes a very important hot topic, and accuracy means that the revenue has been recorded at the correct amounts. So in most cases, the revenue recorded should exclude sales tax. If we not take a look at our stepping off financial position assertions, completeness is the same as the one of the transactions. So it's all assets, liabilities and equity have bean recorded and are therefore complete. Existence means that my assets and liabilities and equity actually exist. They are riel rights and obligations means that the entity has the right to that assets. All has a real obligation for that liability. If you think about something like a data, a data is an asset. The company has the rights to claim that money from that data. If you look at a creditor, the creditors and obligation is a liability, so the entity should be obliged to pay. That creditor evaluation means that the value off the atoms in my assets and liabilities and equity oh, at the correct values. So if you take a look at something like Stuck as an example, stock should be valued in accordance with eyes, too, which means that it should be valued at the lower of cost or net realizable value. And you'll see when we get to stock exactly how you can do that and how you can prove that it's important to understand these assertions and what they mean because in an exam they can ask you what assertion is affected and how so. And what procedure would you put in place as the auditor to verify that, for example, revenue is complete? Remember when we spoke about risks you can never risk? That's overall risk. We can never risk at assertion level. So one of the risks would be that revenues not complete. That is a risk at assertion level. Alternatively, you can have something like there's a risk that stock does not exist, so that is a risk at assertion level, and then you, as the orderto has to design a procedure in order to verify that sales is complete and that this stock actually does exist. And I'll explain to you exactly how to do that when we get to those relevant sections. But how does in order to obtain ordered evidence and I've given you verbs or adverbs on the slide that would it's a must perform the following we can inspect. We can either inspect assets or supporting documentation we can observe. And I said the walk throughs, especially you'll see when we get to internal controls, which is the next chapter that we observe a lot. When you do walk through procedures, we can inquire. We can ask questions we can re calculate, re perform, obtain external confirmations and perform analytical procedures. And it's important to understand these boobs because when you are writing in an exam, you need to use these kind of words because this is what editors do. They are verbs, so we are inspecting, observing, enquiring, recalculating, etcetera. So we need to use these things to say, How would you verify that stock is complete? You can inspect the stuck. You can observe internal controls. You can get enquiries from management's, especially through manager of representation letters, so used these kind of words in an exam. Don't say chick. Check if the stock exists. No, Inquire about the existence of the stuff. Inspect the stock. Observe the internal control surrounding the stock order Thing is a very specialized paper . It's a professional paper. So you need to show you examiners that you are a professional were not checking. We're inspecting recalculating. We are professionals were very eloquence in our words that we use. So show you, examiner that you do know what those verbs mean. 9. Internal Control: internal controls. Now this chapter gets asked all the time. It is extremely important that you understand what internal controls are as well as how to test internal controls. Testing of internal controls is in the next chapter. So we're gonna just take a look at what internal controls are all about before. In order to contest an internal control, the auditor must understand the accounting system and the control environment in order to test that. And the understanding off this internal control will assist the auditors in identifying potential misstatements. So we can design the nature, timing and extent for further ordered procedures. So internal controls is a process designed to ensure the achievement off the entities. Objectives? No. What's all the entities objectives? It's to make profit and to make money. And if you have a weak internal controls structure, it becomes very difficult to find misstatements to prevent those kind of misstatements to detect things like fraud. So it's a very important thing to have within all organizations, so internal controls are important to management because it gives reliability on the financial reporting. If there's a good internal control structure, then it will detect and prevents possible misstatements within those financial reports also assists management with the effectiveness and efficiency off the operations, as well as compliance with applicable laws and regulations. But it's not only important to management also important to assets, the external auditors cause we can identify potential misstatements and weaknesses. And when we do, we report this to management, and they can see it is, Hey, you know, these orders are really helping us out That added value. It also assists us without risk assessment so we can consider factors that affect the material. Misstatement off those financial statements, and it can also help us without ordered approach. Can we rely on these controls so it will determine the nature, timing and extent off further order procedures? But what is the difference between testing substantively and tasting controls when I'm tasting substantively, I am. What's known is ticking and bashing. I need that invoice. I need to verify things on the invoice when I'm tasting a control and tasting the system that's in place, and when I say system, I don't only mean the computer system. I mean, if I'm taking an invoice from this person to that person, what does the other person do with that invoice? Do they review it? Do they process it? Do they do little chicks? And then where does it go? That is the system that I'm checking, so I want to see the whole cycle from initiation. Where does it all start? Right up until how it gets into the financial accounts and you'll see when we get to the next chapter how we can actually do that. So they are five internal control components. We need to look at the control environments we need to take a look at the entities. Risk assessment process, communication and information systems, the control activities and monitoring. Let's take a look at each one separately. The control environment takes a look at the governance at off managements and those charged with governance as well as their attitudes. Their awareness is and their actions concerning the entities, internal control and the importance off those internal controls within the entity in the standard ice or 3 15 actually says that the order to mask obtain an understanding off the control environment and we must evaluate if management has created and maintained a culture of honesty and ethical behavior as well as the strengths in the control environments provided an appropriate foundation for the other components off internal control and whether those components are not undermined by deficiency in the control environments. And, like the Standard says, we need to obtain an understanding off the control environment so we can take a look at things like our management assesses the level of competence for a particular job, as well as the independence from management, their experience, their approach to taking in managing business risks, their attitudes and actions towards financial reporting, the framework within the entity's activities for achieving its objectives or plan executed , controlled and reviewed, as well as human resource policies and practices. Do you recruit? Who do you recruits? How do you recruit? Do you evaluate your staff members? Do they go through any type of orientation? Is the training promotions those sorts of things? And when it comes to the entities risk assessment process, the standard ice a 3 15 Saiz that the auditor must understand whether the entity has a process for identifying personal risks relevant to financial reporting objectives, as well as estimating the significance off the risks we need to assess the lackey hood of their occurrence and decide on actions to address those risks. And it's more than likely these days that the company has some kind of information system. So why information systems important to the clients into the auditor? Well, they contain everything. All of the financial accounts and reports and journals and ledgers and travel Unz The works are all envy, so if you don't have a control behind who information system, you're looking for big trouble. And as auditors, we need to determine how the transactions are initiated, recorded process corrected, transferred to the general later and reported within the financial statements, as well as how the information system captures events of conditions other than transactions . There are still significant to those financial statements. We also need to take a look at the control surrounding journal entries. Journal. Inches off Very dangerous things if you don't know what you're doing, and if there's no monitor and review over journal entries, you can have a lot of things go wrong. You could have somebody processing journal interest to try and hide something within the financial statements. It can be anything from a genuine mistake, and I don't want to be caught at to something that is fraudulent and actually a good control behind. Something with journal entries is that a journal entry is authorized by a senior official before it is processed within the accounting records. When it comes to control activities, the control activities are the policies and procedures that help ensure that managements directives are carried out and control activities include activities designed to prevent, detect and correct errors. And that's done by things like re performance by somebody else, reviewing the physical controls and a very important one. Segregation off duties. Segregation of duties is a very important thing for an internal control structure. Toe work effectively. If one person is doing absolutely everything within the accounting system, then there's limited segregation of duties, and you can not pleasure lines on the internal control structure. Why is that? Think about it. If I'm processing the cash book, I'm processing receipts and payments. Obviously, I am raising an invoice both for my my trade receivables and my trade payables. I'm also in control of the inventory chances I could make an era, and if I make an era, there's nobody there to monitor me. There's nobody there to see from doing it correctly if I'm processing the stuff correctly and accurately. So segregation of duties only works when there's a number off people within the accounting function and everybody's checking everybody. So with from initiation right through to reporting, these different people associate ID Teoh each function before it gets reported within the financial accounts, and this brings us to the monitoring off controls. You cannot just implement an internal control structure with art monitoring them. So we need to see whether or not our design and operation of controls are still working. And if they're not, we need to modify them over time. And this is where the importance off the internal ordered function also applies, so the internal ordered departments can monitor the internal controls off an entity. But internal orders are normally done for very large companies, primarily because of the cost on the function off the business and the nature of the persons and all of those things. So these small companies, the main problem behind their internal control structure, is segregation of duties and director seem to be very involved when it comes to the operations off the entity. And there's a thing called management override, where they can almost enforce and accountants to process something within their counting records, even though it's not correct, and that is a serious internal control weakness. So if that's the case and we cannot basil lines on the control system, then what do we do? Is auditors. We perform substance of procedures so we will get normal things like our confirmations are supporting documentation, all of those things, and we will not pleasure lines on the internal control structure. But if we can place reliance on our internal control structure, that doesn't mean that there is no substance of procedures. There's just limited substance of procedures, so we can pleasure lines on the internal control so it will prevents, detects and correct a material misstatement based on their control activities. But it doesn't eliminate substance of procedures altogether. It just reduces them. External auditors can record the control system and see how it works because we need to understand is the external auditors how these things work in order to see what our approach is going to be. So how do we do that? Well, we can get narrative notes. It's known as a systems notes. We can get a narrative note of how the system actually works, and we can identify weaknesses from that. But they are advantages and disadvantages to using narrative notes. The advantage is that they're relatively simple to record and that can facilitate and understanding about all order team members. You just give it to your team member and they can read it. The disadvantages are having. Something like a narrative note is that it doesn't flow very nicely, and it could be very time consuming to put together. We're something like a flow chart. It's follows a logical order, but a narrative note of person concert. Oh yeah, I just need to add this in as well. I forgot about that. It doesn't flow as nicely. We can put it in the form of flow charts, so we have our different cycles. So our revenue cycle, our purchases cycle bank and cash cycle, payroll cycle, etcetera and we can see how the whole system fits together. And we cannot identify weaknesses within the internal controls from that flow charts and the advantage of putting it in a flow chart. Like I said before that, the information was presented in a standard form and it seems to follow a more logical order and some disadvantages or things like Well, it is. Something is majorly changed within the internal controls, then update it. You're probably going to need to redo it. We can also use. Question is, and question is means that we can ask direct questions based on their system to identify potential risks as well as weaknesses within those internal controls. The advantage of using things, that question is, is it all controls can be considered if it's drafted correctly and thoroughly, and they're also relatively quick to prepare. It also helps us identify key controls, which are most likely to be tested during our controls. Testing. And some of the disadvantages would include things like if it's not prepared properly. Three. Vague. And if that's the case, we can actually must understand that control. And we can also use checklists and the check. This is quite a nice thing to have. Their very similar to question is, but will have a direct question. So does this happen and not take yes or no cross or tickle whatever? So it's actually quite a nice thing to have, and once we have obtained all of these flow charter admiration notes or whatever we're using. We need to evaluate that internal control and the various components within that internal control structure. One of the based ways to do that is once we've got, let's ever using narration, it's We can perform what is known as walk through procedures so we will actually physically stand. They see how the transaction is initiated, follow it to the next person and then see what they do then Hard gets processed, reviewed, authorized all of that to see whether or not the system is actually working correctly. And it will also help us in confirming that we understand how the system is actually working. So when we're testing the control, we will do things like inspection off the documents. What is being used way? We can do re performance off trade, payables, re conciliation to see with your knots that they are correct and that they are authorized and adequate and all of those things. We can observe the controls as well. So, like I said, when we do, our walk throughs were observing the control. And when it comes to tasting the computer and the system there's a whole lot of things that we can do. But one of the most important one, especially when it comes to the bank cycle, is excess. So Paul Sweets and all of those things will taste that as well. Can anybody just get into payroll? Can anybody just release of payments and we'll taste that? Control will actually enter a password to see whether or not anybody can just access that computer system, the payroll, the bank etcetera. And when we find deficiencies or weaknesses within the internal controls as auditors, we need to communicate those deficiencies with managements and those charged with governance. And we need to explain what the deficiency is, as well as the implication off that deficiency. We also need to determine if the deficiency could result in a material misstatement within the financial statements in the future, as well as the amounts exposed to the deficiency and the susceptibility of loss or fraud. And there are various indicators that can show assets the auditors, if they are significant deficiencies within the internal controls. And it could be things like evidence off ineffective aspects off the controlled environments. Absence of a risk assessment process, most statements detected by SS, the auditors restatements off previously issued financial statements that were corrected for material misstatement due to fraud or error. Those kinds of things will tell us if they are deficiencies within the internal control and we should communicate those things with managements and make them away, that there are deficiencies within the internal control structure so that they can rectify it. Remember, management is responsible for the implementation off the internal controls, not the external auditor. We only they to evaluate it. So how do we evaluate internal controls within a computerized environments? There's two aspects to this. We first need to take a look a general controls and then application controls surrounding the computer environments and general controls or controls over the daughter, the network operations system software, a changes in maintenance, excess security, any kind of further developments and any kind of application system acquisition application controls our procedures used to initiate record process and report transactions or other financial daughter and they are controls are in place to ensure that the integrity off the accounting records is in place. So for general controls, this should be a general control over the developments off computer applications. And how do we see that controls in place? One of the key things. The segregation of duties again. So they must be segregation of beauties for those responsible for the design. But they're not responsible for the testing. There should be full testing procedures using test daughter. There should be approval by the computer users and by managements, and they should be training off staff in new procedures and the availability of adequate documentation. So how do you prevent or detected unauthorized change in the program again? One. Segregation of Duties. You should have full records of any program changes. There should be some kind of password protection and restricted access to the system to make any kinds of changes. You should have a virus chick to make sure that viruses cannot destroy your daughter. You should have a backup policy in case anything goes wrong. You don't you start from scratch, but what happens if there is a change in the program? Then it must be documented, and approval of the change must be made by the computer users and by management. When it comes to application controls, they must be a control over the completeness within that input data, as well as a control over the accuracy off that input daughter. And one of the ways that we can look at the accuracy off that input daughter is by looking at digit verification. When there's a limit check as well, so you can't enter more than seven digits. It will reject it. If you think about parse words when you want to do verification of your accounts in your banking system as an example, when you set it up, it actually says that it has to be a certain number of digits long. It must include a number. It must include something else. Capital Letter. So that is a test in the system to see whether or not that accuracy of what is being put in is actually correct. And it is you and that can be used with in accounting systems as well. We can also have what's known as a range taste so you can only enter a value within the permitted range. And if it comes down to something like against segregation of duties, when they control around the application itself within the computerized environment, certain people can only enter certain amounts based on authority or whatever, so you cannot enter. If you're a junior sales clock, you cannot enter an invoice exceeding, let's say, $100,000 that goes to the next person, and then we can look at that control and say, But is that authorized etcetera? So it's a range to determine whether or not those amounts are accurately recorded. And as auditors weaken, taste this. We can actually take a look at the application and say So I'm gonna look in as a junior sales clock, and I'm going to try and into an amount of $500,000 and the system should reject it immediately. We can also verify the digits, the limits. So let me into six instead of eight digits and see whether or not the system rejects it. So we tasting the system, we testing the application all the time and when it comes to authorization, like I said, if somebody else needs to authorize amount, we can actually as auditors obtain some kind off signature authorization spreadsheet or whatever. In order to determine whether or not those transactions that have bean inputted have bean authorized, they should be controls over the processing as well. So there should be some kind of warning screen warning that says you haven't answered all the information correctly. And if you think about it, if you're buying a plane tickets, you need to answer all of your information off the passenger that is going to be on board. So let's say you inter first them but not a surname. And it asks you for a Social Security number, identification number, whatever. And you don't enter that in and you click next. The system shouldn't allow you to go next. It should pop up and say, You haven't filled out the required fields and that is a control over the processing. And what some other accounting systems do is if you are processing an invoice and say it's a sales invoice, but you haven't updated it into the accounting records and the click next or clothes or whatever, and you open it up again and you process another invoice, it should tell you that they are on processed invoices. You can either of you them or update them or whatever the case is, but it should give you some kind of warning that they are UN process benched amounts. We also need to determine the control off the output controls. So again, with my example with an airplane tickets, there should be some kind of confirmation. So I have entered everything correctly. I have made my payments. But then all of that and now I've got a confirmation that it has been processed, and then I'm allowed to get onto the plane, and these days you get what is known as an E ticket. They don't need to go to the airports and get your ticket. They doctors email it to you and you're ready to go. We can then obtain what's known as logs and exception reports so we can see if there's any errors during the whole control process around the computer environment, both for general and application. And these exception reports are very important because, as in orderto, we can identify the weaknesses within that internal control and within the computer environments, Then we can communicate that with management to say, just by the way we found these exceptions. Within your computerized environments, you need to rectify them. So as you can see, internal controls are very important and their help detect and prevent misstatements within the financial statements, and you'll see now on the next chapter how we actually go into detail per cycle for testing controls. 10. Tests of control: So in the previous chapter, we looked at internal controls. We looked at the control environment of control activities as well as a computerized environment now again to be taking a look at each cycle and how we test controls. It's important to note that we need to see from initiation through authorization, recognition, measurement, recording and processing, re conciliation and reporting that the internal control around that works. At each point, it's important to note that if the control breaks at any points, then you cannot place reliance on that internal control unless there is a mitigating control that is in place. And one of the key things that would break it immediately is if they are limited segregation of duties. And this chapter has been asked many times in the past. So it's important for you to understand that to study it and really get to grips of it, because chances are it's going to come up in your exam again. Which cycle it will be, I can tell you that. So you need to know them all, so we will be looking at the sale cycle. The purchases cycle, inventory cycle bank and cash cycle, the payroll cycle and the revenue and capital expenditure cycle. But before we can taste the cycles, we need to determine whether or not the internal control surrounding that cycle is in place . And in the previous chapter, I discussed how we do that through the use off flow charts and generation notes and all of those things. We can determine risks and see whether or not an internal control deficiency actually does exist. So once we have an understanding of the controls and we've determined that they are effective, we will see the design of those controls. And if they are effective, then how are they implement it. We will then take a look at the initial internal control assessment. And if those are effects of, if it's operating effectiveness off, the control is effective. And if that is the case, we can pleasure lines on the internal control, so we'll have a low control risk and a high detection risk. But like I said, if it breaks at any point, then you can't pleasure lines on that internal control and you'll have a high control risk , but a low detection risk bear in mind if a control brakes and there is a deficiency in the cash in banks cycle. That doesn't mean that there's no controls over the inventory cycle. It's separate, so it doesn't mean that well, we can't rely on the bank and cash internal controls. Therefore, we can place no reliance on any controls because they might still be adequate controls within another cycle. That doesn't a thick bank in cash. So let's look at the sale cycle and let's start with completeness and I control objectivist . Ensure that or revenue relations, because dispatch is recorded and the control objective is sequencing. So my invoices should be in some kind of numeracy sequence and follow each other. So how do we taste that control? What? We can see those sequences on those invoices so we can select a sample and see whether or not that is actually the case. Another control objective for completeness is to ensure that all goods and services sold are correctly invoiced. So the control that needs to be in places that the shipping with dispatch documentation is matched to the sales invoice, and we contest that control by selecting a sample of the shipping documents to ensure that there have been matched to related sales invoices and that there have been recorded for cattle my control objectivist to ensure the transactions have been recorded within the correct period. So the control that should be in places, that they should be daily invoicing of good shipped, and that all shipping documentation is forwarded to the invoicing department on a daily basis. In order for us to test this control, we can compare the date of the sales invoices to the corresponding dates on the shipping documentation, as well as comparing the date of the sales invoices with the dates in the sales ledger for accuracy. Our control objective is to ensure that all sales and any adjustments to the sales have bean posted to the correct accounts. So the control that should be in places that all sales invoices and matching documents required for all the entries and the date and reference off the entry are written on each documents. And we can taste this control by reviewing the supporting documentation from a sample of ourselves entries to ensure that their containers and details that indicate that they were referred Teoh when answered for a current in existence, our control objective is to ensure that recorded sales transactions represent goods or services provided. And this is where segregation of duties is very important because they're the recording off the sales and the receiving of the payment needs to be allocated to separate team members or staff members, and we contest that control by observing the processing off the orders and determine if they are proper segregation off duties. Another control is that the sales are only recorded if they are on an approved sales order form, and we can taste this control by taking a sample of the sales invoices and verifying that they're related to a sales order form. We also need to verify that monthly customer statements are sent out to the customers and that any customer queries and complaints are handled independently. And we can taste that control by reviewing the entities procedures for sending out monthly statements and dealing with any customer queries or complaints. Another control objective surrounding occurrence in existence is to ensure that goods and services are only supply to customers with good credit ratings and the control that needs to be in places. That authorization of credit terms are done by a senior official and that there is review off credit limits. We can taste that by reviewing the entities procedures for granting credit to customers. Another control surrounding credit limits is to make sure that orders are not accepted unless their credit limits are reviewed first. And we contest that control by reviewing all new customer falls to ensure that satisfactory created references have Bean obtained for that customer and as another control objective, we need to ensure that goods and services are provided at unauthorized price and unauthorized tombs. So the control that needs to be in places that there's an authorized price list was specifies terms off trade in place. And how do we taste that? Well, we can verify that priceless in terms of trade or property documents had authorized and communicated for classifications. The control objective is to ensure that all transactions are probably classified in the accounts, and normally, what happens in a computerized environments, This tops off codes that you can enter. So that's a code 1000 goes to my revenue. And when that invoices process and that code 1000 has been answered, the revenue should be sitting in the revenue accounts so we can taste In other words, the application controls behind that. All right, so let's take a look at the purchases system when it comes to occurrence and existence. Our control objective is to ensure that recorded purchases represent goods and services received and the control that needs to be in places that they should be some kind of authorization procedures and policies in place for the ordering of goods and services. We contest this in two ways. We can either inspect the policies and procedures. All we can observe the processing off the purchase orders throughout the purchasing cycle. We need to determine if they are adequate segregation of duties in place. Another control that needs to be in places that purchase orders raised for each purchased is authorized by an appropriate senior officer. All personnel. But it has to be senior, and we can select a sample of our purchase orders to see if they have bean authorized. They should also be a control in place where there's an approved purchase order for every receipt of goods, and we can taste that by selecting a sample of good received note and verifying that they relate to a purchase order that has been approved, there should be a control around, start receiving the goods and that they are checking them against the purchase order. And we can observe the receipt of the goods by the stuff and confirm whether or not this check has bean done. They should be a control in place where purchase orders and G R ends are matched with suppliers. Invoice. We contest that by examining supporting documentation to verify that it has been matched. There should be a control in place where supplies statements are independently reviewed and re consult of the trade payables records. We contestants by reviewing procedures for reconciling supply statements. And we can re perform that calculation from a sample of reconciliations for completeness. Our control objective is to ensure that all purchase transactions that occurred have bean recorded, and the controls that need to be in place is that one of them is the purchase orders and G R ends are matched to the supplies invoice, and we taste that by taking a sample of purchase orders in the year and verify that each have been matched to related invoice. There should also be a control in place where there is an independent check off amount recorded within the purchases journal, and we can examine documentation for evidence off this check. There should also be a control with their pre number gee Ahrens and purchase orders. And we can verify that isolating a sample off GR ends and purchase orders to determine if they follow a numerical sequence when it comes to rights and obligations. Our control objective is to ensure that the recorded purchases represent the liabilities off the entity. In the control in place is that the purchase orders and GR ends are matched to the suppliers invoices, and we can taste the spice in electing a sample of invoices and see that it has been matched correctly for accuracy classification in valuation. Our control objective is to ensure that purchase transactions are correctly recorded in the accounting system and our control, so that our purchase orders and GR ends are messed with the supplies invoices. And we can taste this by examining supporting documentation for a sample of invoices. They should also be a control surrounding the mathematical accuracy of the suppliers invoice. We contest this by reviewing a sample of the invoices to verify the accuracy, and we can actually re perform that check as well. Another control is that the amounts posted to the General Ledger or re consult to the purchases Ledger and we contestants by reviewing reconciliations for evidence off this check when it comes to cut off. Our control objective is to ensure that our purchase transactions are recorded in the correct accounting period and a control that needs to be in places that all goods received . Reports have been given to the accounts payable department on a daily basis. And we can taste this by comparing the dates of the reports to the dates off. The relevant supporting documentation and another control that needs to be in place is that purchases are raised as soon as possible after they have been received. And we can verify this by comparing the dates and the vouchers with the dates that they were recorded in the purchases journal. Let's take a look at our inventory cycle for a current in existence. My control objective is to ensure that all inventory movements are authorized and recorded . The controller around that is that there must be pre number documentation. So something like a goods delivery note or a good received note that they have that in place, and we can taste that by reviewing documentation like that. Another control is that they are reconciliations off inventory records in the general Ledger. We can taste this by reviewing a sample of these reconciliations and confirmed that they'll performed and then reviewed by an independent person. They should be. Segregation of treaties is whoa. People should have separate responsibilities for the maintenance of records and custodianship over inventory. And we can taste this through observation. We can see whether or not they are segregation of duties in place. Another control objective with the currents and existence is to ensure that inventory included on the statement off financial position actually exists. And they should be controls over the safeguarding of stock. And we can review the spot seeing the kind of security systems that are in place. So cages with the stuck it is locked inside cameras, those sorts of things to safeguard that inventory, another control that should be in places that the inventory has countered often. And we can taste this control by reviewing the procedures for counting that inventory. And we can attend an inventory count and you'll see later in inventory section and when we do the substance of procedures, what we need to do and we attend an inventory count for completeness. My control objective is to ensure that all purchases and sales off inventory have been recorded in the accounting system and the control in places that there should be some kind of procedures to include inventory held by third parties, an inventory that has consignment stock and again you'll see when we get to the inventory section how we can actually ordered that. But to taste the control, we will review the entities procedures relating to consignment stock, another control that needs to be in places that they are reconciliations of accounting records off the physical inventory and we contest inspire a viewing. Those re conciliation for rights and obligations are control. Objective is to ensure that inventory records only include items that belong to the entity and there should be a control in place for inventory held at third parties and exclude inventory held on consignment for third parties. We can taste this control by reviewing entities procedures relating to consignment inventory for accuracy, classifications and valuation. Our control objective is to ensure inventory quantities have bean accurately determined in the control in place is to actually take a look at the stock and go encounter to see that those quantities are they and that they are correct and they are accurate. They should also be a periodic or an annual comparison with inventory, with amounts showing in a perpetual inventory record. We contest this buyer of U and test the entities procedures for taking physical inventory, so in others when they counted. Another control objective for accuracy, classifications and valuation is to ensure that inventories properly stated at the lower of cost and neutralize herbal value. And you will see when we do the inventory procedures. How we ordered that substantively but four tests of controls that should be a control in place, where inventory managers review the inventory often and identify slow moving obsolete or excess inventory. And we can taste that through observation. They should also be a control in place with standard costs are reviewed by managements, and we can taste that by reviewing and testing the entities procedures for developing standard costs. They should also be a control with a Rosa review, off cost accumulation and variance reports and we can taste that by inspection off those variants Reports produced for cattle Our control objective is to ensure that all purchases and sales are inventory are recorded in the correct accounting period. And the control is that old. The special documents of process daily to record the dispatch off those finished goods, and we contest that through inspection off the documentation to confirm that they have been processed daily. Another control is that all goods inward reports are process daily to record the receipt of that inventory and weaken taste that, through inspection, off documentation to confirm that it has been processed daily. Another control that needs to be in places that they are reconciliations off inventory records with the General Ledger. And we can taste that by reviewing that these reconciliations have bean performed. Yes, no look at the bank and cash cycle. The banking cash cycle is split into two receipts and payments. Let's take a look at receipts first for a current. My control objective is to ensure that all valid cash receipts are received and deposited, so my control again is around segregation of duties. They should be separate responsibilities for the recording. The receipt and the re conciliation off cash. And we can taste this by observing the processing off cash and evaluates if they are sufficient segregation of GTs. There should be a control where monthly bank reconciliations are performed and independently reviewed. And we can test this by reviewing monthly bank reconciliations to confirm that they are performed and reviewed. There should be a control in place with your periodic inspections off cash sales procedures , and we can taste that by enquiring with managers about the results off any inspections. If cash is being received through the post, then the males would be opened by two members off stuff. And we contest that by observation off the male opening procedures. There should be a control in place where there is an immediate preparation off the cash book or a list of all male receipts, and we contest this by observing the preparation of the cash receipt records. It should be a control in place where there is an independent check off agreement off the cash or cheques to be deposited at the bank with the registers, turtles and the receipts listing. And we can taste that by reviewing documentation for evidence often independent check. They should also be a controlled in place with is an independent check of the agreement of the bank deposit slip with the daily cash summary. And we contest that by removing documentation for evidence, often independent check as well for completeness of my cash receipts. My control objective is to ensure that all cash receipts are recorded and again here, segregation of duties is important. They should be separate responsibilities for the recording, the receipt and the reconciliation of cash. And we can taste this by observing the processing off this cash and see whether or not there are adequate in segregation of GT's. And just like occurrence, there needs to be monthly bank reconciliations, and they should be reviewed independency and again, we contestants, by reviewing those monthly bank reconciliations and confirm that they have bean reviewed. We can also re perform are different checks on that reconciliation. They should also be a control in place where customers statements are prepared and sent out on a regular basis, and we contestants by isolating a sample of those customers and see the frequency off those statements because remember, if a customer is giving us cash, they're paying for an account. So we need to see if that is being updated correctly within the customers statements and that they have sent it to the customer. When it comes to accuracy, classifications and valuation. Our control objective is to ensure that cash receipts are recorded at the correct amounts in the control that it should be in places that they should be a daily Remittance report. It should be re consult to the control, listing off the Remittance advices and we contest inspire reviewing those reconciliations. They should also be a control with the bank statement is reviewed independently and we contested by reviewing the reconciliations for evidence that they were performed by an independent person. Another control objective is to ensure that cash receipts are posted to the correct receivables accounts and to the general Ledger. So there should be a control were monthly. Customer statements are sent out and we contest that by reviewing the entities procedures is sending out these statements. It should also be a control in place where monthly cash receipts journal agrees to the General Ledger posting, and we contest that by reviewing the Journal and the posting to the General Ledger There should also be a control with the receivables ledgers re consult of the control account and we contested by reviewing the reconciliations for cattle. Our objective is to ensure that cash receipts are recorded in the correct accounting period . So the control that needs to be in places that there's a bank reconciliation at the period ended. And we can taste this by reviewing the bank reconciliation. So now let's take a look at our cash payments and for a current my control objectivist to ensure that only valid cash payments are made and the controls that should be in places against segregation of duties. There should be separate responsibilities for the recording, the payment and the re conciliation off cash. And we can taste that control through observation to see whether or not they actually are segregation of duties. There should be a control in place with suppliers. Statement is independently reviewed and re consulted the trade payables records and we can taste that control by reviewing the procedures for reconciling supplies statements again. Monthly bank reconciliations must be prepared and reviewed, and we can taste that by reviewing these reconciliations and confirm whether or not a review was actually done. It should be a control in place where only authorize staff members can make Elektronik cash payments and issue checks. And we can taste us by getting a list off delegated authority and see whether or not those payments were made by people that are authorized to do so. There should be a control in place where all payments are prepared only after all the supporting documentation has been independently approved, and we contestants by inspection off the relevant documentation for evidence off approval by a senior official for completeness. My control objective is to ensure that all cash payments that occurred are recorded, and the controls in place should be that the supplies statements are independently reviewed and re consult to my trade payables records and weaken taste this by reviewing the procedures of recording supply of statements and again just like my currents. Monthly bank reconciliations must be prepared and reviewed as part of my control, and I can taste that by reviewing the reconciliations and verify if they have Bean independently reviewed. There should be a control in place where have manager reviews cash payments before they are made, and we can taste that by selecting a sample of the listing for evidence off the senior review, another control that should be in places that they should be pre numbered chicks If you're making a payment by check and you can taste that by examining evidence off those chicks in the checkbook, all the actual chicks themselves that they've been returned from the bank to see that there are pre numbered. They should also be another control in place with daily cash payments or re consult to the postings in the payables account. And we can taste that by reviewing a sample of the reconciliations for evidence that that actually has been done for accuracy, classifications and valuation. Our control objective is to ensure that cash payments are recorded correctly in the ledger , so there should be a control in place where there's a reconciliation off the daily payment report to Elektronik, cash payment transfers and checks issued. And we can taste this by reviewing the re conciliation to ensure that it was performed and reviewed, and that any discrepancies are followed up. It should be a control. In place of the supplies statement is re consult to the payables account on a regular basis , and we can taste this by reviewing reconciliations. They should also be a control in place. We're monthly bank reconciliations are compared against the bank statement and to the ledger accounts, and we can taste the spot reviewing the bank reconciliation for evidence that has been independently reviewed. And we can re perform a sample of bank reconciliations and you'll see when we get to the banking cash section how you actually ordered the whole bank reconciliation. Another control objective is to ensure that cash payments are posted to the correct payable accounts and to the general Ledger, so there should be a control in place. We must supply statements or re consult to the payables accounts on a regular basis, and we can test the spire of viewing the re conciliation. They should also be a control in place where there is an agreement off the monthly cash payments journal to the General Ledger posting, and we can test the spire of you the postings from the journal to the General Ledger. They should also be a control in place with the payables account is re consult of the General Ledger control accounts and we contest that are reviewing the reconciliations to ensure that it is performed, reviewed and that any discrepancies are followed up for cattle. My control objective is to ensure that cash payments are recorded in the correct accounting period. So the control that's in places that they must be a re conciliation off Elektronik fund transfers and checks issued with postings to the cash payments journal and the payables accounts. And we can taste that by reviewing the re conciliation and verify that is carried out on a regular basis. Okay, so now let's look at the payroll cycle for a current in existence. My control objective is to ensure that payment is made only two bona fide employees off the entity. In other words, payment is only made two employees that actually work at the entity, not fictitious employees. So the control is that there is segregation of duties between HR and payroll functions, and we can taste this by reviewing the payroll and HR job descriptions of the company and see whether or not the segregation of duties are in place. They should also be a control way employee files are held for all employees. We can test this by inspecting those employee records and make sure that the correct documentation is in place. So things like proof of bank accounts, um, the contract between the employee and the company, etcetera. It should be a control with There's an authorisation procedure for hiring, terminating time work, wage rates over time benefits, etcetera. And we can taste that authorisation by reviewing and tasting the authorization procedures in place. They should be a control in place where they use clock cards to record the time that has been worked. And we can test this by observing employees using clock cards. They should be a control in place where a supervisor approves those clock cards and the time that has Bean worked. And we contest that by inspecting a sample of those clock cards for the evidence off the approval by appropriate level of management. They should also be a control in place with the HR department is informed to any changes in employment status of employees, so things like special leave maternity leave those kinds of things, and we can taste that by reviewing the policies and procedures in place for changing status and consider whether or not that is adequate. They should also be a control in place, where employees have a unique employee number signed to them and to the payroll most of fall and only employees with a valid employee number is paid, and we can taste that by reviewing the procedures for entering and removing employee numbers from the masterful. They should also be a control in place with payroll. Budgets are in place and reviewed by managements, and we can taste this by reviewing the budgeting procedures for completeness. My control objective is to ensure that all payroll costs are recorded for work done by the employees. So my control would be having pre numbered clock cards that are in use. And I can taste that by reviewing the numerical sequences off club cards. They should also be a control where regular reconciliations are carried out on the payroll records and the employee cost recorded in the general ledger. We can taste that by reviewing a sample of the re conciliation to verify that they are properly carried out and we can re perform a sample of reconciliations. There should be a control where there is a comparison that is made of the chicks and the bank Chancellor list to the payroll to ensure that the employees are all paid and have been recorded via payroll. And we can taste this by enquiring where the comparisons are being made between the payment records and payroll and inspect those supporting documents for review. There should be a control in place over the preparation and authorizations off chicks and bank transfers. We contest that control and examine the checks. Paid well certified copy of the bank list for employees paid by check or bank transfers to ensure that there have been properly authorized for accuracy. Classifications evaluation. Our control objective is to ensure that all benefits and deductions so things like tax and pension and medical aid, etcetera are correctly calculated, so control that needs to be in places. There needs to be an agreement off the gross earnings and total texted acted with the texture tune. And we can test this by inspecting that documentation for evidence off management review. There should be a control in place with is a re performance off the payroll benefits and deduction calculations, and we can taste that by reviewing that supporting documentation for that recalculation to see whether or not it has occurred. normally what happens these days. You get a payroll system and the payroll system calculates the tax it needs to be deducted on the employees using the relevant text tables in whichever country you are in. And what the external auditors then do is we're testing the control. We will verify that the system has the correct text table, and you can select a sample employees during the payroll run and see the text that has been deducted and re calculate their text to see whether or not the system is calculating it correctly. Another control objective around accuracy classifications evaluation is to ensure that the payroll transactions are correctly recorded within the accounting system, in the control that needs to be in places that the payroll master file needs to be reconsidered to the General Ledger. And we contest that by reviewing the reconciliation peril most of all to the general agent and confirm it is any discrepancies for cats off my control objective is to ensure the payroll transactions are recorded within the correct accounting period, so there should be a control in place for any new employees that have come during the year that they are paid within the correct month and any people that have left that's it's terminated in the month that they've left and it doesn't get recorded on. No payment has been made after that and we contest that control. But selecting a sample of new employees and ones that have been terminated or left and see whether or not they have been accounted for in the correct period for revenue and capital expenditure, there's an assertion that doesn't relate to the statement of comprehensive income in statement of financial position. The assertion is authorization and it relates to capital expenditure. So for authorization, my control objective is to ensure that the expenditure is properly authorized. So my controls that I should have in places that all orders for capital items should be authorized by appropriate levels of management, and we can test the spar being policies and procedures that are in place. They should also be a control where invoices should be approved by the person who is authorized to make the order, and we contest that by inspecting the invoices to very father. The invoice has bean appropriately approved. They should also be a control where invoices are marked with an appropriate general edge of code. And that's quite important because, especially when it comes down Teoh things that classifications because if something is capital expenditure, it should go through to the stepping off financial position and not through two stepping off cos of income. So in other words, it's an asset. It's actually not an expense. And we can test this by inspecting invoices to verify that the invoice has the correct general. It occurred marks on it for completeness. My control objective is to ensure that all non current assets are correctly recorded in the accounting system. So my control is that any capital item should be written up in the non current assets register well the fix Essid register and that this fixed asset register should be re consult on a regular basis to the General Ledger, and any differences should be investigated and resolved. And I can taste us by reviewing the reconciliation to ensure that it is regularly carried out and reviewed by a senior person, and that all discrepancies are followed up and resolved on a timely basis. So when it comes to test of controls, you need to think about it as if it was your own company and say What controls do I need to have in place? Based on the sonority that I've been given? What I've just gone through is the generic version off it. But you need to apply your mind a little bit when it comes to auditing and say, If this was my business, whatever controls that I need to have in place and how would I taste those controls? Then all of a sudden taste of controls become very easy. It's important to understand what the internal control theory is, but when it comes to the testing off those controls, you need to just apply yourselves and think logically. 11. Audit procedures and sampling: ordered procedures and sampling. There are two types of tests and order to can perform. One is known as analytical procedures, and the other one is known is tastes of detail or substance of procedures, and we use substance of procedures. Where we go in batch to an invoice we get are supporting documentation. We verify certain things on they etcetera. So it's where we get all of the ordered evidence. Physically, that is a test of detail. That is, substantial procedures and substantial procedures, and this topic has been asked quite a few times in the past and exam. So it's a very important topic as well. You'll see when we get to the auditing off the various balances and transactions, executive types of order, decisions that we use, what the assertion means and the typical taste that we can perform in order to determine whether or not there's a material misstatement within the financial statements and in order to can use directional tasting to determine whether or not is a material misstatement within a certain account balances and transactions and you'll see that there's a thing called cast dog. So if it's a created balance, there's a risk that the account is understated. So a directional of testing. We go from the source to our general ledger for a David balance. The risk is that something's going to be overstated. So we go from a general ledger to our source. Now, let me explain to you why a credit balances understated. Take something that has a credit balance. Let's take revenue as an example. Revenue has a credit balance. It's a total, but it's in credit. Why would a company want to understand revenue? Well, if I understate my revenue, then I will pay less tax at the end of the day. So I need to go from the source of the revenue transaction to the General Ledger and the source of a revenue transaction can be anything and you'll see when we get to revenue procedures, how that actually works and how you determine your source. But Anita go from the source to the General Ledger. If I go from the source, call it a delivery note and it is not in my general ledger. Then my revenue is understated. The same thing applies with credits is why would a company want to understate? Created says Well, if I have less creditors on my stepping off financial position, the company looks better and you'll see when we go through our procedures for trade payables how you can actually identify what's known as UNR accorded liabilities. And again we go from the source back to the General Ledger. And that's particularly true when it comes to something like a Krul's, which is a other payable so foreign. A cruel all went to see the source, meaning the invoice that has Bean paid off the year end but relates to my year. Therefore, the source being the invoice relating to my year hasn't been recorded means that my liabilities are understated. So if we take a look at my David entries something like an expense, why would a company want to overstate their expenses? Well, if I'm overstating my expenses, it means that my profit will be lower, meaning that I can pay less tax. And if I take a look at the stepping off financial position, why would a company want to overstate a debit balance? In other words, an asset. Why would they want to overstate that? Well, if I'm overstating my assets, it means that the staple of financial position looks beta. It's the inverse off my liabilities. My creditors, so want to overstate things like Stuck, my data is balance. Or so we'll look at all this money I'm going to receive from my datas and look at how much stock I have. So the value off my business is more so. What is the direction of tasting that I need to take? I need to go from a general ledger back to the source. And will that prove overstatement? Yes. Why? Because if it's in my general Ledger, but I don't have supporting documentation for it, that means that it is overstated. It's a fictitious account. It's a fictitious entry. It's not supposed to be there. We should only have accounts and transactions within a general ledger where there is some kind of substance behind. It's a some kind of invoice or whatever it is, but they must be supporting documentation in the same applies to the statement of financial position, because I can say that I have more stock atoms that don't actually really exist, same with fixed assets and even the same with trade receivables. So for that we go from our General Ledger back to our source, and you'll see when we get to non current assets. Just as an example, we've ach additions to supporting documentation. We go from the fixed asset register to the supplies invoice. But all of that being said, it comes down to risk and the understanding off the entity because maybe the company is not trying to understate their revenue. Maybe there's a risk that we've identified to say that they are bonuses that are being paid based on profits at the end of the year, which then means that they're probably trying to the risk. Rather is there are overstating their revenue and understating their expenses. So at the end of the year, my profit is higher so that I can declare larger bonuses so it all comes down to risk. But the norm is if it's a credit balance, it's understatement. So we're going from a source to our general Ledger, and if it's a David balance, it's overstatement. So we go from a general ledger to our source. One of the other order procedures that we can perform is what is known as analytical review procedures, and these analytical review procedures are performed during the entire order, so we do it during the planning. We do it doing execution. We we gather, ordered evidence and we do it during finalization as well. But when we start doing analytical review procedures, we need to desist as the auditors, the availability and the reliance and comparability off the information that we have gathered. So what about the reliability of daughter? As auditors, we need to determine the source off the information, and the most reliable information that we can get is from external sources for something that is independent and it's outside of the entity. And we must also be able to compare this information so we can compay various analytical reviews to industries on the same top of industry, etcetera. We also need to evaluate the control over the preparation off the information to ensure its completeness, accuracy and validity thereof, and according toa ice or 5 20 analytical procedures, it provides guidance for the ordinances to use analytical procedures as substance of procedures. The considerations of comparisons should be taken into account with comparable information from prior periods, so I can take a look at the ratio from the previous year and can compare that ratio to the current year to see whether or not this fluctuations. If it's consistent, etcetera, we can also use anticipated results off the entity. We can also say it certain types of expectations and that ties in very closely to what's known as a reasonability test. So reasonability test will be, well, what is reasonable within the financial statements. And I can take a look at, for example, if I go to school and they have 5000 pupils and they're charging $1000 per pupil to attend that school. I should take 5000 people's times $1000 that should be my figure within my statement of comprehensive income. It doesn't necessarily have to be exactly on the nose and exactly correct because there might be various reasons, especially with something like a school. I can have students that are leaving students that are got more students than the year etcetera. But it will be reasonable. It shouldn't be way out, and then we can take a look at industry information. So the industry that the entity is in the analytical review procedures that we've performed is that is what is happening within the industry, So the gross profit percentage is that the same or similar top of gross profit percentage within that industry. Any aberrations as well, such as your current rations, is the current racial within that industry norm. And you know, textbooks normally teach us and say the norm for the current ratio is 2 to 1. I've got a bit of a problem with that, and my problem with that is it's not the norm. If it's not within the industry norm, because some norms for a current ratio is north 0.5 to 1. That's just the industry that it's in. It doesn't mean that, announced, all of a sudden it's it's laced into 21 It's a problem. It could be the industry that it's in when they talk about 2 to 1. That is ideal, not the norm. You would rather have $2 for every assets for $1 off liabilities. That's a great goal to have, but within the industry it might be out off the norm. So as an orderto you need to determine what am I comparing, and I need to compare at the end of the day, apples with apples I can perform analytical review procedures on a company such as a school and compare their to a company that's in aircraft aviation. It's not the same industry. And speaking of ratios, there are a few important rations that we will compare within the same industry. And it would be things like my gross profit margins, operating profit margin receivable, collection periods, payable payment periods, my inventory turnover, my inventory to revenue, racial current racer Quick s a tissue Atia Mike hearing as well as my return on capital. And you'll see that when you start looking at these ratios and you start to apply your mind to them that you can pick up risks as well. So, for example, my receivables collection period, I notice my average collection day, so I take my average data's divide about my credit sales times 365 days. Compare that to the previous year and say it was actually quite high. And if I look at the current year's figure, it's higher than the industry norm, which could indicates a possible risk off irrecoverable dates and that the companies trying to overstate their data's and if we had dance, if I things like this. As auditors, we need to make enquiries of management's and and get appropriate ordered evidence and relevant management responses. We then need to perform other order procedures if necessary. Remember, we cannot just obtain information from management's and just say Well, that's what it is because they said it. We need to verify what they have said as well. The next thing we need to take a look at his accounting estimates. So what is an accounting estimate and accounting estimate is an approximation off a mandatory amount in the absence off the precise means off measurements. And that means that there's some kind of estimation uncertainty as we don't know how to measure what we are providing for its an estimate and order. Just need to be very careful when it comes to an accounting estimates, and we contact and look at things in isolation. We need to take a look at whether or not management is being biased towards that accounting estimates, says auditors. When we are auditing accounting estimates, we must test the management process the use of an independent estimate and review subsequent events in order to assess whether or not the estimates are reasonable. So what do we use accounting estimates full? Well, if we have receivables and we not sure whether or not those receivables are going to pay us , we would have an allowance for doubtful debts or doubtful receivables. So that is an estimate. The we're not sure whether or not they're going to pay, but we're going to provide for it anyway, for things like inventory inventory obsolescence we provide for obsolete stock or inventory depreciation is another one as well as the S is used for life. It's an estimate, if there any costs arising from litigation, settlements and judgements. If a company has any kind of warranty obligations, all of these are accounting estimates. We're not exactly sure all the precise means off measurements, and it's up to management's to come up with these estimates. But as auditors, we need to order them and determine whether or not there are reasonable. And we need to determine how management identifies those transactions and events and conditions that may give rise to the need for an accounting estimates and how management makes. They're counting estimates and the understanding off the daughter on which it is based, including the method off the accounting estimate. Relevant controls, assumptions made by managements. Whether there's any change from the prior in the method that has been used and rather, management has assessed the effect on estimation, uncertainty and overall considerations. We need to take a look at the requirements of applicable financial reporting framework as well as the methods of making. Estimates are appropriate and consistent, and consistency is very important when it comes to financial statements. You can't just chop and change your methods, and your counting estimates it has to be consistent. I understand that an entity and management can change from one year to another year, but it shouldn't chop and change all the time. So when it they do change something, it can be normally and appreciation where they say we believe that the useful life of this asset is no longer five years. It is now four years. That is a change in accounting estimates, and if you remember from your accounting theory, you need to make relevant disclosures relating to that change in accounting estimates. But then come next year, the conference a well, made a mistake so longer four years. It's five years in the After that, they said, No, it's not. Actually, five isn't three years. It has to remain consistent. So as the auditor, the international standards of auditing require the auditor to perform one or more off the falling. When it comes to accounting estimates, we need to determine whether events occurring after the date off. The order to report provides evidence regarding accounting estimates We need to test our management made the accounting estimate and the dot on which it was based. We need to test the operating effectiveness off. The controls of a hard accounting estimate was made, and we didn't need to develop points estimates or range to evaluate management's point estimate. We also need to determine if they're counting estimates are reasonable or they have Bean misstated. And that's sufficient disclosure within the end of financial statements. Is they? And it is correct. We can also obtain management representation letters and see whether or not they believe that the assumptions used are reasonable right ordered sampling. It is uncommon for auditors to verify 100% off a population. That's why we use sampling. It's there's no way is that we're gonna go into a client and verify every single line item off every single transaction and account balance. It's impractical and ordered. Report doesn't say that the annual financial statements are 100% correct. That's why we get samples. And there are five types of sampling. You can have what's known as a random selection. Systematic selection help has its selection block selection and manage the unit sampling through the use of random sampling. It will ensure that all items in a population have an equal chance of selection. So what we'll do is an auditor's will select a random number, and it will generate our population of our sample. That we need to verify systematic selection is where we will take a constant interval between our selections. So let's say that we have AH 100 line items, often entire population, and we believe that it's low risk. So we're going to select every fourth items. We will take line number 5 10 15 20 etcetera And again, something is based on risk. So if it's high risk, we would obviously need to get a bigger population sample so we would select instead of every 5th 1 will select every 2nd 1 Haphazard selection is very similar to random selection , except the order to here will go and pick and choose whatever they want to go and verify. The problem with that is that you can get auditors that are biased towards a certain type of transaction because it's easy to identify it easy to locate. And that's not the point off. Sampling block selection is where you select a specific either month or group off transactions that you're going to verify. So, for example, when it comes to something like salaries and wages that you want to go and verify, you would select one month and you're verify just that month. And it doesn't give a fait view off the entire population because salaries and wages get paid throughout the year. And if you're selecting one month and you have no problems, that doesn't necessarily mean that the aren't any problems within the other months. But they always to get around that as well. There is a way to get satisfaction as he orderto, because chances are, if your tax has been calculated incorrectly within that month, you should extrapolated your sample to determine whether or not that era has been carried forward from the previous month. So there is ways around it, but that's what you doing block selection. You select a group or a month or a week or whatever, and you do your verification. Based on that, manage. The unit sampling is the top evaluated selection, in which a sample size selection and evaluation of results in the conclusion in the monetary amounts another type of selection that auditors can actually do is based on high value or key items. So the order to all select high value items, or anything that looks a little bit out of place or suspicious and materiality is key here . So we'll take a look at anything that is over our materiality, and we will want to go and verify that accordingly. So once we have our ordered sample and we verified whatever we need to verify, we need to evaluate and we need to see if there are any tops off most statements and with Renato's misstatements, are actually okay. So in other words, yes, it was an era. It wasn't material, so we can base a conclusion on that. So if I've got a sample of 100 line items and out of that 100 line items. Only two or 5% was an era. I would still say that it is fairly stated because it's not material over the entire population. I mean, if I'm verifying 100 line items at off. 200 line items are verified 50% of the population and out of their 2% were errors. Chances are fire to extrapolating my test. It's gonna be in material overall, so I could still basic conclusion on that. However, if I get 20% as errors, I would need to reevaluate my whole testing and my sample. And I might need to extrapolating my sample even further to verify if these an era that is actually quite large and is a major problem and something like that, if it was 20% could impact my ordered reported fire to extrapolated, because then all of a sudden I see or 40% of the entire population has an era. That is a problem, says the order. So we need to determine what is tolerable. What is a tolerable misstatement and what is tolerable? Deviation. Okay, so let's take a look at computer system or the techniques also known as cats what All cats , cattle, the use off computers for ordered work. So we use ordered software and we test daughter. So instead of the order to going to verify whatever they need to verify, we're using the computer to do just that. There are two approaches when it comes to auditing. One is known as auditing through a computer, and one is not exported. Sing around a computer, and when you're getting through a computer, you need to use ketz. We're orbiting around a computer. You would actually take a look at invoices, obtain a listing yourself, etcetera. But when using the computer, you would say you select a new obtain as the computer from their daughter directly. And cats can also perform analytical review procedures as well as test the computer information system controls. It sounds pretty awesome. Designate. We can use a computer to do our work so we don't need to be there. That's not the case. There are advantages and disadvantages to the use of cats, and the advantages are that my testing capabilities increased. I could actually leave the computer overnight, and it will test for me. Doesn't need to go to sleep. We as humans need that sleep task instrumentally impossible can be performed. So if I'm auditing a bank, I would use cats. I wouldn't go and add up everything myself. I would ask the computer to do it for me. It's just it's so impractical for me to go and do that. There's cost effectiveness as well. Repetitive work is eliminated and knowledge of the clients system is improved. A couple of disadvantages is that it's expensive. Katz is expensive. The software itself can be very expensive. You would need to train your staff on how to use the cat. Not all systems used by clients are compatible with the cat. There's a risk of corruption of the client daughter because we using live daughter. Imagine if something went wrong and we corrupt their daughter. So they are what's in a bank and something goes wrong, who you're in big trouble. Information is in real time, and it changes all the time because it's live and the testing is only limited to the daughter on the system. So as auditors, we know that we need to verify things that are not only there, but what's also not the things like a Krul's etcetera, so the cats can only test what's the and not what's not. The so human intervention is still needed. And when it comes to the soft way, you get two general types of software. It was known as generalized ordered software or gas, which will allow the order to taste computer files and daughter bases. And then you get custom ordered software, which is written by the auditors for specific tasks, things that calculations comparisons and analytical review procedures When it comes to testing daughter, it is a technique that we use when we enter in Daughter a sample into the computer system, and we'll compare the results obtained with predetermined results. And it's normally used to test the controls. So controls like online passwords, access controls, etcetera, those kinds of things. That's what they're using it for. We can also insert information that is incorrect or invalid daughter, and we can see whether or not the system accepts it or rejects it again. It's a control. We can also set up a dummy unit so we can set up something like a departments or an employee or whatever, and we can post transactions in there to see whether or not, the system has integrated the relevant transactions correctly, So if I raise a sales invoice, it should take it out of my stock and put it to cost of sales. My sales should be posted to my debtors account all my receivables ledger, and we can determine whether or not that is working correctly again. It's a taste of control. You've just got to be careful when you use test starter the because you can corrupt the client's daughter. As a result, if you're not careful, and you can just imagine it that it to happen, this is why you need sufficient training as well of your stuff. Let's take a look and using the work of others. I know that they're using some kind of experts and has ordered says we are not experts in every field, so we may rely on experts. There's certain things that need to be done before you can place your alliance, but we can use an expert as well. You two tops of experts, one of which nine is an auditor's expert, and another one which is a management experts now in order to expert, is an individual or an organization or a firm that has expertise in a specific field. So they could be text experts and we dealing with a complicated text transaction, and we can use their services to assist us on the orders. A management expert is also an individual or a firm or an organization that also has expertise within a field other than auditing and accounting. So a management expert could be somebody that has done evaluation on the building off the enterprise. Well, the company's lawyers, companies going through litigation at the moment, and they will use their lawyers who are seen as experts to determine whether or not that is going to be a contingent liability or whether a provision needs to be raised based on the outcome that the expert has said, however, auditors, we cannot just take an experts word as gospel. We still need to order it. It's so how do you ordered an expert? Well, I says 6 20 requires that the auditor to evaluate whether the auditors expert has the necessary competence, capabilities and objectivity. We can determine the personal experience with previous work done by the experts. We can have discussions with the experts. We can have discussions with other people who are familiar with that. Experts work. We can take a look at their qualifications if they're a member of a professional body, if they have any published papers or books, and whether or not the ordered films, quality control policies and procedures are in place. Isis 6 20 also requires, as is the auditors to agree in writing on the following with the ordered expert, the nature, scope and objectives off the work, the respect of roles and responsibilities off the auditor and the order to experts. The nature, timing and extent of communication between the orderto and orders expert, including the form of any reports and confidentiality requirements. We can also use the work off the internal auditors and I said 6 20 Using the work of internal auditors provides guidance to US external auditors on what we should be doing and the objectives of the order turn accordance with Isis. 6 10 are to determine whether the work of the internal ordered function or direct assistance from the internal auditors can be used and, if so, in which areas and to what extends and if using the work of an internal ordered function to determine whether that work is appropriate for the purpose off the orders as well as if using internal auditors to provide direct assistance so appropriately direct, supervised and review their work. When I say direct assistance, I mean it's the use of the internal auditors to perform ordered procedures under the direction and supervision and review off the external auditor. So what are the scripts and objects is off the internal auditors. They monitor internal controls. They're in charge of risk management, governance, their review, compliance with laws and regulations, their view operating activities and examination off financial and operating information. But as external auditors, we can make use off the internal auditors for assistance. But before we do that, one of the most important things that we need to do is to determine the level of competence and the extent to which objectivity is supported by its organisational status and the relevant policies and procedures are in place. And if we're going to be using the internal auditors, it must be communicated with those charged with governance. But before we make use off the internal orders, the external auditors must evaluate and perform ordered procedures on the entirety of the work that they plan to use and will determine its adequacy for the purpose off. The orders and re performance is also necessary, so we will examine atoms already examined by the internal auditors. We will do examination of other similar items as well as observed the procedures performed by that internal auditor. So when can direct assistance from the internal auditors be used well? Firstly, if it is against the law or any kind of regulation from obtaining director systems from internal auditors, then it cannot be used. But if it is not prohibited by law, the external order to should evaluate whether or not the internal auditors are competence and what their objectivity is. And if either of those two are lacking in the external order, too should not make use of director systems. However, according Toa Isis, 16 it prohibits the use of internal auditors to provide direct assistance to perform procedures that involve making significant judgements in the orders. Relate to hire such risks of material. Misstatement with is more than a limited degree of judgment is required, so they cannot say what the provisioned for obsolete stock is going to be. Those kind of estimates, any kind of work that the internal auditors have been involved in. Obviously, they can't ordered their own work and anything that relates to the decisions that the external order to makes regarding the internal ordered function. And again, if we all using direct assistance, we need to communicate that with those that are charged with governance, and they must be some kind of agreement that is in writing. And it must come from an authorised representative of the entity confirming that the internal auditors will be allowed to follow the external auditors instructions and that the entity will not intervene in the work of the internal auditors performance for the external auditor, as well as an agreement with the internal auditors confirming that they will keep specific matters confidential as instructed by the external auditors, and inform the external auditors off any threat to their objectivity. Okay, so let's take a look at service organizations. A service organization provides services to the entity, and it could be anything from the maintenance of the accounting records to payroll processing to anything like that. So it's normally external. It's another organization that desert on behalf off the entity. Those are service organizations and if that is the case, as auditors, we need to understand the services that are being provided. We need to determine things like the nature materiality of the transactions processed, the degree of interaction, the nature of relationship, including any contract terms. And if we have identified a risk of material misstatement and it's being done by a service organization well, according Toa Icer 3 30 the user orderto must determine where the sufficient appropriate ordered evidence concerning the relevant financial statement assertions is available from the records held by the user entity. And if not, we need to perform further order procedures to obtain sufficient appropriate ordered evidence or use a never auditor to perform those procedures at the service organization on the user. Auditors behalf And when it comes to reporting by the use of auditor, the user or it is always certainly responsible for the orders opinion. So they must be assured that they have gained sufficient appropriate ordered evidence to form an opinion on the financial statements, and they must express the ordered opinion in the auditor's report 12. Non-current assets: non current assets. We're going to be looking at how to order to non current assets and non current assets on my fixed assets. They're my good wool etcetera and non current s has come up quite a lot in the past a C C A . Papers. So it's quite an important topic, and there's non current assets we know are sitting within my stepping off financial position. We're going to be using Coop as my assertions or completeness, existence, rights and valuation. However, sitting within non current assets is depreciation, so we need to work out with a not appreciation has been calculated accurately. Member depreciation is sitting with my stepping of comprehensive income, so we need to use my cocoa assertions and one of the things and they is accuracy. Let's look at curve first, so let's start with completeness. We need to verify that all additions and disposals that occurred in the year have bean recorded on my fixed assets are complete existence, relates to if the assets actually exist and pertained to the entity. So we're looking at ownership. So when the company has an addition, we want to see the supporting documentation and see that that invoice is in the name off the company. Another way of verifying existence is to physically inspect the asset. Now there's two ways off. During inspection of assets, one does completeness and one does existence. If we obtain the fixed asset register from a client and we're verifying from the fixed asset register to the physical asset, then I know that that s it exists. So, for example, you have a change and you say it's the person that's helping you verify fixed assets that you want to verify that this change actually is. There it exists. And I said, You there's the chair, they Heidi nerds, the correct Most companies actually have a system in place. That's they will bark, heard or number each fixed asset. And you can verify that directly through to the fixed asset register to see whether not that asset is exists. The other way of doing it is to verify from the fixed asset physically back to the acid register, and that proves completeness because of an asset is on the floor, call it on the floor, but is not on the acid register. Well, then you're acid registers not complete, but what about things like motor vehicles because the murder vehicle might not necessarily be on the premises when you're performing the orders, especially delivery motor vehicles. One way that we can verify that that s it exists is to go through to the registration documents off that motor vehicle and verify that that registration documents is in the name off the company, and that proves ownership of that vehicle. The same thing will happen with a Croft if you have to go in the fix. Asset verification Often Airline to tell you all the plane is actually not here. It's somewhere overseas. So how do you verify that the Assad really exists? They have to have ownership documents, and that's where rights come in. So I have the rights to use that asset. Why? Because it's in the name of the company. If the acid is in the name of a director, well, it's not an asset off the company. The director's allowed to use a motor vehicle. The acid belongs to the business. The director uses the motor vehicle, and it's a fringe benefits implication as a result, which is covered in Tex. So what about valuation from the standard we know that fixed assets must be valued at cost less accumulated depreciation. In other words, the carrying value. The caring value is the amount that sits on the balance sheet, which is now known as the statement off financial position. And this is where the calculation off appreciation comes into play because accumulated appreciation is exactly that. It's all the depreciation added over the years. So we need to re calculate that appreciation using the company's accounting policy. So if the company's accounting policy says that we depreciate motor vehicles at 20% straight line, we need to re calculate that as it has a bearing on the accumulated appreciation and therefore has a bearing on my evaluation assertion. We also need to consider internal controls, especially around fixed assets, because fixed assets ah, essence off the business at the end of the day and they belong to the entity and people can steal assets. Think about a computer or a laptop. If you steal it and you sell it well, that's a problem. So safeguarding off this fixed assets is very important. We also need to get a management representation later to say management. How do you calculate your depreciation. And is it reviewed on an annual basis? Because, according to the standards, you can have residual values as well when it comes to fixed assets, which adjust to way that you calculate your appreciation. And every single year management has to re review those residual values to see whether or not they're still faith. Something else that must be verified when doing fixed SS is if those assets are adequately insured, because if they're not insured than those assets are no longer safeguarded. And if that's the case, we have an internal control weakness. So at the end of the day, we need to verify from our opening balance through to our closing balance and verify everything in between. So we need to verify additions to supporting documentation. We need to verify that the assets actually exists. We need to verify that the depreciation has been calculated correctly, and we need to verify if there any disposals cause the company can dispose or fixed assets during the year. And if that's the case, we're gonna have a profit or a loss on disposal of fixed assets, which my profit and loss sits in my statement of comprehensive income. So if we look at the Coke assertions, that's accuracy as well. Was the disposal accurately disclosed and calculated at the end of the day? So let's go through these procedures in detail for completeness before we can do anything and you will see this in every single chapter when it comes to order procedures, The first thing that you need to do is you need to obtain the information and and it's very important that you use that word. Obtain obtain is a verb. You're getting something, but we need to obtain the fixed asset register and re console the opening balance to prior years. Financial statements and there's opening balances include the opening cost balance as well as the opening accumulated depreciation for completeness. Like I said before, we need to verify from a fixed answered register to the floor where it's held and whether or not my assets are complete. Remember for completeness, however, that's existence for completeness. It's from the floor to my fix acid register. Is it the if so, then yes, my fixer said. Registers are complete, and remember, you don't have to go and verify every fixed assets. It's a sample of fixed assets within need to agree the closing balances the cost and accumulated appreciation directly to the General Ledger to see that the balances are the same for existence. Like I've explained before, what we will do, it will physically inspect the assets. So here is my fix s a tree. Just show me where that fixed asset register is when it comes to things that move a lot like a motor vehicle or even even a bike or airplane. We would need that registration document to verify that it is in the name of the business. And it does actually exist for rights and obligations. If the company has a building, we can verify that building to a title deed and verify that the title deed is in the name off The company for motor vehicles like a said, we can verify it directly through to the registration documents, just going back to the building just for a second. If the building is mortgaged, then it's possible that the security held behind that mortgage bond is the property. So what we would need to do is, as additional disclosure within the financial statements is to say that the property has got this title deed. It is in the name of the company, etcetera. These of the this is the details off their property. It is secured under a mortgage bond and is normally a reference to the nurse at the mortgage bond. Call it note five in regard to note five and we see that here's the mortgage bond. There's a long term portion and the current portion and a noted the need to say that the mortgage bond is held a security over the property and it would be crushed. Reference to the note off the way the property sitting, Call it note to for all other small assets, such as computers. We can verify that directly through to the supporting documentation and verify that it is in the name of the company. That will therefore prove that the company has the right to use. That s it. And depending on the size of the additions, in other words, quantity not value. But you can either verify 100% of the additions. A sample if it's three items on a fixer surgery, just so chances are Howard verify all three additions to the supporting documentation. A 23 foot is 3000. I would select a sample, probably of the high value items. Something else that would need to do when verifying additions is to verify that the company has made a clear distinction between revenue, expenditure and capitalization. And we would need to review their counts like repairs and maintenance, motor vehicle expenses, general expenses, etcetera to determine whether or not the company has explained something that they should have capitalized. Now, when it comes to evaluation, we have valuation that can be done by experts. So the expert turns around and says that we believe that the value off this building has been revalued to $20 million. We would need Teoh go through the order procedures when we go through use of an expert, and we would need to verify that valuation certificates and follow the procedures in place when it comes to using the work of an expert, and that includes the experience off the valuer, the scope of work, the methods and assumptions used the valuation basis are in line of the accounting standards. We can then use that to determine whether or not that revaluation surplus is fairly stated , and we can recalculate it if need be when it comes to valuation. Remember, I say to you that one of the things that we can do is look at the insurance policy. Now the insurance policy will show us the valley that an asset is insured for and if it is insured for less, for less than what is actually in the fix acid register. We may have a possible impairment, and the inverse is also true because if you're insured, insured value is a lot higher, and I'm talking about materially and not just a couple of $100 higher. If it is really higher than the value that is disclosed within my fix, acid register arm may have a revaluation surplus. Let's look at the statement of comprehensive income side of it. We have depreciation, and we have disposals as well. So we're gonna have profit or loss on disposals off those fixed assets. When it comes to depreciation, we have to review the rates that relate to those fixed assets, and we need to identify things like their useful lives, their residual values, if they have a replacement policy, possible obsolescence. The acid is so degraded at the moment that they said, Well, we're just gonna accelerated appreciation because it's no longer what we thought issues for life is going to be. And we need to re calculate that depreciation using the S its useful life taking into account residual values as well. And we also need to verify that the disclosure off the depreciation policy within the financial statements is correct and consistent when it comes to disposals. We need to verify those disposals to supporting documentation. And if it was something like a building that was sold, we need to verify that transfer has taken place and that the current company that we're auditing no longer has the right to use. That s it. We were then need to re calculate the profit and loss on disposal. And if that asset, like a building was used a security, we need to verify that that company has been released from that security. And lastly, what we need to do is we need to verify that the fixed assets or the non current assets have been disclosed in accordance with I A 16 within the annual financial statements. So what about intangible assets? Because we need to verify intangible assets like good Wallet is any research and development costs or other intangible assets as well as they form part of non current assets. When it comes to something like goodwill, goodwill is normally acquired through a business combination or acquisition, and that's this, normally a sales agreement. So we would need to inspect that sales agreements, and we can re calculate that goodwill as well, so re calculation off that goodwill is important and needs to be done. Management needs to review impairments every single year, and we can discuss this with management and obtain a management representation later to that effect as well. When it comes to research and development costs, we need to confirm that they are capitalized in accordance with I S 38 and we would also need to re calculate the amortization for all ever intangibles such as computer software. Whatever it is, you follow the same rules as you would for any non current asset that is tangible. So I would want to verify the supporting documentation for additions, and I would review the amortization policy and re calculated amortization for current here and then lost Lee. I would make sure that those intangible assets have been disclosed within the annual financial statements. According to the standard non current assets. Order procedures are not very complicated, and if you study them well and you know what assertion you're trying to match to what procedure? It's a very, very easy topic to pause, and like I said, right at the beginning, it seems to come up quite a lot, so it's important for you to understand this theory. 13. Inventory: inventory. Now this section has also come up quite a lot in the past examination. So it is an important topic, and we should know that inventory is according to the eyes to standard. And what does it actually state? It deals with inventory must be stated at the lower of cost or natural izabal value. What does that mean? It means that costs as the fine bias to are all costs, off purchase and other costs incurred in bringing the inventory to its present location and condition. That's according to the standard. So it's all costs relating to that stock. To bring it to where it is supposed to be needs to be included in my cost. Very So what is natural? Izabal value. Well, naturalized value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated cost necessary to make that sale. So now that we understand what the standard Saiz, what assertions are going to be applicable toe auditing inventory, we will be looking at curve as well as cuts off. Cut off off stock is very important when looking at cattle. If we want to make sure that all purchases and sales off inventories are recorded in the correct period. So how's inventory calculated? Well, it has a quantity, the number of units multiplied by the price. In other words, it's cost. That gives me a final inventory balance that sits on my inventory valuation. And as auditors, we need to verify that the quantity is correct and the price is correct within need to do a little bit of meth, multiply the quantity by the price to see that the total balance is correct. So what do you think? We will see when we start auditing inventory, we will see an inventory list. We'll see the physical inventory. We want to take a look at the purchase invoices and any shipping documentation. Let's just go through the physical inventory count first, because that's where it starts. We need to do a stock count in order to verify that the quantity is correct. And doing a stock count would verify that the stock actually exists and is complete. The stock answer normally done at year end, and we would consider internal controls as well around that stock. So what do we do during a stock counts Like I said, we would verify the internal controls that they are internal control surrounding the stock count. We would verify what their stock and procedures were, and then we would re perform checks around what has been counseled. And just like fixed assets. There's two ways to do this. We verify from the stock sheet to the floor and from the floor back to the stock sheet. If I'm verifying from the sheet to the floor, I'm verifying existence. So show me the stock atom here. Where is it? On your way. House floor. It's over there. Okay, it exists now. Go from the floor. Back to the sheet. Show me where the stock atom on your floor is on my sheet. There it is, on my sheet. Okay, It is complete, and then we'll perform quantity checks. So your stock sheet says that there are five units. Are there five units on the floor? Go and count them. 12345 Yes, I'm happy. We also need to determine the locations of the stock. Some stock might not be at the warehouse. It might be in other branches. And we would need to verify controls around those branches. And should the stock be really material, it's advisable to go and count that stock. If it's in a location that is just too far, we could use other auditors in order to count that stock for us. We could make use of an order to expert as well, especially if it's complicated stock atoms and things that are in the process. So things like complicated chemicals that are being used. And we could say, Well, we don't really know whether or not the quantity is correct. We could make use of an expert as a result. But remember, if we making use of an expert, we have to follow the rules according to the standard. When it comes to auditing what an expert has said, something else we would need to consider as well is whether or not the companies using a perpetual stock system or a periodic stock system if they're using a perpetual stock system . That means that the stock is life at all times, and the minutes that it gets scanned art or there's a barcode or whatever. It gets taken out off the system immediately. Periodic stock takes That's not the case. They would have to counter that at least every month a week, depending on the size to determine what their value off their stock is on hand. And if they are using a perpetual stock system, we must ensure that all inventory lines are counted at least once a year. You cannot just place reliance on the system. Stock atoms can be stolen, and you need to verify at least once a year for using perpetual stock systems that the stock is actually the And when we are attending a stock take, we need to gain an understanding of how the stock actually works, and this is normally done through discussions with management. And the reason for things like this is because it might not be an easy stock take. They might have a warehouse that has got different lines in production, So if you're dealing with something like that, you don't have the necessary knowledge that you know we can order the stuff that you don't have the knowledge about how it gets put together, so we would need to obtain that understanding. We would also need to assess risks relating to the inventory and identify the high value items and risks. You need to use your ears and your eyes a little bit here because when you're during the stock take, you need to identify high value items that can be stolen, which is a risky part. And internal controls need to be in place to make sure that stock atoms are not stolen. Things like cameras, access, controls, etcetera. We also need to determine how they countered their stock. Did they count in one team? Were the recounts with the people that counted after them as well, etcetera. And then we would need to plan our procedures during the stock, take and make arrangements for any consignment stock and would need to get arrangement letters in place to say you need to verify that consignment stock during the count again years in order to you need to use your ears and your eyes, and you need to identify any stock atoms that appear to be obsolete. But for example, if we are counting a warehouse that makes DVD players, and we identified that there are also got VCR's that are on the floor, those are obsolete. They're never going to sell them. We need to say to management look your VCR, the windows the last time you sold it many years ago. Well, hang on a second. You cannot have that on your inventory valuation anymore. Because there was no longer at the correct value it is considered obsolete. It's very easy to identify items that are potentially obsolete, not necessarily are but potentially or, and the best way to determine if something is potentially obsolete is to look at the dust on the top because of this dust on the top and Fichter us, too. That stock atom hasn't moved in a very long time, and you need to discuss that with management as the orderto and awesome. Why that item hasn't moved in such a long time, and it's probably because it is obsolete. They're not going to sell it. And during the count's, we can verify if the stock atom has got the correct stock atom. It's in the creek, Ben, or it's got to correct serial number, etcetera. It was also verify that all the recording has been made an ink, and that's quite important because you don't want people to make it in pencil, and he raised it afterwards. It was also be signed by the person that performed the Stockton. A record off the quantity, the condition and the stage of production off work in progress also needs to be recorded. We will then make a conclusion once we had to stop tech as to whether or not the stock take procedures were conducted properly, and we would make any recommendations to management about the internal controls, and we will follow up on any kind of discrepancy. So you said you had five items on your valuation. You actually had three. Why is there a difference? And a recounts may be necessary on a few items, but they need to adjust for the value that they actually have on the floor and just bear in mind. It's important to understand that a discrepancy may exist because in a different location, so it might not be on the site that you busy counting the stock, but we need to get verification off those items. So that's it. You've got five items, but I've counted three. Yes, but the other two are in another site, so we still need to get verification that those two items are on another side, either by going to that other side all by getting other auditors to go to the other side, all by getting some kind of confirmation agreements or whatever, to verify that those two items are infect the if there are items that are held by third parties, we need to get direct confirmation from the third party regarding the quantities and conditions, and that is in accordance with Isil. Five of five external confirmations. We can obviously go to that location and verify the stock ourselves. We can't get other orders us to do it for us. A direct confirmation should should do just fine. But in saying that it depends on the value if most of their stock 80% of the total stock value is sitting in consignment stock, well, we need to go and verify that because it's it's a majority of the population. Once we have our information and we've done our stock take and we've got our reports and everything's happy. We were then obviously conduct the orders off our inventory and we use the information that we've obtained during the stock count to verify the inventory at the end of the year. And remember, we're going to be using curve, so we'll be looking at completeness, existence, rights and valuation as well as cattle. And remember what I said about completeness. If you're verifying from the floor to the sheet and that stock atom is there, you can play some kind of reliance that that stock valuation is complete and just saying that it's pointless to go and test other items on the stock valuation that you didn't count . That's what during the stock count, you need to look at the high value items because we need to be satisfied at the end of the day that the total value off stock has been adequately audited. And if it is a high risk area, you're going to be counting a lot off stock items to get a higher assurance that the stock is fairly stated because we're going to be using the information on the stock take to perform our order procedures. We're not going to go and select another item that we didn't count because we haven't verified that it exists and that it is complete. And that's what stock takes off. Very important, moving on to the nation, which is existence like a city. If you go from your sheet to the floor. You have verified that the stock atom exists. Therefore, if you selecting another item during the audit that you didn't actually verify, it's a bit pointless. When it comes to rights. We need to verify that any inventory that is helpful third parties is not included as part of our stock valuation, and it must be separated during the stock count. And any in any inventory that has held at third party locations is included in our stock valuation at the end of the year. And we would get necessary confirmation from them to verify the quantities. When it comes to evaluation, we need to obtain the inventory list of inventory valuation and agree that the total agrees to the General Asia. We will then perform unnecessary costs and cross costs costing meaning, adding up cross cost meaning, adding across to see that that it is mathematically correct. Then, based on our sample that we got from our stock take, we will verify that price is correct by verifying it to the suppliers Invoice. However, before you can do that, you need to determine what costing method has been used because if it is then at weighted average. You cannot get the later supplies statement and try and agree to that valuation. It won't agree. You have to determine if they're using average costing. Are they using the purchase before that? Plus current purchase divided by two, giving you an average. If that's the case, then you would need to get both invoices from the supplier and do the calculation again. If it is five foe, then you can use the lost supplies statements or the latest one and verify that that cost off that stock is correct. And remember according to the standard, it states that all costs relating to that inventory value must be included as part of the cost, right? So what about things like labor? Well, for labor cost, you can agree that directly through to the wage records. So this whole thing about cost how do we determine whether or not inventories held at the lower off cost or net realizable value in accordance with eyes, too? The first thing that we're going to need to do is to determine what they're costing. Method is are they using average cost, or are they using first in first out five for Method, and this method has to be consistent. That shouldn't be chopping and changing from one year to the next to say, Well, this year, we're going to be using average costs the next year we're going to be using. Pfeiffer doesn't work that way, and I've explained how to very far the cost. The cost would be going straight from the supplies invoices directly back to what the cost is on the valuation. But what about natural Izabal value? And remember that according to the standard net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated cost necessary to make the sale. So when, with the net realizable value be less than its cost well, it is an increase in costs but a falling selling price. So our course on our exceeding are selling price. We need to value our inventory at net realizable value and no longer at cost. If the stock atoms are obsolete, we can't sell it, so selling prices zero. But we have a cost. It needs to be valid at neutralized very or that stock atom that is obsolete needs to be written off. It could also be stuck atoms that are used for marketing purposes, so the company is actually manufacturing these things and giving them away for free. Those stock atoms need to be at net realizable value when it comes to evaluation. We also need to determine slow moving stock items and potentially obsolete items. And we will make enquiries with management regarding these items. And should these items be really old and really obsolete, then there should be removed from the valuation and written off. We can also do a quick calculation of the gross profit percentage and determine whether or not that gross profit percentage is within the industry norm. We can also calculate the inventory days and agreed to the previous year to see whether or not it's still consistent and whether or not it's within the industry norm. Please also note that stock can be held a security and it can be pledged as security. So how do we do that? How do we very father it? Well, we can inquire with that with management and we can review any learn arrangements and weaken obtain board minutes, and that would give us some form of evidence that the infantry has Bean pledged. And if that's the case notes off, that has to be made within the financial statements under the inventory note. Within those financial statements and while we in the financial statements we have to verify that they've been classified correctly. So there's a split between raw materials, work in progress and finished goods. We also need to verify that the accounting policy within those financial statements state the correct costing method used for the inventory for cattle. What we can do is we can get the lost geo rains before your end and the first year ends in the new year and determine whether or not the stock is being recorded within the correct financial year. Cut off is an important decision, especially those within a manufacturing enterprise, and I know that cattle for leads to a transaction assertion. But if there's a cut off era in the recording off sales, it will result in a misstatement in the inventory and the receivables balance. And if there's a cut off problem with the recording off the purchases off those raw materials, it will have an effect on the inventory and payables so cut off is a very important assertion when it comes to inventory. When it comes to purchase invoices, that should be a schedule off goods received. Not yet. Invoiced and items under this should be a crude for in the accounts when it comes to sales invoices that foot relating to goods dispatched after the count should not appear on the statement of comprehensive income for the period. 14. Receivables: what it's in receivables. They all see in this chapter that revenue end debtors go together, and that makes sense because we know raise a debtor. I have to have a sale for the better. So we will be dealing with my coca assertions as well as my curve decisions Coca relating to revenue and curve relating to receivables or data's. When dealing with Coca, we'll start with completeness, and all sales transactions that should have been recorded have been recorded. So my sales are complete at the end of the day. Occurrence all sales transactions recorded that have occurred related to the entity Kattouf . All transactions have been recorded in the correct period gasification. All transactions are recorded properly and accuracy amount relating to transactions have been recorded appropriately and at the correct value. Former receivables were obviously using curve, so completeness or receivables that should have been recorded have been recorded. My existence, my recorded receivables, actually exist my rights and obligations. The entity controls the rights, the receivables and the related accounts. Evaluation receivables are included in the accounts at the correct amounts, and remember that when it comes to evaluation, if he ever foreign receivable in other words, a receivable in another country and you're dealing in U. S. Dollars. You need to re very that receivable and your currency using the relative spot rates at year end. According to I S 39 we value receivables as follows. Initially, initially, an entity shall measured at its face value. In other words, at the invoice amount that was raised. Subsequent measurements is that a mortars cautions in the effective interest rate method, and it isn't in any impairment on the and collectibility off those financial assets. In other words, we need to determine whether or not those receivables actually are receivable once that envoys has been raised and then an entity shall assist at each statement off financial position dates, whether there is any objects of evidence that a financial asset or a group of financial asset is impaired. So it's done every year. Do we believe that these receivables are still receivable and if they are not, we need to make a name payment for it. Let's cover the order procedures now. It doesn't seem like this topic comes up quite a lot, but it is still examine Herbal. It's not as popular as your inventory procedures and your non current assets procedures. Let's cover completeness first, not completeness relates to birth, the receivables and the revenue procedures. We need to go through our general procedures first. And remember, thes general procedures need to be written in your exams wall, and it's easy marks unless they say, in the required ignore gin or procedures in the general procedures are first you need to obtain the information. So we need to obtain the receivables, ledger and what's known as the receivables control accounts. Because if we don't obtain it, how are we going to do anything with it? So that's the key would obtain Once we have obtained the listing, then we need to do a relevant costs. We need to add it down, costs down, and we need to cross cost the amounts as well to see that everything is mathematically accurate. We also need to agree the final balance back to the General Ledger and to the trial balance because of that balance doesn't agree we have a major problem. One of the other things we need to do for sales is we need to do a gross profit percentage and determine whether or not. It's in line with the previous year, and within the industry norm as well. We also need to consider the level of income received in advance. You'll see when we get to classifications, as the assertion that one of the reasons that receivable can ever created balance is because they have actually paid us in advance, meaning that we have income received in advance and it needs to be disclosed correctly. As we know income received in advance is a liability. It's not an asset and should therefore be disclosed that such within the financial statements existence existence is a relatively easy procedure to prove that your receivables actually exist at year end. There are two main procedures that comes to existence one acting performer tonight as a receivables confirmation, and two I can perform. What's known as a subsequent receipt and a subsequent receipt means that the receivable has paid me off the year end, hence the word subsequent. And if they've paid me off the year end, it must mean that that receivable actually exists at your end. It also proves you cover ability or that receivable, because if that receivable is paying me, it means that I'm getting the money and I don't need to imperia it. But you also need to use a little bit of judgment when it comes to things like that. If the receivable has a balance of $100,000 at the end of the year and subsequent to that they pay $10 it doesn't necessarily mean that that receivable is recoverable. We need to follow up with management regarding receipts like that. The other procedure that we can perform, what's what's known as a receivables confirmation? And this is within accordance of ice, a fiver, five external confirmations and you get what is known as a positive or in negative confirmation. But before you send out a confirmation, you need toe, always get the client's approval and us, the auditor, need to send and receive the confirmations directly. A positive confirmation is where the receivable has to respond directly to you as the auditor, and they have to say, Yes, I agree with the balance will. No, I do not agree with the balance, and negative confirmation is with the receivable only response to us. The auditor. If they disagree with the balance at the end of the year. So how do you determine if you should send a positive or a negative confirmation? It's based on risk. And if you believe the receivables are high risk, you would rather send out a positive confirmation than a negative one. And remember when we did internal controls? I say to you that if they are good controls around whatever re auditing, so in this case it's receivables, then the risk is lower. So if I risk is low, then we would draw the center naked of confirmation because we know that they are controls in place. And what do confirmations also proof They prove rights? Because if the receivable says yes, I do owe this money. That means that the company has a right to claim that money from the receivable poor repetitively receivable, disagrees with the amount and says no, that's not the balance that I think it is. I think it's a different figure altogether. As auditors, we need to follow this up with management and say you're a suitable says that they have this ballons and you're saying they have that balance. There's a difference why, and it could be for a number of reasons. It can be a dispute on an envoy. It could be because the receivable centers many before year end. But we didn't recorded until off the year end or it wasn't banks into off the year end. In some businesses, what can also happen is that you have a supply and a customer that's the same company, and on their side, they might net off between the receivable and what's payable and re heavens or vice versa. It can also even be that we have mis allocated a receipt to the incorrect receivable could be a credit note that hasn't been raised, and they believe it should be raised. But we need to make notes off these kind of exceptions. And when it comes to rights, we as auditors can get a bank confirmation letter and it will disclose on there whether or not any off the receivables have been pledged a security. And if that is the case, we need to verify that the necessary disclosure has been made within the financial statements and it sits under the notes off trade and other receivables. As part of our valuation procedures, we need to compare the receivables, turnover and receivables days with the previous year and with the industry norm. And we can usually pick up a problem when it comes to analytical procedures like that, because if the receivable days has increased dramatically over from the previous year, well, that means that we're not getting the money back as quickly as possible. And we may have an indication off possible impairments. And speaking of impairments, we need to review what was provided for in the previous year and compare that to what is being provided for in the current year and to determine whether or not it is consistent. You can also compare your irrecoverable debts to turn over and, as a percentage weaken, say, has the percentage increase or decrease from the previous year. We can then discuss with management and say it's gone really high in the current year. Why is that all the other way around? It's gone really low this year. Why is that? We also need to verify credit notes issued after year in relating to sales that all within our year, because there's a risk behind that. What a company can try and do is add year and try and inflate their sales so that they have nice big profits and then just after year in credit those sales. So when we were reporting on, the financial statements were showing these mess of nice profits. But in fact, that sale is not really riel. It's just a timing issue raised that year. End reversed after year end. And if you think about it, if it happened in the middle of the year, it would be zero with enough financial statements anyway. So we need to get a list of credit notes that have bean processed after year end that relate to invoices with in Arya and reverse that revenue. While we're on the topic of credit nuts, credit notes passed during the year have to have a valid reason, and there have to be authorized by a senior official, and I know this is going to sign kind of obvious. But you have to have the credit note relating to an invoice and that the amounts is the same, and it does not exceed the original invoice. I've actually seen that happen before. It's scary. So the created note that was raised has to be signed by a senior official related to an invoice and a credit note cannot exceed the original invoice, and it has to have a valid reason, such as goods were broken on delivery, incorrect goods issued, etcetera. Subsequent receipts tasting also helps with valuation, as as it is with existence, because if a receivable pays $100,000 after year end and it owes $100,000 at year end, it means that the value at the end of the years correct. We also need to examine large customer accounts individually and compare them with the previous year's balances, because maybe that receivables balance keeps on growing and growing and growing, and then not actually paying full of goods that we have provided to them. And that's another order procedure that we need to perform. We need to review credit limits and determine whether or not customers have exceeded they Could it limits and provide reasons as to why these receivables have exceeded their credit limits. It shouldn't be allowed. It's an internal control weakness that can mean that the value of the debts at the end of the years actually not correct and needs to be in paid. Another thing that it could indicate is that there are no internal controls when it relates to credit checks. And if that is the case, as auditors, we would make a note to management has said that you have a control weakness surrounding the recovery ability of your datas cattle. Cattle for revenue is a very important procedure. Remember, according to the standard eyes 18 you raise revenue when risks and rewards of ownership has been transferred or if you're a service company when the service has been rendered. Cut off problems normally exist in businesses where good is delivered and not really when services are rendered. Let's say you're going to go and buy a motor vehicles so we'll use a motor vehicle dealership as an example. And they say to you that you need to pick up the motor vehicle at the end of February, which happens to be the year in data as well, but you can make it on their dates. So you said, you know what, thank you very much, but I will come and collect it on the third off March. They've raised the invoice at the end of February. You take the vehicle on the third of March, they cannot raise that revenue in February because risks and rewards of ownership of not trans food, you haven't got the vehicle. Yates. They can only raise that invoice on the third of March once you drive it off the showroom floor. And the same problem problem happens when it comes to manufacturing companies or any company that deals with goods. Not so much services where they will raising invoice at the end off the financial year but only deliver the goods in the new year. And according Toa Iess 18 that is not correct. You need to raise the invoice at the dates that it was delivered. So how do we taste this? Well, what we need to do is we actually need to get delivery notes and compay the delivery notes after year end to the invoices raised within our year and for those revenue items that were delivered after year in but raised within our year need to be reversed. And if you remember an inventory, I say to you that cat off is also a very important procedure, because if the sale was raised at year end but the goods were not delivered and so off, the year end that means that we actually might have must that stock because they might have kept it separate for delivery. But it needs to form part of my stock because it's our stock until it gets delivered. The sale needs to be raised in the new financial year, so it's still my stuck. Just remember, when it comes to reversing revenue, you cannot just reverse the raven, you figure, and take it to the data's account. There's a cost of sale portion as well, so you actually need to reverse the sale, the cost of sale, the debtor and the stock all at once. Another important procedure to do in your doing cut off is to look at the sales returns and select a sample of thes returns documents around the year end and trace them back to the relative credits and your determine whether or not it was raised within the correct year. We can also perform analytical review procedures on sale returns by comparing the wrench of the cells returns directly to sales for classifications. What we need to do is we need to select the sample of sales invoices and examine whether or not they have bean classified correctly as sales. When it comes to classifications off receivables, we need to review a list of receivables that have created balances. It's an unusual amount that it's an unusual transaction. So we need to say all of the ones that are in credit, why are they in credit? And some of them have valid reasons receivable, mutt, pay in advance. Like I said before. So they're paying in advance. That means that it's actually not an asset. It's income received in advance, which needs to be reclassified as a liability. We also need to determine whether or not the receivables are long outstanding and which ones are currents. And we need to separate that within the financial statements. Remember trade and other receivables as a current asset, which means that it should actually be turned over and received within 12 months. And if that is not the case, we need to split between what is non currents and what is currents. When it comes to accuracy, we will select a sample off sales invoices and compare the prices in terms to an authorised price list as well as any terms or conditions of the company. In other words, you will pay this invoice within 50 days. We will also taste discounts and see whether or not they were correctly applied and re calculate them from a sample of invoices. We also need to calculate the text in the sample of ourselves invoices So we'll take what the Neitz amounts is. Add our sales text to that to see what our gross invoice amount is, and the gross amount will sit in my receivables balance. The Nets amount will go to my sales, and the sales tax will go to my sales tax account as a credit. The liability when it comes to sales, there are two other assertions that are very important excluding cattle, and that is completeness and occurrence. And in my view, completeness is more important than occurrence. But it's based around risk off the orders completeness. Remember, it means that all sales that should have been recorded have been recorded, and your directional testing is different between verifying completeness and verifying occurrence for completeness. We need to go from the source off the sails transaction back to the General Ledger for a currents. We need to go from the General Ledger back to the source so you can see from completeness that if I'm going from the source and I do not have it in my ledger, my cell is not complete. Now, what is the source of a sales transaction? It depends it the pains on new understanding of the entity and what it does. It can be anything from a delivery note to a job card to a quotation to a till slip. It depends on what it is and you will see in the scenarios that they give you. They will tell you what is used. So if we take a look at a delivery note is my example, I would need to see that's the delivery night way is the invoice in my general ledger. If the invoices not they must sales are incomplete and you will see when it comes to occurrence. Did the sale actually occur and pertained to the entity? I'm going from a general ledger back to my source. So this invoice that I've got in my ledger ways, the delivery nights and if the to agree, then that is my occurrence assertion completed. We also need to perform analytical review procedures on sales. We will compare sales per month for the whole year to the prior and recon plotted on a graph. We can identify unusual months within the year, and we can also see whether or not sales has taken off at the last month, and that can give us a potential risk that sales have been raised at year end. But potential credit notes have been raised off the year end. So as you can see, you cannot just ordered receivables and isolation. You have to take a look at the revenue side as well. They're both important that both work together, and when you run day running your own business, you know what to put in place and the procedures to put in place to make sure that your receivables value at the end of the years, correct and that will turn over or your sales is complete. 15. Cash and bank: cash in bank order procedures. Cash in bank are relatively easy order procedures. It has come up a few times in the past, so it is an important sections obviously understand. As cash and bank forms, part of the stepping off financial position will be dealing with our curve decisions. So for completeness, who wants a very farther to the recorded cash balances include the effects of all the transactions that have occurred for existence, that all the cash balances recorded exists at the end of the period for rights and obligations? Because if it is a nerve, a draft, it's an obligation that the entity has legal title toe all the cash balances shown at the end of the period and for valuation that the recorded cash balances are realizable at the mounts stated. And when it comes to something like valuation, if you have a foreign bank accounts and you are in U. S. Dollars, but you've got a pound account, then you would need to revalue its at year end at the spot rate back into U. S. Dollars. One of the most important procedures we need to do in bank in cash is to obtain a bank confirmation letter, and this is in accordance of ice a fiver, five external confirmations, the bank confirmation letter sent by the auditor directly to the bank. The bank then completes that confirmation letter and sent it back to the auditor. It is a great piece off external confirmations, its third party, so we can place a lot of reliance on their confirmation Later, the bank confirmation will show us that's the recorded cash balances actually exist at year end and that any year in chances are recorded in the correct period, so there's a cut off element is as well. It will also show us the value that is within that bank balance, and you might think yourself years. But if I get a bank statement, surely that shows the value. But bank statements can be manipulated by clients. If they're clever enough, they can manipulate their bank balance and their bank statements, but not when it comes directly from the source off the bank account being the bank itself. So what will the bank confirmation show in orderto it was show any balances that are favorable to the clients. So, in other words, any debit balances and it will have the relative account number, the balance, the top of accounts. It is as well as any interest that has been earned during that period. It will also show balances that are favorable to the bank. So any overdraft and it will show the balance the top of account to the account number and the interest paid on that overdraft during the year. And this is why it's important to get a bank confirmation letter because the bank has to list every accounts that they have with them. And the possibility of as picking up and accounts that hasn't bean recorded in their accounting records is quite high. And you might think yourself. But why would a company want to do that? Why would they not want to show a bank account within the financial statements? What happens if it's in an overdraft? And if that's the case, the Nets wasn't what's known as an UN recorded liability. They don't want to. So liabilities like that that would rather show that their bank balances or healthy they've got many. They when in fact it might not be the case. Yes, they might have a few debit balances, but let's say there could one huge overdraft. And if we show that overdraft within the current liabilities, it might exceed the debit balances without on my current assets indication that the company actually is overall in an overdrive situation. And remember, when it comes to risk the risk when it's a debit balances overstatement, so they would rather want to overstate there. David balances and understate their creative balances, and a bank confirmation will show us all of the bank accounts that the bank has on their records as well as the balances. A bank confirmation will also show us anything that has been pledged or seeded that has credit balances, and they would give us the details accordingly. Those details have to be disclosed within the financial statements and the cash and cash equivalents. You'll have your bank balances. And if you've got any cash on hand and underneath there to your state that anything has been pledged or seeded as a form of security for something. And if the company has an overdraft, the bank might also indicate what kind of securities are held on negative balances. The bank will also confirm if they are away, if the company has opened any new bank accounts during the year. There will also indicate any zero balances to tell us that those accounts have been closed . So even if a bank balance at the end of the year zero, it doesn't mean it's in material. Why's it? Zero did the count clothes and was transferred to another account because, let's say before it was closed there a $1,000,000 in the bank account and then that $1,000,000. What happens to it? Did it get transferred into a new bank account or that did the directors just take it for themselves? The bank will also tell us any arrangements or agreements between the bank and the clients that limit the clans total borrowings. So, in other words, what they will say as an example is we will not give more than $750,000 in an overdraft if the shareholders loan is not below $300,000 in credits, because remember, a credit shareholders learn is a liability so the bank might not want to taking unnecessary risk. So they'll say, Well, we'll limit your overdraft to 700,000 as long as your shareholders learn. That's in credit stays below 300,000. And if it goes over 300,000 then we will reduce the limit that we will be able to give you in an overdraft. So you're gonna put it up to 400,000 as your shelters learn, will drop it accordingly to whatever valley they feel like. They should drop it. See, the bank will also disclosed the turtle facilities available to the company at the end off the period. So if the company has an overdraft facility over $100,000 the bank will say yes. We're aware of $100,000 overdraft that the company currently has. However we were the total facility that we've got and given to them is to the value of $500,000 and that needs to be disclosed as well. We also need to disclose if there are any contingent liabilities arising from things like guarantees and a bank will actually tell us what guarantees the company has made. We as the auditors they need to verify that necessary disclosure has been made within the financial statements regarding these contingent liabilities. It will also show us the authorized signature is And that's an important procedure because we want to make sure that only authorized personnel have access to the bank accounts and can make transfers and payments, etcetera. It shouldn't be the person that is recording the bank statements and putting it into the cash book. It should be separated and segregated. It's an internal control function, and his order to is we use all of the information in the bank confirmation to verify. First of all, that the balances are correct that the necessary disclosure regarding contingent liabilities and securities and anything that's pledged a security etcetera have been disclosed adequately within the financial statements. But before the bank even does this, they request permission from their clients to release information like that to the auditors so attached to the letter, we need tohave clients approval on their letterhead and signed by one of the authorized signatures off the bank accounts. If we take a look at the procedures around bank and cash, they would start with our general procedures, so we would obtain a list of cash and cash equivalents at year end with comparative figures for the previous year and agree those compared to figures with the previous years, working paper and financial statements. We would review the list for any unusual items. So what would be an unusual item in a in a bank? Balance? Zero zero is unusual, and it probably indicates that it's closed. But it's someone unusual item. We will agree. The less to the cash book and the petty cash book will perform are selected costs and calculations to ensure numerous numerical accuracy. And we were compared the atoms per category with the previous year and obtain reasons for unusual changes. And again unusual can be it had a balanced lost yet doesn't have a balance this year. Why we will then request the bank confirmation letter directly from the bank at year end in respect off your imbalances and other information. And we will agree the balance with the bank reconciliation examined guarantees provided. Ensure that they're probably discussing the financial statements. Confirm who the authorized check signatures are confirmed. Elektronik Banking administration rights, in other words, who is allowed to sit at beneficiaries, amend beneficiary details, load payments and release payments. Ensure that all bank accounts of the stood on the bank confirmation letter are recorded in the client's accounting records and obtain explanations for outstanding deposits and follow the outstanding deposits through to the next months. Bank statements When it comes to auditing a bank reconciliation, we would obtain the bank reconciliation at year end and check our 11 costs and calculations . We will also follow reconciling at some street to the settlement or clearing after hearing and agree their mounts and the dates. So any outstanding chicks we will go in. Vouch off the year end to make sure that those checks have cleared and have Bean paid. We will also verify the checks that they are any if they've gone stale, because if they've gone stale, we need to remove them from our bank reconciliation. We will then agree our balances in the reconciliation statement to the cash book and the bank statements as well as the bank confirmation. So we're agreeing. What is the cash book balance say? What is the balance on the reconciliation? Say What is the balance in the bank? Statements say, And what is the bandits in the bank confirmation? It should all agree. We also need to review and inspects the cash book, and banks happens before and after year end to verify any strange entries, and this procedure is not only done before and after year in but should actually be reviewed throughout the entire year, and any material amounts that we identify both receipts and payments. We need to verify to supporting documentation so we can select a sample off large amounts payments and receipts and verified back to supporting documentation. We also need to consider whether or not the entity has a legal right to sit off overdrafts against positive bank balances because for disclosure purposes, sometimes that's not the case. You have to show what your overdraft is, and you have to show what your debit bank balances are as well your positive bank balances . And this is why I said getting a bank confirmation is very important because the company doesn't necessarily want to show an overdraft. They would rather show that they are doing well and they've got money in the bank and everything's okay. And lastly, we will review the accounts to see whether or not proper disclosure has been made in respect of bank and cash. And disclosure doesn't only mean the balances, it's also anything else additional. So my securities, my guarantees etcetera, so that's pretty much it when it comes to the bank balances. But what about cash? So cash? Meaning things in petty cash? Some clients have a large pity cash balance, so we need to verify that because it's going to be disclosed within our financial statements in one of the ways that we can verify Petty cash is to perform a physical cash count. It is important, though, to have the client presence while your accounts in the cash, so that if there are any discrepancies that don't start to cost blame upon us and during the cash counts, we need to verify that the petty cash book has been written. Absa dates and is in ink very important, not in pencil. We will then get all the relevant notes and coins and I O. U's, and we will reconcile it back to what we've cancer toe. What is in the petty cash book. We will then make our ordered working paper accordingly and put it in our ordered file to show these are the cash notes that we had at the date of the counts, and these were the number of coins. This is the petty cash balance, and it needs to re console now. Normally, what happens is that the date of the count is not necessarily year end. So we will count it on a specific day and reconciling it backwards to see all payments that have been made and all receipts into petty cash and reconcile those to see whether or not the balance at the end of the year actually is correct. And how do I actually reconciling backwards? I take my cash on hand the dates of the count. Add my payments, the Dax, my receipts, and I should get back to the balance in the payday cash book. If not, we need to follow up with those kind of discrepancies. And when it comes to things like I O U's, we need to ensure that the I use cash for employees have bean reimbursed back into petty cash and large amounts when it comes to things like i O U's should not be allowed in petty cash, especially if it's things like staff loans. Staff loans should not come out of petty cash if they are large not talking if it's like $100 but if it's $10,000 it should be going through. The bank account itself should be disclosed as staff learn. Obviously with it, it's payday cash or three or bank accounts. But large amounts should not be given Teoh staff out of petty cash. We also need to verify that that petty cash box is kept safe and only responsible people have access to that petty cash and old transfers out of petty cash payments for whatever it is have to have a receipt and signed by the person that has given the cash and by the person that the cash has been given to and on the the most. States. I gave $50 for Malkin, braid for the office and the person that received at $50 issue the receipt from the place that sold the milk and the bread back to the cashier with the relevant change. And the receipt from the supplier should technically be stapled or attached to the petty cash voucher so that anybody who wants to verify it can say yes. I gave $50 at it was for Morgan braided, and it came to $25 I got $25 in change and the $25 goes back into the petty cash books and the recording off the $25 expense has been put into my petty cash book. And then, lastly, we will verify that the petty cash balance has been disclosed correctly within the financial statements. 16. Liabilities, capital and directors' emoluments: here, So we're gonna go through the procedures of liabilities, capital and directors emoluments. Let's first look at the procedures for trade payables, accruals and expenses. It seems that this topic has come up before quite a few times, so chances are it might come up again. We look it accounts payable in the Krul's. First, we know that we are dealing without curve assertions and for completeness. We need to perform the following again. First, we need to obtain the information before we can audit it. So we need to obtain a listing off trade payables and agree the total to the general ledger . We also need to perform are relevant costs and cross costs. We need to compare the current year's balances, full accounts payable and for Krul's with the previous year. We need to compare the payables turnover from the current year to the previous year and within the industry norm toe, see if there's any additional risk that we need to raise. We also need to perform what is known as an and recorded liabilities. Taste non and recorded liabilities exactly what it says. It's a liability that's not recorded. But how do we pick up on recorded liabilities. One of the based ways is to see a subsequent payments, in other words, of payment made off the year end. In my bank statements that relates to an invoice within my year. We need to verify that they've been raised as a liability within my year, and this normally happens with things like a telephone account. A telephone accounts will be paid after year end, but it relates to my year, in other words, the month before. So we need to verify that that a cruel has been raised at year end. We can also examine files off unmatched purchase orders and supplies invoices and identify whether or not they any and recorded liabilities. That way, when it comes to completeness, you also need to obtain a sample off, supplies statements and re consol them to the supplies account. Remember the same as revenue. It's a credit balance of the risk is understatements, so they for a direction off testing is from the source back to a general ledger to verify completeness. So the source of a creditor is the statement. So I've got I've got the statement at the end of the year, where is it on my credit's age analysis or my creditors listing, and where is it in the credit's Later. You can also perform a confirmation off the Count's PayPal's in the same manner that you do it with receivables. But remember again the same. It's receivables. It's based on risk. So if there is a low risk that there's going to be a misstatement coming from accounts payable, maybe we wouldn't do a confirmation. But if it is high risk, then chances are year suitable. And also remember, before sending out any confirmations, you need to have the client's approval first. And in doing that, the confirmation will also show us any and recorded liabilities. So the creditors says, we say that the company owes us this value we're saying in our accounting records. No, that's not the case, and it might view that the creditors actually correct. So we do have an and recorded liability, and it needs to be raised in the accounting recalls. So the reconciliation between the accounts payable and the suppliers statements is a very important procedure. And then what we do is we select a sample off trade payables from our listing, and we've ach it through to the creditors, reconciliation and the creditors statement. When it comes to credit to statements for two copies or not really reliable, they need to be the original documents. And if the client can't give you the original document, then we need to take alternative order procedures approach, and we need to either get it directly from the supplier. Oh, get a confirmation from that supplier. And if the balance agrees exactly, there's no further ordered work that needs to be performed. However, discrepancies can arise and the reasons for discrepancies we discussed in the receivable section. So if you can't remember what they all, you can go back to that chapter and see exactly what they were. When it comes to existence, we will watch a selection, a sample of trade account payables and a Krul's to supporting documentation. So we'll go and see. This is the list of accruals. One of them is telephone. And where's the invoice related to the telephone? In other words, the liability does exist at year end and with when it comes to trade payables, we will get this statement and verify that statement back to our creditors. Reconciliation in other words that creditor actually does exist at the end of the year and the same with receivables. If we are doing a confirmation of our accounts payables, the Net confirmation would also prove existence. We can also perform analytical review procedures by comparing the carriages balances with the previous years to confirm that it's reasonable. And we can also calculate our payables turnover and compared to the previous years when it comes to rights and obligations, will vouch our sample to supporting documentation, such a supplies, invoices or statements. And we'll obtain evidence that way as to whether or not there is an actual obligation at the end of the year for payments evaluation. What we'll do is we'll get our sample of our creditors that you want to verify, and we will verify to supporting documentation the same other Krul's. So we'll get a list of accruals, and we will match that to the supplies invoices to see whether or not it is at the correct value. If you have foreign creditors, you would need to revalue those creditors into your respect of currency at the spot rate at year end, the same way that you would do it in bank, in cash and in receivables in the receivable section, a city that you cannot just ordered receivables in isolation. It has the other leg to it as well, which was sales. The same applies here. When you're auditing trade payables, there's an expense related to it. So we debit the expense and make credit either a Krul's or trade payables. And as such, we have coca decisions as well. I want to get to cut off first, because for cattle cut off is attested will use, and it's the same taste as when we do it for an recorded liabilities. So we will select a sample of ashes and compared the dates with the data they recorded in the ledger. So even if it was paid off the year in the expense relates to my year like my telephone example. So I need to make sure that my expense is within my year. Remember, it's one of the underlying assumptions, and accounting is the cruel basis. So it's when the transaction of coups, not when it is paid procedures relating to expenses or as follows First, we need to obtain a schedule of the expenses per category with comparative figures from the previous year and agree the comparative figures with the previous years. Working papers and financial statements review the list and invest to get unusual items. Now what is an unusual atom in an expense account? It would be something that's normally in the credit and explain should always be a day. But so why do I not have an expense? That's a credit also large amounts. So last year we had in donations as my expense. We had a $5 expense, and now we've got a $50,000 expense. That's unusual. We would also need to agree the list to the trial balance and re performer costs and calculations to ensure that they are accurate on the list and compare, I suspect category with the previous year and obtain a reasons for unusual changes. So those are my general procedures. But what about my specific procedures for expenses? I would need to select material and sensitive accounts. Now what is a sensitive account? It's an account that might be material not because of its value, but because of its nature. And remember, we covered that in materiality, writes the beginning off the course where city, you can get something at this material in nature material in value. So now we're looking at items that are expenses that are material in nature, such as what things like computer expenses, because the company might want to expense a computer instead of capitalizing it in other words, there overstating their expenses. And they can do that so that they can show a smaller profits or a bigger loss in order to avoid paying Texas. The same rule applies to repairs and maintenance. The company might want to replace a repay instead of capitalizing it so that they are overstating their expenses instead of putting it to the capitalization off the asset and recovered. That when we ordered certain on current assets donations is another one because their nations might not be an actual charity that it's going to. It might just be too somebody's friend, and it is therefore, what's known. It's not text deductible, so the tax authorities going to text you on that donation. Things like legal fees is also sensitive because the company might be incurring legal costs , which would indicate a possible contingency, and we need to disclose that contingent liability or asset depending on who's suing who. Within the financial statements. Legal fees also need to be in the production of income. So they suing a receivable because the receivables not paying their account. Therefore it is a legitimate expense. It's part off their business. They need that money from that receivable. But if it is not in the production of income, then it is not tax deductible. So you can't say it's a legitimate expense and the text authorities will text you on that expense. Another sensitive account is what's known as sundry expenses or general expenses. And sometimes what a company will do is that will try and hide expenses that either should be capitalized in the statement of financial position. Or they will put expenses that they're not really sure way to put them. So in other words, they're not classified correctly. So we will select a sample, and we will review the last thing off sensory experiences or general expenses to determine what they are full. We can also perform any let's occur of you procedures on purchase returns. Comparing those purchased returns as a percentage off sales or cost of sales to the previous year for currents would select a sample of actors, and I would inspect the supporting documentation, and I would verify things like the date and the name that it's in the name of the company. So it's occurred within my year, and it pertains to the entity overclassification. I would want to make sure that the expense has been correctly classified in the correct accounts of its telephone. It must be sitting within the telephone account and not somewhere like computer expenses when it comes to the trade payable section. I would want to verify any debit balances, obtain a reason for those debit balances and reclassify them into trade and other receivables the same way as we did it in the receivable section. But you need to get the reasoning behind it, not just reclassified, because they might be a valid reason and disclosure is very important. It might not be an actual trade receivable. It might be a pre payments, so we've paid the creditor in advance. They haven't invoiced us yet. In there. Books there were recorded as income received in advance, but in our books we need to show it as a prepaid expense, and we need to disclose their correctly enough financial statements. So if we're going to reclassify something out off trade payables, but it relates to a prepaid expense, we will reclassified as a prepaid expense. So in my financial statements, I'll have trade and other receivables, my trade datas and then my pre pavements underneath that it's the same way that we did it didn't receivables receivables. Remember I told you that if you've got a receivable, that's a credit that might be income received in advance. And if that's the case, you need to reclassify it as income receipts in advance. In your financial statements, you'll have trade and other payables trade payables income received in advance. When it comes to classifications as well, we need to disclose what is currents and what is non current cause some creditors we might be paying over more than a year, which is very unlikely. I think the credits will be just but beyond annoyed, so we were still there need would need to disclose that. So what is non currents in what is current when it comes to accuracy, we need to re calculate the mathematical accuracy on a sample of our supplies invoices, and we would need to re perform any costs. We would also need to re calculate the sales tax on any supplies invoices to determine that it actually has been re calculated correctly. And it has gone to the debit side off my sales tax accounts. What other liabilities can I have the going through a Krul's of going through my trade payables? What about Tex I can never tax liability to. I'm not talking about Texas an income text company text talking about the text gets deducted from new employees, so I would need to verify the amount paid to the text authorities by inspecting the relevant documentation. And the outstanding balance at the end of the year is normally one month's deductions. So it's the salary that was, I think, expensed in the one month but only paid off the year end. The other text that we need to verify as well a sales tax because I will have a sales tax balance at the end of the year as well, and what we would need to do is we would need to obtain the sales texture tune and verify that the payment has been made off the year end that relates to that return. So we've covered our current liabilities. We've covered how to order to our trade payables as well as a Krul's and any other cruel such as text balances, etcetera. What about non current liabilities? And we should know that non current liabilities are any liabilities that are going to take longer than a year to pay and normally relate to long term loans, mortgage bonds, those sort of things. So we would need to obtain a schedule of all these loans outstanding at the end of the year , showing for each individual loan, the name of the lender, the dates of the loan, the maturity dates, the interest rates and the balance at the end of the year, as well as any kind of security we were there need to compare our opening balances of the previous years Working paper falls as well as tasting the mathematical accuracy off my listing. We would then compare the closing balances too much General Ledger energy degree to the trial balance. We would need to verify any additions and repayments directly to the cash book, so if they got a new loan, we would need to verify that that money has come into our bank accounts, and as soon as you start repaying it, that installment needs to go out of our bank accounts. When it comes to those repayments, though, we need to confirm that those your payments are in accordance with the loan agreements and that the company is not short paying what they should be paying. But just be careful. Remember, in cash and bank procedures, Sometimes a company can have a limit on what they're allowed to borrow the borrowing limit . So we need to verify that the borrowing limits imposed by the agreements are not exceeded. And normally, what happens when you get a new borrowing? It has to be approved by the board of directors, and that board has to have signed minutes within the minute book. So we need to verify that the minutes have been signed and that new barring has been authorized. Minutes also help us is the auditors to identify if any bearings have not bean recorded that should have been recorded, so they've bean minutes ID, but they haven't been accounted for. We can obtain the wreck confirmation from the lenders, similar to what we do with the bank confirmation weaken. Send at a confirmation later to them to say, Please, will you tell us what the amount outstanding is and what the interest is that you has been accrued and what security is being held over that liability. Normally, with the mortgage bond, the security is the property, so you don't pay the bond, they take the property. And just with that, just with mortgage bonds just for a second, you need to split between what its current and what is non currents in your financial statements. And that's very important because the bond can be for 20 years. But there is a current portion that I'm going to pay within my next 12 months. So we need to split what the learn is for 19 years will pretended to new learned from 19 years as non current, and then the one year has to sit US currents when it comes to things like interest. Obviously, lenders are not going to give out anything for interest free, so they gonna in crude interest. As a result, we can verify that that interest that has bean accrued agrees to the real of a supporting documentation, whether or not. It's an amortization schedule or whether or not they've got it in a bank statement or whatever. But we can verify that to supporting documentation, and that's it for non current liabilities. It's not very complicated. What about other liabilities there? Things like provisions and contingencies. How do we ordered those rights in the beginning, off this course, a city that you need to understand the accounting before you can do the auditing. That's very true when it comes to the whole syllabus. So what is the definition of a provision? A provision is a liability that is uncertain in timing or amount. So what is a liability? Liability is a present obligation arising from a past event, with settlement result in an economic outflow. And what is a contingent liability? A contingent liability is a possible obligation that arises from a positive veins whose existence will be confirmed only by the occurrence or non occurrence on one or more and certain future events, not Hurley within the control off the entity. So, in other words, we may or may not have a liability. We're not sure you and it normally surrounds things like litigation, so the company is being sued. But we don't know where through knots this actually going to be a valid outcome. In other words, we are obliged to pay for it. We can get a legal confirmation as well, which is another confirmation that we can get, and the lawyers of the company will determine what the possible outcome is. If the outcome is possible, then it is not a contingent liability. It's actually in a cruel and the contingent asset is the inverse of a contingent liability . But how do we order to How do we obtain evidence off contingencies? The easiest way the food's thing is to inquire with managements, get them to sign a managing representation later and ask them all your way off any contingencies within the entity. We can review minutes of meetings to see if there's any correspondence with legal advisers , and we can review the legal expense accounts because, like a CTO contingent, liabilities got to do with litigation. Most of the time it's got to do with litigation. So if the company is being sued, they're going to have a legal expense cost. And if that's the case, we need to follow up and see why are we paying legal fees and what is it in connection with ? Oh, you're being sued. By who? What is the story? What is going on? And we need to disclose their contingent liability based on the possibility. Remember the definition. It says that it's based on past events whose existence will be confirmed only by the occurrence or non occurrence off one or more uncertain future events, not Hurley in control of the entity. So it's uncertain as to whether or not we're going. Teoh payout This litigation. It's not within our control. So what about provisions now? Well, we know that provision are a liability, meaning that is a present obligation arising from a past event with settlement to result in an economic outflow, that it is uncertain in timing or amount. So first things first. Again, I would need to obtain a shuttle off the provision, and it will show me the opening balances the movements as well as the closing balances. I will then performer relevant costs off that list, and I will agree that opening balances to the previous year in my closing balance to my General Ledger in the current year and remember the definition off a provision that it's a liability. So we need to determine if the company has a present obligation based on the past events. So how do we do this? Well, we can review correspondence relating to the item, and we can discuss this with the directors. Furthermore, because it's a liability. Economic outflows are going to flirt at off the entity once it has been settled. So we need to determine whether or not it's probable that a transfer of economic benefits will be required to settle the obligation. And how do we do that? One of the easiest ways to do that? It's the same procedure in the Krul's so we can verify subsequently year end in their bank statements or cash book whether or not the payment has been made. We can also see whether or not the provision raised are consistent with the previous year. So if the company's raising a provision for bonuses on an annual basis, we can see well. Last year the provision that was raised was $10 million this year, $12 million Does it appear reasonable, Yesona. But remember that in the event that it is not possible to estimate the amount of the provisions. Then we need to consider contingent liability and disclose that contingent liability within the accounts. So we will select the material provision and we'll follow through to the supporting calculations. Every will very father calculations with reference to supporting documentations and re performance calculations. Right, so capital, When dealing with capital, we're dealing with shays off the company when it comes to the share capital. We need to verify the authorised share capital to the statutory documents governing the company's constitution, and it is being any changes to the authorised share capital. We need to verify that there have bean done so correctly via resolutions. When it comes to the issue of shares, we need to verify any issue off the share capital or other changes during the with general and other board minutes. We also need to verify that that issue is in terms off the company's constitution and the directors possess appropriate authority to issue the Shays. It is also important to note that your issue of shades cannot exceed your authorized amount when the shares have been issued. We need to confirm that cash or other consideration has been received or receivable, so the company will issue shares normally in the form of cash. And did that cash get received? And if there is a transfer, Shays Normally, what can happen is that one shareholder control through the shares to another. We need to verify this to relevant correspondence. Very father, it is completed, and stamp transfer forms verify that there's a cancelled share certificates because we don't want that shareholder to run around and say, I'm still a shareholder, but they're actually not and verify that these transfers have bean minutes it in the director's meetings as well. Other things that can happen in Shea Capital is dividends. So we need to agree that evidence paid or declared three year end to authority within the minute books and re performed the calculations with the turtle shake capital issued to determine where they are any outstanding unclaimed dividends. We also need to agree the dividends that have been paid to supporting documentation so normally what happens is that a diffident gets the kid and paid. There's some kind of return that get that gets attached to that, to say that these are the number of shares that you hold, and this is the dividends that has been declared. This is your shade that you are going to get. But please remember, you can only declare a dividend. If the entity has retained earnings, you can declare a dividend up to the maximum amount of retained earnings. And if the company has an accumulated loss, they conta cured evident and another sense very obvious. But I've seen it happen before where a company has an accumulated loss and they attempt Teoh the clear dividend and it's in contravention off legislation. You're not allowed to do that as the company's in solvents and lastly, one of the other things that we need to order to swallow. Reserves and reserves can move at any time. So we need to agree on movements and on the reserves to supporting authority and ensure that the movements on reserves did not contravene the legislation on the company's constitution. By reviewing that legislation, disclosure is also very important. We need to verify that the company has separated what are distributable reserves and what are non distributor reserves within the financial statements, and it will sit within the statement of changes in equity directors and monuments, directors and monuments is is pretty standard. Nothing too fancy here. And what we need to do is auditors is we need to obtain a list off all the directors emoluments for the year, poor director, and there needs to be a split between what they've earned as a celery. Any bonuses benefits such as medical aid, pension contributions and any other Ramallah mints that they have received and other monuments can be like for attending meetings. We can then get a certificate signed by the director to say that they confirm it, what has been disclosed and that total emoluments is correct, and the necessary disclosure needs to be made within the financial statements and within the financial statements. It's split, so you'll have executive directors, and it will split per director What the emoluments were. Bonuses, benefits, etcetera, as well as non executive directors, where they're also spread it per non executive director. What the emoluments were bonuses, benefits, etcetera. We can agree these amounts that have been paid to the relevant directors directly back to the payroll records, and we can also compay the emoluments paid in the previous year to the current year, and that will show if any directors have possibly resigned. So we had a director there that whoever and we paid a $1,000,000 last year and this year any paid $500,000. Why did I drop over? The director resigned so we can perform analytical review procedures on directors emoluments as well. One of the other benefits that director can have is the use of a company assets. So, like a motor vehicle. And if they are using a motor vehicle that belongs to the company, they are receiving a benefit that needs to be Texas, not as a fringe benefit. And that tax we need to verify has Bean disclosed and paid to the relevant tax authorities . 17. Not-for-profit organisations: so we have looked at order procedures that cover normal companies. But what about not for profit organizations? So what is a not for profit organization? Well or not for profit organization is any organization with its objective is not to make profits now. That's not to say that it doesn't make profits, but it's not they to maximize shareholders wealth. So it's things like charities, hospitals, schools, public services, trade unions, home associations. Those are all organizations that are not for profit there for the benefit off society. But some not for profit organizations still need to be audited and the financial reporting around that is specifically for them. So they have standards and compliance regulations according to relevant X and law that they have to comply with. When it comes to financial reporting, they must still show the relevant information they still need to have a statement of comprehensive income in a statement of financial position and the statement of cash flows was relevant notes, just like any other company. So when it comes to the orders, the auditors are still required to produce an ordered opinion about the truth and fairness of the financial statements and whether or not, there are fairly stated, so that doesn't change. But that's only if an order is required. If in order it is not required, it might still need to be audited if it is using public stakeholders. So the general public, so anything that is related to hospitals or anything like that nature it might still requiring orders, even though it was designed to not have a statute she ordered. And if it receives government funding so like municipalities or schools or whatever, then the government may ask an auditor to provide some kind of assurance on the presentation of the financial statements. So it's important for the auditor to understand if it is a statutory orders, if it is required, and if a statutory is not required, what the objects is off the engagement all and what the engagement is to report on to whom the report should be addressed and what form the report should take. And if we are auditing not for profit organizations. As part of our planning, we need to consider the following as the auditors what the scope of the audit is. If there are any recent recommendations off a regulatory body, the acceptability off accounting policies, adopted changes in circumstances in the sector in which the organisation operates past experience on the effectiveness off the organizations, accounting system, key ordered areas and the amount of detail included in the financial statement on which the auditor is required to report. And they are a couple of ordered risks as well. There are inherent risks and all of those things associated to not for profit organizations . And when it comes to inherent risks, one of the things can be, especially with a charity. It's the significance of donations and cash receipts because cash is a risk and it's an inherent risk for a donation company because they're receiving cash all the time. So that would be an ordered risk and also with the charitable organization, there's inserts into your future income. What happens if those donations stop? That's an inherent risk. There's also a lack of predictable income and how you match that income to the expenditure . There's also some complexity around charities with Tex rules, because in some countries the donation received is not text, and in other countries it is. There's an inherent risk around the sensitivity off certain key statistics such as the proportion of resource is used in administration. There's also an inherent risk where there's a need to maintain adequate resource is for future expenditure while avoiding a buildup of all of this cash reserves, which could appear to be excessive because we didn't create the charity to build up a cash . Paul. We used the charity for the common good of the society in the community at large. What about control risk? Well, some of the control risk is the amount of time committed by the directors or the trustees of the organizations of phase. They might spend a lot of time making sure that it's doing what's supposed to be doing. The skills and qualifications off the individuals or the directors or the trustees is also control risk because you're not necessarily going to have somebody that's highly qualified in the charity or, ah, whatever hospital. Hopefully you qualified. But in the charity, you're not going to necessarily have the skills and qualifications to run the charity and identify weaknesses, etcetera. There's also controller surrounding the independence of the trustees from each other and the division off duties between management and trustees. What about the control environments while these kind of not for profit organizations are normally very small, so segregation of duties is a big one and the competence training and qualification off the paid staff and any volunteers and if they're appropriate to the tasks that they have to perform. And what about the involvement of the board of the trustees in the recruitment, appointment and supervision off senior executives? So all of these things need to be taken into consideration. And again, when you like we did in internal controls at the end of city, you need to apply yourself a little bit. What is it that we are auditing? And what could the potential risks be when it comes to inherent risks, control risks and the control environment in its totality? And speaking of internal controls, the main deficiency when it comes to internal controls of ah, not for profit organization is the limited segregation off duties. So chances all you're not going to be doing taste of controls when it comes to not for profit organization, but that doesn't mean that they must not be any control. Remember, as an orderto we will test, the internal control will say there's no limit these limited segregation of duties, so we'll do substantive testing. But that doesn't mean that they shouldn't be controls. So let's take a look at a charity. For example, the charity would use cash donations, and if they are receiving cash donations, they probably have boxes or turns. We drop your money in, but the control would be that there's some kind of number associated to that box or that one, and that those boxes and turns are sealed. There should be regular recording off any proceeds within those boxes and turns, and there should be a deal. Control of accounting and recording off those proceeds if it comes through the post than any open mail must be kept securely and they should be, do your control over opening mail. They should be immediate recording off the donation on opening the mail or the receipt. And an independent person must agree the bank paying in slips to the records off the receipts. So what about a fundraiser? You have a fundraiser, then I must have records maintained for each fundraising events and the controls in place. When it comes down to cash relates to my cash donation, same thing and If the government gives me some kind of grand tour alone, then they should be regular checks that all sources off, income off funds off, fully utilized and appropriate claims are made. And what if I'm making grants to beneficiaries? Well, then records must be maintained as appropriate off any requests for material grounds received and their treatments, appropriate checks made on the applications and applicants for grants, and that the amounts paid or in accordance with legislation we should be controls to ensure that grants made a properly spent by the recipient for its specified purpose. So what happens if we are ordered thing and not for profit organization in the public sector? So things like hospitals and schools and local government, they should be controls as well. So for something like a school, they might be requirements to compare prices off two or more suppliers before raising a purchase order, and therefore we can obtain that resource at a lower cost. So if we using public money government money, we're using it responsibly. When it comes to capital expenditure, capital expenditure committees might be put in place toe authorize significant capital expenditure items. There might also be a clock card policy in place. So you only paying employees that have clocked in. And there should be a strict control around authorization off over time to ensure that it is only words where it is really needed. And when it comes to our risk assessment and materiality, if it is in the public sector, there's an increased risk, especially on non compliance with laws and regulations, and the auditor would need to formulate procedures to respond to those risks. And materiality levels are more than likely influenced by law and the needs of the legislators and the public. So now how do we obtain ordered evidence? We'll order to should pay special attention to the following. It is a possibility of understatement or incompleteness of recording of all the income, including gifts in kind cash donations, etcetera. They might be an overstatement off cash, groans or expenses. They might be a miss analysis or misuse in the application off funds, including the misuse off taxpayers funds, and is a possibility of the existence off restricted or uncontrollable funds in foreign or independent branches. So therefore, completeness of income is a very problematic area when it comes to not for profit organizations and the order to must verify it is any loss of income due to fraud. The recognition off government funding, the recognition of income from professional fundraisers, the recognition of income from branches, associates or subsidiaries, income from informal fundraising groups as well as income from grounds. So when you do the order to Still need Teoh, do an overall review of the financial statements and the order to must consider carefully whether the accounting policies adopted or appropriate to the activities, Constitution and objectives are the not for profit entity and that they are consistently applied and with the financial statements are adequately disclosed. These policies and present fairly the states of a phase and the results for the accounting period. And when it comes to reporting where a statutory or it is required, we returned on the same basis as you would any other company that we have audited. And we will state that the annual financial statements are fairly stated in all material respects or not. So again, when it comes to not for profit organizations, you need to determine is it to be orderto according to lore, legislation, etcetera or not and read the scenario very carefully and again like a certain internal controls, identify possible weaknesses and see how you can mitigate those weaknesses through an ordered procedure if required by the question. 18. Review and Reporting: Water Tribune finalization. So now we've done all of our ordered work, and now we come to the end. We need to finalize our orders. This section is also quite a hot topic when it comes to exams, and they've been asked questions many times when it comes to finalization. So it's very important that you understand the theory. One of the things that we need to consider is what is known as a subsequent event. So when is an event a subsequent event? Let's say that my stepping off financial position date is the 31st of December, and we performed ordered somewhere in between the 31st of December in the 18th of March on the 18th of March, the financial statements are authorized for issue. The very next day, the company makes a press release, and on the 15th of May, the annual general meeting is held and the financials are approved. So when is an event of subsequent event? It is anything from the first of January up until 12 o'clock at night on the 18th of March , and if an event is a subsequent event, we need to determine whether or not stone adjusting event or in non adjusting events and according Toa Eyes 10 and adjusting event of those that provide evidence off conditions that existed at year in date. And adjusting means that we need to adjust the statement of financial position at year in date based on what has happened and non adjusting events are conditions that are rose off the year end. But we don't need to make an adjustment within the stepping off financial position. It becomes more of a disclosure thing if necessary. So let's say one of our major customers went insolvent after year end, but before the issue of the financial statements and the balance that was recorded within the financial statements is material. Is that an adjusting subsequent event or in non adjusting subsequent events? In that case, it would be an adjusting subsequent events. Why? Because it is a loss off a major customer, it will also affect going concern, which we will cover shortly. But I need to restate my trade and other receivables balanced at year end to account for that major customer that has gone insolvent and management might turn around and say you're not adjusting for it. If it is material it would then be a material misstatement within the financial statements and would affect our ordered opinion, which recover in the next chapter. Something else that could be an adjusting subsequent veins is the evidence that inventory is at its net realizable value at year end. And we've probably disclosed our inventory at cost, which is no longer the case if it is a naturalized herbal value. So they again we will have to restate what the inventory balance is at the end of the year . Should we adjust for things that are in adjusting subsequent events in the step in a financial position? Yes, why? Because we report to the shareholders the users of the financial statements. So we want to make sure that the users understand what has happened. And if something has happened from yet end two, when the financial statements are issued, then we need to make the users aware off that. So what is a non adjusting subsequently? Veins? It could be anything from the issue of new Shay's to dividends declared off the year end, something that we might just bring the attention to the users. But it's not adjusting. According Toa Eissa, 5 60 subsequent events. The object is off the auditor or to obtain sufficient appropriate ordered evidence about whether events occurring between the date of the financial statements and the date of the ordered report that need adjustment or disclosure in the financial statements are properly reflected in the financial statements and to respond appropriately to the facts that become known to the auditor after the date of the auditor's report, which may have caused the order to to amend the order to report if they were known to the auditor at the date of the reports you'll see on the slide, let's go through it quickly. Events occur between the step in our financial position date and the date on the financial statements are authorized for issue so that it's a subsequent events and inventors occurred . Did it exist at my year in date? Yes, it is therefore, an adjusting subsequent event. Let's say no, it didn't exist at financial statement. Date is a going concern risk, like a said with the loss of my major customer. Yes, it's an adjusting subsequent event. Did it exist at financial statement date? No. Is there growing concern Risk? No, it is a non adjusting event. However, is it significant? Yes. Then we will disclose the nature off the events. If it is not significant, they may do nothing. I've given you examples off adjusting subsequent events and non adjusting events on the slides below, So pause them, take a look at them, read them and understand them. So whose responsibility is win and way well after the date of the order to report, It is our duty to do the orders, and we will determine whether or not things are adjusting or non adjusting after the order reports has been issued. But before the financial statements have been issued, we have no duty, but we should consider the effective. It comes to our attention and if it's material will either a just a financial statements. And if management says you cannot adjust the financial statements, we need to adjust our audit report. If, after the financial statements are issued, we still have no GT, but we should consider the effective it comes to our attention. If management agreed to adjust and it is correct, we will disclose an emphasis of matter in the orders report, and we will go through different types of reporting the next chapter If management refused to adjust, we need to take the steps to prevent reliance going. Concern going. Concern comes up a lot, and exams and going concern relates to iess. One presentation off financial statements is the financial statements need to be prepared on a going concern. Basis. Manager makes the assessments off the entity's ability to continue as a going concern was in the foreseeable future. And as auditors, we need to assess the validity thereof. There are a couple of things that surround going concern. We need to take a look at the financial aspect of it, the operational side of it, as well as a few other things we need to determine if there's any kind of mitigating factors. Such a subordination agreements and a subordination agreement is where if you've got a Sheldon's, learned anything that's in credit. There was subordinate their learn and say that dont pay as pay as lost so that we can settle the other liabilities first, and we need to assess the going concern for ordered opinion as well. A couple of things that can affect a going concern when it comes to financial indicators is it the network political. The net current liability position of the company is raw the extreme. So in other words, the liabilities are exceeding their assets, meaning that the company is at a going concern. Risk things like fixed term borrowings approaching maturity with at realistic prospects of renewal or repayments. So we need to pay for these borrowings. But with corns negative operating cash flows, the company's always an overdraw adverse key financial ratios such as my current racial, we're my current abilities are exceeding my current assets. Other things as well when it comes to adverse key ratios can be things like a negative net profit margin and negative gross profit margin. Huge, long, outstanding receivable days. Mess of days outstanding for inventory turnover, those kind of things we need to take a look at. And they would give us an indication on the company's ability to continue as a going concern. When it comes to operating indicators, It could be things like loss of key management without replacements. So the CEO was just left there. Nobody's replaced him. Who's running the business, who's who's making sure things are is happening on the ground loss of a major markets or franchise or a license or principal supplier, because if we start to lose these kinds of things, how we're going to operate in the future, What about labor difficulties or shortage off important supplies because of our labor is not willing to work, and we have a bit of a problem. If there forever on strikes or whatever it is. It's unproductive time and impact us as a going concern. They could be other indicators as well, such as non compliant with capital and other statutory requirements, pending legal or regulatory proceedings against the entity. What happens to the companies being sued? And they're being sued for trillion dollars the company compared? And if it's probable that it's going to be paid out? It's not a contingent liability. We raise it as in a cruel. So if that's the case and we can't pay it, we're probably not gonna be a going concern. You were gonna close our doors and all of these things need to be taken into consideration right from financial to operational to other information so that we can make the relevance opinion in our order to report to determine if the company is a going concern or not. And if the company is not a going concern, it has a impact on our order to report. And remember, when it comes to going concern, it's management that makes the assessment first. Do we believe that we are a going concern? Yes or no. We, as the auditors will then assess that if there is that that entity is no longer a going concern, The auditor should request management to make an assessment if it has not been done before and evaluate management's plan for future action. We will then request written representations from management and those charged with governance about the plans for future action and the feasibility off these plans. We can also take a look at cash flows, future cash flows and see whether or not the company is gonna turn itself around. We can review and discuss the entities latest interim financial statements off they have management accounts. You can look at those two to see if the company is turning itself around, and if the entity is going to start disposing of assets, we need to determine the adequacy of support of any plan. Disposals off those assets in the company's ability to continue as a going concern affects our orders report as well, and in order to show, consider where the material uncertainty exists related to the events or conditions which may cause doubt on the entity's ability to continue as a going concern. And this will naturally affect our orders opinion. So if the grand concern assumption is appropriate but material and certainty which has bean adequately disclosed, then the impact on the order to report to be an unmodified opinion and we'll have an emphasis of matter paragraph if the going concern assumption is appropriate. But this material uncertainty which has not been adequately disclosed, we will have a qualified or an adverse opinion. If the use of the going concern assumption is inappropriate, we will have an adverse opinion. And if management is unwilling to make or extend its assessment, we will have a qualified or disclaimer of opinion. Now these ordered opinions will be discussed further in more detail in the next chapter. But remember what I said about growing concern and the different opinions that I've just mentioned management representations. So the auditor will obtain a written representation from management concerning its responsibilities and to support other ordered evidence where necessary. And three at the entire course off say that one of the general procedures is to obtain the manager of representation. So what do these written representations actually do? Well, According Toa Isil, 5 80 written representations, The objects is off. The orderto are to obtain the written representations that management believes that it is for full the fundamental responsibilities that constitute the premise on which the audit is conducted. In other words, that management has done what it is supposed to be doing. They have disclosed information to us. They have prepared the financial statements they have reviewed going concern, etcetera. It also supports other ordered evidence relevant to the financial statements. Like I said, that's been discussed through at as a general procedure when needed to the procedures for all those other chapters. But what happens if management doesn't want to give us a written representation? Well, the order to should then discuss this matter with management, and we should re evaluate the integrity of management because they should. They should be no reason why they don't want to give us a representation later, and it shows that there potentially trying to hide something from us. And if that's the case, we need to determine the impact on our order to report what happens if they give us a representation later. But these doubts about the reliability off that representation, so another was re obtaining ordered evidence, and it's inconsistent with what they've discloses in their representation later, well again, we need to determine what the impact is. We need to discuss this with management, and we need to reconsider the assessment of the competence, integrity and ethical values off management and determine the effect on our order to report . Remember that representation letters are provided from management to the auditor, but it is not the best form off ordered evidence, even though it's used as ordered. Evidence in working paper falls because from an internal source, So you cannot just say, Well, I'm gonna just get a management representational. It's. And if management says everything's okay, then well, then everything's OK. That is not the case. You still have to verify what has being disclosed and whether or not it is in fact true. So once we have everything and we've got a representation letters and we have all our ordered evidence. It's not time to do an overall review of the financial statements. Auditors will verify things like compliance with counting regulations and whether or not the information in the financial statements in accordance with the local or national statutory requirements, and that they're counting policies employed or in accordance with the accounting standards . They've been properly disclosed and they've been consistently applied and are appropriate to the entity. We need to review the financial statements and make sure that they are consistent. And consistency means that is it consistent with our knowledge off the entity's business and with the results off other or procedures and the manner of disclosure is faith. And this is normally done by analytical review procedures at or near year end in accordance with isil 5 20 analytical procedures. And we will determine if the financial statements adequately reflect the information and explanations previously obtained and conclusions previously reached during the course of the orders within me to determine if there any new factors which may affect the presentation or disclosure in the financial statements. Because during the ordered we might have found something that has an impact on disclosure and these analytical review procedures when we doing finalization should cover things like importance accounting ratios, variances, trains and production and sales changes in things like products and customers, etcetera. And one of the other things that we also need to do when we finalizing in order to is to determine the treatment of any misstatements. And a misstatement is some kind of era, and that can be an era. Do Turman amount declassification or even presentation within the financial statements. And what happens is that we can get what's known as an UN recorded misstatements, which is in a misstatement accumulated during the ordered by the auditor, which is not being corrected. So we'll pick up differences. Deering are ordered procedures on various items that say We're going to revalue our foreign receivables and we get a difference off $10,000. But it's not regarded as material, so we're going to say that it's an UN recorded misstatement and according toa icer for 50 evaluation of misstatements identified during the orders. It requires assets the auditors to accumulate almost statements identified during the orders, and you get three tops of misstatements. You get a factual misstatement, which means that there is no doubt that there is a misstatements. You get a judgmental misstatements, which is a misstatement arising from management judgment concerning accounting estimates or policies. And you get what's known as projected missed Aikman's, which is the auditors. Best estimate off misstatements arising from our sample. We gather its finalization stage all of these misstatements, and we discuss them with managements. Management then says Yes, We want to process these so that our financial statements all pretty much correct or no, we don't. And if they don't want to, we need to determine the materiality behind that misstatements. If the misstatement is not material in total, then we will just carry it over into the next year and in next year's orders. You'll have previous years misstatements, carriages, misstatements, total misstatements. But if it is material well when it becomes material and management doesn't want to adjust for it, then we need to have a different order to pin your need to modify ordered opinion accordingly, because we've now got a material misstatement within the financial statements, and that's it for finalisation. And the next chapter you'll see we're gonna go through reports and you'll see the different types reports when We're talking about going concern a little bit earlier. And what? All of those mean disclaimers and adverse and unmodified etcetera. We'll see you there. 19. Reports: right. So we have been planning with an execution. We've gathered our ordered evidence. We've done finalisation, and now we come to reporting. This is where everything matters. Remember in the planning stage and said, We are basing an opinion on whether or not the financial statements are fairly stated and based on our ordered evidence, as well as going through finalization, we now look at it overview and determine what ordered opinion we're going to base. The section is extremely important. This chapter has been asked numerous times in the past. So what kind of opinions do I get? I get what's known as an unmodified ordered opinion and an unmodified ordered opinion is what's known as an unqualified opinion. In other words, the financial statements give a true and fair view. I also get what's known as a qualified opinion and a qualified opinion as an accept Full So in other words, except for revenue. Everything else in the financial statements is fairly stated. I then get the two bad ones what's known as a disclaimer and an adverse opinion. Now a disclaimer is that we do not express an opinion on the financial statements at all. That's not a very good thing to have. It could be something like a limitation of scope. So we we weren't able to obtain that ordered evidence in order for us to express an opinion . So something went very wrong. In contrast to that, I have what's known as an adverse opinion and an adverse opinion is I've got the ordered evidence and I can prove that the financial statements are not fairly stated and adverse opinions are common when we find something and we tell management's about what we found and they refused to make the adjustment or necessary disclosure within those financial statements and that being said again adverse is that yes, we know there's a material misstatement within those financials. Management doesn't want to change it, so that means that I'm going to have to put an adverse ordered opinion within those financial statements and as part of my ordered reports. But in order to form this ordered opinion, regardless of what I'm going to actually have my opinion state, I need to determine the following. I need to determine whether or not sufficient and appropriate ordered evidence has been obtained because of a heaven obtained, sufficient, appropriate ordered evidence, then I don't know what my ordered opinion should actually be. And remember when I said when it comes to ordered risk, the ordered risk is that the auditor is going to base an inappropriate ordered opinion. So I need that appropriate ordered evidence and it has to be sufficient as well. I need to also take a look at all of our uncorrected misstatements. Remember, in finalization, We looked at that as well and we said We've got all of these misstatements that have bean uncorrected but all the material and if they are material, then there should be processed within those accounting records and within the financial statements again, If management refuses to do something like that, we would need to determine a possible qualification. If it's one account or if it affects the financial statements overall, we would have to have an adverse opinion. We need to take a look at whether or not the financial statements have disclosed all significance accounting policies, and if they have, then we're OK. But if they have not, we have a major issue. We need to determine if the information in the financial statements is relevant, reliable, comparable and understandable. We need to take a look at the overall presentation of the financial statements, including the structure and content thereof. We need to determine if the financial statements represent the underlying transactions and events so as to achieve fe presentation. We also need to determine if the financial statements adequately refer to l describe the applicable financial reporting framework. And that is very important because we must make sure member from planning stages that the company is using an applicable financial reporting framework, which means that it's complying with the rules and regulations off if Rhys or if restful, small to medium enterprises and all in compliance the financial statements on compliance with the international accounting standards will the A s. And if everything is okay and we satisfied as auditors that there is no material misstatements within the financial statements, then we will have an unmodified opinion. And an unmodified opinion is in an opinion expressed by the auditor when the order to conclude that the financial statements are prepared in all material respects in accordance with the applicable financial reporting framework, and again, if it is not the case, we need to have a modified ordered opinion, and my modification can either be a qualified adverse or disclaimer. You'll see on the slide that there's another additional paragraph that can be included in the ordered opinion as well. I'll cover that shortly. I want to focus on modified ordered reports first, so when it comes to qualified opinions, it means that we found a material misstatement. But it is not pervasive. In other words, it doesn't affect the financial statements. Overall, it will affect certain line items within those financial statements. And remember, it's an accept full. So except for revenue, we're still of the opinion that the financial statements are fairly stated. So what does that tell the user? It tells the user that revenues not exactly 100% correct. There's a material misstatement in revenue, but other than that, there's no other material misstatements. That being said, though, please note that have revenue is qualified, it affects my net profit before tax. It will affect my taxation, and it might even affect my receivables balances at the end of the year. So even though it's affecting one account, the order to must disclose all other related accounts that it does affect as well so another example would be, let's say, cost of sales. If my cost of sales is materially misstated and the auditors have qualified on cost of sales, that means my net profit before Texas also materially misstated My Texas also incorrect. And it means that my stock for my inventory is also incorrect. Was remember cost the cells is calculated by taking opening stock, plus my purchases less my closing stock. So if my cost of sales is materially misstated, it's very possible and very likely that my inventory balance at the end of the year is also misstated. So when it comes to an adverse opinion River City that we know that we've got the evidence in our file, we know that there is a material misstatement, but management does not want to correct it. Then we would have an adverse opinion, and it means that they are birth material and pervasive. In other words, it affects the financial statements over all. So what would affect the financial statements overall? What about something like going concern when we covered going concern, I said that if we have got the correct evidence that the company is no longer going concern and there's material and certainty in respect of grain concern. It has to be disclosed in the financial statements accordingly. And if we've got this evidence that it is no longer a going concern and management still refuse to make that disclosure, we would have an adverse opinion. It can also be if it's really a lot of a council. Multiple accounts are incorrect. So, for example, my non current assets there's a material misstatement and they can be anything from incorrect disclosure. So they've explained something that should have been capitalized. Appreciation calculation is not correct, etcetera. It could be that my receivables is not recoverable, but management doesn't want to provide for the provisions for credit losses or irrecoverable debts. There could be something in my trade payables as well. That's materially misstated. So I've got multiple a cancer, are affecting both my statement of financial position as well as my statement of comprehensive income. So I'm not going to say in my ordered opinion, I'm gonna qualify on depreciation on non current assets on receivables, balance on more revenue, balance on my net profit before tax on my income tax and trade and other payables, etcetera, etcetera, I'm not gonna go and se except for all of those. Everything else is fairly stated. I would just have an adverse opinion. It's multiple things that are affecting the financial statements, so it is pervasive. And then when it comes to something like disclaimers, it means that we cannot get the sufficient, inappropriate ordered evidence in order for us to base any kind of opinion. So we don't know the effects on the financial statements and the figures there in We don't know if it is material or pervasive. We don't know anything because we didn't get the information so we cannot base an opinion. So what would be a possible disclaimer? It's anything we we didn't gets the information. Correct. So remember when I did inventory? One of the procedures is to attend the inventory stock take at the end of the year. And if we didn't attained it, then how we gonna base an opinion on whether or not those quantities are actually they so they exist and they complete? And what about third party consignment stock? All of that. Remember all of that? So I didn't attend that stock take, how can our base an opinion on it. It's not a qualification. It's a disclaimer. I didn't get the information relating to that stock within my financial statements, and it wasn't able to perform the procedures. Remembers about performing the procedures. I wasn't able to perform the procedure, so I don't know if it's a material misstatement or not. That's why I'll have a disclaimer. So what do we need to include in our report? Well, we need to have a title. So the title indicates that it is in order to support or the report from the independent auditor. And what does that show the users? It shows that we have met all the ethical requirements concerning independence. Because we are independent auditors, we'll have the addressee remember that we had race the shareholders. So we report to the shareholders and we will said it to the shareholders off the company. This is our report. Just underneath that will have our introductory paragraph and it will show the name of the entity that's being orderto. It will stay that the financial statements have bean audited. It will show things that what has been audited, So we have audited the statement off financial position. The statement of comprehensive income. The relevant disclosures and notes etcetera included in the order to support will have management responsibility for the financial statements because remember, management is responsible for the preparation of the financial statements in accordance with an applicable financial reporting framework, not the auditors. Our responsibility is to base an opinion on those financial statements prepared by management. It will also state that management is responsible for internal controls. The auditor can review those internal controls and identify weaknesses within an internal control. But it's ultimately management responsibility. We will also state in our report what our responsibility as auditors. Waas and we will describe the ordered by stating things like it involves performing procedures to obtain ordered evidence about the amounts and disclosures within the financial statements, and that the ordered includes evaluation off the appropriateness off the accounting policies used and the reasonable nous off accounting estimates made by management as well as the overall presentation off the financial statements. Then the most important parts of the order to port the opinion paragraph and within this paragraph we will have our ordered opinion. We will say it's either unmodified or its qualified or has an adverse opinion or a disclaimer, and this is where reliance is placed when it comes to shareholders. So I can replace Reliance on the FEI presentation off these accounts. Based on the auditor's opinion, it has been audited by an independent orderto. They believe that the financial statements are fairly stated. Oh, not we will also give other reporting responsibilities, and it will be underneath. It's an additional paragraph underneath my opinion paragraph. But these other reporting responsibilities is only if it is required by law for the auditor to perform other reporting responsibilities, and then we'll have the order to signature. So, after all these years off studying and going through the learning program to become a registered auditor, you then get to sign the audit report, and we'll include the date of their order to report as well as the auditors address. Now, what about that additional paragraph that I was speaking about earlier? It's an emphasis of meta paragraph, and we can have other matter paragraphs as well in the order to report. But please note an emphasis of Metz of Paragraph does not change the ordered opinion. It's additional information, and it's information that the auditor is drawing to the attention off the uses of the financial statements on relevant matters that have already been disclosed within the financial statements. And where did this come in in the order support? Where does it fit It? Goes, writes underneath the opinion paragraph. And it will state without qualifying are above opinion. We draw attention to whatever it is the auditors trying to draw attention to, and it could be things like the liabilities off the company or exceeding the assets. But the correct disclosure has been made within the financial statements. We still believe that the company is a going concern, so we don't need to have a modified opinion, etcetera. And then one of the last things we need to do is to report to those that are charged with government. It's not as a report to management, and these reports can be sent to management at both the interim and the final orders. And these reports are we? We found weaknesses within their internal controls and with these weaknesses as auditors, we need to show management and tell them what the implication is for the weakness within the internal control as well as a recommendation in order to rectify that weakness within the internal control. But remember that it's management's responsibility to implements the internal control structure. We can only advise and straight, Um, you have a weakness here and the internal control. Here's what the implication of that weakness is, and this is what you should do in order to rectify it and from personal experience. What I found is that the minute that you tell them that they're going to lose money, then the implements is so if you do not implement this internal control, there's a possibility off financial loss Boy, do they jump on that internal control because remember, if there's an internal control, weakness or deficiency, then there is a likely event that if it remains undetected, they could be a financial implication. And that's the lost thing that management ones. Please note that the reports of management shouldn't conflict without ordered opinion at all. It shouldn't be listening if we find a material misstatement but are ordered. Opinion says that its unmodified So it's just a report to them to say these are the deficiencies or weaknesses within your internal control structure. This is the implication, and this is our recommendation in order to rectify it and in an exam. If they require you to write a report to management based on the deficiencies off the internal controls, you have to write it professionally. You are writing a professional paper and wonder when you become an A C C. A member. You were seen as professional. So you need to state there that it's addressed to the board of directors and the address off the entity that you've been auditing and what the report is all about and then start with a heading of way. The weakness of the internal control is so it's within my receivables, and we don't have created control within our receivables. So right, what that deficiency is right? What the implication off that efficiency is as well as the recommendation, and that's it's That's the course. I really hope that it's being insightful and helpful. I would strongly advise that you take the quiz that's included in this application and see how you doing. Go back to chapters. And if you've got any kind off knowledge gaps, listen to the audio again. Go through the slides, go through your book, study hard and absolutely smash this exam. I and the rest of the A plus team wish you the best of luck