1. Audit Framework and Regulation_Presentation Day 1

Technical Cross-Functional

Knowledge Sharing Curriculum

A flavour of audit approach

August 2012

Agenda and Objectives

The main objective is a collaborative, inclusive and transparent

knowledge sharing curriculum, developed and designed to help us

strengthen our market position.

What it is about?

© 2012 Deloitte Romania

The participation in the training program A flavour of audit approach will :

• Enable you to be better equipped with more in-depth knowledge of your

Audit colleagues’ work;

• Ensure you present yourself as a well-rounded professional by

demonstrating borderless behaviors externally and internally;

• Assist you in your professional development;

• Help you to build your internal network and make it even stronger

Why participate?


Duration 2 * 1/2 day – three sessions

weeks starting 06/08/12, 10/09/12 or 08/10/12

Location Bucharest

Place Deloitte office

Targeted Participants TAX All

Consulting All

ERS All

Max. no. of Participants 18

Provider Audit professionals

Program overview


Contents

Day 1

A. Audit Framework and Regulation

1. Concept of Audit

2. Other assurance engagements

3. Statutory audits, IFRS audits and others

B. Audit Approach

1. Planning and Risk Assessment

2. Objectives and assessing the risks

3. Understanding the entity


Contents - continued

Day 2

B. Audit Approach (continued)

4. Materiality computation

5. Fraud, laws and regulations

6. Analytical Procedures

7. Planning and Audit

8. Audit Documentation

C. Audit Evidence

1. Audit Procedures

2. Audit of specific item

3. Audit Sampling


Concept of audit


1. Concept of Audit



1. Concept of Audit

Definition of audit [non-IFAC*]

1. An examination of records or financial accounts to check their

accuracy.

2. An adjustment or correction of accounts.

3. An examined and verified account.

* International Federation of Accountants



1. Concept of Audit

An Audit of Financial Statements

• The purpose of an audit is to enhance the degree of confidence of

intended users in the financial statements.

This is achieved by the expression of an opinion by the auditor on

whether the financial statements are prepared, in all material respects, in

accordance with an applicable financial reporting framework.

In the case of most general purpose frameworks, that opinion is on

whether the financial statements are presented fairly, in all material

respects, or give a true and fair view in accordance with the framework.



1. Concept of Audit

An Audit of Financial Statements (continued)

The financial statements subject to audit are those of the entity,

prepared by management of the entity with oversight from those charged

with governance.

ISAs do not impose responsibilities on management or those charged

with governance and do not override laws and regulations that govern

their responsibilities. However, an audit in accordance with ISAs is

conducted on the premise that management and, where appropriate,

those charged with governance have acknowledged certain

responsibilities that are fundamental to the conduct of the audit. The

audit of the financial statements does not relieve management or those

charged with governance of their responsibilities. (Ref: Para. A2-A11)



1. Concept of Audit

Overall objectives of the Auditor in an audit of Financial Statements

In conducting an audit of Financial Statements, the overall objectives of

the Auditor are:

• To obtain Reasonable Assurance about whether the Financial

Statements as a whole are free from material Misstatement, whether

due to Fraud or Error, thereby enabling the Auditor to express an

opinion on whether the Financial Statements are prepared, in all

material respects, in accordance with an Applicable Financial

Reporting Framework

• To report on the Financial Statements and communicate as required

by The Manual and Professional Standards and applicable legal and

regulatory requirements, in accordance with the Auditor’s findings.

[ISA 200.11]



1. Concept of Audit

Overall objectives of the Auditor in an audit of Financial Statements

(continued)

When reasonable assurance cannot be obtained and a qualified opinion

in the auditor’s report is insufficient in the circumstances for purposes of

reporting to the intended users of the financial statements, the ISAs

require that the auditor disclaim an opinion or withdraw (or resign) from

the engagement, where withdrawal is possible under applicable law or

regulation.



1. Concept of Audit

What can go wrong?

If audit objectives are not met and the auditor expresses an

inappropriate audit opinion when the financial statements are materially

misstated, the public is misled and legal action can be taken against the

companies.

For example, in 2001, Enron, an energy provider, and their CPA firm,

Arthur Anderson, were found guilty of misstating the financial

statements. Enron, once a blue-chip stock company, was falsely

reporting revenues and profits. Arthur Anderson was issuing positive

audit opinions that supported Enron, and masked the fraud. Enron was

bankrupt and sold. Arthur Anderson, once one of the largest CPA firms

in the world, was dissolved.



1. Concept of Audit

What is assurance engagement and why is it important?

Assurance – an opinion expressed by a practitioner (assurance

provider) on a subject matter. It is important because it enhances the

degree of confidence place in the subject matter by the intended users

as to the evaluation or measurement against suitable criteria.

Subject matter information—The outcome of the evaluation or

measurement of a subject matter. It is the subject matter information

about which the practitioner gathers sufficient appropriate evidence to

provide a reasonable basis for expressing a conclusion in an assurance

report.

Assurance engagement—An engagement in which a practitioner

expresses a conclusion designed to enhance the degree of confidence

of the intended users other than the responsible party about the outcome

of the evaluation or measurement of a subject matter against criteria.

[IFAC]



1. Concept of Audit

Features Examples

A. Subject matter

B. The three main parties involve:

• Responsible person

• Assurance provider

(practitioner)

• Intended user

C. The report

a) Financial statements, interim financial

information, etc

b) The three main parties:

• Management

• Deloitte

• Shareholders, Banks,

Investors, Large Publc, etc

c) Audit opinion on the financial

statements (Independent auditor’s

report); review report, etc

What are the features of an assurance engagement?



1. Concept of Audit

Regulatory Framework:

International Standards on Auditing (ISAs) issued by the International

Federation of Accountants,

Auditing standards of a specific jurisdiction or country (Eg.: US

GAAS, Standardele de audit adoptate de Camera Auditorilor Financiari

din Romania )

Other relevant legal, regulatory or professional obligations

ISA require that we comply with ethical requirements and plan and

perform the audit to obtain reasonable assurance whether the financial

statements are free from material misstatement [stnd para in the report].



1. Concept of Audit

Regulatory Framework (continued)

Assurance engagements Applicable standards

1. Audits of historical financial

information (eg.: external

(statutory) audits)

2. Reviews of historical financial

information

3. Assurance engagements other

than audits or reviews of

historical financial information

I. International Standards on Auditing

(ISAs)

II. International Standards on Review

Engagements (ISREs)

III. International Standard on Assurance

Engagements (ISAE)



1. Concept of Audit

Levels of assurance

Under the “International Framework for Assurance Engagements” there

are two types of assurance engagement a practitioner is permitted to

perform:

1 Reasonable assurance engagement—The objective of a

reasonable assurance engagement is a reduction in assurance

engagement risk to an acceptably low level in the circumstances of

the engagement as the basis for a positive form of expression of the

practitioner’s conclusion.

2 Limited assurance engagement—The objective of a limited

assurance engagement is a reduction in assurance engagement risk

to a level that is acceptable in the circumstances of the engagement,

but where that risk is greater than for a reasonable assurance

engagement, as the basis for a negative form of expression of the

practitioner’s conclusion.



1. Concept of Audit

• As the basis for the auditor’s opinion, ISAs require the auditor to

obtain reasonable assurance about whether the financial

statements as a whole are free from material misstatement,

whether due to fraud or error.

• Reasonable assurance is a high level of assurance. To obtain

reasonable assurance, the auditor shall obtain sufficient

appropriate audit evidence to reduce audit risk to an acceptably low

level and thereby enable the auditor to draw reasonable conclusions

on which to base the auditor’s opinion.

Reasonable assurance is not an absolute level of assurance!



1. Concept of Audit

The ISAs require that the auditor exercise professional judgment and

maintain professional skepticism throughout the planning and

performance of the audit.


Other assurance engagements


2. Other assurance engagements

• The performance of assurance engagements other than audits or reviews of

historical financial information requires the service auditor to comply with

ISAE 3000 “ASSURANCE ENGAGEMENTS OTHER THAN AUDITS OR

REVIEWS OF HISTORICAL FINANCIAL INFORMATION”

Examples

• Report on controls at a service organisation – report for use by user

entities and their auditors on the controls at a service organization that

provides a service to user entities that is likely to be relevant to user entities’

internal control as it relates to financial reporting.


Statutory audits IFRS audits

and others


3. Statutory audits, IFRS audits and other

We perform audits of the financial statements of our clients prepared under both

local and international reporting standards:

• Statutory audits

• International Standard Audits



3. Statutory audits, IFRS audits and other

Statutory audits

• legal requirement

• banks, listed companies, entities that meet 2 of 3 criteria (total assets: EUR

3,650,000, - net turnover: EUR 7,300,000, - average number of employees

during the financial year: 50 )

• performed only by statutory licenced auditors (CAFR)

Auditul statutar reprezintă auditul situaţiilor financiare anuale sau al situaţiilor

financiare anuale consolidate, aşa cum este prevăzut de legislaţia comunitară,

transpusă în reglementările naţionale [ORDONANŢĂ DE URGENŢĂ nr. 90 din

24 iunie 2008 privind auditul statutar al situaţiilor financiare anuale şi al

situaţiilor financiare anuale consolidate]



Special considerations ISA 800 –special purpose

• ISA 800 refers to an audit of financial statements prepared in accordance

with a special purpose framework.

• Special purpose framework – A financial reporting framework designed to

meet the financial information needs of specific users. The financial

reporting framework may be a fair presentation framework or a compliance

framework.

• The auditor’s report on special purpose financial statements shall include an

Emphasis of Matter paragraph alerting users of the auditor’s report that the

financial statements are prepared in accordance with a special purpose

framework and that, as a result, the financial statements may not be

suitable for another purpose.



Special considerations ISA 800 –special purpose (continued)

Examples of special purpose framework are:

• A tax basis of accounting for a set of financial statements that accompany an

entity’s tax return;

• The cash receipts and disbursements basis of accounting for cash flow

information that an entity may be requested to prepare for creditors;

• The financial reporting provisions established by a regulator to meet the

requirements of that regulator; or

• The financial reporting provisions of a contract, such as a bond indenture, a

loan agreement, or a project grant.



Special considerations ISA 805 –single financial statements and

specific elements of a FS

• ISA 805 refers to audits of single financial statements and specific

elements, accounts or items of a financial statement.

• The auditor shall express a separate opinion.



SPECIAL CONSIDERATIONS ISA 805 –single financial statements

and specific elements of a FS (continued)

Examples of Specific Elements, Accounts or Items of a Financial

Statement

• Accounts receivable, allowance for doubtful accounts receivable,

inventory, the liability for accrued benefits of a private pension plan,

the recorded value of identified intangible assets, or the liability for

“incurred but not reported” claims in an insurance portfolio, including

related notes.

• A schedule of externally managed assets and income of a private

pension plan, including related notes.

• A schedule of net tangible assets, including related notes.

• A schedule of disbursements in relation to a lease property, including

explanatory notes.



ISA 810 - summary financial statements

• ISA 810 refers to engagements to report on summary financial statements.

• Summary financial statements – Historical financial information that is

derived from financial statements but that contains less detail than the

financial statements.

• Opinion:

The summary financial statements are consistent, in all material

respects, with the audited financial statements, in accordance with [the

applied criteria];

The summary financial statements are a fair summary of the audited

financial statements, in accordance with [the applied criteria].


Summary


Benefits of the audit

• Provide reasonable assurance to creditors and investors that the financial

statements are correct.

• Enhance the brand of the company, as it provides workers, shareholders and

the general public a secure feeling toward a company that complies with a

financial statement audit.

• Greater transparency of the audited entity with respect to third parties

(suppliers, financial institutions, customers, others).

• The transparency is something that is desired by the government for publicly

traded companies, and it can be good for private companies, too. This can

build integrity within the company to ensure workers recognize that their

financials will be checked.

• Honesty and more responsibility is shared among the top and the bottom.

Audits make it hard for a CEO to claim she did not know the financial health

of the company she operates.



Benefits of the audit (continued)

• Opinion of an independent expert on legal regulations, accounting principles,

evaluation criteria, etc with maximum independence with respect to the

audited entity.

• Improved accountability in companies

• Satisfy the legality in force

• Although private companies are not always audited, this could enhance their

potential for cash infusions from outside investors.



Our approach – Focus on Quality !

Reputation, approach, efficiency, knowledge and experience


End Section A

B. Audit Approach

Audit approach

1. Planning and risk assessment

2. Objectives and assessing the risk

3. Understanding the entity

4. Materiality computation

5. Fraud, laws and regulations

6. Analytical procedures

7. Planning and audit

8. Audit documentation


DTT International Audit Approach

Perform Pre-Engagement Activities

Develop the Audit Plan

Perform the Audit Plan

Conclude & Report

Perform Post-Engagement Activities

Perform Preliminary Planning

• Understanding Internal Control

• Understand the Accounting

Process

• Perform Tests of Operating

Effectiveness of Controls

• Plan Tests of Operating

Effectiveness of Controls

• Engagement Reporting

ENTITY LEVEL

BUSINESS CYCLE LEVEL

ENTITY LEVEL

ENTITY LEVEL

ENTITY LEVEL





Planning and risk assessment

• Planning an audit involves establishing the overall audit strategy for the

engagement and developing an audit plan.

• Benefits of planning:

Helps the auditor to devote appropriate attention to important areas of audit

Helps the auditor to identify and resolve potential problems on a timely

basis

Helps the auditor to properly organize and manage the audit engagements

Assists in the selection of engagement team members with appropriate

levels of capabilities, and the proper assignment of work to them

Facilitates the direction and supervision of engagement team members

and the review of their work

Assists, where applicable, in coordination of work done by auditors of

components and experts


Planning the audit – ISA 300

• The auditor shall establish an overall audit strategy that sets the scope, timing

and direction of the audit, and that guides the development of the audit plan.

• The auditor shall develop an audit plan that shall include a description of:

The nature, timing and extent of planned risk assessment procedures

The nature, timing and extent of planned further audit procedures at the

assertion level

Other planned audit procedures that are required to be carried out so that the

engagement complies with ISAs

• The auditor shall update and change the overall audit strategy and the audit

plan as necessary during the course of the audit


Planning the audit – ISA 300

• The auditor shall include in the audit documentation:

The overall audit strategy;

The audit plan; and

Any significant changes made during the audit engagement to the overall

audit strategy or the audit plan, and the reasons for such changes

• The auditor shall undertake the following activities prior to starting an initial

audit:

Performing procedures required by ISA 220 regarding the acceptance of the

client relationship and the specific audit engagement

Communicating with the predecessor auditor, where there has been a

change of auditors, in compliance with relevant ethical requirements.


Risk Assessment– ISA 315

• The risk assessment procedures shall include the following:

Inquiries of management, and of others within the entity who in the auditor’s

judgment may have information that is likely to assist in identifying risks of

material misstatement due to fraud or error.

Analytical procedures.

Observation and inspection.

• The auditor shall identify and assess the risks of material misstatement at:

the financial statement level

the assertion level for classes of transactions, account balances, and

disclosures



• In order to identify and assess the risks of material misstatement, the

auditor shall:

Identify risks throughout the process of obtaining an understanding of the

entity and its environment, including relevant controls that relate to the risks,

and by considering the classes of transactions, account balances, and

disclosures in the financial statements;

Assess the identified risks, and evaluate whether they relate more

pervasively to the financial statements as a whole and potentially affect many

assertions;

Relate the identified risks to what can go wrong at the assertion level, taking

account of relevant controls that the auditor intends to test;

Consider the likelihood of misstatement, including the possibility of multiple

misstatements, and whether the potential misstatement is of a magnitude

that could result in a material misstatement



• As part of the risk assessment , the auditor shall determine whether any of the

risks identified are a significant risk

• In exercising judgment as to which risks are significant risks, the auditor shall

consider at least the following:

Whether the risk is a risk of fraud;

Whether the risk is related to recent significant economic, accounting or other

developments and, therefore, requires specific attention;

The complexity of transactions;

Whether the risk involves significant transactions with related parties;



• The degree of subjectivity in the measurement of financial information related to

the risk, especially those measurements involving a wide range of measurement

uncertainty;

• Whether the risk involves significant transactions that are outside the normal

course of business for the entity, or that otherwise appear to be unusual.

• If the auditor has determined that a significant risk exists, the auditor shall obtain

an understanding of the entity’s controls, including control activities, relevant

to that risk


Understanding the Entity – ISA 315

The auditor shall obtain an understanding of the following:

1. The entity and its environment

• Relevant industry, regulatory and other external factors

• The nature of the entity (operations, ownership and governance structure,

how the entity is structured and financed)

• The entity’s selection and application of accounting policies (whether there

are appropriate for its business and consistent with IFRS)

• The entity’s objectives and strategies

• The measurement and review of the entity’s financial statements

2. The entity’s internal control

• Although most controls relevant to the audit are likely to relate to financial

reporting, not all controls that relate to financial reporting are relevant to the

audit.



• When obtaining an understanding of controls that are relevant to the audit, the

auditor shall evaluate the design of those controls and determine whether they

have been implemented.

• Components of Internal Control:

Control Environment

The entity’s risk assessment process

The information system, including the related business processes, relevant to

financial reporting, and communication

• The auditor shall obtain an understanding of the major activities that the entity

uses to monitor internal control over financial reporting, including those related

to those control activities relevant to the audit, and how the entity initiates

remedial actions to deficiencies in its controls



Factor Description

External factors External factors affecting the entity include industry matters, the general

business environment, and applicable laws and regulations, including the

applicable financial reporting framework.

Internal factors Internal factors affecting the entity include the nature of the entity (i.e., ownership

structure, related parties, operations, investment and financing activities,

financial reporting), the entity’s business objectives and strategies, and the

related business risks that may result in a material misstatement of the financial

statements.

Entity’s selection and

application of accounting

policies

Obtaining an understanding of the entity’s selection and application of

accounting policies includes our consideration of whether the accounting policies

are appropriate for the entity’s business and consistent with the applicable

financial reporting framework and accounting policies used in the relevant

industry.

Measurement and review of

the entity’s financial

performance

In most businesses, management uses certain ratios, financial indicators, or

analyses to monitor the effective functioning and overall control of the business.

Performance measures create pressures on the entity and these pressures may

motivate management to take action to improve the business performance or to

misstate the financial statements.


Understanding the Entity – ISA 315 Audit procedures to obtain the understanding

• We shall perform risk assessment procedures to provide a basis for the

identification and assessment of risks of material misstatement at the financial

statement and assertion levels. Risk assessment procedures by themselves,

however, do not provide sufficient appropriate audit evidence on which to base

the audit opinion

Risk assessment procedures shall include the following:

• Inquiries of management and others within the entity

• Preliminary analytical procedures

• Observation and inspection


Understanding the Entity – ISA 315 Audit procedures to obtain the understanding

• Risk assessment procedures related to accounting estimates

• Risk assessment procedures related to related parties

• Risk assessment procedures related to fraud risk considerations

• As more professional judgment is required, significant partner and manager

involvement is necessary in the upfront planning of the engagement, in order to

provide guidance to the engagement team on the identification of risks by

considering “what can go wrong” and the development of responses.

• This risk based approach enhance understanding of each class of transactions,

account balance, or disclosure, similar to the concepts described in the profiling

approach (e.g., profile and composition of each account, monetary and non-

monetary characteristics - sizes, types, volume of specific items within each

account).


How Do We Identify A Material Class Of Transactions, Account Balance, And Disclosure

Steps:

Apply your professional

judgment to make the

determination

Consider qualitative

factors

Consider quantitative

factors

Generally identify

from the financial

statements


How do we identify and assess risks of material misstatement

• Risks of material misstatement that require special

audit consideration are referred to as significant risks

• There are two presumed significant risks due to fraud,

i.e., revenue recognition and management override of

control

For all significant risks, evaluate the design and determine

the implementationof any relevant controls the entity has

in place

Apply professional

judgment throughout.

Refer to Appendix 1 for

examples of risks of

material misstatements

relating to payroll.

Assess which risks of

material misstatement are

significant

Assess risks of material

misstatement at the

financial statementor at the

assertion level

Identify risks of material

misstatement

Understand

the entity and its

environment, including

internal control


How does this affect the audit engagement?

• Consider both the likelihood of a material misstatement in a class of

transactions, account balance, or disclosure, and the magnitude of the account

or potential understatement when determining whether a class of transactions,

account balance, or disclosure is material. For material classes of transactions,

account balances, and disclosures identified, we are required to identify risks of

material misstatement at the assertion level to provide a basis for designing and

performing further audit procedures. If a class of transactions, account

balance, or disclosure is not material, further audit procedures

(substantive procedures or control procedures) are not required for it.


An example of determining the material classes of transactions, account balances, and disclosures


Audit Documentation – ISA 230

• In documenting the nature, timing and extent of audit procedures performed, the

auditor shall record:

The identifying characteristics of the specific items or matters tested;

Who performed the audit work and the date such work was completed;

Who reviewed the audit work performed and the date and extent of such

review.

• Preparing sufficient and appropriate audit documentation on a timely basis

helps to enhance the quality of the audit and facilitates the effective review and

evaluation of the audit evidence obtained and conclusions reached before the

auditor’s report is finalized. Documentation prepared after the audit work has

been performed is likely to be less accurate than documentation prepared at

the time such work is performed


• Audit documentation – The record of audit procedures performed, relevant

audit evidence obtained, and conclusions the auditor reached

• The auditor shall prepare audit documentation that is sufficient to enable an

experienced auditor, having no previous connection with the audit, to

understand:

The nature, timing and extent of the audit procedures

The results of the audit procedures performed, and the audit evidence

obtained

Significant matters arising during the audit, the conclusions reached

thereon, and significant professional judgments made in reaching those

conclusions.

Audit Documentation – ISA 230


Audit Procedures – ISA 500

• The objective of the auditor is to design and perform audit procedures in such a

way as to enable the auditor to obtain sufficient appropriate audit evidence to be

able to draw reasonable conclusions on which to base the auditor’s opinion.

• When designing and performing audit procedures, the auditor shall consider the

relevance and reliability of the information to be used as audit evidence

• If information to be used as audit evidence has been prepared using the

work of a management’s expert, the auditor shall:

Evaluate the competence, capabilities and objectivity of that expert;

Obtain an understanding of the work of that expert

Evaluate the appropriateness of that expert’s work as audit evidence for the

relevant assertion.



If:

• audit evidence obtained from one source is inconsistent with that obtained

from another;

• the auditor has doubts over the reliability of information to be used as audit

evidence,

the auditor shall determine what modifications or additions to audit procedures

are necessary to resolve the matter, and shall consider the effect of the matter, if

any, on other aspects of the audit



• Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit

evidence. Audit procedures to obtain audit evidence can include:

inspection (involves examining records or documents, whether internal or external)

observation (consists of looking at a process or procedure being performed by others)

Confirmation (An external confirmation represents audit evidence obtained by the auditor as a

direct written response to the auditor from a third party)

Recalculation (consists of checking the mathematical accuracy of documents or records)

Re-performance (involves the auditor’s independent execution of procedures or controls that

were originally performed as part of the entity’s internal control)

Analytical procedures (consist of evaluations of financial information through analysis of

plausible relationships among both financial and non-financial data)

Inquiry (consists of seeking information of knowledgeable persons, both financial and non-

financial, within the entity or outside the entity)



• Although inquiry may provide important audit evidence, and may even produce

evidence of a misstatement, inquiry alone ordinarily does not provide

sufficient audit evidence of the absence of a material misstatement at the

assertion level, nor of the operating effectiveness of controls.

• Procedures for Obtaining Audit Evidence : As required by ISA 315 and ISA

330, audit evidence to draw reasonable conclusions on which to base the

auditor’s opinion is obtained by performing:

Risk assessment procedures;

Further audit procedures, which comprise:

Tests of controls, when required by the ISAs or when the auditor has chosen to

do so;

Substantive procedures, including tests of details and substantive analytical

procedures



The means available to the auditor for selecting items for testing are:

• Selecting all items (100% examination), used when:

The population constitutes a small number of large volume items

There is a significant risk and other means do not provide sufficient appropriate audit

evident

The repetitive nature of a calculation of process performed automatically by an

information system makes a 100% examination cost effective

• Selecting specific items, which may include:

High value or key items

All items over a certain amount

Items to obtain information

• Audit sampling: is designed to enable conclusions to be drawn about an entire

population on the basis of testing a sample drawn from it.


Audit of Specific Items – ISA 501

• The objective of the auditor is to obtain sufficient appropriate audit evidence

regarding the:

Existence and condition of inventory;

Completeness of litigation and claims involving the entity;

Presentation and disclosure of segment information in accordance with the

applicable financial reporting framework.

• If Inventory is material to the financial statements, the auditor shall obtain

sufficient appropriate audit evidence regarding the existence and condition of

inventory by:

Attendance at physical inventory counting

Performing audit procedures over the entity’s final inventory records to

determine whether they accurately reflect actual inventory count results



• If physical inventory counting is conducted at a date other than the date of

the financial statements, the auditor shall, perform audit procedures to obtain

audit evidence about whether changes in inventory between the count date and

the date of the financial statements are properly recorded.

• If attendance at physical inventory counting is impracticable, the auditor

shall perform alternative audit procedures to obtain sufficient appropriate audit

evidence regarding the existence and condition of inventory. If it is not possible

to do so, the auditor shall modify the opinion in the auditor’s report

• If inventory under the custody and control of a third party is material to the

financial statements, the auditor shall :

Request confirmation from the third party as to the quantities and condition of

inventory held on behalf of the entity

Perform inspection or other audit procedures appropriate in the

circumstances.



• The auditor shall design and perform audit procedures in order to identify

litigation and claims involving the entity which may give rise to a risk of

material misstatement, including:

Inquiry of management and, where applicable, others within the entity,

including in-house legal counsel;

Reviewing minutes of meetings of those charged with governance and

correspondence between the entity and its external legal counsel;

Reviewing legal expense accounts

• The auditor shall request management and, where appropriate, those charged

with governance to provide written representations that all known actual or

possible litigation and claims whose effects should be considered when

preparing the financial statements have been disclosed to the auditor and

accounted for and disclosed in accordance with the applicable financial reporting

framework



• The auditor shall obtain sufficient appropriate audit evidence regarding the

presentation and disclosure of segment information in accordance with the

applicable financial reporting framework by:

Obtaining an understanding of the methods used by management in

determining segment information, and:

Evaluating whether such methods are likely to result in disclosure in

accordance with the applicable financial reporting framework;

Where appropriate, testing the application of such methods;

Performing analytical procedures or other audit procedures appropriate in

the circumstances.


Performing Substantive Analytical Procedures

• Identify the account balance or disclosure and the related potential errors to

be tested.

• Develop an expectation.

• Determine the threshold.

• Identify differences requiring further investigation.

• Obtain, quantify, and corroborate explanations.

• Evaluate results.


Tests of Details

What are the three types of tests of details?

• Representative sampling

• Non-representative selection

• Testing of all items in the population


Tests of Details

What is the difference between samples selected using nonrepresentative

selection and representative sampling?

• With nonrepresentative selection, our objective is not to make an assessment

regarding the entire population.

• With representative sampling, we seek to infer characteristics of the entire

population based on characteristics of the sample.

• For items selected using nonrepresentative selection, we only obtain assurance

about those items selected.

• Representative samples tend to be made using statistical selection techniques

like MUS.


Audit Sampling – ISA 530

• This International Standard on Auditing applies when the auditor has decided to

use audit sampling in performing audit procedures. It deals with the auditor’s

use of statistical and non-statistical sampling when designing and selecting the

audit sample, performing tests of controls and tests of details, and evaluating

the results from the sample.

• Audit sampling – The application of audit procedures to less than 100% of

items within a population of audit relevance such that all sampling units have a

chance of selection in order to provide the auditor with a reasonable basis on

which to draw conclusions about the entire population.



• Statistical sampling – An approach to sampling that has the following

characteristics:

(i) Random selection of the sample items; and

(ii)The use of probability theory to evaluate sample results, including

measurement of sampling risk.

• A sampling approach that does not have characteristics (i) and (ii) is considered

non-statistical sampling.

• When designing an audit sample, the auditor shall consider the purpose of the

audit procedure and the characteristics of the population from which the sample

will be drawn



• The auditor shall determine a sample size sufficient to reduce sampling risk to

an acceptably low level.

• The auditor shall select items for the sample in such a way that each sampling

unit in the population has a chance of selection

• For tests of details, the auditor shall project misstatements found in the sample

to the population.

• The level of sampling risk that the auditor is willing to accept affects the sample

size required. The lower the risk the auditor is willing to accept, the greater the

sample size will need to be.


Sample size table

Sample Size table

Population Size - Multiples of Monetary

Precision

Risk(Not Significant )on

Controls Low Extent of

Testing

Risk (Not Significant) and

relying on controls Normal

Extent of Testing

Significant Risk (!) and Relying

on Controls, or Risk (Not

Significant) and not Relying on

Controls

Significant Risk (!) and Not Relying

on Controls

1 x 1 1 2 3

2 x 1 2 3 6

3 x 1 3 5 9

4 x 1 3 6 12

5 x 1 4 8 15

6 x 2 5 9 18

7 x 2 5 11 21

8 x 2 6 12 24

9 x 2 7 14 27

10 x 2 7 15 30

15 x 3 11 23 45

20 x 4 14 30 60

25 x 5 18 38 75

30 x 6 21 45 75(*)

40 x 8 28 60 75(*)

50 x 10 35 75 75(*)

100 x 20 70 75(*) 75(*)

200 x (or greater) 40(*) 75(*) 75(*) 75(*)

(*) The numbers in red indicate the situations that are impacted by the existence of a maximum sample size (i.e., if we didn’t

have a maximum sample size, the required number of selections would be larger in these situations)

- The sample sizes represent minimum samples sizes. Engagement Management may determine that, in some

circumstances, it is appropriate to increase the sample sizes above those in this table

- For populations in between the listed levels of Monetary Precision, we may interpolate to obtain the appropriate sample size

(!) For a population that contain Significant risk, we arre required to perform substantive procedures that are specifically

responsive to that risk (Topic 2820.13). These specifically responsive substantive procedures frequently involve non

representative selection.


Representative Sampling

What are the main characteristics of representative sampling?

• It may be either statistical or nonstatistical.

• We seek to infer characteristics over the entire population.

• Individual items that make up the population need to have similar

characteristics and need to be processed in a similar fashion.

• Appropriate if it provides assurance about the items in the population that are

not selected and examined.


Non-representative Selection

What are the main characteristics of non-representative selection?

• We select items from a population and obtain audit evidence to support them.

• We examine support for the items selected and do not attempt to make

inferences about unselected items in the broader population.

• No assurance is gained on the non-selected portion of the population.

• Does not relieve us of our responsibility to test the remaining population

unless the remaining population is clearly insignificant.


Test Entire Population

When might it be appropriate to test the entire population?

• Sometimes it is efficient to test the entire population.

• Used where populations consists of one or a few large items or where we can

use file interrogation techniques.

• Gives us full assurance.


Evaluation of Misstatements

What are the three different types of likely misstatements?

• Projected probable misstatements in populations tested through representative

sampling less the known misstatements found in performing these audit

procedures.

• Estimated misstatements detected through substantive analytical procedures.

• Misstatements in accounting estimates that we judge not to be reasonable.



What do we mean by “CTT” threshold?

• Level above which identified uncorrected misstatements are aggregated and

posted onto the overall summary of misstatements.

• Maximum 5 % of planning materiality is regarded as CTT.

• The audit engagement partner may determine that a lower level is appropriate.

• Misstatements below the CTT threshold are evaluated for qualitative

considerations



As each misstatement is found, what processes are carried out?

• Each misstatement is evaluated individually, giving consideration to nature and

cause and discussed with the appropriate level of management.

• Impact on the controls reliance strategy is also reviewed and whether our tests

of the operating effectiveness of those controls were adequate.

• Conclude as to whether we have achieved our desired level of assurance for the

potential error being tested.

• After we have concluded whether we have achieved our desired level of

assurance:

If misstatement exceeds CTT threshold, it’s taken to overall summary of known and

likely misstatements.

If misstatement does not exceed CTT threshold, qualitative factors are considered to

determine if it is taken to the overall summary of known and likely misstatements.



At what stage do we discuss misstatements with management? • Best practice to discuss with the Field Senior first.

• Discuss all misstatements resulting from fraud or error, whether or not material,

with the appropriate level of management.

• Discussions with management consider correction of the error, the reasons for

the misstatement and the potential impact on our audit.

• Discuss misstatements discovered in performing interim auditing procedures

with the appropriate level of management during, or at the completion of, the

interim work.

• Discuss disclosure deficiencies with the appropriate level of management.

• We need to make management aware as soon as practical.



In what circumstances do we ask management to correct misstatements?

• Best practice to discuss this with the field senior first.

• Request management to correct known misstatements that, quantitatively or

qualitatively, exceed the CTT threshold.

• Request management to correct likely misstatements arising from estimates

where the recorded estimate is outside the range of amounts we consider to

be reasonable and the likely misstatements exceed the CTT threshold



What is the impact, if any, if the misstatement is indicative of fraud? • Consider the implications of fraud and significant error in relation to other

aspects of the audit.

• If we believe the effect of the misstatement is immaterial to the financial

statements, we evaluate the implications.

• Communication requirements, such as:

Management.

Those charged with governance.

In some cases, to a regulatory authority.


Conclude and report Evaluate the sufficiency and appropriateness of audit evidence

• Conclude whether the audit evidence was sufficient to enable us to draw

reasonable conclusions on which to base our audit opinion.

• Evaluate indicators of insufficient audit evidence.

• Respond to presence of indicators of insufficient audit evidence:

Discuss the uncorrected misstatements with management who will be

required to correct them.

Evaluate qualitative assessment about the relationship between undetected

misstatements and performance materiality.

Perform additional procedures to arrive at a better estimation of projected

misstatements.

Perform additional procedures using lower performance materiality.


Audit reports – Clean opinion

Independent auditor’s report

[Appropriate Addressee]

Report on the Financial Statements

We have audited the accompanying financial statements of ABC Company, which

comprise the statement of financial position as at December 31, 20X1, and the

statement of comprehensive income, statement of changes in equity and

statement of cash flows for the year then ended, and a summary of significant

accounting policies and other explanatory information.


Audit report

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these

financial statements in accordance with International Financial Reporting

Standards, and for such internal control as management determines is necessary

to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error.


Audit report

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on

our audit. We conducted our audit in accordance with International Standards on

Auditing. Those standards require that we comply with ethical requirements and

plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free from material misstatement.


Audit report

An audit involves performing procedures to obtain audit evidence about the

amounts and disclosures in the financial statements. The procedures selected

depend on the auditor’s judgment, including the assessment of the risks of

material misstatement of the financial statements, whether due to fraud or error. In

making those risk assessments, the auditor considers internal control relevant to

the entity’s preparation and fair presentation of the financial statements in order to

design audit procedures that are appropriate in the circumstances, but not for the

purpose of expressing an opinion on the effectiveness of the entity’s internal

control. An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the financial

statements.

We believe that the audit evidence we have obtained is sufficient and appropriate

to provide a basis for our audit opinion.


Audit report

Opinion

In our opinion, the financial statements present fairly, in all material respects, (or

give a true and fair view of) the financial position of ABC Company as at

December 31, 20X1, and (of) its financial performance and its cash flows for the

year then ended in accordance with International Financial Reporting Standards.


Audit report

Report on Other Legal and Regulatory Requirements

• [Form and content of this section of the auditor’s report will vary depending on

the nature of the auditor’s other reporting responsibilities.]

• [Auditor’s signature]

• [Date of the auditor’s report]

• [Auditor’s address]


Modified audit reports

Qualified Opinion

The auditor shall express a qualified opinion when:

• (a) The auditor, having obtained sufficient appropriate audit evidence, concludes

that misstatements, individually or in the aggregate, are material, but not

pervasive, to the financial statements; or

• (b) The auditor is unable to obtain sufficient appropriate audit evidence on which

to base the opinion, but the auditor concludes that the possible effects on the

financial statements of undetected misstatements, if any, could be material but

not pervasive.



Basis for Qualified Opinion

The company’s inventories are carried in the statement of financial position at xxx.

Management has not stated the inventories at the lower of cost and net realizable

value but has stated them solely at cost, which constitutes a departure from

International Financial Reporting Standards. The company’s records indicate that

had management stated the inventories at the lower of cost and net realizable

value, an amount of xxx would have been required to write the inventories down

to their net realizable value. Accordingly, cost of sales would have been increased

by xxx, and income tax, net income and shareholders’ equity would have been

reduced by xxx, xxx and xxx, respectively.



Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for

Qualified Opinion paragraph, the financial statements present fairly, in all material

respects, (or give a true and fair view of) the financial position of ABC Company

as at December 31, 20X1, and (of) its financial performance and its cash flows for

the year then ended in accordance with International Financial Reporting

Standards.



Adverse Opinion

The auditor shall express an adverse opinion when the auditor, having obtained

sufficient appropriate audit evidence, concludes that misstatements, individually or

in the aggregate, are both material and pervasive to the financial statements.



Basis for Adverse Opinion

As explained in Note X, the company has not consolidated the financial

statements of subsidiary XYZ Company it acquired during 20X1 because it has

not yet been able to ascertain the fair values of certain of the subsidiary’s material

assets and liabilities at the acquisition date. This investment is therefore

accounted for on a cost basis. Under International Financial Reporting Standards,

the subsidiary should have been consolidated because it is controlled by the

company. Had XYZ been consolidated, many elements in the accompanying

financial statements would have been materially affected. The effects on the

consolidated financial statements of the failure to consolidate have not been

determined.



Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for

Adverse Opinion paragraph, the consolidated financial statements do not present

fairly (or do not give a true and fair view of) the financial position of ABC Company

and its subsidiaries as at December 31, 20X1, and (of) their financial performance

and their cash flows for the year then ended in accordance with International

Financial Reporting Standards.



Disclaimer of Opinion

The auditor shall disclaim an opinion when the auditor is unable to obtain

sufficient appropriate audit evidence on which to base the opinion, and the auditor

concludes that the possible effects on the financial statements of undetected

misstatements, if any, could be both material and pervasive.



Basis for Disclaimer of Opinion

The company’s investment in its joint venture XYZ (Country X) Company is

carried at xxx on the company’s statement of financial position, which represents

over 90% of the company’s net assets as at December 31, 20X1. We were not

allowed access to the management and the auditors of XYZ, including XYZ’s

auditors’ audit documentation. As a result, we were unable to determine whether

any adjustments were necessary in respect of the company’s proportional share

of XYZ’s assets that it controls jointly, its proportional share of XYZ’s liabilities for

which it is jointly responsible, its proportional share of XYZ’s income and

expenses for the year, and the elements making up the statement of changes in

equity and cash flow statement.



Disclaimer of Opinion

Because of the significance of the matter described in the Basis for Disclaimer of

Opinion paragraph, we have not been able to obtain sufficient appropriate audit

evidence to provide a basis for an audit opinion. Accordingly, we do not express

an opinion on the financial statements.


Thank you !

Technical Cross-Functional

Knowledge Sharing

A flavour of audit approach

Materiality

B. Audit Approach

4. Materiality

The concept of materiality in audit:

Materiality is considered in terms of the smallest aggregate level of

misstatements that could be considered material to any one of the

statements that comprise the financial statements.

We do not establish separate materiality amounts to individual

statements that comprise the financial statements.

Source: Determining Materiality and Performance Materiality, A Guide for Auditors in DTTL Member Firms

(March 2012)- For internal distribution only


B. Audit Approach

4. Materiality

Financial reporting frameworks explain the concept of materiality as

follows:

• Misstatements, including omissions, are considered to be material if

they, individually or in the aggregate, could reasonably be expected to

influence the economic decisions of users taken on the basis of the

financial statements;

• Judgments about materiality are made in light of surrounding

circumstances, and are affected by the size or nature of a

misstatement, or a combination of both;

• Judgments about matters that are material to users of the financial

statements are based on a consideration of the common financial

information needs of users as a group. The possible effect of

misstatements on specific individual users, whose needs may vary

widely, is not considered.


B. Audit Approach

4. Materiality

Materiality determination

The auditor’s determination of materiality:

• is a matter of professional judgment and is often a challenging process

• is affected by the auditor’s perception of the financial information needs of

users of the financial statements.

In determining materiality, the auditors make certain assumptions

(as described on next slide).


B. Audit Approach

4. Materiality

Materiality determination – assumptions

Auditor assumes that users:

a) Have a reasonable knowledge of business and economic activities and

accounting and a willingness to study the information in the financial

statements with reasonable diligence;

b) Understand that financial statements are prepared, presented and audited to

levels of materiality;

c) Recognize the uncertainties inherent in the measurement of amounts based

on the use of estimates, judgment and the consideration of future events;

and

d) Make reasonable economic decisions on the basis of the information in the

financial statements.


Determining materiality in Planning Phase

Understand

the Entity and

Its

Environment

Determine Materiality

Develop the Audit Plan

RISKS

Establish the Overall Audit Strategy

Perform

Preliminary

Analytical

Review

Understand the

Entity’s

Accounting

Process

Understand

Internal

Control

B. Audit Approach

4. Materiality


B. Audit Approach

4. Materiality

The concept of materiality in audit:

The concept of materiality is applied by us :

• in planning and performing the audit - when establishing the Overall

Audit Strategy, we shall determine materiality for the Financial

Statements as a whole. [2210.01]),

• in evaluating the effect of identified misstatements on the audit and of

uncorrected misstatements, if any, on the financial statements, and

• in forming the opinion in our audit report.

We determine performance materiality for purposes of assessing the

risks of material misstatement and determining the nature, timing, and

extent of further audit procedures.


B. Audit Approach

4. Materiality

Computation of materiality: A percentage is often applied to a chosen

benchmark as a starting point in determining materiality, depending on several

factors:

• The elements of the financial statements (for example, assets, liabilities,

equity, revenue, expenses);

• Whether there are items on which the attention of the users of the particular

entity’s financial statements tends to be focused (for example, for the purpose

of evaluating financial performance users may tend to focus on profit, revenue

or net assets);

• The nature of the entity, where the entity is in its life cycle, and the industry

and economic environment in which the entity operates;

• The entity’s ownership structure and the way it is financed;

• The relative volatility of the benchmark.


Steps to determine M:

1. Identify an appropriate base (considering quantitative and qualitative

guidelines developed to assist our professional judgment).

2. Estimate its amount based on the financial statements (consider potential

need to annualize the amount).

3. Apply an appropriate percentage to the base amount.

NOTE: Certain account balances or disclosures which

could reasonably be expected to influence the economic decisions of users

taken on the basis of the financial statements should be reviewed in greater

detail than is indicated by M.

Determining materiality

B. Audit Approach

4. Materiality


CALCULATIONS INSTRUCTIONS

Benchmark chosen Determined based on professional judgment.

Specify other benchmark: Revenues

Benchmark balance: $ 100,000,000

Input selected factor 1.50% Enter factor based on Professional Judgment.

Calculated materiality: 1,500,000

Selected materiality: $ 1,500,000 Selecting materiality is not a mechanical exercise, it requires us to apply professional

judgment. This is the amount that should be entered as "materiality".

Total anticipated uncorrected

misstatements

150,000

Total anticipated uncorrected misstatements is the total amount of factual, judgmental,

projected and SAP misstatements that we anticipate remaining uncorrected at the end of the

current engagement.

Calculated performance materiality: $ 1,350,000

This amount or a rounded equivalent should be entered as "performance materiality" in Form

1810.

Percentage to be used as clearly

trivial misstatements

5.00%

Up to five percent of materiality

Calculated trivial misstatements $ 75,000

This amount or a rounded equivalent should be entered as "trivial misstatements level" in

Form 1810.

Example

B. Audit Approach

4. Materiality


Materiality (M) vs. Performance Materiality (PM)

The volume of the entire glass

represents Materiality.

Each misstatement adds water to the

glass.

If the glass overflows, the financial

statements are misstated.

We use PM (less than a full glass)

when performing tests to allow extra

room for unexpected errors.

We use prior-year errors to estimate

how much extra room to allow for in

the current year.

Materiality

PM

Anticipated

uncorrected

misstatements

B. Audit Approach

4. Materiality


Fraud, laws and regulations -

Laws and regulations

B. Audit Approach

5. Fraud, laws and regulations (ISA 250)

Effect of Laws and Regulations

Non-compliance with laws and regulations may result in fines, litigation

or other consequences for the entity that may have a material effect on

the financial statements.

Responsibility for Compliance with Laws and Regulations

Management


B. Audit Approach


Management responsibility:

• to ensure that the entity’s operations are conducted in accordance

with the provisions of laws and regulations.

Auditors responsibility:

• to obtain reasonable assurance that the financial statements, taken

as a whole, are free from material misstatement, whether caused by

fraud or error.

• to identify material misstatements of the financial statements due to

non-compliance with laws and regulations. However, the auditor is

not responsible for preventing non-compliance and cannot be

expected to detect non-compliance with all laws and regulations.


B. Audit Approach


Categories of laws and regulations from an audit perspective:

1. Direct effect on the determination of material amounts and disclosures in

the financial statements (e.g.: tax and pension laws and regulations)

The auditor’s responsibility is to obtain sufficient appropriate audit

evidence regarding compliance with the provisions of those laws and

regulations.

2. No direct effect on amounts and disclosures, but compliance is

fundamental to the operating aspects of the (e.g.: compliance with the

terms of an operating license, compliance with regulatory solvency

requirements, or compliance with environmental regulations);

Non-compliance with such laws and regulations may therefore have a

material effect on the financial statements

The auditor’s responsibility is limited to undertaking specified audit

procedures to help identify non-compliance with those laws and

regulations that may have a material effect on the financial statements.


B. Audit Approach

5. Fraud, laws and regulations – ISA 250

Audit Procedures in case of Non-compliance :

• Auditor should respond appropriately to non-compliance or suspected

non-compliance with laws and regulations identified during the audit.

• If the auditor becomes aware of information concerning an instance of

non-compliance or suspected non-compliance with laws and

regulations, the auditor shall obtain:

An understanding of the nature of the act and the circumstances in

which it has occurred;

Further information to evaluate the possible effect on the financial

statements.

Discuss the matter with management

Consider the need to obtain legal advice.

Evaluate the effect of non-compliance on the auditor’s opinion

Report


B. Audit Approach


Matters Relevant to the Auditor’s Evaluation

• The potential financial consequences of non-compliance with laws and

regulations on the financial statements including, for example, the imposition

of fines, penalties, damages, threat of expropriation of assets, enforced

discontinuation of operations, and litigation.

• Whether the potential financial consequences require disclosure.

• Whether the potential financial consequences are so serious as to call into

question the fair presentation of the financial statements, or otherwise make

the financial statements misleading.


Fraud, laws and regulations -

Fraud

B. Audit Approach

5. Fraud, laws and regulations – ISA 240 Fraud

Characteristics of Fraud

• Misstatements in the financial statements can arise from either fraud

(intentional) or error (unintentional)

• Fraud is a broad legal concept, but the auditor is concerned with fraud that

causes a material misstatement in the financial statements.

• Two types of intentional misstatements :

misstatements resulting from fraudulent financial reporting, and

misstatements resulting from misappropriation of assets.

Although the auditor may suspect or, in rare cases, identify the occurrence of

fraud, the auditor does not make legal determinations of whether fraud has

actually occurred.


Management vs. employees

Fraud by management on the rise:

• 39.7% of fraud is perpetrated by non-management employees

• 37.1% of fraud is perpetrated by management

• 23.3% of fraud is perpetrated by entity owner/executives

Level of authority held impacts size of fraud loss:

• Median loss for non-management fraud = $70,000

• Median loss for management fraud = $150,000

• Median loss for entity owner/executive fraud is $834,000

High profile, global cases support these statistics:

• Enron, WorldCom, HealthSouth, MicroStrategy, Tyco, Adelphia

B. Audit Approach



Fraud triangle

B. Audit Approach


INCENTIVE / PRESSURE

For fraud to occur, three factors must be present:


Professional skepticism

An attitude of professional skepticism means an auditor:

• Makes a critical assessment with a questioning mind of the validity of

the audit evidence obtained

• Is alert to audit evidence that contradicts

• Brings into question the reliability of documents and responses to

inquires and other information obtained from management and those

charged with governance.

B. Audit Approach



The gray zone

Fraudulent

accounting

Conservative

accounting

Within

GAAP

Violates

GAAP

Aggressive

accounting

(or overly

conservative

accounting)

Gra

y z

on

e

B. Audit Approach



Misappropriation of assets

Skimming of cash:

• Diversion of funds

• Lapping schemes

• Skimming of funds received from sales

• Theft of incoming checks

• Theft in cash register



Procurement frauds:

• Creation of fictitious vendors

• Creation of fictitious shell companies

• False credits, rebates, refunds, and kickbacks

• Phantom or inaccurate invoicing

• Overbilling

• Personal use of entity accounts

• Rigging bidding process



Inventory schemes:

• Removal of inventory

• False sale of inventory

• False write-offs and other debits to inventory



Other embezzling schemes:

• Larceny of cash

• Pay and return schemes

• Theft of entity checks

• Ghost employees

• Falsified work hours

• Other payroll schemes


B. Audit Approach


Audit Procedures to address Risks of Material Misstatement Due to

Fraud:

• Auditor should determine overall responses to address the assessed

risks of material misstatement due to fraud at the financial statement

level.

• Assign and supervise personnel taking account of the knowledge, skill

and ability of the individuals to be given significant engagement

responsibilities and the auditor’s assessment of the risks of material

misstatement due to fraud for the engagement

• Evaluate whether the selection and application of accounting policies

by the entity, particularly those related to subjective measurements

and complex transactions, may be indicative of fraudulent financial

reporting resulting from management’s effort to manage earnings; and

• Incorporate an element of unpredictability in the selection of the

nature, timing and extent of audit procedures.


B. Audit Approach


Audit Procedures (continued):

• Inquiry with management

• Evaluate the Audit Evidence

• Auditor Unable to Continue the Engagement?

• Reporting

• Communications to Regulatory and

Enforcement Authorities


Analytical procedures

Use Of Analytical Procedures (AP) In Auditing

• AP is one method of increasing auditor efficiency.

• AP consist of evaluations of financial information made by an auditor

of plausible and expected relationships among both financial and

non-financial data.

Examples of AP range from simple comparisons (e.g., the current year

with the preceding year) to the use of complex models involving many

relationships and elements of data (e.g., regression analysis).

B. Audit Approach

6. Analytical Procedures – ISA 520


http://accounting-financial-tax.com/category/financial/


The basic premise underlying the application of AP is:

• Predictability : Plausible relationships among data may reasonably

be expected to exist and continue in the absence of known

conditions to the contrary.

• Particular conditions that can cause variations in these relationships

include, for example, specific unusual transactions or events,

accounting changes, business changes, random fluctuations, or

misstatements.

• Relationships involving income statement accounts are more

predictable than relationships involving only balance sheet accounts.

B. Audit Approach



Analytical procedures used in planning the audit might include the

following:

Account balance comparison. Compare unadjusted trial balance

amounts with adjusted tried balance amounts of the prior year.

Computation of significant ratios. Compare current year ratios to

current industry ratios and prior year computing ratios.

Computation of ratios using nonfinancial and financial data. E.g.,

sales per square foot of sales space.

Regression analysis. This procedure is discussed in a separate section

below.

B. Audit Approach




Common analytical procedures we do while assessing audit risk:

• Trend analysis: compare current financial figures to the same figures

in the prior year.

• Ratio analysis: Some common ratios are the current ratio, and

inventory turnover.

• Reasonableness: Does what we’re seeing make sense based on

other facts? For example, does the depreciation expense appear

accurate when you consider the book value of all fixed assets on the

balance sheet?

B. Audit Approach



The auditor’s response to the results of AP in the planning stage

When the results of AP signal possible errors ;

• Increase error risk and thus increase extent of testing

More audit testing than when the results indicate the possibility of no

errors.

• Investigate the reasons for deviations

• Investigate deviations from expectations

• Perform more inquiries with management and obtain corroborative

audit evidence

B. Audit Approach



Use of Analytical Procedures in Concluding Phase of the Audit

The application of AP in the final review of the audit is one of the

last audit tests. Those procedures assist the auditor in assessing

conclusions reached concerning certain account balances and in

evaluating the overall financial statement presentation.

Procedures such as the following may be applied:

• Comparisons with similar financial data of the prior year or of the

client’s industry.

• Ratio analysis.

• Trend analysis.

• Development of common-size financial statements.

B. Audit Approach



Use of AP in assessing a company’s ability to continue as a going

concern

• apply models using ratios and trends that have been developed to

predict bankruptcy

For example:

One of the models was developed using a statistical technique (multiple

discriminant analysis) and five ratios. Those ratios for a public company

are:

• Working Capital/Total Assets

• Retained Earnings/Total Assets

• Earnings before Interest and Taxes/Total Assets

• Market Value of Equity/Book Value of Total Debt

• Sales/Total Assets

B. Audit Approach



http://accounting-financial-tax.com/category/accounting/interest-accounting/

http://accounting-financial-tax.com/category/accounting/equity/

Analytical procedures include the consideration of comparisons of the entity’s

financial information with, for example:

• Comparable information for prior periods.

• Anticipated results of the entity, such as budgets or forecasts, or expectations

of the auditor, such as an estimation of depreciation.

• Similar industry information, such as a comparison of the entity’s ratio of

sales to accounts receivable with industry averages or with other entities of

comparable size in the same industry.

• Among elements of financial information that would be expected to conform

to a predictable pattern based on the entity’s experience, such as gross

margin percentages.

• Between financial information and relevant non-financial information, such as

payroll costs to number of employees

B. Audit Approach



The auditor’s substantive procedures at the assertion level may be:

• tests of details

• substantive analytical procedures

• a combination of both

Substantive analytical procedures are generally more applicable to large

volumes of transactions that tend to be predictable over time.

The auditor may inquire of management as to the availability and reliability of

information needed to apply substantive analytical procedures, and the results of

any such analytical procedures performed by the entity. It may be effective to

use analytical data prepared by management, provided the auditor is satisfied

that such data is properly prepared.

B. Audit Approach



The following are relevant when determining whether data is reliable for

purposes of designing substantive analytical procedures:

• Source of the information available. ( more reliable when it is obtained from

independent sources outside the entity);

• Comparability of the information available;

• Nature and relevance of the information available. (whether budgets have

been established as results to be expected rather than as goals to be

achieved);

• Controls over the preparation of the information that are designed to ensure

its completeness, accuracy and validity (controls over the preparation, review

and maintenance of budgets).

B. Audit Approach



Thank you!


Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK

private company limited by guarantee, and its network of member firms, each

of which is a legally separate and independent entity. Please see

www.deloitte.com/ro/about for a detailed description of the legal structure of

Deloitte Touche Tohmatsu Limited and its member firms.

http://www.deloitte.com/ro/about

1. Audit Framework and Regulation_Presentation Day 1

Documents

Transcript of 1. Audit Framework and Regulation_Presentation Day 1