Untitled Deck Flashcards
(18 cards)
What are substantive audit procedures? and its purpose
Substantive audit procedures are the tests auditors perform to detect material misstatements in the financial statements.
These procedures are used to gather evidence on whether items like revenue, expenses, assets, and liabilities are accurate, complete, and properly valued.
🔍 Purpose:
To confirm the truth and fairness of the financial statements by directly testing the numbers or supporting documents.
2 types of substantive procedures?
Tests of Details
Looking at individual transactions, balances, or disclosures.
Example: Checking invoices to confirm a sales figure.
Substantive Analytical Procedures
Using ratios, comparisons, or trends to identify unexpected relationships.
Example: Comparing current year gross margin to prior years.
What are assertions in auditing?
A: Assertions are claims made by management in the financial statements. Auditors test these claims to assess if the accounts are true and fair. Common assertions include:
Existence – Does the item exist?
Citadel says they have £2.7m in finished goods. You need to check:
Do those goods physically exist in the warehouse?
🛠️ Audit test: Inspect the warehouse and match with inventory records.
Completeness – Has everything been recorded?
Did Citadel forget to record any liabilities or sales?
🛠️ Audit test: Trace from supplier invoices to the ledger to make sure no expenses were missed.
Valuation – Is it recorded at the correct amount?
e: Citadel says inventory is £7.6m. Is that based on real, current prices? Any items overvalued?
🛠️ Audit test: Compare inventory cost to sales prices to check for lower of cost and NRV.
Rights & Obligations – Does the entity own or owe it?
If inventory is on consignment, Citadel may not own it, so it shouldn’t be included.
🛠️ Audit test: Inspect ownership documents or contracts.
Classification – Is it in the correct category?
Is the £5m loan due in 2023 shown under current liabilities, not non-current?
🛠️ Audit test: Review balance sheet layout and loan term
Presentation & Disclosure – Is it clearly disclosed?
Has Citadel properly disclosed the legal case with Arcturus in the notes?
🛠️ Audit test: Review disclosures against IAS/IFRS standards.
Cut off -
Was it recorded in the correct accounting period?
🧾 Example: Did Citadel record December 2022 sales in the 2022 financial year — not in 2023?
🛠️ Audit test: Check invoices/delivery notes dated year-end.
What is going Concern?
A company is a going concern if it is expected to continue operating for the foreseeable future meaning it wont liquidate or close operations
explain the external auditor’s responsibility for going concern in accordance with ISA 570
Under ISA 570, the external auditor must:
Evaluate whether management’s use of the going concern basis of accounting is appropriate;
e.g can the company continue to operate in the next 12 months
-ask management for cash flows forecasts, budgets ETC
Assess whether a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern.
e.g
identify red flags and stress test the back up plans
If such uncertainty exists, the auditor must form a conclusion on:
Whether it is properly disclosed in the financial statements, and
Whether this requires a modification to the audit opinion.
If a company use of going concern basis is inappropriate what happens to the audit report?
The auditor must issue an adverse opinion because the financial statements are materially misstated – they are not prepared on the correct basis.
Impact of auditors report if there is material uncertainity about a companies ability to continue as a going concern?
The auditor issues a modified report with a “Material Uncertainty Related to Going Concern” paragraph, provided that disclosure in the financial statements is adequate.
The opinion remains unmodified, but the auditor draws attention to the uncertainty.
If disclosures are inadequate, the opinion should be qualified or adverse, depending on severity and pervasiveness.
The auditor must consider whether the uncertainty is appropriately described and clearly disclosed in the notes.
Ethics concerns to consider un auditing (Email related question to the mock)
🔷 1. Confidentiality Breach
If a client requests information about another audit client, the auditor must refuse.
This would violate the fundamental ethical principle of confidentiality under the Code of Ethics (e.g. ICAEW or IESBA).
Auditors are not allowed to disclose any information obtained through professional work unless legally required or given explicit consent by the other party.
🔷 2. Conflict of Interest
If the firm is involved with two parties who may be in competition, or one is considering acquiring the other, this creates a conflict of interest.
The firm must assess whether it can continue acting for both parties.
If it chooses to continue, it must apply safeguards, such as:
Separate engagement teams
Confidentiality agreements
Informed consent from both parties
🔷 3. Self-Interest Threat
If the client offers gifts, hospitality, or financial incentives (e.g. exclusive invitations, future business offers), this creates a self-interest threat to objectivity and independence.
Even if well-intentioned, the auditor may be unduly influenced or appear biased.
The auditor must assess whether the gift is clearly trivial or inconsequential. If not, it should be declined.
🔷 4. Familiarity Threat
A long-standing relationship with a client or senior individual may lead to a familiarity threat.
The auditor may become too sympathetic to the client’s interests or reluctant to challenge them.
Regular rotation of audit staff or review by a more senior/independent partner may be necessary to reduce this threat.
🔷 5. Independence Threat (Future Work)
If a client offers future engagements (e.g. due diligence, advisory work, or audit work after a merger), this could create a threat to independence, especially if the auditor is promised this work in exchange for favourable treatment.
Auditors must not allow the prospect of future work to compromise their current judgement.
What simple audit steps help check if a business can keep going (going concern)?
Ask management about their future plans and if they think the business will keep going.
Check forecasts – look at their cash and profit plans for the next 12 months.
Compare plans to reality – see if actual results after year-end match the budget.
Look for proof of funding – check if loans or new money are real and confirmed.
Get written confirmation from management saying they believe the business can continue.
What happens if financial statements are prepared as going concern but the firm is no longer a going concern?
AKA inappropriate
Financial statements are martially misstated and misleading - do not reflect true and fair financial position - pervasive issue = adverse opinion = audit report should state that FS do not give a fair and true view and explanatory paragraph should be included to explain why going concern is inappropriate
If there is a material uncertainty about firms ability to continue as a going concern how does that impact an auditors report?
Going concern = good but there is material uncertainty = audit response depends on quality of disclosure in FS
Good quality = issue unmodified opinion but include Material uncertainty related to going concern paragraph to draw attention to critical information
Bad quality = materially misstated = if issue is material = qualified opinion using the phrase except for
If issue is pervasive = adverse opinion stating FS do not give a true and fair view
Difference between a Material and Pervasive issue
and the audit opinion it leads to:
Material - Important enough to influence decisions of users of the financial statements
e.g large amounts
3 million error in a 10 million profit
Pervasive if it effects the whole set of financial info
Material but not pervasive | Qualified opinion (“Except for…”)
Material and pervasive | Adverse opinion (“Not true and fair”)
Inability to get evidence | May lead to disclaimer of opinion, depending on severity
4 audit procedures for Inventory?
- Physical Verification - Perform a count of inventory to ensure it exists and matches the quantities reported in FS
(EXISTANCE and completeness)
- Cut Off testing = test transaction around year end to ensure they are recorded in the correct accounting period. E.G review shipping records at the end of period - verify sales and purchases are recorded appropriate
(Accuracy and CUT off)
- Valuation testing - verify valuation method is consistent to previous periods - ensure obsolete to slow moving goods are written down to NET realizable value and not overvalued
(Valuation and Accuracy)
- Inspect Documentation
Review purchase invoices to confirm if inventory was correctly recorded at cost price - cross reference sales invoices with inventory movements to verify pricing = ensures delivery receipts match the books.
(Accuracy and completeness)
4 audit procedures for non current assets?
- Existence and ownership
Perform a physical inspection of given non current assets e.g. checking addresses of budlings to confirm they exist - get purchase contracts and asset registers to verify if they are legally owned
(Existence and right & obligations)
- Depreciation calculation
Review depreciation schedule for non-current assets to ensure it follows company policies and recalculate deprecation for a sample of assets to verify correctness.
(Valuation and accuracy)
- Impairment testing
Evaluate whether any impairment indicators exist such as decline in market value by comparing carrying value to the recoverable amount - if needed ensure its properly recorded and disclosed
(Valuation and existence)
- Valuation - if non correct assets are subject to revaluation e.g land or building ensure that revaluation is based on reliable independent appraisals
(Valuation and accuracy)
4 audit procedures
for trade receivables
- Receivables circularisation
Select a sample of customers from year to end ledger
Send receivable circularisation letters to confirm balnce
Existence and Rights & Obligations
2.Trace a sample of receivable balances to bank statements after year-end to check if the amounts have been paid.
Assertion: Valuation and Existence
- Aged Receivables Review + Bad Debt Provision Check
Procedure: Review the aged receivables report and assess if old or disputed balances are adequately provided for. Recalculate the allowance for doubtful debts. - Cut-off Testing
Procedure: Select sales transactions just before and after the year-end and trace them to invoices and despatch notes to ensure revenue is recorded in the correct period.
Assertion: Cut-off
Assertion: Accuracy and Valuation
4 audit procedures for bank and overdrafts
- Obtain Bank Confirmations
Procedure: Send a bank confirmation letter to all banks used by the client requesting confirmation of balances, overdraft terms, loan balances, interest rates, and security held.
Assertion: Existence, Rights & Obligations, Completeness
✅ 2. Review Loan Agreements
Procedure: Inspect original loan contracts to confirm principal amounts, repayment terms, interest rates, and any covenants or security arrangements.
Assertion: Accuracy, Valuation, Classification
.
✅ 3. Recalculate Year-End Accrued Interest
Procedure: Recalculate interest payable on loans and overdrafts to ensure correct year-end accrual.
Assertion: Accuracy
✅ 4. Inspect Cash Flow Forecasts
Procedure: Review management’s cash flow forecasts for the next 12 months to assess whether the company can meet its loan repayment obligations (especially where going concern is a concern).
Assertion: Valuation, Presentation & Disclosure
What is the auditors responsibility between the reporting date and at the end according to ISA 560
ISA 560 – Subsequent Events
Q1: What are the two types of subsequent events under ISA 560?
A:
Adjusting events: Provide evidence of conditions that existed at the reporting date (e.g. legal case settled after year-end).
Non-adjusting events: Arise after the reporting date (e.g. fire at a factory in January).
Q2: What are the auditor’s duties between the reporting date and the auditor’s report?
A:
Enquire with management and those charged with governance
Review board minutes and interim financials
Identify subsequent events
Ensure adjusting events are reflected in the FS and non-adjusting events are disclosed if material.
