P7:Advanced Audit & Assurance (INT)

2 Section D: Audit of historical financial information Designed to give you knowledge and application of: D1. i. Planning, materiality and assessing the risk of misstatement ii. Evidence iii. Evaluation and review D2. Group audits

3  Financial statement’s items and audit procedures. [3]  Analytical procedures in evaluation & review. [3]  Auditor’s responsibilities for corresponding figures, comparative financial statements. [3]  Indicators & mitigating factors of going concern basis. [2]  Evidence available & appropriateness of the going concern basis. [3]  Adequacy of disclosures in FS & its implication on auditor’s report relating to going concern basis. [3] Learning Outcomes D1(iii): Evaluation and review

4 Financial statement’s items and audit procedures Business combinations  If purchase method is applied, as required by IFRS 3  If acquirer is identified correctly  If acquirer’s identifiable assets, liabilities and contingent liabilities are recognised separately  If cost of business combination is measured correctly  If goodwill is recognised by the acquirer as an asset from acquisition date  If goodwill is not amortised but is instead tested for impairment, as required by IFRS 3 Non-current assets  Auditor should look for appropriate audit evidence  Review documentation such as written representations from the management Inventory  All inventories are recorded & relate to entity  Valuation is proper ( in accordance with IAS 2)  Inventories exist physically (SOCF) Cash- flow statements  reconcile each item with FS & document /draw up CFS from audited FS  it indicates liquidity position of the entity & going concern issues

5 Changes in accounting policy  if required by statute & results in more reliable presentation of FS  if treated as retrospective adjustments to opening balances of relevant accounts with appropriate disclosures being made Construction contracts  match revenue with certified work actually completed during the year  cost figures should be matched to the actual invoices  contracts should be periodically reviewed to ensure costs are recoverable Financial statement’s items and audit procedures Standard costing items  review purchase invoices & price index  discuss if it is a valid costing system  consider if inventory is still comparable with previous year due to change in accounting policy  check reasonableness & accuracy  verify standard cost calculations Related parties  Covered in SG D1 (Part 2)

6 Taxation  evaluate reasonableness of assumptions made while calculating current and deferred tax  check accuracy of current and deferred tax calculations  match figures used to calculate temporary differences to those on FS  review provisions according to IAS 12  ensure all disclosures are made  ensure consistency of deferred tax computation from one year to the next Segment information  reported revenues is not less than 10% of combined revenue of all reporting segments  reported profit / loss is not less than 10% of total combined segmental revenue  at least 10% of total assets is owned by the segment  segment reporting, if total external revenue consists of less than 75% of entity's revenue, additional reporting segments must be identified considering that at least 75% of the reportable profit is included in segmental information Financial statement’s items and audit procedures Leases  check lease calculations & workings  verify lease rental payments to bank statements  check if lease has been properly disclosed in FS

7 Fair value  auditor should asses the entity’s systems for determining fair value & its related disclosures  if market value is a base, check current market value & verify the asset’s fair value  method adopted is consistent with applicable accounting standards Revenue recognition  whether a reasonable basis for the recognition of revenue has been applied  if revenue has been correctly recorded by verifying the amounts recorded to its applicable source documents Government grants  verify classification of government grant as revenue by checking documentation  verify value of government grant  check the receipt of the grant from related bank statements  check if grant is accounted for consistently Financial statement’s items and audit procedures Borrowing costs  perform analytical reviews to verify the amount  verify if they are expensed in the SOCI  value amounts by matching the figures with the payments made to & from the lender & verify that amounts are attributable to the constructed asset

8 Provisions, contingent liabilities & contingent assets  determine if client has a present obligation arising from the occurrence of past events by discussing matter with management  determine if it results in outflow of the entity’s resources  recalculate the workings for provisions made & check them for accuracy & compliance  check if adequate disclosure is made Impairment  auditor should check if assets have been annually tested for impairment  Check for indications that may suggest possible impairment  Check if impairment review is performed, if not, impairment review should be proposed & qualifying the report may be considered if management does not agree to review  auditor should verify by reperforming the calculation & comparing the cash flow projects to recent budgets & projections, assets value in use Financial statement’s items and audit procedures Share-based payment transactions  auditor should obtain written representation  he should examine the contract with employees for any share based payment detail  check if all calculations are according to IFRS 2 & that fair value is correctly measured at correct dates

9 EPS  check calculation of EPS  Check consistency of calculations & if it is changed check disclosures made Employee benefits  discuss & review with the actuaries the basis used to calculate assumptions  Check reasonableness of assumptions  obtain written representations from entity’s management regarding the working of assumptions  compare the assumptions used in the current year with those used in the previous years, for consistency  obtain direct confirmations from an investment professional in charge of plan assets  obtain reconciliations from the company’s management matching the valuation as at the scheme year end date with the entity’s reporting date Financial statement’s items and audit procedures Goodwill  verify amount of goodwill  internally generated goodwill is not recognised as an asset  review the impairment calculations for goodwill for accuracy & reasonableness

10 Brands  check if brands are internally generated  they are not included in brands capitalised in FS Investment properties  verify cost from purchase document or fair value from expert’s certificates  ensure that disclosures made are according to IAS 40 R & D expenditure  check project reports to ensure that it can be identified separately  review budgeted revenues, costs & calculations for future cash flows  amortisation schedule should be reviewed to ensure it is charged systematically Discontinued operations  auditor must go through entity’s accounting records & other company documentation  review calculations on discontinued operations Financial statement’s items and audit procedures Effects of foreign exchange rates  Auditor must verify for sample selected whether they are recorded using appropriate exchange rates  account balances have been properly classified into monetary and non-monetary items  effect of the foreign exchange rate has been correctly taken in financial statements in accordance with IAS 21

11 Review procedures and their role in detecting material misstatements Purpose of review procedures To form opinion on FS To consider need for further audit procedures To ensure reduction of risk of material misstatement e.g. appraisal of quality of work performed e.g. assessment of efficiency and appropriateness of audit evidence e.g. things that influence economic decision Review ensures FS are prepared using acceptable accounting policies which are applied consistently FS comply with all relevant statutory and other requirements Conclusions drawn on FS enable auditor to form audit opinion on FS Adequate disclosures are made

12 comparative information where amounts & other disclosures for the prior period are included as an integral part of the current period’s FS are intended to be read only in relation to the amounts & other disclosures relating to the current period level of detail presented in the corresponding amounts & disclosures is dictated primarily by its relevance to the current period figures Corresponding figures Auditor should obtain sufficient appropriate audit evidence that the corresponding figures meet the requirements of the applicable financial reporting framework Corresponding figures

13 Auditor’s responsibilities for corresponding figures Verify by obtaining appropriate audit evidence that prior period’s corresponding figures have been correctly reported & classified according to standards Ensure that appropriate accounting policies are used for corresponding figures of current period Ensure that corresponding figures agree with amount & other disclosures in prior period FS If prior period FS were audited by another auditor / were not audited check for compliance with ISAs 710 & 510 Ensure that appropriate adjustments & disclosures have been made for any inconsistency Auditor’s responsibilities for corresponding figures Refer to Test Yourself 2 on (page 321)

14 Mitigating factors: they reduce effect of identified events / conditions that may cast doubt on entity’s ability to continue as going concern Indicators & mitigating factors of going concern basis Going concern - Financial indicators Adverse key financial ratiosInability to comply with loan agreements Negative operating cash flowsUnavailability of finance to develop new products Inability to pay accounts payable on due dates Consistent substantial operating losses Change from credit to cash on delivery transaction Large arrears of dividend payable Material deterioration of assets used primarily for generating cash flow Short-term borrowings used to finance tangible assets Fixed-term borrowings approaching maturity without any intention of renewal Refer to Test Yourself 6 & 7 on (page 333 & 337)

15 Evidence available & appropriateness of the going concern basis Auditor’s procedure for the review of going concern Planning the audit and performing risk assessment Evaluating management’s assessment Further procedures when events or conditions are identified Review management’s plan for further action Gather sufficient appropriate audit evidence Seek representation letter from management Refer to Test Yourself 8 on (page 339)

16 Adequacy of disclosures in FS The auditor has to ensure that FS:  adequately describe the principal events & conditions that cast significant doubt on the going concern & management’s plans to deal with these  state clearly that because of the above stated uncertainties, the entity might not be able to realise its assets & discharge its liabilities in the normal course of business

17 Reporting implications in relation to the going concern issues Appropriate evidence Disclosure in FS Effect on Audit Report   Unmodified opinion & emphasis of matter / disclaimer of opinion Qualified / adverse opinion (i.e., modified opinion) Adverse opinion (i.e., modified opinion) Qualified / disclaimer of opinion (i.e., modified opinion) No assessment made     = = = = Refer to Test Yourself 9 on (page 342)

18 Refer to SEQ 2 on (page 389) Refer to SEQ 3 on (page 389) Refer to SEQ 4 on (page 389) Practice Questions

19 RECAP  Financial statement’s items and audit procedures. [3]  Analytical procedures in evaluation & review. [3]  Auditor’s responsibilities for corresponding figures, comparative financial statements.  Indicators & mitigating factors of going concern basis. [2]  Evidence available & appropriateness of the going concern basis. [3]  Adequacy of disclosures in FS & its implication on auditor’s report relating to going concern basis. [3]