ACCA F8. Provided by Academy of Professional Accounting (APA) Audit and Assurance (AA) 审计与鉴证业务第 7 讲 ACCA Lecturer: Andy Qu

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1 Professional Accounting Education Provided by Academy of Professional Accounting (APA) ACCA F8 Audit and Assurance (AA) 审计与鉴证业务第 7 讲 ACCA Lecturer: Andy Qu ACCAspace 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com

2 Lesson 7: Assertions and Audit procedures 1 Assertions 2 Audit procedures 2

3 1 Financial Statement Assertions Audit tests are designed to obtain evidence about the financial statement assertions. Assertions relate to classes of transactions and events, account balances at the period end, and presentation and disclosure. Assertions about account balances under audit Assertions about classes of transactions and events for the period under audit Assertions about presentation and disclosure 3

4 Account balances (SOFP) Existence: Assets, liabilities and equity interests exist. Completeness: All assets, liabilities and equity interests that should have been recorded have been recorded. Valuation and allocation: Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Rights and obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. 4

5 Transactions and events (P/L) Occurrence: Transactions and events that have been recorded have occurred and pertain to the entity. Completeness: All transactions and events that should have been recorded have been recorded. Accuracy: Amounts and other data relating to recorded transactions and events have been recorded appropriately. Cut-off: Transactions and events have been recorded in the correct accounting period. Classification: Transactions and events have been recorded in the proper accounts. 5

6 Distinguish Existence (occurrence) and Completeness For a sample at the account balances, trace it to the original invoice/physical assets Existence For a a sample of an original invoice/physical assets, trace it whether it is at the account balances Completeness 6

7 How to understand valuation or accuracy? IAS 2 Inventory Lower of cost and NRV Dr: Cost of sales Cr: Inventory provision Accuracy of COS Valuation of inventory 7

8 Disclosure Occurrence and rights and obligations: Disclosed events, transactions and other matters have occurred and pertain to the entity. Completeness: All disclosures that should have been included in the financial statements have been included. Classification and understandability: Financial information is appropriately presented and described, and disclosures are clearly expressed. Accuracy and valuation: Financial and other information are disclosed fairly and at appropriate amounts. 8

9 Assertions and Misstatement Assets Revenue Liabilities Expenses Completeness Low High Existence or occurrence High Low Accuracy or Valuation High Low 9

10 2 Audit procedures The auditor obtains audit evidence by undertaking audit procedures to do the following. Obtain an understanding of the entity and its environment to assess the risks of material misstatement at the financial statement and assertion levels (risk assessment procedures) Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level (tests of controls) Detect material misstatements at the assertion level (substantive procedures) 10

11 Test of controls and substantive procedures Tests of controls are performed to obtain audit evidence about the operating effectiveness of controls preventing, or detecting and correcting, material misstatements at the assertion level. Substantive procedures are audit procedures performed to detect material misstatements at the assertion level. They are generally of two types: Substantive analytical procedures Tests of detail 11

12 Substantive analytical procedures Variance analysis Ratio analysis Proof in total Source: HSBC Holdings Plc 2015 Annual Report 12

13 1. Inspection Seven audit procedures This is the examination of documents and records, both internal and external, in paper, electronic or other forms. In the audit of purchases the auditor may inspect a sample of purchase invoices to ensure they agree to the amount posted to the general ledger. 2. Observation This involves watching a procedure or process being performed. An auditor may observe the checking of goods received against purchase orders in the goods received department. 13

14 Seven audit procedures Inquiry This involves seeking financial or non-financial information from client staff or external sources. An auditor may discuss with management whether there have been any changes in the key suppliers used and compare this to the purchase ledger to assess completeness and accuracy of purchases. 14

15 Seven audit procedures Recalculation This consists of checking the mathematical accuracy of documents or records and can be performed through the use of IT. The auditor may recalculate accruals and prepayments to gain evidence that other expenses are not over or understated. 15

16 Seven audit procedures Reperformance This is the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control. The auditor may re-perform the payables ledger control account reconciliation to ensure it has been properly carried out. 16

17 Seven audit procedures Analytical procedures This is evaluating and comparing financial and/or nonfinancial data for plausible relationships. Also include the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. The auditor could review expenses on a monthly basis to identify significant fluctuations and discuss them with management. 17

18 Seven audit procedures Confirmation This is the process of obtaining a representation of information or of an existing condition directly from a third party e.g. confirmation from bank of bank balances. 18

19 Professional Accounting Education Provided by Academy of Professional Accounting (APA)