ACCA F8 (INT) Audit & Assurance - 2010 - Study text

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Chapter 10: Introduction to substantive procedures

The audit of accounting estimates: ISA 540

 The nature of accounting estimates and the audit problem

 Auditing accounting estimates: ISA 540

3 The audit of accounting estimates: ISA 540

3.1 The nature of accounting estimates and the audit problem

In the financial statements, estimated figures are used in situations where it is not

practical or not possible to obtain a more precise measurement of an item. ISA 540

defines an audit estimate as: ‘an approximation of a monetary amount in the

absence of a precise means of measurement.’ Accruals, prepayments and

depreciation are all examples of areas where estimates are widely used. Other

examples are the estimation of the net realisable value of inventories and provisions

for the settlement of unfinished legal disputes.

Estimates are made for the financial statements by the management of the entity,

using their judgement. The audit problem is therefore fairly clear. How does the

auditor satisfy himself that the estimates made by management for inclusion in the

financial statements are reasonable? The audit risk can be high.

3.2 Auditing accounting estimates: ISA 540

ISA 540 Auditing accounting estimates, including fair value accounting estimates, and

related disclosures

is concerned with the audit of all accounting estimates, including

those involving fair values. However, since your syllabus, from an accounting point

of view, is limited to only a handful of IASs and IFRSs, questions on this paper

would necessarily be limited to the more straightforward of these estimates.

The ISA gives the following examples of accounting estimates, which could be

relevant to your examination:

 Allowance for doubtful accounts

 Inventory obsolescence

 Warranty obligations

 Depreciation method or asset useful life

 Costs arising from litigation settlements and judgments

The

objective of the auditor per ISA 540 is to obtain sufficient appropriate audit

evidence about whether:

 accounting estimates, whether recognised or disclosed in the financial

statements are reasonable, and

 whether the related disclosures in the financial statements are adequate.

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Audit evidence relating to such estimates is often of relatively poor quality, because

of the nature of the items involved. This means that the auditor will require a higher

volume of this lower quality evidence, particularly where the estimated item may be

material or the audit risk is relatively high.

As part of his

risk assessment procedures ISA 540 requires the auditor to obtain an

understanding of the following.

 The requirements of the applicable financial reporting framework (eg

International accounting standards) in respect of accounting estimates, including

related disclosures.

 How management identify transactions or events that could result in an

accounting estimate being recognised or disclosed in the financial statements.

 How management make such estimates and an understanding of the data on

which they are based, including:

− the method used

− relevant controls

− the use of experts

− the underlying assumptions

− whether there ought to have been any change in the method used since the

prior period

− whether and how management has assessed the effect of estimation

uncertainty.

The auditor is also

required to:

 review the outcome of accounting estimates included in the previous period’s

financial statements

 evaluate the degree of estimation uncertainty associated with each current

period estimate and, if the risk is high, whether this gives rise to significant risks.

Having assessed the risks of material misstatement the auditor is

required to

determine:

 whether management has properly applied the requirements of the applicable

financial reporting framework, and

 whether the methods used for making the estimates are appropriate and have been

consistently applied (or whether any change in method since the previous period

is appropriate).

In response to the assessed risks of material misstatement the auditor is

required to

perform one or more of the following procedures.

 Determine whether events up to the date of the auditor’s report provide sufficient

audit evidence in respect of the estimate.

 Test how management made the estimate and the data on which it is based,

considering the method used and assumptions made.

 Test the controls over management’s procedures for making estimates and carry

out appropriate substantive procedures.

Chapter 10: Introduction to substantive procedures

 Develop his own estimate or range of estimates and compare to management’s

figure, evaluating any significant differences.

The auditor is also

required to:

 consider the need for expert evidence

 obtain written representations from management, and

 document the basis for his conclusions and any indications of management bias.

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Opening balances and comparative information:

ISAs 510 and ISA 710

 Auditing a client’s financial statements for the first time

 ISA 510: Initial audit engagements – opening balances

 ISA 710: Comparatives

4 Opening balances and prior period comparatives:

ISAs 510 and ISA 710

4.1 Auditing a client’s financial statements for the first time

When an audit firm has been auditing the financial statements of a client for a

number of years, the auditor will become familiar with the client’s systems and

controls and will build up an audit file for the client. He will also have audited the

previous year’s financial statements, and will have given an audit opinion on the

financial position of the client entity as at the end of the period.

Since the auditor will have audited the previous year’s financial statements, he

should therefore have obtained sufficient and appropriate evidence of the balances

on the client’s accounts at the beginning of the next financial period.

A different situation arises when an audit firm is carrying out an audit of a client for

the first time.

For example, an auditor may be appointed to carry out his first audit of the financial

statements for the year to 31st December 20X6. To do this, the auditor cannot ignore

the opening statement of financial position, as at 31st December 20X5.

 The figures in the closing statement of financial position for the previous period

will be presented as prior period comparative figures in the 20X6 financial

statements. The new auditor is therefore giving an audit opinion on published

financial statements that include the previous year’s closing balances.

 Errors in the opening balances may affect the figures for the current financial

period. For example, if opening inventory is misstated and is over-valued, the

cost of sales in the current period may also be misstated (too high).

4.2 ISA 510: Initial audit engagements – opening balances

ISA 510 Initial audit engagements – opening balances provides guidance on the

auditor’s responsibilities in relation to opening balances where either:

 the financial statements for the prior period were not audited, or

 the financial statements for the prior period were audited by another auditor

(referred to as the

predecessor auditor).

Chapter 10: Introduction to substantive procedures

The objective of the auditor when considering such an initial audit engagement is to

obtain sufficient appropriate audit evidence about whether:

 the opening balances contain misstatements that materially affect the current

period’s financial statements, and

 appropriate accounting policies reflected in the opening balances have been

consistently applied in the current period (or a change of accounting policy has

been properly accounted for and disclosed).

The following

audit procedures are required:

 Read the most recent financial statements and audit report, if any, for

information relevant to opening balances.

 Check that the prior period’s closing balances have been correctly brought

forward.

 Check that opening balances reflect appropriate accounting policies.

 One or more of the following procedures:

− Where the prior period financial statements were audited, review the

predecessor auditor’s working papers to obtain evidence re opening

balances.

− Consider whether audit procedures carried out in the current period provide

evidence on some of the opening balances. For example, cash received from

customers in the current period gives evidence of the existence of a

receivable at the opening date.

− Carry out specific audit procedures to obtain evidence re opening balances.

A review of the audit report on the financial statements for the previous

period.

 If evidence is found that opening balances could contain material misstatements

affecting the current period’s financial statements perform appropriate

additional procedures to assess the effect, and

 if such misstatements do exist, communicate this to those charged with

governance in accordance with ISA 450

Evaluation of misstatements identified

during the audit

(covered in a later chapter).

 Check that the accounting policies reflected in the opening balances have been

consistently applied in the current period (or a change of accounting policy has

been properly accounted for and disclosed).

 If the prior period’s audit report was modified, evaluate the effect of the

modification on the current period.

The audit report is

required by ISA 510 to be modified where the auditor:

 is unable to obtain sufficient appropriate audit evidence re the opening balances

(“except for” or a disclaimer of opinion)

 concludes that there is a misstatement in the opening balances that materially

affects the current period’s financial statements and the misstatement is not

properly accounted for/disclosed (“except for” or adverse opinion)

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 concludes that accounting policies have not been consistently applied (or a

change of accounting policy has not been properly accounted for/disclosed)

(“except for” or adverse opinion)

or where

 the prior period’s audit report was modified, and the matter is still relevant and

material to the current period’s financial statements (modify as appropriate).

These different types of modification to the audit opinion are discussed in a later

chapter on reporting.

4.3 ISA 710: Comparatives

ISA 710 Comparative information – corresponding figures and comparative financial

statements

also relates to a similar area of the audit work. It deals with audit work on

corresponding amounts and other comparative information for the preceding

financial reporting period. The considerations in ISA 710 apply to all external audit

engagements, whereas ISA 510 focuses specifically on new audit engagements and

opening balances (comparative statement of financial position figures).

The main

objective of the auditor as set out in ISA 710 is to obtain sufficient

appropriate audit evidence about whether the comparative information included

the financial statements has been presented in accordance with the applicable

financial reporting framework.

Audit procedures

Audit procedures carried out on comparative figures are significantly less than

those carried out on the current year figures. They are normally limited to ensuring

that comparative figures have been:

 correctly reported as required by the applicable financial reporting framework ,

and

 appropriately classified.

ISA 710 therefore

requires the auditor to evaluate whether:

 the comparative information agrees with the previous period, or, where

appropriate has been restated, and

 accounting policies have been consistently applied in the two periods, or, if

there have been changes in accounting policies, whether those changes have

been properly dealt with.

Other

requirements:

 If the auditor becomes aware of a possible material misstatement in the

comparative information whilst performing the current period audit, he should

perform appropriate additional procedures.

 The auditor should obtain written representations which cover all periods

referred to in his opinion.

Chapter 10: Introduction to substantive procedures

 If a material misstatement in the prior period financial statements has been

corrected a specific representation covering this matter should be obtained.

If the current year auditor did not audit the prior period financial statements, then

he should also follow the guidance set out in ISA 510 (see above).

Audit reporting

requirements

The audit opinion should not normally refer to the corresponding figures, unless the

following circumstances apply:

 If the auditor gave a qualified opinion for the previous financial period (i.e. if

he was not able to say that the financial statements showed a true and fair view)

and the problem remains unresolved, then he will need to

modify this year’s

audit report.

 If the auditor finds a material misstatement in the prior period financial

statements

, on which an unmodified opinion was previously given, and the

corresponding figures have not been appropriately restated, the auditor should

give a qualified or adverse opinion on the current period financial statements, in

respect of the corresponding figures included.

 If the prior period financial statements were audited by another auditor the

current year auditor should use an “other matter” paragraph to explain this fact

and the type of opinion given.

 If the prior period financial statements were not audited the current year

auditor should use an “other matter” paragraph to state this fact. However, he

remains responsible, per ISA 510, for obtaining sufficient appropriate evidence

on opening balances.

(The different types of audit opinions are explained in a later chapter.)

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Paper F8 (INT)

Audit and assurance

CHAPTER

Substantive procedures:

non-current assets

Contents

1 Tangible non-current assets

2 Intangible non-current assets

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Tangible non-current assets

 Tangible non-current assets: the information subject to audit

 Principal risks of misstatement

 Substantive procedures for tangible non-current assets

 Substantive procedures – additions and disposals

1 Tangible non-current assets

1.1 Tangible non-current assets: the information subject to audit

Before looking at substantive tests for tangible non-current assets, it may be useful

to remind yourself of the information about these assets that is presented in the

financial statements.

The figures in the statement of financial position itself are supplemented by a note

to the accounts, which may be presented as follows:

Land and

buildings

Plant, equipment,

fixtures and fittings

and motor vehicles

Total

$ $ $

Cost

At 31 December Year 1 X X X

Additions X X X

Acquisitions through business

combinations

X X X

Classified as held for sale (X) (X) (X)

Disposals (X) (X) (X)

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At 31 December Year 2 X X X

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Accumulated depreciation and

impairment losses

At 31 December Year 1 X X X

Depreciation charge for the year X X X

Classified as held for sale (X) (X) (X)

Disposals (X) (X) (X)

Impairment losses X X X

Reversal of impairment losses (X) (X) (X)

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At 31 December Year 2 X X X

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Net carrying amount

At 31 December Year 1 X X X

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At 31 December Year 2 X X X

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ACCA F8 (INT) Audit &amp; Assurance - 2010 - Study text - Emile Woolf Publishing

Подождите немного. Документ загружается.

ACCA F8 (INT) Audit & Assurance - 2010 - Study text - Emile Woolf Publishing