ACCOUNTING DEFINITION

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating
financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners'
equity.

AUDITTING DEFINITION
An audit is a systematic process of objectivity obtaining and evaluating evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between these assertions and established criteria, and communicating the results to
interested users

PRINCIPLES OF AUDITING
Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence
between the information and established criteria.
Auditing should be done by a competent, independent person.
Accumulating and evaluating evidence
Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with
established criteria.
Include: Transaction Data, Communications with Outsiders, Observations & Client Testimony
Information and established criteria
To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the
information.
FASB  (Criteria) -> IASB

136 Boggart (12/11) (amended)

a. Describe the auditor's responsibility for subsequent events occurring between:
The year-end date and the date the auditor's report is signed.
The date the auditor's report is signed and the date the financial statements are issued. (5 marks)
b.Boggart Co operates a chain of food wholesalers and its year end was 31 December 20X1. The final audit is nearly complete and
it is proposed that the financial statements and audit report will be signed on 13 March. Revenue for the year is $54.6 million
and profit before taxation is $5.3 million.
Subsequent to the year end, a customer of Boggart Co has been experiencing cash flow problems and its year-end balance is $0.2
million. The company has just become aware that its customer is experiencing significant going concern difficulties. Boggart believe
that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have
not adjusted the receivable balance.
Required
In respect of the issue above:
Discuss whether the financial statements require amendment.
Describe audit procedures that should be performed in order to form a conclusion on the amendment.
Explain the impact on the auditor's report should the issue remain unresolved.

Solution
(a)
i. Events after the year end occurring up to the date of the auditor's report
The auditor must perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the
auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified.
These procedures should be applied to any matters examined during the audit which may be susceptible to change after the year-end.
They are in addition to tests on specific transactions after the period end, eg cut-off tests.
ii. Facts discovered after the date of the auditor's report but before the financial statements are issued
The auditor does not have any obligation to perform procedures, or make enquires regarding the financial statements, after the date of
the auditor's report.
However, if the auditor becomes aware of a fact that, had it been known to the auditor at the date of signature of the auditor's report,
may have caused the auditor to amend the auditor's report, the auditor must:
-Discuss the matter with management and those charged with governance
-Determine whether the financial statements need amendment
-If amendment is required, inquire how management intends to address the matter in the financial statements.

If amendment is required to the financial statements and management makes the necessary changes, the auditor must undertake any
necessary audit procedures on the changes made, extend audit procedures for identifying subsequent events that may require
adjustment of or disclosure in the financial statements to the date of the new auditor's report, and provide a new auditor's report on the
amended financial statements.

If management refuse to amend the financial statements and the auditor's report has already been provided to the entity, and if
management intend to issue the financial statements with this report, the auditor should take steps to prevent reliance on the report.
This might include speaking at the AGM or resigning.
(b).
i) Financial statement implications
A customer, owing $0.2 million at the year end, is experiencing significant going concern difficulties.
The fact that a customer owing $0.2m has had going concern problems although only discovered after the year end, provides further
evidence about the recoverability of the year end customer balance.
Under IAS 10 Events after the reporting period, the evidence about the condition in existence at the year end date should be adjusted
for, if material, by management as it seems at least part of the balance is not recoverable and no allowance has been made.
ii) Further audit procedures
Audit procedures to be applied to establish the adjustment required include:
-Discussing with management why they consider no adjustment is needed.
-Reviewing the post year-end period for payments received from th customer in respect of the year end debt.
-Reviewing any correspondence with the customer to assess the likelihood of recovery of the $0.2m.
iii) Impact on audit opinion if unresolved
The receivable of $0.2 million represents 3.7% of profit ($0.2m/$5.3m x 100%) and 0.3% of revenue ($0.2m/$54.6m x 100%) and is
not material. If the full amount is deemed not recoverable and remains unadjusted, then the $0.2m should be noted in the summary of
uncorrected misstatements.
However, in itself this misstatement is immaterial and no modification is required to the audit opinion solely in respect of this issue.

PYRMONT

For several years Pyrmont plc, has maintained perpetual stock records at each of its ten shoe shops. Nevertheless, it has continued to
determine closing stock by physical count at or near the year end. As the senior in charge of Pyrmont's external audit for the year
ending 31 December 20X9, you are in the process of planning the audit. In discussions with the company's chief accountant, she
informs you that the company is intending to dispense with the annual stock count and to rely on the perpetual records in determining
closing stock.
The company operates a centralised computer system networked to terminal and point of sale registers in each shop. Last year's audit
file indicates that control risks over purchase and sale transactions were assessed as low for the occurrence, completeness and
accuracy assertions. However, the control risk assessment did not extend to the recording of sale and purchase transactions into the
stock records since stock was determined by physical count.
The description of the accounting system shows stock as being delivered directly to each shop. The manufacturers attach a bar-coded
tag to each pair of shoes. On delivery, shop personnel physically check each pair of shoes with the description coded on the tag. They
then scan the tags. The networked computer verifies the goods against the order and records them on the shop's stock records. At the
point of sale the tag is again scanned which both records the sale and removes the item from stock records.
During the past year the company's computing department has rewritten the stock control system to incorporate stock costs as well as
quantities. The computer system now records cost at the point of delivery. On sale the computer determines the cost of sale on a first
in first out (FIFO) basis and recalculates the cost of stock on hand at each shop.

Required
(a)
(i)Describe the control activities you would need to identify in order to accept book stock as the basis for determining the quantity of
inventories on hand at the year end.
(ii)Describe how you would test those controls.

Assuming your assessment of control risk over recorded stock is sufficiently low for you to plan substantive procedures that do not
require observation of the physical count at or near the year end: (b)
(b) Describe the substantive procedures you would perform, both during the year and as at the year end, in order to verify the
completeness and existence of the stock.
(c) State the system development controls you would expect to find applied to the rewriting of the stock control system.

Solution:
94 Tirrol (6/09) (amended)
You are an audit manager for Cal & Co and are in charge of planning the audit of Tirrol Co for the year ended 30 June 20X9. Your
firm has recently gained this audit following a competitive tender.
Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are
computerised, with each location maintaining its own computer system. The software in each location is the same because the
programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly
basis at Tirrol Co's head office to produce management and financial accounts.
Tirrol Co's internal audit department are going to assist with the statutory audit. The chief internal auditor will provide you with
documentation on the computerised inventory systems at Tirrol Co. The documentation provides details of the software and shows
diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly
decrease the time needed to understand the computer systems and enable audit software to be written for this year's audit.
Required
(a) Explain four benefits of using audit software in the audit of Tirrol Co.
(b) Explain how you will evaluate the computer systems documentation produced by the internal audit
department in order to place reliance on it during your audit.

Solution:

(a) Four benefits of using audit software in the audit of Tirrol Co:

1. Increased efficiency: Audit software can automate various audit procedures, such as data extraction, analysis, and testing, which can
significantly reduce the time and effort required compared to manual procedures. This is particularly useful for Tirrol Co, which has
multiple locations and a large volume of data to be audited.

2. Improved accuracy: Audit software can perform calculations, analyses, and comparisons with greater accuracy than manual
procedures, reducing the risk of human error. This is important when dealing with the complex computerized inventory systems and
the amalgamation of data from multiple locations at Tirrol Co.

3. Enhanced data analysis: Audit software can analyze large volumes of data from multiple locations, identify patterns, exceptions, and
anomalies that may not be evident through traditional audit procedures. This can help in detecting potential irregularities or control
weaknesses in the inventory management processes across Tirrol Co's locations.

4. Continuous monitoring: Certain audit software can be integrated with the client's systems, allowing for continuous monitoring and
testing of transactions as they occur. This can provide real-time insights into the effectiveness of internal controls and help identify
issues promptly.

(b) To evaluate the computer systems documentation produced by the internal audit department and place reliance on it during the
audit, you should consider the following:
1. Assess the competence and objectivity of the internal audit department: Evaluate the qualifications, experience, and professional
competence of the internal auditors who prepared the documentation. Additionally, assess their independence and objectivity to ensure
they are free from any conflicts of interest or undue influence.

2. Review the scope and comprehensiveness of the documentation: Ensure that the documentation covers all relevant aspects of the
computerized inventory systems, including system overview, data flows, processes, controls, and interfaces. The documentation
should be sufficiently detailed and up-to-date to provide a comprehensive understanding of the systems.

3. Verify the accuracy and completeness of the documentation: Perform tests to validate the accuracy and completeness of the
information provided in the documentation. This could involve conducting walkthroughs, inspecting system configurations, and
testing a sample of transactions to ensure they are processed as described in the documentation.

4. Evaluate the internal audit department's methodology: Review the internal audit department's methodology for documenting and
evaluating the computer systems. Ensure that they followed a structured and recognized approach, such as using industry-standard
frameworks or best practices.

5. Consider the timing of the documentation: Determine when the documentation was prepared and whether there have been any
significant changes to the systems since then. If the documentation is outdated, you may need to update it or perform additional testing
to ensure its relevance.

6. Assess the internal audit department's quality control processes: Evaluate the internal audit department's processes for reviewing
and approving the documentation, as well as their quality assurance measures to ensure its accuracy and completeness.

If, after performing the above evaluations, you are satisfied with the competence, objectivity, and work performed by the internal audit
department, you may be able to place reliance on the computer systems documentation they have provided. However, you should
exercise professional skepticism and perform additional testing or validation as necessary to support your audit conclusions.

83 EXTERNAL CONFIRMATIONS
(a)Positive circularisations require a response, whatever the response may be whereas negative circularisations only require a response
from the customer fi he disagrees with the balance stated as outstanding on the circularisation letter. The negative method is used less
frequently and only when internal controls within the audited entity are considered to be strong.
There are two types of positive circularisation. The first is where the amount is stated on the letter and the customer is asked whether
he agrees or disagrees with this amount. If he disagrees, he is asked to give reasons. This has the disadvantage that the customer might
just agree to the balance without checking or agree because it is less than what is actually owed. The advantage si that disagreements
might bring other matters to the auditor's attention such as faulty inventory or pricing issues.
The second method is where the customer is asked to confirm the amount owed. This method si likely ot result ni fewer responses
because more effort to required to obtain the balance.

(b)External confirmations can be used for the following:

Bank balances and other information from bankers
Inventory held by third parties
Property title deeds held by lawyers for safe custody or as security
Investments purchased from stockbrokers but not delivered at the year-end date
Loans from lenders
Accounts payable balances

(c)The bank confirmation letter could ask for the following information:
Balances due to or from the client on current, deposit, loan and other accounts
Any nil balances on accounts
Accounts closed during the period
Maturity and interest terms on loans and overdrafts
Unused facilities
Lines of credit/standby facilities
Any offset or other rights or encumbrances
Details of any collateral given or received
Contingent liabilities
Confirmation of securities and other items in safe custody
(Note: only 6 were required)

Solution:
(a) Positive vs. Negative Confirmations:
You have correctly explained the differences between positive and negative confirmations. Positive confirmations require a response
from the third party regardless of whether they agree or disagree with the stated balance, while negative confirmations only require a
response if the third party disagrees with the stated balance.
(b) Uses of External Confirmations:
You have appropriately listed the various items for which external confirmations can be used, including bank balances, inventory held
by third parties, property title deeds held by lawyers, investments purchased but not delivered, loans from lenders, and accounts
payable balances.

(c) Information in a Bank Confirmation Letter:

You have provided a comprehensive list of information that could be requested in a bank confirmation letter, including:

1. Balances due to or from the client on current, deposit, loan, and other accounts
2. Any nil balances on accounts
3. Accounts closed during the period
4. Maturity and interest terms on loans and overdrafts
5. Unused facilities
6. Lines of credit/standby facilities
7. Any offset or other rights or encumbrances
8. Details of any collateral given or received
9. Contingent liabilities
10. Confirmation of securities and other items in safe custody