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Answers
FundamentalsLevel–SkillsModulePaperF8UK
AuditandAssuranceUnitedKingdomJune2009Answers
1aAuditstrategydocument
SectionofdocumentPurposeExamplefromB-Star
UnderstandingtheentitysenvironmentProvidesdetailsoftheindustryareathatSizeofthethemeparksectorand
thecompanyisinalongwithspecificexpectedgrowthoverthenextfewyears
informationabouttheactivitiesand
strategiesoftheindividualclient
UnderstandtheaccountingandinternalDetailsofaccountingpoliciesoftheAccountingpolicyforsales–salesare
controlsystemsclientandpreviousassessmentsofstatednetofsalestaxes
internalcontrolsystemsindicatingthe
RelianceoncontrolsystemsinB-Star
expectedextentofrelianceonthose
maybelimitedduetolackof
systems
documentationofcontrols
RiskandmaterialityTheassessmentofriskfortheclientandMaterialityforsalestobe5ofturnover
riskoffraudanderrorandthe
B-Starreceivescashsales–auditwork
identificationofsignificantauditareas
requiredtodeterminethecompleteness
Thematerialitylevelforauditplanningofsales
purposes
ConsequentnaturetimingandextentofDetailsofthefocusonauditworkonAuditsoftwarecouldbeusedtoprovide
auditproceduresspecificareasDetailontheextentofuseanalyticalproceduresonthesalesof
ofauditsoftwareandpossiblerelianceB-Star
oninternalaudit
Co-ordinationsupervisionandreviewofDetailstheextentofinvolvementofB-Starhasonlyonelocation–auditstaff
auditworkexpertsclientlocationsandstaffingwillberequiredtoworkthereforX
requirementsfortheauditweeks
biRiskaffectingcompleteness
–Thecomputersystemdoesnotrecordsalesaccuratelyandorinformationislostortransferredincorrectlyfromthe
ticketofficecomputertotheaccountsdepartmentcomputer
–Cashsalesarenotrecordedinthecashbookcashisstolenbytheaccountsclerks
–Ticketsareissuedbutnopaymentisreceived–thatisthesaleisnotrecorded
–Cashisremovedbytheticketofficepersonnelbythesecurityguardsorbytheaccountclerks
–Theaccountclerksmiscounttheamountofcashreceivedfromaticketoffice
iiUseoftestsofcontrolsandsubstantiveprocedures
Testsofcontrols
TestsofcontrolaredesignedtoensurethatdocumentedcontrolsareoperatingeffectivelyIfcontrolsoverthe
completenessofincomewereexpectedtooperatecorrectlythentheauditorwouldtestthosecontrols
InB-Starwhilecontrolscouldbeinoperationegtheaccountclerksagreeingphysicalcashtocomputersummaries
thereisnoindicationthatthecontrolisdocumentedthatisthecomputersummaryisnotsignedtoshowthe
comparisonhastakenplaceTheauditorcouldusethetestofinquiry–askingtheclerkswhetherthecontrolhasbeen
usedandobservation–actuallywatchingtheclerkscarryoutthecontrolsAsnotedabovethoughlackof
documentationofthecontroldoesmeanrelyingontestsofcontrolfortheassertioncompletenessofincomehaslimited
value
Substantiveprocedures
Substantiveproceduresincludeanalyticalproceduresandotherprocedures
Analyticalproceduresincludetheanalysisofsignificantratiosandtrendsandsubsequentinvestigationofanytrendsor
relationshipsthatappeartobeabnormalTheseprocedurescanbeusedeffectivelyinB-Starasanapproximationof
incomecanbeobtainedfromsourcesotherthanthecashreceiptrecords
Otherproceduresortestsofdetailarenormallyusedtobalancesheetassertionsandincludeobtainingauditevidence
relevanttospecificassertionsHowevertheycouldbeusedinB-Startotraceindividualtransactionsthroughthe
salescashsystemstoensureallticketsaleshavebeenrecordedcompletenessassertionTheuseofotherprocedures
willbetimeconsuming
ciSubstantiveanalyticalprocedures–completenessofincomeforoneday
–ObtainproofintotalTicketssoldtimespriceshouldequaldaysincome
–Comparedailysalestobudgeteddailysalesforexampleweekendsandbankholidayswouldexpectmoreincome
–Comparesaleswithpreviousdaysandaccountforchangessuchasvariationsforweather
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–Comparesalestosouvenirssalesmorepeopleinparkmeansmoresouvenirsales
–Compareticketofficesday-by-dayandstaffrotationtoseeifsaleslowersomedaysomestaffattempttoidentify
fraudalso
–Comparetheexpectedsalesfromticketnumberstothetotalsalesamountfromcashandcreditsalesforeachticket
office
iiSubstantiveanalyticalprocedures–completenessofincomefortheyear
–ObtainthesalesincomefromthepreviousyearMultiplythisby115toprovidearoughestimateoftheincome
forthisyear
–ObtaininformationonthenumberofdayswithrainduringthelastyearWherethisismoreorlessthan30adjust
theincomeestimateby1730downforeachdayofrainabove30or1730upforeachdayofrainlessthan30
NoteB-Staronlyattracts50ofthenormalnumberofcustomersonarainydayhenceonedayofraindecreases
totalcustomersby1730intheyear
–CompareactualincometobudgetedincomefortheyearAskthedirectorstoexplainanysignificantdeviations
–ObtainindustryinformationonthepopularityofthemeparksandchangeincustomernumbersComparethese
trendstotheresultsobtainedbyB-StarWhereB-Starperformedsignificantlybetterorworsethanaverageobtain
explanationsfromthedirectors
dAuditofyearendcreditcarddebtor
–Agreethebalancesoneachcreditcardcompanysledgeraccounttothelistofdebtors
–Castthelistofdebtorsandagreethetotaltothetotalonthedebtorsledgercontrolaccount
–Forthelastdayofthefinancialyearandthefirstdayofthenewfinancialyearagreetotalsalesincomefromticketoffice
recordstothecashbookanddebtorsledgerensuringtheyarerecordedinthecorrectperiod
Forasampleofmaterialbalancesandarandomsampleofimmaterialitems
–ObtaindirectconfirmationfromthecreditcardcompanyoftheamountduetoB-Starusingadebtorsconfirmationletter
–WheredirectconfirmationisnotpossibleobtainevidenceofcashreceiptaftertheendofthefinancialyearAgreethe
amountonthebankstatementspostyearendofB-Startotheamountdueinthedebtorsledgerlessanycommission
due
–Reviewafterdatesalesdaybookfordebitnotesindicatingthatsalesmayhavebeenoverstatedintheprioryear
–ObtainthefinancialstatementsofB-Starandensurethatthedebtorsamountisdisclosedasacurrentassetnetof
commissionduetothecreditcardcompanies
2aSamplingmethods
MethodsofsamplinginaccordancewithISAUKandIreland530Auditsamplingandothermeansoftestingapplies
RandomselectionEnsureseachiteminapopulationhasanequalchanceofselectionforexamplebyusingrandomnumber
tables
SystematicselectionInwhichanumberofsamplingunitsinthepopulationisdividedbythesamplesizetogiveasampling
interval
HaphazardselectionTheauditorselectsthesamplewithoutfollowingastructuredtechnique–theauditorwouldavoidany
consciousbiasorpredictability
SequenceorblockInvolvesselectingablocksofcontiguousitemsfromwithinthepopulation
TutorialnotesOthermethodsofsamplingareasfollows
MonetaryUnitSamplingThisselectionmethodensuresthateachindividual￡1inthepopulationhasanequalchanceof
beingselected
JudgementalsamplingSelectingitemsbasedontheskillandjudgementoftheauditor
bAssertions–classesoftransactions
OccurrenceThetransactionsandeventsthathavebeenrecordedhaveactuallyoccurredandpertaintotheentity
CompletenessAlltransactionsandeventsthatshouldhavebeenrecordedhavebeenrecorded
AccuracyTheamountsandotherdatarelatingtorecordedtransactionsandeventshavebeenrecordedappropriately
Cut-offTransactionsandeventshavebeenrecordedinthecorrectaccountingperiod
ClassificationTransactionsandeventshavebeenrecordedintheproperaccountsoftheentity
cAuditreportterm
ModifiedAnauditormodifiesanauditreportinanysituationwhereitisinappropriatetoprovideanunmodifiedreportFor
exampletheauditormayprovideadditionalinformationinanemphasisofmatterwhichdoesnotaffecttheauditorsopinion
orqualifytheauditreportforlimitationofscopeordisagreement
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3aiBenefitsofusingauditsoftware
Standardsystemsatclient
Thesamecomputerisedsystemsandprogramsasusedinall25branchesofTirrolLtdThismeansthatthesameaudit
softwarecanbeusedineachlocationprovidingsignificanttimesavingscomparedtothesituationwhereclientsystems
aredifferentineachlocation
Useactualcomputerfilesnotcopiesorprintouts
UseofauditsoftwaremeansthatTirrolLtdsactualstockfilescanbetestedratherthanhavingtorelyonprintoutsor
screenimagesThelattercouldbeincorrectbyaccidentorbydeliberatemistakeTheauditfirmwillhavemore
confidencethattherealfileshavebeentested
Testmoreitems
Useofsoftwarewillmeanthatmorestockrecordscanbetested–itispossiblethatallproductlinescouldbetestedfor
obsolescenceratherthanasampleusingmanualtechniquesTheauditorwillthereforegainmoreevidenceandhave
greaterconfidencethatstockisvaluedcorrectly
Cost
TherelativecostofusingauditsoftwaredecreasesthemoreyearsthatsoftwareisusedAnycostoverrunsthisyear
couldbeoffsetagainsttheauditfeesinfutureyearswhentheactualexpensewillbeless
iiProblemsintheauditofTirrolLtd
Timescale–sixweekreportingdeadline–auditplanning
TheauditreportisduetobesignedaboutsixweeksaftertheyearendThismeansthattherewillbeconsiderable
pressureontheauditortocompleteauditworkwithoutcompromisingstandardsbyrushingprocedures
Thisproblemcanbeovercomebycarefulplanningoftheaudituseofexperiencedstaffandensuringotherstaffsuch
assecondpartnerreviewsarebookedwellinadvance
Timescale–sixweekreportingdeadline–softwareissues
TheauditreportisduetobesignedaboutsixweeksaftertheyearendThismeansthatthereislittletimetowriteand
testauditsoftwareletaloneusethesoftwareandevaluatetheresultsoftesting
ThisproblemcanbealleviatedbycarefulplanningAccesstoTirrolLtdssoftwareanddatafilesmustbeobtainedas
soonaspossibleandworkcommencedontailoringCalCossoftwarefollowingthisSpecialistcomputerauditstaff
shouldbebookedassoonaspossibletoperformthiswork
Firstyearauditcosts
Therelativecostsofanauditinthefirstyearataclienttendtobegreaterduetotheadditionalworkofascertaining
clientsystemsThismeansthatCalComayhavealimitedbudgettodocumentsystemsincludingcomputersystems
ThisproblemcanbealleviatedtosomeextentagainbygoodauditplanningThemanagermustalsomonitortheaudit
processcarefullyensuringthatanyadditionalworkcausedbytheclientnotprovidingaccesstosystemsinformation
includingcomputersystemsisidentifiedandaddedtothetotalbillingcostoftheaudit
Staffholidays
MostoftheauditworkwillbecarriedoutinJulywhichisalsothemonthwhenmanyofCalCostafftaketheirannual
holidayThismeansthattherewillbeashortageofauditstaffparticularlyasauditworkforTirrolLtdisbeingbooked
withlittlenotice
TheproblemcanbealleviatedbybookingstaffassoonaspossibleandthenidentifyinganyshortagesWherenecessary
staffmaybeborrowedfromotherofficesorevendifferentcountriesonasecondmentbasiswhereshortagesareacute
Non-standardsystems
TirrolLtdscomputersoftwareisnon-standardhavingbeenwrittenspecificallyfortheorganisationThismeansthat
moretimewillbenecessarytounderstandthesystemthanifstandardsystemswereused
Thisproblemcanbealleviatedeitherbyobtainingdocumentationfromtheclientorbyapproachingthesoftwarehouse
withTirrolLtdspermissiontoseeiftheycanassistwithprovisionofinformationondatastructuresforthestock
systemsProvisionofthisinformationwilldecreasethetimetakentotailorauditsoftwareforuseinTirrolLtd
Issuesoflivetesting
CalCohasbeeninformedthatstocksystemsmustbetestedonalivebasisThisincreasestheriskofaccidental
amendmentordeletionofclientdatasystemscomparedtotestingcopyfiles
TolimitthepossibilityofdamagetoclientsystemsCalCocanconsiderperformingstocktestingondayswhenTirrol
LtdisnotoperatingegweekendsAttheworstbackupsofdatafilestakenfromthepreviousdaycanbere-installed
whenCalCostestingiscomplete
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Computersystems
Theclienthas25locationswitheachlocationmaintainingitsowncomputersystemItispossiblethatcomputer
systemsarenotcommonacrosstheclientduetoamendmentsmadeatthebranchlevel
Thisproblemcanbeovercometosomeextentbyaskingstaffateachbranchwhethersystemshavebeenamendedand
focusingauditworkonmaterialbranches
Usefulnessofauditsoftware
TheuseofauditsoftwareatTirrolLtddoesappeartohavesignificantproblemsthisyearThismeansthatevenifthe
auditsoftwareisreadytheremaystillbesomeriskofincorrectconclusionsbeingderivedduetolackoftestingetc
ThisproblemcanbealleviatedbyseriouslyconsideringthepossibilityofusingamanualauditthisyearThemanager
mayneedtoinvestigatewhetheramanualauditisfeasibleandifsowhetheritcouldbecompletedwithinthenecessary
timescalewithminimalauditrisk
bRelianceoninternalauditdocumentation
Therearetwoissuestoconsidertheabilityofinternalaudittoproducethedocumentationandtheactualaccuracyofthe
documentationitself
Theabilityoftheinternalauditdepartmenttoproducethedocumentationcanbedeterminedby
–EnsuringthatthedepartmenthasstaffwhohaveappropriatequalificationsProvisionofarelevantqualificationeg
membershipofacomputerrelatedinstitutewouldbeappropriate
–Ensuringthatthisandsimilardocumentationisproducedusingarecognisedplanandthatthedocumentationistested
priortouseTheuseofdifferentstaffintheinternalauditdepartmenttoproduceandtestdocumentationwillincrease
confidenceinitsaccuracy
–Ensuringthatthedocumentationisactuallyusedduringinternalauditworkandthatproblemswithdocumentationare
notedandinvestigatedaspartofthatworkBeinggivenaccesstointernalauditreportsonthestocksoftwarewillprovide
appropriateevidence
Regardingtheactualdocumentation
–Reviewingthedocumentationtoensurethatitappearslogicalandthattermsandsymbolsareusedconsistently
throughoutThiswillprovideevidencethattheflowchartsetcshouldbeaccurate
–ComparingthedocumentationagainstthelivestocksystemtoensureitcorrectlyreflectsthestocksystemThis
comparisonwillincludetracingindividualtransactionsthroughthestocksystems
–UsingpartofthedocumentationtoamendCalCosauditsoftwareandthenensuringthatthesoftwareprocesses
stocksystemdataaccuratelyHoweverthisstagemaybelimitedduetotheneedtouselivefilesatTirrolLtd
4aRoleofinternalandexternalauditors–differences
Objectives
Themainobjectiveofinternalauditistoimproveacompanysoperationsprimarilyintermsofvalidatingtheefficiencyand
effectivenessoftheinternalcontrolsystemsofacompany
Themainobjectiveoftheexternalauditoristoexpressanopiniononthetruthandfairnessofthefinancialstatementsand
otherjurisdictionspecificrequirementssuchasconfirmingthatthefinancialstatementscomplywiththereporting
requirementsincludedinlegislation
Reporting
Internalauditreportsarenormallyaddressedtotheboardofdirectorsorotherpeoplechargedwithgovernancesuchasthe
auditcommitteeThosereportsarenotpubliclyavailablebeingconfidentialbetweentheinternalauditorandtherecipient
ExternalauditreportsareprovidedtotheshareholdersofacompanyThereportisattachedtotheannualfinancialstatements
ofthecompanyandisthereforepubliclyavailabletotheshareholdersandanyreaderofthefinancialstatements
Scopeofwork
Theworkoftheinternalauditornormallyrelatestotheoperationsoftheorganisationincludingthetransactionprocessing
systemsandthesystemstoproducetheannualfinancialstatementsTheinternalauditormayalsoprovideotherreportsto
managementsuchasvalueformoneyauditswhichexternalauditorsrarelybecomeinvolvedwith
TheworkoftheexternalauditorrelatesonlytothefinancialstatementsoftheorganisationHowevertheinternalcontrol
systemsoftheorganisationwillbetestedastheseprovideevidenceonthecompletenessandaccuracyofthefinancial
statements
Relationshipwithcompany
Inmostorganisationstheinternalauditorisanemployeeoftheorganisationwhichmayhaveanimpactontheauditors
independenceHoweverinsomeorganisationstheinternalauditfunctionisoutsourced
Theexternalauditorisappointedbytheshareholdersofanorganisationandareindependentfromthecompanyand
management
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bBenefitsofauditcommitteeinConoyLtd
Assistancewithfinancialreportingnofinanceexpertise
TheexecutivedirectorsofConoyLtddonotappeartohaveanyspecificfinancialskills–asthefinancialdirectorhasrecently
leftthecompanyandhasnotyetbeenreplacedThismaymeanthatfinancialreportinginConoyLtdislimitedorthatthe
othernon-financialdirectorsspendasignificantamountoftimekeepinguptodateonfinancialreportingissues
AnauditcommitteewillassistConoyLtdbyprovidingspecialistknowledgeoffinancialreportingonatemporarybasis–at
leastoneofthenewappointeesshouldhaverelevantandrecentfinancialreportingexperienceundercodesofcorporate
governanceThiswillallowtheexecutivedirectorstofocusonrunningConoyLtd
Enhanceinternalcontrolsystems
TheboardofConoyLtddonotnecessarilyunderstandtheworkoftheinternalauditorortheneedforcontrolsystemsThis
meansthatinternalcontrolwithinConoyLtdmaybeinadequateorthatemployeesmaynotrecognisetheimportanceof
internalcontrolsystemswithinanorganisation
TheauditcommitteecanraiseawarenessoftheneedforgoodinternalcontrolsystemssimplybybeingpresentinConoyLtd
andbyeducatingtheboardontheneedforsoundcontrolsImprovingtheinternalcontrolclimatewillensuretheneedfor
internalcontrolsisunderstoodandreducecontrolerrors
Relianceonexternalauditors
ConoyLtdsexternalauditorscurrentlyreporttotheboardofConoyLtdAspreviouslynotedthelackoffinancialandcontrol
expertiseontheboardwillmeanthatexternalauditorreportsandadvicewillnotnecessarilybeunderstood–andtheboard
mayrelytoomuchonexternalauditors
IfConoyLtdreporttoanauditcommitteethiswilldecreasethedependenceoftheboardontheexternalauditorsTheaudit
committeecantaketimetounderstandtheexternalauditorscommentsandthenviathenon-executivedirectorensurethat
theboardtakeactiononthosecomments
Appointmentofexternalauditors
AtpresenttheboardofConoyLtdappointtheexternalauditorsThisraisesissuesofindependenceastheboardmaybecome
toofamiliarwiththeexternalauditorsandsoappointonthisfriendshipratherthanmerit
IfanauditcommitteeisestablishedthenthiscommitteecanrecommendtheappointmentoftheexternalauditorsThe
committeewillhavethetimeandexpertisetoreviewthequalityofserviceprovidedbytheexternalauditorsremovingthe
independenceissue
Corporategovernancerequirements–bestpractice
ConoyLtddonotneedtofollowcorporategovernancerequirementsthecompanyisnotlistedHowevernotfollowingthose
requirementsmaystarttohaveadverseeffectsonConoyLtdForexampleConoyLtdsbankisalreadyconcernedaboutthe
lackoftransparencyinreporting
Establishinganauditc
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