ACCA P7 lectures Download P7 notes
The above Standard states that auditors should obtain sufficient, appropriate audit evidence to be able to draw conclusions on which to base the audit opinion.
This evidence is obtained in a number of ways including appropriate tests of control and substantive tests.
“Sufficient” means that enough evidence has to be obtained.
ACCA P7 Lecture Index
1 Rules of Professional Conduct
2 Professional Responsibility and Liability
3 Regulatory Environment
4 Practice Management
5 Audit Process
7 Evaluation and Review
8 Audit of Financial Statements
9 Group Audits
10 The external audit report
11 Audit Related Services (Non Audit Services)
12 Assurance Services
13 Prospective Financial Information (PFI)
14 Internal Audit
15 Outsourced Finance and Accounting Functions
16 Social and Environmental Audits
What factors will influence the sufficiency of audit evidence?
“Appropriate” means that the evidence is relevant and reliable. Therefore it must assist the auditor to form an opinion and it must be trustworthy and persuasive.
For evidence to be reliable the following general presumptions apply:
- documentary evidence is more reliable than oral evidence.
- independent evidence is more reliable than internal evidence.
- original evidence is more reliable than copied evidence
- evidence generated by the auditor is more reliable than that generated by the entity itself.
Procedures for obtaining evidence
- analytical procedures
- enquiry of management and employees
- previous audit file
Discuss the appropriateness of the following evidence gathered during the audit of a client.
(1) Agreement of the bank balance to the entity’s year end bank reconciliation
(2) Inspection of title deeds
(3) Agreement of a receivable’s balance to an accounts receivable circularisation response.
Auditors should obtain written confirmation of appropriate representations from management before their report is issued.
Auditors should obtain evidence that the directors acknowledge their collective responsibility for the preparation of the financial statements.
These representations provide necessary audit evidence
But only as support for other evidence
They can never be used as the sole evidence on any material matter within the financial statements
In addition, the auditor requires written confirmation from management that they have:
Fulfilled their responsibilities for preparing the financial statements
Provided the auditor with all relevant information and access to records and personnel as agreed in the terms of engagement
Recorded and reflected in the financial statements all transactions
If there is doubt about management’s integrity and therefore the representations are unreliable, or if management refuses to provide written representations, then the auditor should disclaim their opinion on the financial statements
In what situations are written representations an appropriate source of audit evidence?
The chair of the board or other appropriate senior management should sign the letter.
It should be dated after the completion of all other audit work but before the date of the audit report.
Using the work of an expert
An expert means a person or firm possessing special skill, knowledge and experience in a particular field other than auditing.
Before using an expert, the auditor should agree in writing:
The nature, scope and objectives of the expert’s work
The roles and responsibilities of the auditor and the expert
The nature, timing and extent of communication between the two parties, and
The need for the expert to observe confidentiality
Procedures for evaluating the expert’s work
Auditor must consider:
The consistency of the expert’s findings with the other audit evidence
The significant assumptions used by the expert, and
The use and accuracy of source data
Reliance on an expert might be necessary in the following situations:
- valuation of a non-current asset
- inventory counts or valuations
- legal opinions
- actuarial valuations eg on pensions
Auditors need to obtain evidence that the work of the expert is adequate. This will involve an assessment of the objectivity and professional competence of the expert.
During the year ended 31 December 2010, the head office of Udens Ltd was valued by an external valuer.
What audit procedures would you perform in order to determine whether the valuer has provided an accurate and reliable valuation?
Considering the work of internal auditing
The external auditors should consider the activities of internal audit and their effect, if any, on the external audit procedures.
The external auditors need to assess the internal audit function during audit planning. This will not reduce the external auditors’ responsibility in any way.
The criteria for assessing the internal audit function are as follows:
- organisational status
- scope of function
- technical competence
- due professional care
As a general rule the external auditor should be involved in the audit of all material matters and of those where there is a significant risk of error or misstatement.
If the external auditor decides to place reliance on the work of the internal audit function, the timing and extent of the work should be agreed with the chief internal auditor.
Accounting estimates including fair value accounting estimates and disclosures
There is an increased requirement for the auditor to exercise greater scepticism
The auditor should also consider the likelihood of management bias in the estimation process
The auditor needs to obtain an increased understanding of the process and any related controls
Procedures to be adopted by the auditor include:
Determine whether any subsequent events provide evidence regarding the estimate
Test of management’s methods of measuring the estimate, and the assumptions used
Test the effectiveness of controls over the estimation process, and
Develop a point estimate ( or range estimate ) to evaluate management’s own point estimate
Sampling means the application of audit procedures to less than 100% of the items within an account balance or class of transactions in order to assist in forming a conclusion concerning the account balance or class of transaction.
The auditor must select a sample that is representative of the whole population.
Selection of the sample
The most common methods are:
This ensures that each item in the population has the same chance of being selected. For example, random number tables could be used to generate the sample.
Systematic or interval sampling:
This method would usually use a random starting point and there-after select every nth item. If the population is not spread randomly this method will not result in a representative sample.
This method is truly random, and is entirely dependent upon the (possibly) unstructured choice of the individual auditor
The size of the sample selected is influenced by the following factors:
- the assessment of inherent and control risk. A higher risk will result in a larger sample size.
- the expected error rate in the population. The greater the expected error rate, the larger the sample size needed in order to reach a conclusion.
- the tolerable error. This is the maximum error rate or amount of error that the auditor will accept. The lower the tolerable error, the greater the sample size.
Evaluation of sample results
Having carried out the audit procedures on the sample the auditor needs to determine the number of errors in the sample and draw inferences for the population as a whole.
For example, the auditor may have performed tests of control on a sample of 20 items and found 2 errors. An “error rate” can then be calculated:
A decision must then be made as to whether this level of error is acceptable or not.
There is a basic assumption that businesses trade with other parties at arm’s length. However, if there is a relationship between two businesses, this assumption may not reflect reality because one business may have a high level of control or influence over the other.
Parties are considered to be related if one party has the ability to control the other party or both parties are subject to common control. According to IAS 24, material related party transactions must be disclosed in the financial statements.
The auditor has an obligation to perform audit procedures to obtain sufficient appropriate evidence regarding the disclosure of related party transactions and the control of the entity in the financial statements.
The management are responsible for the identification and disclosure of related party transactions. The auditor should review the information provided by the management and should be alert for other material related party transactions.
What audit procedures should be performed to identify related parties?
During the audit, the auditor should be aware that certain transactions may indicate the existence of unidentified related parties. Examples include:
- transactions which have abnormal terms of trade such as unusual prices, interest rates, guarantees and repayment terms.
- transactions which seem to lack a logical business reason for their occurrence.
- transactions where the substance differs from the legal form.
- transactions processed or approved in a non-routine manner.
- unusual transactions which are entered into shortly before or after the year end.
- a high volume of transactions with one supplier or customer compared with others.
- unrecorded transactions such as the receipt or provision of management services at no charge.
The auditors should obtain written representations from management concerning the completeness of information provided about related parties and disclosures in the financial statements.
Audit conclusions and reporting
If the auditors are unable to obtain sufficient appropriate evidence regarding related parties and transactions with such parties, this gives rise to a limitation of scope.
If the auditors conclude that the disclosure of related party transactions is not adequate, this gives rise to a modification on the grounds of material misstatement.
Auditors should document in their working papers matters that are important in supporting their report. The files must support the statement in the audit report regarding the conduct of the audit in accordance with Auditing Standards.
The audit files should demonstrate:
- planning the audit work
- the nature, timing and extent of audit procedures performed
- the results of audit work
- the conclusions drawn from the audit evidence obtained.
The partner should ensure that there is a proper documentary record of discussions and conclusions relating to going concern, provisions and subsequent events.
At the end of the audit, review procedures will help to ensure that all material issues have been properly dealt with and the audit report is supported by the work performed, and its conclusions.
A discussion between reviewers and those involved with the audit should take place to allow the reviewers to understand the audit approach and the thought process behind it. It will also enable the reviewers to determine how well the audit team understood the client.
Very helpful and to the point material
Mr. Little you are great lecturer I passed f7 because of you
Thanks very much
the lectures is quite easy to comprehend..
He uses real examples and its like an actual class room. He makes it interesting. Its good
Great lecture for he really knows what he is talking about and it is really helping me – thank you
the lectures are audio only? As the picture remains the same for the whole lecture . Is that how it’s supposed to be?
Same happening with me :(.. only audio
I have liked the lecture, it is moere like you are in a real classroom.