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Dear sir,
1) When it says “Where assessment of internal controls at the initial stage of the audit concludes that controls are ineffective/deficient, there is no need to perform tests of controls” Does this initial stage mean interim audit as controls were only assessed during interim audit?
2) The deficiencies in internal control should have been brought to the attention of Group management at the interim stage so that group management could have improved those controls in advance of the final audit?
3) Can we use the “capex” and “Property, Plant and Equipment” words interchangeably i.e., both have same audit procedures?
4) Can we use the “intra-group transactions” or “intra-group balances” words interchangeably i.e., if we audit the balances then we automatically audit transactions and vice versa?
5) In recommended further audit procedures, it is mentioned that “Discuss with the Group finance director the process used to determine the value of intra-group transactions and balances adjusted at consolidation” But in question it says that “intra-group transactions are not being separately identified in the Group’s accounting system and reconciliations of amounts owed between the subsidiaries are not performed” so how the Finance Director will be able to provide the values?
Thanks,
1 – The scenario paints the picture that having determined at the interim stage the controls are not effective, that at the final stage more tests of controls have been performed – again confirming that controls are not effective. This was just a waste of time – as soon as there is evidence that controls are not effective (this might be determined in a walkthrough test when considering the design of the controls), the auditor should plan a substantive approach. Tests of controls are performed with the aim of relying on controls because they are believed to be effective (not to confirm that they are not).
2, I don’t understand, what is your query?
3. No – capex (write it out in full as capital expenditure if you introduce into your answer) refers strictly to payments for additions which is only one aspect of the audit of PPE carrying amount (b/f balances, disposals, depreciation, maybe revaluation, etc).
4. No see page 72 of the notes – transactions and balances have different assertions – also, intra-group transactions will be eliminated in consolidated SoPL and intra-group balances must be eliminated in consolidated SoFP.
5. In the scenario it states that the balances have been cancelled – so even though they are not separately identified the group finance director must have had some basis for making the adjustment – even if it was “guessing”, making the same adjustment as in the prior year, or the same % amount as last year …. you won’t know unless you ask.
Dear sir,
Thank you so much for clarifications.
For 2), I wanted to ask that whether the controls which were assessed 6 months back during interim audit can be used for the yearly audit or not? If it can be used then there is no need for test of control as the controls were deficient for 6 months or may be almost for the complete year, So better to design detailed substantive procedures.
Further, the same deficiencies in controls were mentioned in the Management Letter of interim audit and those deficiencies in controls could have improved by management in advance of the final audit?
See overview on page 51 of the notes – if controls are expected to be ineffective or expected to be effective but not, the auditor must adopt a FULL substantive approach. To be relied on THIS year, controls must have operated effectively THROUGHOUT the year. (It would be no use if, for example, a client introduces controls over credit customers later in the year – it could still be sitting on a pile of bad debts from earlier in the year.)
Yes indeed, not only could they have been improved but they must have been improved (as we are already into the next financial year) if we hope to place any reliance on them for NEXT year’s audit.
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