Advanced Auditing & Assurance

IAS 10 Events after the Reporting Period

* Events that take place after the FS have been prepared but before authorisation * Changes can only be made after the end of the financial year and before the FS have been authorised for issue * ADJUSTING EVENTS - provide evidence of conditions that existed AT THE END of the reporting period. If material then FS should be changed * NON-ADJUSTING EVENTS - conditions that arose AFTER the reporting period. No adjustment made to FS. If material then disclosed in notes.

Essential characteristics of accounting

*A*ccuracy *C*ompleteness *C*ut-off *A*llocation *C*lassification *O*ccurence *V*aluation *E*xistence *R*ights and Obligations

Procedures for obtaining evidence

*A*nalytical Procedures *E*nquiry/confirmation *I*nspection *O*bservarion Recalc*u*lation/reperformance

What must be performed before accepting a PFI engagement?

- Agree terms - Get knowledge of the business - Clarify the time period it relates to

Compilation Engagements

- Asked to compile financial information for presentation to the client - No opinion is issued

Review Engagements

- Assess materiality & procedures to be used - Analytical review (year to year) + forecasts as well as establish relationships between balances - Assess accounting policies & how information is recorded - Examine board of directors meeting minutes to identify any matters that may affect the FS

What is an operating segment?

- Component that engages in business activities, earns revenue & incurs expenses - Operating results are reviewed regularly by the chief operating decision maker - Discrete financial information is available

Audit procedures for EPS

- Discuss with management the requirements of IAS 33 and request that management recalculates the EPS in accordance with those requirements - Review board minutes to confirm the authorization of the issue of share capital, the number of shares and the price at which they were issued - Confirm the share issue complies with the company's legal documentation such as the memorandum and articles of association - Inspect any other supporting documentation for the share issue, such as a share issue prospectus - Recalculate the weighted average number of shares for the year to 31 May 2015 - Recalculate EPS using the profit as disclosed in the statement of profit or loss and the weighted average number of shares - Discuss with management the existence of any factors which may impact on the calculation and disclosure of a diluted EPS figure, for example, convertible bonds - Read the notes to the financial statements in respect of EPS to confirm that disclosure is complete and accurate and complies with IAS 33

Three (3) critical attributes of an Intangible Asset

- Identifiable - Control (power to obtain benefits from the asset) - Future economic benefits

'Emphasis of Matter'

- If the auditor wishes to draw attention to a particular matter, but agrees with the financial statements - The matter is fully disclosed within the accounts, & the auditor is simply bringing attention to the matter. - Audit opinion will clearly state that the opinion is not qualified

Impairment

- Impair asset if the recoverable amount is lower than the carrying value - Recoverable Amount is higher of Value in Use (PV of future cash flows) & FV less Cost to Sell - At the end of each reporting period, an entity is required to assess if there is any indication that an asset may be impaired

Limited Assurance

- Moderate assurance on the reliability of the subject matter - negative assurance , e.g. a review engagement

Disclosure Requirements of Related Parties

- Name of Entity's parent and, if different, the ultimate controlling party - Nature of the related party relationship - Information about the transactions and outstanding balances necessary for an understanding of the relationship on the FS - Key management personnel compensation should be broken down by: ○ Short-term employee benefits ○ Post-employment benefits ○ Other long-term benefits ○ Termination benefits ○ Share-based payment

Intangible Assets

- Recognized when it is probable that future economic benefits that are attributable to the asset will flow to the entity - Cost of asset can be reliably measured - Research costs: expensed - Development costs

Three (3) main types of non-audit services

- Review engagements - Agreed Upon Procedures - Compilation Engagements

Agreed upon procedures

- The client draws their own conclusions from the data presented by the auditor - Report will only be for the client - Should be clear that neither an audit or review is being performed

When do we recognize a provision?

- There is an obligation (constructive or legal) - Probable outflow - Reliably measurable

What should be included in the management letter?

- Weaknesses in internal controls - Failures by staff to adhere to proper procedures - Any efficiencies which could be made - Any other specific issues

Reasonable Assurance

- there is sufficient evidence that the subject matter agrees to certain criteria, e.g. an external audit - high level of assurance - positive assurance (in the auditor's opinion the subject has been prepared in accordance with the criteria required)

How to determine reporting segments?

1. 10% or more of combined revenue 2. 10% or more of profits or losses 3. 10% or more of combined assets

Two (2) types of modified audit reports

1. An unqualified audit report with an 'emphasis of matter paragraph' 2. A qualified audit report

Three (3) main areas of fraud

1. Corruption 2. Misappropriation of assets 3. Financial Statement Fraud

Types of Post-Employment Benefits

1. Defined Contribution Plan - Company promises to pay fixed contributions into a pension fund for the employee and has no further obligations - Contribution payable is recognized in the IS for that period - If contributions are not payable until after a year they must be discounted 2. Defined Benefit Plan - Gives a Company the obligation to pay a defined pension to its employees who have left

Two (2) reasons for a qualified audit report

1. Disagreement 2. Insufficient Evidence

Three (3) types of share-based payments

1. Equity-settled share-based payments Company pays shares in return for goods/services received DR Expense CR Equity 2. Cash-settled share-based payments Cash is paid in return for goods/services, however, the actual cash amount is based on the share price DR Expense CR Liability 3. Transaction with a choice of settlement A choice of cash or shares paid in return for goods & services received

Three (3) components of goodwill

1. FV of Consideration If cash? Use the figure given If future payment? Discount the figure shown If a contingent item? Use the FV of the item it is contingent upon 2. Non-controlling Interest (NCI) One of two (2) choice: - Proportionate value of FV of S's NA - FV of S as a whole 3. FV of NA Acquired - Include intangibles & contingent liabilities that are not on S's accounts normally - If values are provisional - there is 1 year from date of acquisition to change this figure

Order of impairment allocation

1. Goodwill 2. All other non current assets pro rata to their carrying values

Key Considerations when planning for a group audit

1. Group Structure to be ascertained to determine which entities need to be consolidated 2. Materiality Assessment - The materiality of each subsidiary to be determined to decide which subs to visit & which to do analytical procedures on 3. Goodwill - Audit on goodwill arising from acquisition - Audit any impairment test at the balance sheet date 4. General - SFP: ensure assets & liabilities of Parents & subs added together but not Associate (separate line) - I/S: ensure any mid year acquisitions are accounted for pro rata 5. Additions in the Year 6. Disposals 7. Group transactions & balances - A list of all companies in the group included in the group audit instructions 8. Analytical procedures - acquiring subs with similar activities may extend the scope of analytical procedures available; this could possibly increase audit efficiency 9. Accounting policies - Material accounting policies should comply with the rest of the group 10. Timetable - Key dates should be planned for 11. Foreign subs 12. Associates

Five (5) Step Revenue Recognition Process

1. Identify the contract(s) with the customer - Must be approved by all involved - Everyone's rights can be identified - Have commercial substance - Consideration will probably be paid 2. Identify the performance obligations in the contract - Goods/services need to be distinct AND create a separate identifiable obligation 3. Determine the transaction price - Variable consideration: if price varies, then estimate the amount expected 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation - Revenue is recognized when control has passed, over time or at a point in time

Advantages of An Audit Committee

1. Increased confidence in financial statements 2. Frees Executive Directors to manage 3. Clear reporting lines for internal audit/impartial link for external audit 4. Creates culture opposed to fraud

Purpose of a Due Diligence Review

1. Information Gathering about a target company so the buyer knows everything 2. Verification of specific management reps 3. Identification of assets & liabilities, especially internally generated intangibles such as customer databases & brand names (won't show up on SFP) 4. Operational issues, e.g. high staff turnover 5. Acquisition planning 6. Management involvement 7. Credibility

Audit procedures for Intangible Assets

1. Inspect legal documents, confirming the length / type / cost of asset 2. Agree cash paid to the bank statement and the cash book 3. Inspect minutes of a discussion with management regarding amortization / non-amortization and recalculate where necessary 4. Look at forecast sales records to determine the future economic benefit to be derived

Five (5) Principles of the ACCA Code of Conduct

1. Integrity 2. Objectivity 3. Professional Competence & Due Care 4. Confidentiality 5. Professional Behavior

What are the 2 exceptions to leases?

1. Low Value Asset (less than $5,000) Choose for some to go into the IS and some to the SFP 2. Short Term Leases (less than 12 months) Have to treat all classes of assets with short term leases the same way

Three stages of money laundering

1. Placement - introduction of illegal funds into the financial system 2. Layering - passing money through large # of transactions, so that it becomes difficult to trace it to its original source 3. Integration - final integration of funds back into the legitimate economy

Typical issues with group audits:

1. Principal auditor may rely on the work of component auditors 2. Complex group means a complex audit 3. Consolidation adjustments must comply with the specific accounting standards applicable

Two (2) types of Government Grants

1. Revenue Grant DR Cash CR IS (Other Income or Reduce Expense) 2. Capital Grant DR Cash CR Cost of Asset OR Deferred Income

Auditing Warranty Provisions

1. Review and test the process used by management to develop the estimate 2. Review contracts or orders for the terms of the warranty to gain an understanding of the obligation 3. Review correspondence with customers during the year to gain an understanding of claims already in progress at the year end 4. Perform analytical procedures to compare the level of warranty provision year on year, and compare actual to budgeted provisions. 5. Re-calculate the warranty provision 6. Agree the percentage applied in the calculation to the stated accounting policy of the Client 7. Review board minutes for discussion of on-going warranty claims, and for approval of the amount provided

Disadvantages of An Audit Committee

1. Selecting suitable independent NEDs can be difficult 2. Formality may dissuade reporting on judgmental issues 3. Cost of audit committee

Threats to Indepedence

1. Self-interest 2. Self-review 3. Advocacy 4. Intimidation 5. Familiarity

Two (2) main depreciation methods

1. Straight Line (Cost - RV) /UEL 2. Reducing Balance (NBV x depreciation rate)

Types of Related Parties

1. Subsidiaries 2. Associates 3. Joint Venture 4. Key Management 5. Close family of key management 6. Post-employment benefit plan for the benefit of employees

Provision

A liability of uncertain timing or amount.

What is a Related Party?

A party is a related party to a Company under any of the three (3) situations: 1. Control/ is controlled by Entity 2. Is under common control with Entity 3. Has significant influence over the Entity

Leases

All leases go in the SFP (with 2 exceptions)

Familiarity

Auditor and client might have a too close relationship, e.g. due to a long association over many years in carrying out the annual audit

Intimidation

Auditor cannot act independently as they are scared due to threats

Advocacy

Auditor is expected to defend or justify the position of the client & act as an 'advocate'

Self-interest

Auditor may have a financial interest in a matter, e.g. dependence on fees as client makes up a significant portion of the firm's revenue Self-review, Auditor reviews judgment they have made themselves or the firm prepared the financial statements & is then acting as the auditor for the Company.

Government Grants

Can only be recognized when it is probable that all terms will be reached

Accounting Estimates

Change prospectively

Accounting Policy

Change retrospectively

Prior Period Errors

Change retrospectively

Transactions and events (P&L) characteristics

Completeness Cut-off Occurrence Accuracy Classification

Asset and Liability characreristics

Completeness Rights and obligations Existence Valuation Allocation

Safeguards at the Individual Level

Complying with CPD regulations Keeping in contact with fellow professionals Independent mentor used to discuss individual threats

Non-current Assets

Costs include all directly attributable costs, all future obligated costs (discounted for present value), & borrowing costs

Deferred Tax

Difference Tax effect Difference 1 More Income More tax Liability 2 Less income Less tax Asset 3 More expense Less tax Asset 4 Less expense More tax Liability

Material & pervasive disagreement/insufficient evidence

Disagreement which is material & pervasive is of such significance that the financial statements do not give a true & fair view.

Pensions

Employee benefits include paid holiday, sick leave and free or subsidized goods given to employees.

Foreign-exchange Effects

Group Company, e.g. foreign subsidiary · Retranslate SFP at year-end rate · Retranslate IS at average or actual rate · Difference goes to reserves NOT IS Single Company, e.g. dealing with foreign transactions · Difference between buying & paying rate · Difference between selling & receiving rate · Retranslate all foreign monetary balances (cash, loans, debtors, etc) at year-end · Difference goes to IS

Investment Property

Held by a firm for the purpose of collecting rental income and gaining capital appreciation; ONLY DISTINGUISHED BY IFRS; Can be valued using fair value or cost model; Any upside revaluation is recognized as a gain on the income statement; Must disclose the the valuation model used

Indicators of Impairment

Indicators of impairment o Significant decrease in asset's market price o Significant adverse changes in the technological, market or economic environment o Evidence of obsolescence or physical damage of an asset o Adverse change in the way an asset is being used o Evidence that the economic performance of an asset is worse than expected o Cash flow issues Reference: IAS 36.12

Assets Held for Sale

Items in our accounts in which we are not going to use, but rather sell

Due Diligence

Normally someone buying a company wants info about the target organization

Presentation and disclosure characrerstics

Occurrence Rights and obligations Completeness Classification Accuracy Valuation

5 - 10%

Profits Before Tax

Recognition of Inventories

Recognized at the lower of cost & net realizable value (NRV)

Safeguards at The Profession Level

Regular rotation of auditors made compulsory, Using audit committees, ACCA Exams & CPD, Corporate governance & auditing standards

If we have NOT sold an asset in accordance with IFRS 15? (leases)

Seller leaves the asset in SFP & accounts for cash received as a financial liability.

Sale and Leaseback

Seller sells an asset AND THEN leases it back from the buyer. Resulting in, Seller = Lessee (tenant) Buyer = Lessor (landlord)

IFRS 8 Operating Segments applies to who?

Separate or consolidated financial statements whose: - Debt or equity instruments are publicly traded - That files or is in process of filing with the securities commission

Development Costs

Should be capitalized as an intangible assets if meet the specified criteria.

If we have sold an asset in accordance with IFRS 15? (leases)

Step 1 - Take the asset (PPE) out DR Cash CR Asset CR Initial Gain on Sale Step 2 - Bring the right to use asset in DR Right to Use Asset CR Financial Lease/Liability DR/CR Gain on Sale (balancing figure)

What are the steps that should be taken if an auditor suspects an ethical threat?

Step 1: Assess the facts Step 2: Consider ethical issues Step 3: Are the fundamental principles affected? Step 4: See what established procedures there are for dealing with it otherwise Step 5: Look for alternative measures such as an external regulator

Accounting Treatment for Assets Held for Sale

Step 1: Calculate the carrying amount (depreciation or revaluation method) Step 2: Calculate FV - CTS Step 3: Value the assets held for sale IFRS 5 states the new value should be the LOWER of Step 1 & Step 2 Step 4: Check for impairment

Share-based payments

The Company receives a good/service & in return gives (1) its own shares or (2) cash based upon the price of its own shares

Material disagreement/insufficient evidence

The auditor agrees with the rest of the financial statements, but disagrees with that particular element

1 - 2%

Total Assets

Safeguards at the Audit Firm Level

Training,Quality Control Procedures - ensures independence is considered in all work performed by the audit firm, Consultation - so issues can be discussed internally & procedures are laid out to facilitate this, Ethical Codes of Conduct, Internal controls

0.5 - 1%

Turnover

Research Costs

Under IFRS research costs are expensed as incurred and will never be capitalized as an intangible asset.

Borrowing Costs

Where the Company obtains a loan to construct an asset, instead of recognizing the interest on the loan in the IS, it is a directly attributable cost of the asset, therefore, it is capitalized

Prospective Financial Information (PFI)

future information which covers (1) forecasts for up to one year & (2) projections up to 5 years ahead.

Price/Earnings (P/E) Ratio

market price per share/earnings per share

Earnings per Share

net income - preferred dividends / weighted average common shares outstanding

Money laundering

the attempt to conceal the origin of 'dirty' money by making it look legitimate or 'clean'

Expectation Gap

the difference between the actual work and assurance required by GAAS and the expectation of that work by the general public & management

Audit Evidence for Goodwill

· Agreement of the monetary value and payment dates of the consideration per the client schedule to legal documentation signed by vendor and acquirer. · Inspect the bank statement and cash book whether the payment was paid. · If payment occurs after year end confirm that a current liability is recognized on the individual company and consolidated statement of financial position (balance sheet). · Board minutes approving the payment. · Recalculate discounting calculations applied to deferred and contingent consideration. · Agreement that the discount rate used is pre-tax, and reflects current market assessment of the time value of money · Agree % of ownership, e.g. using Companies House search/register of significant shareholdings · Obtain due diligence report and agree net assets valuation if appropriate

Auditing Assets Held for Sale

· Inspect board minute at which the disposal of the properties was agreed by management · Ensure active program to locate a buyer, for example, instructions given to real estate agency · Inspect any minutes of meetings held with prospective purchasers of any of the properties, or copies of correspondence with them · Written representation from management on the opinion that the assets will be sold within a year · Subsequent events review, including a review of post year-end board minutes and a review of significant cash transactions, to confirm if any properties are sold in the period after the year end · Review client's depreciation calculations, to confirm no depreciation once reclassified as held for sale

Audit Procedures on Short-term Investments

• Agree the FV of the shares held as investments to stock market share price • Confirm the original cost of the investment to cash book and bank statements • Discuss the accounting treatment with management and confirm that an adjustment will be made to recognise the shares at fair value • Review the notes to the financial statements to ensure that disclosure is sufficient to comply with the requirements of IFRS 9 • Enquire with the treasury management as to whether there have been any disposals of the original shares held • Review board minutes to confirm the authorisation and approval of the amount invested • For any investments from which dividends have been received, confirm the number of shares held to supporting documentation such as dividend received certificates

Audit procedures for a PFI engagement

• Assess management assumptions • Is it prepared on a consistent basis with historical financial statements, using appropriate accounting policies? • Are calculations correct? • Is information properly prepared on the basis of the assumptions • Agree the cash figure to the bank statement or bank reconciliation

Group Accounting Audit: Acquisition in the Year

• I/S pro rate inclusion of sub • Calculate Goodwill • Pro rata NCI in the year • Think about component auditors • Materiality will now increase • Ensure sub uses same accounting policies and same year end as parent • Analytical procedures may be enough for the audit of this acquisition (if its in the same industry as us) • New related party transactions (with the sub) Further acquisition? Any 'profit' goes to Equity Partial Disposal? Any 'profit' goes to Equity Full Disposal? Any profit goes to IS; Sub is taken out of group accounts; is replaced by an associate at FV

Auditing Insurance Claims (Contingent Assets)

• Obtain a copy of the insurance claim made and confirm the amount claimed • Enquire as to the basis of the amount claimed • Review any supporting documentation such as management accounts showing lost income for the period of halted production • Scrutinize the terms of the insurance policy, to determine whether covered • Seek permission to contact the insurance provider to enquire as to the status of the claim, and attempt to receive written confirmation of the likelihood of any payment being made • Review correspondence between the client and the insurance provider, looking for confirmation of any amounts to be paid • Contact client lawyers to enquire if there have been any legal repercussions arising from the insurance claim, e.g., the insurance company disputing the claim

Auditing Share-based payments

• Obtain management calculation of the expense and agree the following from the calculation to the contractual terms of the scheme: - Number of employees and executives granted options - Number of options granted per employee - The official grant date of the share options - Vesting period for the scheme - Required performance conditions attached to the options. • Recalculate the expense and check that the fair value has been correctly spread over the stated vesting period. • Agree fair value of share options to specialist's report and calculation, and evaluate whether the specialist report is a reliable source of evidence. • Agree that the fair value calculated is at the grant date. • Obtain and review a forecast of staffing levels or employee turnover rates for the duration of the vesting period, and scrutinize the assumptions used to predict level of staff turnover. • Obtain written representation from management confirming that the assumptions used in measuring the expense are reasonable.

Auditing Provisions

• Obtain written evidence from legal advisors that in their opinion amounts are probable to be paid & the basis of their opinion • Review the claim itself to confirm the amount • Inspect the board minutes for evidence of discussion of the claim, to obtain an understanding as to the reason for the claim & whether it has been disputed

Criteria for capitalizing development costs

• P robable future economic benefits • I ntention to complete and use or sell the asset • R esources (technical, financial and other resources) are adequate and available to complete and use the asset • A bility to use or sell the asset • T echnical feasibility of completing the intangible asset (so that it will be available for use or sale) • E xpenditure can be measured reliably

What are the procedures group auditors will perform when relying on the work of component auditors?

• Perform risk assessment on components • Evaluate business risk of components • Evaluate susceptibility of other auditors to error • Attend the closing meetings of component audit • Review of component files Evaluate whether further substantive testing should be performed at a component level

Probability test for Contingent Liabilities

• Remote chance of paying out - Do nothing • Possible chance of paying out - Disclosure • Probable chance of paying out - Create a provision

Probability test for Contingent Assets

• Remote chance of receiving - Do nothing • Possible chance of receiving - Do nothing • Probable chance of receiving - Disclosure • Virtually certain of receiving - create an asset in the accounts