Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

Overview of a Group AuditPrinciples of Auditing: An Introduction to International Standards on Auditing - Ch 13 Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

Contents of Group Audit Instructions • General • Specific procedures • Company • Audit scope, fees & coverage • Critical and Significant audit concerns . • Management Letters • New Accounting Standards • Independence

Contents of Audit Planning Memo- Strategy Part I. Introduction II. Follow- up from last year III. Insights IV. Initial Risk analysis V. Internal controls & control procedures VI. Identification of Critical Audit Objectives VII. Client Service Aspects item- action VIII. Important contacts IX. Service Audit Team

Audit Planning Memo – Plan Part • The plan part of the audit planning memorandum summarizes technical matters,client service matters and logistical matters. • It expands on the strategy part and provides an overview of the client company, the industry environment, significant audit concerns, and areas of interest to the audit team. • The audit program primarily focuses on substantive year-end procedures to provide guidance for the audit work in a practical way

Contents of Audit Planning Memo - Plan Part I. Introduction II. Audit approach III. Critical audit objectives IV. Significant audit areas and accounting issues V. Fees VI. Timetable VII. Client contacts VIII. Local Firm service team

Audit Program (Audit Plan) • The audit plan, traditionally called “audit program” is a set of standardized audit procedures that are needed to substantially test the account balances and transactions outlined in the audit planning memorandum. • The audit program starts out with the basic data about value of assets and revenue, the basis on which the testing will be made and the gauge or monetary precision or materiality, the amount of maximum misstatements allowed. • Illustration 13.6 shows an Audit Plan.

Investments Audit Objectives & Audit Program • For investments audit procedures there are three objectives: • Objective II is Investments exist and are owned by the entity. (The financial statement assertions of management are existence and ownership). • Procedure Number 3 (from Objective II) is agree to authorization in the minutes of the Board of Directors • Local this year bought controlling interest in Newco, Design Information Planning and Programming Resources (DIPPER), Financial Investment National Enterprises (FINE) and 15 per cent of Zap. Check the minutes of the board of directors to see if the board of directors authorized the purchases.

Objective II Oohh-Oh • Ask management for purchase agreements for Newco, DIPPER and FINE. The team traces the purchase amounts to the bank statement to verify the amount and payment. Review a due diligence report for the purchase of FINE. • One purchase agreement shows Sister Information Systems (SIS), not Local (who was thought to be the owner), has entered into a share purchase agreement to purchase all shares of Newco. A discussion with management indicates that Newco is owned by SIS, which is owned by Brother, which is supposedly owned by Local. There is no documentation supporting ownership of Brother by Local. Send a confirmation letter to Newco to determine ownership.

Expenses and Payables OBJECTIVES 1 All unpaid amounts due to suppliers or others for goods and services received prior to year-end are included or otherwise accrued. (Completeness, existence, accuracy, and ownership.) 2. All cash disbursements are valid and properly recorded (i.e., they are for goods and services received by the entity; classification as asset, expense, liability, and other accounts is appropriate.) (Existence and accuracy.) 3. Accounting principles are appropriate and applied consistently (e.g., interest adjustments, if required, are recognized.) (Valuation, presentation and disclosures.)

Expenses and Payables Audit Program 3 Review liabilities recorded after the end of the period and review subsequent cash payments. 5. Vouch claims for credit from suppliers (e.g., receivables from suppliers) to supporting documents

Revenue and Accounts Receivable OBJECTIVES 4 Trade accounts receivable represent uncollected sales or other charges to bona fide customers and are owned by the entity. (Existence and ownership.) 5 All cash collections are accurately recorded. (Completeness and accuracy.) 7 Valuation of trade receivables is appropriate (i.e., provision is made for uncollectable amounts). (Valuation, presentation and disclosures.)

Revenue and Receivables Procedures • Vouch sales from shipping records to sales authorization, sales invoices, and sales I register, including relevant data (e.g. party, price, description, quantity, and dates). • Test sales invoice price of items to authorized lists. • Test processing to general and subsidiary ledgers. • Determine sequential numbering of sales invoices. • Analyze the VAT-payable to total sales (Netherlands). • Evaluate propriety and consistency of accounting principles. • Verify cut-off for sales, cash receipts, returns, etc. • Verify the mathematical accuracy of relevant supporting schedules and agree to trial balance and subsidiary records. • Confirm recorded receivables (amount, date, terms, interest rate, etc.).

Revenue and Accounts Receivable Audit Program Confirm recorded receivables. • Check replies to confirmations and investigate exceptions. • Send second requests where replies to positive requests are not received. (Exceptions to sending second requests for nonresponding positive confirmations should be rare and the reasons for not sending them should be fully documented.) • Investigate undelivered requests returned by post office. If possible obtain better addresses and mail again.

Trade Accounts Receivable Audit Program (continued) Confirm recorded receivables (amount, date, terms, interest rate, etc.). • Where replies are not received to positive requests for confirmation apply alternative audit procedures (e.g. check subsequent remittance advices, shipping documents, billing records, customer orders and correspondence files.) • Summarize results of confirmation requests and alternative procedures.

Inventory and Cost of Sales OBJECTIVES 1. Inventory is accurately compiled and priced in conformity with acceptable methods (e.g., FIFO, LIFO) consistently applied. (Accuracy.)

InventoryAudit Procedures • Verify accuracy of supporting schedules and agree to trial balance and subsidiary records. • Test priced inventory listing. • Vouch purchases of inventory to and from perpetual records. • Vouch sales from perpetual inventory records. • Ascertain that cut-off is proper. • Determine the application of correct rates of exchange for amounts expressed in foreign currency. • Review accounting principles for appropriateness and consistency.

InventoryAudit Program • Test priced inventory listing. • Check the mathematical accuracy of the listing. • Agree test counts with recorded quantities. • Compare items on final inventory listing to physical inventory tags, sheets, or lists, and vice versa. • Determine that unused, voided, and no-quantity tags are accounted for property. • Reconcile totals with general ledger control • Ascertain that corrections and adjustments to the final listing are proper. • Scan the inventory listing and investigate unusual quantities or amounts.

ObsoleteInventory • To review if inventory is obsolete you talk to management and see if they have any products or product lines they plan to cancel in the future. • You also take a look at the sales budget to see what products sales are based on. • You look at inventory turnover on a historical basis and determine that the product management intends to cancel is a very slow-moving product and should have increased allowances for obsolescence.

Asset Balances / ExpensesObjective Objective: Amounts prepaid, deferred or capitalized provide future benefits; amounts and related amortization are calculated correctly; and write-down or loss provision is recorded. (existence, accuracy, valuation, ownership, presentation and disclosure)

Asset Balances / ExpensesAudit Program Audit procedure number 6 is: Test write-offs during the period. ■ Does the Board of Directors authorize assumptions by which the write-offs are calculated? ■ Have these assumptions changed because of change in financial accounting standards? ■ Are the projections management used to determine recoverability of assets reasonable and are they upgraded on a regular basis? ■ Are the valuation methods used in the projections the same as those used in the financial statements? ■ Is the allocation of overheads properly and consistently done? ■ Is the recovery of goodwill amortized over a reasonable period of time?

Contents of Completion Memorandum I. General II. Critical audit areas III. Accounting issues IV. Special audit problems (FINE) V. Other matters V. Outstanding matters VI. Attached schedules

General – Completion Memo • The first item in the completion memorandum is the statement that the engagement manager and partner have reviewed the audit papers related to critical areas. • The other important elements to discuss immediately are audit schedules, going concern considerations and your overall opinion on the work.

Critical Audit Areas / Accounting Issues / Other Matters • Critical Areas are those to do with risk and significant concerns. • Accounting issues are broadly defined. Other topics described in the completion memorandum are foreign exchange, pension plan and postretirement benefits. • Other matters are a round-up of miscellaneous matters including illegal and questionable acts, management letter, summary of unadjusted audit differences and the status of statutory financial statements.

Thank You for Your Attention Any Questions?

Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage