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ACCA 1 AUDIT AND ASSURANCE

Payables and accruals


When testing payables, the auditor must focus on understatement. Objective (a) Existence (b) Rights and obligations Circularise trade payables (the procedure is similar to that used for trade receivables). Reconcile balance at year end to a supplier's statement. The reconciling items must be verified. Circularise/suppliers statements. Cut-off tests purchases/credit Example tests

Both these tests also provide evidence of completeness and valuation.

(c) Completeness Review payables analytically comparing to previous year end or budgets. Review goods received notes around the year end to ensure purchases correctly treated. Review unpaid invoice files for liabilities not provided. Review after date payments for liabilities not recorded. Check the supplier statement reconciliations to ensure that all outstanding invoices are accrued.

(d) Allocation and valuation Check closing accruals calculated in accordance with accounting policies and are consistent. Check any provisions have been recognised in accordance with IAS37.

ACCA 2 AUDIT AND ASSURANCE

Substantive procedures over year-end trade payables


Ensure payables included in financial statements as current liabilities. Review the list of trade payables against prior years to identify any significant omissions. Reconcile the total of purchase ledger accounts with the purchase ledger control account, and cast the list of balances and the purchase ledger control account. Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any reconciling items. Calculate the trade payable days and compare to prior years, investigate any significant differences. Select a sample of payable balances and perform a trade payables circularisation, follow up any non-replies and any reconciling items between balance confirmed and trade payables balance. Review the purchase ledger for any debit balances, for any significant amounts discuss with management and consider reclassification as current assets. Review after date payments, if they relate to the current year then follow through to the purchase ledger or accrual listing to ensure completeness. Review after date invoices and credit notes to ensure no further items need to be accrued. Select a sample of goods received notes before the year-end and follow through to inclusion in the year-end payables balance, to ensure correct cut-off. Enquire of management their process for identifying goods received but not invoiced or logged in the purchase ledger and ensure that it is reasonable to ensure completeness of payables.

ACCA 3 AUDIT AND ASSURANCE

Non-current liabilities
This will include bank loans, debentures, and other loans repayable more than one year after the balance sheet date. Objective (a) Existence Obtain confirmation from banks and other lenders (b) Rights and obligations Review confirmation letters from lenders (c) Completeness Obtain breakdown of liabilities, compare to prior year audit working papers and for any items no longer included agree to Repayment amount in cashbook Inclusion as current liability if reclassified Review board minutes for evidence of any new borrowings which might not be recorded (d) Accuracy Perform proof in total of finance charges Agree capital and interest amounts to confirmation letters Recalculate finance charges agreeing interest rates to loan agreements (e) Classification and understandability Check that liabilities are correctly classified as current/non-current by reference to the repayment dates in the loan agreements Example tests

ACCA 4 AUDIT AND ASSURANCE

Tests on provisions and contingencies


For each material provision: (a) Determine whether the company has a present obligation as a result of a past event by: (i) Review of correspondence and other documentation relating to the item. (ii) Discussion with the directors. Have they created a valid expectation in other parties that they will discharge the obligation? Review evidence of past practices, published policies and statements made. (b) Determine whether it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation by: (i) Checking whether any payments have been made in the post balance sheet period in respect of the item. (ii) Review of correspondence with solicitors, banks, customers, insurance company and suppliers both pre and post year end. (iii) Sending a letter to the solicitor to obtain their views (where relevant). (iv) Discussing the position with similar past provisions with the directors. Were these provisions eventually settled? (v) Review the board minutes to ascertain whether it is probable that the payments will be paid.

(c) Determine whether provisions represent the best estimate of liability by: (i) Recalculating all provisions made. (ii) Comparing the amount provided with any post year end payments and with any amount paid in the past for similar items and considering opinions given by independent experts. (iii) In the event that it is not possible to estimate the amount of the provision, check that this contingent liability is disclosed in the accounts. Consider the nature of the clients business. Would you expect to see provisions e.g. warranties ? For all material provisions and contingencies obtain a management representation. Check that appropriate disclosures have been made in accordance with IAS 37 Obtain a detailed analysis of all provisions showing opening balances, movements and the closing balance. Also obtain details of all contingencies which have been disclosed.

ACCA 5 AUDIT AND ASSURANCE

Purchase
Procedures to obtain evidence and an audit test relevant to purchases and other expenses: Inspection Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspect a sample of purchase invoices and agree the amount is included correctly within the purchase ledger. Inspect purchase orders for evidence of authorisation by a responsible official. Observation Observation consists of looking at a process or procedure being performed by others. Observe the process for logging purchase invoices into the system to ensure that all invoices are entered completely and accurately. Observe the goods received department to assess whether goods received are checked against purchase orders and reviewed for adequate quality. Analytical procedures Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Calculate the operating profit margin/overhead ratio and compare it to last year and budget and investigate any significant differences. Review monthly other expenses to identify any significant fluctuations and discuss with management.

ACCA 6 AUDIT AND ASSURANCE

Inquiry Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity. Discuss with management whether there have been any changes in the key suppliers used and compare this to the purchase ledger to assess completeness and accuracy of purchases. Inquire of department heads the process they follow in authorising orders to ensure that it follows the specified company authorisation process. Recalculation Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically. Recalculate the accuracy of a sample of purchase invoices. Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the other expenses. Reperformance Reperformance involves the auditors independent execution of procedures or controls that were originally performed as part of the entitys internal control. Reperform the purchase ledger control account reconciliation to ensure accuracy. Select a sample of purchase orders and match them to the goods received notes and purchase invoices to ensure completeness of the purchase cycle.

Capital and other issues


AUDIT PLAN: CAPITAL AND RELATED ISSUES SHARE EQUITY CAPITAL Agree the authorised share capital with the statutory documents governing the company's constitution. Agree changes to authorised share capital with properly authorised resolutions.

ISSUE OF SHARES Verify any issue of share capital or other changes during the year with general and board minutes. Ensure issue or change is within the terms of the constitution, and directors possess appropriate authority to issue shares.

ACCA 7 AUDIT AND ASSURANCE

Confirm that cash or other consideration has been received or receivable(s) is included as called-up share capital not paid.

TRANSFER OF SHARES Verify transfers of shares by reference to: Correspondence Completed and stamped transfer forms Cancelled share certificates Minutes of directors' meeting Review the balances on shareholders' accounts in the register of members and the total list with the amount of issued share capital in the general ledger.

DIVIDENDS Agree dividends paid and proposed pre year-end to authority in minute books and reperform calculation with total share capital issued to ascertain whether there are any outstanding or unclaimed dividends. Agree dividend payments with documentary evidence (say, the returned dividend warrants). Test that dividends do not contravene distribution provisions by reviewing the legislation. Inspect tax returns to insure that imputed tax has been accounted for to the taxation authorities and correctly treated in the accounts.

RESERVES Agree movements on reserves to supporting authority. Ensure that movements on reserves do not contravene the legislation and the company's constitution by reviewing the legislation Confirm that the company can distinguish distributable reserves from those that are non-distributable. Ensure appropriate disclosures of movements on reserves are made in the company's accounts by inspection of the financial statements.

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