COURSE OUTLINE

 Week 01 – Introduction to Assurance

 Week 02 – Rules & Regulations
 Week 03 – Assignment, Ethics & acceptance
 Week 04 – Quiz, Risk
 Week 05 – Planning
 Week 06 – Assignment, Evidence
 Week 07 – Quiz, Systems & Control
 Week 08 - Mid-term Examination
 Week 09 - Procedures
o Week 10 - Assignment, Completion & Review
o Week 11 - Quiz, Reporting
o Week 12 - Corporate governance
o Week 13 - Assignment, Internal audit
o Week 14 – Quiz, Summary of ISAs & IFRS
o Week 15 – Project Presentation
o Week 16 - Final Examination
Directional testing

• The concept of directional testing derives from the principle of

doubleentry bookkeeping, i.e. for every debit there should be a
corresponding credit; therefore any misstatement of a debit entry will
also result in a misstatement of a credit entry.

• Auditors primarily test debit entries for overstatement (assets and

expenses) and credit entries for understatement (liabilities and income),
indirectly testing the corresponding entries at the same time.

• All accounts are then tested for both understatement and

overstatement; e.g. directly testing payables for understatement also
indirectly tests expenses/cost of sales for understatement.
• Testing for understatement tests completeness; testing for overstatement tests
valuation, existence, rights and obligations, and occurrence.
Bank and cash

Bank and cash is a good example of where the reliability of the evidence
available means that only a small quantity of evidence is needed. The
auditor relies mainly on just two key pieces of evidence: the bank
confirmation letter and the bank reconciliation.

• Obtain the company’s bank reconciliation and cast to ensure

arithmetical accuracy. Agree the cash book figure to the financial
statements.

• Obtain a bank confirmation letter from the company’s bankers.

• Agree the reconciliation’s balance per the cash book to the year end cash
book.
Bank and cash
• Agree the balance per the bank statement to an original year end bank
statement and also to the bank confirmation letter.

• Trace all of the outstanding lodgements to the pre yearend cash book,
post yearend bank statement and also to payinginbook pre yearend.

• Trace all unpresented cheques through to a pre year end cash book and
post yearend statement. For any unusual amounts or significant delays
obtain explanations from management.

• Examine any old unpresented cheques to assess if they need to be

written back into the purchase ledger as they are no longer valid to be
presented.
Bank and cash
• Examine the bank confirmation letter for details of any security
provided by the company or any legal right of setoff as this may
require disclosure.

• Review the cash book and bank statements for any unusual items
or large transfers around the year end, as this could be evidence of
window dressing.

• Count the petty cash in the cash tin at the year end and agree the
total to the balance included in the financial statements.
Bank and cash
The bank confirmation letter will provide details of loans held, the
amounts outstanding, accrued interest and any security provided in
relation to those loans. Additional procedures that the auditor will
need to perform in relation to loan payables include:

• Obtain a breakdown of all loans outstanding at the year end, cast to

verify arithmetical accuracy and agree the total to the financial
statements.

• Agree the balance outstanding to the bank confirmation letter.

• Inspect bank confirmation letters for any loans listed that have not
been included in the financial statements.
Bank and cash
• Inspect financial statements for disclosures of interest rates, and the
split of the loan between current and noncurrent.

• Inspect the loan agreement for restrictive covenants (terms) and

determine the effect of any loan covenant breaches.

• Inspect the cash book for loan repayments made.

• Recalculate the interest charge and any interest accrual in accordance

with terms within the loan agreement, to ensure mathematical accuracy.
Noncurrent assets
The key assertions for non current assets are existence, valuation,
completeness and rights and obligations. Auditing tangible noncurrent
assets requires the auditor to obtain sufficient appropriate evidence
over many areas:
• existing assets
• additions
• disposals and the related profit/loss in the statement of profit or
loss
• depreciation (which of course affects both the statement of
financial position and the statement of profit or loss)
• revaluations
• related disclosures (the property, plant and equipment note,
depreciation policies, useful economic lives, revaluations and assets
held under finance leases).
Noncurrent assets

Additions

• Obtain a breakdown of additions, cast the list and agree to the

noncurrent asset register: verifies completeness.

• Select a sample of additions and agree cost to supplier invoice:

verifies valuation.

• Inspect the list of additions and confirm that they relate to capital
expenditure items rather than repairs and maintenance: verifies
existence
Noncurrent assets

• Inspect the repairs and maintenance account in the general ledger

for items of a capital nature: verifies completeness.

• Inspect supplier invoices (for equipment), title deeds (for

property), and registration documents (for motor vehicles) to
ensure they are in the name of the client: verifies: rights and
obligations.

• If assets have been constructed by the client, obtain an analysis of

the costs incurred, cast for arithmetical accuracy and agree a
sample of costs to supporting documentation (e.g. payroll,
material invoices): verifies valuation.
Noncurrent assets
Disposals

• Obtain a breakdown of disposals, cast the list and agree all assets
removed from the noncurrent asset register: verifies existence.

• Select a sample of disposals and agree sale proceeds to supporting

documentation such as sundry sales invoices: verifies accuracy of profit
on disposal.

• Recalculate the profit/loss on disposal and agree to the statement of

profit or loss: verifies accuracy of profit on disposal.
Noncurrent assets
Existing assets

• Select a sample of assets from the noncurrent asset register and

physically inspect them: verifies existence.

• Select a sample of assets visible at the client's premises and inspect the
asset register to ensure they are included: verifies completeness.

• Cast the noncurrent asset register totals and subtotals to ensure

arithmetical accuracy: verifies valuation.

• Inspect assets for condition and usage to identify signs of impairment:

verifies valuation.
Noncurrent assets
• For leased assets, inspect the lease document to assess whether the
lease is an operating or finance lease and appropriately treated (finance
lease assets should be capitalised and a corresponding liability created
in accordance with IAS 17 Leases): verifies rights and obligations.

• For revalued assets, inspect the valuer's report and agree the amount
stated to the amount included in the general ledger and the financial
statements: verifies valuation; and ensure that all assets in the same
class have been revalued.
Noncurrent assets
Depreciation (audit procedures verify valuation, allocation, and
accuracy of the depreciation charge in the statement of profit or loss)

• Inspect the capital expenditure budgets for the next few years to assess the
appropriateness of the useful economic lives in light of plans to replace
assets.

• Recalculate the depreciation charge for a sample of assets to verify

arithmetical accuracy.

• Inspect the financial statement disclosure of the depreciation charges and

policies in the draft financial statements and compare to the prior year to
ensure consistency.
Noncurrent assets
• Recalculate the depreciation charge for revalued assets to ensure the charge
is based on the new carrying value.

• Review profits and losses on disposal of assets disposed of in the year, to

assess the reasonableness of the depreciation policies (if depreciation
policies are reasonable, there should not be a significant profit or loss).

• Compare depreciation rates to companies with the same type of assets to

assess reasonableness.

• Perform a proof in total calculation for the depreciation charged for each
category of assets, discuss with management if significant fluctuations arise.
(Analytical procedure)
Noncurrent assets
Intangible noncurrent assets

Remember that the auditor's role is to obtain sufficient appropriate evidence

that the financial statements conform in all material respects with the relevant
financial reporting framework. For this reason, you will need to have a good
understanding of the basic International Financial Reporting Standards.

Development Costs

Development costs should only be capitalised as an intangible asset if the

recognition criteria of IAS 38 Intangible Assets have been met. Development
costs are capitalised when: the technical feasibility of the asset for sale or use
can be demonstrated and the costs can be measured reliably.
Noncurrent assets
The entity must intend to complete the development and use or sell the asset
and have the resources to do so, as well as demonstrate how the asset will
generate future economic benefit. If these critera are not satisfied, the costs
must be expensed to the statement of profit or loss along with all research
expenditure.

• Obtain a breakdown of costs capitalised, cast for mathematical accuracy and

agree to the amount included in the financial statements: verifies valuation.

• For a sample of costs, agree to invoices or timesheets: verifies valuation.

Noncurrent assets
• Inspect board minutes for any discussions relating to the intended sale or
use of the asset: verifies existence.

• Discuss the details of the project with management, to evaluate compliance

with IAS 38 criteria: verifies existence.

• Inspect project plans and other documentation, to evaluate compliance with

IAS 38 criteria: verifies existence.

• Inspect budgets to confirm financial feasibility: verifies existence.

Noncurrent assets
Other intangible assets

• Obtain a breakdown of costs capitalised, cast for mathematical accuracy and

agree to the amount included in the financial statements: verifies valuation.

• For a sample of costs, agree to invoices or timesheets: verifies valuation.

• Inspect board minutes for any discussions relating to the intended sale or
use of the asset: verifies existence.

• Discuss the details of the project with management, to evaluate compliance

with IAS 38 criteria: verifies existence.
Noncurrent assets
• Inspect project plans and other documentation, to evaluate
compliance with IAS 38 criteria: verifies existence.

• Inspect budgets to confirm financial feasibility: verifies existence.

• Inspect purchase documentation for purchased intangible assets:

verifies existence, rights and obligations and valuation.

• Inspect specialist valuer's report and agree the amount stated to the
amount included in the general ledger and the financial statements:
verifies valuation.
Inventory
• The key assertions for inventory are existence, valuation, completeness and
rights an obligations.

• The main source of evidence for inventory, is normally the yearend

inventory count (although some clients may use perpetual or continuous
inventory counting, throughout the year).

• ISA 501 Audit evidence – specific considerations for selected items requires
the auditor to attend the physical inventory count (unless impracticable), if
inventory is material to the financial statements.
.
Inventory
• The inventory count is the responsibility of the client. The auditor attends the
count to help obtain sufficient appropriate evidence to form an opinion as to
whether inventory is free from material misstatement.

• In order to obtain sufficient appropriate evidence, the auditor must perform

procedures before, during and after the inventory count during the final audit.
Inventory
Before inventory count

• Contact client to obtain a copy of the inventory count instructions, to

understand how the count will be conducted and assess the effectiveness of
the count process.

• Inspect prior year working papers to understand the inventory count

process and identify any issues that would need to be taken into account this
year.

• Book audit staff to attend the inventory counts.

Inventory
• Ascertain whether any inventory is held by third parties, and if applicable
determine how to gather sufficient appropriate evidence.

• Consider the need for using an expert to assist in valuing the inventory being
counted.

• Send a letter requesting direct confirmation of inventory balances held at

year end from any third party warehouse providers used regarding
quantities and condition.
Inventory
During inventory count
Tests of controls

Observe the count to ensure that the inventory count instructions are
being followed. For example:

• Nonwarehouse staff performing and managing the count.

• Sections of inventory being tagged or marked as counted to prevent double

counting.

• Counts sheets written in pen rather than pencil.

Inventory
• No movements of inventory during the count.

• Sequentially numbered count sheets and a sequence check performed once

the count is complete.

• Teams of two people performing the count.

• Count sheets show the description of the goods but do not show the
quantities expected to be counted.

• Damaged / obsolete items must be separately identified so they can be

valued appropriately.
Inventory
Substantive procedures

• Select a sample of items from the inventory count sheets and physically
inspect the items in the warehouse: verifies existence.

• Select a sample of physical items from the warehouse and trace to the
inventory count sheets to ensure that they are recorded accurately: verifies
completeness.

• Enquire of management whether goods held on behalf of third parties are

segregated and recorded separately: verifies rights and obligations.

• Inspect the inventory being counted for evidence of damage or obsolescence

that may affect the net realisable value: verifies valuation.
Inventory
• Record details of the last deliveries prior to the year end. This information
will be used in final audit procedures to ensure that no further amendments
have been made thereby overstating or understating inventory: verifies
completeness & existence.

• Obtain copies of inventory count sheets at the end of the inventory count,
ready for checking against final inventory listing after the inventory count.

• Attend the inventory count (if one is to be performed) at the third party
warehouses: verifies completeness and existence
Inventory
After inventory count: final audit procedures

• Trace the items counted during the inventory count to the final inventory list
to ensure it is the same as the one used at the yearend and to ensure that any
errors identified during counting procedures have been rectified: verifies
completeness.

• Cast the list (showing inventory categorised between finished goods, WIP
and raw materials) to ensure arithmetical accuracy and agree totals to
financial statement disclosures: verifies completeness.
Inventory
• Inspect purchase invoices for a sample of inventory items to agree their cost
to verify valuation.

• Inspect purchase invoices for the name of the client to verify rights.

• Inspect postyearend sales invoices for a sample of inventory items to

determine if the net realisable value is reasonable. This will also assist in
determining if inventory is held at the lower of cost and net realizable value:
verifies valuation.

• Inspect the ageing of inventory items to identify old/slowmoving amounts

that may require an allowance, and discuss these with management: verifies
valuation.
Inventory
• Recalculate workinprogress and finished goods valuations using payroll
records for labour costs and utility bills for overhead absorption: verifies
valuation.

• Trace the good received immediately prior to the yearend to yearend

payables and inventory balances: verifies completeness & existence.

• Trace goods despatched immediately prior to yearend to the nominal

ledgers to ensure the items are not included in inventory and revenue (and
receivable where relevant) has been recorded: verifies completeness &
existence.
Inventory
• Calculate inventory turnover/days and compare this to prior year, to assess
whether inventory is being held longer and therefore requires greater
provision: verifies valuation. (Analytical procedure)

• Calculate gross profit margin and compare this to prior year, investigate any
significant differences that may highlight an error in costs of sales and
closing inventory: verifies valuation. (Analytical procedure)

Inventory by third parties

• Where a third party holds inventory on behalf of the client, obtain external
confirmation from the third party of the quantity and condition of the goods
to confirm rights and valuation.
Inventory
• If the goods held by the third party are material the auditor should attend the
inventory count to verify existence of the inventory.

• The auditor can also obtain a report from the third party’s auditors confirming
the reliability of the internal controls at the third party.

Standard Costs

• Obtain the breakdown of the standard cost calculation and agree a sample of
costs to invoices.

• Enquire of management the basis for the standard costs and how often they are
updated to reflect current costs.

• Inspect the variance account and assess the level of variance for reasonableness.
Receivables
The focus of testing for receivables is valuation and existence. Note the effect of
directional testing, e.g. directly testing receivables for overstatement also
indirectly tests revenue for overstatement (Dr: Receivables, Cr: Revenue).

• Obtain an aged receivables listing, cast it to verify arithmetical accuracy and

agree the total to the financial statements.

• Agree the sales ledger control account with the sales ledger list of balances:
verifies completeness and existence

• Select a sample of yearend receivable balances and agree back to valid

supporting documentation of GDN and sales order: verifies existence.
Receivables
• Inspect after date cash receipts and follow through to preyearend receivable
balances: verifies valuation, rights and obligations and existence.

• Select a sample of goods despatched notes (GDN) before and just after the
year end and follow through to the sales invoice to ensure they are recorded
in the correct accounting period: verifies completeness and existence (cutoff
of revenue).

• Perform a positive receivables circularisation of a representative sample of

Murray Co's yearend balances, for any nonreplies, with Murray Co's
permission, send a reminder letter to followup: verifies existence and rights
and obligations.
Receivables
• Inspect the aged receivables report to identify any slow moving balances,
discuss these with the credit control manager to assess whether an
allowance or write down is necessary: verifies valuation and allocation.

• Inspect customer correspondence in respect of any slow moving/aged

balances to assess whether there are any invoices in dispute: verifies
existence and rights and obligations.

• Inspect board minutes of Murray Co to assess whether there are any

material disputed receivables that may require write off: verifies existence
and rights and obligations.

• Inspect the sales ledger for any credit balances and discuss with
management whether these should be reclassified as payables: verifies
valuation of receivables and completeness of payables.
Receivables
• Inspect a sample of post yearend credit notes to identify any that relate to
preyearend transactions to ensure that they have not been included in
receivables: verifies existence (occurrence of revenue).

• Calculate average receivable days and compare this to prior year, investigate
any significant differences: verifies completeness and valuation. (Analytical
procedure)

Prepayments

• Prepayments are services or goods for which a company has paid in

advance.
Receivables
• Inspect bank statements to ensure payment has been made: verifies
existence.

• Inspect invoices to ensure payment relates to goods or services not yet

received: verifies existence.

• Recalculate the amount prepaid to confirm mathematical accuracy: verifies

valuation.

• Compare prepayments with the prior year to identify any missing items or
any new prepayments which require further testing: verifies existence,
valuation, and completeness. (Analytical procedure)
Payables and accruals
The focus of testing for liabilities is completeness. Note the effect of directional
testing, e.g. directly testing payables for understatement also indirectly tests
cost of sales for understatement (Dr: Payables, Cr: Purchases).

• Obtain a listing of trade payables from the purchase ledger, cast to verify
arithmetical accuracy and agree to the general ledger and the financial
statements: verifies completeness.

• Reconcile the total of purchase ledger accounts with the purchase

• ledger control account: verifies completeness.

• Obtain supplier statements and reconcile these to the purchase ledger

balances. Investigate any reconciling items: verifies existence and
completeness.
Payables and accruals
• Inspect after date payments, if they relate to the current year then follow
through to the purchase ledger or accrual listing: verifies completeness.

• Inspect invoices received after the year end to ensure no further items
need to be accrued: verifies completeness.

• Enquire of management their process for identifying goods received but

not invoiced or logged in the purchase ledger and ensure that it is
reasonable: verifies completeness.

• Select a sample of goods received notes before the yearend and follow
through to inclusion in the yearend payables balance: verifies
completeness of payables and cutoff of purchases.
Payables and accruals
• Select a sample of payable balances and perform a trade payables’
circularisation, follow up any nonreplies and any reconciling items
between balance confirmed and trade payables’ balance: verifies
completeness and existence.

• Insect the purchase ledger for any debit balances, for any significant
amounts discuss with management and consider reclassification as
current assets: verifies valuation of payables and completeness of
receivables.

• Compare the list of trade payables and accruals against the prior year
list to identify any significant omissions: verifies completeness.
(Analytical procedure)
Payables and accruals
• Calculate the trade payable days and compare to prior years, investigate
any significant differences: verifies completeness and valuation.
(Analytical procedure)

• Obtain the list of accruals from the client, cast it to confirm

mathematical accuracy and agree to the general ledger and the financial
statements: verifies completeness and classification and
understandability.

• Recalculate a sample of accrued costs by reference to contracts and

payment schedules (e.g. loan interest): verifies valuation (accuracy of
purchases and other expenses).
Payables and accruals
• Inspect invoices received post year end to confirm the actual amount
and assess whether the accrual is reasonable: verifies valuation.

• Compare the accruals this year to last year to identify any missing items
or unusual fluctuation in amount and discuss this with management:
verifies completeness and valuation. (Analytical procedure)
Provisions
IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires an entity to
recognise a provision if: a present obligation has arisen as a result of a past event; payment
is probable ('more likely than not'); and the amount can be estimated reliably. If payment is
only possible, a contingent liability must be disclosed in the notes to the financial
statements.

As such, audit testing will focus on whether an obligation exists and whether
the provision is valud appropriately. Completeness is also a key assertion as the company
may understate liabilities to improve their financial position.

• Obtain a breakdown of the items to be provided for and cast it to confirm arithmetical
accuracy and agree the figure to the financial statements.

• Enquire with the directors or inspect relevant supporting documentation to confirm

that a present obligation exists at the year end.

• Inspect relevant board minutes to ascertain whether payment is probable.

Provisions
• Recalculate the provision and agree components of the calculation to
supporting documentation: verifies completeness.

• Inspect post yearend bank statements to identify whether any payments

have been made, compare actual payments to the amounts provided to
assess whether the provision is reasonable: verifies valuation.

• Obtain a written representation from management that they believe the

provision is valued appropriately and is complete.
Provisions
• Obtain confirmation from client's lawyer about the likely outcome and
chances of payment (e.g. for a legal provision).

• Inspect correspondence received from the lawyer regarding the legal

provision to assess whether a provision should be recognised and if so,
whether the amount of the provision is adequate.

• Inspect the financial statement disclosure of the provision to ensure

compliance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets: verifies classification and understandibility.
Share capital, reserves & director's remuneration

Share capital

• Agree authorised share capital and nominal value disclosures to

underlying shareholding agreements/statutory constitution documents.

• Inspect cash book for evidence of cash receipts from share issues and
ensure amounts not yet received are correctly disclosed as share capital
calledup not paid in the financial statements.

• Inspect board minutes to verify issue of share capital during the year.
Share capital, reserves & director's remuneration

Dividends

• Inspect board minutes to agree dividends declared before the yearend.

• Inspect bank statements to agree dividends paid before the yearend.
• Inspect dividend warrants to agree dividend payment.

Directors remuneration

• Obtain and cast a schedule of director's remuneration split between

wages, bonuses, benefits, pension contributions and other
remuneration, and agree to financial statement disclosures.
• Inspect payroll records and agree wages, bonuses, and pension
contributions.
Share capital, reserves & director's remuneration

Dividends

• Inspect board minutes to agree dividends declared before the yearend.

• Inspect bank statements to agree dividends paid before the yearend.

• Inspect dividend warrants to agree dividend payment.

Directors remuneration

• Obtain and cast a schedule of director's remuneration split between

wages, bonuses, benefits, pension contributions and other
remuneration, and agree to financial statement disclosures.
Share capital, reserves & director's remuneration

• Inspect payroll records and agree wages, bonuses, and pension

contributions.

• Inspect bank statements to verify the amounts actually paid to directors.

• Inspect board minutes for discussion and approval of directors' bonus

announcements or other additional remuneration.

• Obtain a written representation from directors that they have disclosed

• all related party transactions and director remuneration to the auditor.

Share capital, reserves & director's remuneration

Reserves

• Agree opening reserves to prioryear closing reserves and

reconcile movements.

• Agree movements in reserves to supporting documentation (e.g.

revaluation reserve movements independently valuers report).
Statement of profit or loss
Payroll

• Agree the total wages and salaries expense per the payroll system to the
general ledger and the financial statements: verifies completeness.

• Cast the monthly payroll listings to verify the accuracy of the payroll
expense: verifies accuracy.

• Recalculate the gross and net pay for a sample of employees, and agree
to the payroll records: verifies accuracy.

• Reperform calculation of statutory deductions to confirm whether

correct deductions for this year have been included within the payroll
expense: verifies accuracy.
Statement of profit or loss
• Select a sample of joiners and leavers, agree their start/leaving date to
supporting documentation, recalculate that their first/last pay packet
was accurately calculated and recorded: verifies completeness,
occurrence, accuracy.

• For salaries, agree the total net pay per the payroll records to the bank
transfer listing of payments and to the cashbook: verifies occurrence.

• For wages, agree the total cash withdrawn for wage payments equates to
the weekly wages paid plus any surplus cash subsequently banked:
verifies completeness, occurrence.

• Agree the yearend tax liabilities to the payroll records, and subsequent
payment to the post yearend cash book: verifies occurrence.
Statement of profit or loss
• Agree the individual wages and salaries per the payroll to the personnel
records and records of hours worked per clocking in cards: verifies
accuracy.

Analytical Procedures

• Perform a proof in total of total wages and salaries, incorporating

joiners and leavers and the pay increase. Compare this to the actual
wages and salaries in the financial statements and investigate any
significant differences: verifies completeness, accuracy.

• Compare the payroll figure for this year to last year to identify any
unusual fluctuations and discuss them with management: verifies
completeness, accuracy.
Statement of profit or loss
Revenue

• Inspect a sample of GDN's before and after the year end and ensure they
have been recorded in the correct period: verifies cutoff.

• Recalculate discounts and sales tax applied for a sample of large sales
invoices: verifies accuracy.

• Select a sample of customer orders and agree these to the dispatch notes
and sales invoices through to inclusion in the sales ledger: verifies
completeness.

• Inspect credit notes issued after the year end, trace to GDN and invoice
and ensure the sale has been reversed: verifies occurrence.
Statement of profit or loss
Analytical procedures

• Compare revenue against prior year and investigate any significant

fluctuations: verifies occurrence, accuracy and completeness.

• Compare revenue with budget/forecast and investigate any significant

fluctuations: verifies occurrence, accuracy and completeness.

• Calculate the gross profit margin and compare to prior year. Investigate
any significant differences: verifies occurrence, accuracy and
completeness.
Statement of profit or loss
Purchases and other expenses

• Inspect GRN's before and after the year end and ensure they have been
recorded in the correct period: verifies cutoff.

• Recalculate discounts and sales tax applied for a sample of large

purchase invoices: verifies accuracy.

• Select a sample of purchase orders and agree these to the GRNs and
purchase invoices through to inclusion in the purchases ledger: verifies
completeness.
Statement of profit or loss
Analytical procedures

• Compare expenses for each category year on year and investigate any
significant fluctuations: verifies accuracy, completeness and occurrence.

• Compare expenses against budget and investigate any significant

significant fluctuations.

• Calculate gross profit margin and compare with prior year to identify
any possible misstatement of purchases. Discuss any significant
movement with management: verifies accuracy, completeness and
occurrence.
Statement of profit or loss
• Calculate operating profit margin and compare with prior year.
Investigate any significant fluctuations: verifies accuracy, completeness
and occurrence.

• Inspect purchase invoices for a sample of purhcases/expenses in the

ledger for the amount, name of the client and description of the goods:
verifies accuracy, occurrence and classification.
Accounting estimates
There are many accounting estimates in the financial statements, e.g.
allowances for receivables, expected life of property, plant and
equipment, valuation of provisions etc. Accounting estimates are
inherently risky because they are about the future, cannot be 'right',
and are often not supported by documentary evidence.

ISA 540 Auditing Accounting Estimates requires the auditor to:

• Obtain an understanding of how management identify those

transactions, events or conditions that give rise to the need for an
estimate.
Accounting estimates
For each estimate in the financial statements, the auditor must also:

• Enquire of management how the accounting estimate is made and the data on
which it is based.

• Determine whether events occurring up to the date of the auditor’s report

(after the reporting period) provide audit evidence regarding the accounting
estimate.

• Review the method of measurement used and assess the reasonableness of

assumptions made.

• Test the operating effectiveness of the controls over how management made
the accounting estimate.

• Develop an expectation of the possible estimate (point estimate) or a range of

Accounting estimates
• Review the judgements and decisions made by management in the
making of accounting estimates to identify whether there are indicators
of possible management bias.

• Evaluate overall whether the accounting estimates in the financial

statements are either reasonable or misstated.

• Obtain sufficient appropriate audit evidence about whether the

disclosures in the financial statements related to accounting estimates
and estimation uncertainty (e.g. contingent liabilities) are reasonable.

• Obtain written representations from management and, where

appropriate, those charged with governance whether they believe
significant assumptions used in making accounting estimates are