ACCA SA Nov12 Fau f8 Audit Procedures PDF
ACCA SA Nov12 Fau f8 Audit Procedures PDF
Audit procedures
Audit procedures are an important area of the syllabus, though candidates often use
inappropriate audit procedures to answer questions. The following tips will help you to
understand the concepts and write appropriate audit procedures.
Completeness
This means that all transactions have been recorded in the financial statements – ie all
assets, liabilities, equity interests (capital and reserves) and other disclosures have
been included in the financial statements.
Occurrence
This assertion means that transactions and events and other matters that have been
recorded actually took place – and relate to this organisation.
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Accuracy
Accuracy means that amounts and other data relating to transactions and events have
been recorded at the correct amounts – ie at the amounts appearing in the source
documents.
Existence
This means that assets, liabilities and equity interests (capital and reserves) are
physically present/belong to the entity on the reporting date.
Cutoff
This means that transactions and events have been recorded in the correct accounting
period – for example, if goods are delivered prior to year end, they are included in the
cost of goods sold, not inventory.
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3 Think of the audit procedures The auditor will agree the availability of a
that should be performed in revaluation report (a source document for
order to avoid the risk the revaluation) and confirm that the value
mentioned in step 1 mentioned in the valuation report matches
(refer to ‘AEIOU’ below) the amount at which the PPE is revalued
and shown in the financial statements.
A: Analytical procedures
E: Enquiry and confirmation directly from a third party – ie inquiry
I: Inspection of records and assets
O: Observation
U: recalcUlation and reperformance
STEP 3: NOTE THE FOLLOWING WHILE WRITING DOWN THE AUDIT PROCEDURE
1 Write it clearly
Audit procedures should be written in such a way that even a junior auditor will be
able to understand what is to be done. For example, avoid vague procedures like
‘check goods received notes’. This is vague as it does not explain what is to be
examined in the goods received notes. Is it the description of items received, the
quantity received or the name of the vendor?
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• Use the word ‘cast’ to mean totalling up a list – for example, ‘cast the trial
balance’.
Use the words ‘agree’ or ‘trace’ to mean matching information from two documents/
records – for example, ‘agree the total sales of the sales day book to the general
ledger account’; or ‘trace a sample of trade payables to the purchase invoices, to
confirm the existence of the rights to the goods purchased’.
The auditor will agree a sample of items from the inventory sheets to the raw material
inventory1 to ensure that the inventory recorded on the sheets actually exists2. This
will confirm the assertion of existence of inventory as an asset in the financial
statements3.
(1 = the audit procedure; 2 = the reason for the audit procedure; 3 = the assertion).
If the above mentioned procedure is written as ‘The auditor will check a sample of
items from the inventory sheets to the raw material inventory’, it is incomplete as it
does not mention why the audit procedure is being performed.
The examiner’s reports mention various errors that candidates make while writing
audit procedures. Here is a summary of the common errors.
a) Writing an audit procedure without explaining the reason for the procedure – for
example, ‘The auditor will check a sample of items from the inventory sheets to the
inventory.’
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c) Writing what the internal control system should do rather than stating the audit
procedure – for example, ‘for all goods received, there should be a goods received
note raised’.
d) Writing vague procedures – for example, ‘check the invoice’, ‘check the goods
received note’, etc. These procedures are inappropriate as they do not mention
what is to be checked and the reason for checking them.
e) Quoting incorrect assertions – for example, ‘tracing details from the purchase
orders to the goods received notes in order to confirm existence of the goods’ – the
completeness assertion would apply here.
f) Including procedures that cannot be carried out – for example, ‘agree individual
items of physical inventory to the sales invoice’. It will not be possible to agree the
physical goods to the sales invoice as the goods will already be sold.
g) Including procedures that are incorrect – for example, ‘agree details from the
purchase orders (like description of items ordered, quantities ordered) to the goods
held in the inventory store’. This is an incorrect audit procedure as goods received
notes (not purchase orders) are used to update inventory.
i) Writing irrelevant audit procedures – for example, when you are asked to write
audit procedures relating to depreciation of a non-current asset, it will be
inappropriate to provide general audit procedures relating to audit of non-current
assets.
Audit procedures are a vital part of Paper F8 and Paper FAU. Therefore, you need to
practise explaining the audit procedures as suggested above in order to perform well
in the exam.
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