piotr pyziak, consultant, cfrr - world...

EU-REPARIS is funded by the

European Union and is a part of

WB EDIF.

Road to Europe: Program of AccountingReform and Institutional Strengthening

Audit Training of Trainers

Piotr Pyziak, Consultant, CFRR

16 March 2017, Vienna

2

»Discuss substantive testing objectives for selected accounts

»Engage in a group exercise based on the scenario of the simulated audit client case “PejaSko” to design substantive tests for:

» Property, Plant and Equipment

» Receivables

» Cash and Bank

» Revenues

» Cost of Sales

3

»Substantive procedure (ISA 330) – An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise:

» (i) Tests of details (of classes of transactions, account balances, and disclosures); and

» (ii) Substantive analytical procedures.

»Substantive testing is used by auditors to obtain audit evidence.

4

Analytical procedures Test of detail

(balances & transactions)

5

» Key areas when testing tangible non-current assets:

» Confirmation of ownership,

» Inspection of non-current assets,

» Valuation by third parties,

» Adequacy of depreciation rates,

» Potential impairment.

Financial statement assertion Audit objective

Existence and occurrence – Additions represent assets acquired in the year and

disposal represent assets sold or scrapped in the year

– Recorded assets represent those in use at the year-end

Completeness – All additions and disposals that occurred in the year have

been recorded

– All assets in use at the year-end are included in balances

Rights and obligations – The entity has rights to the assets purchased and those

recorded at the year-end

Accuracy, classification and

valuation

– Non-current assets are correctly stated at cost less

accumulated depreciation

– Additions and disposals are correctly recorded

– Review any impairment indicators, test or impairment

Assertions relating to

presentation and disclosure

– Disclosures relating to cost, additions and disposals,

depreciation policies, useful lives and assets held under

finance leases are adequate and in accordance with

accounting standards

6

» Completeness & existence – Physical verification

» Valuation

» Verify valuation to valuation report and consider reasonableness

» Evaluate depreciation rates (in terms of lives of assets, residual amounts, gains/losses on disposal, consistency in accounting policies, replacement policy)

» Compare ratios of depreciation to non-current assets

» Review capitalisation of expenses for additions

» Review labour, material and overhead costs for self-constructed assets, search for any profit element, review capitalisation of finance costs.

7

» Rights and obligations

»Verify title to land and buildings by inspection of title deeds or registry certificates, and give special consideration to leases agreements.

» Inspect registration documents for vehicles

»Classification and understandability

»Review disclosures to ensure they meet IFRS for SMEs requirements

»Contractual commitments, restrictions on title, temporary idle, fully depreciated but still in use

8

»Potential issues for PejaSko:

» Physical existence and counting of live stock

» Depreciation rate estimates

» Low valuation of land and buildings

9

» Key areas when testing

inventories:

» Cut-off,

» Inspection of

inventories,

» Valuation -

obsolescence,

» Adequacy of

depreciation rates.

Financial statement assertion Audit objective

Existence and occurrence – Recorded inventory exists at the year-end

Completeness – All inventory is included in the balance at the year-end

Rights and obligations – The entity has rights to disclose the balances of inventory

at the year-end

– Proper cut-off procedures are applied for disclosing the

right balance

Valuation – Recorder value of inventories is fairly stated

Presentation and disclosure – Disclosures relating to cost, valuation, including potential

provision for obsolescence are adequate and in

accordance with accounting standards

10

»Existence & Completeness

»Physical verification – participation at the year-end count of inventories

»Rights and obligations

»Apply cut-off procedures to verify ownership of inventories –reconcile shipments to goods dispatch notes and sales invoices (Does inventory at year-end belong to PejaSko or clients?).

11

»Valuation

»Review and assess reasonableness of valuation of

inventories. Apply analytical procedures – comparisons of

value and quantity to prior periods. Include in the process

review of provision for inventories.

»Review the cost elements of valuation allocated: labour,

material and overhead costs or any other costs elements

used in the process of valuation of inventories.

12


» Physical existence and counting of inventory

» Issue with proper valuation – proper absorption of costs

» Cut-off of inventories - returned inventory after year end

» Provision for obsolete inventories - returned inventory after year end

13

» Key assertions related to audit of receivables:

» existence,

» completeness and

» valuation

» Tested in conjunction with sales where key assertions are:

» occurrence,

» completeness and

» accuracy.

» Combination of test of details and analytical procedures

14

» Completeness

» Trace shipping documentation to invoice and to recorded sales in sales and

receivables ledger.

» Comparison of gross profit % with industry and prior years.

» Existence

» Circularisation and follow-up with supported explanations for differences or alternative

procedures


» Bank confirmations for any liens on receivables, inquiries to management, inspection

of loan agreements, review of board minutes for evidence of possible factoring.

15

» Valuation and allocation

» Compare aged analysis with prior year or industry, including bad debt expense% of

sales and allowance as % of credit sales or receivables.

» Confirm adequacy of allowance by reviewing correspondence with solicitors or

customers

» Discuss allowance % with management

» Cut-off

» Review material after year end credit notes and adjustments

» Analytical procedure on sales returns.

» Review before year end invoices and trace to documentation for dispatch.

16

»Presentation and disclosure:

» Relating potential provision for doubtful/bad debt in accordance with

accounting standards

17


» Receivable for reimbursement from Insurance Claim

» Distinction between receivables from big retail chains and small buyers

– what are the payment patterns?

» Dependency on few major clients (going concern?)

» The ageing of receivables – potential cash flow issue?

» Doubtful vs bad debt - the need for provision for receivables?

18

Financial statement assertion Audit objectiveExistence Recorded cash balances exist at the

period-end

Completeness Recorded cash balances include the

effects of all transactions that have

occurred

Rights and obligations The entity has legal title to all cash

balances shown at the period-end

Valuation Recorded cash balances are

realisable at the amounts stated

Assertions relating to presentation

and disclosure (classification and

understandability, occurrence and

rights and obligations, accuracy and

valuation, completeness)

Disclosures relating to cash are

adequate and in accordance with

accounting standards and legislation

19

» Bank balances

» Key audit procedure for bank balances is confirmation (attention to cut-off issues).

» Covering all assertions (existence, completeness, cut-off, valuation and allocation, rights and obligations).

» Decide which bank balances to be confirmed, all of them usually.

» Note details of accounts or leave blank.

» Single confirmation requesting information on all loans and deposits including other important information regarding disclosures (i.e. guarantees, restrictions on bank accounts)

» Review bank reconciliations if applicable (for cheques, transfers of cash with different value date).

» Verify bank balances with standard bank statements

20

»Cash in Hand

»Carefully audited if balances are material and susceptible to fraud (hotels, restaurants, retail organisations)

»Auditors will be concerned that the cash exists, is complete, and belongs to the company (rights and obligations) and is stated at the correct value.

»Plan for locations to attend the cash count at year end

»Obtain all reports/certificates on cash counts and compare with accounting records

»Follow-up on banked cash receipts and reconcile with bank statements after cut-off date

21


» Dormant bank account

» Lack of segregation of duties concerning cash payments

» Chairmen travel costs

22

» The major issue is understatement of liabilities

» Completeness

» Test subsequent cash disbursements

» Circularization (blank positive confirmation, small and zero balances sampled)

» Test of unmatched purchase orders and suppliers’ invoices received for unrecorded liabilities

» Disclosure checklists

» Analytical procedures on payables turnover, payables days, sample supplier balances and compare to prior year data.


» Vouch sample of balances to supporting documentation: invoices, receipt notes and purchase orders.

» Valuation and allocation

» Vouch sample of balances to supporting documentation: invoices, receipt notes and purchase orders.

» Recalculate accruals.

23

» Cut-off

» Test transactions around the year-end to determine whether amounts have been recognised in

the correct financial period.

» Perform analytical procedures on purchase returns, comparing the purchase returns as a % of

sales or cost of sales to the previous year.

» Classification and understandability

» Review the trade accounts payables listing to identify any large debits

» Read the disclosure notes relevant to liabilities in the draft financial statements

24


» Payables relating to the personal trips of the owner

» Timely payments of payables threatened by slow collection of

receivabels – cash flow issue and additional costs of external

operational financing

25

Substantive tests Audit objectives

Test the year-end cutoff of sales transactions –verify the sales invoices from end of the audited year and begining of next year to shipping documents and terms of the contract.

Cut-off, Completeness

Test sale returns post year end – verify goods received shipping documents and documents correcting sales, which were issued in the beginning of next year.

Occurrence

Perform analytical procedures on revenue –compare to prior years, compare month by month, investigate margins: monthly, by product, by client, etc.

Review significant year-end sales contracts and discounts - inquire about and examine the volume based discounts granted to supermarkets.

Accuracy

26


Evaluate accounting estimates related to revenues Accuracy

Investigate sale transactions with related parties

Evaluate financial statement presentation and disclosure

Presentation and disclosure

Cross reference confirmation tests from receivables section

Existence, occurrence, and rights, valuation

27


» Revenues could be overstated before year end – with corrections to

sales in the next reporting period

» Existence of volume based discounts and the proper reflection in FS

28


Test the year-end cutoff of purchase transactions(both goods and services) – verify the purchase invoices from end of the audited year and begining of next year to relevant shipping documents and to revelant contract agreements, service orders or other documentation.

Cut-off, Completeness

Verify major purchases of services during the year to supporting documentation, including the contracts. Inquire the nature and relevance of these.

Occurrence

Perform analytical procedures on cost of sales –compare to prior years, compare month by month, investigate margins: monthly, by product, by client, etc. Investigate big and unusual items.

Accuracy

29


Evaluate accounting estimates related to cost of sales

Accuracy

Investigate purchase transactions from related parties



Cross reference confirmation tests from payablessection


30


» Cost of sales could be understated – cost transactions could be pushed

to the next reporting period in order to improve the results of audited

year.

» The nature and amounts of private expenses of the owner needs to be

investigated with detail (potential tax implications).

31


Review employment contracts with latest annexes. Verify amounts from the contracts to payroll list and payroll slips.

Occurrence, Accuracy, Completeness

Verify calculation of relevant social charges and taxes, reconcile to tax returns.

Occurrence, Accuracy

Verify accounting entries and payments of payroll and relevant taxes and social charges to bank account.

Classification, Accuracy, Cut-off

32


Perform analytical procedures on payroll and related social charges and taxes – compare to prior years, compare month by month, investigate margins: monthly, by product, by client, etc. Investigate bid and unusual items.

Accuracy



Cross reference confirmation tests from payablessection and cost of sales


33


» Cost of payroll and related taxes and social charges could be

understated – gray economy.

» Payroll and related social charges and taxes could be wrongly

calculated – risk of tax control, possible penalties and interest.

35

»Use template 11 to perform design substantive tests based on

the PejaSko Case study for:

» Property, Plant and Equipment

» Receivables

» Cash and Bank

» Revenues

» Cost of Sales

»Work in Groups for 15-20 minutes

»Each Group will present the results

piotr pyziak, consultant, cfrr - world...

Documents