Chapter 5: Section 2.5 - 2.12

Question 1

What are non current liabilities?

Answer 1

Loans repayable at a date more than one year after the year end e.g., bank loans and debentures (generally known as borrowings)

Question 2

What are auditors concerned with in relation to borrowings?

Answer 2

Completeness
Valuation
Disclosure

Question 3

How can auditors test disclosures of borrowings?

Answer 3

Review disclosures made in financial statements and ensure they meet legal requirements

Question 4

How can auditors test valuation in relation to borrowings?

Answer 4

1) Trace additions and repayments to entries in the cash book

2) Confirm repayments are in accordance w/loan agreement

3) Examine receipts for loan repayments

4) Obtain direct confirmation from lenders about amount loaned and terms thereof

5) Verify interest charged for the period and adequacy of accrued interest

Question 5

How do auditors test completeness in relation to borrowings?

Answer 5

1) Obtain/prepare a schedule of loans outstanding at end of reporting period

2) Compare opening balances to PY’ working papers (closing balances at end of last year)

3) Test clerical accuracy of schedule

4) Compare balances to general ledger

5) Check names of lenders to relevant info e.g. bank letter or register of debenture-holders

6) Review minutes and cash book to ensure all loans have been recorded

Question 6

What are payables?

Answer 6

Amounts company owes to its suppliers

Question 7

Why will trade and other payables still have various tests that need to be performed on them despite the fact they might not individually be the largest credit balances on the SFP (loans can sometimes be bigger)?

Answer 7

May still be the largest credit balance on aggregrate

Question 8

What is provisions also known as?

Answer 8

Accounting estimates

Question 9

What is an accounting estimate?

Answer 9

An approximation of the amount of an item in the absence of a precise means of measurement

Question 10

What are examples of provisions (accounting estimates)?

Answer 10

-Allowances to reduce inventories and receivables to their estimated realisable value
-Depreciation charges
- Accrued revenue
-Provision for a loss from a lawsuit
-Provision to meet warranty claims

Question 11

What are the 3 situations under IAS 37: para 14 when a provision should be recognised?

Answer 11

When:
1. A company has a present obligation (legal or constructive
2. A probable outflow of resources embodying economic benefits will be necessary to settle it
3. Benefit can be reliably estimated

Question 12

Who is responsible for making accounting estimates included in the financial statements?

Answer 12

Directors and management

Question 13

In what conditions are accounting estimates often made?

Answer 13

In conditions of uncertainty regarding the outcome of events and involve the use of judgement

Question 14

What increases when accounting estimates are involved due to them being made in conditions of uncertainty?

Answer 14

Risk of a material misstatement and thus inherent risk is higher

Question 15

Why do auditors need to exercise significant judgement when dealing with accounting estimates?

Answer 15

Audit evidence supporting accounting estimates is generally less than conclusive

Question 16

When may audit estimates be produced?

Answer 16

As part of the routine operations of the accounting system OR may be a non-routine procedure at the period end

Question 17

What may, as frequently is the case, be used to calculate accounting estimates?

Answer 17

Formula based on past experience

Question 18

Where a formula is used to calculate the estimate what should management make sure they do?

Answer 18

Regularly review it e.g., actual vs estimate in prior periods

Question 19

What must auditors do to make accounting estimates and how will this help them?

Answer 19

Gain an understanding of the procedures and methods used by management to make accounting estimates
Will aid auditors planning of own procedures

Question 20

Auditors must carry out one or a mixture of what 3 procedures relating to accounting estimates?

Answer 20

Procedure 1 - Review and testing the process
Procedure 2 - Use of an independent estimate
Procedure 3 - Review of subsequent events

Question 21

In relation to procedure 1 for accounting estimates (Review and testing the process), what are the 4 things auditors should do?

Answer 21

1. Evaluate data and consider assumptions on which the estimate is based
2. Test calculations involved in the estimate
3. Compare estimates made for prior periods with actual results of those periods
4. Consider management’s/directors’ review and approval procedures.

Question 22

What is procedure 2 for accounting estimates (use of an independent estimate) useful for?

Answer 22

Such an estimate (made or obtained by the auditors) may be compared with the accounting estimate

Question 23

What must auditors do for procedure 3 of accounting estimates (review of subsequent events)?

Answer 23

Should review transactions or events after period end which may reduce or even remove the need to test accounting estimates.

Question 24

Give an example of procedure 3 for accounting estimates (review of subsequent events)

Answer 24

If directors have estimated an allowance for an irrecoverable debt, but all debt existing at the end of the reporting period has been paid by the date of the auditor’s report, this provision will no longer be required (ISA 540: para 13)

Question 25

What is revenue often tested alongside and why?

Answer 25

At same time as receivables due to it being the other side of the double entry

Question 26

Through what procedures is revenue testing usually done by and what does this help with?

Answer 26

Usually done by analytical procedures - should be possible to see predictable relationships arising as usually a great deal of info available in a company about its revenue

Question 27

What are the key assertions relating to revenue?

Answer 27

Completeness Accuracy

Question 28

Why are the relevant assertions for revenue completeness and accuracy?

Answer 28

Auditor wants to confirm all relevant revenue has been included and that revenue actually relates to the correct year

Question 29

For the assertion of completeness, regarding revenue, what are the 3 things auditors should do?

Answer 29

1. Review level of revenue over the year, comparing it on a month by month basis with previous years 2. Consider effect that any price rises have had on both quantity of items sold and amount of revenue received 3. Consider level of goods returned, sales allowances and discounts

Question 30

Regarding completeness of revenue, what other thing may auditors do relating to records? Give a specific example

Answer 30

May test completeness of recording of revenue in the original records, e.g., tracing from documents that first record revenue right through to the GL Specific example = tracing through from sales order to a goods despatch note to a sales invoice to sales book to sales ledger to the general ledger

Question 31

Where a cash business is involved how may auditors test completeness if they are planning to look at original records?

Answer 31

May trace from the till roll to the sales day book to the sales ledger to the general ledger

Question 32

When looking at assertion of accuracy and checking if revenue has been measured correctly, what are the 4 things auditors can do?

Answer 32

1. Checking calculations and additions on sales invoices 2. Ensuring VAT has been dealt with appropriately 3. Checking discounts have been applied properly 4. Checking the casting of the sales ledger accounts and control account

Question 33

When auditors are scrutinising payroll-related payables, what may they also carry out?

Answer 33

Substantive procedures on payroll expense

Question 34

What is payroll expense likely to be in the financial statements?

Answer 34

Highly material

Question 35

Why may a great deal of testing be done by analytical procedures on payroll?

Answer 35

There are a number of predictable relationships (number of staff, standard rates of pay, ratio of deductions to pay etc)

Question 36

Apart from analytic procedures, for payroll, auditors may also carry out tests of detail in relation to what assertions?

Answer 36

Occurrence Measurement Completeness

Question 37

In relation to occurrence for payroll, what 3 things could the auditor do?

Answer 37

1. Check individual remuneration per payroll to personnel records 2. Confirm existence of employees by meeting them 3. Check benefits to supporting documentation

Question 38

In relation to accuracy and payroll, what 3 things could the auditor do?

Answer 38

1. Recalculate benefits 2. Check whether deductions of tax and NI have been made correctly 3. Check validity of other deductions e.g., pension contributions to conditions of pension scheme

Question 39

In relation to completeness and payroll, what 7 things could the auditor do?

Answer 39

1. Check a sample of employees from records to the payroll 2. Check whether joiners have been paid in the correct month 3. Check whether leavers have been correctly removed from payroll 4. Check casts of the payroll 5. Confirm payment of pay to bank transfer records 6. Agree net pay per cash book to payroll 7. Scrutinise payroll and investigate unusual items

Question 40

When testing purchases, what are auditors concerned with (assertions)?

Answer 40

Whether they have occurred Whether they are measured correctly Whether they have been made for valid business reasons

Question 41

What 6 things could auditors do when looking at occurrence and purchases?

Answer 41

Consider: 1. Level of purchases on a month-by-month basis compared with previous years 2. Effect on value of purchases by price changes 3. Effect on value of purchases of changes in products purchased 4. Level of major expenses other than purchases in comparison with previous years Compare: 5. Ratio of trade payables to purchases with previous years 6. Ratio of trade payables to inventory with previous years

Question 42

Apart from assertions mentioned, what else may auditors test in regard to purchases and how?

Answer 42

The completeness of recording of purchases in the original records e.g., tracing documents that first record purchases right through to the general ledger

Question 43

How can auditors check the validity of purchases in the records?

Answer 43

May test individual items in the nominal ledger back through the records to the original purchase order and requisition

Question 44

What are other payables or accruals?

Answer 44

Made when an entity received a product or service for which it has not yet paid (e.g., utilities bill)

Question 45

What 4 things will auditors do to test other payables?

Answer 45

1. Verify valuation, existence and completeness of such items by reference to subsequent payments 2. Verify calculation of the item for reasonableness in light of all supporting evidence e.g., review of SPL and prior years to consider whether other accruals are required 3. Perform analytical procedures to assess if additional payables are required 4. Review payments made and invoices received after the year end to ascertain if they should have been accrued

Question 46

How can PAYE and VAT accruals be verified?

Answer 46

By reference to monthly payroll deductions and the next VAT return

Question 47

What are other receivables or prepayments?

Answer 47

Occur when a company pays for an expense in advance of receiving the item - e.g., insurance premiums, rental of property or even a telephone line

Question 48

What 4 things will auditors do to test other receivables?

Answer 48

1. Trace relevant payments to both cash book and invoice to test existence 2. Review the calculation of the payment for accuracy 3. Review SPL to ensure all likely prepayments have been accounted for 4. Perform analytical procedures to assess whether they seem reasonable