Main risk in relation to investments
Valuation (especially if unlisted)
Specific considerations for valuation and presentation of long term investments (5)
- Obtain evidence as to company’s ability to hold investments on long-term basis
- Discuss plans with management
- Obtain written representations
- Review financial statements of investment company to support carrying amount
- Consider impairment
Other receivables (prepayments and accrued income) tested through: (3)
- SAPs
- Agreeing to supporting documentation
- Reviewing subsequent events
When auditing bank and cash, auditor performs
Tests of detail on closing balance
Common substantive tests for bank and cash include (5)
- Testing the bank reconciliation
- Testing the bank confirmation letter
- Physical cash count of material cash balances
- Verifying foreign currency rates used for FX accounts and recalculating the translation
- Considering appropriate presentation and disclosure
Bank confirmation letter must be obtained for
All bank accounts open at any time during the year
Important assertion for bank and cash
Presentation
Overdrafts presentation (2)
- Should not be netted off against positive balances unless bank has a legal right of set off
- If secured on assets or guaranteed by third party should be disclosed
Key risk of accruals and other payables and non-current liabilities is
Understatement, therefore key assertions = C, A, V and Allocation
Financial statements should include (capital, reserves and equity accounts)
Disclosure note reconciling opening and closing balances therefore audit this
Private companies > audit of capital and reserves
Should present very little risk
Public companies > audit of capital and reserves
Movements in share capital and reserves can be very large, higher risk
Revaluation reserve testing (2)
- Obtain calculation for release of reval reserve and agree to supporting documentation
- Perform recalc to ensure amount released is accurate
Capital redemption reserve testing
Agree transfer to capital redemption reserve is in line with Companies Act and recalculate using supporting documentation
Other reserves testing
Review board minutes to ensure no movements within other reserves category
Retained earnings testing (2)
- Sample of cash flow hedges, obtain supporting documentation to ensure valid transaction, obtain third party exchange rate and recalc
- Agree profit transferred for the year to P&L account to ensure amount accurate
Ordinary shares/ share premium testing (5)
- Agree share issues/ purchases to bank statements
- Agree share capital details to statutory books/ memorandum of association
- Review board mins for discussion and approval of share issue/ purchase and any other transactions not currently disclosed
- Recalc share premium
- Ensure issue costs correctly capitalised
Auditor’s role when auditing contingencies
Verifying whether any contingencies should be disclosed
Common contingent liabilities (5)
- Guarantees
- Charges held by third parties over the company’s assets
- Litigation
- Liabilities under warranties
- Claims for dilapidations under leases
Income statement, may gather most audit evidence from
Tests of controls (due to large volume of transactions)
Analytical procedures - ISA requirement
Final analytical procedures must be performed
Tests of details on income statement
Where auditor can rely on controls, ToD are usually limited to testing opening and closing balances on balance sheet eg revenue > test TR, expenses > test TP
Key risk of revenue
Occurrence (especially where there is a risk of fraud)
Non statistical sampling
Does not display characteristics of statistical sampling, generally based on judgement of the auditor
