Contents
Audit process / Approach............................................................................................................. 3
Collecting Evidence (FS Assertions):.......................................................................................5
Internal audit:........................................................................................................................... 6
Component auditors (in group audits)......................................................................................7
IT................................................................................................................................................. 8
General and Application controls..............................................................................................8
Cyber Security - Internal controls.............................................................................................9
Cloud computing – hosting data on remote serves accessed via the internet..........................9
IT considerations:................................................................................................................... 10
Data analytics......................................................................................................................... 10
Artificial intelligence................................................................................................................ 11
Audit Report............................................................................................................................... 11
New Audit Client........................................................................................................................ 13
IFRS 3 Business Combinations.................................................................................................14
Investment in subsidiaries (stand-alone)................................................................................14
Investments in subsidiaries (consolidation)............................................................................14
Investment in Associate (consolidation).................................................................................15
Consolidation......................................................................................................................... 16
Acquisition.............................................................................................................................. 18
Disposal................................................................................................................................. 19
Identifiable assets / Intangibles recognised............................................................................20
IAS 21 – The effects of changes in foreign exchange rates.......................................................21
Translation of foreign subsidiaries..........................................................................................21
Hyperinflationary economies..................................................................................................22
IAS 32, IFRS 9, IFRS 13 – Financial Instruments......................................................................23
Financial Assets..................................................................................................................... 23
Financial Liabilities................................................................................................................. 25
Trade Payables...................................................................................................................... 27
Effective interest rate.............................................................................................................. 28
Derivatives............................................................................................................................. 28
Embedded Derivatives........................................................................................................... 29
Interest Rate Swaps............................................................................................................... 29
IFRS 9 – Hedge Accounting.......................................................................................................30
1
, Interest rate swap................................................................................................................... 32
IFRS 2 – Share-based payments...............................................................................................33
IAS 19 Employee Benefits......................................................................................................... 34
IAS 36 Impairment of Assets......................................................................................................36
IAS 2 Inventories........................................................................................................................ 37
Accuracy, valuation and allocation:........................................................................................38
Purchase price variance (PPV):........................................................................................38
Overheads:....................................................................................................................... 38
Provisions:........................................................................................................................ 39
Rights and obligations (ownership of inventory).....................................................................39
IAS 16 PPE and IAS 23 borrowing costs...................................................................................39
IAS 38 Intangible Assets............................................................................................................ 41
IAS 37 Provisions, contingent liabilities and contingent assets..................................................41
IAS 40 Investment Property.......................................................................................................43
IFRS 15 Revenue...................................................................................................................... 44
Construction contracts............................................................................................................ 46
IFRS 16 Leases......................................................................................................................... 47
IAS 33 Earnings per share TO BE COMPLETED......................................................................48
IAS 12 Income Tax.................................................................................................................... 49
IFRS 8 Operating Segments......................................................................................................50
IFRS 5 Assets held for sale and discontinued operations..........................................................50
IAS 24 Related Party Disclosures..............................................................................................51
Purchase of a company asset by a director............................................................................51
2
, Audit and Assurance
Audit process / Approach
1. Client Acceptance/continuance -> Considerations: legal, ethical, practical
2. Establish re-evaluate -> LoE
3. Plan the audit -> Obtain understanding, evaluate internal control, assess risks, establish
materiality
4. Develop audit approach -> Audit strategy, audit planning
5. Audit internal control -> Tests of controls, sampling
6. Audit business process -> Analytical procedures, tests of details, sampling
7. Evaluate results -> Analytical procedures, additional procedures?
8. Issue the audit report
The statutory audit process
1) Underlying concepts and Ethics
- Good quality control: comply with ISAs (ISQC1) and the fundamental principles to reduce audit
risk.
- Professional scepticism: questioning mind especially on risky areas such as cut-off and
subjective areas
- Ethics
2) Planning
3
, Planning the audit involves:
Understanding the client and the environment in which it operates
Identifying risk areas by applying analytical procedures (see below)
Setting up materiality levels
0,5%-1% revenue, 1%-2% total assets, 5%-10% PBT, 1%-2% equity, 1%-2% GP
Performance materiality should be lower than materiality as it acts as a safety net.
o Performance materiality can be set as a percentage of the overall materiality (e.g. 80%
of materiality level) or,
o Can be set as a percentage of the amount tested (e.g. 10% of receivables). In this
case, if an error is greater than the 10% of receivables then, this error is considered
material no matter whether this is lower or higher than the materiality level.
Risk assessment
(a) Business risk of the entity
Business risk is the risk that the company fails to meet its objectives. There are three main business risks:
(i) Financial risk: Financial consequences of operating activity and risk associated with the
company’s finance
(ii) Operational risk: Risk associated with the company’s trading activity
(iii) Compliance risk: Risks resulting from non-compliance with law and regulation
(b) Audit risk
Audit risk = Inherent risk * Control risk * Detection risk
Inherent Risk: The risk inherited from the characteristics of the industry and the company. This risk
cannot be influenced by either the client or the auditor. Examples include: doubts about client’s integrity,
complex operations, inexperienced client staff, cash-based business.
Control Risk: The risk that the internal control system of the client fails (the internal control system
should prevent, detect and correct errors/risks on a timely basis). This risk is influenced by the
management. The auditor can perform walk-through tests to understand the system and then, perform
test of controls to evaluate the effectiveness of the internal control system. Examples of internal controls
include segregation of duties, authorisation and review of transactions, performance of reconciliations etc.
The control risk is reduced if the management shows: Attitude, Awareness and Actions
Detection Risk: The risk that the auditor does NOT detect a material misstatement. This risk is
influenced only by the auditor.
If IR and CR are low: mainly perform tests of control and some substantive tests
If IR and CR are high: perform a lot of substantive tests
3) Audit Performance
Overall responses to audit risks:
Emphasise professional scepticism to the team, assign more experienced/skilled staff and/or use
experts, provide more supervision.
Substantive testing vs Tests of control
Detailed audit procedures focusing on risk areas
Take bigger samples
Interim audit
Continuous use of CAATs
4
Audit process / Approach............................................................................................................. 3
Collecting Evidence (FS Assertions):.......................................................................................5
Internal audit:........................................................................................................................... 6
Component auditors (in group audits)......................................................................................7
IT................................................................................................................................................. 8
General and Application controls..............................................................................................8
Cyber Security - Internal controls.............................................................................................9
Cloud computing – hosting data on remote serves accessed via the internet..........................9
IT considerations:................................................................................................................... 10
Data analytics......................................................................................................................... 10
Artificial intelligence................................................................................................................ 11
Audit Report............................................................................................................................... 11
New Audit Client........................................................................................................................ 13
IFRS 3 Business Combinations.................................................................................................14
Investment in subsidiaries (stand-alone)................................................................................14
Investments in subsidiaries (consolidation)............................................................................14
Investment in Associate (consolidation).................................................................................15
Consolidation......................................................................................................................... 16
Acquisition.............................................................................................................................. 18
Disposal................................................................................................................................. 19
Identifiable assets / Intangibles recognised............................................................................20
IAS 21 – The effects of changes in foreign exchange rates.......................................................21
Translation of foreign subsidiaries..........................................................................................21
Hyperinflationary economies..................................................................................................22
IAS 32, IFRS 9, IFRS 13 – Financial Instruments......................................................................23
Financial Assets..................................................................................................................... 23
Financial Liabilities................................................................................................................. 25
Trade Payables...................................................................................................................... 27
Effective interest rate.............................................................................................................. 28
Derivatives............................................................................................................................. 28
Embedded Derivatives........................................................................................................... 29
Interest Rate Swaps............................................................................................................... 29
IFRS 9 – Hedge Accounting.......................................................................................................30
1
, Interest rate swap................................................................................................................... 32
IFRS 2 – Share-based payments...............................................................................................33
IAS 19 Employee Benefits......................................................................................................... 34
IAS 36 Impairment of Assets......................................................................................................36
IAS 2 Inventories........................................................................................................................ 37
Accuracy, valuation and allocation:........................................................................................38
Purchase price variance (PPV):........................................................................................38
Overheads:....................................................................................................................... 38
Provisions:........................................................................................................................ 39
Rights and obligations (ownership of inventory).....................................................................39
IAS 16 PPE and IAS 23 borrowing costs...................................................................................39
IAS 38 Intangible Assets............................................................................................................ 41
IAS 37 Provisions, contingent liabilities and contingent assets..................................................41
IAS 40 Investment Property.......................................................................................................43
IFRS 15 Revenue...................................................................................................................... 44
Construction contracts............................................................................................................ 46
IFRS 16 Leases......................................................................................................................... 47
IAS 33 Earnings per share TO BE COMPLETED......................................................................48
IAS 12 Income Tax.................................................................................................................... 49
IFRS 8 Operating Segments......................................................................................................50
IFRS 5 Assets held for sale and discontinued operations..........................................................50
IAS 24 Related Party Disclosures..............................................................................................51
Purchase of a company asset by a director............................................................................51
2
, Audit and Assurance
Audit process / Approach
1. Client Acceptance/continuance -> Considerations: legal, ethical, practical
2. Establish re-evaluate -> LoE
3. Plan the audit -> Obtain understanding, evaluate internal control, assess risks, establish
materiality
4. Develop audit approach -> Audit strategy, audit planning
5. Audit internal control -> Tests of controls, sampling
6. Audit business process -> Analytical procedures, tests of details, sampling
7. Evaluate results -> Analytical procedures, additional procedures?
8. Issue the audit report
The statutory audit process
1) Underlying concepts and Ethics
- Good quality control: comply with ISAs (ISQC1) and the fundamental principles to reduce audit
risk.
- Professional scepticism: questioning mind especially on risky areas such as cut-off and
subjective areas
- Ethics
2) Planning
3
, Planning the audit involves:
Understanding the client and the environment in which it operates
Identifying risk areas by applying analytical procedures (see below)
Setting up materiality levels
0,5%-1% revenue, 1%-2% total assets, 5%-10% PBT, 1%-2% equity, 1%-2% GP
Performance materiality should be lower than materiality as it acts as a safety net.
o Performance materiality can be set as a percentage of the overall materiality (e.g. 80%
of materiality level) or,
o Can be set as a percentage of the amount tested (e.g. 10% of receivables). In this
case, if an error is greater than the 10% of receivables then, this error is considered
material no matter whether this is lower or higher than the materiality level.
Risk assessment
(a) Business risk of the entity
Business risk is the risk that the company fails to meet its objectives. There are three main business risks:
(i) Financial risk: Financial consequences of operating activity and risk associated with the
company’s finance
(ii) Operational risk: Risk associated with the company’s trading activity
(iii) Compliance risk: Risks resulting from non-compliance with law and regulation
(b) Audit risk
Audit risk = Inherent risk * Control risk * Detection risk
Inherent Risk: The risk inherited from the characteristics of the industry and the company. This risk
cannot be influenced by either the client or the auditor. Examples include: doubts about client’s integrity,
complex operations, inexperienced client staff, cash-based business.
Control Risk: The risk that the internal control system of the client fails (the internal control system
should prevent, detect and correct errors/risks on a timely basis). This risk is influenced by the
management. The auditor can perform walk-through tests to understand the system and then, perform
test of controls to evaluate the effectiveness of the internal control system. Examples of internal controls
include segregation of duties, authorisation and review of transactions, performance of reconciliations etc.
The control risk is reduced if the management shows: Attitude, Awareness and Actions
Detection Risk: The risk that the auditor does NOT detect a material misstatement. This risk is
influenced only by the auditor.
If IR and CR are low: mainly perform tests of control and some substantive tests
If IR and CR are high: perform a lot of substantive tests
3) Audit Performance
Overall responses to audit risks:
Emphasise professional scepticism to the team, assign more experienced/skilled staff and/or use
experts, provide more supervision.
Substantive testing vs Tests of control
Detailed audit procedures focusing on risk areas
Take bigger samples
Interim audit
Continuous use of CAATs
4
