CSS Accounting and Auditing Auditing Syllabus

What is a periodic (final/annual/complete) audit?

An audit carried out only after the close of the accounting period, where the auditor attends once and examines the records continuously until the audit is completed.

State two advantages and two disadvantages of a continuous audit.

Advantages: early detection of errors/fraud and more detailed checking; moral check on staff. Disadvantages: figures already checked may be altered after the auditor's visit; and it may dislocate the client's work and create over-dependence of staff on the auditor.

What is an interim audit?

An audit conducted between two annual audits, usually to determine profit for an interim period (e.g., for declaring an interim dividend) or to ease the final audit workload.

What is an audit programme?

A detailed written plan/set of instructions listing the audit procedures to be performed, the staff responsible, and the time allocated, used to ensure all necessary work is completed systematically and nothing is overlooked.

Distinguish a fixed audit programme from a flexible one.

A fixed (predetermined) programme rigidly lists procedures applicable to all audits regardless of circumstances; a flexible programme is adaptable, allowing the auditor to modify procedures to suit the specific nature, size, and control environment of each client.

What is audit documentation (working papers)?

The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached; it provides evidence of the basis for the opinion and that the audit was planned and performed per standards.

Distinguish the permanent audit file from the current audit file.

The permanent file holds information of continuing importance for several years (e.g., memorandum & articles, copies of contracts, organizational structure); the current file holds information relating only to the current year's audit (e.g., trial balance, working schedules, correspondence).

What are the main purposes of maintaining audit working papers?

To provide evidence supporting the audit opinion; aid in planning, performing, and supervising the audit; demonstrate compliance with standards; assist quality control and review; serve as a defense against negligence claims; and assist future audits.

Define audit evidence.

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based, comprising the information in the accounting records and other corroborating information.

What two qualities must audit evidence possess, and what does each mean?

Sufficiency (the measure of the quantity of evidence) and appropriateness (the measure of its quality — its relevance and reliability in supporting the assertions). The two are interrelated.

List factors that affect the reliability of audit evidence.

Evidence is more reliable when obtained from independent external sources; when internally generated under effective controls; when obtained directly by the auditor; when in documentary or written form; and when from original documents rather than copies.

Name the principal procedures used by auditors to gather evidence.

Inspection (of records/documents and tangible assets), Observation, External confirmation, Recalculation, Re-performance, Analytical procedures, and Inquiry.

Define audit risk.

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated; it is a function of the risks of material misstatement and detection risk.

State the audit risk model formula.

$$AR = IR \times CR \times DR$$ where $AR$ is audit risk, $IR$ inherent risk, $CR$ control risk, and $DR$ detection risk.

Define inherent risk, control risk, and detection risk.

Inherent risk: susceptibility of an assertion to material misstatement, assuming no related controls. Control risk: risk that a misstatement is not prevented or detected and corrected by internal control. Detection risk: risk that the auditor's procedures fail to detect an existing material misstatement.

In the audit risk model, how does the auditor respond when the assessed risk of material misstatement is high?

To keep audit risk acceptably low, the auditor must reduce detection risk by performing more extensive/effective substantive procedures, gathering more reliable evidence, increasing sample sizes, and timing more work at the period end.

How is detection risk related to the risk of material misstatement for a fixed audit risk?

They are inversely related: $DR = \dfrac{AR}{IR \times CR}$, so the higher the assessed risk of material misstatement ($IR \times CR$), the lower the acceptable detection risk must be.

Define materiality in auditing.

Information is material if its omission or misstatement could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements; it depends on the size and/or nature of the item judged in the surrounding circumstances.

What is 'performance materiality'?

The amount(s) set by the auditor at less than materiality for the financial statements as a whole, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

What is the inverse relationship between materiality and audit risk?

Materiality and audit risk are inversely related: the lower the materiality level set, the greater the amount of audit evidence required (lower detection risk), and vice versa; the auditor considers both in determining the nature, timing, and extent of procedures.

What are 'tests of control'?

Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level; performed when the auditor intends to rely on those controls.

What are 'substantive procedures'?

Audit procedures designed to detect material misstatements at the assertion level, comprising (a) tests of details (of classes of transactions, balances, and disclosures) and (b) substantive analytical procedures.

What is the key difference in purpose between tests of control and substantive procedures?

Tests of control assess whether internal controls are operating effectively (the control system); substantive procedures directly test the monetary amounts and assertions in the financial statements for material misstatement.

Why must the auditor always perform some substantive procedures regardless of control reliance?

Because internal control has inherent limitations and tests of control alone provide only evidence about controls, not directly about the financial statement amounts; substantive procedures for material classes of transactions, balances, and disclosures are always required.

Define audit sampling.

The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection, in order to draw a conclusion about the entire population.

Distinguish statistical from non-statistical sampling.

Statistical sampling uses random selection and probability theory to measure sampling risk objectively; non-statistical (judgmental) sampling relies on the auditor's judgment to select items and evaluate results, without measuring sampling risk mathematically.

Distinguish sampling risk from non-sampling risk.

Sampling risk is the risk that the auditor's conclusion based on a sample differs from the conclusion if the whole population were tested. Non-sampling risk is the risk of a wrong conclusion for reasons unrelated to sample size (e.g., inappropriate procedures or misinterpreting evidence).

Name common methods of selecting a sample.

Random selection, systematic selection (using a sampling interval), monetary unit (value-weighted) sampling, haphazard selection, and block selection.

In systematic (interval) sampling, how is the sampling interval calculated?

$$\text{Sampling interval} = \frac{\text{Population size (or value)}}{\text{Sample size}}$$ then a random start is chosen and every $n$th item thereafter is selected.

Define an internal control system.

The process designed, implemented, and maintained by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of objectives regarding reliability of financial reporting, effectiveness and efficiency of operations, and compliance with laws and regulations.

List the five components of internal control (COSO framework).

(1) Control environment, (2) Risk assessment process, (3) Information system and communication, (4) Control activities, and (5) Monitoring of controls.

What is the 'control environment'?

The set of standards, processes, and structures that provide the foundation for internal control, including governance, management's integrity and ethical values, commitment to competence, organizational structure, and assignment of authority and responsibility — it sets the tone of the organization.

Give examples of 'control activities'.

Authorization, performance reviews, information processing controls (general IT and application controls), physical controls over assets and records, and segregation of duties.

What is segregation of duties and why is it important?

Dividing responsibilities for authorizing transactions, recording them, and maintaining custody of related assets among different people, so that no single person controls all phases of a transaction; it reduces opportunities for an individual to both perpetrate and conceal errors or fraud.

Define corporate governance.

The system of rules, practices, and processes by which a company is directed and controlled, balancing the interests of stakeholders, and providing accountability, transparency, fairness, and responsibility in the management of the company.

What is the role of internal audit in corporate governance?

Internal audit provides independent, objective assurance on the effectiveness of risk management, control, and governance processes, reporting to the audit committee/those charged with governance, thereby strengthening accountability and supporting good corporate governance.

What is the function of an audit committee?

A sub-committee of the board, composed mainly of non-executive/independent directors, that oversees financial reporting, the internal control and risk management systems, the internal audit function, and the relationship with (and independence of) the external auditor.

How may an auditor evaluate (record) a client's internal control system?

By using narrative notes, flowcharts, internal control questionnaires (ICQs), and internal control evaluation questionnaires (ICEQs), then confirming the system through walk-through tests.

What is the difference between an ICQ and an ICEQ?

An Internal Control Questionnaire (ICQ) asks whether specific controls exist (answers indicate presence/absence of controls). An Internal Control Evaluation Questionnaire (ICEQ) asks key control questions about whether specific errors/frauds are prevented, focusing on control objectives rather than detailed controls.

What is a 'walk-through test'?

Tracing one or a few transactions through the accounting system from initiation to recording in the financial statements to confirm that the auditor's understanding of the system and its controls is accurate.

What are the inherent limitations of any internal control system?

Human error and carelessness; collusion among employees; management override of controls; costs of controls exceeding benefits; controls geared to routine (not unusual) transactions; and possible obsolescence of controls due to changing conditions.

Define vouching.

The examination of documentary evidence (vouchers) supporting and substantiating a transaction recorded in the books, to verify its authority, authenticity, accuracy, and correct accounting treatment.

What is the main objective of vouching cash transactions?

To ensure that all receipts and payments have actually occurred, are properly authorized and supported by genuine vouchers, are correctly recorded in the right accounts and period, and that no fictitious or omitted entries exist.

In vouching cash receipts, what key points does the auditor check?

That receipts are recorded promptly and in full (completeness), supported by carbon copies of receipts/counterfoils, correctly classified (capital vs revenue), properly banked (compare with bank statements/pay-in slips), and that internal control prevents teeming and lading.

What is 'teeming and lading'?

A type of cash defalcation where a shortage of cash receipts is concealed by misappropriating a later receipt and crediting it to the earlier customer's account, with each subsequent receipt used to cover the previous shortage.

In vouching cash payments, what does the auditor examine?

That payments are supported by proper vouchers (invoices, receipts), are duly authorized, relate to the business, are correctly classified between capital and revenue, are recorded in the correct period, and that there is no duplication or fictitious payment.

What is the auditor's concern in vouching credit purchases (trading transactions)?

To verify that purchases are genuine and relate to the business, are supported by invoices and goods received notes, are properly authorized, recorded at correct amounts in the correct period (cut-off), and that no fictitious purchases or purchases of a capital nature are charged to the trading account.

Define verification of assets.

The process by which the auditor confirms the existence, ownership (rights), proper valuation, presentation, and that the assets are free from undisclosed charges, of the assets appearing in the balance sheet.

Distinguish vouching from verification.

Vouching examines documentary evidence of transactions recorded in the books (focus on income statement items and authenticity of entries); verification confirms the existence, ownership, value, and presentation of assets and liabilities shown in the balance sheet at the period end.

What aspects does an auditor verify for a fixed asset such as plant and machinery?

Existence (physical inspection), ownership/title (purchase documents, registers), proper valuation (cost less accumulated depreciation per policy), that additions/disposals are authorized and correctly recorded, and that any charge/lien on the asset is disclosed.

How does an auditor verify the existence of inventory (stock)?

By attending and observing the physical stock count, performing test counts, checking the count procedures and cut-off, confirming valuation at the lower of cost and net realizable value, and reviewing for obsolete or slow-moving items.

At what value should inventory be stated, and what formula expresses it?

Inventory should be valued at the lower of cost and net realizable value: $$\text{Inventory value} = \min(\text{Cost},\ \text{NRV})$$ where $NRV = \text{Estimated selling price} - \text{Costs to complete and sell}$.

How does an auditor verify trade receivables (debtors)?

By obtaining direct external confirmations of balances, testing the aged receivables analysis, reviewing subsequent cash receipts, checking the adequacy of the allowance for doubtful debts, and verifying cut-off of sales.

What does the auditor check when verifying cash at bank?

Obtaining a bank confirmation letter directly from the bank, reviewing the bank reconciliation statement, verifying outstanding/unpresented items in the subsequent period, and confirming all bank accounts and any charges over them are disclosed.

State the basic formula for the annual straight-line depreciation an auditor would verify.

$$\text{Depreciation per year} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life (years)}}$$

What is the difference between the reducing-balance and straight-line depreciation methods an auditor may need to confirm?

Straight-line charges a constant amount each year on cost less residual value; reducing-balance charges a fixed percentage on the asset's written-down (net book) value, giving a higher charge in early years that decreases over time: $\text{charge} = \text{rate} \times \text{NBV}$.

What is a 'window dressing' concern for an auditor verifying assets and balances?

Window dressing is the manipulation of accounts (e.g., overstating liquidity by delaying payments or recording fictitious year-end transactions) to present a more favorable financial position than reality; the auditor must examine year-end cut-off and unusual transactions to detect it.

What is the difference between an error and a fraud in auditing?

An error is an unintentional misstatement in the financial statements (e.g., a mistake in gathering data or applying policies); fraud is an intentional act involving deception to obtain an unjust advantage (e.g., fraudulent financial reporting or misappropriation of assets).

What is 'professional skepticism'?

An attitude that includes a questioning mind, being alert to conditions indicating possible misstatement due to error or fraud, and a critical assessment of audit evidence rather than unquestioning acceptance of management's assertions.

What is the relationship between the strength of internal control and the extent of substantive testing?

They are inversely related: if internal controls are evaluated as strong and effective (after tests of control), the auditor can reduce the extent of substantive procedures; if controls are weak, the auditor must increase substantive testing to gather sufficient evidence.