THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..)...
Transcript of THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..)...
![Page 1: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/1.jpg)
THE AUDIT PROCESS
Presentation by:
CPA Donald OmengoManager, Audit, KPMG KenyaThursday, 15th February 2018
THE AUDIT PROCESS
Presentation by:
CPA Donald OmengoManager, Audit, KPMG KenyaThursday, 15th February 2018
Uphold public interest
![Page 2: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/2.jpg)
Presentation agenda
Internal Control Assessment and Risk Profiling
Obtaining Audit Evidence
![Page 3: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/3.jpg)
Audit
Users of financial statements
![Page 4: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/4.jpg)
Audit
Independent Auditor
…You
![Page 5: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/5.jpg)
Audit
Detection
Risk
Audit
Risk
Risk of
Material
Misstatement
![Page 6: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/6.jpg)
Audit
Testing is driven by
Audit Risk
![Page 7: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/7.jpg)
Activities covered in an audit
Engagement Setup
Risk Assessment
Testing Completion
![Page 8: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/8.jpg)
Activities covered in an audit (Cont..)
The four steps can be further broken down into:
Pre-engagement
Planning an audit Understanding the entity and its internal control
environment Risk assessment procedures
Documentation and audit evidence Audit completion Reporting
![Page 9: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/9.jpg)
Overview of key concepts
Quality and Risk Management
Quality and Risk Management policies and procedures help usdeliver consistently high quality engagements, behave ethicallyand with integrity, and protect our brand and reputation.”
Audit Risk
“The risk that the auditor expresses an inappropriate auditopinion when the financial statements are materiallymisstated”.
![Page 10: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/10.jpg)
Overview of key concepts (Cont..)
Fraud - As per ISA 240.11(a):
“Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use ofdeception to obtain an unjust or illegal advantage”.
Professional Skepticism
“Professional skepticism is an attitude that includes aquestioning mind, being alert to conditions which may indicatepossible misstatement due to error or fraud, and a criticalassessment of audit evidence”.
![Page 11: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/11.jpg)
Entity and control environment
Industry, regulatory, and other external factors
Nature of the entity
Objective and strategies and related business risksMeasurement and review of financial
performance Internal controls Consideration of the information system relevant
to financial reporting
![Page 12: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/12.jpg)
Controls over Financial Reporting
Preventive - Aimed at avoiding the occurrence of misstatements in the financial statements
Example: Segregation of duties
Detective - Designed to discover misstatements after they have occurred
Example: Monthly bank reconciliations
![Page 13: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/13.jpg)
Controls over Financial Reporting (continued)
Corrective - Needed to remedy the situation uncovered by detective controls
Example: Backups of master file
Controls overlap
✓ Complementary – function together✓ Redundant – address same assertion or control
objective✓ Compensating – reduces risk existing weakness
will result in misstatement
![Page 14: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/14.jpg)
Components of Internal Control
The Control Environment
Risk Assessment
The Accounting Information and Communication System
Control Activities
Monitoring
![Page 15: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/15.jpg)
Control environment Factors
Integrity and ethical values
Commitment to competence
Board of directors or audit committee
Management philosophy and operating style
Organizational structure
Human resource policies and practices
Assignment of authority and responsibility
![Page 16: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/16.jpg)
Risk Assessment - Factors Indicative of Increased FR Risk
Changes in the regulatory or operating environment
Changes in personnel Implementation of a new or modified
information system Rapid growth of the organization Changes in technology affecting production
processes or information systems Introduction of new lines of business, products,
or processes
![Page 17: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/17.jpg)
Risk assessment procedures
Identification and assessment risks of materialmisstatement at both the financial statement leveland assertion level. The auditor has to considerboth inherent and control risks.
The assessed level of risk of material misstatementis used to determine the acceptable level ofdetection risk and to plan the auditing proceduresto be performed.
![Page 18: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/18.jpg)
Risk assessment procedures (cont..)
The engagement team is also required to assessthe risks of material misstatement due to fraud.The team at the planning stage is supposed tosummarize the key risks attached to the entity andfactors that may minimize or eliminate thoserisks.
![Page 19: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/19.jpg)
Control activities
Performance reviews
Information processing
✓ General control activities✓ Application control activities
Physical controls
Segregation of duties
✓ Segregate authorization, recording and custodyof assets
![Page 20: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/20.jpg)
Monitoring
Ongoing monitoring activities
✓ Regularly performed supervisory and management activities
✓ Example: Continuous monitoring of customer complaints
Separate evaluations
✓ Performed on non-routine basis
✓ Example: Periodic audits by internal audit
![Page 21: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/21.jpg)
Audit Evidence
QualityQuantity
Sufficient and Appropriate
ReliableRelevant
![Page 22: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/22.jpg)
Sufficient Audit Evidence
Influenced by:
✓ Competence of evidence
✓ Risks involved
✓ Materiality and tolerable error
✓ Experience
![Page 23: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/23.jpg)
Appropriate and reliable Evidence
Appropriate influenced by:
Relevant
Satisfies audit objective
Timely
Reliability is influenced by:
Independence of source
How the evidence is obtained
Condition of internal control
![Page 24: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/24.jpg)
Substantive Testing – Trade and other payables
Significant accounts:
Liabilities Expenses
Trade payables Cost of sales
Accrued expenses Other expenses
![Page 25: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/25.jpg)
Substantive Testing – Trade and other payables
Trade Payables:
The liability is known with certainty.
Invoice received as of the end of the reportingperiod.
Accrued Expenses:
The liability is, generally, a calculation.
Invoice not yet received as of the end of thereporting period.
![Page 26: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/26.jpg)
Substantive Testing – Trade and other payables (Cont..)
Relevant assertions
Completeness
Existence
Accuracy
Valuation
Rights and Obligation
Presentation and Disclosure
![Page 27: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/27.jpg)
Substantive Testing – Trade and other payables (Cont..)
Nature of accrued expenses:
Expenses that were incurred as of the end of the reporting period but were not entered into Trade Payables.
Amounts are calculated based on information available.
Examples:
Accrued utilities expense, rent expense, interest expense, professional fees, etc.
Accrued salaries and bonus.
Goods received not invoiced.
![Page 28: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/28.jpg)
Substantive Testing – Trade and other payables (Cont..)
Substantive audit procedures:
Trade Payables Sub-ledger Reconciliation - CEA of Trade Payables
Search for Unrecorded Liabilities - CA of Trade Payables and CA of Accrued Expenses
Identification and Testing of Accrued Expenses - CEA of Accrued Expenses
![Page 29: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/29.jpg)
Substantive Testing – Trade and other payables (Cont..)
Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:
Obtain the details of invoices that were received, recorded, or paid after the period end.
Select specific transactions for testwork.
Inspect the evidence and determine if the invoice relates to services rendered or goods received during prior period or current period.
![Page 30: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/30.jpg)
Substantive Testing – Trade and other payables (Cont..)
Substantive audit procedures (Search for Unrecorded liabilities) Example procedure (continued):
If the invoice relates to prior period - included in Trade Payables or Accrued Expenses at yearend.
If the invoice does not relate to prior period - excluded from Trade Payables and Accrued Expenses at yearend.
![Page 31: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/31.jpg)
Key points to remember
Consider results from controls testing performed before you begin to perform substantive audit procedures.
Understand the objective of the substantive audit procedures you perform.
Understand the connection between the Statement of Financial Position and the Statement of Profit and Loss and Other Comprehensive Income.
![Page 32: THE AUDIT PROCESS Presentation by: CPA Donald ... Testing –Trade and other payables (Cont..) Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:](https://reader031.fdocuments.net/reader031/viewer/2022021509/5b0cca0f7f8b9a8b038cb922/html5/thumbnails/32.jpg)
Questions?