Accruals and Analytical Review

    Cards (44)

    • Accruals

      Costs that have been incurred but not yet paid for
    • Accruals procedures
      1. Obtain the list of accruals from the client
      2. Cast it to confirm mathematical accuracy
      3. Agree to the general ledger and the financial statements: completeness, classification
      4. Recalculate a sample of accrued costs by reference to contracts and payment schedules: valuation (accuracy of purchases and other expenses)
      5. Inspect invoices received post year-end to confirm the actual amount and assess whether the accrual is reasonable: valuation
      6. Compare the accruals this year to last year to identify any missing items or unusual fluctuation in amount and discuss this with management: completeness and valuation
    • Provisions
      Liabilities of uncertain timing or amount
    • Provisions procedures
      1. Obtain a breakdown of the provisions, cast it and agree the figure to the financial statements: accuracy and presentation
      2. Enquire with the directors or inspect relevant supporting documentation to confirm that a present obligation exists at the year-end: rights and obligations
      3. Inspect relevant board minutes to ascertain whether payment is probable: existence
      4. Recalculate the liability and agree components of the calculation to supporting documentation: completeness
      5. Inspect post year-end bank statements to identify whether any payments have been made, compare actual payments to the amounts provided to assess whether the provision is reasonable: valuation
      6. Inspect the financial statement disclosure of the provisions and contingent liabilities to ensure compliance with IAS 37: presentation
      7. Obtain a written representation from management that they believe the provisions and contingent liabilities are treated appropriately in the financial statements, are valued appropriately and are complete: valuation and completeness
    • Lawsuit
      A legal claim against the company
    • Appropriate audit responses to a lawsuit
      • Inspect correspondence between the client and their legal advisers
      • Review board minutes to understand management's view about the claim
      • Contact the claimant to understand the details of the claim
    • Payroll
      The total wages and salaries paid to employees
    • Focus of payroll testing
      • Completeness
      • Accuracy
      • Occurrence
    • Sources of evidence for payroll
      • Payroll control account
      • Payroll payment listing
      • Payslips
      • Contracts of employment
      • Hourly rates of pay
      • Timesheets
      • Bank statements and cash book
      • Starters and leavers forms
    • Payroll procedures
      1. Agree the total wages and salaries expense per the payroll control account to the general ledger and the financial statements: completeness and presentation
      2. Cast the monthly payroll listings to verify the accuracy of the payroll expense: accuracy
      3. Recalculate the gross and net pay for a sample of employees and agree to the payroll records: accuracy
      4. Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation, recalculate that their first/last pay packet was accurately calculated and recorded: completeness, occurrence, accuracy
      5. For salaries, agree the total net pay per the payroll records to the bank transfer listing of payments and to the cashbook: occurrence
      6. For cash wages, agree that the total cash withdrawn for wage payments equates to the weekly wages paid plus any surplus cash subsequently banked: completeness, occurrence
      7. Agree the year-end tax liability to the payroll records and subsequent payment to the post year-end cash book: occurrence
      8. For a sample of individuals, agree the amount per the payroll listing to the personnel records, and timesheets if applicable: accuracy
    • Payroll analytical review procedures
      1. Perform a proof in total of total wages and salaries incorporating joiners and leavers and the pay increase. Compare this to the actual wages and salaries in the financial statements and investigate any significant differences: completeness, accuracy
      2. Compare the payroll figure for this year to last year to identify any unusual fluctuations and discuss them with management: completeness, accuracy
    • Total payroll for the year-ending 31 December 20X3 was $1,220,000 (to the nearest $000). At this time Murray Co had 34 employees. Total payroll for the year-ending 31 December 20X4 is $1,312,000 (to the nearest $000). Murray Co now has 37 employees. All employees received a 5% pay rise on 31 March 20X4.
    • Payroll analytical review
      Create an expectation of the total payroll cost for year-ending 31 December 20X4
    • The average salary per employee in 20X3 was $35,882 ($1,220,000/34). We know that all employees received a pay rise of 5% in March. The average value of this pay rise is therefore $1,346 per employee in 20X4 (5% × 9/12 × $35,882). The average salary for 20X4 should therefore equal $37,228 ($35,882 + $1,346). We can set an expectation for total payroll for the year-ending 31 December 20X4 as 37 × $37,228: $1,377,000 (to the nearest $000). The difference ($65,000) is less than 5% more than our expectation. If this is within an acceptable level of variation the auditor will conclude that the payroll cost is not materially misstated.
    • Subsequent events
      Events occurring between the date of the financial statements and the date of the auditor's report
    • Types of subsequent events
      • Adjusting events - provide additional evidence about conditions existing at the statement of financial position date
      • Non-adjusting events - provide evidence about conditions arising after the statement of financial position date
    • Adjusting events must be adjusted in the financial statements i.e. a DR and CR posted to correct the figure.
    • Non-adjusting events must be disclosed in the notes to the financial statements if material.
    • If a non-adjusting event impacts the going concern assumption, the event becomes an adjusting event as the going concern basis of preparation may no longer be appropriate.
    • Audit procedures for subsequent events
      1. Enquiring of directors if they are aware of any subsequent events that require adjustment in the financial statements
      2. Inspecting minutes of members' and directors' meetings
      3. Reviewing accounting records including budgets, forecasts and interim information
      4. Obtaining written representation from management that all subsequent events have been considered in the preparation of the financial statements
      5. Inspecting correspondence with legal advisors
      6. Enquiring of the progress with regards to reported provisions and contingencies
      7. Inspecting after date receipts from receivables
      8. Inspecting the cash book after the year-end for payments/receipts that were not accrued for at the year-end
      9. Inspecting the sales price of inventories after the year
    • The auditor's report is due to be signed next week. During a review of the board minutes for the latest board meeting held two weeks ago you discover that a customer has filed a legal claim against the company in respect of an accident which occurred on the client's premises during December 20X5. The company's lawyers believe the claim is likely to succeed. The claim is material to the financial statements.
    • Going concern
      The assumption that the entity will continue in business for the foreseeable future
    • Indications of going concern issues
      • Net current liabilities
      • Negative cash flow
      • Borrowing facilities not agreed or close to expiry of current agreement
      • Inability to obtain credit from suppliers
      • Sale of non-current assets to fund operating costs
      • Loss of key staff
      • Over-reliance on small number of customers or products
      • Increasing competition
    • Going concern audit procedures
      1. Analyse and discuss cash flow, profit and other relevant forecasts with management
      2. Review the terms of debentures and loan agreements and determining whether any have been breached
      3. Read minutes of the meetings of shareholders, the board of directors and important committees for reference to financing difficulties
      4. Enquire of the entity's lawyer regarding the existence of litigation and claims and the reasonableness of management's assessments of their outcome and the estimate of their financial implications
      5. Review events after the year-end to identify those that affect the entity's ability to continue as a going concern
      6. Review correspondence with customers for evidence of any disputes that might impact recoverability of debts and affect future sales
      7. Review correspondence with suppliers for evidence of issues regarding payments that might impact the company's ability to obtain supplies or credit
      8. Review correspondence with the bank for indication that a bank loan or overdraft may be recalled
      9. Obtain written representations from management regarding its plans for the future and how it plans to address the going concern issues
    • Overall review of the financial statements
      1. Review the financial statements to ensure compliance with accounting standards and local legislation disclosure requirements
      2. Ensure accounting policies are sufficiently disclosed and that they are in accordance with the accounting treatment adopted in the financial statements
      3. Ensure they adequately reflect the information and explanations previously obtained and conclusions reached during the course of the audit
    • Evaluating uncorrected misstatements at the end of the audit
      1. Revisit their assessment of materiality to determine whether it is still appropriate in the circumstances
      2. Determine whether the uncorrected misstatements, either individually or in aggregate, are material to the financial statements as a whole
      3. Report the uncorrected misstatements to those charged with governance and explain the effect this will have on the audit opinion
      4. Request a written representation from those charged with governance that they believe the effects of uncorrected misstatements are immaterial
    • Written representation letter
      A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence
    • Purpose of written representation letter

      To obtain evidence
    • The financial statements are in accordance with the accounting treatment adopted and adequately reflect the information and explanations previously obtained and conclusions reached during the course of the audit
    • Misstatements
      At the end of the audit, the auditor should evaluate the effect of the uncorrected misstatements. If management have failed to correct all of the misstatements reported to them, the auditor should:
      • Revisit their assessment of materiality to determine whether it is still appropriate in the circumstances
      • Determine whether the uncorrected misstatements, either individually or in aggregate, are material to the financial statements as a whole
      • Report the uncorrected misstatements to those charged with governance and explain the effect this will have on the audit opinion
      • Request a written representation from those charged with governance that they believe the effects of uncorrected misstatements are immaterial
    • Purpose of Written Representation Letter
      • To obtain evidence that management, and those charged with governance, have fulfilled their responsibility for the preparation of the financial statements
      • To support other audit evidence relevant to the financial statements if determined necessary by the auditor or required by auditing standards
    • Audit Report Objectives
      • To form an opinion on the financial statements based upon an evaluation of their conclusions drawn from audit evidence
      • To express clearly that opinion through a written report
    • Financial statements give a true and fair view

      • The financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework
      • The financial statements adequately disclose the significant accounting policies
      • The accounting policies selected are consistently applied and appropriate
      • Accounting estimates made by management are reasonable
      • Information is relevant, reliable, comparable and understandable
      • The financial statements provide adequate disclosures to enable the users to understand the effects of material transactions and events
      • The terminology used is appropriate
    • Modified Opinion - Material Misstatement
      • Qualified opinion - the misstatement is material but not pervasive ('TFV Except for...')
      • Adverse opinion - the misstatement is material and pervasive ('Do not give a TFV')
    • Inability to provide sufficient appropriate evidence
      • Qualified opinion - the effect of any possible misstatement is material but not pervasive ('TFV Except for...')
      • Disclaimer of opinion - the effect of any possible misstatement is material and pervasive ('Do not express an opinion')
    • Material but not pervasive
      If the misstatement or lack of sufficient appropriate evidence is material but not pervasive, the auditor will issue a qualified opinion. This means the matter is material to the area of the financial statements affected but does not affect the remainder of the financial statements.
    • Material and pervasive

      A matter is considered 'pervasive' if, in the auditor's judgment:
      • The effects are not confined to specific elements, accounts or items of the financial statements
      • If so confined, represent or could represent a substantial proportion of the financial statements
      • In relation to disclosures, are fundamental to users' understanding of the financial statements
    • Adverse opinion
      An adverse opinion is issued when a misstatement is considered material and pervasive. This will mean the financial statements do not give a true and fair view.
      Examples include:
      • Preparation of the financial statements on the wrong basis
      • Non-consolidation of a subsidiary
      • Material misstatement of a balance which represents a substantial proportion of the assets or profits e.g. would change a profit to a loss
    • Disclaimer of opinion
      A disclaimer of opinion is issued when the auditor has not obtained sufficient appropriate evidence and the effects of any possible misstatements could be pervasive. The auditor does not express an opinion on the financial statements.
      Examples include:
      • Failure by the client to keep adequate accounting records
      • Refusal by the directors to provide written representation
      • Failure by the client to provide evidence over a single balance which represents a substantial proportion of the assets or profits or over multiple balances in the financial statements
    • Unmodified opinion with additional communication
      • Material uncertainty related to going concern - Included when there is a material uncertainty regarding the going concern status which the directors have adequately disclosed in the financial statements
      • Emphasis of Matter Paragraph - Used to refer to a matter that has been adequately presented or disclosed in the financial statements by the directors, which the auditor's judgment is of such fundamental importance to the users' understanding of the financial statements that the auditor should emphasise the disclosure