Auditing, Assurance and Attestation services

General revision

Prepared by:
Andrew Osama Ramses
Junior Auditor
Deloitte. Saleh, Barsoum and Abdel Aziz.
 Topics to be considered in an interview

1-Management assertions
2-Audit risk model
3-Planning the audit (the most important is the Analytical procedures)
4-Attestation, Assurance and Consultation
5-Materiality
6-Factors affecting materiality
7-Audit Evidence, objectives and nature
8-Consideration of fraud in financial statements
9-Subsequent events
10-Interview Tips
11-Some accounting questions
Questions
Q What are the procedures required in order to audit fixed assets?
"The answer covers all related account including dep. Expense"

A We can set an audit plan for auditing fixed assets that test the management
assertions.
Completeness: Are all the transactions affecting the fixed assets recorded?
For example reconcile the subsidiary and the general ledger. The management
maintains subsidiary ledger for every asset which contains the cost, accumulated
depreciation and other related costs which should be compared with the general ledger
which contains the final totals which are presented in the financial statements.
Another example analyzing the maintenance and repairs costs and determine whether
they are capitalized or not. "Added to the cost of the asset"
Accuracy: Are all the amounts for a certain account recorded accurately?
Compare the amounts in the F/S and the amounts presented in the management letter.
Valuation and allocation: Are all the account amounts recorded properly?
"Historical cost minus accumulated depreciation"
First check all the purchase vouchers in order to determine the initial cost of the asset.
Secondly check the vouchers of the addition and disposal of the asset in order to
determine the updated balance of the asset.
Thirdly test the depreciation for fixed assets except Land and determine whether the
depreciation methods are accepted according to the specific standards "IFRS or
GAAP" and applied consistently.
Existence: do the fixed assets recorded actually exist at the balance sheet date?
The auditor is required to select a sample from the recorded assets and checks their
physical existence.
Cutoff: Are all the transactions related to addition or disposal of assets recorded in the
proper period?
Auditor is required to check the addition and disposal of assets near year end to
ensure recording in the proper period.
Rights and obligation: Does the entity have the ownership rights for the assets
presented in the F/S?

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1-Examin titles and leases: some assets such as autos and trucks should have titles
indication ownership.
2-Examin insurance policies: as the entity insures assets of interest.
3-Examine property tax reports: Some laws require paying property taxes which
assures that the entity has interest in the assets.
Occurrence: Did the transactions related to the fixed assets actually occur?
The auditor should inspect the authorization, recording and custody of sample
transactions.
Classification: Is the balance of the fixed assets is presented in the noncurrent section,
and disclosures related to the depreciation methods are properly disclosed?
There are certain rules:
-Fixed assets should be presented in the noncurrent section of the assets.
-Fixed assets amounts should be presented "Historical cost minus accumulated
depreciation"
-Except land which is presented with the historical cost.
-Make inquires with the management about the appropriate disclosures of the
footnote.

Note: By revising this question, you have revised also the Management assertions.
Assertions are grouped into these 3 categories:
1-Assertions about the classes of transactions "Related to Income statement and
cash flow balances":
-Occurrence
-Completeness
-Cutoff
-Accuracy
-Classification
2-Assertions about account balance "Related to balance sheet accounts":
-Existence
-Valuation and allocation
-Completeness
-Rights and obligation
3-Assertions about presentation and disclosure:
-Occurrence and rights and obligation
-Accuracy and valuation
-Classification
-Completeness

Audit risk model:

Audit risk: is the risk that the auditor will fail to modify an opinion on financial
statements that are materially misstated.

Components of the model:

Inherent risk "IR": is the susceptibility of an assertion to material misstatements

independent of the audit of F/S and without the consideration of the control risk.
Control risk "CR": is the risk that the internal control will fail to detect material
misstatements.

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Planned detection risk "PDR": is the risk that the auditor will not detect material
misstatements.
Acceptable audit risk "AAR": is the material misstatement that the auditor may
accept to exist after the audit procedures are done.

PDR =AAR/IR*CR

Risk for material misstatements "RMM": IR*CR

PDR =AAR/RMM

As the risk of material misstatements is the product of inherent risk and the control
risk, and as the inherent risk can't be reduced so the auditor can rely on the control in
order to reduce the control risk and thus reduce the risk of material misstatements.
The auditor must first choose the controls that can reduce or prevent a material
misstatement in a specific assertion.
Some controls have a pervasive effect and others affect specific assertions.
The auditor must also consider the direct and indirect relationships between the
controls, the more indirect relationship the less effective that control.
Assessing the control risk at low level will allow the auditor to reduce the substantive
test of the control.

Test of controls: are all the procedures performed by the auditor in order to obtain
evidence about the design and the effectiveness of the operation control.
In other words, assessing the internal control's ability to detect and prevent material
misstatements.
Procedures to test the controls:
-Inquiry of the entity's personnel
-Inspection of the documents.
-Observation of the application of the control.
-Reperformance by the auditor.

Expanding the use of the Audit risk model:

The use of the audit risk model can be expanded by dividing the planned detection
risk into Test of details "TD" and substantive analytical procedures "AP".
PDR= TD*AP

Test of details and analytical procedures forms the substantive tests which are used to
detect material misstatements in an assertion by:
-Test of details of transactions and account balances.
-Analytical procedures: evaluation of the financial information made by the study of
plausible relationship among financial and nonfinancial data.

PDR is the risk that the auditor will not detect a material misstatement, this may
happen because the test of details of the transactions and the account balances or the
analytical procedures were not effective enough in detection or preventing a material
misstatement.

AAR= RMM*TD*AP

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This equation can be resolved for the TD or the AP.

TD=AAR/RMM*AP

The expectation that the auditor will change the nature and the extent of the test of
details to achieve the acceptable audit risk

AP=AAR/RMM*TD

The risk that the analytical procedures will fail to detect or prevent a material
misstatement

Q What are the sources of the analytical procedures?

A 1-Financial information from comparable periods
If the client's financial statements showed that the sales in year 2006 were 120000 and
in 2007 130000 and in 2008 140000 so the auditor must expect that the sales in 2009
will be 150000
2-Anticipated results
Such as budgets, if the management developed a budget that cost of sales are expected
to be 100000 so the auditor must expect that the cost of sales will 100000.
3-Related nonfinancial data
If the management reported that the working hours of the employees had increased, so
the auditor must expect that the salaries and wages expense will increase.
4-Comparable data with the client industry
If the inventory turnover in the industry had increased by 10 times, the auditor must
expect that the inventory turnover of the client will increase by 10 times.
5-Related data
If the sales on credit had increased by 25% the auditor must expect that the accounts
receivable will increase by 25%.

Q Should the auditor's expectation meets exactly what is expected by the

management?
A Analytical procedures aims at evaluating the financial information by studying the
relationship among plausible data.
It's main consideration in comparing what the auditor expected from the study of the
related financial and nonfinancial information with what the management presented
and deciding are they materially different?
Q What are the differences between Assurance, Attestation and Consultation?

Attestation Assurance Consultation

Provides Conclusion about a Increase the Providing
subject matter or quality of recommendation
assertions from a information for related to the
third party decision makers objectives of the
engagement.
Aims Reliable Better decision Better results and
information making outcomes
Parties engaged 3 (Third party is 3 (Third party may 2
usually external) be employed by
the entity)

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Independence Required Included in Not required
definition
Audit output Compared with the Criteria maybe Recommendation
established criteria established, stated not compared to
or unstated. specific criteria
Information Client Client,CPA CPA
content declared by
Level of assurance Examination, Flexible No specific
review assurance level

Types of Assurance:
1-Assurance about risks
2-Assurance about performance
3-Assurance about systems

Materiality: is the magnitude of an omission or misstatement of accounting

information that in the light of the surrounding circumstances makes it probable that
the judgment of reasonable user relying on this information changed or altered
because of this misstatement or omission.
Judgments about materiality are primarily quantitative but also are affected by
qualitative factors such as nature of account and the underlying circumstances upon
which judgment is made.
Materiality is set for the F/S as a whole and it's calculated as a percentage of the net
profit after taxes, current assets or sales.
This percentage is considered the maximum amount of misstatements the auditor is
willing to accept to exist in the F/S and still issues an unqualified report.
In order to be more practical, materiality is divided upon the accounts and balances in
the F/S.
This amount is called the monetary precision and it's subjected mainly to the inherent
risk of the account "The more the inherent risk the less the monetary precision will
be".

Audit evidence: are all the information used by auditor in order to develop an
opinion about the F/S presented by the client.
Audit evidence can be obtained from accounting information such as entries, general
ledger, etc
Also the auditor can rely on other information such as minutes of the meetings of the
management, bank's confirmation, etc
Evidence conditions:
-Sufficiency: the evidence must be sufficient in order to enable the auditor to develop
his opinion.
The more risk of material misstatement, the more evidence must be obtained.
The more effective the internal control is, the less evidence is required.
There is a trade off between the amount of evidence and the cost of obtaining this
evidence.
-Appropriateness: evidence obtained must be relevant and reliable.
The measurement of the relevance and reliability of the evidence are:
-obtained from independent party outside the entity
-obtained directly by the auditor. For example confirmations must be addressed to the
auditor.

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-obtained under effective internal control system
-original copies, not photocopies
Audit procedures to obtain audit evidence:
-Assessment procedures: assessment of the risk of material misstatements and
obtaining understanding about the entity.
-Test of control
-Substantive tests "includes test of details and analytical procedures"

Types of audit procedures:

-Documentation
-Inspection of the fixed assets
-Inquiry
-Observation
-Recalculation-Checking mathematical calculations
-Reperformance-Executing audit procedures
-Analytical procedures
-Confirmation
Q Develop an audit plan in order to audit net residual value of an asset?
As assets are balance sheet items so the following assertions are to be tested:
Existence: checking the physical existence of the assets.
Completeness: checking whether all the assets existed are recorded.
Rights and obligation: checking the ownership of the assets to the entity
Valuation and allocation: checking the application of the depreciation methods and
their reliability and that's is the major testing of the net residual value of an asset
Net residual value= Cost of the asset-Accumulated depreciation.

Consideration of fraud in the financial statements

The objective of the auditor is to provide a reasonable assurance about whether the
F/S's are free of material misstatements whether caused by error or fraud.
Management is responsible for designing and controlling programs in order to detect
and prevent fraud.
Error and fraud: Error is unintentional misstatement while fraud is intentional.
Three conditions of fraud:
1-Pressure or incentive
2-Oppourtunity
3-Rationalization
Types of fraud:
1-Fraudelent financial statements: Omission or misstatements aimed at deceiving
users.
2-Missappropriation of assets: These results from theft and embezzlement of assets
that causes entity to pay for items not received.
Frauds if fraudulent financial statements are on management level while
misappropriation of assets is on employee level.

Subsequent events:

Are the material events or transactions that occur after the end of the financial year
and prior to the issuance of the financial statements, these events may require:

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-Adjustment of the financial statements
-Disclosure in the footnotes
Events that affect the balances of the financial statements or provide evidence about
conditions in the financial year requires adjustment in the accounts balances such as
loss of an uncollectible accounts receivable that results from the bankruptcy of a
client.
Another example is the adjustment in the value of the assets.
Events that provide evidence about conditions that didn't exist in the financial year
require disclosure in the footnotes and adjustment is needed.
Examples:
-Loss of a plant as a result of fire or anything else.
-Sale of bonds or issuance of stocks.
-Purchase of a business.
-Settlement of a litigation of a claim the occurred after the year end.

Subsequent events don't require modification of audit report.

Some interview tips:

When you enter the interview rooms try to look calm as possible, self-
Confident and relaxed
If you are going to shake hands make sure you have a firm grip
When you are asked a question try to look relaxed and smile a little bit while you're
thinking of the possible answers.
When the interviewer asks a question which contains many numbers and asks you of
the entries, try to concentrate as much as you can and remember all the numbers he
mentioned.
You aren't asked to answer all the questions as the interviewers don't expect that from
you, but you must look confident and serious.
When you're asked some HR questions try to be frank as possible as the interviewers
know when someone lies.
The most important thing is to leave a good impression to the interviewers when you
finish.

GOOD LUCK

Andrew Osama Ramses

Junior Auditor
Deloitte. Saleh, Barsoum and Abdel Aziz.

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Some accounting questions:

Q Explain the differences between different inventory accounting systems?

A Inventory accounting systems are divided into periodic and perpetual system.
The major difference between the two systems is that in periodic system the inventory
records are updated once at the end of the period, while in perpetual system the
inventory records are updated every time a sale or a purchase of inventory occurs.

Sale of inventory
Periodic Perpetual
Accounts receivable xx Accounts receivable xx
Sales revenue xx Sales revenue xx

- Cost of goods sold xx

Inventory xx

NB: Entry of updating the inventory records isn't recorded under the periodic system
as the inventory is updated as the end of the period.

Purchases of inventory
Periodic Perpetual
Purchases xx Inventory xx
Accounts payable xx Accounts payable xx

NB: The purchased inventory under the periodic systems is recorded under purchases
accounts not inventory because inventory is updated at the end of the period.

Cost flow assumptions

Cost flow assumptions are weighted average, first in first out and last in first out.
Under weighted average method, inventories are treated in the same way i.e.
measured at average cost of all costs of the inventory.
Weighted average method is calculated once at the end of the period, so it's
applicable under periodic method.
Moving average: average cost of inventories after each purchase or sale so it’s
applicable under perpetual method only.

First in first out FIFO: assumes that the first purchased inventory is the first which is
sold.
Ending inventory at the end if the period contains the most updated inventory

Last in first out LIFO: assumes that the latest inventory purchase is sold first.
Ending inventory contains the oldest inventory.
The LIFO assumption is prohibited by the law for the following reasons:
-The ending inventory may contain obsolete inventory because it's the oldest inventor
i.e. the inventory which was purchased firstly.
-The cost of goods sold related to the latest inventory purchased may be over stated

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-The overstatement of cost of goods sold causes the revenues to be under stated which
under stated the income taxes.
For these reasons the LIFO assumption is prohibited by the federal law and under the
IFRS IAS2.

Q Explain the purpose of cash flow statement, and the related methods used in its
preparation?

A The primary objective of cash flow statement is to provide information about the
cash receipts and payments by the entity and to provide information about the
operating, investing and financing activities.
Operating activities: are all the revenue generating activities.
Investing activities: are all the activities related to acquisition and disposal of assets
and other investments.
Financing activities: are all the activities that results in change in the size of
contributed equity or the borrowing of the entity.

Direct method: User of this method should display the following

Cash inflow Cash outflow

Cash received from customers Cash paid to employees and suppliers
Interest, dividends received Income tax paid
Other operating cash receipts Other operating cash payment

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In addition to the investing and financing activities similar to the indirect method
The only difference between the two methods is the way the cash flow from operating
activities is calculated.

Under direct method using the previous example:

Under the indirect method:

Calculating the cash flow from operating activities under direct method using income
statement of the client:

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Cash collected from customers:
Cash collected from customers is divided into the sales revenue, the increase "added"
or decrease "Subtracted" of accounts receivables and increase or decrease in inventory
Sales 7810000
Dec. in A/R 30000
Inc. in A/R
Write off (10000)
Net 7790000
Interest and dividends received:
From the income statement directly the interest income amounts to 30000
In the example page 11, it's stated that dice received 10000 as dividends.

Cash paid to suppliers and employees:

Cash paid to suppliers include cost of goods sold, increase in inventory, accounts
payable and prepaid expenses
Cash paid to employees include selling and administrative expenses

CGS 5500000
Selling/Admin cost 1100000
Bad debts (50000)
Inc. in inventory 80000
Dec. in prepaid exp (5000)
Inc. in A/P (105000)
Net 6520000

Income taxes and interest paid:

From the income statement it's stated that the income tax expense amounts to 210000
Plus decrease in the deferred taxes 50000, net 260000, plus the decrease in tax
payables 10000, net 270000.
Interest payment amounts to 140000 in the income statement and interest payables in
the balance sheet increased by 5000, net 135000.

Cash flow statement preparation rule:

Increase in Assets and Expenses Decrease in Assets and Expenses

Cash outflow Cash Inflow

Increase in Liabilities, equity and Decrease in Liabilities, equity and

Revenues Revenues
Cash Inflow Cash outflow

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