AUDIT EVIDENCE – ISA 500

Audit evidence refer to all the facts and information collected by the auditor from
sources under his control from management or from parties considered to be
sufficient and appropriate as a basis of forming an opinion on the financial
statement.

Characteristics of good audit evidence

1) Sufficiency
2) Reliability
3) Relevance

1. Sufficiency
This relates to the quantity or amount of the audit evidence that the auditor
considers as enough as a basis of drawing a conclusion on the item under
examination.
The question of what is enough is a matter of the auditors’ judgment and is
Influenced by several factors such as:
i) Materiality of the item under examination.
ii) The nature or persuasiveness of the audit evidence.
iii) The risk of mis-statements through frauds and errors.
iv) The nature of the ICS.
v) The auditors experience in the practice.
vi) The auditors experience with the client.
vii) Source and reliability of the information that is available.
viii) The audit objective

2. Reliability

May 2012 Q 2b
Reliability relates to the credibility, trustworthiness, integrity and dependability of
the audit evidence as a basis of forming a conclusion on the item under
examination.
The reliability of the audit evidence depends on the nature, the source and the
circumstances under which the evidence was obtained.
However, there are several presumptions that are normally made in evaluation and
the reliability of the audit evidence.
These presumptions include:
i) Documentary evidence is more reliable than oral evidence.
ii) Evidence from independent sources outside the firm is more reliable than
evidence from within.
iii) Evidence from original documents is more reliable than evidence from
photocopies.
iv) Evidence arising from the normal usual conduct of business activities is
more reliable than evidence created to satisfy the auditor.
v) Hearsay evidence is unreliable unless it is corroborated with further audit
evidence.
vi) Direct evidence is more reliable than indirect evidence.
vii) Evidence from best informed sources is more reliable.
viii) Evidence about past events is more reliable than evidence about future
events.

3. Relevance
The evidence should have a logical connection or bearing upon the purpose of the
audit procedure or the assertion under consideration.

Techniques of gathering audit evidence

1) Inspection.
2) Observation.
3) External confirmation.
4) Re-calculation.
5) Re-performance.
6) Analytical review procedures.
7) Inquiry.
8) Risk-assessment procedures.
9) Compliance and substantive testing.

1. Inspection
This involves examination of documents, records and tangible assets.
Inspection of tangible assets provides evidence about existence of the asset but
not necessarily ownership.
2. Observation
This involves witnessing a procedure being performed by others e.g. with the
stock-take, counting of cash etc.
3. External confirmation
This involves obtaining confirmations from 3rd parties through direct written
responses e.g. from debtors, creditors, banks, lawyers, experts etc.
4. Re-calculation
This involves checking the arithmetic of documents and records by re-
calculating.
5. Re-performance
This involves the auditor independently executing a procedure that was
performed by the client’s staff.
 6. Inquiry
This involves seeking information from knowledgeable persons both inside and
outside the entity e.g. management representations.

Types of Audit evidence

1) Documentary audit evidence vs oral evidence.
2) Direct vs indirect audit evidence.
3) Testimonial audit evidence obtained from 3 rd party responses.
4) Circumstantial audit evidence from the prevailing circumstances either
inside/outside the firm.
5) Physical evidence from inspection of tangible assets.
6) Analytical evidence.
7) Hearsay evidence – evidence from casual discussions with the client’s
staff.

Sources of Audit evidence

Internal sources
1) Accounting records such as the ledgers, registers etc.
2) Minutes of meetings.
3) Reconciliations done on records
4) Vouchers and documents.
5) Internal auditor’s reports.
6) Employee interviews.
7) Budgets.
8) Management representations.
9) Marketing literature, website.

External sources
1) The company’s suppliers.
2) The company’s debtors.
3) The company’s bank.
4) The company’s stock-brokers.
5) Expert opinion.
 6) Economic surveys and government statistics.

Steps that an auditor should take to obtain sufficient appropriate audit

evidence from internal sources
1) Obtaining an understanding of the entity and its environment.
2) Assess the risk of mis-statements.
3) Analyze the records and ensure that on one is omitted.
4) Review the company’s records such as minutes, budgets etc.
5) Carry out recalculation of balances.
6) Re-perform procedures.
7) Carry out reconciliation of related types of transactions.
8) Physically inspect tangible assets.
9) Test the effectiveness of the ICS in preventing a detecting mis-statement.
Limitations of gathering Audit evidence Nov.
2011 Q 4a
1) Lack of co-operation from the client staff.
2) Lack of co-operation from 3rd parties.
3) Weaknesses in the client’s accounting an internal control systems.
4) Possibility of collusion between the client staff and 3rd parties.
5) Time-constraints.
6) Cost.
7) Sensitivity of information.
8) Subjectivity i.e. may be judgmental and not objective.
9) The fact that absolute proof is impossible.
10) Lack of technical knowledge about the client’s business.

ISA 620 USING THE WORK OF AN EXPERT

DEC. 2014
Auditor’s expert
This is an individual or a firm possessing specialized skills, knowledge and
expertise in any other field other than in auditing and accounting whose work in
that field will be used by the auditor to gather sufficient appropriate audit
evidence.

Management’s expert
This is an individual or a firm possessing expertise in a field other than auditing
whose work in that field is used by the entity to assist the entity in preparing the
financial statements.

Areas in which the auditor’s expert may render expertise

1) Valuation of complex financial instruments, land and buildings, plant and
machinery, jewellery, work of art etc.
2) Actuarial calculation of liabilities associated with insurance constructs or
employee benefit plans.
3) Estimation of oil and gas reserves and other underground mineral.
4) Valuation of environmental liabilities and site-clean-up cost.
5) Legal interpretation of contracts, laws and regulations.
6) Analysis of complex or unusual tax compliance issues.

Factors to consider before placing reliance on the work of an expert

November 2015 Q 3c
1) The competence and qualifications of the expert.
Consider
a) Professional qualifications.
b) Membership to the professional bodies
c) Experience and reputation.
d) Recommendations from other clients he has provided similar services
top.
e) Valid practicing certification.

2) Independence and objectivity of the expert.

Queries
a) Whether the expert has any blood relations with the key directors.
b) Whether the expert has significant shareholding in the company.
c) Whether he provides other services to the company.
d) How much fee he was paid if he was a management expert e.g. is it a
fair market based price.

3) The scope of work and the depth of coverage.

Queries
a) Objectives of the management’s experts work.
b) TOR – Terms of Reference
c) The methods that were used by the expert.
d) The assumptions that were used by the expert and whether they were
reasonable.
e) The experts access to the supporting documentation.

4) The results obtained by the experts.

Consider
a) Whether the results are consistent with the general expectations.
b) Whether the results are consistent with the results obtained using
other audit procedures.
c) Whether the results are consistent with previous results on a similar
matter.

Factors to consider in evaluating the adequacy of the auditors expert work

1. The relevance and reasonableness of the expert’s findings or conclusions
and consistency with other audit evidence.
2. If that expert work involved significant assumptions and methods check
the reasonableness and relevance of those assumptions and methods.
3. The source of the data that was used, its completeness accuracy and
relevance.

EXTERNAL CONFIRMATON ISA – 505

This is also known as circularization.
It’s the process by which the auditor obtains audit evidence from 3 rd parties
concerting Account balances in the financial statement e.g.
1) Debt circulation to confirm account receivable
 2) Creditor circularization to confirm accounts payable.
3) Circularization of the company’s lawyers to confirm a contingent liability.
4) Circularization of the bank to confirm bank details.

Forms of confirmation
1) Positive confirmation/circularization
2) Negative conformation/circularization

Positive confirmation
This is where the responding party is required to write back to the request whether
he agrees or disagrees with the stated balance of conformation.
Circumstances when the conformation is appropriate
1) Where the accounts are disputed.
2) For balances of related parties.
3) For accounts receiving favorable terms of trade.
4) For accounts showing balances which are materially smaller than usual
outstanding balance.
5) Where there is suspicion of irregularity.
6) Where the ICS is weak.
7) Accounts exceeding the designated credit limit.
8) For accounts with negative balances.

Negative confirmation
This is where the responding party is only required to reply to the request if he
disagrees with the stated balance or information.

Circumstances when positive confirmation is appropriate

1) Where the accounts are disputed.
2) For balances of related parties.
3) For accounts received favorable terms of trade.
4) For accounts shoeing balances which are materially smaller than usual
outstanding balance.
5) Where there is suspicion of irregularity.
6) Where the ICS is weak.
7) Accounts exceeding the designated credit limit.
8) For accounts with negative balances.

Negative confirmation
This is where the responding party is only required to reply to ht request if he
disagrees with the stated balance or information.

Circumstances when negative confirmation is appropriate

1) Where there is no time to obtain responses from the customers.
2) Where the reported difference can be investigated and resolved.
 3) For numerous balances that are not material i.e. the population of the
items is very large costing of small homogenous account balances
transactions or conditions.
4) Where the auditor is familiar with the 3rd parties.
5) Where most of the work and audit evidence has already been gathered at
the interim audit.
6) Where the auditor is not aware of any circumstances or deviations that
would cause the recipients to ignore the request.
7) Where very low exception rate is expected.

Debtor circularization/confirmation
This is the process by which the auditor sends circular letters to the company
debtors requesting them to confirm the specific requested details.
Benefits of debtor circularization to the auditor
1) It provides direct audit evidence about the existence of the debtors.
2) It provides audit evidence about effectiveness of the ICS over sales and
debtors.
3) It enables the auditor to detect frauds and errors involving debtors such
as teeming and lading.
4) It enables the auditor to establish the adequacy of the provision for bad
and doubtful debts.
5) It provides audit evidence about the accuracy of the sales ledger.

Types of errors that may be revealed though circularization

1) Erroneous double posting of an invoice.
2) Arithmetic error in balancing the account.
3) Committed receipts from the debtor by mistake or posted to a different
customers account.
4) Inadequate provision for bad and doubtful debts.

Frauds revealed through debtor circularization

1) Teaming and lading
2) Fictitious write-offs
3) Factious discounts
4) Factious returns
5) Window dressing

Criteria used for selection of debtors for circularization

1) Disputed balances.
2) Overdue accounts.
3) Debtors with material balances.
4) Debtors with credit balances.
5) Debtors write off during the period.
6) Debtors with nil and zero balances.
7) Accounts of related parties.
8) Accounts revealing unusually favourable terms.
 9) Accounts with provisions.
10) Debtor’s accounts that have been active in the past but are now dormant.

Limitations of debtor circularization

1) Non response
2) Delays in responding
3) Collusion between the client staff and the debtor
4) Ti may be an expensive exercise.
5) The auditor may be denied permission by the client to circularize ht
debtors.
6) The debtors may not be keeping proper records.

Process of circularization/confirmation
1) To determine the information to be confirmed or requested.
 2) Select the appropriate confirming parties.
3) Select a sample from the appropriate confirming parties.
4) Obtain permission from the client to circularize the 3rd parties.
5) Design the confirmation letters in the client’s letter head and having it
signed by the relevant officer of the client.
6) Receive the responses directly from the confirming parties.
7) Make a follow up of the request where there is no reply.
8) Perform alternative audit procedures based on the responses.

Alternative audit procedures where there is non-reply

1) Call the debtor.
2) Physically visit the debtors.
3) Seek management representation on the balance.
4) Carry out an examination of subsequent cash receipts from the customers.
5) Perform cut-off test.
6) Perform reconciliation of cash and goods in transit.
7) Review correspondences with the debtor.
8) Perform ARP’S to assess the reasonableness of the balance.
9) Assess the adequacy of the provision for bad-debts.
10) Ask the finance director to follow up the customer.

Audit procedures when the debtor agrees with the balance

1) Check to ensure that the debt appears to be collectible.
2) Review the cash receipted after the balance sheet date.
3) Consider how long the debt has been outstanding.
4) Consider the adequacy of any provision made on the debt.

Audit procedures when the debtor disagrees with the balance

1) Perform a reconciliation of items in transit.
2) Investigate the difference.
3) Review correspondences with the debtor.
 4) Inspect invoices and credit notes and track their recording for accuracy.
5) Perform ARP’s
6) Obtain written management representations.

THE STANDARD BANK LETTER

The auditor can get confirmations about the bank details by sending a standard
bank letter to all the banks to the client operating an account with him.

Importance of sending a standard bank letter Dec.

2012 Q 5c
Rationale behind obtaining confirmation from bank and not from client.
1) Audit evidence from evidence from independent sources outside the firm
is more reliable than evidence from within.
2) Credibility of the source i.e. the banks are highly regulated.
3) Audit evidence from best informed sources is more reliable because the
bank may be more informed about certain matters than the client.
Matters the bank can give confirmations on:
1) Existence of the cash at bank.
2) The balance contained in the bank account.
3) Other banks the company has a relationship with.
4) Details about any over-drafts and loans.
5) Confirmation of assets held as security.
6) Confirmations about any contingent liability by way of guarantees.

Seeps followed in acquiring confirmations from the bank

1) Obtain written authority from the client to the bank to disclose the
necessary information requested.
2) Send the bank letter in standard form in sufficient time in order for it to
arrive at least 2 weeks before the year ends.
3) If additional information over and above what is in the standard letter is
required send a separate letter requesting for that information.
4) When the confirmation is received from the bank check that the bank has
answered all ht questions in the letter.
5) Follow up all the points disclosed in the letter.

AUDIT SAMPLING (ISA 530)

This is the application of audit procedures to less than 100% of the population and
drawing conclusions about the entire population based on the results of the
sample.

Reasons for audit sampling

1) Time constraints.
2) Cost constraints.
3) Auditors aren’t required to provide absolute assurance but reasonable
assurance hence 100% check is not necessary.
4) Massive data may intimidate the audit staff leading to work that is not
thoroughly done.
5) Sampling is fruitful as the audit will be able to gather a variety of
corroborative audit evidence.
6) A census may not be practical where the population is very large.
7) 100% may not add any extra value in certain situations.
 8) Where he clients ICC is strong, 100% check is not necessary.

Situations when audit sampling isn’t appropriate

1) Where the population is very small.
2) Where the clients systems are extremely weak.
3) Where there is suspicion of frauds and errors.
4) When the auditor is on inquiry as a result of past information.
5) In audit of unusual or extra-ordinary items.
6) Where the population is heterogeneous – not same.
7) Where the risk assessment is very high.
Factors considered in determining the size of the audit
1) Population size.
2) The materiality of the item being examined.
3) The nature of the clients accounting and internal control systems.
4) The tolerable error.
5) Expected deviation from the population.
6) Stratification – this is the process of subdividing the population into distinct
subgroups each with separately identifiable characteristics. In order to form
a representative sample items are picked from each stratum the more the
strata the larger the sample size.
7) The risk of mis-statements through frauds and errors.
8) The experience of the auditor with the client and the practice.
9) The time available.
10) The expected error.

Sampling techniques
1) Statistical/probabilistic – Mathematical
2) Non-statistical/non-problematic – Non-mathematical

1. Statistical sampling
This is a mathematical approach to sampling where items from the population are
selected randomly such that every item stands an equal chance of being selected.
The probability theory is used to determine the size of the sample and to
………………..……… the results of the sample.

Advantages
1) Its objective as no human judgment is involved.
2) The auditor is able to obtain precise results.
3) The auditor can justify the items selected as the sample size is
determined scientifically and not arbitrarily.
4) It produces uniform results.
5) It is defensible mathematically.
6) It provides the minimum sample size to meet the precise objectives of the
audit.
7) It is free from classification errors.
 8) The auditor can make use of computer capabilities.
9) It helps in determining the sample reliability and quantifies the risk
inherent in the testing.
10) It facilitates delegation of audit work to the junior staff.
11) No prior knowledge of the elements is required.

Limitations: Case against probabilistic sampling

1) The auditor must have knowledge in statistics.
2) It is complicated and difficult.
3) It is time consuming as time may be wasted in performing mathematical
calculation which do not have any direct relevance to the audit objectives.
 4) When the population is not sequentially numbered random samples are
difficult to extract.
5) It may not be appropriate where the population is very small.
6) It requires a definition of what constitutes an error in advance.
7) The auditor’s judgment is substituted with mathematics.
8) The population has to be normally distributed.
9) It is not possible to extra-polate the results to other areas of the audit.

Circumstances when statistical sampling can be used

1) The population must be fairly large to achieve the benefit.
2) The items in the population must be easily identifiable and numbered.
3) The expected error must be low.
4) The population must be normally distributed.

2. Non-statistical/non-probabilistic sampling
This is a non-mathematical technique where the auditor uses his own
judgment to determine the appropriate nature and size of the sample. The
probability theory is not applied.

Advantages
1) Simple and well understood
2) No special knowledge of statistics is required.
3) Less time consuming.
4) Ideal for a small population.
5) The auditor’s judgment is not substituted with mathematics.

Disadvantages
1) It may be biased.
2) It is unscientific.
3) Vague conclusions may be made/drawn.
4) There is no real logic to selection of the sample units.
5) The auditor must have knowledge of the individual items in the
population.
Sample selection techniques
No. 2010 Q 4
1. Simple random selection
Random numbers are generated and used to pick the items from the population.
Every item in the population stands an equal chance of being selected.
2. Systematic selection
The population is divided with the desired sample size to get an interval. The
population is then arranged sequentially and every K th item selected to form the
sample. The first item is selected randomly.
3. Interval selection
It is similar to systematic selection. However the start is not randomly selected.
 4. Stratified selection

5. Cluster sampling
A cluster is a concentration of items in one place e.g. in a supermarket a lot of the
sales take place during the first few days of the month. The auditor will pick items
from each of the cluster to form the sample.
6. Block selection
This involves selection of a block of items from the population to form a sample.
e.g. in vouching the sales invoices the auditor can select al the sales invoices of
August to form the sample representing all the sales invoices for the whole year.
7. Attribute sampling
The auditor begins by defining the characteristics of the item that should form the
sample.
He then proceeds to the population and picks the items that possesses the pre-
defined characteristics.
8. Haphazard selection
The auditor doesn’t use any structured technique in selecting the sample unit.
9. Multistage sampling
This is where the population is hierarchically separated. Sampling is done
segmentally across the hierarchical levels.
10. Varied selection
The auditor uses different sample selection techniques for different
populations.

Characteristics of a good sample

1) It should be goal oriented.
2) It should be practical i.e. audit procedures can be applied o the units.
3) It should be proportional to the population i.e. the bigger the pop-the
sample is big.
4) It should be random.
5) It should be economical.
6) It should be representative of the entire population.
7) It should provide the actual information required.
8) It should be large enough to minimize the sampling risk.

Factors to consider when carrying out audit sampling

1) Materiality.
2) The distribution of the population.
 3) Reliability of other forms of evidence.
4) The cost and time considerations.
5) A combination of evidence seeking methods is often the optimal solution.

Steps followed in audit sampling

1) Planning the sample
a) Defining the audit projective of the test.
b) Defining the population.
 c) Defining the sampling units.
d) Define the tolerable error and the expected error.
e) Stratify the population where necessary.
2) Carry out the selection of the items using an appropriate technique.
3) Perform the audit procedures on the items selected.
4) Evaluate the results of the sampling.
5) Project the results of the sample to the population.

Definition of terms used in audit sampling

1) Population
This is the entire set of data from which a sample will be selected.
2) Sampling units
These are the individual units that make up the population.
3) Sample units
These are the individual units that make up the sample.
4) Tolerable error/mis-statement
The maximum amount of error that the auditor is ready to accept.
5) Expected error
These are the normal errors or deviation expected or deviations from the
population.
6) Anomalous error
This is an isolated error which doesn’t represent an error in the
population.
7) Confidence level
This is the level of assurance that the auditor has that the results of sampling re
representative of the population.
8) Confidence interval
This is the range within which the population parameter lies.
9) Sampling risk
This is the risk that the auditors conclusion based o the sample differ from the
conclusion if the entire population was subjected to the same audit procedures.
The risk arises due to factors associated with sampling e.g.
10) Non-sampling risk
This is the risk that the auditor reaches an erroneous conclusion due to factors
that have nothing to do with sampling e.g.
i) Using in-appropriate audit procedure.
 ii) Failure to detect a material mis-statement.
iii) Making a wrong judgment etc.

Audit of the elements of the financial statement Financial

statements assertions. Management assertions
These are the representations of the directors that are embodied in the financial
statements.
They are the explicit/implicit claims that the management is making regarding the
information contained in the financial statement.
The assertions are classified into 3:
 1) Assertions about classes of transactions and events.
2) Assertions about account balances.
3) Assertions about presentation and disclosure.
According to ISA 500 the auditor should use assertions about classes of
transaction and events, account balances, presentation and disclosure in sufficient
detail for the assessment of risk material misstatement and the design
performance of further audit procedures.

1. Assertions about classes of transactions and events

Nov. 2011 Q 5c
1) Occurrence
The transactions and events recognized I the financial statement actually occurred
and they pertain to the entity.
2) Completeness
i.e. all the transactions and events that should have been recognized in the
financial statement.
3) Accuracy
i.e. the amount and other data relating to the recorded transactions and events
have been recorded appropriately.
4) Classification
i.e. the transactions have been recorded in the correct class of account.
5) Cut-off
i.e. the transactions and events have been recognized in the correct accounting
period.

2. Assertions about account balance

1) Existence
The assets, liabilities and enquiry elements included it the financial
statement actually existed as at the balance sheet date.
2) Rights and obligations
The entity holds a right and control to the assets and the liability are the
obligations of the firm.
3) Valuation
All liabilities, assets and equity items are included in the financial statement at
appropriate amounts and measured as per the identified financial reporting
framework.
4) Completeness
All assets, liabilities and equity elements that should have been included in the
financial statement have been included.
 3. Assertions about presentation and disclosure

1) Occurrence
The disclosed events, transactions and other matters have occurred and pertain to
the entity.
2) Completeness and disclosure
All disclosures that should have been included in the financial statement have
been included.
 3) Accuracy and valuation
Financial and other information are disclosed fairly and at appropriate amounts.
4) Classification and understandability
The disclosed events, transactions and balances and other financial matters have
been classified appropriately and presented clearly in a manner that promotes
understandability of the information contained in the financial statement.

Vouching and verification

Vouching – It entails training transactions from their origin i.e. the vouchers
through their recording I the books of accounts all the way to their inclusion in the
financial statement.
Verification – Process of confirming/proving the truth about assets, liabilities and
equity elements.

Distinction between vouching and verification

Vouching Verification
1 Deals with transactions from their Deals with balances.
point of origin.
2 It involves checking records with the It involves checking title
help of evidential documents. possession and valuation.
3 Vouching is related to documents. Related to assets and liabilities.
4 Deals with income statement items. Deals with balance sheet items.
5 Done during the year. Done at the year end
6 Done by audit assistants. Done by the audit senior.

Examples of vouchers
1) Sales and purchases invoices.
2) Credit notes.
3) Receipts
4) Contracts.
5) Debenture deeds.
6) Title deeds.
7) Payment vouchers.
8) Minutes etc.

Matters to focus on when inspecting vouchers

1) Date – to ensure that it corresponds with the current accounting period.
2) Name – to ensure it is in the company’s name.
3) Amount – for accuracy.
4) Details – to ensure they correspond to the business activities.
5) Authorization.
6) Alterations.
7) Serial numbers – to identify missing vouchers.
8) Recording.
Irregular vouchers
These are vouchers that should not be accepted by the auditor e.g.
1) Date not corresponding with the current period.
2) Vouchers int eh personal name.
3) Duplicates of missing vouchers.
4) Altered vouchers.
5) Voucher whose details do not correspond with activities of the business.

Vouching of income statement items.

Audit of sales

4) Select a sample of credit notes sent to customers.

5) Match the credit notes with the goods returned notes.
6) Trace the recording of the credit notes to the ledger.
7) Test the sales cut-off.
i) Pick the G.D. notes a few days before the year end and after the year
end.
ii) Match the goods dispatch notes with their respective sales invoices
and the customer’s order.
iii) Trace the recording of h e invoices to the ledger to ensure that the
sales have been recorded in the correct accounting period.
8) Perform ARP’s on the sales by comparing the sales on the month by
month basis with the prior year and enquire into any significant
difference.
9) Check to ensure that the criteria for recognition of revenue have been
met.
10) Check to ensure that the policy for recognition of revenue is consistent
with the IAS (18).
11) Review returns from agents, consignees, distributors etc to confirm that
those sales have been included.
12) Obtain written management representations regarding the sales.
Audit of rent expense

1) Physically inspect the rental property.

2) Inspect the lease agreement to obtain the following details.
a) The names of the landlord and tenants.
b) The rent payable per month/annum.
c) The date when the rent is payable.
d) Responsibilities regarding maintenance.
e) Any penalties on delayed payment.
 3) Verify the payment of the rent to the bank statement and if not paid
check to ensure it has been accrued correctly.
4) Circularize the landlord to confirm the lease details.
5) Obtain a schedule of rent payment during the year.
6) Inspect the receipts from the landlord.
7) Trace the recording of the rent to the ledger.
8) Re-calculate ht accrued or prepaid rent.

Audit of insurance expense

1. Inspect the insurance policy document to confirm the following details:
i) Name of insured and insurer.
ii) The subject matter insured.
iii) Premiums payable.
iv) The sum insured.
v) Period covered y ht policy and the effective start date.
2. Circularize the insurance company to confirm the policy details.
3. Physically inspect the property insured.
4. Enquire into the uninsured property.
5. Inspect the bank statements for payment of premiums.
6. Re-calculate the insurance expense.
7. Perform ARP’s by comparing insurance expense with prior years and enquire
into any significant variation.

Audit of the statement of financial position

Audit of tangible non-current assets
Assertion Audit procedures
Existence Physically inspect the asset to verify existence.
Rights and obligations Inspect the document of title e.g. title deed, logbook to
verify that the asset is in the name of the company.
Circularize the relevant 3rd parties to confirm the
ownership detail.
For equipments and furniture inspect the suppliers
invoices and contract of purchase.
 Establish whether the asset is free or charged and
whether the firm has breached the terms of the contract
by discussing with the management.
For leased assets inspect the lease agreement to
determine the nature of the lease i.e. finance lease or
operating lease.
Valuation Valuation is a function of historical cost, additions,
valuation, impairment cost.
Inspect the document of purchase to determine the
purchase price.
Obtain a list of all the incidental expenses that were
incurred in acquisition of the asset.
 Check to see that the costs were capitalized correctly in
line with IAS no. 16 PPE.
Circularize the supplier to confirm the cost details.
Consider the market price of similar assets.
Depreciation
Discuss the depreciation policy with the management.
Consider the reasonableness of the estimated useful life.
Review the minutes where the management decided to
buy the asset to verify the estimated useful life.
Re-calculate the depreciation.
Check to see the fully depreciated assets are not
depreciated any further.
Check the recording of the depreciation in the ledger.
Review the prior year’s records to verify consistency of
the depreciator policy.
Revaluation
Inspect the minutes to the board to confirm authority of
revalue.
Determine the independence and competence of the
valuer.
Compare the revalued amount with the latest market
price of similar property in the region.
Evaluate the methods and the assumptions used for
reasonableness.
Check the recording of the revaluation.
Check to see that depreciation is based on the re-valued
amount.
Check to see that there is appropriate disclosure
regarding the revaluation.
Additions and disposals
Review the minutes of the board to confirm
authorization.
Review any collateralized property to ensure that there is
appropriate disclosure.
Vouch the purchase/sale transaction.
Check the ledger for recording of the acquisitions and
disposals.
Completeness Inspect the fixed assets register to identify all the non-
current assets of the entity.
Trace the assets to the ledger to verify completeness.

Audit of intangible non-current assets

These are identifiable non-monetary asses without physical substances e.g.
goodwill, Intellectual properties, development cost, software etc.
Audit of goodwill
1) Agree the consideration paid in acquisition of the business to ht sale
agreement.
2) Review the mints of the board of authorization.
3) Confirm that ht evaluation of the assets acquired is reasonable.
4) Re-calculate the goodwill.
5) Check the nature of the goodwill to confirm that only purchased goodwill
has been recognized.
6) Ensure that the valuation of the goodwill is reasonable by reviewing the
prior year’s accounts and discussing with the directors.
7) Review the impairment review for reasonableness.
8) Verify the payment of the consideration to the bank statement.

Audit of intellectual property

1) Obtain a schedule of all the intellectual properties of the client.
2) Examine the assignment deed of the intellectual property.
3) Ensure that the intellectual properties have been fully registered by
circularizing the commissioner of intellectual properties.
4) Verify the payment of the annual fee to the institute of intellectual
property by inspecting the receipts and bank statements.
5) Review the amounts capitalized acquisition.
6) Review the specialist valuation by considering the methods used,
assumptions and source of data.
7) For any additions inspect purchase agreement and confirm authorization
to the minutes of the board.
8) Review the income generated from the intangible asset e.g. loyalty for
evidence about existence and rights.
9) Review amortization by checking the computation and confirming that the
rates are reasonable.
10) Obtain written management representations regarding the intellectual
properties.

Leased assets Audit

1) Inspect the lease agreement to determine whether it’s a finance lease or
an operating lease.
2) If it’s a finance lease:
a) Check to ensure they have recognized an asset under non-current
assets.
b) Check to ensure they have recognized a finance lease obligation under
non-current liabilities.
c) Check that they have depreciated the asset over the higher of the lease
period or the remaining useful life.
d) Check to see that the lease rentals have been split between the
principal element and the interest.
e) Check to see that only interest has been charged to the income
statement and the principal component has amortized the obligation.
 f) Check the valuation of the asset to ensure that it’s consistent with IAS
17 (accounting for leases).
g) Check to ensure there are appropriate disclosures.

3) For operating leases

a) Check to see that the rentals have been charged to the I. statement
and no asset has been recognized.

Accounting
Audit of investments in financial securities
This includes shares, loan stocks, treasury bills and treasury bonds.

Audit procedures
1) Inspect the CDS statement for quoted securities to verify existence
ownership.
2) Circularize the stock-brokers to verify the ownership details.
3) Circularize the CBK to verify investments in treasury bills and treasury
bonds.
4) For unquoted investments circularize the investee companies to verify the
existence and ownership.
5) Inspect the document of purchase to verify the cost of the investment.
6) Review the stock-market data to verify the market price of the investment.
7) Review the income generated by the investment i.e. interest income and
dividend income.

Audit of investment income

1) Obtain a schedule of all the investment.
2) For dividends of quoted shares, review the official announcement by the
company to determine the dividends payable.
3) Re-calculate the total dividend earned by the company.
4) Trace the receipt of the dividends to the bank statement.
5) Check the recording of the dividends to the ledger and ensure it has been
recorded net of withholding.
6) For interest income from fixed return securities review the issue deed to
determine the interest rate receivable.
7) Re-calculate the interest income earned.
 8) Verify receipt of the interest to the bank statement.
9) Trace the recording of the interest to the ledger.
10) Circularize the stock-brokers to verify that all income accrued has been
received.

Audit of current assets

Audit of inventory – IAS 2
Risks associated with audit of stock
1) Stock may be held in different locations.
2) Stock may become damaged or obsolete while in the stores.
3) Stock is highly susceptible to pilferage/theft.
 4) Valuation of stock may b highly subjective.
5) Stock is made up of various components i.e. work-in-progress, raw
materials, goods-in-transit etc.
6) Stock keeps coming in and moving out of the stalls. In the absence of
controls there may be incorrect cut-off.
7) The procedures for audit of stock are very extensive as they involve
attending the stock-take, carrying out procedures before, during and after
the stock-take.

General audit procedures for stock

1) Verify the existence of stock b physical inspection and by attending the
stock take.
2) Verify right and obligations by inspecting the purchases invoices
matching the invoices with the GRN and the LPO.
3) Verify valuation by confirming that the stock has been valued at the lower
of cost ad NRV.
4) Verify the cost by ensuring that the entity has used the acceptable
methods by IAS-2 i.e. FIFO or weighted average method (WAM)
5) Verify NRV by reviewing the sales after the balance sheet date.
6) Review the final stock sheet after the stock-take to confirm that all the
individual stock sheets have been consolidated.
7) Review correspondence with 3rd parties holding the stocks of the firm.
8) Obtain written management representations regarding completeness of
stock.
9) Test the stock-cut-off.

Procedures for stock cut-off

1) Pick the GRN a few days before the year end and after the year end.
2) Match the GRN with their respective purchases invoices and LPO.
3) Trace the recording of the G.R.N. to the stock ledger card the invoice to
the ledger to ensure that they have been recorded in the correct
accounting period.
4) Repeat the same for GDN.
5) If the stock-take was carried out on a different date other than the last
day of the accounting period review the reconciliation schedule to confirm
that there was proper rolling forward or backward.
 6) Obtain written management representations regarding stock cut-off.

Auditor’s attendance of the stock take

Importance
1) To obtain direct audit evidence about existence.
2) To verify completeness of the stock figure.
3) To assess the effectiveness of the ICS over the stocks.
4) To obtain audit evidence about stock cut-off.
5) To identify any difficulties in the valuation of the stock.
6) To conclude on whether the process is effective and reliable.
Audit procedures of the stock-take
1) Review the previous year’s working papers to understand the client’s ICS
and accounting systems over stocks.
2) Discuss with the management about any changes.
3) Determine the nature and the type of stock.
4) Determine the location of the stock.
5) Obtain a copy of the stock-take instructions.
6) Enquire into the possibility of having an expert.
7) Arrange to attend the stock-take planning meeting.
8) Determine the format of the stock-sheets.

Procedures during the stock take

1) Record the serial numbers of the stock-sheets in use before the exercise
begins.
2) Check to confirm that every officer has received a copy of the stock
instructions.
3) Observe to see that the stock-take instructions are followed.
4) Record in the working papers instances when the instructions are not
followed.
5) Conduct a test count of items already counted.
6) Record the results of the test count in the working papers.
7) Compare the results of the test count with the entry in the stock sheet if
they are different order a recount and record in the working papers.
8) Observe to identify difficulties being experienced in the stock-count and
how they are being handled.
9) Observe to see that the procedures for identifying show moving obsolete
and damaged items are working/operating effectively.
10) Note in the working papers the identified abnormal goods i.e. slow moving
absolute and damaged items.
11) Check to see that stock times belonging to the customers have not been
included.
12) Conclude on whether he stock take exercise was effective and that it
forms a reliable-basis for determination of existence and valuation of
closing cost.
 13) Make photocopies of all the stock sheets that were used.

Audit procedures after the stock-take

1) Trace the individual stock sheet to the final stock-sheets.
2) Trace the items that were test-counted to the final stock-sheet.
3) Trace the abnormal goods to the final stock-sheet.
4) Review correspondences between the company and 3rd parties holding the
stocks of the firm.
5) Review the stock reconciliation schedule to ensure there is proper rolling
forward and backwards.
6) Check that the stock ledger cards have been adjusted with any material
difference.
7) Obtain written management’s representations regarding the stock.
Audit of contingent liability (IAS 37)
A contingent liability is a present possible obligation that arose as a result of a
past event which will be confirmed by the outcome of a future event that isn’t
within the control of the entity an whose settlement is expected to result into an
outflow of resources.
Examples:
1) Provision for a pending legal case.
2) Provision for warranties and guarantees
3) Provision to staff pension scheme.

Criteria for recognition of a contingent liability

1) A present obligation has arisen as a result of a past event.
2) It is highly likely that an outflow of economic benefits will be realized to
settle the condition.
3) A reliable estimate can be made of the obligation.

Accounting treatment of contingent liabilities

Probability of crystallization Accounting treatment
Highly probable Recognize a contingent liability on the
face of the financial statements.
Likely Make a disclosure in the notes to the
accounts.
Highly unlikely Ignore

Audit procedures for contingent liability

1) Obtain a list of all the contingent liabilities included in the financial
statements.
2) Obtain a detailed analysis of the movements in the provisions.
3) Determine for each material provision whether the company has a
present obligation as a result of a past event by:
a) Discussing with the directors
b) Reviewing correspondences relating to them.
4) Determine for each material provision whether rights highly probable that
a transfer of economic benefits will be realized by:
a) Discussing with the company’s lawyers.
b) Reviewing correspondences with the lawyers, banks, insurance
companies, and others just before the year end and after the year end.
 c) Discuss the position of past similar conditions with the directors to
find out whether they were ultimately paid.
d) Check whether any payment had been made in the past for similar
items.
e) Consider the likelihood of reimbursement.
f) Review any press reports relating to the case.
5) Discuss with the management to determine the assumptions made in
calculating the provision.
6) Consider reasonableness of the assumptions.
7) Recalculate the provision.
8) Compare the provision with the prior years and the
payments that was actually made with respect to the
provision.
9) Consider the nature of the client’s business.
10) Obtain written management representations relating to the
provisions.