Question forpeugot

cornflower

Hello,

I am going to be completing my audit simulation but I'm a bit unsure of when the auditor has to do certain types of work. Our tutor at college has not gone into a lot of detail on this so wondered if you had any info you could offer me.

Thanks in advance
Carrie:001_smile:

peugeot

Hi Carrie,

I'm sorry you are struggling with the audit sim. This simulation does seem to cause students problems!!

In terms of your query re audit work, then this would all depend on the actual audit client. The auditor devises specific tests according to the levels of risk (see ISA 330). Maybe you could be more specific with what you are struggling with (i.e. tests of control, substantive testing, stratified sampling etc.)

I have written articles on audit which you might find helpful. The links are here:

http://www.lwaltd.com/postimages/LWAoverviewofauditing.pdf

http://www.accountancystudents.co.uk/cms/news/read/auditing_questions_answered/

http://www.accountancystudents.co.uk/cms/professional_bodies/aat_read/reporting_on_audit_clients/

http://www.accountancystudents.co.uk/cms/professional_bodies/aat_read/the_auditors_responsibility_in_the_area_of_fraud/

The first one was written specifically for an AAT audit simulation and this covers most technical queries on audit. Students doing the audit sim will get a good grasp of the fundamentals from this article.

I hope it helps, but feel free to ask me if you need any more help.

Regards
Steve

cornflower

Thanks so much,this is exactly what i have been looking for. Our tutor at college has changed twice and the one we have is a bit hard to understand as she races through the subject.

One more question is how does the auditor decide the tests to do. Is there something that tells them or is it their own decision.

Thanks again

Carrie,

peugeot

The articles do cover this question as it is commonly asked by students doing audit papers at any level.

If a client has robust, sufficient and effective internal controls, this reduces the risk of material misstatement within the financial statements. The auditor will do "tests of control" i.e. test the operating effectiveness of the controls. If they prove satisfactory the auditor can reduce the levels of detailed testing - which is referred to as "substantive testing".

Substantive testing is the detailed work which involves tracing transactions and events through the accounting process to their ultimate destination within the financial statements. Ideally auditors want to reduce the amount of this work to a minimum, which they can do if risk is low and the internals controls operate effectively.

If the client is high risk, or the internal controls are defective or the integrity of management is brought into question, then the auditor must increase their "substantive testing". If this still fails to satisfy the auditor that amounts and disclosures in the financial statements are appropriate, the audit opinion in the audit report is qualified/modified accordingly.

The types of tests auditors do are judgemental. Auditors undertake a lot of audit work behind the scenes which the client does not see. The first part of the audit is the planning. This is where the auditor assesses the levels of risk prevalent in the audit, assesses the internal controls and procedures and then determines what type of test in each audit area is applicable.

The articles in the link above do cover the required knowledge you will need but I would also advise to practice questions in the areas you feel weak on to develop your technical ability.

Kind regards
Steve

cornflower

Steve

Wow! Thank you so much for all this.You have made a difference to my studying for this paper as I was getting really depressed with it. My college has not been helpful at all and I only have to wait to see if I pass DFS and do this sim and then it is all over with.

You should be a tutor as you know your stuff and can explain things really clearly.:thumbup:

Carrie.

peugeot

Thank you. I am pleased you found the information useful.

Good luck.

Steve

cornflower

one more question! Can you tell me what the purpose of an emphasis of matter paragraph is please.

Thanks
Carrie:001_smile:

peugeot

Hi carrie,

The answer to that is in the articles and the question!! Everything an AAT student needs to know about audit is covered in all those articles above.

An Emphasis of Matter paragraph emphasises an issue the auditor has come across during the course of an audit but which does not affect their opinion.

For example, I did an audit last month where the client had an overseas investment. The investment in question had run into cash flow difficulties so there was a question of whether the fixed asset investment needed reducing for impairment. The directors had not tested the investment for impairment.

The investment had returned to profitability, and had adequate cash in the bank (at the time of the audit) to fund working capital requirements. I also received a letter from the investee's bank to say they were willing to support them.

I therefore put an "Emphasis of matter" paragraph in the audit report to emphasise that this was a material issue that had arisen during the course of the audit, but our opinion was not affected by the issue. If I had disagreed that non-impairment had been inappropriate and therefore the investment was carried in the balance sheet at an amount higher than recoverable amount, then I would have qualified the audit report.

Kind regards
Steve

cornflower

Hello steve

Sorry I did not thank you for this reply.

Thank you again for all your help with this. I hope you dont mind but I printed these replies off and gave them to some of my group at college. The tutor we had has now also left so we are a bit confused by how we are supposed to pass this simulation!

Thanks.

Carrie.
:001_smile:

peugeot

Of course I don't mind you printing the thread off!! Feel free to print off the articles if you found them useful and give them to your class colleagues - though I do not want the tutors using them please! They're not designed as (and must not be used for) a substitute for teaching the subject.

Kind regards
Steve

cornflower

Thanks steve,that will really help as most of us don't seem to be coping with this topic very well.:blushing:

One more question please is why do we have 2 lots of standards. We have accounting standards so why do we have another set of auditing standards as well? Surely the accounting standards should be enough!

Sorry for all the questions but my simulation is in a couple of weeks.

carrie.

peugeot

Hi Carrie,

Don't worry about the questions - this is what the forum is for!

Accounting Standards

The UK has a 3 tier financial reporting system. Publicly listed and AIM listed companies report under IFRS, large and medium sized companies report under FRS and small companies can report under FRSSE.

Accounting standards prescribe the treatment of transactions and events within the financial statements. For example (I will keep to international standards for consistency) IAS 17 (Leases) prescribes the difference between an operating and a finance lease (one is capitalised, the other is written off to the income statement as and when payments arise). IAS 34 (Interim Financial Reporting) prescribes the format in which interim financial statements are prepared. IAS 16 (Property plant and equipment) details how fixed assets are recognised and measured in the financial statements.

Accounting standards, therefore, prescribe how an entity deals with transactions and events so as to ensure the financial statements give a true and fair view of the company's affairs.

Auditing Standards

Auditing standards are what the auditor uses to make sure their audit meets the required standard. You need to separate (completely) accounts preparation and audit - they are 2 totally different areas of accountancy. The auditor implements auditing standards to ensure the financial statements have been prepared in accordance with accounting standards. So, the planning of the audit is done in accordance with ISA 315 (Understanding the Entity and its environment), audit evidence is governed under ISA 500 (Audit Evidence) and things like, estimates, provisions and accruals are govered under standards such as ISA 540 (Auditing Accounting Estimates). Each auditing standard ensures the auditor undertakes the audit to meet the requirements of legislative standards and interlinks with accounting standards.

So you can see from the above, that the auditor, in arriving at their opinion, is implementing the auditing standards which prescribe the way in which the audit will be conducted. This interlinks with the accounting standards because if the client has breached an accounting standard (let's say they do not capitalise a finance lease in accordance with IAS 17) then the auditing standards, in accordance ISA 700 (The Auditors Report on a Complete Set of General Purposes Financial Statements) states that the report should be modified (qualified) because the auditor will disagree with the client over the treatment of the lease - i.e. because it should be capitalised and the client has not done so. If the client agrees and capitalises the lease, then the auditor can issue an unqualified opinion.

So, to answer your query by reference to the above, we have 2 lots of standards because audit and accounts prep are 2 entirely separate issues.

Kind regards
Steve

cornflower

Steve I cannot thank you enough for this. I amreally grateful for your help because I would not have known where to start otherwise. Our tutors have been unreliable and uninterested in our studies and you have made a difference to that.

Carrie.

peugeot

It's my pleasure.

What I find astonishing is the fact that your college has provided you with such a paltry standard of tuition in a subject that is technically demanding.

Tuition providers have a duty to provide their students with a minimum required standard of tuition and it seems your college has failed at the first hurdle in providing this tuition. I do not accept the argument that tuition providers are over-stretched and have staffing problems - that's their problem not the students problem. If I were you, I would seriously consider complaining to the college and the AAT about this and maybe ask for some of your course fees to be reimbursed as you have clearly not received the service for your fees.

Please keep me informed as to how you get on in your simulation and don't be afraid to ask (either on here on by PM) if you need any more assistance.

Kind regards
Steve

peugeot

I forgot to mention above that there is an article of mine going on AccountingWeb this week concerning ISA 240 - the fraud standard. When that goes on I will provide a link on this thread for you.

Steve.