ACCA F8 - Audit and Assurance Revision Kit 2016

Audit procedure
Observation involves watching a procedure or
process being performed. This procedure is of
limited use because it only confirms the procedure
took place when the auditor was observing and
because the process of being observed could affect
how the procedure or process was performed.
Inquiry involves seeking information from
knowledgeable persons, both from client staff and
external sources.
External confirmation involves obtaining a written
representation of information or of an existing
condition directly from a third party.
Recalculation is checking the mathematical
accuracy of documents or records, either manually
or using IT.
Reperformance is the auditor’s independent
execution of procedures or controls that were
originally performed as part of the entity’s internal
control.
Analytical procedures consist of evaluations of
financial information through analysis of plausible
relationships among both financial and non-financial
data. They also encompass such investigation as is
necessary of identified fluctuations or relationships
that are inconsistent with other relevant information
or that differ from expected values by a significant
amount.
Example for non-current assets
Observe client staff updating the non-current asset
register and ledger for additions/disposals of noncurrent
assets.
Discuss the useful economic lives for each category
of non-current asset with the finance director to
ensure they appear reasonable.
Obtain a valuation from an independent surveyor to
verify the value assigned to property held by the
client.
For a sample of assets from the non-current asset
register, recalculate the depreciation charge for the
year, based on the asset’s life and the depreciation
policy for the class of asset. Compare it to the
amount recorded in the non-current asset register.
Reperform the reconciliation of the non-current
asset register to the ledger.
Perform a proof-in-total of the depreciation charge
for the year to assess the reasonableness of the
charge to the financial statements, by taking the
opening figure, adjusting for additions and disposals
and applying the depreciation policy in use by the
client. Investigate the reasons for any large
discrepancies.
(Note: Only five types of audit procedures and five examples for non-current assets were required.)
(b)
(c)
Internal audit department and preventing and detecting fraud and error
The internal audit department could assist in preventing and detecting fraud and error by acting as a
deterrent in the first instance.
They could first undertake a risk assessment to identify the risk areas over cash and inventory. They could
then review the existing controls in place over inventory and cash handling and recommend improvements
to those controls if deficiencies are identified. They also need to test that the controls are working by
compliance testing. All findings from their work would be reported in writing to senior management for
review and further action if necessary.
Limitations of an internal audit department
Bush-Baby Hotels have not had an internal audit department before so employees may not like the idea of
being observed in their work and being reported on.
Setting up the department will cost a considerable amount and as there are 18 hotels in the company, the
directors need to ensure they recruit an adequate number of internal audit staff to be able to achieve
coverage across the company.
Unless the department will be set up from existing employees, it is unlikely that the staff recruited will have
the knowledge and experience required to audit this type of industry. Furthermore, internal auditors are not
Answers 165