p7 old tricks

the lecturer we had always went on about this "old tricks" thing. "this" old trick. old trick "that". i realized that there will never be a list for "this" or "that"... until the day one is written, as seen here.

a-e-i-o-u

all references to audit procedures made in p7 will be part of the popular acronym, which stands for the following:

analytical procedures
enquiries
inspection
observation and
recalculation / recomputation

...should you manage to find the sixth procedure, congratulations!

analytical procedures

proof in total / test of reasonableness: where you calculate theoretical totals for comparison against client calculations — applicable in companies with few products or services, and it can be more effective than substantive procedures to elicit enquiries

ratio analysis involves formulas such as gp margin, np margin, inventory t/o days etc. once calculated, usually compared against: company's previous year performance, industry average, auditor's expectations

expressing opinion

a disclaimer situation means you "do not express an opinion", due to limitations during the audit, i.e. you cannot perform the procedures needed to confirm on certain areas/assertions

but an inability to express an opinion is not a disclaimer because it could be an area of uncertainty, e.g. significant uncertainty relating to going concern, which depends on future actions or events not under the direct control of the entity but that may affect the financial statements anyway

f-a-s-s-i

the mnemonic "fassi" stands for the 5 major threats that may compromise an auditor's independence (always use this when ethical issues are raised):

familiarity - by association and social proximity
advocacy - i.e. of client, by auditors
self-review - i.e. when your own work is not checked by an independent reviewer, or when you are taking on multiple jobs for client with chance of self-review
self-interest - especially when financial benefits are concerned
intimidation - i.e. by client

geographical dispersion

when a client operates multiple branches or entities around the globe, it is said to be geographically-dispersed. as auditors, we'll have to consider the risks impacting our work and subsequent reporting:

1. component and group auditors, network firms - is the component/group auditor familiar with the local financial reporting framework and the group's accounting policies — IFRS® 3 Business Combinations? can their work be relied on? are they under undue influence or pressure ("fassi" mnemonic)? what are the monitoring policies and procedures in place to evaluate the appropriateness of the audit methodology?
that said, always use a network firm when the choice is available.

2. environment - how different are the laws, professional oversight, standards, discipline, and external quality assurance, training; language and culture?
specifically, with regards to financial reporting frameworks, there are countries that prefer local GAAP. do we have the necessary competency to audit financial statements consolidated from a mix of non-IFRS® countries?

for more details, consider checking out: International Standard on Auditing (“ISA”) 600, “Special Considerations Audits of Group Financial Statements (Including the Work of Component Auditors)”

inventory-related audit risk

if your client, prospective or current, is a manufacturer, you'll know that work-in-progress is an immediate issue. why? valuation by management could be biased and measured using unconventional standards, resulting in overstatement of finished goods inventory

if your client, prospective or current, deals with physical goods, you, the auditor, should be interested in whether these goods are: portable, valuable, and exchangeable. if the goods fit all these three characteristics, you have a pilferage risk. fewer goods from theft = overstatement of closing inventory at year-end — you'll find this out during the y/end stock count.

if your client, prospective or current, deals with perishable goods, you'll know there is a risk of spoilage, causing inventory loss that might not be accounted for = overstatement of closing inventory.

materiality

materiality levels are considered when formulating procedures so as to reduce the risk of material misstatements to an acceptable level, with reference

revenue / turnover - 0.5% - 1.0%
net profits / profit before tax - 5.0% - 10.0%
gross assets / total assets - 1.0% - 2.0%

note: "performance materiality", a lower estimate than the above, is used to prevent small errors from aggregating into material errors.

relevant section: International Standard on Auditing (“ISA”) 320, “Materiality in Planning and Performing an Audit”

modification

an unmodified report is definitely an unqualified report, but an unqualified report may not be an unmodified report ????

yes, an unqualified report means that there is a true and fair view, i.e. the financial statements are presented fairly in all material respects. but, certain circumstances, an auditor’s report may be modified by adding an “emphasis of matter” paragraph, or highlighting of "other matters" to highlight a matter affecting the financial statements — but which do not tantamount to a qualification

prospective financial info (pfi)

the criteria you should be worried about: are the estimates reasonable?
or are they too good to be true? expect that preparers are normally quick to overstate sales and profits, while keeping expenses and impairment losses low.

pfi is usually prepared you are providing a negative assurance, because you may only perform: a-e — and a limited form of inspection, because documents for future periods covered in pfi projections are limited.