Post Balance Sheet Event HKSA530 Audit Sampling and

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Quality Control and Competence in accept
1
new audit

Not decline the
Professional clearnace
Ethical issue - Section 440 code of appointment of auditor -
a from previous auditor
Change of auditor Ethics for Prof. Acct because it is ununsal
required
situation of changes in
auditor
1. Member of
engagement team have
HKSA220 Quality 1. XYZ did not have
Audit engagement - sufficient knowledge is
Control - Comptence extensive audit exp. in
b Competency and required.
of the new Jewellery industry
Independence 2. More experienced
engagement 2. Self-interest threat
auditors would need to
be assigned

Audit evidence is need Other evidence:
to ascertain 1. Review the work of
1. Open Bal. would not the previous auditor
affect the current 2. Consider the
HKSA510 - Initial period's Fin. Statement comptence and
Opening balance
c Engagement - 2. The brought forward independence of
audit
Opening balances balance restated is previous auditor
correct 3. Review the
3. Appr. Accounting accounting policies
policy are consistently adopted in the FS last
applied. year

Mr. King is a major In additon to weak
shareholder and control environment
Risks of Material
integrity and attitudes found. A.
Risk of Mat Misstatment at the
towards a sound Aggressive business
d Misstatement - Fin Fin Statement level
internal control have strategy,
Statement level relate to the entity's
signf. Implications to b. signf business risk
control environment.
ABC control arising from changes or
environment complexity of business
operation and

1. ABC is a jewellery manufacturing and trading company
2. Mr. King owns 80% and his daughers and key employee own 20%.
3. ABC audited by another CPA firm and the sole proprietor died last
year.
4. A sharp increase in ABC turnover as the economic recovery.
5. ABC inventory amt to HK$98 million and 38% of the total value is un-
mounted gems.
6. Official invoices for gems purchases from known supplier were
available but hand written cash sales memos on scape paper were
available for those purchases from South East Asian countries.
7. Each finished item had an individual sales value according to a
number of determing factors such as size, shape, weight, type, colour
Inventory
2 Audit Response Audit procedure Further audit procedure
balance

1. Errors in recording the
carrying balues or selecting the
The assertion that the
right gems for production.
Risk of material carrying amounts of
Factor indicate a higher risk of 2. Difficult to verify the cost of
misstatement inventory at the
a misst in the valuation and gems
(MM)of the balance sheet date are
allocation. 3. The identification and
valuation approprately included
valaution would depend
in the F.S.
entirely on expert and auditor
is not familiar with gems.

1. Ask ABC mgt the inventory
accounting policy.
Audit Specific audit 1. Obtain a full list of inventory 2. Ask mgt about the process for
procedure objective is to verify 2. Select expensive one for identification of obsolete and
b response to the the carrying amount sample testing. 3. slow moving stock
assessed risk of of inventory at Obtain an independent 3. Perform analytical procedure
MM balance date expert's confirmation and review sales of finshed
goods to verify the valuation of
gems.

1. Unreported loss due to theft
The value of gems is high and
Existence High risk of due to varios types of gems.
size is small creats problems to
assertion of misstatment in the 2. Wrong gems for production
c both auditor and client staff to
Inventory existence assertion of due to a wide variety of gens
identify the existence of any
balance inventory 3. Mistaken identifcation as
particular gems.
expert knowledge required.

The inventory is
1. Review instructions from
material to the 1. Perform cut-off procedures on
ABC;s management
Audit financial statement the details of the movement of
2. Observe count prcedures and
procedure and HKSA501 requires inventory during before and
perform test counts.
d response to the sufficient audit after the count is important.
3. Assess the independ and
existence evidence of existence 2. Obtain expert confirmation
competence of the counting
assertion and condition by about the identification of gems
team that the stocktaking is
attendance at the for some of samples tested.
supervised by experienced staff
physcial stocktaking
Sampling risks and Non
3
sampling risks

1. Non Sampling risk arises from
2. Non-sampling risk can be
factors that cause A & B to reach
Difference between the reduced by proper engagement
3a an erroneious conclusion for any
above risks planning supervison and review
reason not related to the size of
(0.5).
the sample.

1. Sampling risk arises from the
possibiltiy that A & B 's conclusion,
HKSA530 - Audit Sampling 2. Sampling risk can be reduced by
based on a sample, may be
and Other Means of Testing increasing sample size (0.5)
differet from the conclusion
reached.

Stratification help in
3b
substantive audit procedure

In substantive test, a class of Using larger value items may
Sampling risk is reduced with
transaction or account balance contain the greatest potential
appropriately stratified of a
may be stratified by monetary monetary error in terms of
population.
value. overstatement.
4 Management Representation

HKSA 580 requires that auditor
a. On matters materials to the F. S. when other sufficient
a should obtain written
audit evidence cannot reasonably be expected to exist.
representation from mgt

b. That mgt is responsible for the design and
implementation of internal control to prevent and deter
error.

c. That mgt is responsible for the fair presentation of the
financial statements in accordance with applicabale
financial reporting framework.

Other roles of management HKSA240 - Mgt acknowledges its responsiblities for the
b representation in statutory design and implementatin of internal control prevent and
audits detect fraud

HKSA250- Mgt has disclosed to the auditors all known
actual or possible non-compliance with laws and
regulations

HKSA 545 Auditing Fair - regarding the reasonableness of
significant assumption including whether they reflect
mgt's intent and ability

HKSA550 - concerning the completeness of information
provided regarding the identification of related parties
and the adequacy of related party disclosures in the FS

HKSA570 - regarding its plan for future action where there
is significant doubt on the entity's ability to continue as a
going concern.
6 Post Balance Sheet Event

Subsequent event of a strike due HKSA560 - An event occuring up to date of the auditor's
to delay of salary payment report since it occurred before the date of auditor's
impact on financial statement report

Critical issue: Subsequent events
1. Enquiry whether GN would settle the outstanding amt
happened before auditor's report
before ISSUING the auditor report.
date

The strike may raise concern as
to whether the audit procudere 2. Re-consider the risk assessment made during the audit
during the audit process were process to determine whether they remain vaild.
adequate.

Auditor responsibility to enquiry 3. Re-consider the mgt's assessment about GN's ability to
the management if events afte operate as a going concern.
balance sheet happened before 4. Consider the effect of the salary payment delay and
issue of audit report labour strike after the year end on the auditor's report.
6 IT impact on statutory audit

No impact on the objective and
The ojective and scope of statutory audits do not changes
procedure of statutory audits -
in an enviornment where IT is involved
Agree ?

HKSA 315 requires auditor (para Para 81)
HKSA 315 sets out auditor should
1. Obtain an understanding of the information system
obtain an understanding of the
2. Maintain and awareness that when IT is used to transfer
Information system (Para 81)
information automatically

1. Obtain a sufficient understanding of control activities
HKSA 315 Obtain an to assess the risk of material misstatment at the assertion
understanding of how the entity level
has responed to risks arising from (Para 91)
IT (Para 91 & 93) 2. Obtain an understanding of how the entity has
responed to risks arising from IT (Para 93)

HKSA 330 allows the use of Risk assessed with IT environment affects the audit
CAATs for more extensive testing procedures includes: Lack of transaction trials; loack of
of electronic transactions and segreation of functions; dependence on other control over
account files. computer processing.
HKICPA - Q & A analysis (Sep 06)

Question

1 Quality Control and Competence in accept new audit

a Section 440 code of Ethics for Prof. Acct

HKSA220 Quality Control - Comptence of the new
b
engagement

c HKSA510 - Initial Engagement -Opening balances

HKSA 315 & 330 - FS level risk related to control
d
environment

2 Inventory balance Hot topic in Sept 2008

a Risk of material misstatement (MM)of the valuation

b Audit procedure response to the assessed risk of MM

c Existence assertion of Inventory balance

d Audit procedure response to the existence assertion

3 Sampling risks and Non sampling risks
HKICPA - Q & A analysis (Sep 06)