Essentially, the principles to be followed are any or all of:
（1）Review and test the process used by management to develop the estimate
（2）Use an independent estimate （generated by the auditor） to compare with management’s estimate
（3）Consider the use of an expert in the relevant field to obtain an independent view as to whether or not the estimate is accurate
（4）Review subsequent events
Where, in the case of contingent liabilities, subsequent events ‘crystallize’ the liability, there will be no need to review management’s processes or use independent estimates.
The auditor will normally test the calculations of the estimate, assess the assumptions made （e.g. the court is 90% likely to find in our favor）, compare estimates with those made in previous periods and ensure that the estimate is in accordance with the auditor’s knowledge of the business and the other audit evidence obtained.
这部分具体在考试中的运用将在历史考题分析中给大家讲解.
Small company audit issues
The audit of small companies creates additional issues for the auditor when it comes to obtaining independent audit evidence. This is principally due to the very nature of small companies. And the fact that control is often centralized in the form of the managing director. There are also issues surrounding segregation of duties in small managing companies.
History Exam Question Analysis
（B5/D2004）
5 International Standards on Auditing（ISAs） apply equally to the audit of all antities, whatever their size, However, the manner in which ISAs are applied differs from entity to entity and depends on the use of the auditor’s judgement. The characteristics of smaller entities may include:
（a） Common ownership and management;
（b） A control framework that is different to the control framework for larger entities;
（c） The use of standardized computer packages;
（d） Reliance on the auditor for accounting expertise;
（e） A lack of sufficient appropriate audit evidence to support financial statement assertions relating to income from cash transactions.
These characteristics have an effect on the way the audits of smaller entities are approached, how audit risk is assessed, how the audit is conducted, the auditor’s report and the relationship between auditor and client.
Required:
Describe the nature and effect of each of the five characteristics listed in （a）-（e） above on the audit of smaller entities and on the relationship between auditor and client.
NB: The five characteristics （a）-（e） carry equal marks
（20 marks）
答案：
（a） Common ownership and management
（i） The existence of an owner-manager who is actively involved in the day-to-day running of the business is a common feature of smaller entities.
（ii） This characteristic can be seen as increasing audit risk because such and owner-manager is easily able to override any internal controls that have been set up （although the management override of internal controls is not restricted to smaller entities and has been a feature of many large corporate scandals）.
（iii） On the other hand, this characteristic can also be seen as decreasing audit risk because the presence of the owner-manager on a day-to-day basis can be seen as an effective substitute for formal internal comtrols.
（iv） Risk assessment will depend on the auditor’s knowledge of the integrity and competencies of the owne-manager （of any single manager to whom the owner has delegated his management duties）.
（v） The owner-manager may not understand why an audit is necessary and may fail to oo-operate with the auditor. The owner-manager may also be buying a suite of services from the auditor, including tax, accounting and systems advice which may give rise to problems of independence for the auditor, particularly if the auditor is a sole practitioner （see below）.
（b） A control framework that is different to the control framework for larger entities
（i） Intrnational Standards on Auditing need to accommodate the needs of auditors of larger and smaller entities and always make reference to a full range of intemal formal controls. Many smaller entities lack formal internal controls; a lack of staff amongst whom to segregate duties for example and a lack of authorization controls.
（ii） As noted above, the presence of the owner-manager can compensate for this lack of control in the auditor’s risk assessment. Auditors should not assume that because formal internal controls do not exist, there is no intemal control framework to be assessed.
（iii） High-level general or environmental controls, such as those relating to entity requirements for integrity in those in whom trust is placed, and controls involving the overall of day to day accounting records （such as invoices, the bank statement and management accounts） may or may not be formally documented, but such controls can be evidenced in other ways and can therefore be tested.
（iv） It is always efficient for auditors to rely on internal controls wherever possible. However, where to such controls exist, auditors may decide that a wholly substantive approach is more appropriate.
（c） The use of standardized computer packages
（i） Well-established standardised computer packages are generally more reliable and ‘auditor-friendly’ than they used to be. Computer Assisted Audit Techniques （CAATS） have been developed for use with some such packages, for example, and many small firms of auditors advise their clients on the selection of such packages, although this can create independence problems （see below）.
（ii） Such packages may not be easily adaptable to the particular needs of very small entities and some such packages still fail to provide an adequate audit trail.
（iii） The common use of well-established computer packages enables auditors become familiar with their advantages and disadvantages, which makes planning audits more efficient and enables auditors to provide useful recommendations to clients where problems are encountered.
（iv） The proper use of computer packages by adequately trained staff means that, to extent, there is less scope for a certain type of human error; this may have an effect on the auditor’s risk assessment. However, systematic errors resulting from inadequate programming or from the inappropriate use of such packages can give rise to significant risks such as large volumes of data that lack integrity.
（d） Reliance on the auditor for accounting expertise
（i） The packages referred to to above mean that staff at many smaller entities are able to produce a trial balance, which might not have been possible with a manual system. However, many smaller entities still rely on auditors for the preparation of the final statutory financial statements. ACCA’s Rules of Professional Conduct permit this.
（ii） The Rules do not permit the auditor to prepare the basic accounting records, to initiate transactions or to prepare journal entries, for example. This is because auditors must not perform the function of management, otherwise they will be reporting on their own work.
（iii） In practice, the dividing line between what constitutes ‘advice’ to the client, and what constitutes doing the client’s job for the client, can be difficult to draw, and clients often want their auditors to do their jobs for them. For example, a client might wish the auditor to help ‘sort out’ a difficult reconciliation. It is therefore important for auditors to explain clearly to the directors of their clients that directors have responsibilities for the accounting records. Auditors should also ensure that properly drafted engagement letters are in place.
（iv） It is important that where auditors are involved in the preparation of the financial statements in any way, that other audit staff review their work.
（v） Where auditors are providing a suite of services （accounting expertise, tax advice and advice on computer packages, for example）, they may wish to consider whether they can be seen to be independent （as required by the Rules） and whether appropriate safeguards can be put into place to maintain the auditor’s independence and objectivity.
（e） A lack of sufficient appropriate audit evidence to support financial statement assertions relating to income for cash transactions
（i） Where auditors are unable to obtain sufficient appropriate audit evidence on any material area in the financial statements, they must qualify their audit report on the grounds of a limitation in the scope of the audit （‘except for’）.
（ii） If the effect of the lack of evidence is pervasive and affects the view given by the financial statements as a whole, the auditor may need to disclaim an opinion （the auditor cannot form a view as to whether the financial statements give a true and fair view）.
（iii） Qualifications and disclaimers of opinion may be regarded as problematic if they are attached to financial statements that are presented to banks or other providers of finance. If they are attached to financial statements supporting tax computations this may give rise to the possibility of a tax investigation. This may harm the relationship between auditor and client and the client may seek to persuade the auditor to issue an unqualified opinion where it is not appropriate.
（iv） Auditors should consider carefully whether they wish to accept audit engagements where they know at the outset that the client is unable or unwilling to provide them with sufficient appropriate audit evidence （auditors should not be associated with fraud）.
（v） Owner-managers may seek to persuade auditors, either verbally, or by written management representations, that cash transactions are complete, despite the lack of written evidence. Management representations are no substitute for audit evidence that should be present.
（B6/J2004）
6 There are a number of different methods of obtaining audit evidence. Methods include:
（i） analytical procedures;
（ii） audit sampling;
（iii） tests of controls;
（iv） detailed testing of transactions and balances;
（v） computer assisted audit techniques （CAATs）.
These methods overlap and may be used for different purposes during an audit of financial statements.
Required:
（a） Explain the advantages and disadvantages of each of the five methods of evidence gathering listed above.
（15 marks）
NB: You are not required to describe the methods listed above.
（b） Describe the relationship between the five methods of evidence gathering described above. （5 marks）
（20 marks）
（1）Review and test the process used by management to develop the estimate
（2）Use an independent estimate （generated by the auditor） to compare with management’s estimate
（3）Consider the use of an expert in the relevant field to obtain an independent view as to whether or not the estimate is accurate
（4）Review subsequent events
Where, in the case of contingent liabilities, subsequent events ‘crystallize’ the liability, there will be no need to review management’s processes or use independent estimates.
The auditor will normally test the calculations of the estimate, assess the assumptions made （e.g. the court is 90% likely to find in our favor）, compare estimates with those made in previous periods and ensure that the estimate is in accordance with the auditor’s knowledge of the business and the other audit evidence obtained.
这部分具体在考试中的运用将在历史考题分析中给大家讲解.
Small company audit issues
The audit of small companies creates additional issues for the auditor when it comes to obtaining independent audit evidence. This is principally due to the very nature of small companies. And the fact that control is often centralized in the form of the managing director. There are also issues surrounding segregation of duties in small managing companies.
History Exam Question Analysis
（B5/D2004）
5 International Standards on Auditing（ISAs） apply equally to the audit of all antities, whatever their size, However, the manner in which ISAs are applied differs from entity to entity and depends on the use of the auditor’s judgement. The characteristics of smaller entities may include:
（a） Common ownership and management;
（b） A control framework that is different to the control framework for larger entities;
（c） The use of standardized computer packages;
（d） Reliance on the auditor for accounting expertise;
（e） A lack of sufficient appropriate audit evidence to support financial statement assertions relating to income from cash transactions.
These characteristics have an effect on the way the audits of smaller entities are approached, how audit risk is assessed, how the audit is conducted, the auditor’s report and the relationship between auditor and client.
Required:
Describe the nature and effect of each of the five characteristics listed in （a）-（e） above on the audit of smaller entities and on the relationship between auditor and client.
NB: The five characteristics （a）-（e） carry equal marks
（20 marks）
答案：
（a） Common ownership and management
（i） The existence of an owner-manager who is actively involved in the day-to-day running of the business is a common feature of smaller entities.
（ii） This characteristic can be seen as increasing audit risk because such and owner-manager is easily able to override any internal controls that have been set up （although the management override of internal controls is not restricted to smaller entities and has been a feature of many large corporate scandals）.
（iii） On the other hand, this characteristic can also be seen as decreasing audit risk because the presence of the owner-manager on a day-to-day basis can be seen as an effective substitute for formal internal comtrols.
（iv） Risk assessment will depend on the auditor’s knowledge of the integrity and competencies of the owne-manager （of any single manager to whom the owner has delegated his management duties）.
（v） The owner-manager may not understand why an audit is necessary and may fail to oo-operate with the auditor. The owner-manager may also be buying a suite of services from the auditor, including tax, accounting and systems advice which may give rise to problems of independence for the auditor, particularly if the auditor is a sole practitioner （see below）.
（b） A control framework that is different to the control framework for larger entities
（i） Intrnational Standards on Auditing need to accommodate the needs of auditors of larger and smaller entities and always make reference to a full range of intemal formal controls. Many smaller entities lack formal internal controls; a lack of staff amongst whom to segregate duties for example and a lack of authorization controls.
（ii） As noted above, the presence of the owner-manager can compensate for this lack of control in the auditor’s risk assessment. Auditors should not assume that because formal internal controls do not exist, there is no intemal control framework to be assessed.
（iii） High-level general or environmental controls, such as those relating to entity requirements for integrity in those in whom trust is placed, and controls involving the overall of day to day accounting records （such as invoices, the bank statement and management accounts） may or may not be formally documented, but such controls can be evidenced in other ways and can therefore be tested.
（iv） It is always efficient for auditors to rely on internal controls wherever possible. However, where to such controls exist, auditors may decide that a wholly substantive approach is more appropriate.
（c） The use of standardized computer packages
（i） Well-established standardised computer packages are generally more reliable and ‘auditor-friendly’ than they used to be. Computer Assisted Audit Techniques （CAATS） have been developed for use with some such packages, for example, and many small firms of auditors advise their clients on the selection of such packages, although this can create independence problems （see below）.
（ii） Such packages may not be easily adaptable to the particular needs of very small entities and some such packages still fail to provide an adequate audit trail.
（iii） The common use of well-established computer packages enables auditors become familiar with their advantages and disadvantages, which makes planning audits more efficient and enables auditors to provide useful recommendations to clients where problems are encountered.
（iv） The proper use of computer packages by adequately trained staff means that, to extent, there is less scope for a certain type of human error; this may have an effect on the auditor’s risk assessment. However, systematic errors resulting from inadequate programming or from the inappropriate use of such packages can give rise to significant risks such as large volumes of data that lack integrity.
（d） Reliance on the auditor for accounting expertise
（i） The packages referred to to above mean that staff at many smaller entities are able to produce a trial balance, which might not have been possible with a manual system. However, many smaller entities still rely on auditors for the preparation of the final statutory financial statements. ACCA’s Rules of Professional Conduct permit this.
（ii） The Rules do not permit the auditor to prepare the basic accounting records, to initiate transactions or to prepare journal entries, for example. This is because auditors must not perform the function of management, otherwise they will be reporting on their own work.
（iii） In practice, the dividing line between what constitutes ‘advice’ to the client, and what constitutes doing the client’s job for the client, can be difficult to draw, and clients often want their auditors to do their jobs for them. For example, a client might wish the auditor to help ‘sort out’ a difficult reconciliation. It is therefore important for auditors to explain clearly to the directors of their clients that directors have responsibilities for the accounting records. Auditors should also ensure that properly drafted engagement letters are in place.
（iv） It is important that where auditors are involved in the preparation of the financial statements in any way, that other audit staff review their work.
（v） Where auditors are providing a suite of services （accounting expertise, tax advice and advice on computer packages, for example）, they may wish to consider whether they can be seen to be independent （as required by the Rules） and whether appropriate safeguards can be put into place to maintain the auditor’s independence and objectivity.
（e） A lack of sufficient appropriate audit evidence to support financial statement assertions relating to income for cash transactions
（i） Where auditors are unable to obtain sufficient appropriate audit evidence on any material area in the financial statements, they must qualify their audit report on the grounds of a limitation in the scope of the audit （‘except for’）.
（ii） If the effect of the lack of evidence is pervasive and affects the view given by the financial statements as a whole, the auditor may need to disclaim an opinion （the auditor cannot form a view as to whether the financial statements give a true and fair view）.
（iii） Qualifications and disclaimers of opinion may be regarded as problematic if they are attached to financial statements that are presented to banks or other providers of finance. If they are attached to financial statements supporting tax computations this may give rise to the possibility of a tax investigation. This may harm the relationship between auditor and client and the client may seek to persuade the auditor to issue an unqualified opinion where it is not appropriate.
（iv） Auditors should consider carefully whether they wish to accept audit engagements where they know at the outset that the client is unable or unwilling to provide them with sufficient appropriate audit evidence （auditors should not be associated with fraud）.
（v） Owner-managers may seek to persuade auditors, either verbally, or by written management representations, that cash transactions are complete, despite the lack of written evidence. Management representations are no substitute for audit evidence that should be present.
（B6/J2004）
6 There are a number of different methods of obtaining audit evidence. Methods include:
（i） analytical procedures;
（ii） audit sampling;
（iii） tests of controls;
（iv） detailed testing of transactions and balances;
（v） computer assisted audit techniques （CAATs）.
These methods overlap and may be used for different purposes during an audit of financial statements.
Required:
（a） Explain the advantages and disadvantages of each of the five methods of evidence gathering listed above.
（15 marks）
NB: You are not required to describe the methods listed above.
（b） Describe the relationship between the five methods of evidence gathering described above. （5 marks）
（20 marks）
