Chapter 15: Additional practice questions

(i)The inventory count will take placeon 1 January 20X4 commencing at 09.00 hours. No movement of inventorywill take place on that day.

(ii) The count will be supervised by MrSneg, the inventory controller. All staff will be provided withpre-printed, pre-numbered inventory counting sheets that are produced bythe computerised system. Mr Sneg will ensure that all sheets areissued, and that all are collected at the end of the count.

(iii)Counters will work on their own,because there are insufficient staff for them to work in pairs, but theywill be supervised by Mr Sneg and Mrs Zapad, an experienced shopmanager who will make checks on the work performed by counters. Staffwill count inventory with which they are most familiar in order toensure that the count is completed as quickly and efficiently aspossible.

(iv)Any inventory that is known to beold, slow-moving or already sold will be highlighted on the sheets.Staff are required to highlight any inventory that appears to be soiledor damaged.

(v) All inventory items counted will have a piece of paper attached to them that will show that they have been counted.

(vi)All inventory that has beendelivered to customers but that has not yet been paid for in full willbe added back to the inventory quantities by Mr Sneg.

(i)Documentation of accounting and internal control systems;

(ii) Walk-through tests;

(iii)Audit sampling;

(iv)Testing internal controls;

(v) Dealing with deviations from the application of control procedures.

(i)Receipt, processing and recording of orders.

(ii) Collection of cash.

(i)the statutory audit of Billington Travel

(ii) the provision of other services to Billington Travel

(i)List and briefly explain some of the difficulties of using audit software;

(ii) List the audit tests that youcan program into your audit software for the sales and inventory systemin Porthos, explaining the reason for each test.

(i)Inventory counting is important toauditors of manufacturers, wholesalers, retailers and many serviceorganisations. Inventory counting is the best way to establishquantities for valuation purposes and it assists management in makingappropriate provisions against obsolete, slow moving and damaged items.

(ii) Inventory counting provides theonly direct evidence in relation to the existence of inventory.Performed properly, counting also provides evidence on cut-off, certainfrauds and on the quality of internal controls over inventory.

(iii)Auditors should attend inventorycounts where inventory is material to the financial statements(statement of financial position or statement of comprehensive income).

(i)The purpose of a perpetualinventory system procedure in practice is to control inventory. Such asystem involves cyclical counting procedures during the year. Suchprocedures avoid the need for reliance on a year-end count. If auditorswish to rely on the records rather than a year-end count for thepurposes of the financial statements they must ensure that the cyclicalcounting procedures are adequate and are being properly and consistentlyapplied, particularly in a large dispersed organisation.

(ii) I would expect all inventories tobe counted at least once a year and for the records to be up to dateand promptly corrected for any discrepancies discovered as a result ofcounting.

(iii)The auditors must assess the riskattaching to the different locations and seek to visit those locationswhere the value or volume of inventory is substantial, and wherecontrols are weak (i.e. where risk is greater).

(iv)It may be necessary to involveother offices of the same firm, or to engage staff from another firm toattend counts, and to co-operate with internal audit, who may wish toconduct their own counts (on which the auditor may wish to rely), or whomay lend staff to the external auditor.

(v) When using other firms of externalauditors, and when relying on internal audit work, it is particularlyimportant that the auditor is satisfied with the quality of that workand that the reporting auditors' involvement is sufficient for thereporting firm to be able to justify its audit opinion.

(vi)External auditors will oftenperform visits on a rotational basis throughout the year to ensureadequate coverage of all locations.

(i)Documentation of accounting and internal control systems

Auditors document accounting and internal control systems inorder to evaluate them for their adequacy as a basis for the preparationof the financial statements and to make a preliminary risk assessmentof internal controls.

In very simple systems with few internal controls where auditorsdo not intend to perform tests of internal controls, it is not necessaryto document the internal control system in detail. It is alwaysnecessary, however, to have sufficient knowledge of the business toperform an effective audit.

For large entities, where the client has already documented thesystem, it is not necessary for the auditors to repeat the process ifthey can satisfy themselves that the client's documentation is adequate.

(ii)Walk through tests

The purpose of walk-through tests is for the auditors toestablish that their recording of the accounting and internal controlsystem is adequate.

Auditors trace a number of transactions from source todestination in the system, and vice versa. For example, customer orderscan be traced from the initial documentation recording the order,through to the related entries in the daybooks and ledgers.

It is common for walk-through tests to be performed at the sametime as tests of controls, where auditors are reasonably confident thatsystems are recorded adequately.

(iii)Audit sampling

Auditors perform tests of controls and substantive testing on asample basis in order to form conclusions on the populations from whichthe samples are drawn.

It is not possible in anything but the very smallest of entitiesto take any other approach, as testing 100% of a population may beimpractical, not cost effective and not accurate because populations aretoo large and because of human error.

Samples can be selected in a number of ways – eitherstatistically or on the basis of auditor judgement. In all cases, thesample selected must be representative of the population as a whole.

(iv)Testing internal controls

Auditors test internal controls in order to establish whetherthey are operating effectively throughout the period under review. Ifcontrols are operating effectively, auditors can reduce the level ofsubstantive testing on transactions and balances that would otherwise berequired.

In testing internal controls, auditors are checking to ensurethat the stated control has been applied. For example, auditors maycheck that there is a grid stamp on a sales invoice with varioussignatures inside it that show that the invoice has been approved by thecredit controller, that it has been checked for arithmetical accuracy,that the price has been checked, and that it has been posted to thesales ledger. The signatures provide audit evidence that the control hasbeen applied.

Auditors are not checking to ensure that the invoice is, in fact,correct. This would be a substantive test. Nevertheless, it is possibleto perform tests of control and substantive tests on the same documentat the same time.

(v) Dealing with deviations from the application of control procedures

Where it appears that an internal control procedure has not beenapplied, it is necessary to form an opinion as to whether the deviationfrom the application of the procedure is an isolated incident, orwhether the deviation represents a systematic breakdown in theapplication of the control procedure. This is usually achieved byselecting a further sample for testing.

If it cannot be shown that the non-application of the procedureis isolated (i.e. there are no further instances in which the controlhas failed), it is necessary either to find a compensating control thatcan be tested, or to abandon testing of controls and to take a whollysubstantive approach. Where there is a breakdown in internal controls itis also necessary to reassess the auditor's preliminary riskassessment. Abandoning tests of control may place strains on the budgetfor the audit and auditors should always consider the possibility ofcompensating controls before abandoning tests of controls.

(i)Audit risk is the product ofinherent risk, control risk and detection risk. Audit risk isestablished by the auditor and the nature and extent of testing in aparticular audit are determined by an assessment of the other elementsof risk.

(ii) Inherent risk is the risk thatmaterial errors will occur both at the entity level, and at the level ofindividual transactions and balances. Certain account balances andcertain entities are more inherently risky than others. For example,inventory is more inherently risky than cash, volatile businesses aremore inherently risky than stable businesses.

(iii)Control risk is the risk thatinternal controls will not prevent or detect material errors, both atthe entity level, and at the level of individual transactions andbalances.

(iv)Detection risk is the risk that auditors will fail to detect material errors (due to human error or sampling risk, for example).

(i)In the case of EWheels, the level of inherent risk, control risk and detection risk all appear to be higher than normal.

(ii) EWheels is in a volatile sectorof the economy. It has grown rapidly and is planning further expansionwhich will require additional resources. There is a real risk of'over-trading', i.e. that the business will exhaust its cash resourcestoo soon as a result of rapid growth. In such circumstances, there is arisk that creditors will go unpaid and that the business will be forcedinto liquidation. This is risky for both the directors and for theauditors.

(iii)In a highly competitive sector,there is a possibility that the company itself will be vulnerable totake-over, particularly if it is in a weak financial position which itappears to be with net liabilities. The dispute between the ex-directorand the current directors means that the current directors do not haveoverall control of the company. It is particularly important intake-over situations for auditors to be cautious in the audit opinionthey give.

(iv)The overall control environment atEWheels is weak. There has been no proper control of the accountingfunction for six months and errors are appearing as a result. This maymean that the accounting records are unreliable and the financialstatements may be materially misstated.

(v) The attitude of the directors (whichis relevant to the overall control environment) is suspect, they haveindicated that they would prefer an unmodified opinion in circumstanceswhich may warrant a modified opinion. They also appear to be overlyambitious in their expansion plans.

(vi)EWheels is suffering from financialpressures; it wishes to expand but additional resources are needed andthey are becoming scarcer, loan finance may become more expensive. Theex-director is claiming a substantial amount of money from the company.It may be preferable for the company to seek further equity finance orto delay the expansion plans.

(vii)The audit is also risky for thefirm because this is the first year of audit (and mistakes are thereforemore likely to be made) and because there is pressure to issue anunmodified opinion. It will be important for the firm to ensure thatadequate time and resources are allocated to what is likely to be adifficult audit. Any pressure by the directors to complete the auditquickly should be resisted.

(i)It will be necessary to review theoverall financing position of the company in detail. This will involveexamining budgets and cash flow forecasts, and performance againstbudgets and cash flow forecasts. If this information is not availablefor whatever reason, it will probably be necessary for the directors toproduce it.

(ii) The relationship between thecompany and its bankers should be investigated thoroughly, because ifthe relationship is poor, additional finance is unlikely to beforthcoming.

(iii)It is likely that financialinformation will be sent to the bank on a regular basis and this shouldbe inspected. It will be necessary to inspect correspondence with thebank and possibly for the auditors to make their own enquiries of thebank, although banks do not normally provide much information toauditors in this context.

(iv)Enquiries should be made ofdirectors about that availability of additional equity and other financewhich will be necessary for the planned expansion. All statements inthis respect should be corroborated and supported by documentation.

(v) Enquiries should be made of thecompany's lawyers as to the nature and likely outcome of the disputewith the ex-director. It will be necessary to make either a provision ordisclosure in the financial statements unless it is very unlikely thatany amount will be payable to him.

(i)The audit report would probably bemodified by means of the inclusion of an 'emphasis of matter' paragraph,highlighting the problem. This would only be possible however, if thematter were adequately disclosed in the financial statements.

(ii) If the matter were not adequatelydisclosed in the financial statements, it might be necessary to issuean 'except for' opinion, because the auditor would conclude that thefinancial statements were not free from material misstatement.

(iii)An 'adverse' opinion stating thatthe financial statements do not fairly present the position at allbecause of the lack of disclosure might be necessary if the auditorsconsidered the matter to be pervasive to the financial statements as awhole.

(iv)In extreme circumstances, where itwas clear that the company was not a going concern, and the financialstatements were still prepared on a going concern basis, it wouldprobably be necessary to issue an 'adverse' opinion.

(i)It is important for externalauditors to be independent of their audit clients because externalauditors act on behalf of the owners of the business (normally theshareholders) and report on the financial statements prepared by themanagement for the benefit of shareholders.

(ii) If external auditors are notindependent of their clients, for example if they hold shares in thecompanies that they audit, their ability to form an objective opinion onthe financial statements is impaired.

(iii)External auditors must also beseen to be independent because if they are not, the owners of thebusiness will not have confidence in the audit reports that the auditorsissue.

(iv)The ACCA's Rules of ProfessionalConduct require that auditors are independent, and that they are seen tobe independent. The Rules cover a number of areas in which theauditors' independence may be, or be seen to be, impaired.

(v) National legislation also normally requires external auditors to be independent.

(i)The statutory audit

(ii)The provision of other services

(i)It may be appropriate to discussthe matter, discreetly, with other staff members to establish whether ornot it is of concern to them, as well as to you. It would be preferableto discuss the matter with persons who are known to be reliable.

(ii) If the concerns are shared, or ifthe other staff have no knowledge of the matter, or if you are stillconcerned about the matter, it may be appropriate to discuss the matterwith the chief internal auditor to try and establish why the matter hasnot been reported, as there may be a good reason. If other staff supportyou in your view, it may be appropriate to take another member of staffalong to the discussion.

(iii)If the chief internal auditor isable to reassure you (either that it is not necessary to report thematter, or that the matter will be reported), no further action will benecessary, although it may be useful to make a brief note of thediscussion.

(iv)If you are not satisfied, or ifthe chief internal auditor undertakes to report the matter but does notdo so within a reasonable time, the situation may be more serious and itis more important in such circumstances to make notes of anydiscussions. It may be appropriate to have further discussions with thechief internal auditor.

(v) If you are still not satisfied,and you consider that the matter is sufficiently serious, it may beappropriate to approach a more senior member of management to voice yourconcerns. You may wish to avoid this situation but it may be necessaryin order to protect yourself.

(vi)On the assumption that the matteris one of internal concern to the company and there is no question ofillegality, the question of reporting the matters to third partiesoutside the organisation does not arise.

(i)The principal danger in doingnothing lies in the possibility that you may be accused of not bringingattention to the matter or even of being actively involved in a'cover-up'.

(ii) Professional ethics do not permitchartered certified accountants to take no action at all where seriousmatters are concerned and to do nothing might, in extreme circumstances,involve you in disciplinary proceedings by the ACCA, even as a student.

(iii)To do nothing might also meanthat the business of the company you work for is damaged, and thereforeyour own employment prospects.

(i)Difficulties of using audit software

Sales and ticketing

(i)The sales function is likely to beintegrated with the accounting and internal control system used toproduce the figure in the financial statements for revenue, on which theexternal auditor reports.

(ii) The internal auditors' work onthe ticketing system is less likely to be useful because it relates toan operational area which does not have a direct impact on the financialstatements. There are, however, regulatory matters that may need to beconsidered by the external auditor. Ticketing may also have an indirecteffect because it is likely to be integrated with the sales system andthere is likely to be some crossover between the controls over ticketingand controls over sales generally. The work of the internal auditors istherefore likely to be of some use to the external auditor.

Fleet acquisition and maintenance

(iii)The internal auditors' work onthe fleet acquisition system is likely to be very relevant to theexternal auditors because owned aircraft and leased aircraft willconstitute a substantial element of statement of financial positionassets and liabilities, and depreciation and finance charges in thestatement of comprehensive income.

(iv)Much of the internal auditors'work is likely to relate to ensuring that company policy has beencomplied with. Policy will relate to the authorisation for andacquisition of aircraft, and accounting for aircraft in terms of thecorrect classification of leases (operating or financing) anddepreciation policy, for example. Company policy is likely to beextensive and detailed for such material items and external auditorswill be concerned to ensure that it is both appropriate and has beencomplied with.

(v) It is also possible that theinternal auditors' work may involve some verification of the statementof comprehensive income and statement of financial position entries atthe year-end. Given the likely materiality of the amounts involved, thiswork will also be of interest to the external auditors.

(vi)It is possible that the internalauditors' work may also relate to the quality of aircraft, and otheroperational aspects of fleet management. These issues may also berelevant to the external auditors, at least insofar as they relate tocompliance with laws and regulations.

(vii)In relation to maintenance, theinternal auditors' work is likely to relate to the authorisation andcorrect accounting for maintenance expenditure (capitalisation orexpensing), and on the operational side, to the quality thereof, as forfleet acquisition (above). Maintenance expenditure in the statement ofcomprehensive income may well be material and the work of the internalauditors is therefore of interest to external auditors.

Trade payables and long term debt financing

(viii)The extent of the externalauditor's interest in the internal auditors' work on trade payables andlong term financing will depend on the materiality of the amountsinvolved. Trade payables (for certain types of routine maintenance, andpayables due to the service organisations, for example) may be material.Long term debt financing is very likely to be material as many airlineshave substantial debt financing.

(ix) Internal audit work on tradepayables is likely to involve ensuring that routine internal controlsare properly designed and are operating. The external auditors may wellbe interested in the internal auditors' work in this area.

(x) There are substantial financialstatement disclosures required for debt financing. The internalauditors' assistance with ensuring that disclosures are properly made,as well as with ensuring that any covenants have been complied with andthat the accounting for the financing is appropriate, may also behelpful to the external auditors.

(i)The quality of the internal auditfunction will have a significant effect on the extent of the externalauditor's reliance. If the quality of work is not adequate, reliancewill not be possible, regardless of the extent and relevance of the workperformed.

(ii) The firm will seek to ensure thatthere is an appropriate structure within the department itself, withappropriate reporting lines outside the department, preferably reportingto the audit committee.

(iii)The internal audit function hasrecently been expanded and there are likely to be changes in the waythat it is organised. The function should have operational independencewithin the organisation and formal terms of reference that encompass therecent changes made.

(iv)The function should have a clearlydefined set of operating procedures, as well as a work program. Properdocumentation of all work performed is essential.

(v) Staff should be appropriatelytrained, experienced and qualified. The head of such an importantdepartment should preferably be professionally qualified.

(i)Internal controls exercised by thecompany over in-flight catering and payroll must be properly designedand operated. The firm will seek to review documentation of controls andinternal audit reports. It will seek to obtain evidence that controlshave beenapplied.

(ii) A breach of regulations or adeterioration in the quality of catering could both have a significanteffect on the financial statements, particularly if fines were payableor adverse publicity was likely. Enquiries into both areas and a reviewof relevant documentation provided by, for example, food licensingauthorities to the company or the service organisation, and companylawyers (in relation to passenger complaints, perhaps), will benecessary.

(iii)Evidence of controls sought by the firm will include:

• controls over the selection of the service organisations selected (by competitive tendering, for example);
• evidence relating to the completeness, accuracy and timeliness of information provided to, and received from, the payroll organisation (batch summaries and exception reports, for example);
• evidence relating to the security measures taken by the payroll organisation to ensure that confidential information is kept confidential;
• evidence relating to the security measures taken by the catering organisation to ensure that health and safety standards are maintained and that no 'sabotage' of the food can take place.

(i)The internal audit function in anyentity is part of the overall corporate governance function of theentity. Corporate governance objectives include the management of therisks to which the entity is subject that would prevent it achieving itsoverall objectives such as profitability. Corporate governanceobjectives also include the overarching need for the management of anentity to exercise a stewardship function over the entity's assets.

(ii) A large part of the management ofrisks, and the proper exercise of stewardship, involves the maintenanceof proper controls over the business. Controls over the business as awhole, and in relation to specific areas, include the effectiveoperation of an internal audit function.

(iii)Internal audit can help management manage risks in relation to fraud and error, and exercise proper stewardship by:

• commenting on the process used by management to identify and classify the specific fraud and error risks to which the entity is subject (and in some cases helping management develop and implement that process);
• commenting on the appropriateness and effectiveness of actions taken by management to manage the risks identified (and in some cases helping management develop appropriate actions by making recommendations);
• periodically auditing or reviewing systems or operations to determine whether the risks of fraud and error are being effectively managed;
• monitoring the incidence of fraud and error, investigating serious cases and making recommendations for appropriate management responses.

(iv)In practice, the work of internalaudit often focuses on the adequacy and effectiveness of internalcontrol procedures for the prevention, detection and reporting of fraudand error. Routine internal controls (such as the controls over computersystems and the production of routine financial information) andnon-routine controls (such as controls over year-end adjustments to thefinancial statements) are relevant.

(v) It should be recognised however thatmany significant frauds bypass normal internal control systems and thatin the case of management fraud in particular, much higher levelcontrols (those relating to the high level governance of the entity)need to be reviewed by internal audit in order to establish the natureof the risks, and to manage them effectively.

(i)External auditors are required byISA 240 The Auditor's Responsibility to Consider Fraud in an Audit ofFinancial Statements to consider the risks of material misstatements inthe financial statements due to fraud. Their audit procedures will thenbe based on a risk assessment. Regardless of the risk assessment,auditors are required to be alert to the possibility of fraud throughoutthe audit and maintain an attitude of professional scepticism,notwithstanding the auditors' past experience of the honesty andintegrity of management and those charged with governance. Members ofthe engagement team should discuss the susceptibility of the entity'sfinancial statements to material misstatements due to fraud.

(ii) Auditors should make enquiries ofmanagement regarding management's assessment of fraud risk, its processfor dealing with risk, and its communications with those charged withgovernance and employees. They should enquire of those charged withgovernance about the oversight process.

(iii)Auditors should also enquire of management and those charged with governance about any suspected or actual instance of fraud.

(iv)Auditors should consider fraudrisk factors, unusual or unexpected relationships, and assess the riskof misstatements due to fraud, identifying any significant risks.Auditors should evaluate the design of relevant internal controls, anddetermine whether they have been implemented.

(v) Auditors should determine anoverall response to the assessed risk of material misstatements due tofraud and develop appropriate audit procedures, including testingcertain journal entries, reviewing estimates for bias, and obtaining anunderstanding of the business rationale of significant transactionsoutside the normal course of business. Appropriate managementrepresentations should be obtained.

(vi)External auditors are onlyconcerned with risks that might cause material error in the financialstatements. External auditors might therefore pay less attention thaninternal auditors to small frauds (and errors), although they mustalways consider whether evidence of single instances of fraud (or error)are indicative of more systematic problems.

(vii)It is accepted that because ofthe hidden nature of fraud, an audit properly conducted in accordancewith ISAs might not detect a material misstatement in the financialstatements arising from fraud. In practice, routine errors are mucheasier to detect than frauds.

(viii)Where auditors encountersuspicions or actual instances of fraud (or error), they must considerthe effect on the financial statements, which will usually involvefurther investigations. They should also consider the need to report tomanagement and those charged with governance.

(ix)Where serious frauds (or errors)are encountered, auditors need also to consider the effect on the goingconcern status of the entity, and the possible need to report externallyto third parties, either in the public interest, for national securityreasons, or for regulatory reasons. Many entities in the financialservices sector are subject to this type of regulatory reporting andmany countries have legislation relating to the reporting of moneylaundering activities, for example.

(i)Stone Holidays is subject to all ofthe risks of error arising from the use of computer systems. Ifprogrammed controls do not operate properly, for example, theinformation produced may be incomplete or incorrect. Inadequate controlsalso give rise to the risk of fraud by those who understand the systemand are able to manipulate it in order to hide the misappropriation ofassets such as receipts from customers.

(ii) All networked systems are alsosubject to the risk of error because of the possibility of the loss orcorruption of data in transit. They are also subject to the risk offraud where the transmission of data is not securely encrypted.

(iii)All entities that employ staffwho handle company assets (such as receipts from customers) are subjectto the risk that staff may make mistakes (error) or that they maymisappropriate those assets (fraud) and then seek to hide the error orfraud by falsifying the records.

(iv)Stone Holidays is subject toproblems arising from the risk of fraud perpetrated by customers usingstolen credit or debit cards or even cash. Whilst credit card companiesmay be liable for such frauds, attempts to use stolen cards can causeconsiderable inconvenience.

(v) There is a risk of fraudperpetrated by senior management who might seek to lower the amount ofmoney payable to the central fund (and the company's tax liability) byfalsifying the company's sales figures, particularly if a largeproportion of holidays are paid for in cash.

(vi)There is a risk that staff mayseek to maximise the commission they are paid by entering falsetransactions into the computer system that are then reversed after thecommission has been paid.

Inherent and control risks

(i)Charities can be viewed asinherently risky because they are often managed by non-professionals andare susceptible to fraud, although many charities and the volunteersthat run them are people of the highest integrity who take a great dealof care over their work. The assessment of this aspect of inherent riskdepends on each individual charity, and the areas in which it operates.

(ii) Charities are also at risk ofbeing in violation of their constitutions which is important where fundsare raised from public or private donors who may well object stronglyif funds are not applied in the manner expected. Other charities andregulatory bodies supervising charities may also object. Again, theauditors will assess the level of risk. The involvement of a recentlyretired Chartered Certified Accountant in the preparation of accounts inthe past may lower the auditor's assessed inherent risk to an extent.

(iii)Most small charities have a highlevel of control risk because formal internal controls are expensive andare not often in place. This means that donations are susceptible tomisappropriation. Charities rely on the trustworthiness of volunteers.The auditors will assess the level of risk.

Detection risk

(iv)Detection risk comprises samplingrisk and non-sampling risk. It is possible in this case that alltransactions will be tested and therefore sampling risk (the risk thatsamples are unrepresentative of the populations from which they aredrawn) is not present.

(v) Non-sampling risk is the risk thatauditors will draw incorrect conclusions because, for example, mistakesare made, or errors of judgement are made in interpreting results, orbecause the auditors are unfamiliar with the client, as is the casehere.

Audit risk

(vi)Audit risk is the product ofinherent risk, control risk and detection risk and is the risk that theauditors will issue an inappropriate audit opinion. This risk can bemanaged by decreasing detection risk by altering the nature, timing andextent of audit procedures applied. Where inherent risk is high andcontrols are weak (as may be the case here) more audit work will beperformed in appropriate areas in order to reduce audit risk to anacceptable level.

(i)Attend fund raising events andobserve the procedures employed in collecting, counting, banking andrecording the cash. This will help provide audit evidence that fundshave not been misappropriated and that all income from such events hasbeen recorded. Sealed boxes or tins that are opened in the presence oftwo volunteers are often used for these purposes.

(ii) Perform cash counts at the eventsto provide evidence that cash has been counted correctly and that thereis no collusion between volunteers to misappropriate funds.

(iii)Examine bank paying in slips,bank statements and bank reconciliations and ensure that these agreewith records made at events. This also provides evidence as to thecompleteness of income.

(iv)Examine the records of expenditurefor fund raising events (hire of equipment, entertainers, purchase ofrefreshments, etc.) and ensure that these have been properly authorised(where appropriate) and that receipts have been obtained for allexpenditure. This provides evidence as to the completeness and accuracyof expenditure.

(v) Review the income and expenditureof fund raising events against any budgets that have been prepared andinvestigate any significant discrepancies.

(vi)Ensure that all necessary licences(such as public entertainment licences) have been obtained by thetrustees for such events in order to ensure that no action is likely tobe taken against the charity or volunteers.

(vii)Obtain representations from thetrustees to the effect that there are no outstanding unrecordedliabilities for such events – again for completeness of expenditureand liabilities.

The directors are normally required to prepare the financialstatements of the company using the appropriate law of their country andin accordance with the International Accounting Standards (IASs). Theauditors are normally required to check or audit those financialstatements, again in accordance with the legislation of their countryand the International Standards on Auditing.

Fraud and error

The directors are responsible for preventing and detecting fraudand error in the financial statements, no matter how immaterial this maybe. Auditors are responsible for giving an opinion on whether thefinancial statements show a true and fair view; in other words that thefinancial statements are materially correct. Auditors are not requiredto detect immaterial fraud or error.

Disclosure

The directors must ensure that there is adequate disclosure ofall matters required by statute or IASs in the financial statements. Theauditor will check that disclosure provisions have been complied with,and where certain disclosures have not been made, provide thisinformation in the audit report.

Going concern

The directors are responsible for ensuring that the company willcontinue in operational existence for the foreseeable future, and reportto the members in the published financial statements if this isunlikely to be the case. The auditor will check the accuracy of thedirectors' workings and assumptions and if these are consideredincorrect or inappropriate, then the audit report may be modified orqualified to bring the situation to the attention of the members of thecompany.

The basis of opinion paragraph may not meet the requirements of ISAs 700-705 for the following reasons:

The use of the term Auditing Standards is not clear, because thereport does not state which auditing standards have been used. Thisprovides uncertainty regarding the actual standard of work performed.

The assessment of estimates and judgements made by the directorsnormally relates to significant amounts only, rather than all of thoseestimates and judgements. The use of the word all implies that the auditwas more thorough than it probably was. Replacing the word all with theword significant will show that there was some limit to the audittesting and that this was probably focused on material amounts only.

Stating that time was a factor in obtaining information andexplanations for the audit is not correct as this implies some factorwhich could have been avoided and that the audit may therefore beincomplete. The auditor has to plan the audit carefully and ensure thatall the information and explanations considered necessary are obtainedto form an opinion, not simply stop work when time runs out.

The auditor does not confirm that the financial statements arefree from material misstatement as this implies a degree of accuracythat the auditor simply cannot provide. Making the statement could alsoleave the auditor liable to claims from members or third parties shoulderrors be found in the financial statements later. Rather than make sucha categorical statement, the auditor provides reasonable assurance thatthe financial statements are free from material misstatement, whichclearly implies that audit techniques are limited.

The disclaimer regarding errors appears to be useful in that itlimits the auditor's liability. However, it does not belong in the basisof opinion paragraph as it appears to severely limit the basis of theauditor's opinion by stating that the directors are responsible for allerrors. Directors' responsibilities are also clearly outlined in anothersection of the report, and this statement also appears to extend thoseresponsibilities making the audit report overall less clear. This couldalso imply that the auditor has done little or no work.

As the auditor is not required to audit the whole of the annualreport of a company, it is inappropriate to refer to disclosure in thatreport when checking overall adequacy of presentation. Adequacy ofpresentation can only be confirmed regarding items actually audited,which is basically the financial statements.

A positive assurance report means that the auditor has carriedout sufficient work to be able to state that financial information isfree from material error.

A negative assurance report means that nothing has come to theattention of the auditor, which indicates the financial informationbeing reported on has errors in it. However, the extent of the workcarried out is normally less, which means that less reliance can beplaced on this report.

The advantages of providing negative assurance include: