Assessment 2: Group Case

Study
BSB7400 Auditing
12/28/2014

Group Members

Class Number
Course
Tutor Name

Name

ID Number

Amal Mohamed AlShaikh

201001063

Zahra Mahdi Shamlooh

201102306

Kawthar Mahdi Busehail

201101555

Layla Mustafa Kashtakar

201100852

Zainab AbdulKarim AlAsfoor

201100592

002
BSB 7400 Auditing
Namasiku Liandu

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BSB 7400 Auditing

Table of contents

1.0 Overall audit strategy for the financial statements of Bahrain Flour Mills Company ............................ 3
1.1Audit Scope .......................................................................................................................................... 3
1.2 Audit Timing ........................................................................................................................................ 6
1.3 Nature of communication ................................................................................................................... 7
1.4 Resources ............................................................................................................................................ 8
1.5 Significant Factors (Materiality and Audit Risk) ................................................................................ 11
2.0 Audit plans ............................................................................................................................................ 12
2.1 Audit plan for Property, Plant & Equipment asset ........................................................................... 12
2.2 Audit plan for Trade payable liability ................................................................................................ 16
2.3 Audit plan for Share Capital .............................................................................................................. 21
3.0 Internal control procedures for payroll cycle ....................................................................................... 26
4.0 Working papers ..................................................................................................................................... 31
4.1 Working paper for the Property, Plant & Equipment ....................................................................... 31
4.1 Working paper for the payroll control .............................................................................................. 33
4.3 Working paper for Share Capital....................................................................................................... 35
4.4 Working paper for Trade payable ..................................................................................................... 37
5.0 The explanation of how the audit report would have been different there been a material
misstatement in any of the key components of the financial statements ................................................. 39
6.0 References ............................................................................................................................................ 41

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1.0 Overall audit strategy for the financial statements of Bahrain Flour
Mills Company
The following audit strategy is designed in accordance with ISA 300
1.1Audit Scope
Engagement terms
Our engagement letter dated 12 January 2014 sets out the terms of reference as auditors and
has been provided to the Board.
The purpose of this memorandum is to highlight the key element of the audit strategy for the
audit of Bahrain Flour Mills Company for the year ended 31 December 2013.
Audit responsibilities
Our responsibilities as auditors are:
We are required to express our audit opinion on the company financial statements which
are: the statement of financial position as at 31 December 2013, the statement of profit or loss,
the statement of other comprehensive income, the statement of changes in shareholders
equity and the statement of cash flows and summary of significant accounting policies and
other explanatory information.
Our audit is conducted with the International Standards on Auditing and in comply with the
Code of Ethics for Professional Accountants (IESBA Code) requirements.
Perform and plan the audit to get reasonable assurance whether the financial statements are
free from material misstatement
Perform procedures to obtain the evidence of audit about the amounts and disclosures in the
financial statements
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates that are made by the management as well as the evaluating the overall
presentation of the financial statements.

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BSB 7400 Auditing

Independence
To maintain our independence as auditors we ensure that our partners and audit team have no
family, employment, investment or business relationship with the company.
Report elements
The elements of our audit report that is provided to your company:
Title
Addressee
Opening paragraph: Includes identification of the audited financial statements and a
statement of the responsibility of the entity's board of directors and the auditors responsibility
Scope paragraph that includes a description of that the auditor performed and a reference to
the standard that are used.
Opinion paragraph that includes reference to the financial reporting framework used to
prepare the financial statements, expression of the opinion on the financial statements and
report on other legal and regulatory requirements
Date of the report
Our Company address
Auditor's signature
Currency
The currency to be used in reporting is the Bahrain Dinar
Availability of data
We want to ensure that all of the data they are needed for implementing the audit is available
for the auditors in any time they require it.
Roles and responsibilities
The Board of directors is responsible for the preparation and fair presentations of the financial
statements in accordance with International Financial Reporting Standards and the
requirements of the Bahrain Commercial Companies Law, Decree Number 21 of 2001 and for

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such internal control as the management decides is needed to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
The board of directors is responsible for:
- Identification, management, assessment the risk
- Operating, developing and monitoring the internal control system
- Providing principles for overall risk management
The Company has to maintain such books and records as will be sufficient to show the nature
of all transactions and disclose, at any time, the financial position of the company.
The Audit Committee is required to review internal financial controls of the company. The
Audit Committee is required to assess all other internal controls and approve the statements
that are included in the annual report in relation to the internal control and the risk
management.
The Audit Committee has to must receive reports from the management as to effectiveness
of the system they have established as well as the conclusions of any of testing that is
conducted by internal audit.
Audit strategy
Our audit will be as it is planned in the audit process in the following section and on the agreed
timetable of working in the Audit.
In summary of our audit strategy:
-

Updating our understanding of the company through the discussions with the Audit
Committee and the review of the accounts
Assess the internal control effectiveness and the audit risk.
Plan and perform the substantive procedures
Reviewing and analyzing variety of documents, financial records ,policies, procedures ,
transactions and review the disclosure issue in the financial statements
Perform the opinion after performing the completion and overall evaluation in order
issue the report.

Our audit approach is to

-

Documenting our understanding of the key of the financial processes by which the
transactions are recorded within the financial statements
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Testing and evaluating the effectiveness of the internal control through the year
Following our assessment of the controls and processes, we focus on the substantive
testing that is required to form our opinion.

1.2 Audit Timing

Our audit work is used to take three months starting from 1 th of February 2014 30th of April
2014. The following table represents the schedule for our audit:
Audit process

Planning

Preliminary
Review

Fieldwork

Time

Request the needed documents for the audit work

Determine the audit strategy and audit plan
Establish the detailed audit program and procedures
Develop audit scope and objectives
Perform risk assessment procedures
Identify the risks
Understand the internal control of the company
3 weeks
Conduct entrance meeting with the Audit Committee to
explain the audit process, audit scope and objectives, any
concerns they have for expanding the focus of the audit, audit
timing and current practices.

Evaluate the existing internal control structure

Test the operating effectiveness of the selected controls
Assess the design and implementation of the selected
2 weeks
controls
Assess the control risk and risk of significant misstatement
Make a questionnaire to assist the internal control

Plan the substantive procedures

Perform the substantive procedure
Consider if the evidence of audit is appropriate and
sufficient
Perform detailed testing of transactions
Collect and analyze a variety of documents, financial records
,policies, procedures , transactions
4 weeks
Evaluate the compliance with the International Financial
Reporting Standards and the requirements of the Bahrain
Commercial Companies Law, Decree Number 21 of 2001.

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Reporting
and
completion

Follow up
6

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Perform completion procedures

Perform overall evaluation
Form an opinion
Prepare a draft report containing the audit observations,
conclusions, and any recommendations for improvement and
distribute it to the Audit Committee
Conduct exit conference to get the Audit Committee 3 weeks
responses and recommendation about the report
Issue the final report to Audit Committee of Bahrain Flour
Mills Company

Conduct follow-up procedures after seven months of issuing of the final report.
We will revisit the company to ensure that that the corrective measures and
actions have been implemented in a timely and effective manner

1.3 Nature of communication

We welcome to conduct entrance meeting on 7th of February 2014 in the company with the
Audit Committee in order to justify the audit process, audit scope, audit timing and about any
concerns that they have for expanding the focus of the audit .
In the progress of audit work, we propose to conduct meetings with Audit Committee in the
company every week in order to discuss how the process of the audit is going and discuss the
significant findings that we reach to.
We want also to conduct exit conference meeting on 22th of April 2014 in the company after
writing the draft report in order to get Committee responses and resolve any questions or
concerns that they may have about the observations and resolve issues before the final report
is released. The Audit Committee is expected to review the review audit issues and
recommendations for the accuracy and completeness and prepare a formal response.
We would be interested to hear if there are any matters that the Audit Committee would want
us to address and to understand more fully the expectations and requirements of the
Committee from the process of audit.

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1.4 Resources
The following table represents the audit team that assigned to carry out the audit work in your
company:
Name of the auditor

Amal AlShaikh

Zahra
Shamlooh
Senior
Auditor

Kawthar
Busehail
Junior Auditor

Position

Senior Auditor

Days of working

Qualifications

Layla
Kashtakar
Supervisor
Auditor

50 days ( 8 per
day )

50 days ( 8
per day )

47 days ( 8 per 70 days ( 8

day )
per day )

47 days (8 per day )

Bachelors
degree in
Accounting or
related field.
CPA
certification
preferred.

Bachelors
degree in
Accounting or
related field.
CPA
certification
preferred.

Bachelor's
degree in
accounting,
finance or
business
administration

Bachelor's degree in
accounting, finance or
business administration

Qualified
Chartered
Accountant
(ACA or
equivalent).

Zainab AlAsfoor
Junior Auditor

The following table represents the auditors tasks:

Audit process

Planning

Amal
Alshaikh

Zahra
Layla
Kawthar
Shamlooh Kashtaker Busehail

Zainab
Alasfoor

Gather the needed documents

for the audit work
Determine the audit strategy and
audit plan
Establish the detailed audit
program and procedures
Develop audit scope and
objectives
Perform
risk
assessment
procedures

Identify the risks

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Understand the internal control

of the company

Conduct entrance meeting with

the Audit Committee to explain
the audit process, audit scope and
objectives, any concerns they have
for expanding the focus of the
audit, audit timing and current
practices.

Preliminary
Review

Evaluate the existing internal

control structure
Test the operating effectiveness
of the selected controls
Assess
the
design
and
implementation of the selected
controls
Assess the control risk and risk of
significant misstatement
Make a questionnaire to assist
the internal control

Collect and analyze a variety of

documents,
financial
records
,policies, procedures , transactions
Plan the substantive procedures

Fieldwork

Perform
the
substantive
procedure
Consider if the evidence of audit
is appropriate and sufficient
Perform detailed testing of
transactions
Evaluate the compliance with
the
International
Financial
Reporting Standards and the
requirements of the Bahrain
Commercial
Companies
Law,
Decree Number 21 of 2001.

BSB 7400 Auditing

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Perform completion procedures

Perform overall evaluation
Form an opinion
Prepare a draft report containing
the
audit
observations,
conclusions,
and
any
recommendations
for
Reporting and improvement and distribute it to
the Audit Committee
completion
Conduct exit conference to get
the Audit Committee responses
and recommendation about the
report
Issue the final report to Audit
Committee of Bahrain Flour Mills
Company

Follow up

BSB 7400 Auditing

Conduct follow-up procedures

after seven months of issuing of
the final report. We will revisit the
company to ensure that that the
corrective measures and actions
have been implemented in a
timely and effective manner.

The following table represents the budgeting that reflects on the audit work that will be carried
out:
Billing date
30 - 2 - 2014
30 - 3 2014
30 -4 - 2014
Total amount

%
35 %
55%
10 %

Amount
4025 BD
6325 BD
1150 BD
11500 BD

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1.5 Significant Factors (Materiality and Audit Risk)

Materiality
Since the companys main goal is to make profit, materiality will be set on at a level reflecting
the emphasis on profitability. Based on analyzing the company, planning materiality has been
set at 40% of profits. So the materiality level is BD87,710, which is the maximum amount we
are willing to accept of material misstatements. For the Performance materiality, because
inherent risk has been set as low, therefore, performance materiality has been set at 20% of
the planning materiality. This is equal to BD 17,542. Therefore anything below 5% of the
performance materiality is trivial error and should be ignored.

Audit Risk
The following is the audit risk formula:
AR = IR x CR x DR
It is best to keep the Audit risk as low as possible, therefore 5% is preferable.
After analyzing the companys risks, it shows that the inherent risks are low, and they are
estimated to be at 40%. And after assessing the companys internal controls, the control risk
would low as well, about 25%. Therefore the formula will give us a detection risk (DR) of about
50%. This tells us that the lower the material misstatement risk, the higher the level of
detection risk the auditor is willing to accept, which means we will do more substantive tests in
order to gain sufficient appropriate evidence and reduce the audit risk to as low of a
percentage as possible.

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2.0 Audit plans

2.1 Audit plan for Property, Plant & Equipment asset
Overall Objective
Our objective is to express give an appropriate audit report on the financial statements of
Bahrain Flour Mills Company.

General Objectives
The firm has chosen to audit the Property, Plant & Equipment of the Bahrain flour mills
companys non-current assets. The company has stated on its statement of financial position
that it has BD 6,250,038 in the year ended 31 December 2013.

Audit Procedure
Audit procedure

Explanation

Assertion
Existence

Test the existence of PPE, which may include assets

that should have been written down due to end of its
useful life or disposal. Ownership agreements should
be assured and has a document of prove.

Assertion
Completeness

Assure that the PPE has been recognized including all

costs related to lease, maintenance cost and any other
costs.

Risks associated
Over-valuation
Under-valuation

The over-valuation risk is the risk that the company

increases the amount of its assets to have a favorable
presentation in its financial statement.
Under-valuation is writing the assets less than it
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actual value.
In the case of property, plant and equipment there is
a high risk that the company over-valuates it assets,
also because the total amount of the asset is very
material because if any decrease in the amount of the
PPE can cause the company losses and can change
profits to losses. Therefore it is a high risk and the
assertion chosen is relevant where as if the PPE does
not exist then these amounts could be changed and the
company can face serious fraud and losses issues.
Audit procedures
Compliance test

Testing the clients control system, to assure that the

recording and documentation system is appropriate,
also that it has low risk probability of having a fraud.

Audit procedure
The company owns verity of PPE therefore it would be
Substantive test
required the conformation of expertise of the same
Enquiry and confirmation directly from
field to confirm the existence of these assets and to
a third party
assure that the amount that have written are accurate
and it was not overstated
Additionally, the company has leased three properties
from the government, the company has leased three
properties

from

the

government,

therefore

conformation and lease agreement will be requested

from the government.
By doing this procedure the auditors will be fulfilling
the existence assertion, where it would confirm the
existence of these PPE.
Audit procedure
Substantive test
Recalculation and re-performance

It is performed to assure that all associated expenses of

the PPE such as maintenance or routine service or
registration fees for some assets.
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Therefore, the auditors will recalculate the total

amounts manually and also by using the companys
systems to assure that both methods have the same
answers and there are no over or under allocation.
This procedure will be fulfilling the completeness
assertion which is assuring all amounts has been
recognized and assured that it belongs to correct
account with the correct amount without any under or
over allocations and all relevant costs are added.

Sampling
Non-statistical sampling will be performed to test for the substantive test, where all items of
the PPE will be listed and would be numbered, and then using a computer system random
numbers will be selected. Where all the item numbers will be inserted into the computer and a
data will be created then the computer itself will randomly select item, the auditor would take
these number find the item and audits it existence by requesting from third party to confirm
also its completeness by recalculating and re-performing the figures and assuring that all totals
are accurate.
Since the risk of having items overstated is high then a high number of items should tested,
therefore a percentage of 40% of the PPE will be tested.

Budgeted Cost
Auditors
Junior
Senior
Supervisor
Total

Number of auditors
2
2
1

Rate
BD 68
BD 120
BD 400

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Days
10
4
7

total
BD 680
BD 480
BD 3600
BD 4760

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Substantive test

Junior auditor (2)

Trace purchase of PPE documents

Trace disposal of PPE document
Compare third parties conformation
with client statements
Create item number for PPE items
Select random sample
Test samples
Analysis of value and age of PPE
Recalculate the associated costs of
PPE
Re-perform the calculation using
client system
Review
financial
statement
classification
Identify disposed PPE
Total Hours

1
1

Senior
(2)
-

1.5
0.5
3
-

10

1
4

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auditor Audit
Supervisor (1)

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2.2 Audit plan for Trade payable liability

General objective

Specific objective

Risk associated

Audit procedure

Liabilities are usually Inspection: reconcile accounts

prone

be payable ledger with control

to

understated due to account to ensure that all the

the companys desire transactions
to show it is in a good control

match

account

and

the
the

healthy position of validity of the balance owing.

not having too many Also, agree accounts payable
liabilities and debts. general ledger subsidiary to
This is due to the general ledger in order to
nature

Are the accounts and trade

payables fairly stated?

Are all transactions

recorded

in

the

financial statements?

the ensure they are recorded

of

purchases.

Invoices properly and in the same

are usually received amounts. These will confirm

after

receiving

the the assertion of completeness

goods. The company of trade payables as a liability

should

keep

book in the financial statements.

open for a specific Inspection:

match

the

period of time after payments subsequent to the

the year end to make year end with the payables to
sure all invoices are ensure there are not any
recorded

in

the unrecorded

period in which they understatement

and
of

thus
the

belong. Otherwise, if liabilities.

there are no cut off
procedures,
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they Also, testing the extraction

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would

BSB 7400 Auditing

not

recorded

be and total of trade payables

in

the ledger

balances

and

correct period and agreement of the list of

liabilities would be balances with the control
understated.

account to ensure the validity

and

completeness

of

the

balances.
These procedures will confirm
the assertion of completeness
of trade payables as a liability
in the financial statements.
Confirmation
parties:

confirm

third
account

payables with suppliers to

Do the accounts and

trade payables reflect The

from

risk

of

this

the liability of this happening is low.

company?

ascertain

the

companys

liability towards the suppliers.

This will confirm the assertion
of rights and obligations of
trade payables as a liability in
the financial statements.
Confirmation
parties:

Do the trade payables

reflect valid liabilities There is a high risk of
at the balance sheet this not happening
date?

confirm

the

from

third

auditor

shall

account

payable

balances to suppliers and to

their original documentation
in order to make sure they
exist.
A cut-off test should be done
as well by testing a sample of

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receiving reports in order to

make
recorded

sure
at

they
the

were
correct

period. This will confirm the

assertion of existence of trade
payable as a liability in the
financial statements.
Recalculation:
Are the balances of

the

auditor

should recalculate a sample of

trade

payables There is a high risk of invoices in order to ensure

recorded

at

the this not happening

correct amounts?

that the balances are at their

right amounts. This confirms
the assertion of accuracy.

Are

the

included

amounts

Observation and inspection:

in

observe and agree that the

the

balance according to
the company policy
and

the

financial

relevant

The

risk

of

happening is low

reporting

framework-IFRSs?

this

recording of the balances

conform to the companys
policy and the IFRSs. This
confirms the assertion of
valuation and allocation.

Sampling
Statistical ordinary sampling method will be used by choosing a random percentage of the total
trade payables in order to allow an equal chance of selection for each sampling units. Since the
risk of understanding the trade payables is high, the sample size will be 50% of the total trades
payables which should be tested.

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Budgeted cost
Auditors

Number of auditors

Rate

Days

total

Junior

BD 68

BD 1,224

Senior

BD 120

BD 1,920

BD 150

BD 1,200

Senior

Audit

Manager
Total

BD4,334

Substantive test

Junior auditor (2)

reconcile accounts payable ledger

with control account
agree accounts payable general ledger
subsidiary to general ledger
match the payments subsequent to
the year end with the payables
testing the extraction and total of
trade payables ledger balances
agreement of the list of balances with
the control account
confirm

account

payables

Senior
(2)

auditor Senior

Manager (1)

2
8

1.5

0.5

with

suppliers
confirm account payable balances to

2
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Audit

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suppliers

and

Group Case Study

to

their

BSB 7400 Auditing

original

documentation
Cut-off test
recalculate a sample of invoices

3
2

observe and agree that the recording

of the balances conform to the 1
companys policy and the IFRSs
Total Hours

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2.3 Audit plan for Share Capital

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General
objective

Assertion/Specific
objective

Are the share Accuracy and valuation

capital accounts Are all the amounts of
fairly stated?
transactions
and
records that are related
and stated in the share
capital account have
been
all
recorded
correctly
and
appropriately?

Group Case Study

BSB 7400 Auditing

Risks

Audit procedures

One risk related

to the share
capital is that the
amount is not
representing the
fair value, thus
understating or
overstating the
share capital.

Recalculation
Verify that the amount of issued share premium
has been credited to the share premium
account in order to ensure that that the amount
of the share premium has been recorded at a
correct amount. This will confirm the assertion
of accuracy of share capital account in the
financial statement.
Inspection
Check and trace the entries in bank statement
regarding shares issued for cash. To ensure that
all the recorded transactions and entries in the
bank statement for the issuing of share for cash
are recorded at a correct amount. This will
confirm the assertion of accuracy of share
capital account in the financial statement.
Inspection
Check the amount of consideration with
supporting documents for shares issued for
consideration other than cash. To ensure that
the entire amounts are recorded correctly
based on the documents regarding the issuing
of shares for non-cash consideration. This will
confirm the assertion of accuracy of share
capital account in the financial statement.
Analytical procedure
Compare the balance of each significant capital
account to the comparable balance from the
previous period. The analytical procedures that
will be conduct is reasonableness testing that
analyze the accounts and changes in the
accounts between the accounting periods. In
order to Investigate unusual or significant
fluctuations. This will confirm the assertion of
accuracy of share capital account in the financial
statement.

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Existence

BSB 7400 Auditing

Confirmation
Trace the authorized share capital with the
memorandum and articles of associations and
agree any changes with proper authorized
resolution. To ensure that all the authorized
share capital exists. This will confirm the
assertion of existence.
Inspection
Agree on any issue of share capital or other
changes during the year with minutes of
meetings or resolutions and ensure that such
change is within the terms of the memorandum
and articles of association. This aim to ensure
that all records regarding issue of share capital
and changes are recorded in the company
share capital accounts. This will confirm the
assertion of completeness of share capital
account in the financial statement.
Inspection and recalculation
Agree dividends paid and proposed dividends to
the authorization made in the minutes book by
checking the accounting records regarding the
companys
dividends
accounts.
Also,
recomputed the dividend calculations with total
share capital. To ensure that the all the
transactions regarding dividends paid are
correctly recorded. This will confirm the
assertion of completeness regarding share
capital account in the financial statement.

Completeness
Are all the transactions,
records and changes
that are related to the
share capital account
have been all recorded?

Inspection
Check and agree that the balance on share
capital accounts aligned with the register of
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members and the amount of the total list of

issued share capital with the amount in the
nominal ledger. To ensure that all balances
included in the register of members and list of
issued capital are completed. This will confirm
the assertion of completeness regarding share
capital account in the financial statement.
Inspection
Trace any transfers of shares with
correspondence,
minutes
of
directors
meetings, cancelled share certificate and
transfer register. To ensure that all transferred
shares are recorded. This will confirm the
assertion of completeness regarding share
capital account in the financial statement.
Inspection
Trace the number of shares and value of
redemptions with the cash disbursements and
supporting records. This aim to ensure that all
the value related to share redemptions is
recorded. This will confirm the assertion of
completeness regarding share capital account in
the financial statement.
Inspection and recalculation
Trace the number of shares and proceeds from
issuance of new shares to cash receipts and
supporting records. Then, recalculate the
entries regarding par value of outstanding
shares and paid in capital. This will ensure that
all the amounts of issuance new shares are
completely recorded. This will confirm the
assertion of completeness regarding share
capital account in the financial statement. This
will confirm the assertion of completeness
regarding share capital account in the financial
statement.
Classification
Are all the share capital

Review the presentation and disclosure for

share capital to ensure that it is in compliance
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accounts have been

presented,
classified
and disclosed in the
financial
statements
according
to
the
requirements
of
applicable
financial
reporting framework?

BSB 7400 Auditing

with the accounting standards and statutory

requirements. This will confirm the assertion of
classification regarding having the financial
statements at appropriate amount based on the
financial reporting framework.

Sampling
Statistical random sampling will be used for the substantive tests regarding share capital. This
method will be used by selecting a random percentage from the total share capital which
allows an equal chance of selection. Since the risk of overstating the share capital is low, the
sample size will be 30% of the total share capital.

Budgeted cost
Auditors
Junior
Senior
Supervisor
Total

Number of auditors
2
2
1

Substantive test
Verification of amount of issued share
premium that is credited to the share
premium account.
Trace the bank statement for shares
issued for cash.
Check shares issued for consideration
other than cash documents.
Compare the balance of current year
account with the previous period.
Trace the authorized share capital with the
memorandum and articles of associations.
Agree on any issue of share capital or
other changes with minutes of meetings

Rate
BD 68
BD 120
BD 150

Days
19
7
15

Junior auditor (2)

Senior
(2)

2
Page 25 of 41

total
BD 2584
BD 1680
BD 2250
BD 6514

auditor Audit
Supervisor (1)

15

Class Number: 002

Agree on paid and proposed dividends to

the authorization made in the minutes
book
Recalculate dividend amount with total
share capital
Check the balance on share capital
accounts with the register of members
Check the amount of the total list of issued
share capital with the amount in the
nominal ledger
Trace
transfers
of
shares
with
correspondence, minutes of directors
meetings, cancelled share certificate and
transfer registers.

Trace the number of shares and value of

redemptions with the cash disbursements
and supporting records.
Trace the number of shares and proceeds
of new shares to cash receipts and
supporting records.
Review the presentation and disclosure for
share capital.
Total Days

Group Case Study

BSB 7400 Auditing

19

15

3.0 Internal control procedures for payroll cycle

The payroll cycle is the period of a beginning date and the ending date of a time length. The
payroll cycle includes a variety of activities. The following points will illustrate the activities in
the payroll cycle ("The human resources," 2010):

Update Payroll Master File.

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Class Number: 002

Group Case Study

BSB 7400 Auditing

First is updating the master file of payroll in order to reflect variety types of the payroll
changes for instance: terminations, new hires, changes in the rates of pay or changes in
the discretionary withholdings.

Validate time and attendance data.

For pay schemes, the company uses an employee ID card that records the arrival and
departure of the employee times for each work shift and the total hours that worked
during the period of pay. The payroll department has the responsibility for validating the
time records for the employee.

Prepare payroll.
The payroll transaction file is sorted by the number of the employee. The sorted time
data file is then used in order to prepare the employee paychecks. All of the deduction is
subtracted from the gross pay and the overtime is added to the gross pay to obtain the
net pay. Then the payroll register and the employee paychecks are printed.

Disburse the payroll

One the paychecks have been prepared, the register of payroll is sent to the account
payable department in order to review and approval. The payroll register is returned to
the department of payroll where it is filled data along with the employee ID cards and
the job time tickets ("The human resources," 2010).

The following points illustrate the objectives of the payroll control:

Payroll transactions are recorded.

Payroll transactions are authorized.

Payroll transactions are valid.

Payroll transactions are complete.

Payroll transactions are properly classified (recorded in the correct account).

Payroll transactions are stated at their correct value or amount.

Payroll transactions are in their correct accounting period.

Page 27 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

The following paragraphs justify the internal control procedures for the payroll cycle
activities ("Standards of internal control," 2007):

1- Update Payroll Master File procedures

A payroll master file should be prepared that include all the employees. The file should contain all
information regarding the current rates of pay and withholding deductions.

Procedures should be maintained in order to physically protect master file information. As access to
master file information should require official password. Changes to master file information should be
restricted to authorized additions or deletion or changes that are supported by forms approved by
senior official for new hires, termination, decrease or increase in hourly payments and decrease or
increase in salaries. Also, log of amendment and change to data should be produced and reviewed.

An independent check has to be done of standing amendments log to supporting documentation.

Access to the payroll department and its records should be allowed only for the authorized personnel.
Formal notification regarding the termination or transformation of employees or payroll changes
should be sent promptly to the payroll department in order to make the required adjustments in the
payroll records.

The responsibilities of payroll preparation, recording, and distribution should be segregated from
payroll authorization.

Payroll has to be prepared from the payroll master file and the approved time reporting .Payroll
registers, paychecks and the earning records must be prepared simultaneously where feasible.

Controls must be maintained with sufficient edits to make sure that all sources of data are valid and
rightly input. Controls must be established to make sure unauthorized or duplicate payroll source data
might not be processed.

The departmental procedures must clearly documented for all of the major payroll functions and the
period end cut off procedures.

Restriction of access to payroll master database ("Standards of internal control," 2007).

Page 28 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

2- Validate time and attendance data procedures

The supervision of clocking on points and control over employee ID cards are essential
The employee ID cards must be authorized by a responsible official before they are sent to the payroll
departments

The payroll department must keep the ID cards that are only issued for the new employees with
contracts of employment.

The payroll department is the authorized for validating the time records for the employee ("Standards
of internal control," 2007).

3- Prepare payroll procedures

The overtime should be checked and authorized by the responsible managers before the input to the
system

Match the payroll register to the supporting documents. The registry of payroll shows grows wages,
deductions and the net play, and so good a summary document from that to trace back to the
documents for the purpose of verification.

A sample of the calculations of the payroll must be reviewed by senior responsible and the payroll
initialed

To reduce the risk of collusion in altering the rates of pay, it is required to get more than one approval
signature for the employee pay change, one by the employees supervisor and the other signature is
from the next-higher level of supervisor.

The payroll transactions is sorted by the employee number ("Standards of internal control," 2007).
4- Disburse the payroll procedures
Employee compensations should be made based on appropriate rate and then authorized. Also, any
changes into the compensation should be properly authorized.

Page 29 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

Before paying the final payroll amount to a terminated employee, Human resource
department and the supervisor of the employees department should make sure that all the
statements regarding employees outstanding advances and expense are cleared, all compute
access and accounts are cancelled, employee badges and security passes or keys have been
returned to prevent the access to the company property and data.
Control system should be established to make sure that all the source data regarding the payroll are
valid and edited. Also, control should be maintained to ensure that duplicated amount or unauthorized
payroll source data will not be processed and errors report should be produced with a list of all the
rejected items.

Conduct periodic testing for the payroll records to ensure that payroll information is similar to the
Human resource file documentations and data.

The preparation of payrolls should be based on payroll master file records and the approved time
reporting records.

A comparison between the actual and budgeted payroll costs should be conducted by the appropriate
department managers with an investigation and analysis of significant variances.

All disbursement accounts should be reconciled on a monthly basis.

All the additional payment requests such as bonuses, paid vacation benefits should be reviewed
documented and approved by an appropriate individual.

Before the payment, the financial management should Review and approve all the completed payroll
registers, journal reports and requests for payroll account or any documents that support the amount
being paid

All of the disbursement accounts must be reconciled on monthly basis.

Verification of identity of all employees receiving paychecks
Pre-numbering and periodically accounting for all payroll checks and review of all EFT direct deposit
transactions ("Standards of internal control," 2007).

Page 30 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

4.0 Working papers

4.1 Working paper for the Property, Plant & Equipment
Bahrain Flour Mail Company
Year ended 31 December 2013
Property, Plant & Equipment Risk

Reference: A120
Prepared by: A.S
Date: 15 Jan 2013
Reviewed: L.M
Date: 20 Jan 2013

Audit objectives
1. To verify the existence of the PPE
2. To verify the accurate cost of the PPE.
3. To verify the ownership of these PPE.
Audit Procedures (and key symbols):
# Traced payment of the PPE
< Compared ownership with third party confirmation
* Re-performed the calculation
> Confirmed the cost of PPE with third party expert
@ Work in process PPE were valuated except for those with +

Sample selection
Population: all items included in the Property, plant & equipment account
Sample: 40% of the total population that was randomly selected by a computer
program

Result of procedures
Date

Type of PPE

8/2/2013

Motor vehicles

1/5/2013

plant and machinery

21/6/2013

motor vehicles

16/9/2013

building on lease land

5/11/2013

office equipment f & f

Audit procedure
conformation Amount 1 2 3 4 5
letter
reference
8721
BD
# < * > @+
6217
6213
BD
# < * > @
1200
5219
BD
# < * > @
6400
3321
BD
# < * > @
110,870
8212
BD
# < * > @+
1350

Page 31 of 41

Class Number: 002

19/12/2013

Group Case Study

plant and machinery

5001

BSB 7400 Auditing

BD
4390

<

>

Comments
@+ These amounts include items that has been disposed during the year

Conclusion
(1) Third parties has sent conformation of existence of these properties
(2) these PPE are owned by the company except for the leased lands
(3) The amounts of the PPE has been valued and depreciated at the accurate amount, disposed
items has been deducted from the financial statements

Page 32 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

4.1 Working paper for the payroll control

Reference: A144
Prepared by: A.S
Date: 15 January 2014
Reviewed: L.M
Date: 20 January2014

Bahrain Flour Mail Company

Year ended 31 December 2013
Payroll control

Audit objectives
1. To verify the transaction has been recorded accurately
2. To verify are valid and completed
3.To verify the transactions were authorized
Audit Procedures (and key symbols):
Audit Procedures (Recalculation and re-performance):
# Traced payment made to staff
< Compared salary slips and payment
* Re-perfumed the calculation
> Confirmed that salaries paid are complied with the HR
bounce paid was authorized any account with ^ refers to allowance

Sample selection
Population: all items included in the payroll account
Sample: random selection of 25% of the total population

Result of procedures
Audit procedure
Date

paid to

payment
number

28/01/2013

Ahmed Ali

01-00891

BD 550

<

>

28/04/2013
28/06/2013
28/08/2013
28/09/2013

Sajeda Yousif
John Terry
Dana Sadeq
Komar Patel
Dawood
Mohammed

04-00122
06-00432
08-00092
09-00521

BD 1200
BD 780
BD 3000
BD 200

#
#
#
#

<
<
<
<

*
*
*
*

>
>
>
>

@
@^
@
@^

11-00302

BD 430

<

>

28/11/2013

Page 33 of 41

Amount

5
@

Class Number: 002

Group Case Study

Comments
&+ Non-Bahraini employees receive housing allowance

Conclusion
(1) Salary slip and payments made are matching.
(2) All allowances have been added to the salary.
(3) Bounce payment was authorized by authorized personal.

Page 34 of 41

BSB 7400 Auditing

Class Number: 002

Group Case Study

BSB 7400 Auditing

4.3 Working paper for Share Capital

Bahrain Flour Mail Company
Share capital
Year ended 31 December 2013

Audit objectives
1. To verify the existence of share capital accounts.
2. To verify that share capital account are accurately and
appropriately valued.
3. To verify that share capital accounts are completely
recorded.
4. To verify that share capital accounts are properly classified.

Audit Procedures (and key symbols)

# Traced the bank statements for shares issued for cash. The
entire amount in the bank statements agreed with the
recoded cash.
<Traced the authorized share capital with the memorandum
and articles of associations. All the authorized share capital are
recorded in the memorandum and articles of association
* Recalculated dividend amount with total share
capital. All the amount of dividend and total
share capital are correctly calculated.
> Agreed on paid and proposed dividends to the authorization
made in the minutes book. All the paid and proposed
dividends records agree with amount in the minutes book
@ Check the balance on share capital accounts with the register of
members.
Traced the number of shares and proceeds of new shares to cash
receipts and supporting records. All the cash receipts agreed the number
of share and proceeds except for those marked +

Sample selection
Population: all items included in the share capital accounts
Sample: 30% of the total population that was randomly selected.

Page 35 of 41

Reference: A130
Prepared by: A.S
Date: 15 Jan 2013
Reviewed: L.M
Date: 20 Jan 2013

Class Number: 002

Group Case Study

BSB 7400 Auditing

Result of procedures
Audit procedure

Date

Shareholders name

15/1/2013

Bahrain Mumtalakat
holding
Bahraini shareholders

10/2/2013
20/6/2013

Reference
No
7929
8921

Amount 1

BD
87317
BD
18952
BD
59870
BD
79899

<

>

@+

<

>

<

>

<

>

Kuwait Flour Mills and

Bakeries
Mr Abdul Rahman Bin
Yousuf Fakhroo

618

5/11/2013

Mr Ebrahim Mohammed Ali

Zainal

2073

BD
13580

< *

>

12/12/2013

Mr Mohemed Yousfuf Nass

1890

BD
43990

<

>

12/9/2013

2971

Comments
+some of these accounts were sold by the share holders to other while as some other were
recalled by the company as treasury shares.

Conclusion
(1) Capital share account existence has been tested not to be fraud.
(2) All share capital holders were identified and confirmed.
(3) Amounts on financial statements were traced and verified.

Page 36 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

4.4 Working paper for Trade payable

Bahrain Flour Mail Company
Trade payable
Year ended 31 December 2013

Reference: A124
Prepared by: A.S
Date: 15 Jan 2013
Reviewed: L.K
Date: 20 Jan 2013

Audit objectives
1. To verify the accuracy of trade payable accounts.
2. To verify the ownership of Trade payable
3. To verify the completeness of share capital

Audit Procedures (and key symbols)

# agreed accounts payable general ledger
subsidiary to general ledger. All the amount of
payable general ledger subsidiary matches the
amounts in the general ledger.
<matched the payments subsequent to the year end with the
payables. All the balance of payments match with the year end
payables except for those marked <+
*tested extraction and total of trade payables
ledger balances. All the balance of total trade
payable match with the results expected for
those marked*^
> confirmed account payable balances to suppliers and to their
original documentation. All the amount of account payable
balances agreed with suppliers documentations.
@ recalculated a sample of invoices. All the recalculated sample of
invoices is accurate.

Sample selection
Population: all items included in the Trade payable account
Sample: 50% of the total population that was randomly selected.
Result of procedures:
Date

Paid to

19/2/2013

Hussain Ali

Invoice
Number
8921

Page 37 of 41

Audit procedure
Amount 1 2 3 4 5
BD
8931

<

>

Class Number: 002

Group Case Study

16/5/2013

Mohemmed Ahmed

4619

21/6/2013

Ali Ebrahim

5892

8/9/2013

Hassan Yousuf

7927

9/11/2013

Nasser Mohemmed

8931

20/12/2013

Ahmed Hussain

9258

BSB 7400 Auditing

BD
7951
BD
8924
BD
9217
BD
2360
BD
5927

<+ *

>

<

*^ >

<

>

<

>

<

>

Comments
<+After recalculation, Payable after the year does not match the balance.
*^ After recalculation, some balances of total trade payable and extraction does not match the
balance.

Conclusion
(1) Accuracy of trade payable accounts was verified.
(2) Completeness of trade payable accounts was verified.
(2) Ownership of trade payable accounts was confirmed.

Review and discussion of results of audit procedures and conclusion, Layla Kashtakar
Signature of auditor (completed the working paper): .
Signature of the reviewer: .

Page 38 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

5.0 The explanation of how the audit report would have been
different there been a material misstatement in any of the key
components of the financial statements
According to ISA 700, when the financial statements are free from material misstatements and
sufficient appropriate evidence was obtained, the auditor would express an unmodified opinion
(IFAC, 2010 ). The audit report with an unmodified opinion will contain the address, report on the
financial statements or one of them only, the managements responsibility for the financial
statements, the auditors responsibility, opinion, report on Other Legal and Regulatory
Requirements, the auditors signature, date of the report and at last the auditors address. The
opinion for Bahrain Flour Mill company according to ISA 700 paragraphs 34 and 35 is In our
opinion, the financial statements of Bahrain Flour Mill Company for the year ended December 31,
2013 are prepared, in all material respects, in accordance with International Financial Reporting
Standards and the heading for this paragraph must be Opinion (IFAC, 2010).
However, the auditor issues a modified opinion if the financial statements are not free from
material misstatements or inability to obtain sufficient appropriate evidence by the auditors. There
are three types of modified opinion and they are: Qualified, adverse and disclaimer. When the
auditor obtain sufficient appropriate evidence and concludes with material statements in the
financial statements the modification is either going to be Qualified or adverse and this will be due
the auditors judgment about the pervasiveness of the effects or possible effects on the Financial
statements.
So if we assume that there is a misstatement which is material but not pervasive in the financial
statement of Bahrain Flour Mill Company, the auditor must express a qualified opinion. If the audit
report contains qualified opinion due to a material misstatement, it should includes: the address,
report on the financial statements or one of them only, the managements responsibility for the
financial statements, the auditors responsibility, basis of qualified opinion, qualified opinion,
Report on Other Legal and Regulatory Requirements, the auditors signature, date of the report and
at last the auditors address. In the basis of qualified opinion the auditor provides a description of
Page 39 of 41

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Group Case Study

BSB 7400 Auditing

the matter raised in the financial statement and any other explanation or information needed
regarding the material misstatement, and this paragraph should be placed immediately before the
qualified opinion paragraph according to ISA 705 paragraph 16,17,18 and 19 (IFAC,2010). According
to ISA 705 paragraph 22 and 23, in the opinion paragraph the auditor expresses his opinion and the
opinion for this company is In our opinion, except for the effects of the matter described in the
Basis for Qualified Opinion paragraph, the financial statements give a true and fair view of the
financial position of Bahrain Flour Mill Company as at December 31, 2012, and (of) its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards. Also the heading of this paragraph must be Qualified opinion (IFAC,2010)
But if we assumed that there is a misstatement which is material and pervasive in the financial
statement of Bahrain Flour Mill Company, the auditor should express an adverse opinion. And in
case of containing an adverse opinion in the audit report, the following must be included in the
report: the address, report on the financial statements or one of them only, the managements
responsibility for the financial statements, the auditors responsibility, basis of adverse opinion,
adverse opinion, Report on Other Legal and Regulatory Requirements, the auditors signature, date
of the report and at last the auditors address. In the basis of adverse opinion paragraph according
to ISA 705 paragraph 21, the auditor should describe and explain the reasons of the matter and its
effects. And in the adverse opinion the auditor express his opinion according to his evidence and
the matter that was already mentioned in the previous paragraph, so for this company according to
ISA 705 paragraphs 22 and 24 the opinion will be In our opinion, because of the significance of the
matter discussed in the Basis for Adverse Opinion paragraph, the consolidated financial statements
do not give a true and fair view of the financial position of Bahrain Flour Mill Company as at
December 31, 2013, and (of) their financial performance and their cash flows for the year then
ended in accordance with International Financial Reporting Standards. And the heading of this
paragraph must be Adverse opinion (IFAC, 2010)

Page 40 of 41

Class Number: 002

Group Case Study

BSB 7400 Auditing

6.0 References
-

International standard on auditing 700. (2010). Retrieved December 27, 2014, from
http://www.ifac.org/sites/default/files/downloads/a036-2010-iaasb-handbook-isa700.pdf

International standard on auditing 705. (2010). Retrieved December 27, 2014, from
http://www.ifac.org/sites/default/files/downloads/a037-2010-iaasb-handbook-isa705.pdf

Standards of internal control. (2007, April). Retrieved December 27, 2014, from
http://www.asu.edu/fs/documents/standards_of_internal_controls.pdf
The human resources management /payroll cycle . (2010 ). Retrieved December 27,
2014, from
http://staff.uny.ac.id/sites/default/files/pendidikan/Diana%20Rahmawati,%20M.Si./SIA
%20Bab%2014.pdf

Page 41 of 41