Auditing GROUP ASSESSMENT: BAHRAIN CINEMAS B.S.C

Names:

Ali Sarhan 201101119

Ali Yusuf 201201237

Salman Ismaeel 201100106

Khalid Kamal 201101318

Jalal Taqi 201102179

Class: 02

Tutor: Namasiku Liandu

Subject: Auditing

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Table of Contents 1.0 Audit Strategy ......................................................................................................................................... 3

1.1 Introduction ........................................................................................................................................ 3

1.2 Engagement Team (Resources required for the audit) ...................................................................... 3

1.3 Development & Amendments of the Strategy ................................................................................... 4

1.4 Objectives of Audit Strategy ............................................................................................................... 4

1.5 Communication of Result .................................................................................................................... 4

1.6 Auditor’s Independence ...................................................................................................................... 4

1.7 Timeframe of the Audit ....................................................................................................................... 4

1.8 Matters Necessary in Directing the Engagement ............................................................................... 5

1.9 Audit Critical Areas .............................................................................................................................. 8

1.10 Indication of Materiality ................................................................................................................... 8

1.11 Indication of Sampling .................................................................................................................... 11

1.12 Audit Assertions .............................................................................................................................. 12

2.0 Introduction to Audit Plan .................................................................................................................... 13

2.1 Auditing Cash & Cash Equivalent .......................................................................................................... 13

2.1.1 Audit Risk Associated with Cash & Cash Equivalent ...................................................................... 13

2.1.2 Tolerable Error ............................................................................................................................... 14

2.1.3 Sample Size .................................................................................................................................... 14

2.1.4 Notes on Cash & Cash Equivalent Assertions, Objectives & Procedures ....................................... 14

2.1.5 Audit Objectives ............................................................................................................................. 15

3.1.6 Substantive Testing ........................................................................................................................ 15

2.1.7 Further Detailed Audit Program .................................................................................................... 16

2.1.8 Budget for auditing Cash & Cash Equivalent ................................................................................. 17

2.1.8.1 Resources Needed .................................................................................................................. 17

2.1.8.2 Budget ..................................................................................................................................... 18

2.2 Auditing Trade Payables ....................................................................................................................... 18

2.2.1 Audit risk associated with Trade Payables ..................................................................................... 18

2.2.2 Tolerable Error ............................................................................................................................... 18

2.2.3 Sample Size .................................................................................................................................... 19

2.2.4 Note on substantive tests .............................................................................................................. 19

2.2.5 Assertions related to Trade payables. ........................................................................................... 19

2.2.6 Substantive Testing ........................................................................................................................ 20

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2.2.7 Budget for Auditing Trade Payables .............................................................................................. 23

2.2.7.1 Resources Needed .................................................................................................................. 23

2.2.7.2 Budget ..................................................................................................................................... 23

2.3 Auditing Share Capital ........................................................................................................................... 24

2.3.1 Audit Risk Associated with Share Capital ....................................................................................... 24

2.3.2 Tolerable Error ............................................................................................................................... 24

2.3.3 Sample Method .............................................................................................................................. 24

2.3.5 Notes on Substantive Tests ............................................................................................................ 25

2.3.6 Assertions Related to the Objectives of the Share Capital Audit .................................................. 25

2.3.7 Substantive Testing ........................................................................................................................ 26

2.3.8 Audit Procedures ........................................................................................................................... 27

2.3.9 Budget for Auditing Share Capital .................................................................................................. 28

2.3.9.1 Resources Needed .................................................................................................................. 28

2.3.9.1 Budget ..................................................................................................................................... 29

3.0 Payroll Cycle .......................................................................................................................................... 29

3.1 Relation to Financial Statements of Bahrain Cinemas ...................................................................... 29

4.2 Payroll Cycle Process ......................................................................................................................... 30

4.3 Objectives of Payroll Cycle Internal Controls .................................................................................... 30

4.4 Internal Controls of Payroll Cycle: ..................................................................................................... 30

4.5 Assertions Related to Test of “Segregation of Duties” Control: ....................................................... 33

4.0 Working Papers ..................................................................................................................................... 34

4.1 Working Paper of Cash & Cash Equivalent ....................................................................................... 35

4.2 Working Paper for Trade Payables ................................................................................................... 37

4.3 Working Paper for Share Capital ....................................................................................................... 39

4.4 Working Paper for Payroll Cycle ....................................................................................................... 41

5.0 Quality Control ...................................................................................................................................... 43

6.0 Material Misstatement ......................................................................................................................... 44

7.0 References ............................................................................................................................................ 48

8.0 Appendices. ........................................................................................................................................... 50

8.1 Appendix 1: Financial ratio analysis .................................................................................................. 50

8.2 Appendix 2: Trend analysis ............................................................................................................... 51

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1.0 Audit Strategy

1.1 Introduction The audit strategy is an overall approach that acts a road map in this audit engagement with the client,

Bahrain Cinema Company B.S.C. This strategy was created in accordance with the requirements of the

international standards of auditing (ISA) 300: planning and audit of financial statement (IAASB, 2009A).

This strategy was created by the supervisor and manager and approved by the engagement partner and

its aim us to provide a sufficient understanding of the aspects of the audit engagement in order for the

audit team to be able to create audit plan sufficient to gather appropriate sufficient audit evidence.

1.2 Engagement Team (Resources required for the audit)

The following is a list of the engagement team members that represent the resources required

to complete the audit engagement successfully:

Engagement Team Roles & Responsibilities Focus on specific area

Ali Sarhan Engagement Partner -

Ali Yusuf Manager -

Khalid Kamal Assistant Manager -

Salman Ismaeel Supervisor -

Jalal Taqi Senior Auditor Non-Current Assets

Esraa Isa Senior Auditor Current Assets

Jaffer Khalid Senior Auditor Liabilities and equity

Mohamed Jassim Junior Auditor Non-current Assets

Ahmed Maki Junior Auditor Non-current Assets

Sawsan Yusuf Junior Auditor Non-current Assets

Mahmood Sami Junior Auditor Non-current Assets

Fatima Jalal Junior Auditor Current Assets

Maryam Hassan Junior Auditor Current Assets

Sara Mohd Junior Auditor Current Assets

Marwa Ali Junior Auditor Current Assets

Yusuf Madan Junior Auditor Liabilities and equity

Ali Mohd Junior Auditor Liabilities and equity

Mossa Jassim Junior Auditor Liabilities and equity

Hassan Fadhel Junior Auditor Liabilities and equity

As for the experts: no significant expert will be needed, though a need might arise for experts in case

auditors found the unexpected need to test a specific area . Experts such as: Tax expert auditors will

not be used due to unavailability of taxes as the legal system in Bahrain does not require any tax

deduction on companies’ figures and the client does not operate in a jurisdiction with tax expense.

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1.3 Development & Amendments of the Strategy The audit strategy is the responsibility of the manager and the supervisor who have the right to edit the

audit strategy before the approval of it by the engagement partner, any editing to the strategy done by

the supervisor should be approved by the manager. After final approval of audit strategy by the

engagement partner, only the manager has the rights to request editing the audit strategy from the

engagement partner. The editing request should be in a written format submitted to the engagement

partner and it should include the editing details including parts to be edited and reasons for the editing.

From then onwards during the audit engagement, no editing will be done without the request been

approved by the engagement partner.

1.4 Objectives of Audit Strategy The objective of this strategy is to create a guidelines to create sufficient audit plan that will be able to

gather sufficient and appropriate audit evidence to determine the level of compliance of the

consolidated financial statements of Bahrain Cinema Company with:

1) The accounting policies promulgated by the International Accounting Standards Board

("IASB"); which are the International Financial Reporting Standards(IFRS)

2) The interpretations issued by the International Financial Reporting Interpretations

Committee ("IFRIC")

3) The Bahrain Commercial Companies Law, Decree Number 21 of 2001 requirements.

1.5 Communication of Result

After the audit evidence have been gathered and evaluated, the engagement team will format

it into an audit opinion as a part of the Audit Report. This report will be addressed solely to the

Shareholders of Bahrain Cinema B.S.C.

1.6 Auditor’s Independence The relationship between the engagement team and the Engagement client will follow the "Code of

Ethics for Professional Accountants" the latest 2013 edition published by IFAC (International Federation

of Accountants) and done by the IESBA (International Ethics Standards Board of Accountants) (IFAC,

2013). Auditor shall have Independence of Mind (his judgment shall not be influenced) and

Independence in Appearance (Being perceived to be independent).

1.7 Timeframe of the Audit This audit will be carried out by the engagement team starting from 20 January 2014 until 1 April 2014.

Process Performer Start date End date

Create audit strategy Manager & Assistant

manager 20 Jan 2014 27 Jan 2014

Create overall audit plan (including risk assessment)

Manager & Assistant manager

28 Jan 2014 5 Feb 2014

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Create Sample and choose items to test

Supervisor & Assistant manager

6 Feb 2014 11 Feb 2014

Create specific audit program for each item

chosen

Supervisor & Assistant Manager

12 Feb 2014 18 Feb 2014

Create Work papers Supervisor 19 Feb 2014 20 Feb 2014

Use audit program created and working

papers to generate tests

Senior & junior auditors

21 Feb 2014 20 March 2014

Create Audit report and letters

Supervisor, Assistant manager and

Manager. 21 March 2014 26 March 2014

Review details, report and letters and sign

them Engagement partner 27 March 2014 1 April 2014

1.8 Matters Necessary in Directing the Engagement The following are important guidelines for the engagement team to carry the plan, this includes the

understanding the client, materiality level, sampling strategy and critical areas to focus on.

Understanding the client:

The following information were gathered and analyzed using the client website (Bahrain Cinemas, n.d.)

and their 2013 financial information (Bahrain Cinemas, 2014).

Client Overview

The client is the Bahrain Cinema B.S.C Group, a public Bahraini shareholding company incorporated in

1967. The clients’ operation fall within the Bahraini Service industry and provides sale of Films,

advertisements, operations restaurants and leisure and entertainment related services. There are 6

subsidiaries under the group:

1) Aradous Properties Management W.L.L 2) Saar Cinema Complex 3) Al Logistics Company BSC 4) The Gulf Gourmet Group W.L.L 5) Qatar Bahrain Cinema Company W.L.L 6) CinecoW.L.L (Qatar)

The client operates in the entertainment service industry; which by nature does not have complex transactions. The industry itself is reasonably profitable, thus it would be expected that the client operations will experience growth, though the above financial ratio analysis did detect an area that is worth focusing on. It is also important that to focus on the fact the client is a group with 6 subsidiaries, thus a complex

network existence which raises the chances of misstatements. Then network mostly is located in

Bahrain with one subsidiaries being in the State of Qatar; a country near Bahrain and fellow Gulf

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countries council member that has similar regulations as Bahrain. This makes it easier to control the

networks. It does, however, have transactions with countries such as USA where they have investments

and their suppliers of films. Besides that, the client is supported by its 44 years history that had no

significant fraud or illegal acts in it. This will place the company inherent risk in lower levels.

Business risks:

Interest risk: the company is dealing with Bank overdrafts which his subjective to the interest rate

fluctuation. This means that there is a higher risk of understating the balance of Bank overdrafts.

Credit risk: This risk of their Customers not being able to pay their amounts due to the client. The client,

however, accept clients with good cash rating from the banks, thus the credit risk is not huge and as the

result the risk of overstating the trade receivables.

Currency Rate risk: The client operates in a regional market between Bahrain and Qatar and has

available-for-sale investments in United States Dollars and GCC currencies and foreign currency

transactions in Saudi Riyals and Qatari Riyals. Thus, the client adjust the balances according to the

exchange rates; which fluctuates, resulting in a risk of the company having material errors in the

balances. However, since the Bahraini Dinars is pegged by the US dollar, it will not fluctuate as much and

thus this risk and its impact on material misstatements risk is minimal.

Price risk the Group investments are held by the Group and classified on the consolidated statement of financial position as available-for-sale at fair value through profit or loss. Thus, the client must reevaluate the investment value according to the market prices creating reasonable doubt of risk of overstating the value in the statement of financial position. Liquidity risk: The Company is facing the risk of not having enough liquidity to cover their due current liabilities because of their lesser amount of cash and focus on short term investments. They do have the option to cover the investment to cash when needed but that still put them in high liquidity risk. Due to this, there is a risk of material misstatement of the cash being overstated in order to reduce this risk and improve the client’s liquidity in front of their shareholders. Inherent risk: From the above analysis, it can be concluded that they operate in an industry with rather straightforward transactions despite holding some investment; which does not increase the complexity of transactions. Furthermore, there operations as a group increases the inherent risk of material misstatements occurring. At the same time, there are noticeable business risks surrounding the client operations; but most of them are not noticeably high, with the exception of interest, price and liquidity risks. Thus, overall the inherent risk with this engagement client is assessed to be at low level. Control Risk

Regarding the control risk, Bahrain Cinema Company overall seems to have good controls. This is mainly

stated because of the main common controls being applied. The company has an internal audit function

that is responsible for reviewing the controls and maintaining the internal control system over the year.

Moreover, the company has its audit committee that is responsible for over sighting the internal audit

function, it compromises of four directors who have a good financial and audit knowledge and that is

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reflective of strong governance. The committee takes up important roles like checking the company's

internal control policies, procedures and systems.

After conducting meetings with management, observing and interviewing different members from the

company; results were added to the risk assessment. The results showed that control framework exist

and it is operating effectively. The company's effective control framework is evidenced via number of

procedures the company undertakes:

The segregation of duties - separating authorization from preparation

Maintaining strong and systematic documentation and records

Physical controls on assets and records, for instance assets are kept in safe location and

important confidential records are placed in a safe.

Pre-numbering of documents (all transactions recorded only once)

Authorization (before commitment of resources)

Independent checks to maintain asset accountability (review bank reconciliation, compare

subsidiary record to control accounts, compare physical count of inventory to records)

Timely and appropriate performance reviews (comparison of actual performance to budgets,

compare financial to nonfinancial, review reports etc.)

All these factors being present and as they are reliable, the overall control risk was assessed as low.

Detection risk

In determining the detection risk some factors should be noted:

Bahrain Cinema Company is listed as a service company.

Bahrain Cinema Company has more than one subsidiary and has a quite large number of

investments.

Bahrain Cinema Company has a good internal auditing function and a reliable audit committee

that has reliable directors with acceptable finance knowledge and experience.

One of the audit firm policies is to maintain the overall audit risk at or below 8%.

Both inherent and control risks are identified as of low level risks.

Accordingly, detection risk will be set at a reasonable level of medium.

Measurement of risk

To have a unified understanding it Is important to understand what it is meant by low or high level of

audit risk components ( inherent, control and detection risks) in percentage form . The following table

was created for this purpose based on the engagement team professional judgment. It will be useful

when analyzing the different risk variables while planning audit procedures.

Level of risk Percentage value

High 60% and more

Medium More than 30%- 59%

Low 30% and less.

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Other areas of focus:

Bahrain Cinema Company has an unaudited amount of assets and net profit/ (loss) extracted from the

unaudited financial statements of the 100% subsidiary Aradous Properties Management W.L.L. This

causes overall increase to the audit risk due to possibility of material misstatements the amounts might

add to the consolidated financial statements of Bahrain Cinema Company.

Moreover, Bahrain Cinema Company has risk of non-compliance with provisions of the high level control

module stated by CBB. These risk of non-compliances are related to the latest provisions, HC 1.4.6 and

HC 1.3.6. Overall these risk does not look significant and with low relation to overall audit risk (CBB,

2013).

1.9 Audit Critical Areas

The following was conducted in order to determine areas that the engagement team will focus on in the audit Engagement. The first tools used to do are financial ratios and trend analysis, which can be found in details in (appendix 1 and 2 respectively). The result combined with the analysis of the client resulted in identifying the following areas that the client must focus on:

Inventories: Thus from the analysis done it can be concluded that the first area to be focused on is the

Inventory turn overdue to the noticeable change. It means that the company is holding inventory in

fewer days than it did the last reporting period. This might corresponds with the increase in sales, but it

might also related to the company miscounting the inventories and their sales rate.

Payables: Payables represent the only liabilities the company has, thus it is definitely a critical are to

focus on to evaluate if the company has been understating their liabilities. By examining the notes,

Trade payables were identified as their most noticeable payable and thus, their main liability as well;

this it will be a focus point of the engagement.

Cash: This is mostly due to the liquidity risk as explained. The cash is noticeably lower than investment

stated in the statements of financial position where the client depends on their short-term available for

sales investments to cover their current liabilities. The issue here is that these investment might not be

converted to cash immediately when needed and thus the shareholders usually are pleased with

reasonable cash balance. The company does not do that however which raises the question why Is not

there more cash balance.

1.10 Indication of Materiality Materiality is vital in planning as it is state the level of which if the errors or misstatements was above it

will lead to unfair representation. It is based on whether the error can impact the economic decisions of

users. Materiality level was based on the international standards of auditing (IAS) 320: audit materiality

(IAASB, 2010)

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Materiality computation

Key steps on materiality computation as per the firm’s Audit methodology are as follows:

Selection of Benchmark

Net Profit (NP) is the basis of calculation selected to calculate materiality. This approach is consistent

with prior year audits and is assessed as a reasonable basis. This figure was chosen due to the company

being a service company and therefore profit is the main objective of it and one of the most critical

figures for the company and shareholders who are interested in the Net profit figure because it highly

affects the dividends distribution and earnings per share. Moreover, the benchmark wasn’t changed

from prior year audit as there has been no major change in the company’s structure, shareholders or the

company’s activities and operations.

On that basis the following benchmark was formed:

Net profit for the year BD 6,297,407 Materiality for the audit overall.

Based on our professional judgment BD 500,000 deemed a reasonable materiality and that is

approximately 8% of the benchmark. This is within the firm permitted range of 5-10%. This figure will

represent the level of accepted material misstatements in the entire audit engagement.

The materiality toward the higher end of the range is appropriate given number of factors; the company

is registered with un-concentrated shareholders (474) and statutory audit is required by law.

Selection of Benchmark

Determining Planning Materiality and tolerable error

Determining Performance Materiality (PM) – used for

testing

Determining Audit Misstatement Posting Threshold (AMPT) – used

for error comparison

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Materially at the individual accounts and class of transaction (tolerable error).

This materiality will be the level of accepted material misstatement in the accounts or class of

transactions tested. The tolerable error will be a percentage of the Planning materiality (either 50% or

75%). The engagement team will make the decision regarding the used percentage based on the level of

the risk of the class of transactions and its significance to the users of financial information. Historical

engagement with the client should be considered, however, this is not feasible since this is the first time

the engagement team is involved with this particular engagement client.

The audit engagement will use this figure in order to determine the level of procedures to undertaken

to test that specific class of transactions. It should be noted that only significant class of transactions will

have tolerable error set to them based on whether it is expected that material misstatement will exist

below the planning materiality

Performance Materiality (PM)

The engagement team has set a performance materiality, that is a monetary value lower than the over

materiality that is used as an indication that the aggregate value of undetected and uncorrected

material misstatements will exceed the planning materiality.

Materiality for the financial statements as a whole shall be used as a starting reference point to

determine performance materiality. BD 375,000 is deemed appropriate and that is 75% of the

materiality. This is because a 75% of the planning materiality will be sufficient indicator for the audit

engagement of the closeness the amount of material misstatements to reaching the audit materiality

and thus will be able to carry out further testing in order to obtain better estimation of the

misstatements in the audit overall.

Audit Misstatement Posting Threshold (AMPT) / Trivial error

BHD 7,500 AMPT is deemed appropriate and that is approximately 1.5% of materiality for the financial

statements as a whole. This amount was set based on analyzing the size of the client operation, which

resulted in that misstatement of BHD7500 has an extreme low likelihood of it being remotely able to

affect the economic decisions. Thus, the auditor will not consider, report or analyze any misstatement in

an account a group of transactions aggregated to BHD7500 or below.

Materiality amendments and usage.

The amounts of the different types of materiality will not be set as a fixed value that cannot be changed for the entire the audit engagement. The audit engagement team realize that Monterey materiality might not judge whether the error is material or not (i.e does it affect the economic decisions of users). Thus, the engagement team will exercise professional judgment, and using the materiality limit stated above, when finding a misstatements to decide whether it is material or not. It is also possible the team might decide to chance the material level during the progress of the audit due to the discovery that the benchmarks is not suitable, changed understanding or any applicable factor. In this case, the manager will be informed of such situations and if there is a need to adjust the different materially level, then revised materiality limits will be created and documented.

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1.11 Indication of Sampling The substantive tests at times will require to gather a sample for testing as it is not efficient cost and

time wise to carry the test on the whole populations. Thus, the sample must be gathered which will be

done of the basis of International standards of auditing (IAS) 530: Audit sampling (IAASB, 2009B)

Statistical sampling will be used instead of the non-statistical where a mathematical statistical formula

will be used to detriment the sample in order to increase the objectivity and the randomness of the

sample; thus the sample is more likely to reflect the population characteristics. This will lead to more

accurate substantive tests. Furthermore, the sampling method is random selection in order to ensure

that every member of the population tested while carrying substantive tests has an equal chance of be

tested which increase the chance of the sample randomness.

The statistical approach requires the use the following formula:

𝑆𝑎𝑚𝑝𝑙𝑒 𝑠𝑖𝑧𝑒 = 𝑍 × 2 × 𝑝𝑟𝑜𝑝𝑜𝑡𝑖𝑜𝑛 (1 − 𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛)

Where Z is the value associated with the Confidence level is the level is of assurance that the sample will

reflect the population, and can be calculated represented by (1- Detection risk). The value of Z can be

found after calculating the confidence level:

Confidence level Z score values

80 % 1.28

85 % 1.44

90 % 1.65

95 % 1.96

99 % 2.58

The proportion is the percentage of the sample that will have a material misstatement; the auditors

have estimated that this value can be measured as an equivalent to the material misstatement risk.

After finding the percentage of the sample out of the population, the sample will be gathered using a

randomizer software to ensure its randomness. This approach will be used when applicable for the

whole engagement.

Usage of non-statistical sampling

It should be noted that the engagement partner authorize the usage of non-statistical sampling where

the sample and its size will be selected based on the auditor judgment. This will only be applicable in a

situation where the statistical approach is not applicable or will result in a very large sample size that is

not efficient to test. The non-statistical sample decisions must be approved by the supervisor.

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1.12 Audit Assertions Bahrain Cinema Company has an internal audit function which the audit engagement team is planning

to use. This decision was taken after reviewing and assessing the internal audit function work which

came out with results that the auditing of the internal audit is to an extent valid, reliable and most

importantly useful for the audit performed by the engagement team. Moreover, the client kept a

control on the internal audit function by assigning the audit committee the responsibility of reviewing

the findings and work created by the internal function, this makes the work produced by the internal

auditors more reliable. The audit engagement team will not use any other assistors from the company's

side in the audit. There is no use of any service organization by the client, therefore no work of a service

organization will be used in the audit.

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2.0 Introduction to Audit Plan

Notes on assertions

Our audit firm, uses an a ready set of assertions depending on the understanding spread in the firm and

this set is used on different audited cycles and items. This set of assertions take are known as "CEAVOP"

and it has the following assertions:

C - Completeness: All amounts are completed and correctly recorded; it also measures the

arithmetic accuracy of transactions recorded.

E- Existence: All assets, liabilities & equity interest do physically exist; also see if all transactions

took place & any amounts recorded really existed.

A- Accuracy of measurement: The transactions took place in the same dates recorded and all

are for the proper accounting period.

V- Valuation: Values of certain assets, liabilities & equities are correctly calculated according to

company policies and relevant financial reporting policies used.

O- Obligations & rights: Company has obligations to liabilities and rights to assets.

P- Presentation & disclosure: All presentations and disclosures needed for certain information

has took place according to requirements of the financial reporting policies adapted.

2.1 Auditing Cash & Cash Equivalent

2.1.1 Audit Risk Associated with Cash & Cash Equivalent Auditing the cash & cash equivalent end year balance is a policy taken by the audit firm in auditing any

client. The reason for this policy is that the cash & cash equivalent is an important balance as most

transactions will involve the cash or bank account being a second leg in that transaction. Nevertheless,

the importance of cash in any business plays a critical role in keeping that policy. This importance is

reflected in many areas, some are:

Liquidity: cash is an important asset when determining the business liquidity level because it has

a huge effect over it.

Payment of obligations: cash is needed in any operating business in order to pay expenses,

creditors and any other cost or liability.

Accordingly, for any company cash & cash equivalent should have a good level of control over it in

order to maintain sufficient level of cash in the business. When assessing the risk associated with

controls over cash; Bahrain Cinema Company has good controls over cash as mentioned before in

overall control risk, yet they lack controls in those areas in relation to cash:

Independent performance check on employees handling cash.

Insurance on employee theft.

Rotation of employees which helps in uncovering employee embezzlements and fraud.

Delays that may occur in forming banking results.

Implementing the fraud triangle in controls kept over cash.

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This overall leads to the cash & cash equivalent figure and balance being important to the business and

shows the need of it being audited.

The engagement team accepts no more than 10% of audit risk associated with cash & cash equivalent.

Assessing the inherent risk (37%) and control risk (44%) of this item; the RMM of cash & cash equivalent

is 16.28%. While the detection risk was assessed as 33.3%, therefore the audit risk associated with cash

& cash equivalent is totaled to be 5.4%.

2.1.2 Tolerable Error This percentage represent the percentage of material misstatements errors that we are willing to accept

while auditing the Cash & cash equivalent. Due to the importance of the cash & cash equivalent to the

business and liquidity of it and also the audit risk associated with it; as a whole the engagement team

has decided to set the tolerable error rate at 10% from the planning materiality. The other main reasons

behind this rate is the high importance of cash and its medium to small size balance of nearly BD

700,000. Therefore, tolerable error is:

10% x BD 500,000= BD 50,000

2.1.3 Sample Size Since statistical approach will be used to determine the size of the sample, the below formula will be

used as stated in the overall strategy:

Sample size = Z × 2 × propotion (1 − proportion)

The Confident (1- Detection risk) if found at 66.7% while Z is found according to the statistical table at

1.07. As for the proportion, it is the portion of the population to have material misstatements; which

was identified at 9%.

Thus, by Appling the above formula:

Sample size = 1.07 × 2 × 9% × 91% = 17.5%

The auditor are to use this multiplier of the population (this will include the number of transactions,

number of receipts etc.) when there is a need to test on a sample instead of a whole population.

2.1.4 Notes on Cash & Cash Equivalent Assertions, Objectives & Procedures As mentioned above in "Notes on assertions", some assertions are grouped in their understanding by an

audit firm policy. Therefore, procedures planned will test more than one assertion at the same time.

These critical points/areas are:

The rights of client to the bank account: this will be tested indirectly in the "Existence"

assertion when obtaining the bank confirmation as the bank account details will be written and

can be confirmed with the ones in the business records.

Additional critical note on procedures:

If there is more than one procedure mentioned above, it will be up the Audit manager decision to

perform more than one of them and also his responsibility to choose the most relevant procedure to

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perform from them according to the his professional judgment on whether how much will it take to

reach to a sufficient appropriate audit evidence. Accordingly, in this audit only the first procedure of all

assertions will be tested and second could be tested on request from manager.

2.1.5 Audit Objectives

3.1.6 Substantive Testing The following matrix shows the substantive tests that will be carried to test the assertions. It shows how

some tests are used to test several assertions at the same time according to set of assertions (CEAVOP)

used by the audit firm:

Substantive tests C E A V O P

Obtain the period end bank reconciliation

Obtain different cash journals

Prepare a standard bank confirmation request

Confirm dates of balances, transactions and records

Ensure information disclosure

Assertion General objectives Specific objectives

Existence Does the cash balance really

exist?

Is the cash correctly counted?

Does the bank account(s) have the balance record?

Completeness Is the cash and bank balance

complete?

Is there records for all cash/bank transactions?

Are all sales discounts are calculated correctly?

Does cash balance agree with records?

Occurrence Does cash belong to the

company at the year end?

Is there any cash/bank receipt which are postdated?

Presentation & disclosures

Is all the information disclosed according to adapted policies? -

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2.1.7 Further Detailed Audit Program

Assertions Audit Procedure(s)

Completeness

1. Obtain the period end bank reconciliation, in order to check if balances are complete and correctly recorded:

o Agree "as per statement" amount to the bank statement and/or the returned bank confirmation letter;

o Agree "Nominal Ledger" amount to the trail balance; o Verify the mathematical accuracy of the reconciliation; o Verify the reconciling items by checking bank statements subsequent to the

year-end date; and, o Investigate any unusual reconciling items and assess whether they have been

recorded appropriately. o Investigate long-outstanding reconciling items

2. Obtain different cash journals, in order to trace cash receipts & disbursements to see

if records are complete: o Agree cash balances with "petty cash book" having custodian’s signature. o Trace proper recording of a sample of remittance advices & cancelled cheques. o Trace samples of remittance advices to deposit slips and cash receipts journal. o Trace samples of cancelled cheques to the cash disbursement journal.

Existence

1. Obtain a list of all bank that the entity has transacted during the period. Prepare a standard bank confirmation request, in order to check existence of assets. The request for confirmation should include the following:

o Account balances at the period end; o Notes payable; o Lines of credit; o Assets pledged and guarantees; o Financial instrument etc.

On receipt of the confirmations perform the following procedures: o Vouch to confirm balances to the entity's reconciliations; o Assess whether other matters confirmed are appropriately recorded and/or

adequately disclosed; o Assess whether any restrictions on the availability of bank accounts are

appropriately disclosed o Assess whether the confirmation indicates possible guarantor or other

relationships with related parties. o Conduct a surprise cash count.

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Accuracy of Measurements

Confirm dates of balances, transactions and records to test if all dates are correct and recorded amounts are related to the accounting period being audited:

o Verify the cutoff of cash receipt & cash disbursements shortly before & after

period end and concentrate on tracing any postdated transactions.

o Agree dates of a cash receipt sample with bank deposits.

o Trace a sample of cheques cleared for any delay from the bank. o Ensure information disclosed is related to period of audit evidence gathered.

Presentation & Disclosure

Ensure information disclosure; to maintain appliance of adapted financial reporting policies (IFRS 7 - Financial instruments: Disclosures):

o Ensure disclosure of cash & cash equivalent definition in the financial statements notes.

o Ensure financial statement notes include a disclosure mentioning restrictions of cash.

o Ensure that any requirements of compensating balance is disclosed to the notes of financial statement.

o Trace accuracy of footnotes related to cash.

2.1.8 Budget for auditing Cash & Cash Equivalent

2.1.8.1 Resources Needed

Effort need by engagement team to audit Cash & cash equivalent (in days)

Substantive test

Needed Engagement Team Staff

Juniors (3) Senior Supervisor Total

Obtain the period end bank reconciliation 1 0.5 0.5 2

Obtain different cash journals 0.5 0.5 0.5 1.5

Prepare a standard bank confirmation request 0.2 0.3 0.3 0.8

Confirm dates of balances, transactions and records 0.3 0.2 0.2 0.7

Ensure information disclosure

0.5 0.5 1

Total 2 2 2 6

Accordingly, the audit procedures of cash & cash equivalent will overall take maximum of 6 days.

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2.1.8.2 Budget

The budget of the audit procedures are calculated using the effort made by the engagement team

members as highlighted in the table above multiplied by the hourly salary rates of each member:

(Salary.com, 2014)

Compensation Needed to audit Cash & cash equivalent (in BHD)

Audit engagement team member Number of

members needed Rate

Days needed

Total

Juniors 3 32 2 192

Seniors 1 62 2 124

Supervisor 1 108 2 216

Total BD 532

2.2 Auditing Trade Payables The liability items to be the subject in the following plan are Bahrain Cinema Trade payables because it is

the most significant component of their aggregated single liability balance “Trade payables and other

accounts”. It was chosen because it represent a huge portion of the client’s liabilities and thus its

auditing procedures must be planned thoroughly.

2.2.1 Audit risk associated with Trade Payables The engagement team is willing to accept 5% as an audit risk while auditing trade payables. The client

has stated that they implement sufficient internal controls to supervise their trade payables transactions

and insure their accuracy. Therefore, the control risk has been set at low, the inherent risk for the group

and the type of suppliers it deals with is set at medium-low, but it is important to note that trade

payables represent a huge portion of the client liability, thus there is an inherent risk that it might be

understated. Therefore, detection risk do not have be minimized as much to meet the desired level of

audit risk and thus there is no need to test thoroughly the trade payables because that will inefficient.

The material misstatement risk (inherent risk and control risks) is estimated to be about 30%, thus the

detection risk will be set at 16.7%.

2.2.2 Tolerable Error Nonetheless, considering that trade payable is significant to the client’s liabilities, thus it is a primitive

item in the statement of financial position and as a result, it is important to the shareholders to identify

whether the trade payables and consequently the liabilities have been understated. Thus, a percentage

of material misstatements errors that we are willing to accept while auditing the Trade payable will be

figured out. Due to the importance of the trade payables to the financial statements and the client’s

liability as whole the engagement team has decided to set the tolerable error rate at 35%. This is

because the client should have given this item special consideration and thus not much error will be

tolerable. Therefore, tolerable error for trade payable is:

35% of BD 500,000= BD 175,000.

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2.2.3 Sample Size Since statistical approach will be used to determine the size of the sample, the below formula will be

used as stated in the overall strategy:

Sample size = Z × 2 × propotion (1 − proportion)

The Confident (1- Detection risk) if found at 71.4% while Z is found according to the statistical table at

1.1. As for the proportion, it is the portion of the population to have material misstatements; which was

identified at 11%.

Thus, by Appling the above formula:

Sample size = 1.1 × 2 × 11% × 89% = 21.5%

The auditor are to use this multiplier of the population (this will include the number of transactions,

number purchase order etc.) when there is a need to test on a sample instead of a whole population.

2.2.4 Note on substantive tests Some assertions below in the substantive testing are grouped together and some procedures will

address more than one assertion.

Moreover, not all procedures might be performed. The number of procedures performed is decided by

the manager depending on the reach of the sufficient appropriate audit evidence.

2.2.5 Assertions related to Trade payables. The following assertions are made the client regarding trade payables and thus substantive tests must

be carried to confirm the accuracy of these assertions. The following table highlight these assertions and

the objectives derived from them.

Assertion General objectives Specific objectives

Existence/Occurrence.

Do the recorded accounts payable represent valid liabilities at the balance sheet date?

-

Rights and Obligations. Does the balance of accounts payable reflect the liability of Bahrain cinema B.S.C?

-

Completeness.

Does the Trade payable balance contains all transactions for the period?

Do all transactions that occurred was in deed recorded?

Were all creditors recorded with the amounts due them?

The purchases balance confirm with the creditors list?

Were the previous year balance probably been brought up?

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Was the transactions related to purchases from suppliers that happened in the year, were recorded in the year?

Accuracy

Is the balance figure represent the value of the trade payable with accuracy?

Were the figures in the trade payable properly calculated?

Valuation.

Were the Trade payable balance probably been allocated in accordance with the international financial reporting standards/ IAS 13: Presentation of Current Assets and Current Liabilities?

Were the provisions of accruals adequate?

Were there any set off between the trade receivable and trade payable accounts?

Is the creditor list being aged probably?

Presentation.

Were the account payable presented in accordance with the international financial reporting standards / IAS 13: Presentation of Current Assets and Current Liabilities?

Were the trade payable probably been classified?

Is there debit trade payables under current assets?

Were there proper disclosure to the trade payable?

2.2.6 Substantive Testing The following matrix shows the substantive tests that will be carried to test the assertions. It shows how

some tests are used to test several assertions at the same time according to set of assertions (CEAVOP)

used by the audit firm:

Substantive tests C E A V O P

Trace suppliers transactions to their source documents

Agree creditors ledger with the supplier statement

Examine the creditors list

Test brought forward balance

Cut off test

Recalculate the creditor ledger.

Creditor Circularization

Payments review

Review the trade payable notes to financial statements

Set off test

Ageing analysis

Review disclosers of trade payables

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The following table contains a detailed plan to carry audit procedures in order to confirm whether the

assertions holds true or not. While there is a lengthy list procedures, it should be noted that these

procedures were designed to test several assertions at the same time while maintaining efficiency. This

is because, as stated, trade payable represent a noticeable portion of the client liability and thus it must

be tested thoroughly while keeping matters efficient.

Assertion Audit Procedures.

Existence & Accuracy of measurements (& rights and obligation)

1) Creditors circularization: The auditor will select as sample of the creditors to confirm with them whether the purchase ledger is recording creditors correctly, thus enabling the auditor to identify whether the liability indeed exists or not.

2) Agree creditors transactions to the source documents: the auditor will Agree a sample of the creditors transactions with their related source document by tracing from the ledger to the invoices, good received notes, purchase order to ensure that the transaction indeed occurred and the goods has been received.

3) Brought forward balance testing: the auditor will also examine the ending balance of the previous year to see if it brought forward (i.e. to confirm if the opening balance of the current year exist in the balance sheet.

Extra procedure: The following an extra substantive test planned just in case a need for further testing rose

Payments review: The auditor will review payments made to creditors after the year end to confirm if the existence of any adjusting transactions that will affect the year-end balance. This will also be done via a sample.

Cut off test: the auditor will also carry a cut off test by examining a sample of goods received notes. This test will be carried before and after the year end, to confirm whether the trade payable transactions that accorded within the correct accounting period.

Note: The main important assertion is testing the existence of liabilities. It is important to carry it out first because if the liability does not exist than it is effort wasting to test for the rest of the assertions. The right and obligations is grouped with it because this assertion is not tested very much and through the procedures listed above, the auditor will be able to test right and obligations as well.

Completeness (& accuracy of figures)

1) Examine source documents: Trace the source documents related to purchases with the transactions in the (creditors control ledger) in order to confirm if all amounts that incurred as stated in the source document have been recorded in order to test completeness and accuracy.

2) Examine trade payables list: Obtain a list of trade payables (also known as creditor list) and trace it to the payables ledgers to confirm that all amounts due

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to the suppliers are recorded in the list.

3) Examine the major trade payables: The auditor will compare the list of the previous year with the current reporting year to identify if there are any major liability to creditors that existed the last year and are not existing this year and identify the reasons.

4) Test brought forward balance: The auditor will inspect the trade payable balance in order agree the ending balance of the previous year with the beginning balance of the current year in order to identify whether the trade payable balance has been properly been brought forward. No test sample is needed.

5) Recalculate the creditors’ ledger: the auditor will cast the creditors’ ledger to ensure the end balance is accurate.

Valuation

Review the trade payable notes to financial statements to identify the basis of valuation and preparations and confirm their compliance with preparation methods stated in IAS13.

Set off tests. Compare the trade payable and trade receivable ledgers to identify if there were any set off that might have occurred which will affect the balance.

Ageing analysis: the auditor will conduct ageing analysis in order to confirm whether the client has been paying amounts to suppliers in accordance to their trade payable ageing policy (i.e. Do they apply the policy regarding the days allowed to settle their trade payables).

Presentation and disclosure

1) Review disclosers of trade payables: The auditor will review the presentation of the trade payable account to ensure that it has been classified properly according to IAS to confirm their compliance the IAS 13: Presentation of Current Assets and Current Liabilities. He will consider:

Review the creditor list in order confirm whether the creditors has been properly classified according to their type and the expected realization date.

Review classification of trade payables in the financial statements.

Examine the current assets to confirm if the debit balance of trade payables are disclosed under the current assets.

Review the notes to financial statement to deduce whether the client has disclosed all information related to the trade payables according to the IAS 13.

Note on procedures and related assertions: "Some procedures test more than one assertion when

performed and therefore some assertions are added together." For a better understanding of these

procedures, refer to the matrix above.

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2.2.7 Budget for Auditing Trade Payables

2.2.7.1 Resources Needed

The resources needed to audit trade payables for the client consistence of human effort of the

engagement team. Below is a list of effort to be made by each needed engagement team member to

carry each procedure measured in Days:

Effort need by engagement team to audit trade payables (in days)

Substantive test Needed Engagement Team Staff

Juniors (3) Senior Supervisor

Trace suppliers transactions to their source documents 0.2

2.3

Agree creditors ledger with the supplier statement 0.2

Examine the creditors list 0.3

Test brought forward balance 0.3

Cut off test

0.5

Recalculate the creditor ledger. 0.2

Creditor Circularization

1

Payments review

0.3

Review the trade payable notes to financial statements

0.2

Set off test 0.3

Ageing analysis 0.2 0.3

Review disclosers of trade payables

0.2

Total

1.7 2.5 2.3

6.5

Thus, with 3 junior auditors, one senior and one supervisor the total of days need to audit trade payable

is 6.5 days.

2.2.7.2 Budget

The budget of the audit procedures are calculated using the effort made by the engagement team

members as highlighted in the table above multiplied by the hourly salary rates of each member:

(PayScale, 2014)

Compensation Needed to audit Trade Payable (in BHD)

Audit engagement team member Number of members

needed Rate

Days needed

Total

Juniors 3 32 1.7 163

Seniors 1 62 2.5 155

Supervisor 1 108 2.3 248

Total BD 566

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2.3 Auditing Share Capital The equity item to be the subject in the following plan is Bahrain Cinema Share capital because it is one

of the important aspects of the Equity section that is related directly to share issuance and

authorizations besides being the same amount for the prior year and the current year.

2.3.1 Audit Risk Associated with Share Capital The engagement team is willing to accept 20% as an audit risk while auditing share capital. The group

has stated that they implement sufficient internal controls to maintain and ensure the accuracy of the

share capital transactions. Therefore, the control risk has been set at low, and the inherent risk for the

group and the type of shares it deals with is set at medium-low. Therefore, detection risk does not have

be minimized as much to meet the desired level of audit risk and thus there is no need to test

thoroughly the share capital because that will be inefficient. The material misstatement risk (inherent

risk and control risks) is estimated to be about 30%, thus the detection risk will be set at 66.67%.

2.3.2 Tolerable Error This percentage represent the percentage of material misstatements errors that we are willing to accept

while auditing the share capital. Due to the importance of the share capital to business & shareholders

and the audit risk level associated with it; as a whole the engagement team has decided to set the

tolerable error rate at 70% from the planning materiality. Therefore, tolerable error is:

70% x BD 500,000= BD 350,000

2.3.3 Sample Method The substantive tests at times will require to gather a sample for testing as it is not efficient cost and

time wise to carry the test on the whole populations.

The substantive tests at times will require to gather a sample for testing as it is not efficient cost and

time wise to carry the test on the whole populations. Thus, the sample must be gathered.

The team will inherit the use of CAAT software to compare between the samples for the share capital

procedures and this is due to the large population of the outstanding shares and this makes choosing

the statistical approach inefficient. In this case, the information in the certificates book of the

outstanding shares for the current financial year should be entered to the software. Then, the software

will compare the occurrence of the issuance of shares besides the auditor assigned to the procedures

will test a small sum of the compared samples in the software for the largest contributed investor in the

company.

This “Soft” method was chosen as it can analyze all the samples in terms of misstatements and risks

besides giving the opportunity to the audit engagement to be more efficient through specific tests in

relation to the transactions associated in the samples. Added to that, it can detect the fraud

commitments and this is an important approach in relation to the procedures that need the sampling in

the Share capital. (Arbutus, n.d.)

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2.3.5 Notes on Substantive Tests Some assertions below in the substantive testing are grouped together and some procedures will

address more than one assertion. An important note is that:

The auditors will check the accuracy of the capital accounts in relation to the five assertions:

Whether the company’s records existence in the entries are accurate besides the compliance of

the issued shares with the board of director’s authorization and company laws.

To ensure the appropriateness of authorizing the proportioned shares besides their entries in

accordance with IFRS.

Moreover, not all procedures might be performed. The number of procedures performed is decided by

the manager depending on the reach of the sufficient appropriate audit evidence.

2.3.6 Assertions Related to the Objectives of the Share Capital Audit The following assertions are made the client regarding share capital and thus substantive tests must be

carried to confirm the accuracy of these assertions. The following table highlight these assertions and

the objectives derived from them: (Quizlet, n.d.)

Assertion General objectives Specific objectives

Completeness Does the Share capital balance contain all authorized transactions for the period?

Does the balance shows any changes compared with the historical balance?

Does the certificate numbers are all issued during the period?

Existence (Occurrence) Do the recorded share capital represent the valid capital balance at the balance sheet date?

Does the share capital account

reflect the entries to the stock

accounts?

Does the account abide by the laws

of B.S.C in terms of the entries?

Are B.S.C records accurate?

Does the issued stock approved by

the board of directors and comply

with the laws of the company?

Rights and Obligations Does the balance of share capital reflect the Equity of Bahrain cinema B.S.C?

-

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Valuation (& allocation)

Were the share capital balance probably been allocated in accordance with the international financial reporting standards/ IAS 32?

Were the transactions made in compliance with the contracts, stock issuance and registration statements in terms of proceeds from security issuance?

Was there any over-issuance of shares?

Are the proportional shares

approved correctly and entered in

compliance with IFRS.

Presentation &Disclosure

Was the share capital balance prepared properly in accordance with the international financial reporting standards/ IAS 32?

Does the minutes of board of directors meeting approve the appropriateness of the authorization of transactions?

Were the share capital account computed and disclosed properly?

2.3.7 Substantive Testing

The following matrix shows the substantive tests that will be carried to test the assertions. It

shows how some tests are used to test several assertions at the same time:

Substantive tests C E A V O P

Cast all security certificates numbers

Trace the recalculated capital to the prior capital

Trace documented entries to the ledger to the capital accounts

Reconcile subsidiary ledger to the general ledger

Cast all the profits from the issuance of securities

Agree and trace the issued share capital to the register

Check on the share capital compliance with the company’s laws

Analyze the certificates book

Examine the ownership legal documents

Review meeting minutes

Check the computations and disclose of the share capital compliance

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2.3.8 Audit Procedures

Assertion Procedures Sampling

Completeness

1. The auditor will cast all security certificate

numbers issued to stakeholders to ensure that

there are no unauthorized securities issued

while the financial period.

2. The auditor will request for an analysis for all

equity accounts or produce a report analyzing

them to come-up with the previous capital to

trace if there were any changes to it in order

to check the company’s compliance to laws

related to authorization and issuance of

shares.

3. The auditor will need to do some

computations such as ratio analysis for the

equity accounts to trace them with the

previous year ratios.

1. The approach for this procedure will be the Random Sampling since it will go through the certificates that are a physical item. The sample size that will be chosen upon the certificates will be relatively small as all the shares are assigned by fixed price and time.

Existence (& Occurrence)

1. The auditor will agree and trace the issued

share capital in the financial statement to

ensure that it exists in the register of shares of

the company.

2. The auditor will check whether the share

capital in accordance with the laws to

ascertain that the company has complied or

not with them.

3. The auditor must analyze the certificates book

by reconciliation to ensure the occurrence of

torn nubs of outstanding shares.

3. The approach for this procedure will be the Random Sampling since it will go through the certificates that are a physical item. The sample size that will be chosen upon the certificates book will be relatively small as the outstanding shares are assigned by a fixed price and time.

Rights and obligations

1. The auditor will need to examine the

company’s legal ownership documents to

ensure that the capital is presented

appropriately traced to the value in the

financial statements.

-

Valuation (& Allocation)

1. The auditor will trace documented entries to

the ledger to the capital accounts made by

individuals to ascertain that the values entered

are right.

2. The auditor will reconcile the subsidiary ledger

traced to the general ledger to agree on the

value of the outstanding shares besides

-

(SEMO, n.d.)

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eliminating the over-issuance of shares.

3. The auditor will cast the returns from the

issuance of securities to be traced with the

contracts, registration and shares issuance

statements to ensure their relation and

compliance.

Presentation & disclosure

1. The auditor must review the meeting minutes

of the board of directors to ensure the

appropriateness of the transaction

authorization.

2. The auditor will check the computation and

disclosing of the transaction to ensure their

compliance to IAS 32.

-

2.3.9 Budget for Auditing Share Capital

2.3.9.1 Resources Needed

To calculate the budget needed to audit the share capital, it is necessary to identify the amount of effort

and the audit staff needed. The following table was created in order to show the amount of effort

needed from each staff (expressed in days) in order to test each assertion by applying the procedures:

Effort need by engagement team to audit trade payables (in days)

Substantive test Needed Engagement Team Staff

Juniors (3) Senior Supervisor

Cast all security certificates numbers 0.2

1.5

Trace the recalculated capital to the prior capital

0.3

Trace documented entries to the ledger to the capital accounts

0.2

Reconcile subsidiary ledger to the general ledger 0.2 0.1

Cast all the profits from the issuance of securities 0.3

Agree and trace the issued share capital to the register 0.2

Check on the share capital compliance with the company’s laws

0.3

Analyze the certificates book 0.2

Examine the ownership legal documents 0.2 0.2

Review meeting minutes

0.3

Check the computations and disclose of the share capital compliance

0.3

Total

1.5 1.5 1.5

4.5

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2.3.9.1 Budget

Using the information in the above table, the compensation for each staff member, which will represent

his cost to audit share capital as shown below: (Salary.com, 2014)

Compensation Needed to audit Share capital (in BHD)

Audit engagement team member

Number of members needed

Rate/day Days needed Total

Juniors 3 32 1.5 144

Seniors 1 62 1.5 93

Supervisors 1 108 1.5 162

Total BD 399

There is no extra cost such as cost of hiring expert or cost for traveling/ accommodations; thus about

BHD 4,290 will be the budgeted cost to audit this item.

3.0 Payroll Cycle Payroll cycle is basically referred to the period of time between each payroll due when the employer

allocates payroll to his employees. (US Legal, n.d.) The payroll cycle in Bahrain Cinemas (Baharin

Cinema, 2014) is expected to be on monthly basis.

3.1 Relation to Financial Statements of Bahrain Cinemas Payroll cycle is relevant to running the business and its financial statements, the following statements

are directly affected by this cycle: (Accounting Coach, n.d.A)

Statement of Comprehensive Income: It comes under Staff Cost in Expenses as shown in Note 22 of the

Financial Statements. These costs amounted to BD 2,533,267 on 31st December 2013, while it was BD

2,043,895 on the same day of 2012. Staff costs also include Employee Benefits, which are the pensions

paid to the SIO (Social Insurance Organization) amounting to BD 114,181 in 2013 while it was BD

109,828 in 2012. These amounts were calculated in the payroll cycle for 367 full-time and part-time

employees in both 2013 and 2012. As mentioned in the Critical Area, this section of the financial

statements is expected critical due to the sudden increase of approximately BD 500,000 between the

two periods.

Statement of Financial Position: It comes under Liabilities, Trade Payables specifically, in this financial

statement. It occurs when the company does not remunerate for the payroll cycle when it is due, which

are called Accrued Payrolls (Accounting Coach, n.d.B). This account is recorded within the Accruals

accounts in the Trade Payables if the company had any Accrued Payrolls. As the financial statements or

their notes (Note 16) do not have this detail, it is safe to assume that they actually do have Accrued

Payrolls. This is due to the sudden increase of total payroll costs by approximately BD 500,000, which

could relate to the sudden increase in Accruals account of almost BD 200,000 from BD 1,448,871 in 2012

to BD 1,640,430 in 2013.

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Statement of Cash Flow: It comes under the total Profit derived from the Statement of Comprehensive

Income. As an expense, the Payroll cycle is included in calculating the total profit of the company for the

year, which is taken as the first operating activity in the statement of cash flow. The cycle could also

relate to this statement through the section about “Change in Trade and other payables” as it marks the

increase or decrease in the Trade payable account, including the Accrued Payrolls (Li, n.d.). The amount

of this account notably doubled from BD 629,485 in 2012 to BD 1,256,740 in 2013.

4.2 Payroll Cycle Process Employees’ information and records in this cycle will be derived from the Human Resource Cycle. The

activities carried out in the payroll cycle are as follows: (Blackbaud, 2011)

Entering payroll information for new employees after human resources create employee

records.

Entering the attendance and time worked by employees.

Calculating the payroll for the employees.

Calculate automatic deductions for Social Insurance Organization (GOSI).

Set up EFTs (Electronic Fund Transfers) to deposit money into employees’ bank accounts and

print cheques for employees not using EFT.

Charge payroll expenses back to the departments or accounts which relate to the employees.

4.3 Objectives of Payroll Cycle Internal Controls Due to the size of the company as a big group, it is expected to find a lot of complex transactions. The

reason behind putting these internal controls on the payroll cycle is to ensure that all payroll

transactions are: (Porter, Simon, & Hatherly, 2014A)

Properly Recorded: all relevant information of transactions are recorded at the transaction

time.

Properly Authorized: all transactions are authorized by a person with required authority.

Valid: all the transactions are recorded with the compliance with related parties.

Complete: all transactions are recorded into the system with no omissions.

Properly Classified: all the transactions are categorized in their correct groups.

Accurate: all payroll transactions are accurately recorded.

Assets Safeguard: all assets (Cash & Data) are protected from theft.

Efficiency & Effectiveness: all payroll activities are recorded in their correct accounting periods.

4.4 Internal Controls of Payroll Cycle: To achieve the objectives of the payroll cycle, as mentioned above, certain internal controls needed to

be placed in order to ensure its accuracy. The internal controls expected to be found in Bahrain Cinemas

are: (Accounting Tools, n.d.)

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Payroll Control Details Sufficiency

General Internal Controls

1 Audit Periodic audit, internal or external, of payroll to evaluate payroll payments.

Sufficient in checking whether payroll payments are done correctly, the employees being paid are still working for the company and for the correct time records.

2 Change

Authorization

Requesting a written and signed from employees when they request to change their marital status, allowances or deductions.

Sufficient in having reliable data of each employee through using these written and signed sources to prove such changes.

3 Change

Tracking log

When using a computerized payroll system, change tracking is activated to track all the changes that occur to the system.

Sufficient in tracking and identifying incorrect or fraudulent entries to the system.

4 Expense Trend

Lines

Investigate for changes in payroll-related expenses in the financial statements.

Sufficient in identifying if any unrecorded changes were done.

5 Issuing

Payment Report

Sending a list of employees’ names and their payroll payments to the supervisor of departments.

Sufficient in detecting whether payments are made to employees that no longer work for the company.

6 Record Access

Restriction Protect files and payroll records with passwords.

Sufficient in preventing unauthorized personnel of accessing information of other employees, or preventing authorized changes.

7 Segregation of

Duties

Having different payroll personnel in each stage of payroll (Preparing, Authorizing, Creating payments)

Sufficient in reducing the risk of fraudulent opportunities found throughout the cycle.

8 Control on Employee Updates

Payroll personnel who input promotions, resignations, etc. is different than personnel who reviews and approves these changes.

Sufficient in preventing fraudulent attempts of increasing pay rates incorrectly in promotions or making payments to employees that no longer work for the company.

9 Compare Monthly Payrolls

Compare the total payroll payments of current and previous months.

Sufficient in identifying any unrecorded changes.

10 GOSI Compare the total amount Sufficient in identifying any errors in

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Deduction Comparison

in GOSI’s SIO invoice with the total deduction employees’ salaries.

deductions made from the salaries.

Calculations Internal Controls

11 Automated

Timekeeping Systems

Installing computerized time clock to track employee’s clock in or out, shifts and overtimes.

Sufficient in eliminating the risk of buddy-punching where employees clock in for each other, as well as disallowing unsupervised overtime.

12 Hours Worked

Verification Supervisor approving hours worked by employees.

Sufficient in preventing charging more working hours to an employee than their actual hours.

13 Matching

Timecards to Employee List

Checking off the names of the employees from the employees list when their timesheets are submitted.

Sufficient in keeping record of employees that turned in their timesheets in timely manner or not, which affects the payment of their salaries.

14 Overtime Worked

Verification

Supervisors recording the overtime worked by employees.

Sufficient in saving the company from incorrect costs as overtime pays are higher than normal pays.

15 Pay Change

Approval

Requires 2 signatures for pay changes, from supervisors and the second higher supervisor.

Sufficient in reducing the risk of conspiracy in modifying pay rates.

Check Payment Controls

16 Update

Signature Authorization

Change the list of authorized signers for payroll checks when signers are no longer in that position, and forward the list to the bank.

Sufficient in eliminating the risk of payments being made by unauthorized people.

17 Secure

Undistributed Checks

If an employee is not present when checks are distributed, the check will be locked up securely.

Sufficient in preventing theft attempts.

18 Match

Addresses

If checks are sent by mail to employees’ houses, check whether the check address matches the employee address.

Sufficient in Identifying if different checks are being sent to the same address, which could be because of the payroll staff making payments to fake employees.

Bank Transfer Payment Controls

19 Payroll

Checking Account

Separating company’s account and specifying an account that is only funded when payroll payments are to be made.

Sufficient in preventing personnel from fraudulently increasing the amount of their salary, since the funds in the account would not be sufficient to support this increase.

20 Checking Bank Reconciliation

After transferring the payroll payments into employees’

Sufficient in keeping accurate records which will eliminate fraudulent opportunities.

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bank account, confirm that the bank reconciliation matches the company’s records.

4.5 Assertions Related to Test of “Segregation of Duties” Control: The following table clarifies the assertions and their objectives in relation to testing the control of

Segregation of Duties in the payroll cycle:

Assertions General Objectives Specific Objectives

Completeness Are all the payroll documentation signed and approved?

-

Existence Do all the employees with the right authorization to the document exist?

Are all employees stated in the documents still working?

Do the employees still have authorization to process the document?

Accuracy Are the payroll documents accurately documented?

Have the duties been segregated properly?

The following table will clarify what procedures will be taken in order to achieve the previously

mentioned assertions:

Assertions Procedures

Existence

Auditor will request a list of payroll personnel authorized and responsible for payroll activities.

Auditor will make sure that the payroll personnel in the list currently exist and work for the company in their correct positions.

Accuracy Auditor will compare the list of personnel authorization with the documents

to examine whether the documents were prepared, reviewed and signed by the employee with the correct authorization.

Completeness Auditor will check the payroll documents to identify whether they have

been prepared, reviewed and signed or not.

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4.0 Working Papers Audit Work papers are the auditor’s documentation of work that has been done. They are vital because

evidence of the audit procedures, there details, results and conclusion drawn from them. It servers to

guide auditors in different stages starting from planning up till the creation of the audit opinion and the

audit report. Below are 4 example of working papers used by the engagement team to record

procedures they have carried. The design of these papers was based on ISA 230: Audit Documentation

(IAASB, 2009E) and considering ISA 220: internal quality control.

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4.1 Working Paper of Cash & Cash Equivalent

Procedures information

Assertion Tested: Completeness

Objectives: Is the cash and bank balance complete and has the correct amounts?

1. Does cash balance agree with records?

2. Is there records for all cash/bank transactions?

3. Are all sales discounts are calculated correctly?

Sample Size: The subject of the completeness testing is reviewing information related to the period end

bank reconciliation.

The sample size to be tested after applying the sample multiplier for the whole audit plan:

Population Multiplier Sample Size

481 Reconciled items 17.5% 85 items

Audit risk proportion 5.4%

Material misstatement proportion

16.28%

Confidence level 65%

Score to confidence level 1.07

Sample size 17.5%

W/P Reference: BCS147

Created by: Esraa Isa

Date: January,19th 2014.

Signature: E.I

Reviewed by: Jalal taqi

Date of revision: January,

the 20th, 2014

Signature: J.T

Bahrain Cinema Company (B.C.S)

Cash & Cash Equivalent

Year end at 31st December, 2013

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Procedure result and comments

Test done by Details Comments

Jalal Taqi

The "as per statement" amount agrees to the bank statement and also to the returned bank confirmation letter.

Both "Nominal Ledger" amount and the trail balance amount agree to each other.

The mathematical accuracy of the reconciliation statement & figures related to it was verified and assessed as relatively high.

Verified the reconciling items by checking bank statements subsequent to the year-end date.

Found a small number of unusual reconciling items which have not been recorded properly.

Some long-outstanding reconciling items exist.

Nearly 3.5% of the sample tested are unusual reconciling items, these items were not recorded correctly and results of data entry error. The client was addressed with this issue in order to adjust these errors. Further test on reconciling items might be conducted to investigate more.

Nearly 14% of the sample tested are long outstanding reconciling items, this increases risk of detecting errors, unrecorded amounts, theft & loss of funds. Therefore, a memo will be raised to manager in order to address client -if deemed necessary- about this possible issue.

Conclusion:

This audit had come-up with the result of the Bahrain Cinema Company has complete and correct records of cash and cash equivalent. Furthermore, some issues related to controls were detected but these issues do not seem to result in any material or significant error. These issues are addressed to manager for review and to the client for adjustments if wanted. Overall, the cash & cash equivalent recorded in the year ended 31st December 2013 consolidated statement of financial position of Bahrain Cinema Company is complete and correct.

Review: The results and conclusions of this substantive test was reviewed and discussed with Mr.

Salman Ismaeel, the Supervisor. No major amendment were required by the supervisor.

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4.2 Working Paper for Trade Payables

Procedures information

Assertion tested: completeness and accuracy

Objective: Does the trade payable ledger contain all transactions that accord?

1) Ensure that all purchases have been recorded.

2) Ensure that the amount is accurate

Description: the procedure is considered with the auditors tracing the sources documents to the

transaction in the trade payable ledger account. This is to obtain reasonable assurance that the

make sure that the company has recorded all transactions they incurred with an accurate amount.

Sample size:

The subject of the procedure testing are creditors’ transactions.

Population Multiplier Sample size

5000 invoice, credit and debit notes (each)

35% 2100 invoice, credit and debit notes

6000 Transaction 35% 2100 transactions.

W/P Reference: BCS301

Created by: Mossa Jassim

Date: January, 19th 2014.

Signature: Mossa.j

Reviewed by: Jaffer Khalid

Date of revision: January,

the 20th, 2014

Signature: J.K

Bahrain Cinema Company (B.C.S)

Trade Payable

Year end at 31st December, 2013

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Procedure result and comments

Test done by Details Comments

Mossa Jassim

Ali Mohd

Hassan Fadhel

Yusuf Madan

The auditors gathered a sample of the source documents (Invoices, credit and debit notes) with a sample size as specified above. Then they traced the sample to the payable control ledger to identify whether the ledger is complete. At the same time the auditors compared the sample with the amounts on ledger. To further test accuracy, a sample of transaction from the trade payables ledgers were selected at random and traced to their source documents to check the amounts stated in the ledger.

After testing the sample It was found that all the sample are traceable to their invoices and no missing amount or inconsistency between the sample of the ledger transaction and the source documents were located. The amounts in the source documents of the sample tested showed were all included.

95% of the sample tested was confirmed to have accurate amount between the invoices and the ledger.

5% of the sample was found to have inaccurate amounts. These happened due to position errors. The amount of misstated amount total BHD6000.

Conclusion:

Based on the above results, for completion it was found that the same of source documents were

indeed recorded. Because the sample was both random and represents reasonable percentage of the

population, it can be said with confidence that the sample reflect the population and therefore to

answer the objective: the Trade payable ledger confirm with the source documents. Based solely on this

procedures completeness has been tested with positive result however this will be further confirmed by

completing all planned procedures.

As for the accuracy, while 5% error was found in the amounts tested. However, this is not material and

in reality is under the trivial amounts stated in the strategy (BHD 7,500). Thus, it can be said with

reasonable confidence that the trade payable ledger is indeed accurate based on this procedures solely.

Further tests will confirm this fact.

Review: the result and conclusions of this substantive test was reviewed and discussed with Mr. Salman

Ismaeel, the Supervisor. No major amendment were required by the supervisor.

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4.3 Working Paper for Share Capital

Procedures information

Assertion Tested: Existence

Objectives: Do the recorded share capital represent the valid capital balance at the balance sheet date?

Does the share capital account reflect the entries to the stock accounts?

Does the account abide by the laws of B.S.C in terms of the entries?

Sample Size: The subject of the occurrence testing is the torn nub in the certificates book for the

financial year. CAAT approach will be used where an auditing software will be used to compere the

certifcents due to the huge numbers that makes taking a sample from the start inefficient. Thus, the

auditor will test few samples of the biggest investor in the company after getting them analyzed from

the software and this all will be after the entry of the information in the certificates book.

Procedure result and comments

Test done by Details Comments

Jalal Taqi

The auditor, firstly, requests the certificates book for the issued shares for the current financial year.

The auditor, then, gather the appropriate sample size of the issued certificates

The next step is to identify whether those certificates nubs in the book have been torn besides ensuring at the first place of being authorized.

Then, the auditor compares the casted value of the certificates and traces it to the value of the share capital in the financial statement for the current and prior years.

90% of the certificates were torn at the time of issuance as this represents the appropriateness of issuing the authorized shares. The remaining 10% of the sample certificates tested were torn in different times/in other words, not in sequence. This will lack the appropriateness of the issuance procedures besides increase the possibility of fraud and inaccuracy in maintaining the books.

W/P Reference: BCS500

Created by: Jalal Taqi

Date: January, 19th 2014.

Signature: J.T

Reviewed by: Salman Ismail

Date of revision: January,

the 20th, 2014

Signature: S.I

Bahrain Cinema Company (B.C.S)

Share Capital

Year end at 31st December, 2013

Page 40 of 51

Conclusion:

This audit had come-up with the result of the Bahrain Cinema Company has presented and computed the Share capital item properly and fairly in relation to the current accounting period, compliance with the laws of authorizing & issuance of shares in relation to the torn nubs in the certificates book . Moreover, this can be seen clearly and obviously from the tests handled on the samples of the torn nubs in the certificates book in relation to the procedure conducted to ensure the existence assertion of this item.

Review: the result and conclusions of this substantive test was reviewed and discussed with Mr. Salman

Ismael, the Supervisor. No major amendment were required by the supervisor.

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4.4 Working Paper for Payroll Cycle

Procedures information

Control Tested: Segregation of Duties

Assertion Tested: Existence

Objectives: Do all the employees with the right authorization to the document exist?

Are all employees stated in the documents still working?

Do the employees still have authorization to process the document?

Description: the procedures to test this control are done through testing the payroll documents. This is

to assure that this internal control of the payroll cycle is working effectively.

Sample Size: The subject of the control testing are payroll documents that are prepared on monthly

basis.

Population Multiplier Sample Size

12 Payroll documents 35% 4 Payroll Documents

W/P Reference: BCS402

Created by : Hassan Fadhel

Date: January, 22nd 201

Signature: H.F

Reviewed by: Salman Ismaeel

Date of revision: January, the

20th, 2014

Signature: S.I

Bahrain Cinema Company (B.C.S)

Payroll Cycle

Year end at 31st December, 2013

Page 42 of 51

Procedure result and comments

Test done by Done by Details Comments

Hassan Fadhel

The auditor, firstly, requests an updated list of payroll personnel in the company with authorization to work on the payroll process (preparing, reviewing and signing).

The author, then, gathered the appropriate sample size of the payroll documentation to run the test on.

The next step is to identify whether the employees who have prepared, reviewed and signed the sample documents still work for the company and whether they have the right authorization to do those activities.

75% of the sample documents tested were properly prepared in accordance with the Segregation of Duty control. The remaining 25% of the sample documents tested were not prepared properly as the Segregation of Duties control was nowhere to be seen, which increases the possibility of fraud.

After running the control test and identifying that the control is not being carried out properly 25% of

the sample, Mr. Hassan Fadhel was requested by Mr. Khaled Kamal to carry out further testing and to

double the sample amount to examine whether to assume that failure risk of the control is high or low

(KKnote1).

Test Done By Details Notes

Hassan Fadhel

The author gathers the second sample of payroll documents to run the test on.

The next step is to identify whether the employees who have prepared, reviewed and signed the sample documents still work for the company and whether they have the right authorization to do those activities.

100% of the sample documents tested were properly prepared in accordance with the Segregation of Duty control.

Conclusion:

Based on the control test performed and shown above, and since the sample chosen was both

reasonable and random, it is safe to say that the objective of this control has been answered: all the

employees with the right authorization to the document exist. The percentage of sample that was not

prepared properly in accordance to this control is seen to be trivial error. Thus, the assertion “Existence”

of Segregation of Duties Internal Control of Payroll Cycle is being done properly.

Review: The result and conclusions of this substantive test was reviewed and discussed with Mr. Khalid

Kamal, the assistance manager. The major comment was to double the value of the sample, which has

been carried by the engagement team member (see: KKnote1)

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5.0 Quality Control The engagement team are construed with the quality controls and their objectives as dictated in ISA 220

in every audit engagement (IAASB, 2009D). The engagement team are tend to assign quality control,

design & carry procedures and policies that will involve complying with the professional standards and

legal requirements besides maintaining the appropriateness of the reports made by the engagement

partner. In addition, the auditors within the engagement teams shall abide with requirements of the ISA

220 to attain the quality aspect of audit and this includes the engagement partner being leader in terms

of maintaining the quality of the audit engagement.

Moreover, the auditors must have the ethical aspects of a good auditor must be throughout their audit

career and the structure of the engagement team should be appropriate as it should include an

engagement partner, manager, assistant manager, supervisor, senior auditor and junior auditors besides

their audit performance of being complying with the professional standards, legal requirements and

maintaining the appropriateness of the audit report. Finally, the engagement partner should

accommodate all the aspects of performance to maintain the good performance in terms of quality, and

this will include the direction & supervision of the engagement partner on the work produced by the

team members besides the review & feedback upon what the audit firm require from its policies. Added

to that, there should be a consultation request where its necessary made by the engagement team, for

example, experts and then, monitoring the audit engagement aspects from the beginning and

documenting all what is required by ISA 220.

In relation to our audit engagement team, first, the team structure have been made and assigned roles

upon what is stated by ISA 220 mentioned above. In addition, the engagement team have created and

complied all procedures and policies in accordance with the professional standards of ISA and legal

requirements. Moreover, the engagement partner have created and revised the reports been made

properly to maintain the accurate information to be provided in them. The engagement team were not

chosen only upon their knowledge only but also upon ethics as the audit firm organize surveys related to

ethics annually to outline the ethical views of their auditors. Furthermore, the team engagement

partner have directed the members to what is being required for this audit engagement besides being

obliged to assign supervisors to go through the seniors & juniors work and performance, then, the work

and performance have being reviewed by the engagement partner to ensure the compliance with the

professional standards and legal requirements.

The engagement partner have stated to the members of being open to any clarifications and even more,

assigning experts to be consulted on necessary aspects that help to come-up the audit evidence. In

addition, the engagement partner have been monitoring all the engagement aspects upon the

monitoring process created by the firm to assure that the engagement is being carried out upon the high

qualified policies and procedures. Moreover, requesting all team members to document every aspect

throughout the engagement period, for instance, working papers have been made for the items and

cycles being audited.

All of these measures have been undertaken by the engagement partner and the team members in

order to maintain the quality control upon producing a good audit report with sufficient appropriate

audit evidence.

Page 44 of 51

In relation to ISA 220 Quality Control, the following is the checklist of which the audit engagement team

follows in reviewing the audit procedures and the audit overall. It is used for example to evaluate the

procedures as documented in the work papers presented.

Review Activities Yes No Ref.

Audit Evidence

1. Is the engagement partner satisfied with the sufficiency and appropriateness of the audit evidence obtained to support the conclusions reached?

Consultation

2. Have the engagement team undertaken sufficient appropriate consultation during the course of engagement?

3. Is the nature, scope and conclusions resulting from the consultation satisfactory?

4. Have the conclusions derived from the consultation been implemented?

Monitoring

5. Have monitoring been performed to assure compliance with policies and procedures?

Review

6. Has the work been performed in accordance with the professional standards and legal requirements?

7. Have significant matter been raised for further consideration?

8. Have there been appropriate consultation in the course of engagement?

9. Have the nature, timing and extent of work performed been revised?

10. Does the work performed support the conclusions reached?

11. Are the audit evidence obtained sufficient and appropriate to support the audit report?

12. Are the objectives of the audit engagement achieved?

Documentation

13. Have the nature, scope and conclusion results from the undertaken consultation been documented?

6.0 Material Misstatement In regard to the issue how the audit report will change when a material misstatement is found, the answer is it will change the opinion stated by the auditor and modify it. The guidelines of modification

Page 45 of 51

are stated in International standards of auditing (ISA) 705: modifications to the opinion in the independent auditor’s report (IAASB, 2009C). Audit opinion is the auditor judgment about the fairness and truthiness of the client’s financial

statements. It is the main of the audit procedures, because all the work that auditors do is to obtain

appropriate and sufficient evidence so they are able to formulate a valid opinion (Porter, Simon, &

Hatherly, 2014B). To answer the question in hand, the different opinion types and the effect of

materiality misstatement must be identified.

Material misstatements are those misstatements that are found in the financial statements in an

account of class of transactions and will affect the economic decisions of the users of the financial

statements (Porter, Simon, & Hatherly, 2014B). Based on the results, the opinion will be determined.

There are two main categories of audit opinion, unmodified and modified. The unmodified audit opinion

is also sub divided into qualified, adverse and disclaimer opinions (Finley, 2014). When auditors carry

out all of their procedures and have a satisfactory conclusion that the statements are free from material

misstatements do not find a material misstatement, then their opinion will be unmodified and will be

expressed by the following similar on what BDO expressed when auditing Bahrain Cinema Company

(Porter, Simon, & Hatherly, 2014B):

“In our opinion, the consolidated financial statements present fairly, in all material respects, the

consolidated financial position of the Group as at 31 December 2013, and its consolidated financial

performance and its consolidated cash flows for the year then ended in accordance with

International Financial Reporting Standards”.

As for the modified opinion, when the auditor is unable to find appropriate and sufficient evidence that

the statements are free from material error and the second case is when the auditor has been able to

obtain appropriate and sufficient evidence that the statements contain material misstatements.

In the first case, if Auditors might not be able to obtain appropriate sufficient evidence may be due to

force majeure such as a fire destroying vital records. It can be due to circumstances related to the

nature/ existence of the audit engagement for example the auditor being unable to test the quality

control and this inability of obtain appropriate and sufficient evidence might due to lamination posed by

the client’ management (Porter, Simon, & Hatherly, 2014B). Whatever the case might be, the auditor

must modify his opinion to state that he is unable to obtain the evidence. This is called, according to ISA

705, a disclaimer. However, the question in hand state that how finding material misstatement will

impact the opinion, thus the question suggest that there is an appropriate and sufficient evidence that

prove the existence of material misstatement. Therefore, the auditor opinion will not be modified to a

“disclaimer”.

If a material misstatement was found which can be due to client poor selection of accounting policies,

the application of said polices and/or inappropriate presentation and disclosures of the financial

statements. In case a material misstatement is found with sufficient evidence, then the auditor will

request the management to adjust for this misstatement (Porter, Simon, & Hatherly, 2014B). If the client

management accepted and the misstatement was addressed or justified properly, then there is no need

to modify the audit opinion. The issue is however, if the management declined to address the material

misstatement, then there is a need for modification.

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ISA 705 further state that it modification does not depend solely on about having sufficient evidence on

a material misstatement where the management did not adjust for it. But also evaluating it to decide

whether it is pervasive or not (Finley, 2014). A pervasive material misstatement an error so impactful

that it will result in the entire misstatement to be consider to not be presented fairly. The pervasiveness

can be determine by considering the proportion of the misstatement of a financial statement itself or

that it effects will spread from an account to another (Porter, Simon, & Hatherly, 2014B). An example of

potential account that can experience a pervasive material misstatement is a huge misstatement in

Bahrain cinema company trade payables and other payables that it will render the entire liability

section, and thus the statement of financial position as whole, will be considered to not be presented

fairly. The determination of the pervasiveness of a misstatement is based on the auditor’s judgment.

The information provided does not state whether the material misstatement is pervasive or not, thus

both cases will be examined, thus the both cases will be examined:

Assuming that an appropriate and sufficient evidence was found on a material misstatement, but

after analysis this misstatement was not pervasive. For example in the non-current assets account:

investment property. And in case the management did not adjust it, then In this case, assuming

that all other aspects are free from material error, the auditor will modify the opinion into a

qualified opinion (Finley, 2014) that can be written as:

“In our opinion, except for the effect on the statement of financial position regarding the

amount included under the account investment property, the consolidated financial position of

the Group as at 31 December 2013, and its consolidated financial performance and its

consolidated cash flows for the year then ended in accordance with International Financial

Reporting Standards”

On the other hand, assuming that there were a pervasive material misstatements with no

adjustment made, then because of the effect of this material misstatement will not allow to

express that the financial statement is presented fairly. Since the audit is to confirm the fairness

and truthiness of all financial statement; then the auditor will have to modify their opinion to an

adverse (Finley, 2014) opinion as:

“In our opinion, the consolidated financial statements of Bahrain Cinema B.S.C do not present

fairly in all material respects in accordance with the International Financial Reporting

Standards”.

Bottom line:

The matter in had only provides the information that the assumption of a material misstatement was found.

Assuming that the auditor has asked the management to adjust this misstatement with proper justification and

they refused. Then, based on the perverseness of the material misstatement the auditor will modify their opinion

into a qualified (if the material misstatement is not pervasive) and will create an adverse audit opinion if the

material misstatement was indeed pervasive. The following table summarize this fact:

Material Misstatement

With sufficient and appropriate evidence? Persuasive? Modification

Yes No Qualified opinion

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Yes Yes Adverse opinion

Page 48 of 51

7.0 References Accounting Coach. (n.d.A). Payroll Accounting: Explanation. Retrieved from

http://www.accountingcoach.com/payroll-accounting/explanation

Accounting Coach. (n.d.B). What is accrued payroll? Retrieved from

http://www.accountingcoach.com/blog/accrued-payroll

Accounting Tools. (n.d.). Payroll Internal Controls. Retrieved from

http://www.accountingtools.com/payroll-internal-controls

Arbutus. (n.d.). CAAT Software. Retrieved from http://www.arbutussoftware.com/CAAT_software.html

Bahrain Cinema. (2014). Bahrain Cinemas 2013 Annual Report. Retrieved from

http://www.bahraincinema.com/reports/2013/Cineco%20AR2013-Eng-EMAIL.pdf

Bahrain Cinema. (n.d.). About Us. Retrieved from http://www.bahraincinema.com/AboutUs.aspx

Blackbaud. (2011). Payroll Processing Guide: Understanding the Payroll Cycle. Retrieved from

https://www.blackbaud.co.uk/files/support/guides/fepy/pyproces.pdf

Central Bank of Bahrain (CBB). (2013). High-Level Controls Module. Retrieved from

http://www.cbb.gov.bh/assets/Consultations/Vol_5_Financing_Companies_HC_2013.pdf

Finley, S. (2014). Matter of opinion. Retrieved from: http://www.accaglobal.com/uk/en/student/acca-

qual-student-journey/qual-resource/acca-qualification/f8/technical-articles/matter-of-opinion.html

Foster, M. (n.d.). University of Washington: School of Business – The Human Resources Management

and Payroll Cycle. Retrieved from

https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&cad=rja&uact=8&sqi=2&ved

=0CEYQFjAH&url=http%3A%2F%2Fstaff.washington.edu%2Flducharm%2FAcc320%2FCN13.pptx&ei=6sq

bVIKcOIWt7AaD8oHYDg&usg=AFQjCNEnlAfIhWnulK1_b-mg8csjONqrfQ&sig2=Qtm7zxk804x-

V03cygKR_Q&bvm=bv.82001339,d.ZWU

IFAC. (2013). International Ethics Standards Board for Accountants: Handbook of the Code of Ethics for

Professional Accountants. Retrieved from

http://www.ifac.org/sites/default/files/publications/files/2013-IESBA-Handbook.pdf

International Auditing and Assurance Standards boards (IAASB). (2009B). International Standard on

Auditing 530: Audit Sampling. Retrieved from http://www.ifac.org/sites/default/files/downloads/a027-

2010-iaasb-handbook-isa-530.pdf

International Auditing and Assurance Standards boards (IAASB). (2010). International Standard on

Auditing 320: Materiality in Planning and Performing an Audit. Retrieved from

https://www.frc.org.uk/Our-Work/Publications/APB/ISA-320-Materiality-in-planning-and-performing-

an.aspx

International Auditing and Assurance Standards boards (IAASB). (2009A). International Standard on

Auditing 300: Planning an Audit of Financial Statements. Retrieved from

http://www.ifac.org/sites/default/files/downloads/a016-2010-iaasb-handbook-isa-300.pdf

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International Auditing and Assurance Standards boards (IAASB). (2009E). International Standard on

Auditing 230: Audit Documentation. Retrieved from

http://www.ifac.org/sites/default/files/downloads/a011-2010-iaasb-handbook-isa-230.pdf

International Auditing and Assurance Standards boards (IAASB). (2009D). International standards of

auditing (ISA) 220: Quality control for an audit of financial statements. Retrieved from

http://www.ifac.org/sites/default/files/downloads/a010-2010-iaasb-handbook-isa-220.pdf

International Auditing and Assurance Standards boards (IAASB). (2009C). International standards of

auditing (ISA) 705: modifications to the opinion in the independent auditor’s report. Retrieved from:

http://www.ifac.org/sites/default/files/downloads/a037-2010-iaasb-handbook-isa-705.pdf

Investcorp. (2013). Investcorp Bank B.S.C.: Corporate Governance Guidelines. Retrieved from

http://www.investcorp.com/lib/docs/045030-

september2011revisedcorporategovernanceguidelines.pdf

Li, A. (n.d.). Impact of Accruals on Cash Flow. Retrieved from http://smallbusiness.chron.com/impact-

accruals-cash-flow-24074.html

PayScale. (2014). Senior Auditor Salary. Retrieved from

http://www.payscale.com/research/US/Job=Senior_Auditor/Salary

Porter, B., Simon, J. & Hatherly, D. (2014A). Principles of External Auditing [Fourth Edition]: Chapter 10: Internal Control and the External Audit Pg399. UK: John Wiley & Sons. Ltd.

Porter, B., Simon, J. & Hatherly, D. (2014B). Principles of External Auditing [Fourth Edition]: Chapter 14:

Audit reports to users of financial statements and management Pg565-Pg580. UK: John Wiley & Sons.

Ltd.

Quizlet. (n.d.). Audit Stockholders’ Equity – Assertions and Programs. Retrieved from

http://quizlet.com/21674056/audit-stockhol-ders-equity-assertions-and-programs-flash-cards/

Salary.com. (2014). Auditing Supervisor – Hourly Wages. Retrieved from

http://www1.salary.com/Auditing-Supervisor-I-hourly-wages.html

Southeast Missouri State University (SEMO). (n.d.). Stockholder’s Equity. Retrieved from

http://www4.semo.edu/gjohnson/notes/auditing%20procedures%20-%20stkholder's%20equity.htm

US Legal. (n.d.). Payroll Cycle Law & Legal Definition. Retrieved from

http://definitions.uslegal.com/p/payroll-cycle/

Market watch.com.(2014). Bahrain Cinema Financial ratio. Retrieved from:

http://www.marketwatch.com/investing/stock/cinema/financials/balance-sheet

WallStreet journal. 2014. CINEMA Financial. Retrieved from:

http://quotes.wsj.com/BH/XBAH/CINEMA/financials

Page 50 of 51

8.0 Appendices.

8.1 Appendix 1: Financial ratio analysis

Source: (MarketWatch.com, 2014), (Wallstreet journal, 2014)

The above table highlights the result of five main financial ratios for the company in two periods; 2012

and 2013. Firstly, with the current ratio, we see a 9% increase in the company ability to cover their

short-term liabilities with their current assets. However, this might not be an accurate evaluation since

calculations were done by counting the inventory (which is illiquid in its self). Thus, the quick ratio was

calculated and also gave about a positive 9% increase. By examining the statements, this was mainly due

to 6 months fixed deposit in Islamic instruments. On the surface, this does not raise any red flags.

Moving on to the receivables turnover, it decreased to 57 and the outstanding days are at 6.4 this is a

good news because the company usually receive the trade receivables payment within 30-90 days.

Nonetheless, a huge change was found in inventory turnover 32% indicating rapid selling of inventories.

This is further proven by the decrease of days of inventory remaining in the company’s position. Usually

a higher turnover and lower holding days are good sign, but this is a huge change to have thus this area

is worth focusing on.

Increase by 2% which is the result of an increasing operating gross income. This is not an abnormal

increase ( but search for the news). As for the net, it increased by 4% which is still within the normal

range

2013 2012 Change

Gross Profit Margin (%) 33.39% 32.79% 2%

Net Profit Margin (%) 36.38% 34.83% 4%

Inventory turnover 47.79052 36.43409 0.311698

days with inventory at hand 7.637498 10.01809 -0.237629

Current Ratio 3.19 2.92 0.092466

Quick Ratio 3.12 2.84 0.098592

Page 51 of 51

8.2 Appendix 2: Trend analysis To understand the performance of the company, it is extremely useful to compare it with the

performance in previous years. The following table shows the movement of the net/ revenue and gross

profit of Bahrain Cinema B.S.C in the period of 2008-2013.

(MarketWatch.com, 2014)

As seen, the company has been experiencing an increase of three elements since 2011 and had the

biggest increase yet in 2013. It is something looking at, but generally speaking, the increase is so far

logical. Albeit there is an increase of about 5 millions in the operating income; it is mostly due to the

company entering a new joint venture with business trading company-Qatar to open an new restaurant

in the state of Qatar. It is also noteworthy that the company level of net profit and gross profit out of

the income revenue is somewhat consistence.