Acca aa s21 Notes

The audit approach, in the overview above, then divides:
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Left hand branch. Here, the auditor has reason to expect that there are effective internal 
controls operating. For example, authorisation of transactions, employees checking another's 
work, monthly reconciliations (e.g. of bank and suppliers' statements), etc. If there is good 
internal control the chances of errors getting through into the financial statements are 
significantly reduced. Therefore rather than examine a high volume of transactions and 
balances, auditors tend to test the effectiveness of controls. If satisfactory, the examination of 
the details of transactions and balances themselves can be reduced.
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Right hand branch. If the auditor does not expect there to be effective internal controls, the only 
way to obtain assurance that the financial statements are free from material misstatement will 
be to carry out procedures designed to detect material misstatements ('substantive procedures). 
This will mean examining a higher volume of transactions and balances.
Of course, if the auditor expects to rely on effective controls but then discovers, after testing begins, 
that they are not operating satisfactorily, all audit evidence must be obtained from substantive 
procedures. 
Management will be written to with an outline of why the controls are ineffective or are operating 
unsatisfactorily. Hopefully management will take action so that in the following year the problems are 
less.
Note that the same approach is not necessarily taken to ALL areas of the audit. For example, the 
auditor may plan to rely on controls over purchases (and hence the recording of liabilities also) but 
adopt a substantive approach to revenue (and receivables). 
After all the audit procedures (either the 'combined approach' of tests of controls and substantive 
procedures or 'substantive approach'), there is an overall review of the financial statements. Think of 
this as sitting back and looking at a financial statements as a whole: taken as a whole, do the financial 
statements present fairly, in all material respects, the company's financial position and performance? 
Finally the auditor’s report can be issued.