10 Audit Evidence and Substantive Testing Flashcards
Audit Evidence and ST
3 Major Audit Procedures
- Risk Assessment Procedures (RAPs)
I, AP, O, I - Test of Controls
I, I, O, R - Substantive Testing
Audit Evidence and ST
Specific Audit Procedures
RIO CI RIA
Audit Evidence and ST
Audit Evidence must be Persuasive rather than Conclusive
Kasi nga reasonable assurance lang pinoprovide, not absolute. Pag conclusive, absolute at costly and time consuming
Further, that auditor is not satisfied with audit evidence that is less than persuasive.
So what is persuasive?
Convicing
Audit evidence is more persuasive when items of evidence from different sources or of different nature are consistent
Audit Evidence and ST
Corroborating Evidence means?
Example of Direct Evidence
Supporting/Indirect Evidence/Other Information - PO, SO, BOL, etc.
Direct Evidence - GL, SJ, PJ
Audit Evidence and ST
Explain Nature of Assertions
- Financial statements are not statements of facts.
- They are a collection of claims and assertions, made implicitly
or explicitly by the entity’s management, about the recognition, measurement, presentation, and disclosure of information in the financial statements. - Assertions (or management assertions) are representations by management, explicit or otherwise, that are embodied in the financial statements.
- These assertions relate to the fairness of presentation of the financial statements; thus, they are directly related to applicable financial reporting framework.
Audit Evidence and ST
Examples of assertions:
✓ All the assets exist. (Existence).
✓ All sales transactions have been recorded. (Completeness).
✓ Inventories are properly valued (Valuation).
✓ All amounts are properly presented and disclosed in the financial statements. (Accuracy).
Audit Evidence and ST
Audit Evidence
- Audit evidence refers to all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Thus, audit evidence supports the opinion and the auditor’s
report. - Sometimes called as evidential matter, it is the main output/product of performing audit procedures.
- The auditor shall conclude whether sufficient appropriate audit evidence has been obtained based on his professional judgment.
Audit Evidence and ST
Two Nature of Audit Evidence:
Accounting records (Underlying data)
Corroborating evidence
Explain
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Audit Evidence and ST
Two Nature of Audit Evidence:
Accounting records (Underlying data)
- Accounting records (Underlying data) – accounting records/data prepared by the client’s personnel and from which financial statements are prepared.
✓ Records of initial accounting entries.
✓ Supporting records, such as checks and records of electronic fund transfers, invoices and contracts.
✓ General and subsidiary ledgers.
✓ Journal entries and other adjustments to the financial statements that are not reflected in formal journal entries.
✓ Records such as worksheets and spreadsheets supporting cost allocations, computations, reconciliation and
disclosures.
Audit Evidence and ST
Two Nature of Audit Evidence:
Corroborating evidence
Corroborating evidence – corroborating information that are used by the auditor to verify the fairness of the accounting
records.
✓ Documents (such as checks, bank statements, contracts and minutes of meetings).
✓ Information/evidence from other sources such as:
* Previous audits
* Confirmations from third parties
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* Client written representation
✓ Information obtained by the auditor from audit procedures such as inquiry, observation, inspection and computation.
✓ Other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid
reasoning.
Audit Evidence and ST
Types of Audit Evidence:
- Physical evidence – obtained by physical examination of assets.
- Mathematical recomputation – auditor’s recomputation of the
accuracy of client’s computations such as depreciation, amortization, doubtful accounts, etc. - Documentation – examination of the supporting documents of recorded transactions and balances appearing in the financial statements.
- Representation by third parties (or confirmation) – a document originating from independent outside party and sent directly to the auditor.
- Representation by client personnel – statements from client
personnel in response to queries posed by the auditor. - Results of analytical procedures.
- Internal control – existence of effective internal control may be regarded as a strong evidence of the validity of the accounts and amounts found in the financial statements.
- Subsequent events – they provide additional evidence regarding
conditions that already existing on the balance sheet that and affect accounting estimates.
Audit Evidence and ST
Explain 1)Sufficient and 2) Appropriate Audit Evidence
- Sufficiency – the measure of the QUANTITY or amount of audit evidence that the auditor shall accumulate.
✓ Sufficiency is determined based on the auditor’s professional judgment.
✓ Audit evidence is sufficient if there is enough of it to afford a reasonable basis for an audit opinion on the financial statements. - Appropriateness – measures the QUALITY of audit evidence, that is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based.
✓ Relevance – deals with the logical connection with, or bearing upon, the purpose of audit procedures and the
assertion under consideration.
✓ Reliability – objectivity of evidence
▪ Reliability of evidence is influenced by:
-Its source (external or internal) - Its nature (visual, documentary, or oral)
-The circumstances under which it is obtained
-Where relevant, the controls over its
preparation and maintenance
Audit Evidence and ST
- Appropriateness
✓ Relevance
✓ Reliability
Provide Hierarchy of reliability of evidence: (from most reliable to least reliable)
✓ Direct evidence or personal observation and knowledge (such as physical observation).
✓ Externally generated evidence sent directly to the auditor (such as confirmations from banks and customers and bank statements and cutoff bank statements received from banks).
✓ Externally generated evidence kept by the client (such as vendor’s invoices, bank
statements received from the client).
✓ Internally generated evidence circulated
externally (such as sales invoices from sale to customers and paid checks and cost
allocations).
✓ Internally generated evidence not circulated externally (such as purchase requisitions,
customer’s order and cost allocations).
✓ Oral evidence.
Audit Evidence and ST
Explain Persuasive Evidence:
Audit evidence is persuasive if it is sufficient both in quantity and
quality to support audit opinion. Thus, sufficiency and appropriateness of audit evidence are the determinants of
persuasiveness of audit evidence.
The auditor may need to rely
on audit evidence that is persuasive rather than conclusive.
However, to obtain reasonable assurance, the auditor must not be satisfied with audit evidence that is less than persuasive.
Audit Evidence and ST
Information produced by a management expert as audit evidence
- A management expert is an individual or organization possessing expertise in a field other than accounting or auditing,
whose work in that field is used by the entity to assist the entity in preparing the financial statements. - When information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor shall, to the extent necessary, having regard to
o Evaluate the competence, capabilities and objectivity of that expert.
✓ Competence – relates to the nature and level of expertise of the management’s expert.
✓ Capability – relates to the ability of the management’s expert to exercise that competence in the
circumstances.
✓ Objectivity – relates to the possible effects that bias, conflict of interest or the influence of others may have on the professional or business judgment of the
management expert.
