4(New). Audit Evidence Flashcards
Many related party transactions are in the normal course of business. However, the nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties. Give few examples of such areas.
Many related party transactions are in the normal course of business. In such circumstances, they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties.
For example
A) Related parties may operate through an extensive and complex range of relationships and structures.
B) Information systems may be ineffective at identifying or summarising transactions and outstanding balances between an entity and its related parties.
C) Related party transactions may not be conducted under normal market terms and conditions; for example, some related party transactions may be conducted with no exchange of consideration.
An auditor is appointed for the first time for audit of accounts of an entity. The accounts of previous year were unaudited. He is unable to obtain sufficient appropriate audit evidence regarding the opening balances. What is his responsibility in this regard?
- If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
2 If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s financial statements, and the effect of the misstatement is not properly accounted for or not adequately presented or disclosed,
the auditor shall express a qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705.
Discuss some of circumstances when work of the internal auditor cannot be used by external auditor.
The external auditor shall not use the work of the internal audit function if the external auditor determines that:
a) The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors;
b) The function lacks sufficient competence; or
c) The function does not apply a systematic and disciplined approach, including quality control.
Discuss what is understood by “appropriateness” of audit evidence.
Appropriateness is the measure of 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.
The reliability of evidence is influenced by its source and nature, and is dependent on the individual circumstances under which it is obtained.
discuss the objective of Auditor with respect to Opening balances in conducting an initial audit engagement.
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether:
a) Opening balances contain misstatements that materially affect the current period’s financial statements; and
b) Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
When using external confirmation procedures, the auditor shall maintain control over external confirmation requests. Explain the points as to when using external confirmation procedures, the auditor would be required to maintain control over external confirmation requests.
When using external confirmation procedures, the auditor shal maintain control over external confirmation requests, including:
a) Determining the information to be confirmed or requested;
b) Selecting the appropriate confirming party;
c) Designing the confirmation requests, including determining that requests are properly addressed and contain return information for responses to be sent directly to the auditor; and
d) Sending the requests, including follow-up requests when applicable, to the confirming party.
Explain clearly the examples of matters relevant in planning attendance at physical inventory counting.
Matters relevant in planning attendance at physical inventory counting include, for example:
a) Whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting.
b) Nature of inventory.
c) Stages of completion of work in progress.
d) The risks of material misstatement related to inventory.
e) The nature of the internal control related to inventory.
f) Whether the entity maintains a perpetual inventory systenm.
g) The locations at which inventory is held, including the materiality of the inventory and the risks of material misstatement at different locations, deciding at which locations attendance is appropriate.
h) The timing of physical inventory counting.
i) Whether the assistance of an auditor’s expert is needed to obtain sufficient appropriate audit evidence.
What is meant by sufficiency of Audit Evidence? Explain the factors affecting the auditor’s judgement as to the sufficiency of audit evidence.
Sufficiency is the measure of the quantity of audit evidence.
Auditor’s judgement as to sufficiency may be affected by the factors such as:
a) Materiality
It may be defined as the significance of classes of transactions, account balances and presentation and disclosures to the users of the financial statements.
Less evidence would be required in case assertions are less material to users of the financial statements. But on the other hand if assertions are more material to the users of the financial statements, more evidence would be required.
b) Risk of material misstatement
It may be defined as the risk that the financial statements are materially misstated prior to audit. This consists of two components described as follows at the assertion level:
Inherent risk - The susceptibility of an assertion to a misstatement that could be material before consideration of any related controls.
Control risk - The risk that a misstatement that could occur in an assertion that could be material will not be prevented or detected and corrected on a timely basis by the entity’s internal control.
Less evidence would be required in case assertions that have a lower risk of material misstatement. But on the other hand, if assertions have a higher risk of material misstatement, more evidence would be required.
c) Size & characteristics of a population
It refers to the number of items included in the population.
Less evidence would be required in case of smaller, more homogeneous population but on the other hand in case of larger, more heterogeneous populations, more evidence would be required.
