4: Process of assurance - Evidence and reporting Flashcards
Define audit evidence
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based
What are the two types of tests carried out?
- Test of controls: Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting materia misstatements at the assertion level.
- Substansive procedures: Designed to detect material misstatements at assertion level - detailed approach. Broken into 2:
- Test of details (of classes of transactions, account balances)
- Substasive analytical procedures
How does the strength of controls effect the level of substansive testing?
Strong controls: auditor can reduce the level of substansive testing and place greater reliance on internal controls. TOC + small level of SP
Weak controls: there is greater chance of fraud and error therefore more detailed substansive testing will be required.
Do substansive tests have to be performed if there are strong controls?
Yes, have to be performed on all audits. It is just the level of substansive testing that changes. Never appropriate to just do TOC
What must audit evidence be? Explain
-Sufficient - Enough evidence to support audit opinion (volume/quantity)
-Appropriate - relevant and reliable (Type of evidence/quality)
What is sufficient evidence impacted by
-Risk assessment
-Control systems (TOC/SP)
-Materiality of an item
-Results of audit procedures
-Experience from previous audit
Explain what makes info relevant and reliable
Relevant - evidence gathered must cover the assertion being tested
Reliable - External is better thaan internal, by a third party e.g. a bank.
- Written better than oral
- Originals better than copies (can be altered)
-Auditor generated better than client generated (could be biased/altered)
What are the evidence gathering procedures?
AEIOU
Analytical procedures - evaluation of financial info by studying possible relationships among financial and non-financial data.
Enquiry - ask a relevant person for info
Inspection - of a document e.g. invoice
Observation - of a process such as an inventory count
recalcUlation - Check mathmatical accuracy of a doc e.g. bank rec
2 extra
Reperformance - verificaition managements approach by auditor e.g. repeating an activity already done
Confirmation - relates to evidence from a third party source
What are the assertions about classes of transactions, events and disclosures, used by the auditor? P/L
COCCOA
-Completeness: all transactions, events and disclosures that should be recorded are recorded.
-Occurence: transactions and events that have been recorded /disclosed have occured and pertain to the entity
-Classification: t&e recorded in the proper/correct accounts
-Cut-Off: t&e recorded in correct accounting period
-Accuracy: t&e recorded appropriatley and disclosures accurately described
What are the assertions about account balances and related disclosures? SOFP
CCOVE
Classification: assets, liabilities, and equity interests have been recorded in the proper accounts.
Completeness: all assets, liabilities and equity interests that should have been recorded have been recorded and disclosures included.
Obligations and rights: the entity holds or controls the rights to assets and liabilities are the the obligations of the entity.
Valuation, accuracy and allocation: assets, liabilities and equity interests and any related disclosures included in financial statements at appropriate amounts.
Existence: assets, liabilities and equity interests exist.
Presentation: assets, liabilities, and equity interests are appropriately aggregated and disaggregated. Disclosures understandable and in line with IFRS requirements.
What does it explicitly mean for the auditors to state in their opinion that the annual accounts give a true and fair view?
- Financial statements properly prepared in accordance with the companies act, the relevant financial reporting framework and consistent with the directors report.
What must be explicitly stated in the audit report?
- Financial statements have been properly prepared in accordance with the Companies Act
- Financial statements have been properly prepared in accordance with the relevant financial reporting framework
- The information in the directors’ report is consistent with the financial statements
What are reported by exception in the audit report
- Adequate accounting records have been kept.
- Returns adequate for the audit have been received from branches not visited.
- The financial statements are in agreement with the accounting records and returns.
- All information and explanations have been received as the auditors think necessary
- Auditors have had access at all times to the company’s books, accounts and vouchers.
- Details of directors’ emoluments and other benefits have been correctly disclosed in the financial statements.
These are only reported by exception, if above have not been met)
What is the layout of the audit report
- Title
- Adressee
- Auditors opinion and basis for this
- conclusions related to going concern
- Approach to audit (Key audit matters i.e. areas of high risk, significant events, judgements) and how the scope addressed each key matter.
- Materiality, other info and opinion on other matters
- Responsibility of directors/auditors
- Names, signature, date
What is the expectations gap explained?
The difference between what the auidtor does and what’s percieved by 3rd parties e.g.
- Misunderstanding of nature of financial statements
- Miunderstanding as to type and extent of work undertaken by auditors
- Misunderstanding about the level of assurance provided by auditors
