4 - Process of assurance - evidence and reporting Flashcards
What is the process of testing?
First you assess the IC’s. You need to see if they actually exist and do this through observation and enquiry. Then you check their documents and review them.
If they appear strong then you test the IC’s and whether they are effective or not. Observation - whether invoices are being authorised before being paid and things like that. Inspection - maybe the control leaves a paper trail through things like a sign off or authorisation signature etc. Walkthrough - this is where you get a single transaction and track it all the way through the organisation systems.
Were the IC’s effective or not?
If yes then we do substantive testing. Tests of detail and substantive analytical procedures are carried out. We do these even if controls were ineffective but we change the ratios. If they were effective then we lower the amount of tests of detail we do and increase the amount of SAP’s we do. Remember SAP’s are less intrusive and we can afford to do that due to the IC being so good. This means audit must be low risk which means we can have a higher materiality which means a lower sample size which is easier.
If no then we do much more tests of details which is diving into numbers and tryna prove those numbers with tangible evidence and doing much less SAPS’s. This makes it a high risk audit so we lower materiality which means we increase our sample size.
If your IC’s appear weak you skip those steps and go straight to the bit above
What is the difference between tests of controls and substantive procedures?
Tests of controls: Audit procedures designed to evaluate the operating effectiveness of controls in preventing pr detecting and correcting material misstatements at the assertion level
Substantive procedures: Audit procedures designed to detect material misstatements at the assertion level. They comprise of:
Tests of details and Substantive analytical procedures
What is sufficient and appropriate evidence? ISA 500
Audit evidence requires auditors to obtain sufficient appropriate evidence to be able to draw reasonable conclusions on which to base the auditors opinion.
Sufficient means enough to support the audit opinion - quantity
Appropriate means relevant and reliable - quality
Sufficient, relevant and reliable evidence?
Sufficient has an impact on sample size:
Risk assessment - If high risk then high sample size
Adequacy of control systems - If poor then increase sample size
Materiality of an item - Lower materiality means an increased sample size
Result of audit procedures - If issues found, then increase sample size
Experience from previous audits - If past issues then increase the sample size
Relevant means the evidence being gathered is covering the assertion being testes
Reliable:
External better than internal
Written better than oral
Originals better than copies
Auditor generated better than client generated
What are the evidence gathering procedures? AEIOURC
Analytical procedures - evaluation of financial information by studying possible relationships among financial and non financial data
Enquiry - ask a relevant person for information
Inspection - of a document such as an invoice
Observation - of a process such as an inventory count
recalcUlation - Check the mathematical accuracy of a document
Reperformance - Verification of managements approach by the auditor
Confirmation - relates to evidence from a third party source (outside the company)
What are assertions?
They are the things that stand a risk of being misstated inside the FS.
Assertions for PNL and for SFP accounts
PNL:
CCCAPO:
Classification - Right accounts?
Cut off - Correct accounting period?
Completeness - Is anything missing?
Accuracy - Right amount?
Presentation - Disclosures easy to read and everything adds up?
Occurrence - Did it happen?
SFP:
PERVCC:
Presentation - Easy to read and everything adds up
Existence - Does it exist?
Rights and obligations - Make sure ownership is with the company
Valuation - Use companies act to make sure valued correctly
Completeness - Is anything missing?
Classification - Right accounts?
Types of opinions
Reasonable assurance engagement - statutory audit
Evidence needs to be sufficient and appropriate (higher risk and more intrusive). You need to consider the internal controls, then use AEIOU to confirm the assertions. This will lead to a positive opinions which means the FS show a true and fair view in all material respects.
Limited assurance engagement - Review of company cash flows
Sufficient and appropriate (lower risk and less intrusive). Procedure tends to be limited to analytical procedures and enquiry AE. Leads to negative opinion which means nothing has come to out attention that makes us believe that the FS are misstated
What is an unqualified opinion and what does it consist of?
It is considered unqualified if the FS are true and fairn
The companies act 2006 means a true and fair opinion includes: must be stated
FS have been prepared in accordance to the companies act
FS have been properly prepared in accordance with the relevant financial reporting framework
The information in the directors report is consistent with the FS
Only stated if missing:
Adequate accounting records have been kept
FS in agreement with the accounting records and returns
All info and explanations have been received as the auditors think necessary
Auditors have had access to everything they want
Details of directors benefits etc have been correctly disclosed
What are the contents of an auditors report
Title
Addressee
Auditors opinion
Basis for the opinion
Conclusion relating to going concern - company will last etc
Our approach to the audit, significant matters such as:
Areas of high risk of material misstatement
Areas requiring significant auditor judgment such as estimates
The effects of significant events or transactions that occurred that year.
Then we need to describe how our scope addressed this matter
Our application of materiality and how it was established.
Other stuff being consistent with FS (CSR)
Opinion on others matter required by the companies act. Whether directors and strategic report is consistent with FS
Responsibilities of directors
Responsibilities of auditors
Name of engagement partner
Signature of engagement partner
Auditors address
Date of the report
What is the expectations gap?
The difference between what the auditor does and what is perceived by 3rd parties:
Misunderstanding of the nature of audited FS:
The balance sheet provides a fair valuation of the reporting entity
The amounts in the financial statements are stated precisely
The audited FS will guarantee that the entity will continue to exist
Misunderstanding as to the type and extent of work undertaken by auditors:
All items in FS are tested
Auditors will uncover all errors
Auditors should detect all fraud
Misunderstanding about the level of assurance provided by auditors:
The auditor provides absolute assurance that the figures in the FS are correct
