5 Audit Evidence and Working Papers Flashcards
What must an audit opinion be based on
Evidence, or it is a guess which would be negligent
What would happen if there is a lack of evidence
Would be a qualified audit opinion
What does ISA 500 “Audit Evidence” call for
Sufficient and appropriate evidence should be obtained to draw reasonable conclusions to base the audit opinion
What is ISA 200 “Objective and General Principles Governing an Audit of Financial Statements”
The general principles that govern auditing, similar to conceptual framework
What is audit risk
The risk that the auditor expresses an inappropriate audit opinion
What is business risk
The risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.
What is a scope restriction
When there is insufficient or inappropriate evidence to form an opinion
Must be disclosed
Such as directors withholding information
What is sufficiency
This is for the auditors to apply their own judgement
What is materiality and risk
The relative size of the company, its inherent complexity and likelihood that there might be misstatement
What are economic factors when considering the collection of audit evidence
Audit firms are there to make money and their biggest costs are labour
Would look at cost/benefit of investing more man hours to the additional quality of the report
Does often lead to junior staff not reporting overtime so they appear to be more productive and secure promotions
What are population size and characteristics when considering the collection of audit evidence
The sample size to gain confidence over the whole population
Can’t review every transaction so often audit based on systems
Evaluate the system and if that works with a small sample it should be good for the whole population
What is Relevance and Reliability when considering the collection of audit evidence
All information must be specific to the auditors’ objectives
Must be telling the auditor something about if the accounting show a true and fair view
Anything else is waste
What are the five characteristics of relevant information
- Existence or occurrence
- Completeness
- Rights and obligation
- Valuation or measurements
- Presentation or disclosure
What is existence or occurrence
Have to make sure that all assets exist, and all transactions took place within the year and not the prior or following
Existence relates to items on SFP (snapshot in time) and occurrence relates to the P&L leading up to that snapshot
What is completness
Nothing is missing, overstated or duplicated
Not just what is inside the audited entity but also third party inputs
What is rights and obligations
Make sure that all assets and liabilities meet the recognition criteria as set out in the Conceptual Framework
What is valuation or measurements
Assets, liabilities, equity, revenues and expenses are recorded at an appropriate amount
Also that processes are mathematically accurate and in alignment with the supporting schedules
Most popular one to manipulate the numbers
What is presentation or disclosure
Must all be shown in a clear and understandable way
Various components must be properly classified, described and disclosed
What is reliability
Reliability of audit evidence depends mainly on its nature, source and objectivity
What is the most reliable source of evidence
External evidence
What makes internal evidence more reliable
Strong internal controls
Which is more reliable: Evidence generated by the client or audit firm
Audit firm
What are the two main types of evidence
Direct
Corroborative
What is direct evidence
Direct audit evidence is from underlying accounting data
Given too the auditor by the client
Why is it not the best to solley rely on direct evidence
Relying on this is limited as relying on management to provide true facts
An audit based only on this has little value as you are just trusting what management is telling you
What is corroborative evidence
All evidence that corroborates the direct evidence given by the client
Can be generated inside the company and corroborated outside
What is the purpose of corroborative evidence
To confirm direct evidence
What is documentary evidence
It is a form of corroborative evidence such as:
Orders, invoices, receipts, goods received noted (GRN’s), despatch notes, supplier statements, bank statements, cheques, board minutes, legal documents, correspondence
What are confirmations
It is a form of corroborative evidence
When an auditor specifically writes to a third party to confirm something
This must be done with the clients permissions
The people are not required to reply
How can you get confirmations if the party does not reply
By checking if they pay the outstanding balance
What are the main types of audit procedure
Inspecting documents
Analytical procedures
Confirming
Inquiring
Physical examination and/or counting
Observing
Reperforming
CAATs
What is inspecting documents
Includes all work where the auditor obtains evidence by reading the words and/or numbers, calculations, signatures etc., on any document (whether direct or corroborative).
What are analytical procedures
All computations and analyses performed by the auditor
This includes ratio analyses and analytical reviews.
What is confirming
Where the auditor writes to an independent person (e.g. a bank or a debtor) asking them to confirm (corroborate) direct audit information obtained from the client
This is known as a ‘confirmation letter’.
What is inquiring
Includes all questions asked of client staff
Where important, conversational (oral) evidence MUST be supported in some permanent form, e.g. a signed documentary record or minutes of a meeting
What is physical examination
Where the auditor physically examines and /or counts anything, e.g. inventory items during stock-taking observations
Long term asset inspections and counts
If needs to be valued a professional valuer should be brought in
What is reperforming
Where the auditor re-performs anything already done by the client, such as calculations
What are CAATs
Normally, this work is performed by specialists employed with the audit firm’s computer audit section. CAAT’s are beyond the scope of the syllabus. However CAAT’s fall mainly within 2 types:
* Parallel Simulation
* Test Data
What is parallel simulation
The auditor processes REAL batches of client data, (e.g. sales data, inventory records), through the audit firm’s computer.
The auditor’s output files should match the client’s files
What is test data
The auditor processes his/her own batches of ‘test data’ through the client’s computer (usually during a week-end).
What is the importance of sampling
Must collect enough data to form a representative view on the company
What is the relationship between risk and required evidence
When the risks inherent with the organisation increase the need for evidence increases
What is observing
Where the auditor observes the client staff performing a procedure, such as stock-taking
What is enhancing evidence
External information is generally more trusted than that provided by management
Evidence is enhanced when there is clear evidence of strong internal controls
What are working papers
Include all paperwork and electronic documentation and other records generated by the auditors
All of the tests, evidence, results and conclusions must be thoroughly documented by the auditor as these documents comprise the evidence that leads to their opinion
An audit not based on evidence is a negligent guess
What are compliance tests
Test accounting systems are working
Make sure what is meant to happen is complied with
What are substantive tests
Tests to substantiate the final numbers
Mostly done after year end as needs to be consolidated
What is the importance of staff performance reviews
Included in working papers and is an important part of accountability
Senior reviews junior, manager reviews senior and partner reviews manger
What is the overall audit process
All process documentation that the partner and manager create that leads to the audit opinion should be included
This is in case they have to defend their audit opinion in court as it will be used as key evidence
It should explain all evidence for the years audit
What is the importance of confidentiality
All papers are the property of the audit firm
Even information they have collected on the client
Firms are very protective of this information and is held very securely
What is the current file
Contains all of the audit programme and all evidence and documentation relevant to the current year
Also carries last years file for reference
What is the permanent file
Contains all evidence of ongoing relevance for reference purposes
Thorough documentation on company’s activities, practices and polices
Everything a new member of staff would need to fully understand the company
Prevents auditor annoying the company by asking the same questions about their activities every year
What is the nature of working papers
To create records of:
* Procedures applied
* Tests performed
* Information obtained
* Conclusions reached
So that anyone can fully understand the audit by just looking at the papers
What is the purpose of working papers
- Principle support for the audit papers
- Evidence that the audit complied with ISA’s
- Means for supervising and reviewing the audit
What are the types of working papers
Schedules and analysis for every section of the audit
Audit memoranda and corroborating information
Including external corroborating evidence
Working trial balance and adjustments
