8 Intro to audit evidence

Question 1

What is audit evidence?

Answer 1

Audit evidence is all the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.

Question 2

What is the appropriateness and sufficiency of audit evidence?

Answer 2

appropriateness of audit evidence 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 sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.

Question 3

How do you define relevance?

Answer 3

Relevance deals with the logical connection with the purpose of the audit procedure and the assertion under consideration (we look at assertions in the next section). The relevance of information may be affected by the direction of testing

Question 4

Reliability is influenced by the source. What are the generalisations to help in assessing the source

Answer 4

External; Auditor ;Entity ; Written ; Originals

Question 5

QUALITY OF EVIDENCE: Explain External documents

Answer 5

Audit evidence from external sources is more reliable than that obtained from the entity’s records because it is from an independent source.

Question 6

QUALITY OF EVIDENCE: Explain Auditor documents

Answer 6

Evidence obtained directly by auditors is more reliable than that obtained indirectly or by inference.

Question 7

QUALITY OF EVIDENCE: Explain Entity documents

Answer 7

Evidence obtained from the entity’s records is more reliable when the related control system operates effectively.

Question 8

QUALITY OF EVIDENCE: Explain Written documents

Answer 8

Evidence in the form of documents (paper or electronic) or written representations are more reliable than oral representations, since oral representations can be retracted

Question 9

QUALITY OF EVIDENCE: Explain Originals documents

Answer 9

Original documents are more reliable than photocopies or facsimiles, which can easily be altered by the client.

Question 10

How is a management expert?

Answer 10

A management’s expert is an individual or organisation possessing expertise in a field other than auditing or accounting, whose work in that field is used by the entity to assist the entity in preparing the financial statements.

Question 11

What if there are inconsistencies and doubts over the reliability?

Answer 11

If audit evidence from one source is inconsistent with that from another, or the auditor has doubts over the reliability of information, the auditor must determine what modifications or additions to audit procedures are necessary to resolve the issues and must consider the effect on other aspects of the audit

Question 12

What are financial statement assertions?

Answer 12

Financial statement assertions are the representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur.

Question 13

Explain the assertions about classes of transactions and events and related disclosures for the period under audit in occurrence

Answer 13

Transactions and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity.

Question 14

Explain the assertions about classes of transactions and events and related disclosures for the period under audit in Completeness

Answer 14

Completeness: All transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included

Question 15

Explain the assertions about classes of transactions and events and related disclosures for the period under audit in Accuracy

Answer 15

Accuracy: Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described

Question 16

Explain the assertions about classes of transactions and events and related disclosures for the period under audit in Cut-off

Answer 16

Cut-off: Transactions and events have been recorded in the correct reporting period.

Question 17

Explain the assertions about classes of transactions and events and related disclosures for the period under audit in Classification

Answer 17

Classification: Transactions and events have been recorded in the proper accounts.

Question 18

Explain the assertions about classes of transactions and events and related disclosures for the period under audit in Presentation

Answer 18

Presentation: Transactions and events are appropriately aggregated or disaggregated and are clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Question 19

Explain the Assertions about account balances and related disclosures at the period end in existence

Answer 19

Existence: Assets, liabilities and equity interests exist.

Question 20

Explain the Assertions about account balances and related disclosures at the period end in Rights and obligations:

Answer 20

Rights and obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Question 21

Explain the Assertions about account balances and related disclosures at the period end in Completeness:

Answer 21

Completeness All assets, liabilities and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Question 22

Explain the Assertions about account balances and related disclosures at the period end in Accuracy, valuation and allocation:

Answer 22

Accuracy, valuation and allocation: Assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

Question 23

Explain the Assertions about account balances and related disclosures at the period end in Classification:

Answer 23

Classification: Assets, liabilities and equity interests have been recorded in the proper accounts.

Question 24

Explain the Assertions about account balances and related disclosures at the period end in Presentation:

Answer 24

Presentation: Assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Question 25

Audit evidence can be obtained by___

Answer 25

inspection, observation, enquiry and confirmation, recalculation, reperformance and analytical procedures.

Question 26

The auditor obtains audit evidence by undertaking audit procedures to do the following.

Answer 26

• Obtain an understanding of the entity and its environment to assess the risks of material misstatement at the financial statement and assertion levels (risk assessment procedures) • Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level (tests of controls) • Detect material misstatements at the assertion level (substantive procedures)

Question 27

Why are tests of controls and substantive tests carried out?

Answer 27

Tests of controls are necessary to test the controls to support the risk assessment, and also when substantive procedures alone do not provide sufficient appropriate audit evidence. Substantive procedures must always be carried out for material classes of transactions, account balances and disclosures.

Question 28

Define tests of controls and substantive tests

Answer 28

Tests of controls are an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. Substantive procedures are audit procedures designed to detect material misstatements at the assertion level. Substantive procedures comprise: (a) Tests of details (of classes of transactions, account balances, and disclosures); and (b) Substantive analytical procedures

Question 29

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Inspection of tangible assets

Answer 29

Inspection of tangible assets that are recorded in the accounting records confirms existence, but does not necessarily confirm rights and obligations or valuation. Confirmation that assets seen are recorded in accounting records gives evidence of completeness.

Question 30

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Inspection of documentation or records

Answer 30

This is the examination of documents and records, both internal and external, in paper, electronic or other forms. This procedure provides evidence of varying reliability, depending on the nature, source and effectiveness of controls over production (if internal). Inspection can provide evidence of existence (eg a document constituting a financial instrument), but not necessarily about ownership or value.

Question 31

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Observation

Answer 31

This involves watching a procedure or process being performed (for example, post opening). It is of limited use, as it only confirms the procedure took place when the auditor was watching, and because the act of being observed could affect how the procedure or process was performed.

Question 32

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Enquiry

Answer 32

This involves seeking information from client staff or external sources. Strength of evidence depends on the knowledge and integrity of source of information. Enquiry alone does not provide sufficient audit evidence to detect a material misstatement at assertion level, nor is it sufficient to test the operating effectiveness of controls.

Question 33

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Confirmation

Answer 33

This is the process of obtaining a representation of information or of an existing condition directly from a third party eg confirmation from bank of bank balances.

Question 34

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Recalculation

Answer 34

This consists of checking the mathematical accuracy of documents or records and can be performed through the use of IT.

Question 35

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Reperformance

Answer 35

This is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.

Question 36

Auditors obtain evidence by one or more of the following procedures. Explain the procedures for Analytical procedures

Answer 36

Evaluating and comparing financial and/or non-financial data for plausible relationships. Also include the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.