Audit Evidence 1 (Sem 2) Flashcards
- Management Assertions - Revision
What are they?
For example?
Why are they called assertions?
These are attributes or qualities that we expect revenues, costs, assets and liabilities in the financial statements to have. For example, we expect the cash balance to exist.
They are called assertions because those charged with governance have prepared the financial statements and are asserting certain things about them.
Types Of Assertions (3)
- Transactions and events for the period under audit
- Account balances at the period end
- Presentation and disclosure in the financial statements.
Summary of Assertions
Transactions and Event for the Period (Income Statement)
Balances at the Period End (Balance Sheet)
Presentation and Disclosure
Answer the questions below with the assertion used
- Should this transaction be in these accounts?
- Is it shown at the right amount?
- Is everything relevant included?
- Is the disclosure appropriate?
Transactions and Events for the Period (Income Statement)
Should this transaction be in these accounts?
Assertions: Occurrence, Cut-off
- Ensures that recorded transactions actually happened and are recorded in the correct period.
Is it shown at the right amount?
Assertions: Accuracy
- Ensures that transactions are recorded at the correct amounts.
Is everything relevant included?
Assertions: Completeness
- Ensures that all relevant transactions are included in the financial statements.
Is the disclosure appropriate?
Assertions: Classification
- Ensures that transactions are recorded in the correct accounts.
Balances at the Period End (Balance Sheet)
Should this transaction be in these accounts?
Assertions: Existence, Rights and Obligations
- Ensures that assets and liabilities exist and the entity has rights or obligations.
Is it shown at the right amount?
Assertions: Valuation
- Ensures that assets and liabilities are valued correctly.
Is everything relevant included?
Assertions: Completeness
- Ensures that all relevant balances are included in the financial statements.
Is the disclosure appropriate?
Assertions: Rights and Obligations, Allocation
- Ensures that disclosures related to rights and obligations are accurate and properly allocated.
Presentation and Disclosure
Should this transaction be in these accounts?
Assertions: Occurrence, Rights and Obligations
- Ensures that the disclosed events and transactions occurred and pertain to the entity.
Is it shown at the right amount?
Assertions: Accuracy, Valuation
- Ensures that the disclosed information is accurate and properly valued.
Is everything relevant included?
Assertions: Completeness
- Ensures that all necessary disclosures are included in the financial statements.
Is the disclosure appropriate?
Assertions: Classification, Understandability
- Ensures that disclosures are appropriately classified and understandable to users.
- Assertions, Risk And Evidence
Auditors should use…, to…?
How do auditors reduce the risk of assertions being wrong?
Sufficient evidence implies…,but…?
What two words does appropriate evidence mean?
Auditors should:
‘use assertions…in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures.
- To reduce the risk of the assertions being wrong, auditors gather sufficient and appropriate evidence that they are right.
- Sufficient evidence implies quantity, but quality is more important.
- Appropriate evidence means relevant and reliable.
- Sources of Evidence
More reliable (5)
Less reliable (5)
More Reliable:
- Independent evidence like bank statements and invoices
- Internal evidence if controls are effective
- Evidence obtained directly by auditor
- Documents generated externally held by the client
- Original documents
Less Reliable:
- Internal evidence not circulated externally
- Internal evidence if controls ineffective
- Evidence obtained indirectly or by inference
- Oral evidence
- Photocopies or faxes
- Procedures For Gathering Evidence
8 procedures - what assertions does each one address
Inspection of Records or Documents
- Existence/Occurrence (ensures transactions have actually occurred)
- Completeness (ensures all transactions are recorded)
- Accuracy (ensures amounts and other data are correct)
- Classification (ensures transactions are recorded in the correct accounts)
Inspection of Tangible Assets
- Existence (ensures assets physically exist)
- Valuation (ensures assets are recorded at their appropriate values)
- Rights and Obligations (ensures the entity owns the assets)
Observation
- Occurrence (ensures processes or events have happened)
- Completeness (ensures all necessary processes are included)
- Classification (ensures processes are classified correctly)
Enquiry
- Occurrence (ensures events have taken place)
- Completeness (ensures all necessary information is gathered)
- Rights and Obligations (clarifies ownership and responsibilities)
- Understandability (ensures disclosures are clear and understandable)
Confirmation
- Existence/Occurrence (ensures balances and transactions exist)
- Completeness (ensures no omissions)
- Rights and Obligations (ensures the entity’s ownership)
- Valuation (ensures accurate valuation)
Recalculation
- Accuracy (ensures mathematical correctness)
- Valuation (verifies calculations related to valuation)
- Completeness (ensures all relevant calculations are included)
Reperformance
- Accuracy (ensures processes are performed correctly)
- Completeness (ensures all steps in a process are included)
- Classification (verifies that processes are correctly classified)
Analytical Procedures
- Completeness (ensures all relevant transactions are included)
- Valuation (ensures reasonable valuation based on expectations)
- Accuracy (ensures amounts are reasonable based on relationships)
Most substantive tests involve one or more of these procedures.
- Analytical Procedures - Revision
What do analytical procedures involve?
ISA 520?
- Analytical procedures involve evaluating financial information by comparing it with other financial and non-financial information.
- ‘The auditors’ substantive procedures at the assertion level may be derived from tests of details, …. analytical procedures, or from a combination of both.’ (ISA 520).
- Analytical Procedures: Considerations
What must auditors consider? (4)
Auditors must consider:
- Suitability
- Reliability
- Expectation
- Difference
Analytical Procedures: Suitability (2 with examples)
The suitability of analytical review:
- If controls are weak, may not be suitable
Example: If a company’s inventory controls are weak, meaning there are frequent errors or irregularities in inventory counts and records, performing an analytical review on inventory balances may not provide accurate results
- If other tests of detail for same assertion, will give more assurance
Example: If auditors perform detailed tests such as verifying individual sales invoices and receipts for revenue transactions, these tests are likely to give more reliable evidence about the occurrence and accuracy of revenue than an analytical review, which might only compare current revenue levels to previous periods or industry benchmarks.
Analytical Procedures - Reliability (4)
The reliability of the data
- Is source internal or external?
External sources are generally more reliable than internal ones due to their independence from the entity.
- Comparability – is client very specialised?
Specialized clients may have less comparable data, affecting reliability.
- Nature of data – e.g. results to be expected or a goal?
Actual results are more reliable than goal-oriented data.
- Controls – if controls are good, analytical review is more useful
Strong internal controls enhance the reliability of analytical procedures.
Analytical Procedures - Expectation (2 with examples)
Is the expectation sufficiently precise to identify a material misstatement? Depends on:
- the accuracy with which expected results can be predicted
Detail: This involves the ability to forecast expected financial results accurately. High predictability means the results are consistent and deviations can easily be identified.
Example: If a company has a stable expense pattern, predicting future expenses will be more accurate, making it easier to identify discrepancies.
- The degree of detail which can be obtained.
Detail: The level of granularity in the data available. More detailed data allows for more precise and targeted analysis.
Example: Detailed transaction-level data provides more insight compared to aggregated data, enabling auditors to pinpoint specific areas of concern.
Analytical Procedures - Difference (3)
Amount of difference from expected values that is acceptable
- As the risk of material misstatement increases, the difference that can be accepted reduces.
- Unusual items should be investigated, and explanations/corroborating evidence obtained.
- Other audit procedures may be required.
- Analytical Procedures - Advantages (4) vs Disadvantages (6)
Advantages
-
Cost effective way of obtaining evidence
Can reduce/replace other detailed tests - Efficient way to reduce detection risk
-
Tests for under and over statement at same time
Applied at all stages of audit process. Assess absolute amounts & relationships between amounts. -
Wide coverage of business, may add value
Can increase understanding and lead to recommendations and improvements
Disdvantages
- Needs reliable data
Depends on the understanding of the client’s business, understanding of the business environment and their professional judgement - Little use for new/changed businesses
- Need good knowledge of business to form appropriate expectations
- Consistency may conceal material error
- Tends to be performed mechanically
- Needs experienced staff for good results.
