Audit evidence Flashcards
Audit evidence - three types of audit procedures
Risk assessment procedures - assessing the risk of material misstatement
Tests of controls - testing operating effectiveness of controls detecting, preventing and correcting material misstatement
Substantive procedures - procedures to detect material misstatements in account balances and disclosure
Assertions - definition
Assertions = a statement
Financial statement assertions and evidence - Account balances and disclosures
Existence - assets, liabilities and equity. Asset register.
Rights and obligations - rights to assets and liabilities. Legal documents.
Completeness - all assets, liabilities should have been recorded and disclosed. Look at all payments made and received.
Valuation - all assets, liabilities included at an appropriate value. Auditor should be able to confirm costs or a formal valuation document.
Classification - assets, liabilities included in the proper accounts. Use of own knowledge on types of assets.
Presentation - assets, liabilities are appropriately aggregated. Review of financial statements with their professional understanding.
Financial statement assertions and evidence - Class of transaction and events
Occurrence - transactions recorded related to the entity. Relevant invoices / agreements.
Completeness - all transactions that should be recorded have been recorded. Review 3rd part engagements.
Accuracy - amounts and detail are appropriate. Examine invoices.
Cut-off - recorded in the correct accounting period. Match goods dispatch notes with sales invoices.
Classification - transactions recorded in correct accounts. Scrutinise records to ensure correct allocation.
Presentation - transactions are appropriately aggregation. review records to ensure presentation is correct.
Quality and Quantity of audit evidence
Evidence needs to be sufficient and appropriate.
Sufficient = quantity (previous client experience, level of risky areas, material areas, judgement areas)
Appropriate = quality - must be relevant and reliable (analytical procedures, asking a relevant person, documents, observation like an inventory count, mathematical accuracy, 3rd party confirmations, re performance of a key procedure)
Relevant and Reliability of audit evidence
Relevant = relates to assertions made Reliability = Original document, 3rd party evidence, written evidence over oral, obtained directly by auditor
Accounting estimate and examples
Audit procedures
Is an approximation of amount of an item in absence of a precise measurement, examples:
Inventory allowance, Doubtful debt allowances, Useful economic lives of non-current assets, Provision for a loss from a lawsuit, Provision to meet warrant claims.
Review process used by management, have they used appropriate evidence.
Analytical procedure, discuss any variations.
Use independent expert, should consider the same facts as the management.
Review accuracy of prior year estimates to actual results.
Audit procedures - receivables
Agree the total receivables list to nominal ledger and financial statements - ensure that nominal ledger matches financial statements.
Review aged receivables for unpaid amounts - ensure figure is not overstated
‘Circularisation’ Write to a sample of customers to confirm outstanding balance - prove existence, valuation, cut-off and rights
Audit procedures - Prepayments
Schedule of prepayments - reconciled to financial statements
Analytical procedure
Compare schedule to cash book and invoices
Mathematical accuracy
Audit procedures - Inventory
Valued at lower of cost and net realisable value
Cost compared to purchase doc, labour from payroll / hours and overheads from normal activity level (only production)
Net realisable value = estimated selling price, less cost of completion.
Check post year end sales
Audit procedures - Inventory count
Before and During
Before:
Check prior year info for an expected inventory figure
Request a copy of the ‘count instructions’
Review instructions for reasonableness
Staff to count in pairs
Warehouse / shops be shut so no movement of stock
Mark inventory so no double counting
Ask on normal write-down of inventories
During: Ensure instructions are being followed Obtain completed count sheets Perform some test counts Review physical conditions Check state of work in progress
Audit procedures - Payables
List of payables - ensure list is accurate and individual balances are right
Agree total payables nominal ledger to financial statements - ensure payables are recorded correctly
Analytical review - initial indication of accuracy
Request supplier statement and reconcile to ledger - more accurate as from a 3rd party
Sample near year end - ensure cut-off is correct
Audit procedures - Accruals
Schedule of prepayments - check arithmetical accuracy
Sample near year end - for cut-off correctness
Provision
A provision must be recognised when all the following happen:
Present obligation as a result of a past event
More likely than not that an outflow of cash to settle obligation
The amount can be reliably estimated
Audit procedures - Bank and cash
Get confirmation from bank on balances, loan agreements - gives evidence for existence and valuation
Agree balance to TB
Opening balance agree to financials
Agree any unpresented cheques
