Audit Evidence & Testing Flashcards
Assertations
- Assertions are used for transactions, balances and disclosures to see if sufficient evidence relating to them has been collected
- Help assess risk
- Help auditor consider potential misstatements and so design audit procedures for those particular risks
Classes of transactions and events, and related disclosures for the period- assertions (IMPORTANT)
- Occurrence
- Completeness
- Accuracy
- Cut off (correct accounting period)
- Classification
- Presentation
Account balances and related disclosures at the period end - assertions (IMPORTANT)
- Existence
- Rights and obligations
- Completeness
- Accuracy, valuation and allocation
- Classification
- Presentation
Sources of audit evidence
- Test of control
- Substantial procedure
-> test of detail
-> analytical procedure
Test of control procedures
- Auditor asses each of the areas to identify riskier areas
- Then undertake tests of control to establish whether they can place reliance on them
- Test the systems in place by determining whether the controls over it are effective in preventing or detecting and correcting material misstatements
- Stronger the control system, the lower the control risk. This reduces the risk of material misstatement in financial statements and auditor is able to place reliance on the information generated by that particular system
Substantive procedures
- Process that created conclusive evidence regarding the assertions of transactions and balances in the financial statements
- Enough documentation must be collected so that another competent auditor could conduct the same procedure on the same documents and make the same conclusion
- Analytical procedures provides less reliable evidence than the tests of detail
- Tests of detail verify individual transactions and balances
Procedures to obtain evidence (IMPORTANT)
- Analytical procedures
- Enquiry and confirmation
- Inspection (documents and physical assts)
- Observation
- Recalculation and re performance
Sufficient appropriate audit evidence
- External = more reliable than internal
- Auditor direct obtained = more reliable if directly sourced by auditor
- Entity = more reliable when related internal control system operates effectively
- Written = more reliable than oral representations
- Original = more reliable than photocopies
Ranking of evidence
- Internal oral
- External oral
- Internal written
- External written
-> worst to best
Directional testing
- Item in financial statement being tested there are two possibilities.
-fairly stated
-misstated - If misstated can be
-overstated
-understated
Overstatements
Auditor should start with the figures given and follow the audit trail until coming to the supporting document
-> test debts
Understatements
Auditor will have to select from a population which will give the change of selecting omitted items (reciprocal population).
-> test credits
Auditor will carry out several procedures on an area of accounting estimate
- Test the process that management used to calculate the estimate and the data on which it is based and decide whether it is appropriate
- Use the work of an expert to ascertain whether an estimate is accurate
- Check that any items accrued for do occur after the balance sheet date
- Discuss any points of concern with management to see why they included the item at the amount they did
-> check reasonableness of the figure and reach a conclusion on if fairly stated
Substantive audit procedure
Every procedure must state
1. Assertion level
2. Audit procedure
3. Reason for the procedure (relate to risk of material misstatement)
Selecting items for testing
- Select all items to test (small population- cost and time)
- Selecting specific items for testing
-high value items
-all items over certain amount - Sampling
Sampling
- IAS (UK) 530
- All sampling units should have chance of selection
- Gives evidence which helps from a conclusion for the entire population
- Statistical or non statistical approach
- Material items must be tested
Statistical sampling
- Random selection = uses random number generator or table and ensures each it’s, in a population has an equal chance of selection
- Systematic selection = constant sampling interval is used (every 50th)
- Monetary unit sampling = select items based on monetary values (higher values)
-extrapolate the error (half sample size wrong then half population wrong)
-sample must be sufficiently large to represent population
-auditor can increase sample size if errors are discovered
Non statistical selection
- Hazard selection = the auditor selects the sample without following a structured technique (avoid bias or predictability)
- Sequence or block selection = selecting continuous blocks of items from within a population
-judgement sampling
Drawing conclusions from sampling
- Consider whether items in question are true misstatements
- Consider any effects the misstatements might have on other parts of the audit
- Common features discovered, auditor may decide to identify all items in the population that possess the common feature
- Misstatement an anomaly and nit representative of the population
-> extrapolation
-> nature and cause of misstatement
Smaller entities
- Lower risk assessments
- Under direct control of owner managers
- Simple systems
Problems
1. Possibility of management override
2. Lack of segregation of duties
Using CAATS
-computer assisted audit techniques
1. Audit software = examine client data
2. Test data = test client program
3. Data analytics = examine raw data to draw conclusions
Audit software
- used to run client data to check for errors
- large volumes of data
- do the following
1. Select a sample using different sampling techniques
2. Re perform calculations
3. Automate the confirmation letter process
4. Produce reports
5. Follow transactions
Test data
-> putting dummy transaction through the system to ensure that controls are working and they calculations are performed correctly
-> auditor should predict what the clients program should do and compare with what it actually does
Data analytics or audit data analytics
-> discovering and analysing patterns, deviations and inconsistencies and extracting other useful info
-> generate intuitive visitations of very complete data which they can use in their analysis to spot trends that might otherwise have been missed
Auditing round the computer
- Auditor doesn’t know how computer works but checks the inputs generates the expected output from the system
- Increases audit risk as the auditor cannot tell with certainty whether the internal processes of the system are working correctly
- Difficult to determine why errors occur
- Fixing may need external expert
Advantages of CAAT
- Enables auditor to test more items more quickly
- Able to test system rather than printouts
- Results can be compared with other tests to increase audit confidence
- Audit tests can be performed more cost effectively
Disadvantages
- CAATs can be expensive and time consuming to set up
- Client permission and cooperation may be difficult to obtain
- Potential incompatibility with the clients computer system
- Audit team may not have the knowledge or training needed to understand the results of
- Data may be corrupted or lost during application of CAATs
PROCEDURES
GO THROUGH IN WORKBOOK WEEK 8
