Audit Evidence & Testing

Question 1

Assertations

Answer 1

1. Assertions are used for transactions, balances and disclosures to see if sufficient evidence relating to them has been collected
2. Help assess risk
3. Help auditor consider potential misstatements and so design audit procedures for those particular risks

Question 2

Classes of transactions and events, and related disclosures for the period- assertions (IMPORTANT)

Answer 2

1. Occurrence
2. Completeness
3. Accuracy
4. Cut off (correct accounting period)
5. Classification
6. Presentation

Question 3

Account balances and related disclosures at the period end - assertions (IMPORTANT)

Answer 3

1. Existence
2. Rights and obligations
3. Completeness
4. Accuracy, valuation and allocation
5. Classification
6. Presentation

Question 4

Sources of audit evidence

Answer 4

1. Test of control
2. Substantial procedure
   -> test of detail
   -> analytical procedure

Question 5

Test of control procedures

Answer 5

1. Auditor asses each of the areas to identify riskier areas
2. Then undertake tests of control to establish whether they can place reliance on them
3. Test the systems in place by determining whether the controls over it are effective in preventing or detecting and correcting material misstatements
4. 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

Question 6

Substantive procedures

Answer 6

1. Process that created conclusive evidence regarding the assertions of transactions and balances in the financial statements
2. Enough documentation must be collected so that another competent auditor could conduct the same procedure on the same documents and make the same conclusion
3. Analytical procedures provides less reliable evidence than the tests of detail
4. Tests of detail verify individual transactions and balances

Question 7

Procedures to obtain evidence (IMPORTANT)

Answer 7

1. Analytical procedures
2. Enquiry and confirmation
3. Inspection (documents and physical assts)
4. Observation
5. Recalculation and re performance

Question 8

Sufficient appropriate audit evidence

Answer 8

1. External = more reliable than internal
2. Auditor direct obtained = more reliable if directly sourced by auditor
3. Entity = more reliable when related internal control system operates effectively
4. Written = more reliable than oral representations
5. Original = more reliable than photocopies

Question 9

Ranking of evidence

Answer 9

1. Internal oral
2. External oral
3. Internal written
4. External written
   -> worst to best

Question 10

Directional testing

Answer 10

1. Item in financial statement being tested there are two possibilities.
   -fairly stated
   -misstated
2. If misstated can be
   -overstated
   -understated

Question 11

Overstatements

Answer 11

Auditor should start with the figures given and follow the audit trail until coming to the supporting document
-> test debts

Question 12

Understatements

Answer 12

Auditor will have to select from a population which will give the change of selecting omitted items (reciprocal population).
-> test credits

Question 13

Auditor will carry out several procedures on an area of accounting estimate

Answer 13

1. Test the process that management used to calculate the estimate and the data on which it is based and decide whether it is appropriate
2. Use the work of an expert to ascertain whether an estimate is accurate
3. Check that any items accrued for do occur after the balance sheet date
4. 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

Question 14

Substantive audit procedure

Answer 14

Every procedure must state
1. Assertion level
2. Audit procedure
3. Reason for the procedure (relate to risk of material misstatement)

Question 15

Selecting items for testing

Answer 15

1. Select all items to test (small population- cost and time)
2. Selecting specific items for testing
   -high value items
   -all items over certain amount
3. Sampling

Question 16

Sampling

Answer 16

1. IAS (UK) 530
2. All sampling units should have chance of selection
3. Gives evidence which helps from a conclusion for the entire population
4. Statistical or non statistical approach
5. Material items must be tested

Question 17

Statistical sampling

Answer 17

1. Random selection = uses random number generator or table and ensures each it’s, in a population has an equal chance of selection
2. Systematic selection = constant sampling interval is used (every 50th)
3. 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

Question 18

Non statistical selection

Answer 18

1. Hazard selection = the auditor selects the sample without following a structured technique (avoid bias or predictability)
2. Sequence or block selection = selecting continuous blocks of items from within a population
   -judgement sampling

Question 19

Drawing conclusions from sampling

Answer 19

1. Consider whether items in question are true misstatements
2. Consider any effects the misstatements might have on other parts of the audit
3. Common features discovered, auditor may decide to identify all items in the population that possess the common feature
4. Misstatement an anomaly and nit representative of the population
   -> extrapolation
   -> nature and cause of misstatement

Question 20

Smaller entities

Answer 20

1. Lower risk assessments
2. Under direct control of owner managers
3. Simple systems

Problems
1. Possibility of management override
2. Lack of segregation of duties

Question 21

Using CAATS

Answer 21

-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

Question 22

Audit software

Answer 22

• 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

Question 23

Test data

Answer 23

-> 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

Question 24

Data analytics or audit data analytics

Answer 24

-> 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

Question 25

Auditing round the computer

Answer 25

1. Auditor doesn’t know how computer works but checks the inputs generates the expected output from the system
2. Increases audit risk as the auditor cannot tell with certainty whether the internal processes of the system are working correctly
3. Difficult to determine why errors occur
4. Fixing may need external expert

Question 26

Advantages of CAAT

Answer 26

1. Enables auditor to test more items more quickly
2. Able to test system rather than printouts
3. Results can be compared with other tests to increase audit confidence
4. Audit tests can be performed more cost effectively

Question 27

Disadvantages

Answer 27

1. CAATs can be expensive and time consuming to set up
2. Client permission and cooperation may be difficult to obtain
3. Potential incompatibility with the clients computer system
4. Audit team may not have the knowledge or training needed to understand the results of
5. Data may be corrupted or lost during application of CAATs

Question 28

PROCEDURES

Answer 28

GO THROUGH IN WORKBOOK WEEK 8