Audit Procedures For Obtaining Audit Evidence

Question 1

How is audit evidence obtained?

Answer 1

Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing the following procedures:

1. Risk assessment procedures
2. Further audit procedures which consist of:
   2. 1 Test of controls
   2. 2 Substantive testing

Question 2

What are Financial statement assertions? Name them

Answer 2

Financial statement assertions are claims made by an organization’s management regarding its financial statements. They form a theoretical basis from which external auditors develop a set of audit procedures.

The assertions are divided into two categories namely:

1. Assertions about classes of transactions, events, and related disclosures for the period under audit.
2. Assertions about account balances and related disclosures at the period end.

Question 3

List and briefly explain the assertions about classes of transactions, events, and related disclosures during the period under audit..

Answer 3

1. Accuracy = all the information contained within the financial statements has been accurately recorded.
2. Occurance = the recorded/disclosed transactions are recorded within the stipulated period that is under audit and pertain the entity under audit.
3. Completeness = all information that should be disclosed/recorded has been included in the financial statements.
4. Cut-off = transactions have been recorded in the correct accounting period.
5. Classification = transactions and events have been recorded in the correct accounts.
6. Presentation = transaction and events are appropriately aggregated/disaggregated and clearly describe and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Question 4

List and briefly explain assertion about Account balances and related disclosures at the period end or year-end.

Answer 4

1. Existence = assets liabilities and equity interests exist.
2. Completeness = all assets, liabilities, and equity should have been recorded and all related disclosures should be included in the financial statements.
3. Accuracy, validation, and allocation = assets, liabilities have been included in the financial statements at appropriate amounts and any resulting valuation/allocation adjustment has been appropriately recorded and related disclosures have been appropriately measured and described.
4. Rights and obligations = the entity holds/controls the rights to the assets and the liabilities are the obligation of the entity.
5. Classification = assets, liabilities, and equity have been recorded in the correct accounts.
6. Presentation = assets, liabilities, and equity are properly presented in the financial statement in terms of the financial reporting framework.

Question 5

Name and briefly explain the components of the risk assessment procedure.

Answer 5

1. Inspection = involves examining records/documents whether internal/external, in paper form, or electronic/another medium.
2. Observation = consists of looking at the processes/procedures being performed by others for example the staff of the entity.
3. External confirmation = involves obtaining a direct written response from a third party to request/query from the auditor to that third party in paper/electronic/another medium
4. Recalculation = consists of manually/electronically checking the mathematical accuracy of the documents/records.
5. Reperfomance = involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
6. Analytical procedures = involve evaluating the financial information through analysis of plausible relationships among both financial and non-financial information.
7. Inquiry = consists of seeking information both financial and non-financial from knowledgeable individuals within the entity or outside the entity.

Question 6

Name further audit procedures

Answer 6

1. Test of controls

2. Substantive tests

Question 7

Explain Test of controls

Answer 7

Even if the auditor finds that the accounting system and related activities are excellent and operating effectively, he/she must realise that:

• All internal control systems have inherent limitations which make them less than 100% efficient.
• The internal control system may have been operating at the time the auditor performed his/her tests but that doesn’t mean that it did so throughout the year.
• There will still be an inherent risk at both the financial statement level and assertion level to consider
• There is a large amount of information in a set of financial statements, which is not generated through the internal control system and which the auditor will still need to substantiate.

Question 8

Explain what is substantive tests and why they should be performed.

Answer 8

Substantive testing is a further audit procedure that examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of the entity are complete, valid, and accurate.

Question 9

Explain how substantive procedures are performed.

Answer 9

Substantive procedures can be performed on balances and totals themselves or on the individual transactions making up the balance or total and on disclosure. They may be broadly distinguished as tests of detail or analytical procedures.

When conducting tests of detail the auditor carries out procedures on the specific detail of a transaction/ account balance/disclosure.

When conducting the analytical procedures the auditor does not look at the detail of specific transactions/balances/disclosures but rather attempted to evaluate financial information through analysis of plausible relationships among both financial and non-financial data.

Question 10

List evidence that supports the financial statement assertions

Answer 10

Substantive procedures seek to provide evidence to support the financial statement assertions. When the auditor is performing the substantive tests, he/she is interested in the following assertions;

1. Balances - completeness, assistance, valuation, rights and obligations, presentation, and disclosure.
2. Transactions - Completeness (totals), occurrences, accuracy, cut-off, classification and presentation and disclosure
3. Disclosures - occurrence, rights and obligation, completeness, classification and understandability accuracy, and valuation.

Question 11

What is meant by verifying and vouching?

Answer 11

Verifying and vouching are terms commonly used by auditors. Vouching relates to the audit transaction and verifying relates to balances. Both terms signify a collection of different substantive procedures.