Audit Process: Evidence (17)

Question 1

RECAP:

Which three methods can be used by an auditor to gather evidence (2 before substantive testing)?

Answer 1

1. Understanding the entity - Planning
2. Test of Controls - Systems and Controls
3. Substantive testing of numbers - Substantive Testing and Completion.

Question 2

What is substantive testing?

Answer 2

When the auditor determines the evidence that must be sought in relation to the numbers within the financial statements.

Question 3

What practical problems arise when assessing if the FS give a true and fair view?

Answer 3

The audit objective is extremely wide.

An audit must not only be done but be seen to be done.

Question 4

What are assertions?

Answer 4

Detailed objectives for transactions and balances including related disclosures, which allow the auditor to consider the different types of potential misstatements that may occur.

Question 5

Balance Sheet/ SOFP Assertions - COVECP

Answer 5

C - Completeness
O - Rights and Obligations
V - Accuracy, Valuation and allocation
E - Existence 
C - Classification
P - Presentation

Question 6

Transactions / P&L Assertions - OCCCAP

Answer 6

O - Occurrence
C - Completeness
C - Classification
C - Cut-off
A - Accuracy
P - Presentation

Question 7

Why do auditors use assertions?

Answer 7

1. Provides a clearer definition of specific audit objectives.
2. Provides a clearer demonstration of work done.

Question 8

How do auditors use assertions?

Answer 8

Auditors check that each assertion is achieved for each material figure to decide whether each material balance, transaction and disclosure is correct.

Question 9

Why are assertions required by ISA (UK) 315?

Answer 9

They provide:

1. a means of breaking down the overall wider audit objective.
2. a clearer definition of specific audit objectives.
3. a clearer demonstration of work done.
4. a means of checking each material balance, transaction and disclosure.

Question 10

ISA (UK) 500 states the auditor must obtain sufficient, appropriate evidence. What does sufficiency and appropriateness mean here?

Answer 10

Sufficiency - a measure of the quantity of evidence

Appropriateness - a measure of the quality - relevance and reliability - of evidence

Question 11

What determines the relevance of evidence?

Answer 11

Satisfies one or more of the assertions

Question 12

What determines the reliability of evidence?

Answer 12

Its source and nature

Question 13

What are the three sources of evidence and how reliable are each?

Answer 13

Auditor generated - highest reliability
Client generated - lowest reliability
Third-party generated - variable reliability (depends on independence of party)

Question 14

What are the four natures of evidence?

Answer 14

Natural evidence (or primary)
Created evidence (or secondary)
Rational argument (obtained through logic)
Testimonial evidence

Ranked from highest to lowest reliability.

Question 15

Sufficiency of evidence:

Answer 15

Balance of evidence sufficient to enable auditor to meet assertions including consistence of evidence from different sources

Question 16

Principle of synergy:

Answer 16

when evidence from two independent sources is consistent, assurance > sum of individual parts

Question 17

Principle of diminishing marginal effect:

Answer 17

when evidence is from one single source, further consistent evidence will increase assurance by < sum of individual parts

Question 18

Determining sufficiency

Answer 18

Matter of auditor judgement based on:

level of materiality
assess ROMM
sources and quality of evidence available

Question 19

Audit Data Analytics - reliability

Answer 19

accuracy and completeness of data

sufficiently precise and detailed