Chapter 03 Audit evidence Flashcards
What is audit evidence?
The information used by the auditor in arriving at the conclusion on which the auditor’s report is based. Evidence must be sufficient and appropriate.
What is meant by sufficient evidence?
Sufficiency is the measure of the quantity of evidence. It is affected by the following factors:
1) Assessed risk of material misstatement.
2) Nature and Complexity of the item.
3) Auditor’s knowledge and experience of the entity.
4) Quality of audit evidence
5) Strength of internal controls of the entity
What is meant by appropriate evidence (1)
It is the measure of the quality of audit evidence. It is affected by the reliability and relevance of the data on which it is based.
Describe the factors that must be considered to determine if audit evidence is relevant.
Relevance deals with the logical connection between assertion and audit procedures.
The following are the factors that must be considered to determine the relevance of audit evidence:
1. Relevance is affected by the direction of testing. In testing overstatement, relevant items should be the amounts recorded in accounts. In testing understatement, relevant items should be supporting documents outside accounting records.
2. Some procedures which are relevant for one assertion may not be relevant for other assertions
Describe the factors that must be considered to determine if audit evidence is reliable.
Reliability depends upon source, timing, and the circumstances under which it is obtained.
For example:
> Internally generated Evidence is more reliable when internal controls are strong
>Evidence is more reliable when it is in its original form than photocopy
>Evidence obtained from independent external sources is more reliable than internal
>Evidence obtained directly by an auditor is more reliable
>Evidence in document form is more reliable than oral
Briefly explain risk assessment procedures to obtain evidence and examples.
Risk Assessment Procedures are auditor’s procedures to obtain an understanding of the entity and its internal control to assess the risk of material misstatement at the financial statement level and at the assertion level.
Examples of Risk Assessment Procedures:
Inquiries of management and others within the entity (e.g. internal audit function). Observation and Inspection (e.g. observation of entity’s operations and inspection of internal audit reports).
AnalyticalProcedures.
Explain Risk at the F/S level and examples.
Risk at the F/S level refers to the risk that affects financial statements pervasively and potentially affects many assertions.
Examples of risks at the financial statement level:
1. Risk of fraud by management.
2. Risk of management override of control.
3. Lack of Competence and Integrity of management.
4. GoingconcernIssues.
How auditor should respond to the risk at F/S level.
1). Increased level of professional skepticism especially during an audit of judgmental areas.
2. Adequate planning, and reduced materiality level.
3. Assigning more experienced and specialized staff e.g. use of experts if necessary.
4. Increased supervision and review of the audit work performed.
5. Incorporating unpredictability in nature, timing, and extent of audit procedures.
7. Making changes to audit procedures.
8. More audit procedures at period end rather than at interim date.
9. Obtaining more reliable audit evidence.
Explain risk at the assertion level and examples.
refers to risk that do not affect financial statements pervasively and affect only specific identifiable assertion.
Examples of risks at the assertion level:
1. Risk that precious and portable asset may not exist.
2. Risk that a liability may not be recorded.
3. Risk that complex transactions (e.g. deferred tax, lease), and non-routine transactions (e.g. purchase or disposal of fixed assets) may not be accurately recorded.
4. Risk that large transactions at year-end may be incorrectlyrecorded.
How auditor response to risk at assertion level.
To address risk at the assertion level, the auditor shall perform the following audit procedures:
Tests of Controls, and SubstantiveProcedures.
Explain test of controls?
The objective of tests of controls is to confirm the operating effectiveness of internal control preventing, detecting, and correcting material misstatements at the assertion level.
Examples of Tests of Controls.
Inspecting approval of transactions.
Inspecting reconciliations. Observing segregationofduties.
Explain substantive procedures?
The objective of Substantive Procedures is to detect material misstatements in financial statements at the assertion level. Examples of Substantive Procedures:- * Analytical Procedures, and Tests of Details.
When tests of controls are required?
> When controls are operating effectively and auditor plans to rely on internal controls for risk assessment.
What are financial Statements assertions?
Assertions are representations by management that are embodied in the financial statements. These are used by auditors to assess different types of misstatement that may occur and to obtainevidence.”
what is directional testing?
Directional testing means testing directly debit items for overstatements and credit items for understatement
