Chapter 4 Process of assurance: evidence and reporting

Question 1

1.1 Obtaining evidence

Answer 1

ISA 500 requires auditors to obtain support appropriate audit evidence to draw conclusions. Evidence must be sufficient and appropriate. Under appropriate it must be reliable (the source and format) and relevant (proves our financial statement assertions).

Question 2

1.2 ISA 315 Financial statement assertions

Answer 2

Assertions about classes of transactions and events and related disclosures for the period under audit include:
- Occurrence: transactions recovered have occurred and pertain to the entity
- Completeness – all transactions have been recorded
- Accuracy – amount recorded appropriately
- Cut-off: transactions recorded in correct accounting period
- Classification: transactions recorded in the proper accounts
- Presentation: transactions and events are appropriately aggregated, clearly described and are relevant and understandable
Assertions about account balances, and related disclosures, at the period end include:
- Existence: assets, liabilities and equity interest exist
- Rights and obligations: entity owns the assets and liabilities
- Completeness: all assets, liabilities and equity have been recorded
- Accuracy, valuation, and allocation: all included at the appropriate amounts
- Classification: recorded in the proper accounts
- Presentation: clearly described, and related disclosures are relevant and understandable

Question 3

1.3 Audit approach

Answer 3

Tests of control
- Test the system that gets the numbers into the accounts
- Procedures including enquiry, observation and reperformance and data analysis may assist the auditor in this work
- Appropriate if control risk is low
- The auditor cannot just carry out tests of control due to limitations
Substantive testing
- Test the numbers in the accounts
- Procedures include analytical procedures and tests of detail
- Must always carry out substantive procedures on material items

Question 4

2.1 Evaluate results

Answer 4

The auditor should consider whether the evidence gathered meets the basic rules.
- Relevant: should be audit evidence to support all of the financial statement assertions
- Reliable: auditor should consider whether any matters have come to light that cast doubt on the reliability of evidence. For example, doubts over management integrity and discrepancies between sources of evidence
- Sufficient: if evidence gathered is not sufficient, the auditor should attempt to find further evidence or consider the implication for the audit opinion.

Question 5

3.1 Concluding and reporting audit opinions

Answer 5

The auditors’ report contains express opinions (always stated) and implied opinions (only required is a material problem arises). Express opinions on the financial statements show they are true and fair and are prepared in accordance with CA 2006 and accounting standards. The information contained in the directors’ report and strategic report.
Implied opinions are reported by exception under CA 2006 if any of the following matters arise:
- Returns adequate for our audit have not been received from branches not visited by us
- Accounts not in agreement with underlying accounting records
- Proper accounting records not been kept
- Information and explanations required for the audit were not received
- Directors remuneration disclosures required by law were not made

Question 6

3.2 The format of an auditors’ report

Answer 6

ISA 700 states the following are included in the auditors’ report: title, addressee, auditor’s opinion of the accounts, basis for opinion, going concern section, key audit matters, other information, management responsibilities, auditor responsibilities, explanation of the extent to which the audit was capable of detecting irregularities including fraud, opinion on other matters, matters on which the auditor is required to report on by exception under CA 2006, name and signature of the engagement partner, auditor’s address and the date of the report.
If the accounts show a true and fair view the auditor’s report will be unmodified, they use the standard wording of the ISA 700 auditor’s report. If they conclude the accounts are misstated or there is insufficient evidence, it will be modified.

Question 7

3.3 Entities applying the UK corporate governance code

Answer 7

Companies applying the UK corporate governance code have additional explanations of the audit process. These explanations are required in the audit report under the three headings:
- Assessment of risks of material misstatement
- Application of materiality
- Overview of scope of the audit
This aims to reduce the expectations gap.

Question 8

3.4 Other reports

Answer 8

Non-audit assurance engagements are covered by international standards on assurance engagements (ISAEs) and the International standards on review engagements (ISREs). Reports are address to the users of the assurance material and are similar to ISA 700 auditor’s reports. The format is:
- Title and Addressee
- Identification and description of subject matter
- Identification of criteria
- Any inherent limitations which exist
- Any restrictions upon purpose/user
- Statement identifying responsible party
- Work performed in accordance with [relevant Standards]
- Summary of work performed
- Conclusion
- Date
- Name of firm/practitioner