evidence

Question 1

what are the assertions contained in FS about transactions and events?

Answer 1

C-completeness, all transactions and events that shud have been recorded are recorded, and related disclosures that shud have been included are included
O-occurrence, the transactions and events occurred and pertain to entity
C-classification, all transactions and events are classified correctly in the proper accounts
C- cut off, TE are recorded in the correct accounting period
A- accuracy, amounts are recorded appropriately and related disclosures are appropriatly measured.

Question 2

what are the assertions contained in FS about yr end balances?

Answer 2

C- COMPLETENESS (ALL ALC THAT SHUD HAVE BEEN RECORDED ARE RECORDED, DISCLOSURES ALSO MADE)
E- EXISTENCE (ALC EXIST)
R- RIGHTS AND OBLIGATIONS- ENTITY CONTROLS THE ASSETS, AND LIABILITIES ARE OBLIGATIONS
V- VALUATION- ALC are included at appropriate amounts , adjustments are appt recorded disclosures r measured aptly and described.
PRESENTATION: All events/ transactions and assets/liabilities are appropriately aggregated or disaggregated, clearly described and all related disclosures are relevant and understandable

Question 3

DESCRIBE AUDIT PROCEDURES TO OBTAIN EVIDECE:

Answer 3

ANALYTICAL PROCEDURES: comparasions trends etc for plausible relationships btw both financial and non financial data. these can also be used as a substantive procedure

ENQUIRY - seek info from client or externally

EXTERNAL CONFIRMATION-from another source of details in the client’s accounting records, eg. bank and lawyer confirmation

INSPECTION -
of assets: confirms existence and valuation, not rights and obligations. confirming that all assets r recorded ensures completeness.

inspection of documents: confirm to accounting records, to ensure asset exists or transaction occured. confirming that document items are recorded in FS ensures completeness

verify cutoff by inspecting reverse population: eg. check transactions recorded after reporting period to document, to ensure they occured after reporting period.
inspection also provides evidence of valuation, rights obligations and nature of items (presentation and disclosure)
OBSERVATION- look at process being performed. limited use as it shows it only took place when auditor was watching.

RECALCULATION/ check arithmetical accuracy eg. adding up ledger balance

REPERFORMANCE- independently carry out procedure which is originally part of client’s internal control, eg. bank recon, inventory count, payroll calculation, ageing, depreciation calculation

Question 4

what is test data? what are its uses?

Answer 4

it is when auditor enters fake “dummy” data into client system, to check if it’s correctly processed, and misstatements are identified by the system.
eg. codes that dont exist
-transactions above limits
-invoices with math errors

Question 5

adv and disadv of test data?

Answer 5

advantages:
-good test of control
-minimal cost

disadvantage:
-risk of corrupting system
-requires time spent in live environment, maybe inconvinient for client (remember saadat at hbl)

Question 6

what is an audit software?

Answer 6

it is used to interrogate the client’s system. it can be off the shelf or packaged or customised for client.
it can be used to scrutinise large volumes of data. which wud be inefficient to do manually.a

Question 7

what specific procedures can be performed using audit softwares?

Answer 7

-extracting samples according to specified criteria like above or below x amount
-calculating ratios and benchmarking
-recalculating depreciation
-casting ledgers
-preparing reports (budget v actual)
-data stratification
-producing letters to send to customers n suppliers

Question 8

advantages and disadvantages of audit software?

Answer 8

-quicker calcultions and casting of reports
-more transactions can be tested
-no printing required
-cost effective once set up

disadvantegs:
-expensive
-training costs
-may slow down or corrupt clients systems
-errors may go undetected by auditor

Question 9

types of audit tests

Answer 9

test of controls: obtain audit evidence of the design and effective implemetnation of controls

substantive tests: test of detail about transactions and balances, and analytical procedures performed to obtain evidence to detect MM in FS.

Question 10

what are benefits of big data?

Answer 10

Data analytics involves discovering patterns in data to extract useful insights, aiding audit planning and execution.

-allows auditor to perform tests on complete sets of data rather than samples.
-it can help identify risks, test controls, and SP. however data will still need to be evaluated by auditor to analyse results.
-results can be visualised graphically
-audit quality can be enhanced
-procedures can be performed quickly
and continually
-more timely reporting
-a reduction in billable hours as audit efficiency inceases

Question 11

limitations of big data?

Answer 11

-quality of DA depends on reliability of data used
-FS will still contain a significant amount of estimates
-auditor skepticism and prof judgement will still be required

so due to this, still only reasonable assurance can be given even tho 100% transactions r being tested.

Question 12

examples of current use of data analytics?

Answer 12

-analysing all transactions , stratify populations, identify outliers (eg. any journal entries posted outside of office hours, and cross referencing by origniator, useful for fraud checks)
-analysing sales trends by product, store, month etc in detail
-reviewing all purchases to ensure they can be traced back to a matching order , goods received note and an invoice.

analyse large amounts of data
data visualisation techniques such as dashboards and AI, auditor can summarise data more effectively

Question 13

discuss quality and quantity of audit evidence

Answer 13

according to IAS, auditor needs to gather SAE to provide basis for opinion.
sufficiency relates to quantity, this is a matter of professional judgement
appropriateness is quality (relevant and reliable)

Question 14

examples of substantive analytical procedures

Answer 14

-simple comparasion year on year, can give persuasive evidence that an expense like rent for eg. is recorded correctly
-comparasion with estimates made by auditors. eg. lots of assets that r depreciatied at different rates. so take closing balance of asset and multiply with avg dep rate. if this is similar to actual depreciation charge, it would allow us to conclude that dep charge is materially correct.
-relationship between financial and non financial info: eg. for employee costs:

prior year wages expense x average # of employees in current year/ avg. # of employees in prior year * % pay increase

if this estimate is not similar to the actual figure, further explanation will be required, eg. double shifts

if no explanattion, then detailed substantive tests, evidence of mis postings and dummy employees

Question 15

discuss reliability and relevance

Answer 15

reliability:
-how trustworthy is it?
external or client generated, direct or indirect, client generated evidence is least reliable, written more than oral.

the more reliable, the less is needed. if its unreliable, it will never be approproate, no matter how much.

relevance:
it means it relates to FS assertion being tested.

Question 16

what is audit sampling and what is the need for it?

Answer 16

Audit sampling is when you pick some things to check out of a bigger group, so you can understand the whole group better.

its needed because it may be too costly or time consuming, plus auditor dont give absolute assurance

Question 17

what is stratification

Answer 17

Stratification is when you divide a large group into smaller, more similar subgroups before selecting a sample for auditing. This helps ensure that different parts of the group are represented in the sample, making the results more accurate and reliable.

Question 18

what is the difference between statistical and non statistical sampling?

Answer 18

Statistical sampling uses math for accurate results.
1- random- thru random number generator or table
2- systematic (every nth number)
3- monetary unit selection
Non-statistical sampling relies on judgment and is simpler but less precise.
1- haphazard- no structure but avoids bias
2- block selection( usually higher value items are chosen)

Question 19

what are the basic principles of statistical sampling?

Answer 19

1-Choose items randomly.
2-Use math to decide how many items to check.
3-Use probability and statistics to analyze and interpret the results.

Question 20

examples of how auditor might use statistical sampling?

Answer 20

Checking Inventory: Instead of counting all items in a store, the auditor counts a few randomly picked items. This gives an idea of how accurate the whole count is.

Reviewing Transactions: Instead of looking at every sale in a company’s records, the auditor looks at a few sales chosen randomly. This helps check if the records are correct.

Examining Tax Returns: Instead of checking all tax forms, the auditor looks at a small group of forms chosen randomly. This gives an estimate of how well people follow tax rules.

Testing Controls: The auditor tests a few random processes to see if company rules are followed. This shows how well the rules work overall.

Verifying Payments: Instead of checking all payments, the auditor looks at a random group of payments. This helps find if any payments are not right.

Checking Payroll: Instead of reviewing every paycheck, the auditor checks a few paychecks chosen randomly. This helps see if paychecks are accurate.

Question 21

what substantive procedures are used to gather SAE?

Answer 21

-TEST OF DETAIL: VERIFY INDIVIDUAL TRANSACTIONS AND BALANCES
-SUBSTANTIVE AP ANALYSING INFO FOR INCONSISTIES

Question 22

advantage disadvantage of small client

Answer 22

• Lower risk – Smaller entities may be engaged in relatively simple activities which reduces risk.
• Direct control by owner managers – Can be a strength because they know what is going on and have the ability to exercise real control. However, they are also in a strong position to manipulate the figures or put private transactions through the business.
• Simpler systems – Smaller entities are less likely to have sophisticated IT systems, but pure, manual systems are becoming increasingly rare. This is good news in that many of the bookkeeping errors associated with smaller entities may now be less prevalent. However, a system is only as good as the person operating it.

Question 23

Type of evidence in small entities

Answer 23

• The quantity of evidence may be less than for a larger organisation due to fewer transactions being carried out.
• It may be more efficient to carry out 100% testing in a smaller organisation.

Question 24

Problems in small entity audit

Answer 24

• Management override – Smaller entities will have a key director or manager who will have significant power and authority. This could mean that controls are lacking in the first place or they are easy to override.
• No segregation of duties – Smaller entities tend to have a limited number of accounts clerks who process information. To overcome this the directors should authorise and review all work performed.
• Less formal approach – Smaller entities tend to have simple systems and very few controls due to the trust and the lack of complexity. It is therefore difficult to test the reliability of systems and substantive testing tends to be used more.

Question 25

tolerable misstatement

Answer 25

Tolerable misstatement is the largest error an auditor can accept in financial statements without changing their opinion, helping to guide testing and assess risks.

Question 26

tolerable rate of deviation

Answer 26

Tolerable rate of deviation is the maximum percentage of errors or deviations from a control procedure that an auditor is willing to accept without affecting the reliability of the control. It helps determine how much testing is needed to assess the effectiveness of internal controls.

Question 27

sampling risk

Answer 27

Sampling risk is the possibility that an auditor’s conclusions drawn from a sample may differ from the conclusions if the entire population were examined. It arises because the sample may not accurately represent the population, leading to potential errors in the audit results.

Question 28

non sampling risk

Answer 28

Non-sampling risk refers to the risk that an auditor may reach an incorrect conclusion for reasons unrelated to the sampling process. This can occur due to errors in judgment, misinterpretation of evidence, or failure to detect issues, regardless of how the sample was selected.

Question 29

factors that determine if evidence is sufficient and appropriate

Answer 29

-risk assessment
-materiality of item being examined
-nature of internal control system
-experience gained during prior audits
-auditor’s knowledge of the business and industry
-results of audit procedures
-source and reliability of info

Question 30

audit documentation

Answer 30

-complete and detailed, such that exp auditor with no previous connection to audit can understand the work performed and conclusions reached
-accurate record of work performed, results and any significant matters. this includes preparing WPs which are reviewed by a senior.
-reasonings and conclusions on all significant matters requiring exercise of judgement.

Question 31

auditors expert vs management expert

Answer 31

An auditor’s expert is a specialist whose knowledge the auditor relies on to obtain evidence, such as actuaries or appraisers, helping to assess complex aspects of financial statements, may be an internal expert or an external expert.

management expert: expert whose work is used by management to assist in preparing the FS

Question 32

relying on the work of management expert

Answer 32

-evaluate competence, capabilities and objectivity
-obtain understanding of experts work
-evaluate appropriateness of work as audit evidence

Question 33

when is reliance on auditors expert necessary?

Answer 33

-valuation of asset like land, building
-determination of physical condition or quantities of assets
-actuarial valuation on pension or insurance liabilities
-measurement of work completed where performance obligations are satisfied over time
-legal opinions to determine outcome of litigation

Question 34

consideration before using auditor expert

Answer 34

importance of matter being considered
risk of misstatement due to nature and complexity of matter
quantity and quality of other available audit evidence

Question 35

can we use auditors expert even if entity has used management expert?

Answer 35

yes in case:
-management expert work is inadequate of audit purposes
-expert not independent enough from management
-competence and capabilities not sufficient

Question 36

consideration before relying on internal auditors work

Answer 36

-organisational status of internal audit, are they objective?
-level of competence
-internal audit’s discipline and quality control.

Question 37

why is there an ISA on related parties

Answer 37

because govts in various countries have been investigating companies trading with organisations and individuals other than at arm’s length.

Question 38

definition of RP

Answer 38

-An RP defined by applicable framekwork
-if framework doesnt define then:

-a person or entity that has control or significant influence over the reporting entity
-another entity over which reporting entity has control or SI
-another entity that is under common control eg. common directorships, owners who r close family, common controlling ownership

Question 39

management responsibility regarding Related party

Answer 39

-management is resp for identifying RP transactions. these transactions shud be properly approved as they are frequently not at arms length. management is also resp for disclosure of RP transactions

Question 40

auditor responsibilites regarding RP

Answer 40

-irresepctive of requirements of framework, obtain an understanding of RPs and transactions to be able to:
-recognise fraud risk factors
-to conclude whether FS achieve fair presentation and are not misleading

when framework does establish RP requirmenets, obtain SAE whether RP relationships and transactions have been properly identified, accounted for and disclosed in FS.

audit team shud be alert for transactions which may indicate the existence of uninden tified RPs.

-also obtain written rep from management confirming completeness of info provided for RP and adequate disclosures

Question 41

eg. of transactions that may indicate unidentified RP transactions

Answer 41

-abnormal trading terms like price, interest rate, payment terms
-lack logical business reason
-substance differs from form
-processed in unusual manner
-unrecorded transactions

Question 42

if auditor is unable to obtain evidence regarding RPs, impact on audit report?

if auditor concludes inadequate disclosure…

Answer 42

qualified opinion due to insufficient or inappropriate audit evidence

if inadequate disclosure then qualified opinion due to material misstatement