Evidence and Risk 1 Flashcards
Definition of Audit Evidence
AU-C 500 - Audit Evidence consists of all information used by the auditor in arriving at the conclusions on which the audit opinion is based.
It includes the information contained in the accounting records underlying the financial statement (checks, invoice, contract) and other information (minutes, confirmations, benchmarking).
Accounting records alone is not sufficient appropriate evidence.
What is the relationship between Evidence and Detection Risk?
- Evidence has an inverse relationship with Detection Risk
- The Detection Risk is one aspect of Audit Risk that an auditor can control through Nature Timing Extent of substantive procedures
- Inherent Risk and Control risk are outside of auditor’s control
Which aspects of Audit Risk can an auditor control?
Detection Risk which is decreased by increasing substantive procedures
What is the primary constraint on audit evidence?
Cost vs. Benefit is a primary constraint
Which aspects of Audit Risk can an auditor NOT control?
Inherent Risk and Control Risk are outside of an auditor’s control
High level of Detection Risk
- Scope of substantive procedure → lower
- Nature → less reliable audit evidence
- Timing → gather audit evidence prior to year-end (interim)
- Extent → verify a smaller number of transactions or components of the account balance
Low level of Detection Risk
- Scope of substantive procedure → Higher
- Nature → More reliable audit evidence (often externally generated)
- Timing → perform test at year end
- Extent → verify a larger number of transactions or components of the account balance
What characteristics should audit evidence have?
-
Sufficient → Quantity of evidence
- Persuasive evidence, not totally convincing evidence
- cost vs. benefit of obtaining the evidence
- based on the auditor’s judgment
-
Appropriate → Quality of evidence
- Relevant: pertains to the assertion it support
- Reliable: based on the source (+ directly obtain, obtained from outsider, prepared by outsider, prepared by client -), personal knowledge, or developed under strong IC
- based on the auditor’s judgment
Persuasiveness of evidence based on its source
More to Less Persuasive
1. Auditor developed - directly obtained by auditor (e.g. inventory observation) - More persuasive
2. Outside – obtained from source outside of the client company (e.g. bank confirmation)
3. Outside/Inside – prepared by outsider but obtained from client (e.g. bank statement)
4. Inside – prepared by client (e.g. client sale invoice)
Basic procedures used in Audit
- Risk Assessment procedure – used to obtain an understanding of the entity and its environment, including Internal Control (Chap 1). They do not provide a sufficient basis for auditor opinion - PLANING
- Test of Controls are performed to test the operating effectiveness of controls in preventing or detecting material misstatement at the relevant assertion level (chap 4)
- Substantive procedures – used to detect material misstatement through test of details and analytical procedures for all relevant assertion related to each material class of transaction, account balances, and disclosures. These are used regardless of the assessed risk of material misstatement. (chap 5)
What are the objectives when evaluating an entity’s accounting estimates?
AU-C 540 When evaluating accounting estimates an auditor’s objectives are to obtain sufficient appropriate evidence that (1) all material accounting estimates have been developed, (2) are reasonable, and (3) are in conformity with GAAP.
How are Management Estimates audited?
- First and foremost you need to understand management’s rationale and methods for developing estimates before you can judge reasonableness.
- Next Auditor should formulate their own opinion on what a good estimate should be and compare it.
- Finally determine if subsequent events affect the estimates
Responsibility of the auditor with respect to estimates is to evaluate the reasonableness of accounting estimates in the context of the financial statements taken as a whole
What are Substantive Procedures?
- Substantive procedure is an audit procedure designed to detect material misstatement at the assertion level.
- Substantive procedure comprise Test of Details (of transaction, balances, and disclosures) and Analytical Procedures.
- Types of procedures I-CORRII A
Test of Details of transaction, balances, and disclosures TD
Test of details refer to test designed to verify the account balances, the transactions and the disclosures that occurred during the year and were the source of the account balances.
I-CORRII (Analytical procedures)
TD includes: Inquiries, Confirmation, Observation, Recalculation, Reperformance, Inspection of tangible asset, Inspection/Examination of records or document (Tracing, Vouching)
Tracing and Vouching
ICORRII - A
Inspection/Examination of records or documentation
Tracing → Completeness: trace from the source of the document into the book -understatement
Vouching → Existence or Occurrence: book to source - overstatement
