Lecture 7 - Audit evidence (1)

Question 1

Under ISA 500 the assertions fall into three different types:

Answer 1

1. Transactions and events for the period under audit
2. Account balances at the period end
3. Presentation and disclosure in the financial statements.

Question 2

To reduce the risk of the assertions being

wrong, auditors gather….

Answer 2

Sufficient and appropriate evidence that they are right

Question 3

Sufficient evidence implies…..

Answer 3

Quantity, but quality is more important.

Question 4

Appropriate evidence means…

Answer 4

Relevant and reliable.

Question 5

Procedures for gathering evidence -ISA 500 mentions 8 of them:

Answer 5

(i) Inspection of records or documents
(ii) Inspection of tangible assets
(iii) Observation
(iv) Enquiry
(v) Confirmation
(vi) Recalculation
(vii) Reperformance
(viii) Analytical Procedures

Question 6

Analytical procedures - Auditors must consider: (ISA 520)

Answer 6

(i) Suitability
(ii) Reliability
(iii) Expectation
(iv) Difference

Question 7

(i) The suitability of analytical review:

Answer 7

-If controls are weak, may not be suitable
-If other tests of detail for same assertion, will give
more assurance

Question 8

(ii) The reliability of the data

Answer 8

-Is source internal or external?
-Comparability – is client very specialised?
-Nature of data – e.g. results to be expected or a
goal?
-Controls – if controls are good, analytical review is
more useful

Question 9

(iii) Is the expectation sufficiently precise to identify a material misstatement?
Depends on:

Answer 9

-The accuracy with which expected results can
be predicted
-The degree of detail which can be obtained.

Question 10

(iv) Amount of difference from expected values that is acceptable

Answer 10

-As the risk of material misstatement increases, the
difference that can be accepted reduces.
-Unusual items should be investigated, and
explanations/corroborating evidence obtained.
-Other audit procedures may be required

Question 11

Advantages of analytical procedures:

Answer 11

a) Cost effective way of obtaining evidence
b) Efficient way to reduce detection risk
c) Tests for under and over statement at same time
d) Wide coverage of business, may add value

Question 12

Disadvantages of analytical procedures -

Answer 12

a) Needs reliable data
b) Little use for new/changed businesses
c) Need good knowledge of business to form
appropriate expectations
d) Consistency may conceal material error
e) Tends to be performed mechanically
f) Needs experienced staff for good results