Module 17: Audit Process: Evidence Flashcards
What are the issues associated with assessing whether the financial statements give a true and fair view?
- The overall objective is extremely wide. Auditor might fail to perform sufficient work to achieve the overall audit objective
- An audit must not only be done, it must be seen to be done. Auditor needs to demonstrate the thought process behind the audit.
Auditor must break down the overall audit objective to make it more manageable.
Audit can be broken down into certain assertions for transactions and balances.
What are the balance sheet assertions?
- Existence(E) - Do the balances exist, are the genuine
- Completeness (C) - Have balances been recorded or omitted
- Accuracy, valuation and allocation (AVA) - Balances are recorded to an appropriate amount and in accordance with accounting standards
- Classification (CL) - Have they been recorded in the proper accounts
- Rights and obligations (R&O) - Entity controls or holds the rights to assets or liabilities
- Presentation (P) - Are they clearly described and appropriately aggregated / disaggregated
What are the transaction (P&L) assertions?
- Accuracy (A) - have the amounts and other data been recorded properly
- Cut-off (CO) - Transactions and events have been recorded in the correct period
- Occurrence (O) - Have the transactions and events that have been recorded actually occur
- Completeness - Have they been recorded
- Classification (CL)
- Presentation
Why use assertions?
- Provide a clearer definition of specific audit objectives
- Provide a clearer demonstration of work done, the auditor can demonstrate that the audit has been performed in accordance with the auditing standards and relevant company law.
The auditor will check, for each material figure, that each of the assertions have been achieved. This will form the basis of whether or not the financials statements are true and fair.
Explain sufficient and appropriate evidence?
Sufficiency is a measure of the quantity of evidence.
Appropriateness is the measure of quality of evidence. Auditor will obviously prefer higher quality evidence as it provides higher assurance.
For evidence to be relevant it must satisfy one or more of the assertions.
What are the two elements of reliability?
- Source - Can be auditor generated, Client generated or third party generated.
Auditor generated info has highest reliability, highest ability to assess quality and lowest susceptibility to director manipulation
Client generated info has medium reliability (depending on control), medium ability to assess quality and highest susceptibility to director manipulation
Third party generated info will have varied reliability (independent third party more reliable than close connection to audit client), lowest ability to assess quality and varied susceptibility to director manipulation
- Nature - Can be split into four categories
i) . Natural evidence: The auditor physically witnesses the event or asset
ii) . Created evidence - Documentary evidence for example invoices or board minutes, auditor should always use originals
iii) . Rational argument - Neither physical or documentary evidence, evidence through logic. Example checking reasonableness of a depreciation figure by using appropriate depreciation rate.
iv) . Testimonial evidence - Spoken evidence
What is principle of synergy?
Where evidence from two independent sources is consistent, the sum of the assurance gained by the auditor is greater than the sum of the individual parts
What is principle of diminishing marginal effect?
Where evidence is obtained from one source only, further consistent evidence from the same source will increase the total audit assurance by less than the sum of the parts.
What are the sample selection methods?
- Random selection
- Monetary unit sampling (MUS) - A type of value-weighted selection in which the sample size, selection and evaluation results in a conclusion of monetary amounts. Results in the effort being directed to larger value items which can result in smaller sample sizes.
- Haphazard selection - Auditor selects the sample with no structured technique but would nonetheless avoid conscious bias or predicability to ensure all items have a chance of selection
What are the evidence collection techniques? I CARE
- Inspection of records and documents or tangible assets
- Confirmation from third party
- Analytical procedures
- Recalculation by the auditor to check mathematical accuracy
- Enquiry of client staff
- Observation of a process or procedure
Re-performance of a process or procedure
What can substantive testing be broken down into?
Substantive analytical procedures
Tests of details
What is the difference between substantive testing and test of controls?
A test of control is a test of something that the client has already done during the year. Substantive testing procedure is the auditors own test of whether a number in the financial statements is correct at the end of the year.
What is an audit work programme?
Substantive procedures due to be performed on a particular account in response to ROMM are documented in an audit work programme.
Should be prepared by someone of appropriate seniority and experience. Audit work programmes can only be produced after ROMM has been established.
What should audit work programme contain?
The client name
The client year-end date
A title of the work programme
A description of the substantive procedures required in sufficient detail for whoever is going to perform the test to understand them
The assertions met by each substantive procedure
Initials of the audit staff member who completed the substantive procedure
The date the substantive procedure was complete
A work paper reference to where the substantive procedure work was completed
What is the approach to analytical procedures?
- The auditor must form an expectation of the balance being tested based on knowledge of the entity during the financial year, and then must identify the level of deviation that they are willing to accept between the expectation and the actual figure.
- The expected balance should be compared to the actual figure and any differences identified
- Differences that exceed acceptable limit must be investigated and substantiated
- Conclude whether the figure is correct or whether there has been a material misstatement. Or whether a new area of ROMM has been highlighted.
