Module 17 Audit process evidence Flashcards
Once ROMM has been concluded on, the evidence that must be sought in relation to numbers is done through what?
Substantive testing, due to the inherent limitations in internal control, the auditor must always perform some substantive procedures.
What are assertions?
Audit standard identifies and defines detailed objectives called “assertions” for transactions and balances, including the related disclosures.
Assertions allow the auditor to consider the different types of potential misstatements that may occur
List the balance assertions
Balance (balance sheet) assertions:
Existence (E) - Balances exist and are genuine
Completeness (C) - Balance and related disclosures that should have been recorded have been recorded
Accuracy, valuation and allocation (AVA) - Balances and related disclosures are recorded at appropriate amounts and in accordance with the accounting standards
Classification(CI) - Balances have been recorded in the proper accounts
Rights and obligation (R&O) - The entity holds or controls the rights to assets and liabilities are the obligations of the entity
List the transaction assertions
Transaction (P&L) assertions:
Accuracy (A) - Amounts and other data relating to transactions (and related disclosures) have been recorded appropriately
Cut-off (CO) - Transaction and events have been recorded in the correct accounting period
Occurrence (O) - Transactions and events that have been recorded or disclosed have occurred and pertain to the entity (did it actually happen and does the company have hte right requirement to recognise the transaction)
Completeness - All transactions and events and related disclosures that should have been recorded have been recorded
Classification (CI) - Transactions and events have been recorded in the proper accounts
Presentation (P) - Transactions are appropriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable
Why use assertions?
Assertions give auditors:
A clearer definition of specific audit objectives - letting auditor focus on key areas
A clearer demonstration of work done - auditor can demonstrate audit has been done to auditing standards and relevant company law
Auditor will check for each material figure that each assertion is met to arrive at the overall opinon on the truth and fairness of financial statements
Audit evidence must be sufficient and appropriate, what do they mean?
Sufficiency - a measure of the quantity of the evidence
Appropriateness - a measure of the quality of evidence (relevance and reliability)
Appropriate evidence is measured by reliability and relevance - True or false
True
Reliability of evidence is affected by the nature (natural/created evidence/rational argument/testimonial evidence) and source (Auditor/Third Party/Client generated)
What is the meaning of sufficient evidence?
It is the balance of finding the right amount of evidence required and the cost effectiveness of obtaining the evidence.
Higher ROMM = higher level of evidence
Best approach is to look for a balance of evidence
Principle of synergy = two independent sources is consistent
Principle of diminishing marginal effect = evidence from one source, further consistent evidence from the same source will increase the total assurance by less than the sum of the parts (dont do more work than its worth)
How is sufficiency determined?
The level of materiality
Assessed ROMM of the figure being tested
The sources and quality of available evidence
What are the sampling methods auditors use?
Sampling can be 100%, specific items (high value/risk), audit sampling
Methods can be used:
Random selection - random number generators
Monetary unit sampling - a type of value weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts
Haphazard selection - selects sample with no structured technique
what is sample extrapolation?
This is when the auditor projects sample error onto the population as a whole
What are the types of substantive testing approaches?
Substantive analytical procedures - testing the total population
Test of details - selecting specific items within the population for testing
What is the difference between tests of controls and substantive procedures?
Test of controls is testing something the client has already done during the year and provides evidence that the clients control procedures prevent/detect and correct missatements
Substantive procedures are the procedures that the auditor undertakes to detect possible misstatements that may exist in the financial statements (testing the numbers) at the year end
What does an audit work programme include?
This document should be prepared by the audit senior or manager and it contains substantive procedures in response to ROMM for particular financial statement accounts.
It also includes as a minimum:
Client name
Client year end date
Title of work programme
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 who completed the substantive procedure
The date the substantive procedure was completed
A work paper reference
What is substantive analytical procedure?
This is when analytical procedures are used to identify a material misstatement at the assertion level and therefore the process for performing the analytical procedure is more robust.
