The Nature of Audit Evidence Flashcards
Audit Evidence
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.
Sufficient
refers to the quantity of evidence
appropriate
refers to the quality of evidence in terms of its relevance and reliability.
“Reliability” is affected by the source and nature of evidence and depends upon individual circumstances however, the SAS offers the following guidelines:
1) Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference
2) Evidence is more reliable when obtained from independent (knowledgeable) sources outside the entity;
3) Evidence generated internally is more reliable when the related controls are effective;
4) Evidence is more reliable when it exists in documentary form (whether paper or electronic); and
5) Evidence provided by original documents is more reliable than evidence based on photocopies/facsimiles (faxes).
five traditional financial statement assertions:
Existence/occurrence; Completeness; Rights and obligations; Valuation and allocation; and Presentation and disclosure.
AICPA Professional Standards now classify assertions in three separate categories for the auditor’s consideration, related to:
Account balances;
Presentation and disclosure; and
Classes of transactions and events.
There are four assertions specific to “account balances at period end”
1) Existence
That the assets, liabilities, and equity interests exist.
2) Completeness
That all assets, liabilities, and equity interests that should have been recorded have been recorded. There are no omissions.
3) Rights and obligations
That the entity holds or controls the rights to its assets, and the liabilities are the obligations of the entity. Any restrictions on the rights to the assets or obligations for the liabilities must be disclosed.
4) Valuation and allocation
That assets, liabilities, and equity interests are included in the financial statements at appropriate amounts (relative to the requirements of GAAP) and any resulting valuation or allocation adjustments are appropriately recorded.
There are four assertions about “presentation and disclosure.”
1) Occurrence and rights and obligations
That the disclosed events and transactions have occurred and pertain to the entity.
2) Completeness
That all disclosures that should have been included have been included. There are no omissions of required disclosures.
3) Classification and understandability
That financial information is appropriately presented, described, and clearly expressed.
4) Accuracy and valuation
That financial and other information are disclosed fairly and at appropriate amounts.
There are five assertions about “classes of transactions and events during the period.”
1) Accuracy
That amounts and other data have been recorded appropriately.
2) Occurrence
That transactions and events that have been recorded have occurred. In other words, they are properly recorded and valid.
3) Completeness
That all transactions and events that should have been recorded have been recorded. There are no omissions.
4) Cutoff
That transactions and events have been recorded in the correct accounting period. Note that there are only two ways to record a transaction in the wrong period. One is by recording a transaction prematurely, which violates the “occurrence” assertion; and the other is to record a transaction belatedly, which violates the “completeness” assertion.
