Week 5 Flashcards
Assertions
Those charged with governance of an entity are responsible for ensuring that the financial report gives a true and fair view of the entity and its operations. Management make assertions about each account and related note disclosures. Assertions are statements regarding the recognition, measurement, presentation and disclosure of items included in the financial report. ASA 315 (ISA 315) requires auditors to use assertions when assessing the risk of material misstatement and designing audit procedures. This means that auditors need to gather sufficient appropriate evidence about each assertion for each transaction and account balance, or disclosure. Presentation and disclosure assertions relate to the disclosures themselves, not the underlying asset, liability, equity, revenue or expense items. ‘Classification and understandability’ relates to the classification of the disclosure, not whether the correct account was used for the transaction or event.
Types of audit evidence
Evidence is the information that an auditor uses when arriving at their opinion on the truth and fairness of the client’s financial report (ASA 500; ISA 500). Evidence: sufficient appropriate audit evidence external confirmations documentary evidence representations verbal evidence computational evidence physical evidence electronic evidence
Sufficient appropriate audit evidence:
Auditor must gather sufficient appropriate evidence.
Sufficiency relates to quantity of evidence.
Appropriateness relates to quality of evidence.
Audit risk determines what evidence is required.
External confirmations:
Auditor requests third party to confirm matter in confirmation letter.
Examples include:
Banks: confirm cash balances, securities, loans.
Lawyers: confirm documents being held.
Creditors: confirm amount owed, terms, by client.
Debtors: confirm amount owed to client.
Examples include:
Others: confirm description and quantity of assets held.
Negative form: reply if information incorrect.
Hard to interpret non-response.
Positive form: reply in all circumstances.
Cannot know how well other party checked their records.
Documentary evidence:
Invoices, suppliers’ statements, bank statements, minutes of meetings, correspondence, legal agreements.
Can be internally or externally generated.
Auditor can:
verify information in client’s records by reading documents to confirm existence, rights and obligations (‘vouching’)
trace from documents to clients records to confirm classification, accuracy and completeness (‘tracing’).
Representations:
Legal representation letter is sent by client to its lawyers to complete and return direct to auditor.
Can include opinions on legal matters, details of disagreements with client (ASA 502; ISA 501).
Management representation letter contains acknowledgement of management’s responsibilities, undertaking about legal compliance, confirmation of discussions.
Auditor still needs to gather other evidence.
ASA 580; ISA 580.
Verbal evidence:
Auditor documents discussions with client management and staff.
Used to gain understanding of internal controls; corroborate other evidence.
Computational evidence:
Auditor checks mathematical accuracy.
Re-adding the entries.
Re-computing more complex calculations.
Verifying formulae.
Physical evidence:
Gathered inspection of a client’s tangible assets.
Traces details of tangible assets on hand back to the recorded amount.
inspects a client’s physical assets.
Electronic evidence:
Includes data held on client’s computer, emails to auditor, and scans and faxes.
No paper trail.
Auditor needs to consider quality of client’s computer system when assessing reliability of this evidence.
Persuasiveness of audit evidence
Auditor is seeking evidence to corroborate client’s recorded transactions and balances.
Greater corroboration is provided by more persuasive evidence.
Evidence types vary in persuasiveness.
Least to most persuasive:
evidence generated internally by client
evidence generated externally, held by client
externally generated evidence send direct to auditor
Internally generated evidence:
Includes:
records of cheques sent
copies of invoices and statements sent to customers
purchase orders
company documentation regarding policies and procedures
contracts, minutes of meetings
Could be held in paper or electronic form.
Least persuasive because it is possible that client could manipulate or omit this type of evidence.
Externally generated evidence held by the client:
Includes supplier invoices and statements, customer orders, bank statements, contracts, lease agreements, tax assessments.
Originals are more persuasive than photocopies.
More persuasive than internally generated evidence because it is produced by third parties.
Still possible that client could omit or tamper with evidence.
Externally generated evidence held by the client: Includes: supplier invoices and statements customer orders bank statements contracts lease agreements tax assessments.
Externally generated evidence sent directly to the auditor:
Includes bank confirmations, debtors’ confirmations, correspondence with client’s lawyers, experts valuations.
Most reliable type of evidence because it is independent of client.
Client has no opportunity to alter evidence.
More reliable when external party is considered to be more reliable, trustworthy, independent of client.
Using the work of an expert
Auditor may engage expert to help in audit when auditor does not possess required skills and knowledge to assess item.
Expert could be member of audit team, audit firm, client, or independent.
ASA 620; ISA 620 provides guidance:
is expert required?
determining scope of work for expert.
selecting expert – assessing objectivity, capability of expert.
assessing work of expert.
auditor is responsible for drawing conclusions.
