Week 6 Flashcards
what is the purpose of audit documentation?
- provide proof that we have carried out audit work
- give basis for audit report
- give evidence that audit was planned & performed in accordance with auditing standards / regulatory requirements
- allows the audit to be supervised & reviewed
in what format must audit documentation be?
can be electronic or on paper
if legal action is taken against an auditor, can audit files be used in court?
yes
audit files will be used in court to prove/disprove negligence
what must an audit documentation contain?
must be sufficient to allow an experienced auditor with no connection to the audit to understand:
- work performed
- evidence obtained
- significant matters
- conclusions drawn
what 12 elements should all working papers in an audit documentation include?
- client name
- year end date
- file reference
- name of preparer & date
- name of reviewer & date
- subject
- objective of test
- source of information
- sample size
- work performed
- conclusion made
- errors
does audit documentation working papers need to be kept confidential?
yes
how long should working papers from an audit documentation be kept for?
all working papers should be kept for 5 years from the date of the audit report
what 2 qualities must audit evidence have?
- sufficient (must be enough evidence - enough quantity)
- appropriate (must be reliable and relevant - good quality)
in which cases will more audit evidence be required?
- if risk is higher
- if items are material
- if internal controls are weak
- if the evidence is not as reliable
which evidence is more reliable - auditor generated or client generated evidence?
auditor/third party generated evidence is more reliable than client generated evidence
client generated evidence is more reliable if it generated from strong internal controls
which evidence is more reliable - original/written evidence or copy/oral evidence?
original/written evidence is more reliable than a copy/oral evidence
what makes audit evidence relevant?
if it proves one or more of the financial statement assertions
what are the 6 financial statement assertions in the P&L?
- occurrence (transactions occurred & relate to the entity)
- completeness (all transactions have been recorded)
- accuracy (amounts are recorded appropriately)
- cut off (recorded in current period)
- classification (transactions were recorded in correct accounts)
- presentation (disclosures are clear)
what are the 6 financial statement assertions in the SOFP?
- completeness
- classification
- presentation
- existence (do assets, liabilities and equity exist)
- rights & obligations (does entity actually own assets/have rights to obligations)
- accuracy & valuation (assets, liabilities & equity are recorded at appropriate values)
what are the types of procedures in audits?
- tests of controls
- substantive testing
purpose of ‘tests of controls’?
designed to test if controls are operating effectively in preventing or detecting material misstatments
purpose of ‘substantive testing’?
designed to test the figures in the FSs and detect material misstatements
includes:
- test of detail (test individual transactions & balances)
- analytical procedures (evaluate the FSs through analysis of plausible relationships)
plausible = ?
reasonable or probable
what do substantive testing procedures constitute?
- test of detail
- analytical procedures
what needs to be done when performing ‘tests of controls’?
- understand how the system operates
- document the system
- test the controls to assess their effectiveness
- determine the impact of the audit
what needs to be done when performing ‘substantive procedures’?
test the numbers in the FSs
what does substantive procedures does ISA 330 require auditors to carry out?
- check FSs to the underlying records
- examine material journal & transactions
- examine adjustments made in FSs
how do auditors gather evidence?
- inspection of assets/documents
- observation
- inquiry
- confirmation
- recalculation
- re-performance
- analytical review
what does ISA620 ‘using the work of an auditor’s expert’ state?
that an auditor should obtain sufficient evidence that the work of the expert is adequate for audit purposes
- assess the expert’s competence
- assess objectivity/independence
criteria for using the work of an expert?
- work of the expert must be agreed
- work of the expert must be evaluated to ensure consistency with other evidence and that auditors are comfortable with the methods & assumptions used by the expert
should external auditors rely on the client’s internal audit department?
they can
what are the responsibilities of the internal audit department?
to ensure:
- test of controls
- risk assessments
- fraud investigations
- compliance with laws & regulations
what does ISA 610 ‘using the work of internal auditors’ state?
that auditors must assess the effectiveness of the internal audit function and if the work is adequate for audit purposes
must an external auditor re-perform the work of the internal audit team?
yes to ensure they’ve reached the same conclusions
what does the extent of checking the internal auditor’s work depend on?
- amount of judgement involved
- risk of material misstatements
what does ISA 402 ‘audit considerations relating to an entity using service organisations’ deal with?
deals with the auditor’s responsibility to obtain sufficient appropriate audit evidence when a client outsources functions to service organisations
e.g., payroll, receivables, entire finance function
what should the auditor do regarding ISA 402 ‘audit considerations relating to an entity using service organisations’?
- gain an understanding of the services being provided
- assess the design & implementation of internal controls of the service provider
- visit the service provider and perform tests of controls
- contact the service provider’s auditor to obtain an opinion on the system’s suitability of controls
sampling = ?
the application of audit procedures to less than 100% of the items within a population to draw generalised conclusions
what must an auditor do regarding sampling?
must choose a representative sample so accurate conclusions can be drawn
to reduce audit risk, sample size can be increased
stratification = ?
involves breaking down a population into smaller subpopulations
each subpopulation has similar characteristics
examples of statistical sampling methods?
- random selection
- systematic selection
- monetary selection
examples of non-statistical sampling methods?
- haphazard selection
- block selection
- sequential selection
deviations = ?
issues identified during tests of control
misstatements = ?
issues identified during substantive testing
when would substantive testing be required?
if the deviation rate is above a tolerable level
when are misstatements acknowledged/ignored?
ignored when isolated and non-representative of the population
if misstatement exceeds a tolerable level, the auditor will need to extend the sample
