What are financial statement assertions?
Assertions are therefore representations by those charged with governance that financial statements have been prepared in accordance with the applicable financial reporting framework.
Why are assertions needed in external audit?
Assertions are needed to consider the different types of potential misstatements that may occur when identifying, assessing and responding to the risks of material misstatement.
Either:
1. Assertions about account balances, and related disclosures, at the period end.
- Assertions about classes of transactions and events, and related disclosures, for the period under audit.
What does sufficient, appropriate evidence mean?
Sufficiency - A measure of the quantity of evidence.
Appropriateness - A measure of the quality of evidence (that is, its relevance and reliability).
aka Does the auditor have enough quality evidence to reduce that risk to an acceptably low level.
What factors affect the appropriateness of evidence?
- Relevance - whether the evidence obtained addresses (is relevant to) the assertion being tested.
- Reliability - Auditor generated, Client generated, Third part/Externally generated.
What factors affect the sufficiency of evidence?
Quantity of evidence provided
How does an auditor make sure that each material figure etc is free from misstatement?
By checking off the assertions for that material balance, transaction or disclosure.
This then helps the auditor give an audit opinion that they are free from material misstatement.
What is audit sampling?
Audit sampling is when conclusions can be drawn about an entire population on the basis of testing a sample drawn from it.
What 3 things does the selection of sampling approach are determined by?
- The characteristics of the population:
- For example, the population may be made up of a handful of large items or a large number of similar, smaller items. - The risk of material misstatement (RoMM):
- Generally, higher risk areas require more testing. If the RoMM is higher, the auditor will need to lower the detection risk, resulting in more work being performed to mitigate the higher risk of misstatement. - The audit efficiency of the approach.
- If the auditor has sophisticated computer programs to perform simple repetitive tasks, sample sizes may be able to be increased.
What are some examples of sampling methods?
- Random selection (Random number generator)
- Haphazard selection (No structured technique)
- Monetary unit sampling (Value-weighted selection to higher $)
What evidence collection techniques are available to the auditor?
- Inspection of records and documents or tangible assets
- Confirmation from a third party
- Analytical procedures
- Recalculation by the auditor to check mathematical accuracy
- Inquiry of client staff
- Observation of a process or procedure (ie a control)
- Re-performance of a process or procedure (ie a control)
Which evidence collection techniques are more appropriate at the Test of controls stage or Substantive testing?
Test of controls:
- Observation
- Re-performance
- Inspection of documents
- Inquiry
Substantive testing:
- Confirmation
- Analytical procedures
- Inspection of assets
- Recalculation
- Inquiry
- Inspection of documents.
What is the difference between analytical procedures and test of details?
Analytical procedures are the systematic study and comparison of relationships among elements of financial and non-financial information and the investigation of significant fluctuations and variances from the expected relationship.
Test of details are carried out to obtain evidence of individual debits and credits that make up an account, to reach a conclusion about the account and the accuracy of the closing balances on the reporting date.
The audit opinion is based on audit evidence, which is obtained by performing:
- Risk assessment procedures (Module 5)
Further audit procedures, which comprises:
a) Tests of controls (Module 6)
b) Substantive procedures, including tests of details and substantive analytical procedures
How is data prepared for use in data analytics at the substantive testing stage?
- Data acquisition - make sure its in the right formats etc and is quality to support data analytics
- Making sure the data is relevant and reliable before using -
What are substantive analytical procedures?
Procedures that allow the auditor to analyse patterns/fluctuations over balances/transactions to easily see where the expectation vs actual is more different than expected, thus investigate if its an error etc in the planning stage of the audit.
For balances Substantive analytical procedures cover the following assertions:
- Completeness
- Existence
- Accuracy, valuation and alloation
- Classification
For transactions, SAP cover following assertions:
- Completeness
- Occurence
- Cut-off
- Accuracy
- Classification
How can audit data analytics be used for performing substantive analytical procedures?
Can be used to analyse information and provide calculations using the clients information e.g. reasonableness tests where it can extra GL and produce a calculation.
What areas of statistics may be relevant during the audit process?
DAY 6
How can statistics be used in the sample selection process?
DAY 6
What is substantive testing?
(AEIOU)
Substantive testing involves performing audit procedures that are designed to detect material misstatements over Account balances, Class of transactions and Disclosures.
What type of substantive procedures can we do generally?
- Substantive analytical procedures (testing whole population at once) [P&L Mainly]
- Test of details (Specific items within the population) [BS Mainly acct balances]
What are the stages to the approach for test of details, and why do we use this process to select the correct sample?
- Source document/Evidence
- Sub-ledgers/ Supporting evidence
- Nominal ledger/ Trial balance
- Financial Statements
Helps us select sample as we start with sub-ledger and tie this into the TB and then into the FS to make sure we have the right sample.
State some examples of source documents that tie back to:
- Sales sold in year
- Purchases purchased in year
- Fixed assets purchased in year
Sales:
Sales invoices
Goods despatch notes (GDN)
Purchases:
Purchase invoices
Goods received notes (GRN)
Fixed assets:
Bank statements
Calculations of depreciation
Board minutes
Fixed assets (the physical asset itself)
What is directional testing?
Thinking about whether the thing you are testing is more likely to either be OVERSTATED or UNDERSTATED.
Based on this when testing for overstatement (or existence/occurrence),
a different approach is used from testing for understatement (or completeness).
What is the approach to writing substantive procedures?
“What” and “Why” aka Source and Purpose of what we are going to test.
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1. Assurance Engagements14
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2. Statutory Audit35
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3. Auditor Independence and Ethics34
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4. Accepting Clients and Agreeing Engagement6
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5. Audit planning39
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6. Evaluating systems of internal control32
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7. Substantive procedures31
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8. Audit completion and Reporting34
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9. Sustainability Reporting Assurance10
