Audit evidence
all the information used by the auditor in arriving at their conclusions on which the auditor’s opinion is based
What is sufficient audit evidence?
Quantity (sufficient to support the audit opinion)
Factors to consider are
1. risk assessment
2. materiality of the item
3. results of audit procedures
4. source and reliability of information available
5. experience gained during previous audits
6. nature of accounting and internal control systems
what is appropriate audit evidence?
- Relevant and 2. Reliable
Relevant - evidence gathered must cover the financial statement assertions - Reliable - external better than internal
auditor generated better than client generated
internal more reliable when controls are effective
written/documentary evidence better than oral
original documents more reliable than faxes/copies
Assertions
claims that management makes about the financial statements—like saying everything exists, is complete, accurate, belongs to the company, and is properly presented. Auditors test these claims to check if the financial statements are truthful and reliable.
Assertions about classes of transactions and events and related disclosures
Occurence
Completeness - all transactions that were supposed to be recorded have been recorded and pertain to the entity
Classicfication - transactions and events have been recorded appropriately
Accuracy
Presentation - transactions and events are appropriately aggregated or disaggregated, clearly described and are relevant in the requirements of the applicable financial reporting framework
What are assertions about classes of transactions?
these apply to individual transactions within the period. they focus on the flow of transaction through the year. Accuracy, cut off, completeness, classification, presentation,
What are assertions about account balances and related discloures at the period end
they apply to the account balances of assets, liabilities etc. they focus on the closing balances at reporting date. completeness (all assets/liabilities have been recorded), obligation and rights, existence, classification, valuation, accuracy and allocation, presentation
Management expert
an individual/organisation possessing expertise in a field other than audit or accounting whose work is used by the entity to assist in the preparation of financial statements
Two types of audit procedures
tests of controls: audit procedures designed to evaluate the operating effectiveness of controls in preventing, detecting and correcting material misstatements at the assertion level
substantive procedures: audit procedures designed to detect material misstatements at the assertion level. Substantive procedures include analytical procedures and tests of details
to help develop audit procedures, use the nuemonic - AEIOU
A - (analytics (substantive)
e - enquiry (substantive and test of controls) and confirmation (substantive)
i - inspection (both)
o - observance (test of controls)
u - recalculation (substantive) and reperformance (test of controls)
analytical procedures an auditor may use
variance analysis
ratio analysis
proof in total - you build an independent expectation of an account balance from key drivers (quantity × price, rate × base, etc.) and compare it to the recorded amount
factors to consider when using analytical procedures
reliability of the data from which ratios are developed
the difference that is acceptable without further investigation being required
whether the expectation is precise enough to identify a material misstatement
suitability or analytical procedures to a particular assertion
What are tests of controls
focuses on the auditor confirming their understanding of the control being in place and testing that it has operated effectively during the period (enquire, reperform, observe, inspect)
what are the two categories that substantive procedures fall into?
- tests to discover errors
- tests to discover omissions
Tests to discover omissions
these tests start from outside the accounting records and are matched back to the records/GL.
Directional testing
Directional testing is the idea that when auditors test for overstatement or understatement, they choose the direction of testing based on the risk of misstatement.
Because the source documents and ledgers link in one direction, you can only test one assertion at a time
