In order to audit evidence to be appropriate, it must be both
Relevant and reliable
Audit evidence is relevant as long as it
Provides evidence over one or more of the financial statement assertions
Reliability of audit evidence depends on its
Source and nature
Professional scepticism requires attitude that includes (3)
- Questioning mind
- Being alert to conditions which may indicate possible misstatement due to error or fraud
- Critical assessment of audit evidence
When auditor carries out substantive testing, evidence of exercising professional scepticism includes (6)
- Not just accept information produced by the entity
- Use knowledge of entity to identify specific audit risks
- Analyse figures, results of testing and challenge management’s assumptions and explanations
- Determine if any contradictory evidence
- Make judgements only on evidence gathered and only conclude on an account once..
- Document audit judgements setting out conclusion and rationale
Only conclude on an account once (3)
- Sufficient enquiry and challenge
- Sufficient testing of assertions has been undertaken
- Quality of evidence obtained has been critically appraised and judged by the auditor to be sufficiently persuasive
Five types of substantive analytical procedures
- Comparison
- Ratio analysis
- Reasonableness test
- Trend analysis
- Large and unusual items review
Stages for analytical procedure
1) Form expectation
2) Compare expectation to actual
3) Investigate and corroborate
4) Conclude whether sufficient appropriate evidence has been obtained
Auditor should use
Knowledge of entity and all other information available to them
Audit may use following sources of information to form expectation (5)
- Management accounts
- PY information adjusted for CY trends
- Known interaction between financial data eg interest expense and loan balance
- Known interaction between financial and non financial data eg payroll costs and staff numbers
- Discussions with management
Any significant differences between the expectation and actual balance will be
Followed up
Test of detail involves testing of
Specific items within a population
When documenting audit test, remember (4)
1) Verb
2) Population
3) Document
4) Acitivity
Exam approach (7 considerations)
1) Risk of material misstatement
2) Approach
3) Accounting policies
4) Assertions
5) Testing techniques
6) Standard tests
7) Common procedures
Approach the testing the detail of an account balance by either
- Testing the movements which give rise to the balance
- Testing the closing account balances directly
General rule > NCA and liabilities > test
Movements (usually few because held for a long time)
General rule > Current assets and liabilities > test
Closing balance (fluctuating constantly due to operations)
Accounting policies considerations (3)
- Requirements of accounting standards in relation to particular account
- Accounting policies applied by client in calculating figure
- Business and operations to assess whether policies are appropriate and all aspects of accounting standards have been considered
Perform audit test for each
Assertion
Key assertions > Assets
Existence
Accuracy
Key assertions > Liabilities
Completeness
Key assertions > Transactions
Cut-Off
Occurrence
Tests commonly performed by audit software include (4)
- Sample selection
- Summarisation
- Computation
- Re-performance/ recalculation
Audit data analytics usually focus around analysis of (8)
- Journals
- Substantive analytical procedures
- Recalculating transactions/ balances
- Comparing valuations
- Analysing contracts
- Comparing entity data to external data
- Manipulating data eg impairment modelling
- Supporting SAPs
