Audit Evidence part 1

Question 1

Characteristics of audit evidence

Answer 1

• Audit evidence should be SUFFICIENT & APPROPRIATE.

Question 2

What is audit evidence ?

Answer 2

-It is proof collected by the auditor of their audit work carried out.

Question 3

Sufficient

Answer 3

It is the quantity characteristic of audit evidence.
The amount of audit evidence to be collected is based on several factors

Question 4

Factors that influence the amount of audit evidence to be collected:

Answer 4

1. Risk at F.S level: Increased risk at F.S level indicates that more audit evidence is req. to be collected.
2. Materiality of items: More audit evidence is required to be collected for material item whereas immaterial items only need to be reviewed if they appear correct.
   3.Nature of accounting and control systems: Auditors will place more reliance on good accounting and internal control system, hence limiting the amount of audit evidence to be collected.
   4.Source and reliability of information: Where information is obtained from a reliable source then less audit evidence is req. to be collected than unreliable source.
   5.Knowledge and experience of business: Where auditors possesses good past knowledge and experience with client and trusts integrity of staff then less audit evidence is req. to be collected.

Question 5

Appropriate

Answer 5

It describes the quality characteristic of audit evidence. It is further divided into 2 components: Relevance and Reliability.

Question 6

Appropriate: Relevance

Answer 6

Audit evidence is considered relevant when it addresses the assertion of the item reported in the F.S.

Question 7

Appropriate: Reliability

Answer 7

-Audit evidence is considered reliable if auditor has obtained it from a trustworthy resource.
-Reliable sources of information/audit evidence are:-
a. Auditor generated over mgmt. generated
documents.
b. Original document over copies
c. 3rd party confirmation over mgmt. confirmation
d. Written confirmation over verbal confirmation.

Question 8

What are assertions ?

Answer 8

-Indirect claims made by mgmt. and could be made either by informing auditor in person or whenever they include an item in the F.S
- Two kinds of assertions exist: SOPL and SOFP

Question 9

SOPL assertions

Answer 9

1. Occurrence: The transactions and events that have been recorded, have they been occurred in reality.
   2.Completeness: The transaction and events that should have been recorded, have they been recorded completely in the F.S
   3.Cut-off: Have the transaction and events been recorded in the correct accounting period.
   4.Accuracy: The amount and data related to the transaction and events have they been recorded at the correct amount by the mgmt.
   5.Classification: Have the transactions and events been recorded properly in their respective accounts.

Question 10

SOFP assertions

Answer 10

1. Completeness: Have the asset, liabilities and equity interests that should have recorded completely, have they been recorded in the F.S
   2.Existence: Do the assets, liabilities and equity interests recorded in the book exist in reality.
   3.Valuation, allocation and accuracy: Have the assets, liabilities and equity interests been recorded at their appropriate amounts by the mgmt.
   4.Rights and Obligations: Does the client hold the right to control the asset recorded in the F.S and is the client under obligation to settle the liability recorded in the F.S.
   5.Classification, presentation and disclosure: Have the assets, liabilities and equity been classified properly in their respective accounts and have they been presented in the format prescribed by the accounting std.s and appropriate disclosures related to assets, liabilities and equity interests made as per accounting stds.

Question 11

How is audit evidence collected ?

Answer 11

-Audit evidence is collected based on which assertion auditor wishes to address.
-It is collected in two ways: tests of controls and substantive procedures.

Question 12

What is test of controls ?

Answer 12

-These are tests performed by the auditor to assess the operating effectiveness of the I.Cs in preventing, detecting and correcting misstatements due to fraud, error and irregularity.
-Its main focus to ensure I.C procedure operates effectively and does not focus on confirming the monetary value of the transaction or event.

Question 13

What is substantive procedures ?

Answer 13

-These are procedures that are used /applied to detect material misstatements at assertion level.
-Its main focus is to confirm the monetary value of the transaction and event by addressing each assertion.
-There are 2 kinds of substantive procedures: Test of details and analytical review

Question 14

Why is analytical review not mandatory to be performed in execution stg. of the audit ?

Answer 14

-It is not mandatory to perform analytical review because this is applied as a substantive procedure and might address only a few assertions. Thus, auditors use it on selected assertions as it is not useful to address all assertions in the SOPL and SOFP.
-A.R is mandatory to perform in planning and completion stg. of the audit.

Question 15

Test of details

Answer 15

• Theses are tests carried out to verify individuals accounts, balances and disclosures.

Question 16

How to write audit procedures ?

Answer 16

Use RARECOPI, which stands for :
1. Recalculate: To verify the mathematical accracy of mgmt. calculation.
2. Analytical review: To confirm completeness but need to carry out other testings too to corroborate findings from A.R.
3.Reperform: Do a dummy transaction to confirm occurrence and existence.
4. Enquiry: Ask information from client ; but not so reliable as it is verbal confirmation
5.Confirmation: Obtain 3rd party confirmation like bank confirmation, receivables confirmations and supplier confirmation to ensure existence and rights and obligations
6.Observe: See how the client performs a particular process to ensure existence .
7.Physically verfiy: confirms existence and valuation as auditor is looking at the asset
8. Inspect : Used to inspect documents for signatures , amount, date to confirm rights and obligations, existence and valuation

Question 17

How to perform receivables circularization ?

Answer 17

-Seek permission from client to perform debtor’s circularization and if received, then these are the following steps to perform:
1. Obtain a list of receivables and cast it. Then select a sample of receivables based upon large balances, old balances and nil balances.
2. Request a written confirmation from the debtors on the balances and that all replies are directly sent to the auditor and not the mgmt.
Have mgmt. sign the request letter to inform debtors this is a genuine request for authorisation.
3. Have mgmt. sign on all request letters before sending them out.
4. For any replies received, these replies should be reconciled to the client’s receivables ledger.

Question 18

What to do if debtors don’t respond to circularization ?

Answer 18

• Seek permission from the client and send a follow up circularization letter to the debtor.
  -If there is no response again then the auditor should request permission from the client to phone call the debtor. Then a senior should phone call the debtor and ask them to respond to the circularization letter sent in writing.
  -If there is no response again then the auditor should perform alternative procedures.
  -Alternative procedures are: Inspect order placement and dispatch documentation like Gdns and post year-end bank statement to see if payment was made or not.

Question 19

What to do for responses received with differences?

Answer 19

-Auditor should identify the disputed amounts and determine whether the difference is arising due to error in the client’s records or timing differences and investigate.
-If it is assumed due to errors in the client’s records then inspect the client’s receivable ledger to identify any possible mis postings to justify a response with a difference
-If any balances are flagged as disputed by the receivables then discuss with mgmt. if they believe that customer will settle the payment or not. If not then suggest mgmt. to write off the receivable.

-If response is with difference due to timing difference then inspect post y/e bank statement to agree the money received with the cash in transit.

Question 20

2 kinds of circularization:

Answer 20

1. Positive circularization
2. Negative circularization

Question 21

What is negative circularization and why is not reliable way to obtain audit evidence ?

Answer 21

1. Negative circularization is requesting debtors to only respond to the request letters if they disagree with the balance stated or outcome.
2. This is an unreliable way of obtaining audit evidence because there is a possibility that the debtor might have not received the letter in the first place or it may be a fake customer. Hence, risk of not detecting material fraud and not collecting S&A audit evidence.

Question 22

What is positive circularization?

Answer 22

-Requests all debtors to respond to the request letter irrespective of what the balance is stated as or the outcome is.

Question 23

Why debtors may not respond to circularization?

Answer 23

-It may be a fake sale as a result there is a risk of money laundering
-It may be a fake customer and might not exist in reality, thus risk of fraud
-The cash is in transit and will only be received after the year-end. Thus, need to review the post-Y/E bank statement to ensure payment was received.

Question 24

Completeness: Receivables

Answer 24

1. Analytically review the receivable days for the current year and compare them with the previous year to identify any variances and investigate them.
2. Obtain the figure for receivables from the F.S and trace it back to the trial balance and back to the aged receivables listing, receivables ledger and journal to confirm completeness.
3. Review the disclosure notes for receivables to ensure adequate disclosure has been made as per the accounting std.

Question 25

Existence: Receivables

Answer 25

1. Obtain the debtor's circularization to confirm existence 2. Obtain a sample of sale invoices to confirm existence

Question 26

Classification, presentation & disclosure: receivables

Answer 26

1. Review the F.S to ensure receivables have been classified properly and presented as per the accounting std.

Question 27

Rights and obligations : receivables

Answer 27

1. Obtain a debtor's circularization to confirm the client's rights to receivables. 2. Inspect a sample of sale invoices for the name and address of the client to confirm the client's rights to receivables.

Question 28

Prepayments procedure

Answer 28

1. Inspect bank statements for prepayment and agree with a sample of purchase invoices for goods and services that have not yet been received to confirm existence. 2. Obtain a sample of purchase invoices related to prepayments for goods and services not received yet to ensure correct valuations 3. Cast all prepayments in the prepayment schedule and agree with mgmt. the calculation to confirm accuracy. 4. Analytically review the prepayment of the current year and compare it with the previous year to identify any variances and investigate them.

Question 29

Continuous inventory count

Answer 29

-Where the inventory counts take place on a continuous basis such as on a monthly basis, weekly basis and quarterly basis.

Question 30

Perpetual inventory count procedures

Answer 30

-As auditors cannot attend all counts, hence auditors should at least attend one count to ensure adequate controls exist and observe how records are prepared and see if count results match with records. -Identify the no. and value of adjustments made during the year. if a significant amount and value of adjustments are made during the year.Then auditors cannot rely upon the system figures at y/e. Thus, a full count must be requested. - Inspect pre and post year end GDNs and GRNs for the dates to ensure correct cut off has been applied.

Question 31

Normal inventory procedures for completeness and rights and obligations

Answer 31

1. Analytically review inventory days of the CY and compare it with PY to identify any variances and investigate them 2. Obtain the figure of inventory from the F.S and trace it back to the trial balance, aged inventory listing/report , inventory ledger and journal to ensure completeness 3. Inspect a sample of purchase invoices for the name and address of the client to confirm rights to inventory 4. Obtain 3rd party confirmation from 3rd party warehouse that they are holding inventory of client to confirm rights

Question 32

Inventory : Valuation, allocation and accuracy procedures

Answer 32

1. Inspect a sample of purchase invoices for the amount paid for materials to ensure correct valuation of cost. 2. Obtain a breakdown of the total cost of finished goods and WIP to identify DL,DM,DE and production OH to ensure correct valuations 3. Cast the items in the inventory schedule and agree it with mgmt. calculations to ensure accuracy 4. Recalculate production OH cost and agree with mgt. calculation to confirm accuracy.

Question 33

Direct labour cost and production OH cost : procedures

Answer 33

1. Review pay rates against payroll records and ensure its matching to confirm correct valautions 2. Review labour cost against actual labour and production records to ensure allocation and correct valuations. 3. Review labour hours worked against time records to calculate labour cost to ensure accuracy. 4. Obtain a breakdown of production OH cost to identify only production OH cost elements are included and not non-production OH 5. Recalculate share of production OH to ensure OAR is based on normal level of output to ensure correct valuation.

Question 34

Detailed NRV and Cost testing procedures

Answer 34

-Compare selling prices as per sales invoices with purchase prices as per supplier statements to determine whether NRV or cost is lower. -Review the order book to determine the cost at which goods were ordered to verify valuations -Enquire mgmt. if any write downs from last year still exist in inventory and discuss the reasons with mgmt. -For unsold items, discuss with mgmt. to identify the inventory as slow-moving and whether a provision has been created or not. -Review aged inventory report to identify any slow-moving goods and to enquire with mgmt. why has it not been written down

Question 35

Inventory : existence procedures

Answer 35

-Inspect a sample of inventory records and physically verify these to the warehouse to confirm the existence -For any additions during the year: inspect a sample of purchase invoices and physically verify these to the inventory in the warehouse.

Question 36

NCA : Existence procedures

Answer 36

-Obtain NCA register and physically verify the assets listed to the client's location to confirm existence. - For additions during the year: obtain a sample of purchase invoices and physically verify the details of the asset to confirm existence

Question 37

NCA: Rights and obligations

Answer 37

- Inspect title deed and other documents supporting ownership of NCA for name and address of the client to confirm rights to NCA - Inspect purchase invoices of NCA for client's name and address to confirm rights

Question 38

NCA : Completeness

Answer 38

-Physically verify NCAs in the client's location against a sample of NCAs listed in the NCA register. to confirm the completeness - Analytically review NCA of the CY and compare it with PY to identify any variances and investigate them. -Obtain the figure for NCA from the F.S and trace it back to the trial balance, NCA register, NCA ledger and journals to ensure completeness,

Question 39

Depreciation : procedures

Answer 39

1. Recalculate the dep. cost and agree it mgmt. the calculation to confirm accuracy. 2. For accounting policy on dep. compare the policy with industry methods and assess the reasonableness of the policy applied. 3. Inspect NCA register to see whether dep. is charged on all assets with limited life to ensure completeness. 4. If assets are revalued, review whether dep. expense is charged on the revalued amount to ensure correct valuations.

Question 40

NCA : Full account procedures

Answer 40

1. Opening balance: Obtain the previous year F.S for closing balance and agree with the opening balance of the CY to ensure correct valaution. 2. Additions/ Significant events : a.Review board meeting minutes for evidence of discussion of approval on purchase of NCA and authorisation. b. Inspect purchase invoice and agree amount in NCA register to confirm correct valautions. 3. Closing balance : Cast the closing balance and agree with mgmt. calculation to ensure accuracy 4. Disposals : a. inspect board meeting minutes to verify discussion of disposals to NCA and approval and authorisation for it. b. Recalculate the profit or loss on disposal and agree with it mgmt. calculations to ensure accuracy. c. Inspect NCA register for disposal to ensure NCA has been correctly removed to ensure valuations d. Obtain disposal documents to confirm disposal and the amount for correct valuations. e. Inspect bank statements to agree the cash received on disposal for correct valuations.