Chapter 4: Audit Evidence Flashcards
(14 cards)
Name all of the statement of financial position financial assertions?
Balances = VERP2C
Valuation
Existence
Rights/Obligations
Presentation
Completeness
Classifications
Name all of the statement of profit/loss
financial assertions?
Transactions = COCCAP
Completeness
Occurrence
Classifications
Cut-off
Accuracy
Presentation
Sufficient:
Factors that have an impact on the amount of the evidence that needs to be gathered:
Previous experience of the client
Risky areas will require more evidence
Material areas will require more evidence
Areas requiring judgement will require more evidence
The quality of the evidence obtained
Audit techniques auditors use to gather evidence:
AEIOURR
Analytical procedures - evaluation of financial information
Enquiry - ask relevant people
Inspection - records or documents
Observation - process or procedure performed by the client
Recalculation - check mathematical accuracy
Confirmation - representation from third party
Reperformance - key procedure by the auditor to satisfy himself that the client has done it properly.
Relevant:
Factors that have an impact on the quality of the evidence that needs to be gathered:
Original documents are more reliable than photocopies.
Third party more reliable than client-generated
Written evidence more reliable than oral
Audit evidence obtained directly from the auditor is more reliable than audit evidence obtained indirectly or by inference
Common audit procedures for accounting estimates
Review the process used by management to develop the estimate.
Perform analytical procedures on the estimate year on year and budget against actual and discuss variations with management
Use an independent expert to make an estimate for comparison
Review the accuracy of prior years estimates compared to the final actual results
Review subsequent events that help to confirm accuracy of the estimate
Obtain sufficient appropriate audit evidence about whether the disclosures in the financial statements relates to accounting estimates are reasonable.
Why would you not test 100% of a population?
Audit sampling
May not be practical
May not be cost effective
May take too long
Statistical v non-statistical sampling
Statistical sampling - any approach to sampling that involves the random selection of a sample; and the use of probability theory to evaluate the sample results, including measurement of sampling risk.
Non-statistical sampling - any approach which does not use statistical methods ex. where the auditor picks his sample using judgement.
Different types of statistical sampling
Random selection – ensures each item in a population has an equal chance of selection, for example by using random number tables or random number generators.
Systematic selection – involves taking every nth item in a population, starting at a random point.
Monetary unit sampling (MUS) – a value-weighted selection whereby every $1 in a population is regarded as a separate sampling unit. This technique should ensure that every $1 in a population has an equal chance of being selected. Material balances are more likely to be selected.
Non-statistical sampling
Haphazard selection – where a sample is chosen by hand. This is often deemed to be an inappropriate method of selection as bias would often creep in e.g. an auditor may attempt to avoid choosing any potentially problematic items.
Block / sequence selection – involves selecting a block(s) of continuous item from a population e.g. examining all sales invoices for the month of January.
CAAT
Computer-Assisted Audit Techniques
Advantages
5.2 Advantages of using CAATs
Enable the auditor to test program controls – if CAATs were not used then those controls would not be directly tested.
Enable the auditor to test a greater number of items quickly and accurately. This will also increase the overall confidence for the audit opinion.
Allow the auditor to test the actual accounting system and records rather than printouts which are only a copy of those records and could be incorrect.
CAATs are cost effective after the initial setup (as long as the company does not change its systems) as the auditor can run the same audit software each year.
Allow the results from using CAATs to be compared with ‘traditional’ testing – if the two sources of evidence agree then this will increase overall audit confidence.
There are two forms of CAAT:
Audit software – this is where the auditor uses his own computer programmes to carry out substantive procedures a balance or transaction. The most commonly used form of audit software is the spreadsheet, which can check the correct casting (addition) of a set of numbers.
Audit software can also be used to select samples, analyse monthly trends and calculate ratios.
Test data – this is where the auditor tests the controls in the client’s system by posting data onto the client’s computer system to see if the transactions are posted as they should be.
Discuss the extent to which auditors are able to rely on the work of internal audit
external auditor has sole responsibility for the audit opinion expressed
Areas of the audit where the external auditor may be able to use the work of the internal auditor might include systems documentation, controls testing and inventory count procedures
should consider the following:
(a) Organisational status: In the ideal situation, internal audit will report to the highest level of management. Also, the internal auditors will need to be free to communicate fully with the external auditor.
(b) Technical competence: Whether internal auditing is performed by persons having adequate technical training and proficiency as internal auditors. The external auditor may, for example, review the policies for hiring and training the internal auditing staff and their experience and professional qualifications.
(c) Systematic and disciplined approach including quality control: Whether internal auditing is planned, supervised, reviewed and documented in such a way as to be able to draw reasonable conclusions from the work. The existence of adequate audit manuals, work programmes and working papers would be considered.
Considerations for auditors to rely on work of experts
This will involve considering the expert’s:
Qualifications – for example, via membership in an appropriate professional body.
Experience and reputation in the field in which the auditor is seeking audit evidence.
References – from previous work performed.
Access to information – the expert should be allowed access to whatever information he feels
necessary at the client.
Independence/objectivity of the expert (e.g. if the expert has a family/financial connection with
the client).
