evidence Flashcards
(42 cards)
what are the assertions contained in FS about transactions and events?
C-completeness, all transactions and events that shud have been recorded are recorded, and related disclosures that shud have been included are included
O-occurrence, the transactions and events occurred and pertain to entity
C-classification, all transactions and events are classified correctly in the proper accounts
C- cut off, TE are recorded in the correct accounting period
A- accuracy, amounts are recorded appropriately and related disclosures are appropriatly measured.
what are the assertions contained in FS about yr end balances?
C- COMPLETENESS (ALL ALC THAT SHUD HAVE BEEN RECORDED ARE RECORDED, DISCLOSURES ALSO MADE)
E- EXISTENCE (ALC EXIST)
R- RIGHTS AND OBLIGATIONS- ENTITY CONTROLS THE ASSETS, AND LIABILITIES ARE OBLIGATIONS
V- VALUATION- ALC are included at appropriate amounts , adjustments are appt recorded disclosures r measured aptly and described.
PRESENTATION: All events/ transactions and assets/liabilities are appropriately aggregated or disaggregated, clearly described and all related disclosures are relevant and understandable
DESCRIBE AUDIT PROCEDURES TO OBTAIN EVIDECE:
ANALYTICAL PROCEDURES: comparasions trends etc for plausible relationships btw both financial and non financial data. these can also be used as a substantive procedure
ENQUIRY - seek info from client or externally
EXTERNAL CONFIRMATION-from another source of details in the client’s accounting records, eg. bank and lawyer confirmation
INSPECTION -
of assets: confirms existence and valuation, not rights and obligations. confirming that all assets r recorded ensures completeness.
inspection of documents: confirm to accounting records, to ensure asset exists or transaction occured. confirming that document items are recorded in FS ensures completeness
verify cutoff by inspecting reverse population: eg. check transactions recorded after reporting period to document, to ensure they occured after reporting period.
inspection also provides evidence of valuation, rights obligations and nature of items (presentation and disclosure)
OBSERVATION- look at process being performed. limited use as it shows it only took place when auditor was watching.
RECALCULATION/ check arithmetical accuracy eg. adding up ledger balance
REPERFORMANCE- independently carry out procedure which is originally part of client’s internal control, eg. bank recon, inventory count, payroll calculation, ageing, depreciation calculation
what is test data? what are its uses?
it is when auditor enters fake “dummy” data into client system, to check if it’s correctly processed, and misstatements are identified by the system.
eg. codes that dont exist
-transactions above limits
-invoices with math errors
adv and disadv of test data?
advantages:
-good test of control
-minimal cost
disadvantage:
-risk of corrupting system
-requires time spent in live environment, maybe inconvinient for client (remember saadat at hbl)
what is an audit software?
it is used to interrogate the client’s system. it can be off the shelf or packaged or customised for client.
it can be used to scrutinise large volumes of data. which wud be inefficient to do manually.a
what specific procedures can be performed using audit softwares?
-extracting samples according to specified criteria like above or below x amount
-calculating ratios and benchmarking
-recalculating depreciation
-casting ledgers
-preparing reports (budget v actual)
-data stratification
-producing letters to send to customers n suppliers
advantages and disadvantages of audit software?
-quicker calcultions and casting of reports
-more transactions can be tested
-no printing required
-cost effective once set up
disadvantegs:
-expensive
-training costs
-may slow down or corrupt clients systems
-errors may go undetected by auditor
types of audit tests
test of controls: obtain audit evidence of the design and effective implemetnation of controls
substantive tests: test of detail about transactions and balances, and analytical procedures performed to obtain evidence to detect MM in FS.
what are benefits of big data?
Data analytics involves discovering patterns in data to extract useful insights, aiding audit planning and execution.
-allows auditor to perform tests on complete sets of data rather than samples.
-it can help identify risks, test controls, and SP. however data will still need to be evaluated by auditor to analyse results.
-results can be visualised graphically
-audit quality can be enhanced
-procedures can be performed quickly
and continually
-more timely reporting
-a reduction in billable hours as audit efficiency inceases
limitations of big data?
-quality of DA depends on reliability of data used
-FS will still contain a significant amount of estimates
-auditor skepticism and prof judgement will still be required
so due to this, still only reasonable assurance can be given even tho 100% transactions r being tested.
examples of current use of data analytics?
-analysing all transactions , stratify populations, identify outliers (eg. any journal entries posted outside of office hours, and cross referencing by origniator, useful for fraud checks)
-analysing sales trends by product, store, month etc in detail
-reviewing all purchases to ensure they can be traced back to a matching order , goods received note and an invoice.
analyse large amounts of data
data visualisation techniques such as dashboards and AI, auditor can summarise data more effectively
discuss quality and quantity of audit evidence
according to IAS, auditor needs to gather SAE to provide basis for opinion.
sufficiency relates to quantity, this is a matter of professional judgement
appropriateness is quality (relevant and reliable)
examples of substantive analytical procedures
-simple comparasion year on year, can give persuasive evidence that an expense like rent for eg. is recorded correctly
-comparasion with estimates made by auditors. eg. lots of assets that r depreciatied at different rates. so take closing balance of asset and multiply with avg dep rate. if this is similar to actual depreciation charge, it would allow us to conclude that dep charge is materially correct.
-relationship between financial and non financial info: eg. for employee costs:
prior year wages expense x average # of employees in current year/ avg. # of employees in prior year * % pay increase
if this estimate is not similar to the actual figure, further explanation will be required, eg. double shifts
if no explanattion, then detailed substantive tests, evidence of mis postings and dummy employees
discuss reliability and relevance
reliability:
-how trustworthy is it?
external or client generated, direct or indirect, client generated evidence is least reliable, written more than oral.
the more reliable, the less is needed. if its unreliable, it will never be approproate, no matter how much.
relevance:
it means it relates to FS assertion being tested.
what is audit sampling and what is the need for it?
Audit sampling is when you pick some things to check out of a bigger group, so you can understand the whole group better.
its needed because it may be too costly or time consuming, plus auditor dont give absolute assurance
what is stratification
Stratification is when you divide a large group into smaller, more similar subgroups before selecting a sample for auditing. This helps ensure that different parts of the group are represented in the sample, making the results more accurate and reliable.
what is the difference between statistical and non statistical sampling?
Statistical sampling uses math for accurate results.
1- random- thru random number generator or table
2- systematic (every nth number)
3- monetary unit selection
Non-statistical sampling relies on judgment and is simpler but less precise.
1- haphazard- no structure but avoids bias
2- block selection( usually higher value items are chosen)
what are the basic principles of statistical sampling?
1-Choose items randomly.
2-Use math to decide how many items to check.
3-Use probability and statistics to analyze and interpret the results.
examples of how auditor might use statistical sampling?
Checking Inventory: Instead of counting all items in a store, the auditor counts a few randomly picked items. This gives an idea of how accurate the whole count is.
Reviewing Transactions: Instead of looking at every sale in a company’s records, the auditor looks at a few sales chosen randomly. This helps check if the records are correct.
Examining Tax Returns: Instead of checking all tax forms, the auditor looks at a small group of forms chosen randomly. This gives an estimate of how well people follow tax rules.
Testing Controls: The auditor tests a few random processes to see if company rules are followed. This shows how well the rules work overall.
Verifying Payments: Instead of checking all payments, the auditor looks at a random group of payments. This helps find if any payments are not right.
Checking Payroll: Instead of reviewing every paycheck, the auditor checks a few paychecks chosen randomly. This helps see if paychecks are accurate.
what substantive procedures are used to gather SAE?
-TEST OF DETAIL: VERIFY INDIVIDUAL TRANSACTIONS AND BALANCES
-SUBSTANTIVE AP ANALYSING INFO FOR INCONSISTIES
advantage disadvantage of small client
• Lower risk – Smaller entities may be engaged in relatively simple activities which reduces risk.
• Direct control by owner managers – Can be a strength because they know what is going on and have the ability to exercise real control. However, they are also in a strong position to manipulate the figures or put private transactions through the business.
• Simpler systems – Smaller entities are less likely to have sophisticated IT systems, but pure, manual systems are becoming increasingly rare. This is good news in that many of the bookkeeping errors associated with smaller entities may now be less prevalent. However, a system is only as good as the person operating it.
Type of evidence in small entities
• The quantity of evidence may be less than for a larger organisation due to fewer transactions being carried out.
• It may be more efficient to carry out 100% testing in a smaller organisation.
Problems in small entity audit
• Management override – Smaller entities will have a key director or manager who will have significant power and authority. This could mean that controls are lacking in the first place or they are easy to override.
• No segregation of duties – Smaller entities tend to have a limited number of accounts clerks who process information. To overcome this the directors should authorise and review all work performed.
• Less formal approach – Smaller entities tend to have simple systems and very few controls due to the trust and the lack of complexity. It is therefore difficult to test the reliability of systems and substantive testing tends to be used more.
