Flashcards in Workshop 5 - Audit Evidence Deck (48):
Why do auditor use assertions?
For transactions, account balances and presentations and disclosures when assessing the risk of material misstatement and when designing their audit procedures.
What type of evidence do auditors need to gather for each assertion?
Sufficient appropriate evidence.
What are the transaction related audit assertions?
How to test for Occurrence (transaction related)?
Search for evidence to verify that a recorded transaction or event took place and relates to the entity.
Important when the auditor believes that there is a risk of overstatement and some transactions where recorded but did not occur.
How to test for Completeness (transaction related)?
Search for transactions or events and makes sure these have been recorded.
Important when auditor believes their is a risk of understatement and transactions that should have been recorded but have not been recorded.
How to test Accuracy (transaction related)?
Searches for evidence that transactions and events have been recorded at appropriate amounts.
Important when believed that reported amounts are not accurate.
How to test for Cut-off (transaction related)?
Searches for evidence that transactions have been recorded in the correct accounting period.
Important when close to year end.
How to test for Classification (transaction related)?
Ensuring that transactions and events have been recorded in their proper accounts.
Important for material account.
What are the balance sheet related audit assertions?
Rights and obligations
Valuation and allocation
How to test for Existence (balance sheet related)?
Search for evidence to verify that asset, liability and equity items actually exist.
Important when believed that there is a risk of overstatement.
How to test for Rights and Obligations (balance sheet related)?
Search for evidence to verify that recorded assets are owned by the entity and that recorded liabilities represent commitments of the entity.
Important where there is risk that items are held but not owned.
How to test for Completeness (balance sheet related)?
Search for asset, liability and equity items and ensures they have been recorded.
Important when believed their is a risk of understatement and the client has omitted some items form the balance sheet.
How to test for Valuation and allocation (balance sheet related)?
Search for evidence that A,L and E have been recorded at appropriate amounts and allocated to the correct general ledger.
Important when believed their is a risk of over or undervaluation.
What are the presentation and disclosure related audit assertions?
Occurrence, rights and obligations
Classification and understandability
Accuracy and valuation
How to test for Occurrence, rights and obligations (presentation related)?
Checking that disclosed events, transactions and other matters have occurred and pertain to the entity.
How to test for Completeness (presentation related)?
Ensure that all disclosures that should have been included in the financial report have been included.
How to test for Classification and understandability (presentation related)?
Ensuring that financial information is appropriately presented and described, and disclosures are clearly expressed.
How to test for Accuracy and valuation (presentation related)?
Checking that financial and other information are disclosed fairly and at appropriate amounts.
What are the key audit assertions relating to revenues?
What are the key audit assertion relating to expenses?
What are the key audit assertions relating to assets?
Rights and obligations
Valuation and allocation
What are the key audit assertions relating to liabilities
Valuation and allocation
What is sufficient appropriate evidence?
Sufficiency = quantity of evidence
Appropriateness = quality of evidence
Audit risk determines what evidence is required.
How will detection risk and audit evidence be affected when their is a significant risk of misstatement and the client has poor internal controls?
Detection risk will be set as low and more high-quality evidence is gathered.
How will detection risk and audit evidence be affected when their is a low risk of misstatement and the clients internal controls are adequate?
Detection risk is set as high and less quality evidence is gathered.
How are external confirmations used to provide audit evidence?
Auditor requests third party to confirm matter in confirmation letter.
What are the types of external confirmations?
Negative form - reply if information is incorrect. (hard to interpret non-response)
Positive form - reply in all circumstances (cannot know how well other party checked their records)
How is documentary evidence used to provide audit evidence?
Can be internally or externally generated
- Verify information in client's records by reading documents to confirm existence, rights and obligations
- Trace from documents to clients records to confirm, classification, accuracy, completeness.
How are representations used to provide audit evidence?
Legal representation letter is sent by client to its lawyers to complete and return direct to auditor.
- can include opinion on legal matters, details of disagreements with client.
Management representation letter contains acknowledgement of management's responsibilities, undertaking about legal compliance, confirmation of discussions
- auditor still needs to gather other evidence
How is verbal evidence used to provide audit evidence?
Documenting discussion with client management and staff
Used to gain understanding of internal controls; corroborate other evidence.
How is computation evidence used to provide audit evidence?
Auditor checks mathematical accuracy; re-adding, can include complex re-calculations, verifying formulae
How is physical evidence used to provide audit evidence?
Gathered via inspecting assets, to assess condition, to reconcile to client's records.
How is electronic evidence used to create audit evidence?
Includes data held on client's computer, emails to auditor, and scans and faxes
No paper trail
Auditor needs to consider quality of client's computer system when assessing reliability of this evidence.
What is corroborating evidence?
information gathered to confirm amounts recorded in client records.
Greater corroboration is provided by more persuasive evidence.
Which evidence is most persuasive?
Externally generated evidence sent direct to the auditor
Which evidence is least persuasive?
Evidence generated internally by the client.
Why is internally generated evidence least persuasive?
Possible for the client to manipulate or omit this type of evidence.
What falls between internally and externally generated evidence and why is it more persuasive than internally generated?
Externally generated, held by client.
More persuasive than internally generated evidence because it is produced by third party.
Still possible that client could omit or tamper with evidence.
What makes externally generated evidence more reliable?
Reliable because it is independent of the client. No opportunity to alter evidence.
More reliable when external party is considered to be more reliable, trustworthy and independent of the client.
Why might an auditor use the work of an expert?
Auditor themselves does not possess the skills or knowledge to assess the item.
What are factors to consider when using the work of an expert?
1. The need to use an expert
2. The scope of the work to be carried out
3. Assess the capability/objectivity of the expert
4. Assess the expert's report
5. Responsibility for conclusion
Why might an audit firm use a component auditor?
The client operates in a number of locations
Has divisions or subsidiaries spread around the country or globe
Has significant assets in other locations.
How might an auditor gather evidence?
Inspection of records and documents
Inspection of tangible assets
Observation of client staff
What is the difference between a positive and negative debtor confirmation?
Positive - letter sent to the debtor requesting confirmation of whether the stated balance is correct or incorrect.
Negative - request to debtor to contact the auditor, but only if debtor disagrees with the stated balance owing.
What is the limitation of the negative confirmation?
Failure to receive a response leads to the presumption that the balance is correct even though the failure to respond may have been due to the debtor not:
-receiving the statement
-bothering to respond
-noticing the request
When should a positive confirmation be sent?
Most valuable if:
-IR or CR is high
-Individual balances are relatively large
When would a negative confirmation be appropriate?
IR and CR assessed as low
Large number of small balances in the total debtor balance
expect very few exceptions