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CHAPTER 4Audit

Evidenceand Programs

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financial statements

financial statement cycles

management assertions

general auditobjectives

specific auditobjectives

the cycleapproach

audittests

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management assertions (AU 326)management assertions (AU 326)- existence or occurrence - financial components exist at a given date, transactions have occurred during a given period

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- existence or occurrence - completeness - all transactions and accounts are presented, nothing has been left out

management assertions (AU 326)management assertions (AU 326)

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- existence or occurrence - completeness- valuation or allocation - com- ponents of financial statements are included at appropriate amounts

management assertions (AU 326)management assertions (AU 326)

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MortgageNote

PropertyDeed

- existence or occurrence - completeness- valuation or allocation - rights and obligations - assets are rights of the entity and liabilities are obligations

management assertions (AU 326)management assertions (AU 326)

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- existence or occurrence - completeness - rights and obligations - valuation or allocation - presentation and disclosure - financial statement components are properly classified, de- scribed, and disclosed

management assertions (AU 326)management assertions (AU 326)

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}

financial statements

financial statement cycles

management assertions

general auditobjectives

the cycleapproach

Audit evidence must be

gathered to support/refute management assertions.

specific auditobjectives

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An audit can be divided An audit can be divided into into four phasesfour phases..

I IIIII IV

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An audit can be divided An audit can be divided into into four phasesfour phases..

I. Plan and designan audit approach.

II. Perform testsof controls and sub-

stantive tests oftransactions.

III. Perform analyt-ical procedures and

tests of details ofbalances.

IV. Complete theaudit and issue an

audit report.

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PersuasivenessPersuasiveness of evidence is of evidence is determined by:determined by:

relevance

timeliness

sufficiency

competence

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types of evidence types of evidence - physical examination - inspection or count by the auditor of a tangible asset

veryvery competent evidence! competent evidence!

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auditor

client’s customer

- physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request

veryvery competent evidence! competent evidence!

types of evidence types of evidence

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types of evidence types of evidence

Whenever reasonable,a sample of accounts receivable

must be confirmed by theauditor (AU 330).

- physical examination - confirmation - receipt of a written re- sponse from an independent third par- ty at the auditor’s request

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- physical examination - confirmation - documentation (vouching) - auditor examination of client documents and records

types of evidence types of evidence

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- physical examination - confirmation - documentation (vouching)- observation - using the senses to audit; often an informal procedure necessitat- ing followup procedures

types of evidence types of evidence

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- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - useful but biased and not persuasive unless supported by another form of evidence

CPA

types of evidence types of evidence

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- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - reperformance - checking the accuracy of client calculations and transfers of information (often performed by an audit software package).

types of evidence types of evidence

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- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - reperformance - analytical procedures - involve analy- sis of comparisons and interrelation- ships in data (may be performed by an audit software package).

types of evidence types of evidence

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Purposes of Analytical ProceduresPurposes of Analytical Procedures- facilitate understanding of client’s business and industry- may indicate financial difficulty and the client’s ability to continue as a going concern- may indicate misstatements in the fi- nancial statements- may result in a reduction of detailed audit tests

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Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results- comparisons with expected results, using nonfinancial data, example:

account can be calculated fromequipment maintenance expense production

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What is an What is an audit audit programprogram??

The audit program is the set of detailedinstructions for the entire collection of

evidence for an audit.includes:

- procedures to performinquiries examination

of documentsand recordsanalytical

procedures

observation

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The audit program for most The audit program for most audits is designed in three parts.audits is designed in three parts.

testsof controls and

substantive testsof transactions

analyticalprocedures

tests ofdetails ofbalances

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What are What are working papersworking papers??

proceduresapplied

informationobtained

conclusionsreached

testsperformed

auditor records of:auditor records of:

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working papersworking papers

Working papers also provide:- a basis for planning the audit- a record of the evidence accumulated and the results of tests- data supporting the audit report- a basis for supervisor/partner review

Their objective is to aid the auditor in providing reasonable assurance that an

adequate audit was conducted inaccordance with GAAS.

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working papersworking papersWorking papers include

current files andpermanent files.

?

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Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance

to current and future engagements.to current and future engagements.

INCLUDE:- copies of client documents of continu- ing importance- analyses from prior audits that have continuing importance - internal control information - results of prior audit analytical procedures

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