Audting 3_Audit Evidence

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AUDITING 3 (Module 1)

Obtaining Audit evidence chapter 5


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Your title here


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AUDT

311 INTRODUCTION

EVIDENCE

Audit evidence is absolutely crucial to the audit function

to Support opinion.

ISA 500 - "The Auditor should obtain : SUFFICIENT APPROPRIATE EVIDENCE

to be able to draw a reasonable conclusions on

which to base audit opinion." :

KEY PHRASE = sufficient appropriate evidence.

Evidence usually relates to Assertions on Fin Stats.


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Overall measure of whether enough sufficient appropriateevidence is gathered cannot be 100% exactly determined:

BUT SUFFICIENT EVIDENCE:

1) SUFFICIENT means if QUANTITYof evidence is enough.

2) Evidence is Cumulative: E.g. debtors test =

1-debtors circularisation +

2-test if debtors pay (very good evidence they exist!)

3)To calc. quantity of evidence needed

=NO hard and fast way, only: USE professional Judgment + statistical

methods.

This is done as part of the "AUDIT PLAN" stage.

SUFFICIENT

APPROPRIATE EVIDENCE


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1) APPROPRIATE

Means if QUALITY of evidence is enough. Further broken down into: a)RELIABILITY (source & nature)

b)RELEVANCE (to assertion being tested)

2) RELIABILITY: Hierarchy of Reliability of Evidence:

a) Most Reliable =Developed by auditor: e.g. (inspect stock)

b) Reasonably Reliable

=Evidence from 3rd party (not client) if

1-Independant 2-Reputable

3-Competent e.g. (attorney)

SUFFICIENT



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Less Reliable =From 3rd party BUT passed through client.

E.g.: bank statement.

Less Reliable =Evidence from clients SYSTEM and where relatedcontrols it passed through were Effective

Least reliable= Evidence provided by client (lacks independence)

Written more reliable than oral (easy denied)

Original documents More than Photocopies/facsimiles.

Also, REM these are guidelines, e.g. if competence + integrity of

directors employees are strong & acc.sys and internal controls arestrong, evidence from client could be very reliable.

E.g. sheet to shelf = existence BUT shelf to sheet =completeness.

SUFFICIENT



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3) RELEVANCE: a)Evidence MUST be MATCHED to assertion tested :

e.g.; self stock count= 'existence some 'valuation' BUTnot 'rights' e.g. could be uncollected but sold .NOR'completeness' yet e.g. must first be traced to records to

determine if all were included in records.

b)E.g. tests of controls as to accuracy will not provevalidity or completeness.

c)A single procedure could be relevant to morethan 1 assertion though.

SUFFICIENT APPROPRIATE

EVIDENCE


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INFLUENCEING FACTORS IN DETERMINING WHETHERSUFFICIENT APPROPRIATEEVIDENCE HAS BEENOBTAINED.

Factors which MUST influence auditors decision.

THE ASSESMENT of Inherent Risk and Control Riskat the client.

:if higher riskmore evidence from most reliable sourceneeded.

THE MATERIALITY of Item Being Examined: e.g. if stock is very materialauditor must get more of

appropriate evidence.-whygreater likelihood of materialmisstatement.


EVIDENCE


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3) Experience from Previous audits (at sameclient). HISTORY

4) Results of audit procedures ALREADY CONDUCTED

E.g. if test of debtors was good, then do less other tests.

5) RELIABILITY and Source of info. Available. If no reliabletests available, then much more of less reliable tests must do.

6) PERSUASIVENESS of the audit evidence:

e.g.: evidence gathered on one section of audit which is Supportedby evidence from another section = more persuasive .If itContradicts it = less persuasive.


EVIDENCE


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FINANCIAL STATEMENTASSERTIONS:

1)The OBJECTIVE of an audit:

is for an auditor to EXPRESS an OPINION on whether theFINANCIAL STATEMENTS are FAIRLYPRESENTED. In allMATERIAL ASPECTS after comparing it to an IDENTIFIEDREPORTING FRAMEWORK (check other definitions of thisbefore)

2)Embodiment of Assertions:

the financial statements are the EMBODIMENT of the

ASSERTIONS of the DIRECTORS of the COMPANY ,in thePRESCRIBED FORMAT , on the FINANCIAL RESULTS andPERFORMANCE of OPERATIONS ,which they are managingon behalf of shareholders.

ASSERTIONS


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3)ISA 500R : the auditor should use assertions for classes of transactions ,account

balances, and presentation and disclosure, in sufficient detail to form

a basis for the assessment of risks of material misstatement and the

design and performance of further audit procedures.

4)It is the Auditors duty to gather sufficient evidence to

support assertion being audited.

5)Every assertion should be considered for audit, but thoseassert. presenting highest risk of MATERIAL MISSTATEMENT

by the AUDITOR in his' "OPINION on ... ", must

be concentrated on.

ASSERTIONS


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6)CATEGORIES OF ASSERTIONS: ISA 500R Categorises the Assertions as follows:

a)Classes of Transactions and Events(for period) e.g:.

sales, purchases, interest received

b)Account Balances carried forward to next year

(at year end)eg:property plant &equipment ,accounts receivabe

c)Presentations and Disclosure :e.g. notes to bal.

Sheet, contingent liabilities

ASSERTIONS


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1.Classes of TRANSACTIONSAND EVENTS: Assertions about (during period)

1.1.OCCURENCE : recorded trans.& events DID occur and DO PERTAIN to THIS entity

1.2.COMPLETENESS :all that should have been recorded, wererecorded ,none missing.

1.3.ACCURACY :1-Amounts & 2Data were recorded appropriately.

1.4.CUTOFF : in right accounting period.

1.5.CLASSIFICATION (and UNDERSTANDABILITY) :recorded in correct account names.

ASSERTIONS


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2.ACCOUNT BALANCES :Assertions about(end period).

2.1.EXISTENCE : assets, liabilities, equity's DO actually exist.

2.2.RIGHTS AND OBLIGATIONS : entity holds rights to assets , liabilitiesare obligations of this entity , namedshareholders. : do hold the rights to the equity.

+2-ALL ENCUMBERENCES on ownership must be . .. .:Disclosed 2.3.COMPLETENESS : all that should have been recorded, were recorded,

none missing.

2.4.VALUATION AND ALLOCATION: assets ,liabilities , equity recorded atappropriate valuation amounts and any resulting :valuation adjustments or

allocation adjustments are appropriately recorded . ALSO , :DEPRECIATION and OBSOLECENCE

ALSO allocated to correct accounts in ledger

ASSERTIONS


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3.PRESENTATION AND DISCLOSURE: Assertions about.

3.1.OCCURENCE

3.2.AND RIGHTS AND OBLIGATIONS. :disclosed events ,transactions& other mattersDID occur and Do pertain to this entity.

3.3.COMPLETENESS : All matters that should be disclosed in FIN Statements., weredisclosed, none missing.

3.4. CLASSIFICATION AND UNDERSTANDABILITY. : Financial info./disclosures areappropriately/ properly PRESENTED and DESCRIBED, and EXPRESED CLEARLY .,and classified correctly in ledger

3.5. ACCURACY amounts disclosed in e.g. notes are not junk

3.6. VALUATION & ALLOCATION. :

1-FINANCIALand 2-OTHER INFORMATION

( e.g. notes on union problems) are disclosed FAIRLY and at APPROPRIATE AMOUNTS. (atcorrect valuation amounts and in a correct and proper'FAIRLY presented' - manner.)

ASSERTIONS


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No ASSERTION TRANSACTIONEVENTS

ACCOUNT

BALANCESPRESENTATION

DISCLOSURE1 COMPLETENESS 2 OCCURRENCE 3 EXISTENCE 4 ACCURACY 5 CUT OFF

6

CLASSIFICATION (and for Pres. & Disclosure:UNDERSTANDABILITY)

7 RIGHTS and OBLIGATIONS 8 VALUATION and ALLOCATION

ASSERTIONS


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EXAMPLES OF ASSERTION CLASSIFICATION IN PRACICE: 1. SALES TRANSACTIONS: 1.1. FIRSTLY: all Sales figures PLUS all disclosures pertaining to

sales should be checked for :( leave out Occurrence fordisclosures though)

1.1.1. Occurrence: all sales included DID actually occur. (Not fictitious) 1.1.2. Completeness: all sales made were included in sales total, none

left out. 1.1.3. Accuracy: all sales recorded appropriately, meaning prices

discount & vat rates are correct & correctly calculated. 1.1.4. Cutoff: All sales recorded occurred in accounting period beingaudited. 1.1.5. Classification: All sales posted to proper account incl. Contra

accountsVAT, DISCOUNT, CREDITORS.

ASSERTIONS


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TRANSACTION

& EVENTSOccurrence Completeness Accuracy Cut-Off Classify &

Understand

ACCOUNT

BALNCESExistence Completeness Rights &

ObligationValue at. &

Allocate

Plant &Equipment All in bal.Sheet existedat time of bal.

sheet

All owned is

included, noneleft out.

Holds rights to

ownership+2-

Encumbrances

On ownership

disclosed.

Reflected at

appropriateamount incl

allocat.

1Obsolete

+2-Dep.PRESENTATION &

DISCLOSURE

Occurrence Completeness Accuracy Cut-off Classify &Understand

Rights & Obligat

2.Auditor self stock count= 'existence some 'valuation' BUT not 'rights' e.g. could be uncollected but sold .NOR 'completeness'

yet because must first be traced to records to determine if all were included in records.

3. Sheet to shelf = existence BUT shelf to sheet =completeness.

4. Tests of controls specifically as to accuracy will not prove validity (occurrence /existence?) or completeness.

EXAMPLE


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1. Auditor has ONLY 2 things in his TOOLBOX A. TESTS OF CONTROLS =to test if control procedures

complied with

B.SUBSTANTIVE PROCEDURES. =to test if verify /

substantiate 1-TRANSACTIONS

2-BALANCES

TESTS OF CONTROLS

THE AUDITORS TOOLBOX


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1) CATEGORIES OF TESTS OF CONTROLS:

i) RE-PERFORMANCE: repeating 1-Wholly 2- In Part controlprocedures e.g.: re-perform bank recon.

ii) INSPECTION: verify on docs. If control procedures did happen:e.g.: verify if transaction authorization signature is there.

iii) ENQUIRY: ask person CONCERNED with control procedure asto effective operation of. NOT just accept mngmnts word. E.g.: findout who performs each procedure and what they do.

IV) OBSERVATION: watch process/procedure being performed e.g.:watch what a receiving clerk does when supplier delivers goods.receiving clerk does when supplier delivers goods.



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2) Tests of Control are performed to obtain evidence ofwhether

i) Controls suitably designed to

(1)PREVENT

(2)DETECT (3)CORRECT material misstatements)

Operated effectively

THROUGHOUT PERIOD AUDITED. 3) Good results reduce control risk and hence audit risk,

and then less time need spent on substantive tests.



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4) LIMITATIONS OF: tests of controls:

a) Good when checked but not in the rest of the Fin. Year. b) Inherent risk? Ch7 e.g. 1-only test some 2- subjectivity-auditor own

method 3-

5) LIMITATIONS OF: internal controls:

i) Cost exceeds benefitlimits capacity of internal controls.

ii) Directed at routine transactions.miss non-routine e.g. sell copier.

iii) Human error.e.g.: calc. discount after vat.

iv) Collusion- e.g. fraudulent pay packet- collude wage clerk, foreman,personell mngr.

v) Mngmnt Override /Abuse of responsibility over internal control- e.g.mngr overrides stop on purchases for overdue acc.49



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SUBSTANTIVE PROCEDURES. 1) Tests controls cannot provide 100% assure so

sustant.tests need be done.

2) SUBSTANTIVE TESTS BROADLY DISTIGUISHED

INTO; a) Tests Of Detail.

b) Analytical Procedures. (Very powerful tool)



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3) CATEGORIES OF SUBSTANTIVE PROCEDURES:

i) REPERFORMANCE: repeating 1-Wholly 2- In Part same procedures performedby client e.g.: debtors age analysis.

ii) INSPECTION: inspect 1-docs+records, or 2-tangible assets e.g.: inspect fixedasset to verify existence or inspect.Confirmation of Balance Certificate" from longterm loan creditor.

iii) ENQUIRY: 1-oral or 2-formal written: to inside or outside entity to get 1-Corroborative evidence or 2-Plain knowledgeable person inside or outside entity.

iv) CONFIRMATION: procedure of obtain response to an enquiry to corroborateinfo. in the acc. records. Knowledgeable person inside or outside entity

v) RECALCULATION: check arithmetic on source docs & records. E.g.: checkdepreciation calc.

vi) ANALYTICAL PROCEDURES: analysis of ratios + trends , then investigateinconsistent deviations .(statistics)



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4) Substantive procedures are performed on a) Balances Assertions=; Existence, Completeness, Rights

& Obligations, Valuation & Allocation.

b) Transactions Assertions=; Occurrence, Completeness,

Cutoff, Classification & Understandability, Accuracy 5) Financial stat. consist of only

a) Collection of balances - bal sheet

b) Summary of totalsinc.stat



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6) VOUCHING AND VERIFYING:

a) Vouching: (To Vouch) TRANSACTIONS auditing.

b) Verifying: BALANCES auditing.

c) Example:

i) VOUCHa sales transaction = inspect docs + enquire discounts+ recalculate

ii) VERIFYa debtors balance = confirmation in writing fromdebtors + enquiries as to calc. of prov. bad debts. +re-perform aginganalysis of debtors.

7) DUAL PURPOSE TESTS:

Some tests can be a test of control and substantive test at sametime e.g.: bank recon. Re-perform = test of control (recon is acontrol) and substantive test (bank balance).



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Ability Is what you're capable ofdoing.

Motivation determines what you

do.

Attitude determines how well you do

it.THE ENDfor now


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Audting 3_Audit Evidence