TOPIC5:MATERIALITY&AUDITEVIDENCE

TOPIC6:AUDITPROGRAM,DOCUMENTATIONTestofControls

Make inquires of client personnel Inspect documents, records and reports (e.g. policy and

systems manuals) Observe activities and operations related to controls

Re-perform client procedures SubstantiveTesting: Testdollarmisstatementsdirectlyaffectinggeneralledger

TOPIC7:INTERNALCONTROLSControls and Procedures

Control Procedure to test operating effectiveness Purchase order signed by staff

• Select sample of purchase orders • Check appropriate staff member has signed

Receiving Report Completed

• Select sample of goods received and match to Receiving reports

Matching Purchase Order, Receiving Report and Supplier Invoice

• Select sample of payments and vouch to 3 way match documents • Check for indicators that matching conducted • Occurrence

Payment Approved • Select sample of payments – check approval is present • Cheques: proof that cheque matches 3 way matched documents • EFT – approval codes

Types of Audit Evidence Example

Physical Examination

Inspection/count of tangible assets: Direct means of verifying asset existence Ø Distinction with Documentation: object being examined

has no inherent value e.g. invoice

Before cheque is signed = document Signed Cheque = Asset Cancelled Cheque = document

Confirmation

Written/oral response from independent third party verifying accuracy – used in non-current asset additions

Confirmation not required for any other than Accounts Receivable

ASA 505 Positive confirmation: Return confirmation in all circumstances Negative confirmation: Respond only when incorrect

Documentation Examination of documents and records to substantiate information that is or should be included in financial statements

Customer orders, shipping documents, duplicate sales invoices – useful evidence for verification of accuracy of client’s records

Observation Use of senses to assess certain activities – sight hearing, touch and smell to evaluate wide range of items

Observe whether equipment is rusty to evaluate whether obsolete, watch individual perform accounting tasks

Inquiries of client

Written or oral information from client in response to questions from auditor ASA 580: normally necessary to obtain further corroborating evidence through other procedures

Recalculation Rechecking sample of calculations – checking arithmetical accuracy through computer assisted audit software

Extending sales invoices, inventory, adding journals and subsidiary records, checking calculation of depreciation and prepaid expenses

Re-performance

Vouching: Using documentation to support recorded transactions or amounts – sourcing originals

Tracing: Independent tests of accounting procedures or controls by retracing steps

Compare price of invoice to price list, re-perform aging of accounting receivable

Analytical Procedures

Comparisons/relationships to assess whether account balances or other data appear reasonable - Sometimes used to isolate accounts or transactions that should be investigated more extensively

Comparing gross margin % with preceding year

Key Controls Typical Test of Control Automated credit approval per credit limit

Examine sample of sales invoices and compare customer order with credit limit (re-performance)

Sales supported by authorized shipping documents and approved customer orders attached to duplicate sales invoice

Examine sample of duplicate sales invoices to determine each is supported by authorized shipping document and approved customer order (documentation)

Separation of duties between billing, recording sales, handling cash receipts

Observe personnel responsible for handling cash having no accounting responsibility and inquire as to duties (observation and inquiry)

Shipping documentations forwarded to billing daily and billed subsequent day

Observe whether forwarded daily and when billed (observation)

Audit Evidence Test of Transactions

Verifying specific transactions from journals from general ledger

Vouch back: Occurrence Trace forward: Accuracy and Completeness Documentation, Inquiries of Client

Analytical Procedures (Comparison/ aggregation)

Trend analysis, Data comparisons to budget, industry or prior years, ratio analysis: Ratios identify unusual patterns: reveal risks/possible misstatements from unusual relationships

Inquiries of Client

Test of details of Balances

Involves balance sheet accounts – cash and A/R, main focus on ending general ledger balances for both balance sheet and income statement

Confirmation (Customer balances), Re-performance, Recalculation, Documentation, Inquiries of Client Physical Examination (Inventory)

Control Deviation

Where control found to not operate according to design

Tolerable Deviation Rate

Rate of deviation auditor willing to tolerate

Test of Controls

Control Testing Procedures – find deviations

Calculate Actual Deviation Rate

Assumed to be projected onto population

Evaluation Investigate source of deviation – one off of systematic issue? Collect another sample and re-perform test – is issue still present? If Actual Deviation > Tolerable = adjust CR, DR and Audit Strategy

Build Rapport

Control to prevent misstatement on Completeness, Accuracy, and

Occurrence

LOW, MEDIUM, HIGH

à Less substantive testing

ASA 315: Understanding the Internal Control

ASA 315: Components of Internal Control

CONTROL ENVIRONMENT

- Company foundation - Organisational Culture - Hierarchy/Structure - Management philosophy - Hiring choices

RISK ASSESSMENT - Management assessment of BUSINESS RISKS – what will prevent achieving objectives

- Audit perspective: how frequently managers assess risk, at what levels e.g. executive level: dependent on industry

Reactive Proactive

CONTROL ACTIVITIES

- Primary auditor concern - Activities prevent/detecting

material misstatements BUSINESS DECISIONS: Minimize Occurrence Minimize Impact Insure against: policy Avoid Risk: e.g. location Do nothing

Separation of duties: authorization, access to assets, recording transactions à minimize possibility of fraud Authorization: different levels, quotes Independent Checks: Monitoring/Review Adequate Records: Pre-numbered - completeness

INFORMATION & COMMUNICATION

- IT - Information collected about

organisation

MONITORING - Overview - Monitoring Controls, Risks

and Environment through Information System

E.g. bank reconciliation Security checks Controls operate as intended: key issue in targeting misstatements i.e. if controls stop working – efficiency in identifying problem