1 Audit Evidence Week 11. 2 Audit evidence What evidence is required? Auditors should obtain...
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Transcript of 1 Audit Evidence Week 11. 2 Audit evidence What evidence is required? Auditors should obtain...
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Audit Evidence
Week 11
2
Audit evidenceWhat evidence is
required? Auditors should obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion (SAS 400.1)
Audit evidence is obtained in a number of ways
Including an appropriate mix of tests of control and substantive procedures
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Assertions in Financial statements
The auditor is making an opinion on the assertions made in the financial statements
These then must be The evidence collected and
evaluated must therefore be Sufficient Appropriate
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Assertions
Assertions and the implications of those assertions are as shown
These can be evidenced by substantive testing
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Sufficiency & Appropriateness
Sufficiency is the measure of the quantity of evidence
Appropriateness is the measure of the quality of reliability of audit evidence
and its relevance to a particular assertion Whilst sufficiency and appropriateness are interrelated, various
factors including risk of misstatement and materiality need to be considered when judging as to what is sufficient appropriate audit evidence
But there are two major constraining factors in seeking evidence Time: an audit timetable is normally agreed with the
management of the entity giving a deadline date for the conclusion of the audit.
Cost: the fee for an audit assignment is normally agreed in advance. Thus, effective use of audit resources is crucial if commercial viability is to be maintained
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Quantity Quantity of evidence Is a function of the methods adopted
to collect evidence from the population of a class of transactions
This relates to an assessment of risk and The employment of sampling
techniques
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Reliability Reliability of audit evidence is influenced by
individual circumstances, but Audit evidence from external sources is more
reliable than that obtained from the entity’s records
Evidence from entity’s records is more reliable when internal controls work effectively
Direct evidence by auditors is more reliable than that obtained from entity
Written evidence is more reliable than oral Original documents are more reliable then
photocopies,etc SAS 400.16
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Obtaining evidence
Evidence may be obtained by Inspection Observation Enquiry and confirmation Computation Analytical procedures
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Analytical procedures Identification of relationships Between items of financial data in the
same period Between comparable financial data
from different periods In order to Identify consistencies and predicted
patterns of significant fluctuations and The results of investigations thereof.
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The role of analytical procedures
Analytical procedures can themselves provide sufficient audit evidence where an item can be verified directly by reference to another item
Eg commission on sales or bank interest receivable
Analytical procedures may also be effective in testing for understatement (i.e., completeness)
Eg in predicting sales from purchases and known margins
But sufficient substantive evidence is not obtained by analytical procedures alone, some tests of detail will also be required
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Circumstances where appropriate
Analytical procedures are most likely used
With existing well-established clients In well-known, stable industries Where predictive information is
readily available Where accounting and internal
control systems are effective
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Audit of accounting estimates
These are such items as Adjustments for stock and debtors
to net realisable value Depreciation Accrued income Provision for deferred taxation General provisions made
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Accounting Estimates
Frequently complex Business specific Maybe based on formula Subject to certain internal
controls May require specialist
knowledge
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Accounting EstimatesCollection of evidence
Confirmation of estimates by combination of Review and test of process used to develop
estimate Evaluation of data & consideration of the
assumptions Testing calculations Comparison of estimates made for prior
periods Consideration of directors’ review procedures
Use of independent estimate Review of subsequent events
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Opening balances and comparatives
Auditors need to obtain sufficient audit evidence that
Opening balances have been appropriately brought forward
Opening balances do not contain errors or misstatements
Appropriate accounting policies have been consistently applied
Changes in accounting policies have been correctly applied
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Comparatives Same rules apply Comparatives must be free from
error Comparatives must incorporate
correctly applied accounting policies If a new auditor May require substantive testing to
provide adequate assurance of opening balances and comparatives
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Confirmation as evidence There are instances where
knowledgeable third parties may be asked to provide corroborative evidence of assertions
This generally relates to requesting written evidence in relation to account balances
This sort of evidence is a confirmation
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Situations where appropriate
Confirmation used where there exists: knowledgeable party independent of the entity where alternative reliable evidence is not readily
available
Knowledgeable parties usually in a commercial relationship with the entity holding reciprocal information as to entity balances
Debtors Creditors Banks Lenders, etc
It is in the interest for such parties to maintain reliable records of their relationship with the entity
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Extent of evidence by confirmation
Where confirmations relate to reciprocal balances they provide persuasive evidence as to rights and obligations
Confirmations also provide strong evidence of ownership where the other party is acting as custodian
But confirmations may not provide persuasive evidence of accuracy where the entity’s balance is in error in the other party’s favour
an understatement of debtors an overstatement of creditors
Confirmations provide reliable evidence of the valuation of assets
Where the other party is a debtor or borrower further evidence is required of their ability to pay
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Interpretation
Reliability is high when There is assurance of responsibility
and sound internal controls on the part of the third party
Can provide useful evidence where Entity’s internal controls are weak It is supportive of material
misstatement