SPECIFIC TYPES OF AUDIT EVIDENCE

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ISA 505 – External confirmations• “SAICA Handbook” or IFAC website

ISA 540 – Auditing accounting estimates• “SAICA Handbook” or IFAC website

ISA 520 – Analytical procedures• “SAICA Handbook” or IFAC website

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REFERENCES

It is imperative for topics relating to ISA 540 & ISA 520 that the standards themselves are used for study purposes.

LEARNING OUTCOMES1. Explain the auditor’s responsibility relating to:

• external confirmations (ISA 505)• the audit of accounting estimates(ISA 540)• the performance of analytical procedures (ISA 520)

in regard to account balances at the end of the financial year being audited.

2. Describe the audit procedures that the auditor should carry out to discharge his/her responsibility regarding:

• the use of external confirmations(ISA505)• the estimates included in account balances(ISA540)• analytical procedures (ISA520)

3. Explain the reliability of external confirmations in a given scenario in terms of the appropriateness of audit evidence(ISA505)

External Confirmations

– ISA 505

Legal matters

Audit evidence and reliability:

Source: external / internal; level of authority. Obtained direct or indirect/by inference. Form: documentary (paper/electronic) / verbal.

1. INTRODUCTION – ISA505 para 2

Use ofExternal Confirmations

to obtain

For which assertions can audit evidence be obtained through external confirmations? (i.t.o. account balances) Existence, Rights / Obligations, Valuation and/or Completeness?

Title DeedsDocuments held in safe custody Loan amounts/outstanding debtInvestmentsInventory held by third partiesAccounts receivable (e.g. trade debtor balances)Bank information

2. REQUIREMENTS– ISA505 para 7

2.1 When performing external confirmation; procedures:

- Control over process - What Information?

- Confirming party? - Design request

- Send

NB: obtain management permission to send beforehand

0

2. REQUIREMENTS– ISA505 para 8

2.2 If management refuses permission to confirm:

Reason? Reasonable?

Impact on risk assessment (RMM) /risk of fraud?

Alternative procedures...

Objective: must regardless, obtain sufficient appropriate audit evidence! What if can’t?

2. REQUIREMENTS– ISA505 para 9

2.3 Doubts as to reliability of audit evidence from external confirmation

Alternative procedures

Impact on risk assessment (RMM)/risk of fraud?

Evidence , then impact on audit opinion

2.4 TYPES OF EXTERNAL CONFIRMATION REQUESTS

Positive confirmation request Respond if agree or disagree

Negative confirmation request Respond only if disagree

Which offers more reliable audit evidence?

2. REQUIREMENTS– ISA505 para 06

EXAMPLES

Examples of alternative audit procedures

• If cannot confirm a debtor’s balance?

• If cannot confirm a creditor’s balance?

Example of a bank confirmation (SAAPS 1100)

Auditing Accounting Estimates – ISA 540

INTRODUCTION – ISA 540 para 6

Sufficient appropriate audit evidence about:

(a) accounting estimates reasonable;(b) related disclosures in the financial statements are

adequate.

Auditor’s Responsibility/Objective

Definition

“An approximation of a monetary amount in the absence of a precise means of measurement.”

Examples

DEFINITIONS – ISA 540 para 7

“Auditor’s point estimate – The amount, or range of amounts, respectively, derived from audit evidence for use in evaluating management’s point estimate.” - ISA540 para7(b)

“Estimation uncertainty – The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.” - ISA540 para 7(c)

“Management bias - A lack of neutrality by management in the preparation of information” - ISA540 para 7(d)

“Management’s point estimate – The amount selected by management for recognition or disclosure in the financial statements as an accounting estimate.” - ISA540 para 7(e)

“Outcome of an accounting estimate – The actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting estimate.” - ISA540 para 7(f)

Other Definitions

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NATURE OF ACCOUNTING ESTIMATES – ISA 540 para 2 Risk of material misstatement in accounting estimates varies:

dependent on the level of estimation uncertainty of the estimate involved, in turn dependent on:

 • Complexity of the business activities of the entity;

• Frequency at which the estimate is made (routine/non-routine transactions);

• Availability (“Observability”) of data;

• Ease at which the method of measurement is applied, as prescribed by IFRS;

• “Model” used to measure the estimate.

Auditor’s considerations when determining the risks associated with estimates: • The requirements of the financial reporting framework (e.g. IFRS)?• How management identifies indicators that give rise to the need for estimates?• How does management make the estimate? On what data is it based?

The method used Relevant controls Whether an expert was used Underlying assumptions Changes in the method used from the prior period How management has assessed the effect of estimation uncertainty 

• What is the estimation uncertainty associated with the estimate?• Is there a significant risk associated with the estimate?

REQUIREMENTS– ISA 540 para 8-11

1. Risk Assessment Procedures: ID and Assess RMM

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Put risk assessment into action (i.e. respond to the information obtained as per the previous slide):

Auditor determines whether: Requirements of the applicable financial reporting framework

have been applied appropriately? Expert is needed in assisting with valuation? Controls were in place when management made estimate?

Auditor tests whether: Methods used by management are appropriate and have been

applied consistently; Assumptions used are reasonable; Management’s point estimate reasonable compared to

auditor’s.

REQUIREMENTS– ISA 540 para 12-14

2. Responses to the Assessed Risk of Material Misstatements

REQUIREMENTS– ISA 540 para 21-22

Review the judgments/decisions made by management to identify whether there are indicators of possible management bias.

Indicators of Possible Management Bias

Written Representations

Obtain written representations from management whether they believe significant assumptions are reasonable.

RO/RGO302

Analytical Procedures

ISA 520

APPLICABILITY

There are two ways to accumulate audit evidence.

Test the controls

Perform substantive tests on the

transactions and the balances

Test of detail

and/or

Analytical proceduresISA -520

APPLICABILITY

ISA 520 para 1 and 3.

When would we as auditors make use of ISA 520 ?

1. As a substantive procedure• During an audit• For relevant , reliable evidence, as to an assertion/s• Alone/in combination with other substantive tests of detail.

2. To corroborate conclusions formed at the end of the audit Suggestion of responsibility to perform in the final conclusion of the audit

3. Risk assessment ( but this is covered by ISA315)

ISA 520 para 4.

ANALYTICAL REVIEW DEFINED

What is an analytical procedure?

Comparison /Relationship

Evaluation

Comparison/Relationship

ANALYTICAL REVIEW DEFINED

Current financialtransactions/balances

• individually• aggregated• dissembled

to other

ISA 520 para 4. and A1. to A3.

of

Financial ,non financial and operating data of

• Prior periods• Budgets• Same/similar industry• Auditors expectations• etc.

This can take the form of : • Ratios• Percentages• Volumes• Averages• GP%• Payroll costs to number of employees etc.

ANALYTICAL REVIEW DEFINEDISA 520 para 4. and A1. to A3

Comparison/Relationship

Evaluation

ISA 520 para 4. and 5 and A15. to A21.

The results must be evaluated against predetermined expectations

The auditor would need to:

• Get explanations from management as to why any results differ from the expected

• Corroborate these explanations • Perform further substantive tests of detail if still not

satisfied

ANALYTICAL REVIEW DEFINED

ISA 520 para. 5 and A12 to A16

DESIGNING & PERFORMING PROCEDURES

1. Suitability of actual analytical procedure

2. Reliability of data

3. Predetermined expectations

4. Need to determine an amount of acceptable difference based on materiality and desired level of assurance

In designing Analytical Procedures the auditor should consider:

DESIGNING & PERFORMING PROCEDURES

ISA 520 para. 5 and A6. to A10.

Of procedure for purpose

Predictable

1.Suitability?

Assessed risk ofmaterial misstatement

Degree of reliance

DESIGNING & PERFORMING PROCEDURES

ISA 520 para. 5 and A12

Independent Source

ComparabilityNature and relevance

2.Reliability?

Preparation

DESIGNING & PERFORMING PROCEDURES

ISA 520 para. 5 and A15

Precision of results ?

Dissembling of information

Detection of material

misstatement

3.Predetermined expectation!

EXAMPLE

A typical , basic analytical procedure that one may perform for a dairy’s sales (Financial year end 31 December)

o First : Dissemble the information e.g.• Ice cream sales• Milk sales• Cream sales etc.

o Second: Determine expectations e.g.• Sales increased 8% on previous year, increase occurring

on 1January 2013 (management’s documented price increase policy)

• Higher sales in summer and the holiday seasons• Lower sales in winter

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septem

ber

Octobe

r

Novem

ber

Decem

ber

0

100

200

300

400

500

600

700

800

Monthly Ice Cream sales of Delly Dairy (Pty)Ltd

20122013

Months

Ran

ds

EXAMPLES

A typical , basic analytical procedure that one may perform for a dairy’s sales

EXAMPLE

o Third: Accumulate data

o Fourth: Analyse data e.g. ask management why• April and May are lower than last year ?• June through to July are lower than last year ?

o Fifth: Corroborate management’s reasons • Perform additional tests if necessary

DESIGNING & PERFORMING PROCEDURES

SUMMARY

Predetermined Expectation!

Corroborate expectations if necessary

Gather & dissemble data

Ensure data agrees to the financial records

Compare data to expectations

Corroborate reasons

Determine reasons for any differences

END

THANK YOU!

BAIE DANKIE!

ENKOSI KAKHULU!