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Lecture 5

Lecture 5 - Audit Evidence.docx

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LECTURE 5 – AUDIT EVIDENCE Overview  In planning an audit, three questions need to be answered: o What audit procedures should be performed (nature)? o How much evidence is needed (extent)? o When should the audit procedures be performed (timing)?  Audit programs detail the auditor’s plan to gather, evaluate and document evidence. Audit Evidence  Information – conclusions – audit opinion  Sufficient, appropriate evidential matter – ASA 500 (6) o “The auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.”  The auditor has to obtain the right quantity (sufficient) of the right quality (appropriate) evidence. o “When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence.” ASA 600 (7) Assertion Model  The auditor gathers evidence to evaluate the management assertions embodied in the financial statements and individual accounts. o Existence or occurrence o Completeness o Rights and obligations  Ownership o Valuation or allocation o Presentation and disclosure Assertion Categories (Objectives) Transactions Account balances Disclosure Occurrence x x Completeness x x x Accuracy x x Cutoff x Classification x x Existence x Rights and obligations x x Valuation and x x allocation Understandability x Transaction-related audit objectives Account balance audit objectives Steps in the Overall Audit Process 1 Understand the client and industry. 2 Assess environment risk. 3 Directly test transactions and/or account balances. 4 Assess adequacy of evidence. Nature of Audit Testing  Auditors have traditionally used direct tests of year-end account balances, as opposed to examining the transactions that make up the account balance. o OK if there are fewer items in year-end balances than the underlying transactions during the year. o Also, if risky, more reliable evidence usually exists for an ending balance than for the underlying transaction.  If you can gather evidence during the year – you do this!  However, there are different types of accounts: o Some have a high turnover of transactions, such as accounts receivable o Others, such as many long-term accounts (assets, liabilities, owners’ equity) are more stable:  The auditor may focus on the transactions that occurred during the audit period. Commonly Used Evidence Fathering Procedures  Inspection of documents – examination/authenticity  Inspection of tangible assets –existence/obsolescence/completeness  Observation –personnel/procedures but intrusive  Inquiries of client personnel – efficient but needs corroboration  Confirmations with outside parties – strong evidence o Write to bank/creditors to confirm existence of transaction  Recalculation of data – cross-footing/recalculations – aided by caats  Reperforman
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