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CHAPTER 8.docx

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Ryerson University
ACC 521
Kathryn Bewley

CHAPTER 8: AUDIT EVIDENCE AND ASSURANCE Evidence- gathering audit procedures • Most auditors work involves designing and performing audit procedures to obtain sufficient audit evidence, then evaluating that evidence to draw reasonable conclusion on which to base the audit opinion 6 Audit techniques 6 types of evidence Example of specific procedures 1. Recalculation 1.Auditor’s calculations or 1. recomputed amortization expense /reperfomanc performance using declining balance e * Recompute sales tax as percentage of total sales on invoices 1. Observation 2. auditor’s observations 2. Observe data entry process * observe petty cash control procedures *observe auditee’s inventory counting procedures 2. confirmation 3. statements by independent 3. obtain writing confirmation of AR parties balance and details from customers 3. enquiry 4. statements by auditee personnel 4. enquire about frequency of bank reconciliation procedures 4. inspection 5a. documents prepared by 5a. read terms of lease agreement independent party for lessee 5b.documents prepared by auditee 5b. review inventory variance analysis report prepared by 5c. physical inspection of tangible production department assets 5c. auditor’s test counts of physical inventory quantities on hand at year- end 5. analysis 6. data interrelationships 6. Analyze monthly gross margin by product line. Compare inventory turnover rate to previous year Recalculation/reperformance Recalculation: audit procedures that involve redoing calculations already performed by auditee personnel to determine if the result is accurate Reperformance: audit procedure in which auditor executes a procedure that is part of the auditee’s internal control to assess its effectiveness Observation • consist of looking at how policy/ procedures are applied by others • provides highly reliable evidence as to performance • can be done by taking a tour to watch personnel carry out daily activities External confirmation • consist of en enquiry, usually written, to verify accounting records The selection of confirmation applications includes: 1) banks – account balance 2) Customers – receivable balance 3) Borrowers – note terms and balances 4) Agents – inventory/ consignment or in warehouse 5) Lenders- note terms and balances The important general points about confirmation include: • Confirmation letters should be printed on auditee’s letterhead and signed by an auditee officer • Auditors should be careful that the recipient’s address is reliable and not altered by auditee • Requests should seek information the recipient can supply • Confirmations should be controlled by audit firm, not given to auditee personnel for mailing • Responses should be returned directly to audit firm, not auditee Confirmation of receivables/payables takes 2 forms: 1) Positive confirmation: requests reply about if account balance is correct or incorrect 2) Negative confirmation: request replies only if the account balance is incorrect • If no response to positive confirmation request appears, or if no response to either type of confirmation varies from the auditee’s records, the auditor should investigate with other audit procedures. Enquiry • Involves collecting oral evidence from independent parties, auditee officials and employees. • Done to obtain an understanding of business and nature of specific transactions • Management explanations can be compared to those of other auditee employees, industry experts, and other sources of evidence • Auditors must obtain statements from management in written representation letter acknowledging all importing enquires Inspection • Consist of looking at records and documents or assets with physical substance • Procedures are of varying degrees of thoroughness: o Examining o Perusing o Reading o Reviewing o Scanning o Scrutinizing o Tracing o Vouching • Physical inspection of tangible goods provides reliable evidence of existence. Documents prepared by independent external parties • Numerous evidence is external- internal Formal authoritative documents are more reliable than ordinary documents prepare by outsiders. Examples in chart. Formal authoritative documents Ordinary documents • Bank statements • Suppliers’ invoices • Cancelled cheques • Customers’ purchase orders • Insurance policies • Loan applications • Notes receivable • Credit notes received • Securities certificates • Expense receipts • Loan and collateral agreements • Insurance policy applications • Elaborate contracts • Simple, standard contracts • Title papers • Correspondence • Income and payroll tax assessment Documents prepared and processed within the entity under audit Common documents include: • Sales invoice copies • Sales summary reports • Shipping documents • Credit notes issued • Purchase requisition slips • Purchase orders • Receiving reports • Cost distribution reports • Employee payroll information forms • Bank deposit listings and slips • Budges and performance reports • Documentation of transactions with subsidiary / affiliated companies • General journal entry support forms A particular inspection procedure: vouching- examination of documents Vouching: auditor selects sample of financial information items from account and goes backwards through accounting and control systems to find the source documentations supporting the items o Helps auditors decide if all recorded data are supported A particular inspection procedure: Tracing - examination of documents Tracing: auditor select samples of basic source documents and goes forward through the accounting and control systems to find the final record of the accounting transactions A particular inspection procedure: Scanning Scanning: Audit procedure in which the auditor quickly reviews a whole report, account, journal or other listing in the auditee’s records to look for any unusual items that require further investigation Analysis Analysis: procedures that involve evaluations of financial information by a study of plausible relationships among both financial and non financial data to identify fluctuations or relationship that are inconsistent with other relevant information or that differ from expected values by a significant amount and need to be investigated in order to assess risk of material misstatement, obtain substantive evidence, or form an overall opinion at end of audit. Analysis consists of: 1) Identifying components of financial statement items so characteristics can be considered in designing the nature, timing and extent of other audit procedures 2) Performing analytical procedures, which are techniques by which the auditor: a. Studies and uses meaningful relationships among elements of financial and non financial information to form expectations about what amounts recorded in the accounts should be b. Compares expected with recorded amounts to identify fluctuations and relationships that are no consistent with other relevant information or that deviates significantly from expected amounts c. Uses the results of this comparison to help determine what other audit procedures are needed for obtaining sufficient evidence that the recorded amounts are not materially misstated • When analysis is used to provide substantive evidence, auditors need to be careful to use independent, reliable information for comparison purposes. • Quantitative information must be verified by auditors if high level of reliance is placed on evidence provided by analysis Analytical procedures: includes data comparison, predictions based on outside data, analyses of interrelationships among account balances, reasonableness tests, estimates and cursory review of financial statements in the audit planning stage • 2 procedure categories o Expectations from prior years (involved the carry over of analytical and detail knowledge about continuing audit clients) o Discussion with auditee personnel Effectiveness of audit procedures • Audit firms seldom give auditing researchers access to their audit working papers, as they need to protect auditee confidentiality and protect themselves from risk of litigation or lost of reputation. Business information sources and methods Substantive evidence: give direct evidence about financial amounts reported in financial statements o Risk assessment procedures and control tests only provide indirect evidence about dollar misstatements Enquiries, including prior working papers • Enquiries and interviews with management help bring auditors up to date on changes in
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