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Auditing midterm notes 2.docx

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Carolyn Mac Tavish

Chapter 8 Evidence gathering Audit procedures Auditing Techniques 1. Recalculation/re-performance  Recalculation Is redoing calculations already performed by auditee personnel.  Mathematical evidence can serve the objectives of both existence and valuation for financial statements that result from calculations  The auditor must audit every significant part of the original computation if recalculation is to provide strong persuasive evidence  Re-performance is a related type of evidence usually applied to control testing providing evidence about the effectiveness of a control procedure 2. Observation  Looking at how policy or procedures are applied by others  Does not reflect performance at other times or over long periods 3. External Confirmation  Verifying accounting records. Direct correspondence with independent external parties is a confirmation procedure  Produces evidence of existence, ownership, valuation and cutoff  Important general points about confirmations are: o Confirmation letters should be printed on auditee’s letterhead and signed by a auditee officer o Auditors should be very careful that the recipients address is reliable and not altered by auditee personnel so that is misdirects the confirmation o The request should seek information the recipient can supply, such as the amount of a balance or the amounts of specified invoices or notes o Confirmation should be controlled by the audit firm, not given to auditee personnel for mailing o Responses should be returned directly to the audit firm. Direct communication is required so that auditee personnel cannot alter responses  Confirmation of receivables o Positive confirmation requests a reply in all cases, whether the account balance is considered correct of incorrect o Negative confirmation request replies only if the account balance is considered incorrect 4. Enquiry  Generally involves collecting oral evidence from independent parties  Evidence gathered by formal and informal enquiry of auditee personnel generally cannot stand alone and must be corroborated by the findings of other procedures  Talking to other employees and asking them questions  Consistent responses increases the degree of assurance 5. Inspection  Consists of looking at records and documents or at assets with physical substance.  Physically inspecting tangible assets provides reliable evidence of existence and may give some evidence of condition, and hence valuation but it does not provide reliable evidence of ownership  Documents prepared by Independent External Parties o A great deal of documentary evidence is external-internal; that is, convincing documentation prepared or validated by other partied and sent to the auditee o Makes it difficult to alter and therefore more reliable pg 278 for examples  Documents prepared and processed within the entity Under Audit i. Internal evidence, may not be very authoritative or reliable pg 279 for ex  A particular inspection procedure: vouching- Examination of Documents i. An auditor selects an item of financial information from an account and goes backward through the accounting and control system to find the source documentation supporting that item ii. Existence, occurrence assertion but not evidence  Particular inspection procedure: Tracing – Examination of Documents i. Tracing is the opposite of vouching ii. Auditors takes samples of basic source documents and goes forward through the accounting and control system to find the final record of the accounting transactions iii. Completeness  A particular Inspection Procedure: Scanning i. Scanning makes use of auditors alertness to unusual items and events in the auditee documentation. Looking for anything unusual 6. Analysis a. Obtaining evidence about financial statement accounts by method of study and comparison b. Includes everything else an auditor can think to do that does not meet the definition of the other 5 c. Most useful for assertions of completeness, valuation and presentation d. Analysis Consists of: i. Identifying the components of a financial statement item so the characteristics of these can be considered in designing the nature, timing and extent of other audit procedures ii. Performing analytical procedures, which are techniques by which the auditor 1. Studies and uses meaningful relationships among elements of financial and nonfinancial information to form expectations about what amounts recorded in the accounts should be; 2. Compares expected with recorded amounts to identify relationships that are not consistent with other relevant info 3. Uses the results to determine what other audit procedures are needed for obtaining sufficient appropriate audit evidence that the recorded amounts are not materially misstated Information Source Evidence of Reliability of Information Source Financial account information for Information agrees with audited financial statements, or information in prior year audit comparable prior period(s) working papers (e.g., monthly results). Company budgets and forecasts Budgeting or forecasting process is reviewed by the auditor and found to be based on realistic assumptions and methods, and targets are achievable under normal business conditions. Budget and forecast information is produced by the company's information systems under internal controls monitored by senior management; auditor has assessed these controls to be strong. Budgets and forecasts are used by board of directors for decision making. Financial relationships among Account balances used in analysis should be agreed/referenced to audit working papers accounts in the current period in current year file where they are verified substantively. Industry statistics Sources should be well-known industry analysis services (e.g., Moody's, Standard and Poors) and reports used should be obtained directly by the auditors. Nonfinancial information, such as Nonfinancial information is prepared by the company's information systems under physical production statistics internal controls monitored by senior management; auditor has assessed these controls to be strong. The nonfinancial information is used by senior management and the Board for decision making. Business Information sources and Methods - Enquiry, including prior working papers o Enquiry and interviews with the company’s management, directors, and audit committee brings auditors up to date on changes in the business and industry o Information gathered in prior audits and documented in the working papers can also provide relevant and reliable information as follows:  The nature of the org, its environment, and its internal control  Significant changes that the entity or its operations may have undergone since the prior financial period, which help the auditor identify and assess new risks of material misstatement  Misstatements discovered in past audits and the timeliness of their correction - Observation o The tour is the time for auditors to get personal knowledge by seeing company personnel doing their normal day-to-day tasks - Research databases o Specialized magazines or journals or the internet. o Must be careful with the internet because it has some unreliable info so a minimum knowledge of the auditee and its industry is necessary to properly interpret such information - Internal Auditors o Internal auditors can assist by providing information for understanding the business and its systems and controls and even by performing control or substantive testing under the supervision of the independent audit team - Auditor’s experts o Experts are persons skilled in fields other than accounting and auditing such as actuaries, appraisers, legal counsel, engineers, chemists, and geologists who are needed for obtaining the understanding and evidence necessary for a particular account or assertion o External experts much have qualifications and good reputation, not part of the audit team and should be unrelated to the auditee in order to provide objective evidence o May be employees of the audit firm in which case they are subject to all
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