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RSM323 Audit I Textbook Ch 8.docx

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University of Toronto St. George
Rotman Commerce
Vicki Zhang

RSM323 Chapter 8 - Audit Evidence and Assurance  Learning Objectives o Outline six general types of audit techniques for gathering evidence. o Identify the procedures and sources of information auditors can use to obtain evidence for understanding an auditee’s business and industry, assessing risk, and responding to assessed risk. o Explain audit evidence in terms of its appropriateness and relative strength of persuasiveness. o Describe the content and purpose of the audit plan as well as the specific audit programs and detailed procedures it contains. o Learning Objectives o Explain the purpose of audit documentation and review an audit working paper for proper form and content. o Apply and integrate the chapter topics to analyze a practical auditing situation / case / scenario.  Chapter Overview o Evidence-gathering Audit Procedures o Business Information Sources and Methods o Sufficient Appropriate Evidence in Auditing o Audit Plan and Detailed Programs o The Planning Document o Audit Working Papers  General Audit Procedures o Auditors set out six basic types of evidence, and use six general techniques to gather it. Technique Type of Evidence Recalculation Auditors calculations Observation Physical observation Confirmation Statements by independent parties Enquiry Statements by client personnel Inspection Documents prepared by independent parties Documents prepared by the client Physical inspection of tangible assets Analysis Data interrelationships o Recalculation / Reperformance  Performing independent calculations or recalculating the client’s calculations.  Computation produces highly reliable mathematical evidence.  Computation addresses existence and valuation for calculated amounts.  Reperformance is applied in control testing, the auditor independently executes an internal control procedure. o Observation:  Looking at the application of policy or procedures by others.  Reliable evidence as to performance at the time of observation.  Produces a general awareness of events. o External Confirmation:  Consists of (written) enquiry to verify accounting records.  Confirmation with independent parties is used widely for a variety of transactions and balances.  Confirmation can produce evidence regarding existence, ownership, valuation and cut- off. o Confirmation procedures:  Confirmations should be printed on the client’s letterhead, signed by a client officer.  Auditor needs to ensure that the address on the confirmation is legitimate.  The recipient should be able to provide the information.  The auditor must mail the confirmations.  Responses must be returned directly to the auditor. o Forms of confirmations:  Positive confirmations: request a reply in all cases.  Follow-up is required for all exceptions reported, and for all unreturned confirmations.  Negative confirmations: request a reply only where information is incorrect.  Only exceptions need to be followed up. o Enquiry:  Involves the collection of oral evidence from the client and independent third parties.  Evidence from enquiry requires corroboration.  Evidence from enquiry is important in understanding the client’s business.  Audit standards now put more reliance on enquiry as a means to understanding strategy and risks and controls. o Inspection:  Looking at records, documents, or assets having physical substance.  Reliable evidence for existence, supports valuation.  Documents can be prepared by independent outside parties as either formal authoritative or ordinary documents.  Documents can also be prepared by the entity under audit.  Particular Inspection Techniques  Vouching: o Information is selected from an account or other summary of information and the auditor goes back through the control system to find the source documentation.  Vouching supports existence. o  Tracing: o Auditor selects source documents and proceeds forward through the control system to the final recording of the transaction.  Tracing supports completeness.  Scanning: o An eyes-open approach of looking for anything unusual.  Does not produce direct evidence, but can raise questions.  Computers can be used to scan electronic data files.  Scanning can be used to reduce sampling risk by scanning the items not selected. o Analysis:  Evaluation of financial items in determining other audit programs and performing analytic procedures that compare recorded amounts to expectations.  Analysis is the “other” category in the list of audit techniques.  Analytical procedures are both important and effective.  Analysis is used in planning, execution, and completion of the audit.  Some typical analytic procedures:  Compare current year to prior year.  Compare current year to budget.  Evaluate current year balances against other current year balances.  Compare financial ratios to industry standards.  Study relationship of balances and non-financial information.  Effectiveness of Audit Procedures o Audits are designed to provide reasonable assurance of detecting misstatements that are material to the financial statements.  Soft procedures (enquiry and analysis) account for 45% to 50% of discovered errors.  Note: these procedures are applied first.  Detail procedures are also effective.  Misstatements uncovered by soft procedures will be quantified by detail procedures.  Business Information Sources and Methods o For continuing audits, information about the client is available in the permanent files.  The auditor will interview client management and directors to learn of any changes in the business or industry.  The auditor will assess relevance of prior period information for the current audit  Business Information Sources and Methods o Observations and tour of company’s physical facilities may indicate conditions that should be reflected in the financial statements. o The auditor can study and review research databases, published materials, guides, and other reference materials on the industry and the client.  Business Information Sources and Methods o Internal auditors can assist by providing information about systems and controls. o The auditor may employ or contract the services of an expert in certain fields.  Sufficient Appropriate Evidence in Auditing o Standards require auditors to obtain sufficient appropriate evidence.  Accounting records are evidence, but are not sufficient appropriate evidence for an audit opinion.  Corroborating evidence needs to be obtained.  Appropriateness of Evidence o To be considered appropriate, evidence must be relevant and reliable.  Relevant: audit evidence must relate to one of the management assertions.  Reliable: reliability of audit evidence depends on nature and source.  Reliability combined with relevance determine the persuasiveness of evidence.  The following hierarchy of evidence can be used to judge reliability.  Reliability of Evid
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