Management and Organizational Studies 3363A/B Chapter 8: MOS 3363 - Chapter 8

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Western University
Management and Organizational Studies
Management and Organizational Studies 3363A/B
Michelle Loveland

Audit Evidence • The examination standard requires (under GAAS) to obtain sufficient and appropriate audit evidence, then draw reasonable conclusions and disclose your opinion • Must of the auditors work involves obtaining and evaluating evidence Five Evidence Decisions 1. RISK: Which risks could result in a risk of material misstatement at the assertion level? o Existence, valuation, completeness (liabilities and expenses) o For each major class of transactions, the auditor looks at the potential for material misstatement o Knowledge of industry, business and operating procedures will help 2. NATURE: Which audit procedures to use o Type of procedures you’re going to do 3. EXTENT: What sample size to select for a given procedure o The sample size o How much are you going to test? 4. SELECTION: Which particular items to select from the population o What items are you going to select? 5. TIMING: When to perform the procedures o Two types of audits: interim and year-end o Year-end is generally test of details, while interim is testing internal controls Audit Evidence • Risk o For each major class or transactions, the auditor looks for material misstatement • Audit Procedure o The detailed instructions for collection of audit evidence o Example: when you count inventory you note the quantity, location, tag number, unit of measure and condition • Sample Size & Sample Selection o See below Sample Size • The sample size will vary, depending on: o The sampling methods chosen o The type of tests (test of controls vs. test of details) o The amount of assurance to be obtained from the test • Professional judgement will aid in this decision Sample Selection • Methods include: o Interval sampling o High dollar items o Random sampling o Dollar unit sampling o Haphazard sampling (random sampling) Audit Program • Summarizes what needs to be done by cycle • Then determine the audit program used for the cycle Persuasive Evidence • There is enough evidence of a high enough quality to form a conclusion with respect to the audit opinion • Sufficiency refers to the quantity of evidence obtained o Sufficient evidence is persuasive, rather than conclusive • Appropriateness refers to the quality of evidence obtained o The more appropriate the evidence, the less evidence you need o Relevance: pertains to the audit assertion being tested. o Reliable: depends upon a number of factors, including who examined the evidence, the state of the client’s systems, and the type of evidence collected. • Timeliness is also of importance • The auditor needs to consider all of the evidence factors together (sufficiency, appropriateness and timeliness) Reliability of Evidence • Auditor’s direct knowledge — evidence obtained directly by the auditor through physical examination, observation, reperformance and/or inspection. • The independence of provider — evidence obtained from a source outside the entity is more reliable than that obtained from within. • The effectiveness of client’s internal controls —when a client’s internal controls are effective, evidence obtained internally is more reliable than when controls are weak. • The qualifications of the information provider — individuals providing information should be competent and qualified to do so. • The degree of objectivity — evidence that requires the use of a high level of judgment is less objective. • Consistency from multiple sources — evidence with all sources consisten
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