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CHAP 9 EVIDENCE IN AUDIT AND COMPLETION OF AUDIT.pptx
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- 2. The principles ofevidence
- 3. • Audit proceduresare designed to obtain evidence in response to the assessment of risk at the planning stage • Evidence gathered must be sufficient and appropriate to reduce assessed risk to an acceptable level • If, at the review stage, the senior audit staff deem that the risk of misstatement has not been reduced to an acceptable level, more evidence will be required
- 4. • Auditor shouldobtain appropriate evidence (quality of evidence-relevance and reliability) • Reliability of evidence depends on several factors: 1. Independent (preferably externally generated evidence) 2. Effective controls imposed by the entity 3. Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference 4. Better to get written and documentary evidence 5. Original documents provide more reliable evidence than photocopies or fax
- 6. DISCLOSURE • Concerns havebeen raised about whether auditors are giving sufficient attention to disclosures during the audit • Emphasizing management responsibility to make available the information relevant to disclosures, early in the audit process
- 7. AUDIT PROCEDURES FOROBTAINING EVIDENCE Methods of obtaining evidence: • Inspection of records, documents or physical assets • Observation of processes and procedures, e.g. inventory counts • External confirmation obtained in the form of a direct written response to the auditor from a third party • Recalculation to confirm the numerical accuracy of documents or records • Re-performance by the auditor of procedures or controls • Analytical procedures • Enquiry of knowledgeable parties
- 9. TESTS OF CONTROLS Designedto check that the audit client’s internal control systems operate effectively • Inspect purchase invoice for evidence of authorization by a manager before payment is made • Observe the process for dispatch of goods to ensure the warehouse staff check the goods to the order before dispatch • Using test data, enter a dummy order over a customer’s credit limit to verify that the system won’t allow the order to be accepted
- 10. SUBSTANTIVE PROCEDURES • Designedto find material misstatements in the financial statements (fraud and error) • Can be tests of detail or analytical procedures • Substantive tests of detail look at the supporting evidence for individual transactions and traces them through to the financial statements to ensure they are dealt with appropriately
- 11. SUBSTANTIVE ANALYTICAL PROCEDURES •Test the balances as a whole to identify any unusual relationships • E.g. comparison of a gross profit margin year on year might highlight that revenue is overstated if there is no known reason for the GPM to increases • Analytical procedure test the “reasonableness” of a balance
- 12. ISA 501 AuditEvidence-Specific Considerations for Selected Items • The existence and condition of inventory • The completeness of litigation and claims involving the entity • The presentation and disclosure of segmental information
- 13. ISA 505 EXTERNALCONFIRMATIONS • Written responses received from third parties directly by the auditor to help them obtain sufficient appropriate evidence • Example: receivables circularisations and bank letters • In order to ensure that the evidence sought remains reliable auditors should maintain control over this process
- 14. ISA 530 AUDITSAMPLING • Auditors should select appropriate samples for testing that provide a reasonable basis to draw conclusions about the population form which the sample is selected • Auditor should consider: 1. The purpose of the procedure and the characteristics of the population from which the sample will be drawn 2. Ensure the sample size is sufficient to reduce sampling risk to an acceptable level 3. Ensure each sampling unit has a chance of selection
- 15. SUBSTANTIVE ANALYTICAL PROCEDURES •ISA 520 analytical procedures states that the use of analytical procedures as substantive evidence is generally more applicable where: 1. There are large volumes of transactions 2. Relationships exist amongst the data and are believed to be predictable over time 3. Controls are working effectively
- 16. CAAT (COMPUTER ASSISTEDAUDIT TECHNIQUES) • Include test data and audit software • Test data is used to test the programmed controls within a computer system allowing the auditor to test aspects that would otherwise not be capable of testing manually • Audit software is used to: 1. Calculate ratios for use in analytical procedures 2. Identify exceptional transactions 3. Extract samples in a non-biased manner 4. Check the calculations in client prepared reports 5. Prepare lead schedules for the auditor to use in working papers
- 17. RELYING ON THEWORK OF OTHERS • Management’s expert: An employee of the client or someone engaged by the audit client who has expertise that is used to assist in the preparation of the financial statements • Auditor’s expert: An employee of the audit firm or someone engaged by the audit firm to provide sufficient appropriate evidence
- 18. RELYING ON THEWORK OF A MANAGEMENT’S EXPERT (ISA 500) • Evaluate the competence, capabilities and objectivity of that expert • Obtain an understanding of the work of that expert • Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion
- 19. RELYING ON THEWORK OF AN AUDITOR’S EXPERT (ISA 620) • Circumstances such as: 1. The valuation of complex financial instruments, land and buildings, works of art, jewellery and intangible assets 2. Actuarial calculations associated with insurance contracts or employee benefit plans 3. The estimation of oil and gas reserves 4. The interpretation of contracts, laws and regulations 5. The analysis of complex or unusual tax compliance issues • Auditor must evaluate whether the expert has the necessary competence, capability and objectivity for the purpose of the audit
- 20. EVALUATING OBJECTIVITY • Assessingthe objectivity of the expert is particularly difficult, as they may not be bound by a similar code of ethics as the auditor • May be unaware of the ethical requirements and threats with which auditors are familiar • It would be relevant to: 1. Make enquiries of the client about known interest or relationship with the chosen expert 2. Discuss applicable safeguards with the expert 3. Discuss financial, business and personal interests in the client with the expert 4. Obtain written representation from the expert
- 21. AGREEING THE WORK •The nature, scope and objectives of the expert’s work • The roles and responsibilities of the auditor and the expert • The nature, timing and extent of communication between the two parties • The need for the expert to observe confidentiality
- 22. EVALUATING THE WORK •Consider the reasonableness of the findings and their consistency with other evidence • The significant assumptions made • The use and accuracy of source data
- 23. REFERENCE TO THEWORK OF AN EXPERT • Auditors cannot devolve responsibility for forming an audit opinion • Auditor has to use their professional judgment whether the evidence produced by the expert is sufficient and appropriate to support the audit opinion • Use of an auditor’s expert is not mentioned in an unmodified auditor’s report unless required by law or regulation • This doesn’t diminish the auditor’s responsibility for the opinion
- 24. RELYING ON INTERNALAUDIT (ISA 610) • Internal audit department forms part of the client’s system of internal control • If this is an effective element of the control system it may reduce control risk, and therefore reduce the need for the auditor to perform detailed substantive testing
- 25. EVALUATING THE INTERNALAUDIT FUNCTION • The extent to which the internal audit function’s organisational status and relevant policies and procedures support the objectivity of the internal auditors • The competence of the internal audit function • Whether the internal audit function applies a systematic and disciplined approach
- 26. EVALUATING OBJECTIVITY • Whetherthe internal audit function reports to those charged with governance or has direct access to those charged with governance • Whether the internal audit function is free from operational responsibility • Whether those charged with governance are responsible for employment decisions such as remuneration • Whether any constraints are placed on the internal function by management or those charged with governance • Whether the internal auditors are members of a professional body which requires compliance with ethical requirements
- 27. EVALUATING COMPETENCE • Whetherthe resources of the internal audit function are appropriate and adequate for the size of the organisation and nature of its operations • Whether there are established policies for hiring, training and assigning internal auditors to internal audit engagements • Whether internal auditors have adequate technical training and proficiency, including relevant professional qualifications and experience • Whether the internal auditors have the required knowledge of the entity’s financial reporting and the applicable financial reporting framework and possess the necessary skills to perform work related to the financial statements • Whether the internal auditors are members of a professional body which requires continued professional development
- 28. EVALUATING THE SYSTEMATICAND DISCIPLINED APPROACH • Existence, adequacy and use of internal audit procedures and guidance • Application of quality control standards such as those in ISQC 1
- 29. EVALUATING THE INTERNALAUDIT WORK • The work was properly planned, performed, supervised, reviewed and documented • Sufficient appropriate evidence has been obtained • The conclusions reached are appropriate in the circumstances • The reports prepared are consistent with the work performed
- 30. USING THE INTERNALAUDIT TO PROVIDE DIRECT ASSISTANCE • External auditors can consider whether the internal auditor can provide direct assistance with gathering audit evidence under the supervision and review of the external auditor • Consideration whether direct assistance cannot be provided where laws and regulations prohibit such assistance • The competence and objectivity of the internal auditor • The external auditor must not assign work to the internal auditor • The planned work must be communicated with those charged with governance
- 31. DOCUMENTATION • The evaluationof the internal auditor’s objectivity and competence • The basis for the decision regarding the nature and extent of the work performed by the internal auditor • The name of the reviewer and the extent of the review of the internal auditor’s work • The written agreement of management • The working papers produced by the internal auditor
- 32. USE OF SERVICEORGANISATIONS • If a company uses a service organisation this will impact the audit as audit evidence will need to be obtained from the service organisation • ISA 402 Audit considerations relating to an entity using a service organisation provides guidance to auditors
- 33. PLANNING THE AUDIT •Obtain an understanding of the service organisation sufficient to identify and assess the risks of material misstatement • Design and perform audit procedures responsive to those risks
- 34. IMPACT ON THEAUDITOR’S REPORT • If sufficient appropriate evidence has not been obtained, a qualified or disclaimer of opinion will be issued • The use of a service organisation auditor is not mentioned in an unmodified auditor’s report unless required by law or regulation
- 35. RISKS WITH RELATEDPARTY TRANSACTIONS • Related party transactions may increase the potential for the financial results to be manipulated as transactions may be carried out on a basis other than arms length • The auditor should obtain sufficient appropriate evidence that the financial statements achieve fair presentation on the related party relationships and transactions and have been accounted for in accordance with the financial reporting framework
- 36. Disclosure should bemade : • The nature of the related party relationship • Information about the transactions including the amount and any balances outstanding at the year-end • Any allowance for doubtful receivable or expense recognized in respect of irrecoverable debts
- 37. INDICATORS OF RELATEDPARTY TRANSACTIONS • Transactions which are overly complex • Transactions with abnormal terms of trade • Transactions that appear not to have a logical business reason • Transactions that are not processed in the usual or routine way • High volume of transactions • Unrecorded transactions such as rent free accommodation
- 38. • If theauditor identifies related party transactions outside the entity’s normal course of business they should: 1. Inspect the underlying contracts or agreements to establish: the business rationale, the terms of the transaction, whether appropriate disclosures have been made 2. Obtain evidence that the transactions were appropriately authorised
- 39. ESTIMATES AND FAIRVALUES (ISA 540) • Requires auditors to obtain sufficient appropriate evidence about whether estimates (incl fair values) are reasonable and adequately disclosed in the financial statements
- 40. RISK ASSESSMENT • Howmanagement identifies transactions and balances requiring estimation such as fair values and financial instruments • How management makes the estimates • Whether the valuation techniques are commonly used by other market participants • The competence and objectivity of those responsible for the valuations
- 41. INITIAL ENGAGEMENTS-AUDIT CONSIDERATIONS • Auditorstake on a new client must ensure that: opening balances don’t contain material misstatements and appropriate accounting policies have been consistently applied, or changes adequately disclosed
- 42. IMPLICATIONS FOR THEAUDITOR’S REPORT • If there is an inability to obtain sufficient appropriate evidence over the opening balances, a qualified or disclaimer of opinion will be issued • If the opening balances are materially misstated or the accounting policies haven’t been consistently applied, a qualified or adverse opinion will be issued.
- 43. CORRESPONDING FIGURES AND COMPARATIVEFINANCIAL STATEMENTS • Requires auditor to obtain sufficient appropriate evidence about whether comparative information included in the financial statements has been presented in accordance with the financial reporting framework • Two categories of comparative information exist: Corresponding figures and comparative financial statement
- 44. AUDIT PROCEDURES • Comparativeinformation agrees to the prior year financial statements • Accounting policies reflected in the comparative information are consistently applied or any changes have been properly accounted for and adequately disclosed • The auditor should request a written representation regarding any restatement made to correct a material misstatement that affects the comparative information
- 45. AUDIT DOCUMENTATION (ISA230) • Timely preparation of audit documentation necessary to provide a sufficient and appropriate record of the basis for the auditor’s report, and evidence that the audit was carried out in accordance with ISAs and applicable legal and regulatory requirements • Audit documentation sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the audit work performed, the results and audit evidenced obtained, and the significant matters identified and conclusions reached thereon.