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9.401 Auditing

9.401 Auditing. Chapter 6 Audit Evidence. What is Audit Evidence?. =Any information used by the auditor to draw conclusions regarding whether the information being audited is stated in accordance with the established criterion

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9.401 Auditing

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  1. 9.401 Auditing Chapter 6 Audit Evidence

  2. What is Audit Evidence? =Any information used by the auditor to draw conclusions regarding whether the information being audited is stated in accordance with the established criterion • Must be sufficient and appropriate at lowest possible cost

  3. Audit evidence decisions • Nature • What type of procedure to use and what evidence to gather • Timing • When evidence is gathered and covering what time period • Extent • How many items to test and which items to select

  4. Sufficiency: Refers to quantity “Extent” evidence decision Depends on expectations of errors, quality of controls, size of popn, materiality, level of assurance, etc. Appropriateness Refers to quality “Nature” and “Timing” evidence decisions Depends on level of assurance needed If evidence is not appropriate, sufficiency won’t help. Sufficient and Appropriate Evidence

  5. To be appropriate… • Relevance = addresses the objective or assertion Eg. Existence vs. completeness • Auditor’s direct knowledge vs. otherwise • Examination, observation, inspection or computation by auditor > someone else • Independence of provider • Provider external to org > external to acctg dept > acctg dept • Documents external to org > external docs held by org > internal docs

  6. To be appropriate… • Effectiveness of Internal controls • Evidence from system of good I.C. > evidence from system of poor I.C. • Qualifications of individuals providing the information • Degree of objectivity of evidence (vs. subjectivity)

  7. Timing • Auditor must express conclusion on information at balance sheet date. • However, may gather information as at non-balance sheet date and “roll forward” the conclusion by: • Substantive tests • Relying on internal controls • Other procedures • To do this, consider • quality of internal controls, • materiality of item and • level of risk associated with item

  8. Types of Evidence • Physical Examination • = inspection or count of tangible assets • Good evidence of existence, but not at all of ownership and not really of valuation • Confirmation • = receipt of response from 3rd party verifying accuracy of info requested by auditor • Costly, but reliable evidence of existence • Usually required for A/R except in certain circumstances • Used for many other accounts as well • Must be kept under control of auditor

  9. Types of Evidence • Documentation • = inspection of documents and records • Quality depends on quality of document (external vs. internal, internal control) • If electronic, auditors must assess controls over changes to documents • Observation • = watching certain activities • Generally needs corroboration for assurance that conditions persist

  10. Types of Evidence • Inquiries of Client • = written or oral representations of client in response to auditor’s request for information • Generally not conclusive, should be corroborated when possible • Underlines importance of mgmt good faith, care must be taken in choosing clients • Reperformance • = auditor rechecking computations or other operations done by client • Particularly often used when testing controls

  11. 7. Analytical Procedures • = using financial and non financial data in meaningful comparisons and relationships to determine whether account balance is reasonable • Can be quite effective at low cost • Reliability depends on quality of data, nature of analysis, skill of auditor, level of detail

  12. Purposes of Analytical Tests • As audit evidence which enables the reduction of audit testing of details. • Indication of errors in the statements requiring follow-up. • Indication of financial difficulty. • Understanding the client’s business and industry. • An aid to management.

  13. When Analytical procedures are used: • MUST be used in: • planning • final review • MAY be used as a substantive test

  14. Analytical Procedures • Comparison of Current year balances to: • balances for one or more comparable periods. • company’s budgets and forecasts. • other current-year balances for conformity with predictable patterns based on the company’s experience. • similar information for the industry in which the company operates. • relevant non-financial information.

  15. Analysis of Un-audited Financial Statements • Horizontal analysis examines changes of FS numbers and ratios across two or more years • Vertical analysis examines FS amounts expressed each year as proportions of a base. • Auditors look for relationships in accounts as indicators of problems and to plan further audit work

  16. Problems discovered by analytical procedures • Account balances that seem high could indicate problems with: • existence • valuation • ownership • Account balances that seem low could indicate problems with: • completeness • valuation

  17. Conclusions from analytical procedures • Don’t indicate definitively that there is an error. Unexpected fluctuations may be from error or non-error causes. • Client explanations should be corroborated if they relate to a material item.

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