1 / 42

AUDITING CHAPTER 6

AUDITING CHAPTER 6. Evidence By David N. Ricchiute. TOPICS. Acquisition & evaluation of evidence Financial statement assertions, audit objectives, & audit procedures Tests of controls, substantive tests, analytical procedures & nonfinancial measures Audit documentation. AUDIT EVIDENCE.

ganesa
Download Presentation

AUDITING CHAPTER 6

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. AUDITINGCHAPTER 6 Evidence By David N. Ricchiute

  2. TOPICS • Acquisition & evaluation of evidence • Financial statement assertions, audit objectives, & audit procedures • Tests of controls, substantive tests, analytical procedures & nonfinancial measures • Audit documentation GBW 8th ed., Ch. 6

  3. AUDIT EVIDENCE Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding financial statements under audit. SAS 31 & SAS 80, Amendment to SAS 31. GBW 8th ed., Ch. 6

  4. MEANING OF SUFFICIENT, COMPETENT EVIDENCE • Sufficient: quantity of evident necessary to test management’s assertions • Competent: relevant, valid, reliable • Kinds of evidence necessary to test management’s assertions • Link audit risk & audit evidence • Relevance • Amount of evidence GBW 8th ed., Ch. 6

  5. EVIDENTIAL MATTER • Underlying accounting data • Records of original entry (journals, ledgers, etc.) • Data files • Spreadsheets • Corroborating information • Documents (checks, invoices, contracts) • Written representations from 3rd parties (vendors, attorneys) • Inquiries of management GBW 8th ed., Ch. 6

  6. FINANCIAL STATEMENT ASSERTIONS • Existence or Occurrence • Completeness • Rights & Obligations • Valuation or Allocation • Presentation & Disclosure GBW 8th ed., Ch. 6

  7. ACCOUNTS & JOURNAL ENTRIES Purchase & sale of inventory Inventory Accounts payable Cost of Goods Sold Inventory GBW 8th ed., Ch. 6

  8. EXISTENCE OR OCCURRENCE ASSERTION • All assets, liabilities, equities exist • All transactions occurred • Example • Test whether inventory physically existed at balance sheet date GBW 8th ed., Ch. 6

  9. COMPLETENESS ASSERTION • All transactions that occurred during period are reported for the time period • All accounts complete as to data • Examples • Test whether all purchases goods, services are recorded • Test whether all obligations included as liabilities GBW 8th ed., Ch. 6

  10. RIGHTS & OBLIGATIONS ASSERTION • Entity entitled to assets (rights) • Entity liable for obligations • Example • Test whether all inventory is owned, not on consignment GBW 8th ed., Ch. 6

  11. VALUATION OR ALLOCATION ASSERTION • Assets, liabilities, equities, revenues, expenses recorded at proper amounts • Example • Test whether inventory valued at lower cost/market • Revenues, costs, expenses allocated to proper accounting periods GBW 8th ed., Ch. 6

  12. PRESENTATION & DISCLOSURE ASSERTION • Financial statement components properly classified, described & disclosed • Example • Test to assure financial statements, notes reveal substance of recorded transactions GBW 8th ed., Ch. 6

  13. AUDIT PROCEDURES • Observation • Documentation • Confirmation • Mechanical tests • Analytical procedures (Comparisons) • Inquiries GBW 8th ed., Ch. 6

  14. RELATING OBJECTIVES TO OBSERVATION • Direct evidence about existence • Example: physically observing client’s assets GBW 8th ed., Ch. 6

  15. RELATING OBJECTIVES TO DOCUMENTATION • Internal evidence in documentary form to support existence, valuation • Example: vouch documents supporting selected cash disbursements or liabilities GBW 8th ed., Ch. 6

  16. RELATING OBJECTIVES TO CONFIRMATION • External evidence from third parties supporting existence, valuation of account balances • Example: request confirmation of accounts receivable GBW 8th ed., Ch. 6

  17. RELATING OBJECTIVES TO MECHANICAL TESTS • Direct evidence to support valuation • Example: recomputing (footing) cash receipts journal • Direct evidence to support presentation • Example: trace transactions through accounting system for proper recording, classification GBW 8th ed., Ch. 6

  18. RELATING OBJECTIVES TO COMPARISONS • Analytical procedures (Comparisons) • Direct evidence about completeness, presentation, disclosure • Example: examine trends for advertising expense to determine whether more procedures necessary • Example: compare disclosures with prior periods GBW 8th ed., Ch. 6

  19. RELATING OBJECTIVES TO INQUIRIES • Direct evidence although less persuasive, may help generate leads • Corroborated through other procedures GBW 8th ed., Ch. 6

  20. TESTS OF CONTROLS & SUBSTANTIVE TESTS • Tests of controls • Audit procedures to assess the ability of controls to prevent or detect material misstatements • Provide evidence about control risk • Substantive tests • Audit procedures that detect material misstatements • Provide evidence about detection risk GBW 8th ed., Ch. 6

  21. TESTS OF CONTROLS • Procedures address questions such as • How are controls applied? • Are controls applied consistently? • By whom are controls applied? GBW 8th ed., Ch. 6

  22. TESTS OF CONTROLS & CONTROL RISK • Tests of controls are procedures to assess control risk • Assessed level control risk helps determine acceptable level detection risk GBW 8th ed., Ch. 6

  23. CATEGORIES OF CONTROL ACTIVITIES • Controls that create documentation, i.e., leave an audit trail • Manager’s initials for credit approval • Prevention control • Controls that do not create documentation • Bank reconciliation provides no evidence of independence of preparer for cash function • Detection control GBW 8th ed., Ch. 6

  24. COMBINED SUBSTANTIVE & CONTROL TESTS Dual-purpose tests • Provide evidence about control risk & monetary error • Example: recomputing extensions on sales invoices GBW 8th ed., Ch. 6

  25. SUBSTANTIVE TESTS • Tests of details • Transactions • Balances • Analytical tests GBW 8th ed., Ch. 6

  26. ANALYTICAL PROCEDURES • Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data SAS No. 56 GBW 8th ed., Ch. 6

  27. TESTS OF DETAILS v. ANALYTICAL TESTS • Comparisons • Tests of details tests all 5 assertions but analytical procedures do not support existence or rights & obligations • Analytical procedures are high level tests • Tests of details lead to conclusions about aggregated data but analytical procedures test aggregated data GBW 8th ed., Ch. 6

  28. USING ANALYTICAL PROCEDURES WhenPurpose GBW 8th ed., Ch. 6

  29. TYPES ANALYTICAL PROCEDURES • Trend analysis • Ratio analysis • Activity ratios • Profitability ratios • Liquidity ratios • Solvency ratios • Modeling • Statistical tests, i.e., regression GBW 8th ed., Ch. 6

  30. JUDGMENT ERRORS & ANALYTICAL PROCEDURES • Over reliance on unaudited numbers • Disregard for unchanging account balances • Overreliance on management’s explanations GBW 8th ed., Ch. 6

  31. CUSTOMER PERSPECTIVE & SKEPTICISM IssueProfessional skepticism GBW 8th ed., Ch. 6

  32. INTERNAL BUSINESS & SKEPTICISM IssueProfessional skepticism GBW 8th ed., Ch. 6

  33. INTERNAL LEARNING & SKEPTICISM IssueProfessional Skepticism GBW 8th ed., Ch. 6

  34. COGNITIVE BIASES IN EVALUATING EVIDENCE • Heuristics: simplifying rules of thumb that may bias decision making • Representativeness • Availability • Anchoring-and-adjustment GBW 8th ed., Ch. 6

  35. COGNITIVE BIASES:Representativeness Given an item, b, and a class of items, A, making a judgment based on how much b resembles other items from class A rather than making a judgment based on the probability that b came from class A. GBW 8th ed., Ch. 6

  36. COGNITIVE BIASES:Availability The decision maker evaluates the likelihood of a particular outcome based on infrequent but highly publicized outcomes rather than outcomes predicted by the profession’s collected experience. GBW 8th ed., Ch. 6

  37. COGNITIVE BIASES:Anchoring-and-Adjustment The decision maker assesses likelihood of an outcome with an initial, sometimes biased probability estimate (anchor) then adjusts the probability insufficiently when discovering new information. GBW 8th ed., Ch. 6

  38. AUDIT DOCUMENTATIONASB Standards • Auditor’s judgment about nature, extent of documentation depends on • Risk of misstatement • Judgment about audit work • Nature of procedures • Significance of evidence • Nature, extent of assertions tested GBW 8th ed., Ch. 6

  39. AUDIT DOCUMENTATIONPCAOB • Reviewability standard • Derived from governmental standards • Documents sufficient for experienced auditor to understand work performed, when, why • Rebuttable presumption • Absent documentation of audit work, presumption that work not performed GBW 8th ed., Ch. 6

  40. AUDIT DOCUMENTATION FILES • Correspondence (administrative) file • Permanent file • Information of continuing interest & relevance • Tax file • Past, present, future income & property tax obligations GBW 8th ed., Ch. 6

  41. ROLE OF AUDIT DOCUMENTATION • Work was adequately planned, supervised, and reviewed (1st standard fieldwork) • Internal control considered as basis for substantive tests (2nd standard fieldwork) • Sufficient competent evidential matter was obtained (3rd standard fieldwork) GBW 8th ed., Ch. 6

  42. AUTOMATED DOCUMENTATION • Spreadsheet software • Analytical procedures, data import/export, graphing, sorting • Database management • Relational structuring: combining 2 or more files for single query • Text retrieval • Access & retrieve electronically stored text GBW 8th ed., Ch. 6

More Related