Part Five Auditing Standards, Audit Evidence & Audit documentation

1. Part Five Auditing Standards, Audit Evidence & Audit documentation

2. Structure of Seminar • 1. Auditing Standards • 2. Audit evidence • 3. Audit Procedures • 4. Audit documentation

3. 1. Auditing Standards • From 2004, Auditing & Assurance Standards Board (AUASB) constituted under the government’s Financial Reporting Council (FRC); issues Australian Auditing Standards (ASAs) • From 1 July 2006, Australia fully adopted international auditing standards (ISAs) • Standards a minimum level of care

4. 2. Audit evidence • Audit evidence is used to verify management’s F/S assertions • Evidence is gathered and evaluated to meet specific audit objectives • Evidence consists of -Underlying accounting data of entity -All corroborating information • Underlying accounting data • Books of original entry • General & subsidiary ledgers

5. Audit evidence • Related accounting manuals • Memoranda & informal records • Corroborating information • Documents (cheques, invoices, receipts, etc) • Confirmations & other written representations • Information from inquiry, observations, inspection & physical examination • All other information acquired by auditor

6. Audit evidence • ASA 200 ‘Audit Evidence’ • “the auditor should obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion” • Sufficiency of audit evidence • Materiality and audit risk • Economic factors -Cost-benefit • Population size and characteristics -sampling

7. Audit evidence • Appropriateness of audit evidence • Relevance • Reliability • Source & nature of information • Timeliness • Objectivity • Reasonable basis for forming opinion – evidence is persuasive not conclusive

8. Reliability of documentary evidence

9. Types of Evidence

10. 3. Audit Procedures • Methods & techniques used by auditor to gather evidence • Analytical procedures • Inspecting • Tracing • Vouching • Confirming • Enquiring • Counting

11. Audit Procedures • Observing • Re-performing • Many of these procedures can be performed with audit software

12. Vouching vs Tracing

13. Audit Procedures • Classification of auditing procedures 1)Procedures to obtain an understanding of the internal control structure 2)Tests of controls Substantive procedures • Tests of details of transactions • Tests of details of balances • Analytical procedures

14. Evaluation of Evidence Obtained

15. 4. Audit documentation • It is important to document audit work performed in working papers to: — Enable reporting partner to ensure all planned work has been completed adequately — Provide details of work done for future reference — Assist in planning and control of future audits — Encourage a methodical approach

16. Audit documentation 1) The objective of audit documentation Audit documentation is the record of audit procedures performed, relevant audit evidence obtained and conclusions reached. The term 'working papers' or 'work papers' are also sometimes used. Audit documentation is necessary for the following reasons: — It provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective.

17. Audit documentation — It provides evidence that the audit was planned and performed in accordance with ISAs and other legal and regulatory requirements. — It assists the engagement team to plan and perform the audit. — It assists team members responsible for supervision to direct, supervise and review audit work. — It enables the team to be accountable for its work. — It allows a record of matters of continuing significance to be retained.

18. Audit documentation — It enables the conduct of quality control reviews and inspections (both internal and external). 2) Form and content of working papers • The ISA requires working papers to be sufficiently complete and detailed to provide an overall understanding of the audit. Auditors cannot record everything they consider. • The form and content of working papers are affected by matters such as: — The size and complexity of the entity

19. Audit documentation — The nature of the audit procedures to be performed —The identified risks of material misstatement —The significance of the audit evidence obtained —The nature and extent of exceptions identified —The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed or audit evidence obtained —The audit methodology and tools used

20. Audit documentation (1) Permanent audit files These contain: • Engagement letters • 􀁸 New client questionnaire • 􀁸 The memorandum and articles • 􀁸 Other legal documents such as prospectuses, leases, sales agreement • Details of the history of the client’s business • 􀁸 Board minutes of continuing relevance

21. Audit documentation • 􀁸 Previous years’ signed accounts, analytical review and management letters • 􀁸 Accounting systems notes, previous years’ control questionnaires • (2) Current audit files • These should be compiled on a timely basis after the completion of the audit and should contain: • Financial statements • 􀁸 Accounts checklists

22. Audit documentation • Management accounts details • 􀁸 Reconciliations of management and financial accounts • 􀁸 A summary of unadjusted errors • 􀁸 Report to partner including details of significant events and errors • Review notes • 􀁸 Audit planning memorandum • 􀁸 Time budgets and summaries • 􀁸

23. Audit documentation • Representation letter • 􀁸 Management letter • 􀁸 Notes of board minutes • 􀁸 Communications with third parties such as experts or other auditors • 3) Safe custody and retention of working papers • Working papers are the property of the auditors. They are not a substitute for, nor part of, the entity’s accounting records.