AUDITING

BAC2664 (New), BAC2287(Old)

Topic 6, Lecture 6
Audit Responsibility, Objectives,
Evidence and Procedures

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 Audit Responsibility, Objectives,
Evidence and Procedures
• Objectives and responsibility of audit
• Overall audit plan and audit program
• Types of tests; audit procedures; Types of evidence
• Relationship between tests and evidence; Evidence mix
• Brief introduction to analytical procedures; Obtaining
audit evidence
• Audit planning; basic concept of materiality and audit
risks
• Design of the audit program; types of audit working
papers

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 Audit Objectives
ISA 120 (AI 120), Framework of International Standards on Auditing,
paragraph 11 states:
“The objectives of an audit of financial statements is to enable the auditor
to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with an identified financial
reporting framework.”

This implies:
1 the audit evidence should, in total, enable the auditor to form an
opinion on the FS,
2 the auditor gathers evidence that are material, to obtain reasonable
assurance, that the FS are not affected by material misstatements,
3 managements assertions are verified for the validity of their assertions.

To achieve the audit objectives, the auditor carries out substantive tests.
There are two types of audit objectives: (1) audit objectives for test of
detail transactions, and (2) audit objectives for test of details of
balances.

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audit objectives for test of detail
transactions
1 Occurrence – only transactions that had validly occurred are
recorded in the journals
2 Completeness – all existing transactions are recorded in the
journals
3 Accuracy – the amount recorded in the journal are correct
4 Classification – transactions recorded in the journal are properly
classified
5 Timing – transactions are recorded in the journal on the dates the
transaction occurred
6 Posting and Summarization – transactions recorded in the
journals are properly posted in the subsidiary ledger; and then
summarized and posted to the general ledger

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 audit objectives for test of
details of balances
1 Existence – the amount of assets and liabilities included in the balance sheet
(BS) represent those that exist at the BS date
2 Ownership – the amount of assets included in the FS are owned by the
company; whereas the amount of liabilities are owed by the company
3 Completeness – all existing general ledger (GL) balances are included in the
FS
4 Accuracy – the GL account balances included in the FS are correct
5 Classification – the GL account balances included in the FS are properly
classified
6 Cut-off – transactions that occurred near the BS date are recorded in the
correct financial year
7 Detail tie-in – total of account balances extracted from the subsidiary ledger
should agree with the balance of the control account maintained in the GL
8 Realisable value – the historical cost of assets and liabilities are reduced to
reflect net realisable value or carrying amount at the year end
9 Presentation – assets and liabilities are properly presented in the BS;
revenue and expenses are properly presented in the IS.
10 Disclosure – disclosures made in the notes to the FS are informative and
comply with the requirements of CA 1965 and Approved FRS/MASB/IAS.

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Relationship between Management
Assertions and Audit Objectives
• Management Assertions
- existence
- occurrence
- rights
- obligations
- completeness
- valuation
- allocation
- presentation
- disclosure
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Relationship between Management
Assertions and Audit Objectives
• Audit Objectives – Tests of details of
transactions
- occurrence
- completeness
- accuracy
- classification
- timing
- posting
- summarization

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Relationship between Management
Assertions and Audit Objectives
• Audit Objectives – test of details of balances
- existence
- ownership
- completeness
- accuracy
- classification
- cut-off
- detail tie-in
- realizable value
- presentation
- disclosure
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 Glimpse into Auditors’ Test of Details of
Account Balances – The Fixed Assets Account
• Management’s assertion:
- existence or occurrence:
physically examine the FA to ensure acquisitions are actual, brought forward
still exist, justify the net book value.
- completeness:
scrutinize the FA register , for identification number, acquisition, disposal are
recorded, obtain confirmation from solicitor to determine pending legal transfer
- rights and obligation:
examine supporting documents to ensure authorization, examine minutes of
directors meetings
- valuation or allocation:
consider adequacy of company’s policies with regards to depreciation rates,
perform reasonable calculation and test to determine correctness of
depreciation
- presentation and disclosure:
consider the requirement of FRS to ensure disclosure of information, obtain
bank confirmation to obtain evidence on restrictions on FA

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 Audit Timing
Soon after the acceptance of the engagement, auditors should decide on the
appropriate audit timing. In order to obtain optimal efficiency and
effectiveness in most of the assignments, the auditors should consider three
audit timing:
2 Audit planning
3 Interim audit
4 Final audit

Audit timing will benefit both the auditors and the clients, in the following:
7 To avoid pooling of work
8 To refrain any considerable inconvenience and disruption on the work of the
client’s personnel
9 To promote audit efficiency by allowing staff mobility
10 To obtain the degree of reasonable assurance, and conclude their work
11 Tests of controls can be done prior to the company’s balance sheet date
(interim audit)
12 Substantive procedures and tests can be performed after the balance sheet
date, but before concluding the audit (final audit)

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 Crucial Six Months After Balance
Sheet Date
For companies that end their financial year on 31 December every
year, the last date to table the audited financial statements at the
annual general meeting is on 30 June the following year. The
duration of six months given by the CA 1965 have the following
significance:
2 To allow companies management to prepare the FS
3 To enable auditors to examine the FS prepared by the
management, and subsequently issue an audit report
4 To enable companies to call for an AGM with the agenda of
ordinary business, inter alia, to receive and adopt the audited FS

S167(1A), CA 1965, allows companies sixty days duration to close the

financial records and produce FS

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 Planning
ISA 300 (AI 300) – Planning, states that an auditor should plan his work to
enable him to conduct an effective audit in an efficient and timely
manner.

An audit plan should be made to cover, amongst other things:

4 Pre-plan (accept a new client or not, select audit staff)
5 Obtain background information (client’s business, competitor,
industry, client’s office and site, policies, related parties, consider
experts help)
6 Acquiring knowledge of the client’s accounting system, policies,
and internal control procedures
7 Assessing acceptable risk and level of materiality
8 Establishing the expected degree of reliance on internal control
9 Determining and programming the nature, timing, and extent of an
overall plan and program (audit procedures to be performed)
10 Coordinating the work to be performed

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 Purpose of Planning
1 To achieve audit objectives
2 To assist in the direction, supervision and
review
3 To obtain sufficient appropriate audit evidence
4 To help keep audit cost reasonable
5 To allow mobility of staff from one client to
another without interruption
6 To avoid misunderstanding
7 To minimize the possibility of audit failure
8 To protect from legal liability

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 Factors to be considered in
Planning an Audit
ISA 310 (AI 310), Knowledge of the Business, paragraph 2, states that the auditor
should obtain a knowledge on client’s business sufficient to enable the
auditor to identify and understand the events, transactions and practices
that, in the auditor’s judgment may have a significant effect on the FS or on
the examination or audit report.

The auditor obtains knowledge of client’s business to determine:

(a) nature and timing of audit report or other communication with the client
(b) Materiality level and audit risks
(c) Effect of new approved accounting standards and auditing standards
(d) Applicable statutory or regulatory requirements
(e) Appropriateness of client’s accounting policies and disclosures
(f) Adequacy of client’s accounting and internal control system
(g) Extent of reliance on internal auditor and involvement of experts
(h) Arrangement for stock-take observation
(i) Reasonableness of the results from analytical review
(j) Adequacy of overall audit planning, and the nature, timing, and extent of
programs

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 Sources of Information on
Knowledge of Client’s Business
1 Annual reports
2 Minutes of meetings of shareholders, board of directors,
important committees
3 Management reports
4 Clients policies and procedural manual
5 Periodicals, Economic reports
6 Visiting clients premises and touring of the plant
7 Discussion with client’s management and staff (business
environment, organizational structure, business operations, legal
structure)
8 Ratio analysis (analytical review)
9 Previous year audit working paper
10 Competitor and Industry statistics

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 Audit Program
ISA 300 (AI 300) – Planning, paragraph 10, states: ‘the auditor should develop and
document an audit program setting out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan.”

Benefits derived from the audit program are:

4 Obtain a degree of reasonable assurance that the FS are not affected by
material misstatements and to make a conclusion on the truth and fairness
of FS
5 To guide the audit staff in discharging their duties competently and with due
care
6 To provide evidence of proper planning and a record of work done that
conforms to auditing standards
7 To provide a basis for delegation and coordinating the audit work
8 To control the time spent on gathering sufficient appropriate audit evidence
9 To minimize the possibility of audit failure
10 To protect auditors from legal liability

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 Components of Audit Program
The auditor prepares a written audit program setting forth
the objectives to achieve and the procedures to fulfill.
From carrying out the procedures, the auditor concludes
whether the account balances and class of transaction
presented give a true and fair view of the results and
financial position.
Objectives – clearly stated at outset (management’s
assertions, and auditor’s duty)
Procedures – sufficiently explained what procedures are to
be carried out by the audit staff in search of evidence
Conclusions – form a true and fair view opinion on the FS,
with reasonable assurance

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 Types of Audit Programs
Two types:
• Standard audit program – a general purpose
audit program that are applicable to most audit
assignment
• Tailored audit program – a specially
designed audit program to meet the unique
circumstances of the client’s business

Both types of audit programs need to be reviewed

and updated if there are changes in the
accounting and auditing standards

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 Documentation
ISA 230 (AI 230), Documentation, paragraph 2, states that:
“the auditor should document matters which are important
in providing evidence to support the audit opinion and
evidence that the audit was carried out in accordance
with ISAs.”

Documents refers to working papers (WP) prepared or

obtained by the auditor in connection with the
performance of the audit.

The WP are the property of the auditor. He has to ensure

that the WPs are retained by him and are not misplaced
or lost.

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 Purpose of Working Papers
1 To facilitate the auditor in the planning of the current
year and future engagement
2 To facilitate the auditor in the supervision and review
of the work done by assistants
3 To provide a tangible starting point for evaluation of
staff competency and their training
4 To support the auditor in providing reasonable
assurance that an adequate audit was conducted in
accordance wit Approved Auditing Standards
5 To provide the evidence to support the auditor’s
opinion on the truth and fairness of FS

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 Types of Audit Files
Two types:
2 Permanent Audit File (PAF)
3 Current Audit File (CAF)

PAF contains historical information and information of continuing interest to the

auditor that are still valid to support the current year audit work. They are
updated with current information of continuing importance to succeeding
audits.

Contents of PAF include abstracts of significant documents pertaining to:

8 Information about the client business and its industry
9 Memorandum and articles of association
10 List of directors retired by rotation
11 Accounting system and internal controls structure
12 Significant accounting policies
13 Documents used by the client
14 Schedule of account that have large balances carried forward
15 Contracts and agreements
16 Specimen of signatures

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 Types of Audit Files
WP prepared by the auditor that are part of PAF are:
2 Tailored audit programs
3 Information related to the auditor’s evaluation of the client’s accounting
system and internal control
4 Results from analytical review procedures

CAF contains information that support the management assertions embodied in FS

being audited. The information documented in the CAF are relevant to the
current year audit engagement. Contents are:
7 Draft FS
8 Audit program
9 Working trial balance
10 Journal entries
11 IS, BS, CFS, SCIE, Notes
12 Schedules
13 Memorandum
14 Minutes
15 correspondences

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Criteria of Quality Working Papers, Ownership
and Custodian of Working Papers

Criteria of Quality Working Papers:

• Procedures followed
• Test performed
• Evidence obtained
• Conclusions reached pertinent to the audit

Ownership and Custodian of Working Papers:

• Belongs to the auditor
• Confidential

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Materiality

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Audit Risk

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Audit Sampling

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Audit Evidence

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 References
1 Lecture notes
2 Tutorial questions
3 Past examination questions
4 ACCA articles
5 Text:
- Chapter 3 (Risk Assessment and Materiality),
- Chapter 4 (Audit Evidence and Audit Procedures),
- Chapter 5 (Planning and Audit Documentation)
- Chapter 8 & 9 (Audit Sampling)

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