FAU Tutorial Class

Session 3
Audit Evidence, Procedure & Materiality

20 Feb 21
AUDIT EVIDENCE

ST =

AL =
RELIABILITY OF AUDIT EVIDENCE (AWESOME)
QUESTIONS
Audit Evidence Reliable
or not?

Oral representations by management that all suppliers

owed money at the year end have been included in the
financial statements.

Physical inspection of a non-current asset by an auditor.

Confirmation by a receivable of money owed.

AUDIT APPROACH

System based approach:

Direct verification approach:

AUDIT PROCEDURE (A, E, I, O, U)
Test of Controls:

1. I
2. R
3. O
Substantive Procedures:

1. A
2. E
3. I
4. U
Audit Procedures T or S

Inspecting invoices to ensure they have been

approved by the managing director

Obtaining confirmation from the bank of balances held

at the year end

Confirming how unauthorised personnel are

prevented from entering where the inventory is held

Confirming if references are sought for all new major

customers

T = TEST OF CONTROLS, S = SUBSTANTIVE PROCEDURES

FINANCIAL STATEMENTS ASSERTIONS

SPL (Income Statement) SOFP (Balance Sheet)

Occurrence Existence

Completeness Completeness

Accuracy Valuation & Allocation

Cut-off Right and Obligations

Classification and Presentation Classification and Presentation

MATERIALITY

Information is material if its omission or

misstatement could reasonably be expected to
influence the economic decisions of users of
financial statements.
Planning Performance

Materiality

Quantitative Qualitative

Professional
Judgement
CALCULATION OF MATERIALITY

Value %
Revenue 0.5 - 1%
Gross Profit 0.5 - 1%

PBIT 5%
Net Profit 5 - 10%
Total Assets 1 - 2%
PROFESSIONAL SCEPTICISM

An attitude that includes a questioning mind, being alert to

condition which may indicate possible misstatement due to
error or fraud, and a critical assessment of audit evidence.
WHY PROFESSIONAL SCEPTICISM?

1. Reduce the risk of overlooking the unusual

transaction and over-generalising the conclusion.
2. Necessary to the critical assessment of the audit
evidence
PROFESSIONAL JUDGEMENT

Application of relevant training, knowledge and experience

in making informed decisions about the courses of action
that are appropriate in the circumstances of the audit
engagement.
WHY PROFESSIONAL JUDGEMENT?

Useful for the following assessment:

1. Materiality and audit risk
2. Nature, timing and extent of audit
procedures
3. Evaluation of management judgment/
audit evidences obtained
4. Drawing conclusions for the audit opinion
SIGNIFICANT RISK

Risks assessed that requires special audit consideration.

Eg. Risk of fraud / Unusual transaction
Auditor must evaluate the design and the
implementation of the entity’s control in that area