Financial Statements

Management
assertions about
Audit report
components of
financial statements

Auditor reaches a
conclusion based on Audit Procedures
the evidence

Provide evidence on
the fairness of the
financial statements
 Accuracy
Occurrence
Cutoff
Completeness
Classification
Authorization
Presentation
 Accuracy
Existence
Valuation &
Allocation
Rights & Obligations
Classification
Completeness
Presentation
 Information used by auditor in arriving at the
concussions on which the audit opinion is based

Nature of audit evidence

Sufficiency and appropriateness of audit

evidence

Evaluation of audit evidence

 Nature of audit evidence – Form or Type of Information
Accounting Records
• Records of initial entries and
support
• General ledger, subsidiary
ledgers, journal entries, and
adjustments to financials
• Worksheet and spreadsheets
supporting allocations, of costs,
calculations, reconciliations,
and disclosures
• Contracts
Other Information
• Minutes of meetings
• Third party confirmations
• Analysts reports from an
industry
• Data about competitors to use
as comparison
• Control manuals
• Information gotten by auditor
from inquiry, observation, and
inspection
Sufficiency and appropriateness of audit evidence
Sufficiency measure of the quantity of
audit evidence

The greater the risk of The higher the quality of

misstatement the higher audit evidence the lower
the quantity of audit the quantity of audit
evidence needed evidence needed
 Sufficiency and appropriateness of audit evidence
Appropriateness is a measure of the Relevance
quality of audit evidence Reliability
Reliability factors:
Independent source outside the entity

Effectiveness of internal control

Auditor’s direct personal knowledge

Documentary evidence

Original documents
Evaluation of evidence requires
understanding of both:

Types of evidence Relative reliability of that

available available evidence
Acts performed by the auditor to gather evidence
about whether specific assertions are met

Risk assessment Substantive

Test of Controls
procedures Procedures
 Set of audit procedures prepared to test assertions
for a component of the financial statements
Audit Program for Accounts Receivable
Management Audit Procedures
Assertion
Existence Confirm accounts receivable

Rights and obligation Inquire of management whether receivable have been sold

Completeness Agree total of accounts receivable subsidiary ledger to accounts

receivable control account or general ledger
Valuation or allocation Test adequacy of the allowance for doubtful accounts
Inspection of records and documents
Evidence from external documents is more reliable
than that obtained from internal documents

Tracing
Tests Completeness Journal or
Source Ledger
Document
Vouching (Books)
Tests Occurrence
Inspection of tangible assets
• Physical examination of a tangible asset

Inspection of tangible assets

• Watching a process or procedure being
performed by others
Inquiry
Auditor will:
Evaluate the knowledge, objectivity, experience, responsibility, and qualifications of the individual that is questioned

Format questions to be clear, concise, and relevant

Understand and use both open and closed format questions

Understand and apply active listening

Ask appropriate follow up questions based on responses

Confirmation

Third party direct written response to auditor inquiry.

Reliability varies depending on factors including:

Form of the confirmation

Prior experience with the entity

Nature of the information being confirmed

Confirmation
Information Confirmed Confirmation source
Cash balance Bank

Accounts Receivable Individual customers

Inventory on consignment Consignee

Accounts payable Individual vendors

Bonds payable Bondholders

Insurance coverage Insurance company

Recalculation

Mathematical accuracy check

Reperformance
Auditor executes procedures or controls
Analytical Procedures
Examination of financial information made by a study of
plausible relationships in both financial and nonfinancial
data
Scanning
Review accounting data to identify significant or unusual
items to test
 • Inspection of records
and documents • Inspection of tangible
• Observation assets
• Confirmation
• Inquiry • Reperformance
• Analytical procedures
• Recalculation
• Scanning

Lower Higher
 After assessing potential
effectiveness of internal
No controls, will tests of
controls be conducted?
Usually the answer is yes
Yes

Do test of controls

Can effective and efficient

substantive analytical
procedures be done?
No Can effective and efficient
substantive analytical
procedures be done?

Yes
Perform substantive
analytical procedures

Is additional substantive
No
evidence needed?
Yes
Perform substantive tests of details on
Document results
transactions and or balances
 Remaining Assurance Needed From Tests of
Details

Substantive Analytical
Procedures

Tests of
Controls
Fill the bucket
with evidence Risk Assessment
Procedures
 Controls
Substantive
testing and
analytical Test of details
risk
procedures
assessments

Completeness Accuracy Cutoff Presentation Existence or Valuation Rights and

and occurrence obligations
disclosure
Auditor’s record of the audit procedures performed,
relevant evidence obtained, and conclusions reached
Audit documentation or working papers functions:

Provide support for the audit report

Aid in the planning, performance, and supervision of the audit

Provide a focal point for reviewing work of subordinates. Helps to provide a basis
for quality reviews
Show how the audit complied with auditing and
related practice standards

Show evidence for the auditor’s conclusions

about each material financial statement assertion

Show that the underlying accounting records

agreed or reconciled to the financial statements
 Contain written audit program explaining auditing
procedures necessary to accomplish audit objectives

Be constructed in such a way to enable an experienced

reviewer to:
Understand the nature,
Determine who performed
timing, extent, and results of
and reviewed the work.
audit procedures, evidence
Show the dates of the work
obtained, and conclusions
and the reviews of it.
reached
Permanent Files Current Files

• Corporate charter documentation

• Significant contracts • Organization charts
• Chart of accounts • Terms of stock and
• Internal control bond issues
Permanent Files Current Files

• Adjusting journal • Current financial

entries statements and
• Audit plan and auditor’s report
programs • Meeting minutes
• Working trial balance • Working papers
 • Entity name
Heading • Title of working paper
• Entity’s year-end

Indexing and • Indications that provide a trail from

cross- financial statements to audit
referencing documentation

• Indications next to work paper items

Tick Marks showing auditor actions and reviewer
actions
 Audit Documentation
Documentation
documentation is should be retained
should be organized
property of the for a number of
in such a way that
auditor. This includes years from the
evidence supporting
documentation completion date of
financial statements
prepared by the the engagement per
amounts can be
entity at the The Sarbanes-Oxley
easily found
auditor’s request Act.
When using analytical procedures auditors need to
have expectations to use as a kind of benchmark.
Sources could include
Financial data

Budgets

Industry standards

Competitor information

Management’s analysis
Precision – Quality of an expectation

How closely does

Potential Degree of
the expectation
effectiveness of reliance that can
approximate the
an analytical be put on the
correct but not
procedure procedure
known amount
 If the assertion
being tested
Amount of Function of the requires a low
the purpose of
desired materiality and level of
the analytical
precision can required detection risk,
procedure
differ with: detection risk the expectation
needs to be
very precise
• Disaggregation

• Plausibility and predictability of the relationship being

studied

• The reliability of data

• Types of analytical procedures used to make the expectation

Significance of the account

Degree of reliance that will be put on substantive

analytical procedures

Procession of the expectation

Differences identified by substantive analytical procedures
indicate an increased likelihood of misstatement. Follow up
with:

Quantification

Corroboration

Evaluation
 Quantification Corroboration Evaluation

• Determine • Obtain • Evaluate results

whether the sufficient audit of substantive
explanation or evidence that analytical
error can links the procedures to
explain the explanation to decide whether
observed the difference the desired
difference and level of
substantiate assurance has
that the been achieved
information the
explanation is
reliable