AUD339 AUDITING

TOPIC 3: AUDIT PLANNING &

FIELDWORK
(Audit Evidence & Audit
Procedure)
 TOPIC COVERED
1. Audit Procedures
2. Audit Evidence
3. Audit Programmed
4. Audit Documentation
5. Internal Control
 Engagement letter Client acceptance

Development of audit strategy

No
Probable intention to
rely on internal control

Yes
Identify and document internal controls

Make preliminary evaluation

Still intend to rely?

No Identify weaknesses in or
Absence of internal control
Yes

Overview
Identify and document internal control
on which reliance will be placed

of the Perform compliance test

Audit Evaluate internal controls in action

Process Yes

Rely on internal control No Other controls on No

for substantive which reliance is
procedure? possible?

Yes

Evaluate internal controls in action Evaluate internal controls in action

Do results of
No
substantive test satisfy
and assure audit?

Yes

Legal representation letter

Dose evidence No
constitute sufficient
Client’s representation appropriate evidence to
Subsequent event review support an opinion?

Possible disclaimer

Issue audit report

 OVERVIEW OF AUDIT PLANNING
• Definition:
• It involves general strategy and detail approach for
the expected nature, timing and extent of an audit
• Reasons for Audit Planning:
• To enable the auditor to obtain sufficient
competent evidence for the circumstances
• To help keep audit costs reasonable
• To avoid misunderstandings with the client
 Overall Timing Of Engagement

AUD390 2014
 STEPS IN AN AUDIT

1. PREPLAN
2. OBTAIN INFORMATION BACKGROUND
3. OBTAIN INFORMATION ABOUT CLIENT’S
LEGAL OBLIGATION
4. PERFORM PRELIMINARY ANALYTICAL PROCEDURES
5. SET MATERIALITY & ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL CONTROL & ASSESS
CONTROL RISK
7. DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME(AP)
 PREPLAN
1. Initial Audit Planning
2. Scope Of Audit
 Financial Statement Audit
 Responsibility Of Auditor Vs. Management
3. Setting Audit Objectives
 Management Assertion
Transaction Related Audit Objectives
Balance Related Audit Objectives
 Fraud Vs. Error
 1. Initial Audit Planning
i. Decides whether to accept a new or continue
serving an existing one
ii. Identifies why the client wants or needs an audit
iii. Obtains an understanding with the client about
the terms of the engagement
iv. Select the staff for the engagement
 i. Client Acceptance & Continuance
• New Client Investigation
• Reasons for investigation:
Prospective client’s standing in the business
community
Financial stability
Relations with previous auditor
• Procedure to communicate with predecessor auditor
1. The successor auditor should get the prospective
client’s permission to communicate with the
existing predecessor auditor. If the permission is
not given, the successor auditor should decline the
appointment.
2. The successor auditor should inquire the predecessor
auditor whether there is any professional reason for
the proposed change. If there are such reasons, the
successor auditor should request the predecessor
auditor to provide him with all necessary details in
order to decide the acceptance of the appointment.
3. If the successor auditor does not receive a reply to his
inquiry, he is required to send a reminder to the
predecessor auditor or communicate with him through
other means.
4. If no response within a reasonable period after
sending of 2 reminders, the successor auditor should
inform the predecessor auditor of his attention to
accept the engagement.
• Continuing Clients
• Determine reason for not continuing to do the audit
Is there any previous conflicts over scope of audit,
the type of opinion to issue or audit fees?
 ii. Identify Client’s Reason for Audit

• Statutory requirements
• Financial statement audit
• Compliance audit
• Weaknesses noted in the operations
• Operations audit
• Audit on Internal Control System
 iii. Obtain an Understanding With the Client

• ISA210 requires that auditors must document their

understanding of an engagement in the audit files,
including the engagement’s objectives, the
responsibility of the auditor & management, and the
engagement’s limitations
• Engagement Letter (refer pp. 133)
 An agreement between the CA firm and the client for
the conduct of the audit and related services
 iii. Obtain an Understanding With the Client

• Contents:
 Specify job performed by the auditor (audit,
review, compilation, tax return, etc.)
 Restriction to be imposed on the auditor’s work
 Deadlines for completing the audit
 Assistance to be provided by clients
 Schedules of audit to be performed by auditor
 Audit fees
 iv. Select Staff for Engagement

• MIA By-Laws stated

• A member should carry out his work with a proper
regard for the technical & professional standards
expected of him as a member and should not
undertake or continue professional work which he is
not himself competent to perform unless he obtains
such advice and assistance as will enable him
competently to carry out his work
 2. Scope Of Audit

• ISA200 states ~ an audit is accordance with ISAs is

designed to provide reasonable assurance that the FS
taken as whole are free from material misstatements
• Auditor’s main responsibility is detecting material
misstatements in the financial statements
• Objective of an audit of financial statements is to
enable the auditor to express an opinion whether the
financial statements are free from material
misstatements, which the equivalent term used are
the “true and fair view” opinion
 Materiality
Information is material if its omission or
misstatement could influence the economic
decision of users taken on the basis of the FS
 Misstatement
A mistake in financial information which would
arise from errors and fraud
 True and Fair View
A legal concept, but there is no legal definition
made by the court
True ~ accounts must be in accordance with facts
& reality
Fair ~ the accounts should be unbiased, just &
equitable
The accounts considered true & fair, when the
information they contain is sufficient in quantity &
quality to satisfy the reasonable expectation of the
readers to whom they are addressed
 Reasonable Assurance
 Assurance ~ the level of certainty that the
auditor has obtained at the completion of the
audit
 Reasonable, but not absolute assurance ~ the
auditor is not an insurer or guarantor of the
correctness of the FS
 Reasons why the auditor is responsible for
reasonable but not absolute assurance:
1. Most audit evidence results from testing a
sample of population
2. Accounting presentation contain complex
estimates, which involve uncertainty & can be
affected by future events
3. Fraudulent prepared financial statements are
difficult for the auditor to detect
 2 types of misstatements are errors & fraud
 Error
o Unintentional misstatement of the FS
o For e.g.
1. Mistake in extending prices times quantity
on sales invoice
2. Overlooking older raw materials in
determining the lower of cost or market for
inventory
 Fraud
o Intentional misstatement of the FS
o 2 types:
1. Misappropriation of assets, often called as
defalcation or employee fraud
E.g. intentional overstatement of sales near
the balance sheet date to increase reported
earnings
2. Fraudulent financial reporting, often
called as management fraud
E.g. a clerk taking cash at the time a sale is
made
3. Setting Audit Objective

MANAGEMENT
ASSERTION

Transaction Balance
Related Audit Related Audit
Objectives Objectives
• MA is defined as implied or expressed representations
by management about classes of transactions and
related accounts in the financial statements
• Act as criteria that management uses to record and
disclose accounting information in financial statements
• Refer to the definition of auditing … a comparison of
information (financial statements) to established
criteria (assertions established according to approved
accounting standards)
• ISA500 Audit Evidence classifies assertion into 7
categories:
1. Existence
2. Occurrence
3. Rights and obligations
4. Completeness
5. Valuation or allocation
6. Measurement
7. Presentation and disclosure
 Assertion about Existence

• Concern whether assets, obligations and

equities included in the balance sheet actually
existed on the balance sheet date
 Assertion about Occurrence

• Concern whether recorded transactions

included in the financial statements actually
occurred during the accounting period
• E.g. management asserts that recorded sales
transactions represent exchanges of goods or
services that actually took place
 Assertion about
Rights & Obligations

• Concern whether assets are the rights of the

entity & liabilities are the obligations of the
entity at a given date
• E.g. management assets that assets owned by
the company or that amounts capitalized or
leases in the balance sheet represent the cost
of the entity’s rights to leased property
 Assertion about Completeness

• Concern whether all transactions and accounts

that should be presented in the financial
statements are included
• E.g. management asserts that all sales of
goods and services are recorded and included
in the financial statements
 Assertion about Valuation

• Concern that whether assets, liability, equity,

revenue and expense accounts have been
included in the financial statements at
appropriate amount
• E.g. management asserts that trade account
receivable included in the balance sheet are
stated at net realizable value
 Assertion about Measurement

• Concern whether a transaction or event is

recorded at that the proper amount & revenue
and expense are allocated to the proper period
• E.g. management asserts that property is
recorded at historical cost and that such cost
is systematically allocated to the appropriate
accounting period through depreciation
 Assertion about
Presentation & Disclosure

• Concern whether components of financial

statements are properly combined or
separated, described and disclosed
• E.g. management asserts that obligations
classified as long-term liabilities is the balance
sheet will not mature within 1 year
 Setting Audit Objectives
• Auditors needs to obtain evidence that supports each
of the assertions for every material components of the
financial report.
• The categories of assertions provide a framework for
developing a specific audit objectives.
• An audit objective is an assertion translated into terms
that are specific to the particular balance or class, the
entity’s circumstances, nature of economic activity
and the accounting practices of its industry.
 Example: Audit Objective For Cash
Existence The petty cash funds, deposited receipts, Bank A/C &
any other items reported as cash exist at BS date.

Completeness Reported cash includes all petty cash funds, deposited

receipts, bank balance and other cash on hand.

Rights & All items included in cash are controlled by the entity at
Obligations BS date.

Valuation The items constituting cash have been correctly valued.

Cash receipts & payments journals are mathematically
correct and have been properly posted to the GL.
Cash on hand has been correctly counted

Presentation & Required disclosures have been made

Disclosure
 STEPS IN AN AUDIT
1. PREPLAN
2. OBTAIN INFORMATION
BACKGROUND OF CLIENTS’
3. OBTAIN INFORMATION ABOUT CLIENT’S
LEGAL OBLIGATION
4. PERFORM PRELIMINARY ANALYTICAL PROCEDURES
5. SET MATERIALITY & ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL CONTROL & ASSESS
CONTROL RISK
7. DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME(AP)
• Have better understanding about client:
• Client’s history, owner & mngt. of the co.
• Major activity, org. structure, mngt integrity
• Reliability of work done by internal auditor
• Obtain knowledge & client’s industry & business
• Established any unique acc. requirements
• Identify industry & any inherent risk
• Tour of client’s facilities
• Identify related party information
• Eg. Government regulation
• Requirement of an expert work/outside specialists
 STEPS IN AN AUDIT
1. PREPLAN
2. OBTAIN INFORMATION BACKGROUND OF CLIENT
3. OBTAIN INFORMATION ABOUT
CLIENT’S LEGAL
OBLIGATION
4. PERFORM PRELIMINARY ANALYTICAL PROCEDURES
5. SET MATERIALITY & ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL CONTROL & ASSESS
CONTROL RISK
7. DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME(AP)
• Examine
• Memorandum Of Association (MOA)
• Articles Of Association (AOA)
• Minutes Of BOD’s meetings
• Contracts
 STEPS IN AN AUDIT
1. PREPLAN
2. OBTAIN INFORMATION BACKGROUND OF CLIENT
3. OBTAIN INFORMATION ABOUT CLIENT’S
LEGAL OBLIGATION
4. PERFORM PRELIMINARY
ANALYTICAL PROCEDURES
5. SET MATERIALITY & ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL CONTROL & ASSESS
CONTROL RISK
7. DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME(AP)
 Analytical Procedures
• Definition: a study of relationship between elements of
financial information expected to conform to a
predictable pattern based on the auditor’s knowledge of
the business relationship between financial and non
financial information

Types of data, ratios, etc Comparison with

Financial Data (Account Corresponding period, budget &
balances, budgets, etc) forecasts
Non Financial Data (Production, Entries in accounting records,
employment statistics) other financial data
Ratios & Percentage Preceding period, budget &
AUD390 2014 forecast, industry statistics
• Types of analytical procedures:
1. Compare client data & industry data
2. Compare client data with similar prior-period data
3. Compare client data client-determined expected
results
4. Compare client data & auditor-determined
expected results
5. Compare client data with expected results, using
non financial data
• Common financial ratios
1. Short-term Debt-Paying Ability
 E.g. Cash ratio, quick ratio & current ratio
2. Liquidity Activity Ratios
 E.g. Accounts receivable turnover, Days to
collect receivables, Inventory turnover, Days to
sell inventory
3. Ability to meet Long-term Debt Obligations
 E.g. Debt to equity, Times interest earned
4. Profitability Ratios
 E.g. Earnings per share, Gross profit margin,
Profit margin, Return on assets, Return on
common equity
 STAGES PLANNING DETAILED TEST REVIEW FS
TIMING Before the FS are Start after client had Carry out overall
available
Cont…
submitted FS
supporting schedules
with review of FS when most
of audit testing are
completed

PURPOSES 1.To understand the 1. To ensure 1.To update auditor’s

client’s industry & completeness, accuracy knowledge of client’s
business & validity of information business
2.To assess going contain in the FS 2.To ensure the FS are
concern 2.To obtain sufficient not materially
3.To indicate audit evidence by misstated
possible reducing the work done 3.To corroborate
misstatement through substantive conclusions form during
4.To reduced tests the audit
detailed tests

SOURCES OF Interim FS, Annual FS, Accounting & Drafted audited FS

INFORMATIONS Management reports, other records,
Budget & forecasts, Management reports,
Internal audit report Internal audit reports

EXAMPLES Calculate key ratios Reasonable test on EPF Recalculate

for client and contribution account ratios/figures noted in
AUD390 2014
compare against the audit findings
industry’s ratios
 STEPS IN AN AUDIT
1. PREPLAN
2. OBTAIN INFORMATION BACKGROUND
3. OBTAIN INFORMATION ABOUT CLIENT’S
LEGAL OBLIGATION
4. PERFORM PRELIMINARY ANALYTICAL PROCEDURES
5. SET MATERIALITY &
ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL CONTROL & ASSESS
CONTROL RISK
7. DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME(AP)
• Materiality is a criterion for determining the items
require attention & detail examination
• Auditor needs to consider both the quantitative &
qualitative (nature) of the misstatement
1. Common bases in judging materiality
(quantitative)
For example: Total Assets, Total Revenue, NPBT, GP
2. Qualitative aspects that affect materiality.
For example:
 Use of inappropriate / inadequate accounting policy
 Cumulative small amount of misstatements  material
misstatement
 Fraud/non-compliance with laws & regulations
 Amounts that affect trend in earnings
 STEPS IN AN AUDIT
1. PREPLAN
2. OBTAIN INFORMATION BACKGROUND
3. OBTAIN INFORMATION ABOUT CLIENT’S
LEGAL OBLIGATION
4. PERFORM PRELIMINARY ANALYTICAL PROCEDURES
5. SET MATERIALITY & ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL
CONTROL & ASSESS CONTROL
RISK
7. DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME(AP)
• AUDIT RISK :
• Risk that the auditor gives an inappropriate opinion
when the FS are materially misstated
• Risk that the auditor delivers an incorrect audit
opinion – an opinion which states that the account
presents a true & fair view while in reality they do not
• Measure of how willing the auditor is to accept that
the FS may be materially misstated after the audit is
completed & unqualified audit opinion has been issued
• Factors result in uncertainty in audit performance
• Nature of audit test
• Inherent limitations of an audit
• Inherent limitations of the effectiveness of client’s
internal control system
 AUDIT RISK

Risk that the accounts may contain

misstatements

Inherent Risk Control Risk Detection Risk

 Inherent Risk (IR)
• Risk related to the characteristics of the business that
may cause material FS
• Factors used in assessing inherent risks
• Nature of client’s business
• Integrity of management
• Client motivation
• Client’s knowledge of accounting standards
• Nature of client’s inventory & technological
development
• For example external factors such as technological
development might make a particular product obsolete
• IR is high if no internal control system & IR is low of
internal control exist
 Control Risk (CR)

• Risk that the client’s internal control will not prevent or

detect material errors or misstatements in the account
balance
• Control risk exist due to the inherent limitation of
internal control system & inadequacy of the segregation
of duties such as human error, faulty judgment
• CR high if internal control system is not effective & CR
low if internal controls system is effective
 Detection Risk (DR)

• Risk that any remaining material misstatements after

assessing IR & CR will not be detected by auditor
• Risk that the auditor’s substantive procedures & review
FS will not detect material errors misstatements
• DR high if the auditors are not competent & due care &
DR low if the auditors are competent & exercise due care
 AUDIT SAMPLING

o Since the auditor cannot examine every item, the

auditor has to select a sample of items for
testing; i.e. “audit sampling”
o Audit sampling is the application of audit
procedures to less than 100% of the items within
an account balance or class of transactions, to
enable auditors to obtain and evaluate audit
evidence about some characteristic of the items
selected in order to form or assist in forming a
conclusion concerning the population.
 Advantages Of Statistical Sampling
permits the auditor to calculate precision and
reliability or confidence level
requires the auditor to plan the audit approach in a
systematic and scientific manner
permits the auditor to interpret the sampling results
objectively on the basis of values for precision and
reliability (confidence level)
permits the auditor to rely on a smaller sample than
would be the case for judgement sampling
permits a more intensive examination of sample
items since with smaller sample sizes the auditor is
able to thoroughly scrutinize each item that is drawn
 INTERNAL CONTROL SYSTEM

• A system of internal controls consists of policies &

procedures to provide management with reasonable
assurance that the company achieves its objectives &
goals.
• These policies & procedures are called controls, and
they normally considered as entity’s internal control
• A set of policies are principles, rules, and guidelines
formulated or adopted by an organization to reach its
long-term goals and typically published in a booklet or
other form that is widely accessible.
• Procedures are the specific methods employed to
express policies in action in day-to-day operations of
the organization. Together, policies and procedures
ensure that a point of view held by the governing body
of an organization is translated into steps that result in
an outcome compatible with that view.
• Three objectives in designing internal control
systems:
• reliability of financial reporting
• effectiveness & efficiency of operations
• compliance with laws & regulations
• Limitations of IC
• Human error
• Management override of IC
• Cost constraints
• Cost of entity’s ICS should note exceed that are
expected to derived
• Lack of personal quality among employee
• Collusion “an act of 2 or more employees to
steel assets or mistake records”
 Components Of ICS

CONTROL ENVIRONMENT

RISK ASSESSMENT INFORMATION &

COMMUNICATION

CONTROL ACTIVITIES MONITORING

 Control Environment
• Definition:
Includes governance and management’s overall
attitude, awareness and actions regarding IC and its
importance in the entity
• Auditors should consider:
• communication and enforcement of integrity and ethical values
• commitment to competence
• participation by those charged with governance
• management’s philosophy and operating style
• organisational structure
• assignment of authority and responsibility
• human resource policies and practices.
 Risk Assessment
o Definition:
Management’s identification & analysis of risks
relevant to the preparation of fin stat in
accordance with accounting standard i.e. FRS
o Risk assessment process
– Identify factors affecting risks
– Assess significance of risks & likelihood of
occurrence
– Determine actions necessary to manage risks
 Control Activities
o Definition:
Policies & procedures established by management in order
to ensure that its directives are carried out
o Types of specific control activities:-
– Segregation (Separation) of duties
– Authorisation of transactions and procedures
– Adequate documented transactions and records
– Physical controls over assets and records
– Independent checks on performance
 Information & Communication
o Definition:
o Method used to initiate, records, process &
report an entity’s transactions & to maintain
accountability for related assets
o An effective information system establishes the
records and the methods that:
o Identify and record all valid transactions.
o Resolve incorrect processing of transactions.
o Process and account for system overrides.
o Transfer information from transaction processing systems
to the general ledger.
o Capture information relevant to financial reporting for
events and conditions other than transactions.
o Present the transactions and related disclosures properly
in the financial report.

o
 Monitoring
o Definition:
Management’s ongoing & periodic assessment of the
quality of IC performance to determine whether
controls are operating as intended and are modified
when necessary
o Monitoring mechanism:
– Studies of existing IC
– Internal Audit Reports
– Reports from Regulatory such as BNM, SC, Bursa
Malaysia
– Feedback from operating personnel
– Complaints from customers
Obtain & Document Understanding of
Internal Control
o Purpose:
– To obtains an understanding of the entity’s IC
through
 Gathering evidence about the design of IC
 Observed whether the IC have been placed
in operations
o Methods in gathering evidence:
i. Narratives
ii. Flowcharts
iii. Internal Control Questionnaire
 Narratives

o Definition ~ A written description of a client’s IC

o A proper narrative of any ICS include 4
characteristics
i. The origin of every documents & records in the
system
ii. All processing that takes place
iii. The disposition of every document and records in
the system
iv. An indication of the controls relevant to the
assessment of control risk
 Flowcharts
o Definition ~ A diagram of the client’s documents and
their sequential flow in the organization
o Advantages:
– It provides a concise overview of the client’s
system
– It helps in identifying inadequacies in the system
– Easier to read
– Easier to update
AUD390 2014
 Internal Control Questionnaire

o Definition ~ A series of questions about the controls in

each audit areas as a means of uncovering aspects of
internal control that may be inadequate
o It require a ‘yes’ or ‘no’ response, where NO
indicating potential internal control deficiencies
 Tests of Controls
 Definition ~ Audit procedures to test the operating
effectiveness of controls in support of reduced
assessed control risk
 4 types of procedures involved:
i. Make inquiries of appropriate client personnel
ii. Examine documents, records & reports
iii. Observe control-related activities
iv. Re-perform client procedures
 COMMUNICATION OF INTERNAL
CONTROL RELATED MATTERS
• Auditing Standards (ISA315 & ISA260) require the
auditor to communicate to those charged with
governance, as soon as practicable, material
weaknesses in the design or operation of the
accounting & internal control systems, which have
come to the auditor’s attention

1. Management Letter (ML)

An optional letter written by the auditor to a
client’s management containing the auditor’s
recommendations for improving any aspects of the
client’s business
2. Director’s Statement on Internal Control
• Under the Listing Requirements of Bursa Malaysia
Securities Berhad (Listing Requirements)
 Listed Companies to include a Statement on
Internal Control in the annual reports
 Company’s external auditors must review the
Statement on Internal Control & report the
result to the BOD
• The Director’s Statement on Internal Control should
incorporate the following aspects
 The Board should maintain a sound system of IC to
safeguard shareholders’ investment & the
company’s assets
 The Board should (inter alia)
 Identify the principal risks & ensure the
implementation of appropriate systems to
manage the risks;
 Review the adequacy & integrity of the
company’s ICS & Management information
system, including systems for compliance with
applicable laws, regulations rules, directives &
guidelines
 Relationship Of IC &
Audit Evidence

• Effective IC reduces planned audit evidence in the audit

of FS
• Types of potential misstatement
• Risk of material misstatement

• Once audit of IC completed, auditor can use the results

to determine the nature, timing & extent of audit
procedures
 AUDIT EVIDENCE

• ISA 500 Audit Evidence requires the auditor to

accumulate sufficient appropriate evidence to support
the opinion issued
• Determinants of the persuasiveness of evidence are
• Appropriateness or Reliability
• Sufficiency
 Appropriateness or Reliability
 Def… the degree to which evidence can be considered
reliable or worthy of trust
 E.g. if an auditor counted the inventory, the evidence
will be more appropriate if the auditor counted the
inventory rather than the management give the figure
 7 characteristics of appropriate or reliable evidence:-

1. Relevance 5. Qualifications of individuals providing

2. Independence of provider the information
3. Effectiveness of client’s 6. Degree of objectivity
internal control 7. Timeliness
4. Auditor’s direct knowledge
Reliability Of Audit Evidence
• Evidence from sources outside an entity is more reliable
than evidence obtained solely from within the entity.
• Evidence generated internally is more reliable when the
internal control structures are effective.
• Evidence obtained directly by the auditor is more
reliable than evidence obtained from the client.
• Evidence in the form of documents or written
representations is more reliable than oral
representations.
• Evidence provided by original documents is more
reliable than evidence provided by photocopies
or facsimiles
 Sufficiency

• Definition:
• Measured primarily by the sample size the auditor select
• 2 factors determine the appropriate sample size:-
• Auditor’s expectation of misstatements
• Effectiveness of the client’s internal controls
 TYPES OF AUDIT EVIDENCE

1. Physical examination/ Inspection

2. Observation
3. External Confirmation
4. Documentation
5. Re-performance
6. Analytical procedures
7. Inquiriy
 Physical Examination
• Definition: The inspection or count by the auditor of
a tangible asset
• Objective:
• Verifying that an asset actually exist (existence
obj.)
• Ascertaining both the quantity & the description
of the asset
• Evaluating an asset’s condition or quality
 Confirmation
 Definition: The receipt of a written or oral response
from an independent third party verifying the accuracy
of information that was requested by the auditor
 ISA 501…identifies 2 common types of confirmation
requests i.e. positive confirmation & negative
confirmation
 Positive confirmation
– Ask the recipient to respond in all circumstances
 Negative confirmation
– The recipient is asked to respond only when the
information is incorrect
 IMPORTANT: Process of getting confirmation must be controlled by the auditor from the
time they are prepared until they are returned; to maintain the reliability of the evidence
 Documentation
 Def… the auditor’s examination of the client’s
documents & records to substantiate the information
that is or should be included in the financial
statements
 Advantage:
– Widely used
– Readily available at a relatively low cost
 Classified into 2; Internal & External
 Internal Documents
– Docs. that has been prepared & used within the
client’s organisation & retained without ever going
to an outside party
– E.g. duplicate sales invoice, employees’ time
reports & inventory receiving report
 External Documents
– Docs. that has been in the hands of someone
outside the client’s organisation; who is party to
the transaction, but which is either currently in the
hands of the client or readily accessible
– In some cases, docs originate outside the client’s
organisation & ended up in the hand of client
 – E.g. vendor’s invoices, cancelled note payable,
insurance policies, cancelled cheque (returned by
supplier/vendor)
 Vouching … the process in which the auditor use
documentation to support recorded transactions or
amounts
– E.g. to vouch recorded acquisition transactions, the
auditor trace transaction from acquisition journal to
support vendor’s invoices & receiving reports
 Analytical Procedures
 ISA 520 – Analytical procedures use comparisons &
relationships to assess whether account balances or other
data appear reasonable
 It is being used for different purposes on an audit
– Understand the client’s industry & business
– Assess the entity’s ability to continue as a going
concern
– Indicate the presence of possible misstatements in the
financial statements
– Reduce detailed audit tests
 Inquiries of the Client

 Def… the obtaining of written or oral information from

the client in response to questions from the auditor
 Disadvantage:
– It is not from an independent source & may be biased
in the client’s favor
 When the auditor choose to obtain evidence through
inquiries, it is normally necessary to obtain further
corroborating evidence through other method
 Re-performance

 Def… Involves rechecking a sample of the

computations and transfers of information made by
the client during the period under audit
 Also known as testing the client’s arithmetical
accuracy
 Observation

 Def… the use of the sense to assess certain activities

 Opportunities to exercise sight, hearing, touch &
smell to evaluate a wide range of items
 AUDIT WORKING PAPER
• Def… the principal record of auditing procedures
applied, evidence obtained, & conclusions reached
by the auditor in the engagement
• It should include:
› The information the auditor consider necessary to
conduct the audit
› The information needed to prepare an audit report
• Objective:
› The aid to auditor in providing reasonable
assurance that an adequate audit was conducted
in accordance with auditing standards
• Function of Audit WP
• Planning and performing the audit
• Supervising and reviewing the audit work
• Gathering evidence and providing essential support
for the auditor’s opinion, including evidence that
the examination was conducted in accordance with
the auditing standards.
 TYPES OF AUDIT WORKING PAPER
• Permanent Files
• Def … Data of a historical or continuing nature
pertinent to the current audit
• It include:
Extract or copies of such company documents of
continuing importance as the articles of
incorporation, bylaws, bond indentures &
contracts
Analysis from previous years of accounts that have
continuing importance to the auditor
Information related to the understanding of
internal control & assessment of control risk
The results of analytical procedures from previous
years’ audits
• Current Files
• All audit documentation applicable to the year under audit
• It include:
Audit Programs
Auditing Standards require a written audit program
for every audit
General Information
Documents to support audit for current year
E.g. audit planning memos, abstracts or copies of
minutes of the BOD meeting, abstract or contracts
or agreements not include in the permanent file,
etc.
 Control & Rights
To The Audit Working Papers
• The ownership: the property of the auditor
• Part A-5 of the MIA By-Laws (Code of Professional
Conduct & Ethics) highlighted that there is a need to
maintain a confidential relationship with the client
• Exception:
• Subpoenaed by a court
• Used as part of MIA approved peer review program
with other CA firms
 STEPS IN AN AUDIT
1. PREPLAN
2. OBTAIN INFORMATION BACKGROUND
3. OBTAIN INFORMATION ABOUT CLIENT’S
LEGAL OBLIGATION
4. PERFORM PRELIMINARY ANALYTICAL PROCEDURES
5. SET MATERIALITY & ACCEPTABLE AUDIT RISK
6. UNDERSTANDING INTERNAL CONTROL & ASSESS
CONTROL RISK
7. DEVELOP AN OVERALL AUDIT PLAN
& AUDIT PROGRAMME(AP)
DEVELOP AN OVERALL AUDIT PLAN & AUDIT
PROGRAMME (AP)

• Definition:
• A document which contains audit procedures to be
performed by Audit Assistant (AA).
• Purpose of AP:
• To provide a set of detailed step by step audit
procedures for each auditable areas & a guideline
for a systematic audit approach
• As a means to control & record proper execution of
the work b4 arriving at an opinion of the FS
• Contents :
• Audit objectives, time budget, audit tests/results
 Advantages Of AP

• Clear set of instructions on work to be carried out

• Ensure completeness of audit work
• Ensures no duplication of audit work
• Evidence of work done is available for use as defense in
court
• Review of work by seniors/partners can be easily done
• Reduces time of audit work