Audit Evidence You cant perform an audit or give an opinion without evidence.

This evidence must satisfy three qualities: Relevance Reliability Sufficient

Relevant Evidence A producer of accounts makes assertions about the items in the accounts. Assertions CEAVOP

Reliable Evidence Documentary evidence is more reliable than oral evidence (must be original documents). Evidence from outwith the enterprise is more reliable (e.g. bank statement). Evidence originated by auditor is better than evidence from others (e.g. calculation of depreciation). Several evidential sources are better than a single source.

Sufficient Evidence The amount depends on: Materiality Business risks Audit risk model Sampling procedures

Limitations of Evidence The quality and quantity of evidence is constrained by: Absolute proof is impossible Time is limited Money is limited Materiality

Materiality A matter is material if its omission would reasonably influence decisions of the users. No hard and fast rule for calculating materiality. Materiality and truth and fairness are inter-related. The lower the materiality, the higher the cost of obtaining the evidence. Materiality is set at the planning stage.

Planning Materiality The determination of Planning Materiality is an important judgement made by the auditor when designing an audit program, since the extent of auditor effort in performing his duties will vary with the level of materiality, e.g. lower materiality means more work. Professional guidelines, i.e. ISAs are non-descriptive and there are no guidelines on how to calculate materiality. Textbooks give a rule of thumb, e.g. 1-10% of profits before tax, or a % of net assets, etc.

Journal Quick Notes: The aim of the journal is to look at what happens in real life since the guidelines are so vague. Big 5 have smaller materiality levels than the Non-Big 5. Rule of thumb and constant base cannot be used - KPMG (gauge formula test).

JOURNAL ARTICLE (Stein) - Factors Affecting Auditors Assessments of Planning Materiality Key Points: The study was to investigate planning materiality values used by auditors in The Netherlands. This was for a sample of engagements performed by Big 5 (now 4 Arthur Anderson are gone) and Non-Big 5 firms in the last nineties. It found that, consistent with archival evidence from KPMG (gauge formula), materiality is not a constant percentage of a base, but increases at a decreasing rate with client size. In addition, planning materiality values increase with the quality of the clients control environment and the magnitude of the clients rate of return on assets, while decreasing the complexity of the client. It also found that Big 5 firms use lower planning materiality values than Non-Big 5 firms, ceteris paribus, which is consistent with the production of relatively higher audit quality levels by the Big 5. It also found that auditors use lower materiality values in situations where earnings might be managed to show a small profit or a small loss.

Debtors Risks Balances may inaccurate. Account balances may not exist. Accounts receivable may not be collectable. Bad debts write-offs may not be valid. Sales transaction may be processed in the wrong period.

Debtors - Audit Program 7 steps: Agree a detailed listing of accounts receivable to the summary. Positively confirm selected accounts receivable balances. Review confirmation replies. Test accounts where there is no confirmation. Assess adequacy of allowance for doubtful accounts. Review bad debt write-offs. Test sales/accounts receivable cut-off (point at which one accounting period ends and the next begins).

JOURNAL ARTICLE (Brown) The expanded audit report - a research studying within the development of SAS 600 Background: In 1993, the APB published SAS (Statements of Auditing Standards) 600 entitled Auditors Reports on Financial Statements. This was later replaced ISA 700.

Purpose: Looking at the development of SAS 600 in relation to the publicity surrounding the audit expectations gap at that time.

Two strategies of response (Humphrey): Defensive approach Constructive approach focusing on education and reassurance of the public. seeking to convey a willingness to change audit activities to meet public concern.

Conclusion: The expanded audit report has been a useful but limited impact on the expectations gap. It also gives a patchy performance in terms of moving users perceptions towards those of auditors. In terms of the analysis by Humphrey, the expanded audit report was seen by the APB itself to be only a short term solution responding to the immediate pressures on a newly formed board.

ISA 700 - The Auditors Report on Financial Statements Audit report must be clearly titled. Addressed to the shareholders. Reference to the actual financial statements audited (page numbers normally given). Responsibilities of directors and auditors explained. Explanation of the basis of opinion by including: Compliance with accounting standards? Audit process involves examining items on a test basis, assessment of the significant estimates and judgements made by directors, consideration of accounting policies, and their consistency and disclosure.

Audit is planned to have reasonable assurance that the accounts are free from material misstatements. A clear expression of the audit opinion. Report should be dated and signed (auditor address to be stated to).