The third standard of FW: sufficient appropriate (competent) evidence (of management’s assertions)

Appropriateness/Competence (Quality) Sufficiency (Quantity)

-Relevance
-Validity – SOURCE of the data
#1 Auditor developed (e.g., observation)
#2 Outside source (confirms)
#3 Outside/inside (prep’d externally,
but the client touched it)
#4 Client (Can never rely solely on the client)
ASSUMING APPROPRIATENESS/
COMPETENCE…
• Depends on IC’s (ICS functioning as
intended – test controls with ARCCS)
• Cost benefit considerations

Management’s assertions:

U&C Disclosures are understandable, Accounts and transactions are appropriately Classified
R&O Rights to assets; Obligations to creditors (liabilities)
Accuracy Dollar amounts of transactions are correctly captured and reported
Completeness The tendency to understate liabs and expenses and overstate assets and revenues.
E&O E usually deals with the BS and O usually deals w/ the IS
Cutoff Proper periodic reporting
Val/All. V- Usually more important for assets; A – e.g., Proper matching

Audit objectives substantiate management’s assertions using the following substantive audit procedures
(e.g., NTE or substantive tests - $$$):

TESTS OF DETAILS
Confirm Usually from SOURCE #2 and usually proves E&O, R&O, V, Accuracy
Any asset not under the client’s roof
Cash confirm: bank tells us cash balances. Also tell us of any O/S debt
(Completeness – undisclosed liabilities)
Observe Usually SOURCE #1 and usually proves E&O
Tangible assets
Is inventory that isn’t moving obsolete? (Val/All, Accuracy)
Recalculate Usually proves Val/All, Cutoff, and Accuracy (SOURCE depends on whose #’s you recalculate)
Recalc BS balances
Reasonableness tests: do the interest test for undisclosed liabilities
Can also do reasonableness tests for taxes, assets, liabs, sick pay, vacation accrual.
Inspect documents Usually proves all of URACECV (SOURCE depends on what you look at)
We inspect contracts and major agreements like sales agreements
Is Invty at LCM? – see price lists and invoices (Val/All, Accuracy)
Invty completeness – sales cutoff testing (Completeness, Cutoff)
Rights to invty? Paid invoices? Received goods? (R&O)
check BOD min’s to see if AR is factored (R&O, Val/All, Accuracy)
Is the lease capital or optg? Title tfr, BPO, 75% of useful life, 90% of PV of lease pmts? (U&C)
Debt – any loan covenants? Inspect the BOD mins. Is the debt callable or current? Ratios met?(UC)
Inquire Usually proves Completeness and Val/All. (SOURCE depends on who you are asking)
RPT’s – inquire of everyone
Analytical Procedures Usually proves C, Val/All, Cutoff, Accuracy. (SOURCE depends on whose #’s you are using)
(Not technically CY-PY
CY-budget
a T.O.Detail, but is Industry
used as a substantive test) AP’s are used to determine reasonableness; used 3X in the audit.
(NOTE: my examples are NOT meant to be comprehensive in any way – they are just examples).