&

Auditing
Assurance
Services(M)
Semester 1 2019

UNIVERSITY OF ADELAIDE Semester 1: 2019 Lecture 2

BUSINESS SCHOOL Fundamental Audit Concepts
Dr Phil Saj PhD CPA
University of Adelaide 2

Fundamental Concepts

￭ Financial report assertions and

audit objectives
FINANCIAL
￭ Audit evidence REPORT
￭ Sufficient appropriate evidence
ASSERTIONS
3 University of Adelaide 4

Directors’ Declaration for the year Financial Report Assertions

ended 30 June 2018
(Extract from Downer EDI 2018 Annual Report) By signing-off that the financial
In the opinion of the Directors… statements are prepared in accordance
(a) The financial statements … are in accordance with the
Corporations Act 2001 (Cth), including:
with the accounting standards and that
(i) Complying with Accounting Standards …and other they provide a true and fair view,
mandatory professional reporting requirements; and management and those charged with
(ii) The financial statements and notes thereto give a
governance are effectively making a set
true and fair view of the financial position and
performance of the Company… of assertions.
R M Harding Chairman
Sydney, 16 August 2018
University of Adelaide 5 University of Adelaide 6

1
 Financial Report Assertions Lecture Illustration: Assertions
For example, management is asserting that: Extract from Balance Sheet of Ace Ltd at 30/6/2018
￭ Transactions that are recognised actually took place.
$m
￭ All transactions that took place are recognised (the Cash 205
record is complete). Receivables 45
￭ Transactions that are recognised took place during Inventory 16
the period. Other 70
￭ Transactions are accurately recorded. Current assets 336
￭ Assets and liabilities that are recognised exist. PP&E. 1200
￭ All assets and liabilities are recognised. Intangible assets 670
Deferred tax assets 100
￭ Assets and liabilities are valued at the appropriate Other 45
amounts. Non-current assets 2015
￭ Items recognised in the financial statements are Total assets 2351
properly classified.
University of Adelaide 7 University of Adelaide 8

Assertions About Transactions

Financial Report Assertions and Events and related disclosures
for the Period
Assertions fall into two categories
(see ASA 315. A128) Occurrence: transactions and events that have been
recorded or disclosed have occurred and pertain to the entity.

Assertions about transactions Completeness: all transactions and events that should have
and events for the period and their been recorded have been recorded, and all related disclosures
that should have been included in the financial report have
related disclosures been included.

Assertions about account Accuracy: amounts and other data relating to recorded
balances at period-end their related transactions and events have been recorded appropriately,
disclosures and related disclosures have been appropriately measured
and described.
9
10

Assertions About Transactions Assertions About Account Balances

and Events and related disclosures
for the Period
Cut-off: transactions and events have been recorded in
the correct accounting period.
Classification: transactions and events have been recorded
in the proper accounts.
Presentation: transactions and events are appropriately
aggregated or disaggregated and clearly described, and
related disclosures are relevant and understandable in the
context of the requirements of the applicable financial
reporting framework.
11
and Related Disclosures at
the Period End
Existence: assets, liabilities and equity interests exist.
Rights and obligations: the entity holds or controls the
rights to assets, and liabilities are the obligations of the entity
Completeness: all assets, liabilities and equity interests that
should have been recorded have been recorded, and all
related disclosures that should have been included in the
financial report have been included.
Classification: assets, liabilities and equity interests have
been recorded in the proper accounts.
12

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 Assertions About Account Balances The Auditor’s Use of
and Related Disclosures at Financial Report Assertions
the Period End
Accuracy, valuation and allocation: assets, liabilities, and
equity interests have been included in the financial report at
The auditor uses assertions in assessing
appropriate amounts and any resulting valuation or allocation
risks by considering the different types of
adjustments have been appropriately recorded, and related
disclosures have been appropriately measured and described.
potential misstatements that may occur,
Presentation: assets, liabilities and equity interests are and thereby designing audit procedures
appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and that are responsive to the assessed risks.
understandable in the context of the requirements of the
applicable financial reporting framework.
14
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Financial Reporting Assertions and Financial Reporting Assertions and

Transaction Related Audit Objectives Transaction Related Audit Objectives

O Recorded sales transactions occurred during the period Cu-O Sales are recorded in correct period

O Did recorded sales transactions occur during the period? Cu-O Are sales recorded in the correct period?

All sales transactions that occurred during the

Co Cl Sales are classified correctly
period are recorded
Are all sales transactions that occurred during
Co Cl Are classified correctly?
the period recorded?

Acc Sales amounts are recorded accurately P Sales are appropriately presented

Acc Are sales recorded accurately? P Are sales appropriately presented?

15 16

Financial Reporting Assertions and Financial Reporting Assertions and

Transaction Related Audit Objectives Transaction Related Audit Objectives

E Inventory recognised in the St of Fin Position exists Cu-O Inventory is recognised at the appropriate amount

E Does inventory recognised in the St of Fin Position exist ? A,V & A Is inventory recognised at the appropriate amount?

Inventory recognised in the St of Fin Position is

R&O owned by the entity Cl Inventory is correctly classified
Is inventory recognised in the St of Fin Position
R&O owned by the entity? Cl Is inventory classified correctly?

All the entity’s inventory is recognised in the

Co P The required disclosures for inventory are made
St of Fin Position
Is all the entity’s inventory recognised in the P Are the required disclosures for inventory made?
Co St of Fin Position
? 17 18

3
What does this mean?
￭ If an account balance is misstated it is because of one or
￭ If transactions are misstated it is because of one
or more of the following problems:
￭ A transaction(s) that did not occur was recorded.
￭ A transaction(s) that did occur was not recorded.
￭ A transaction(s) that occurred was recorded inaccurately.
￭ A transaction(s) that occurred in the next period was
recorded in the current period.
￭ A transaction(s) that occurred in the current period was
recorded in the following period.
￭ A transaction (s) was classified wrongly
￭ Transaction were incorrectly presented in the Income
Statement
19
What does this mean?
more of the following problems:
￭ An item that does not exist was recognised.
￭ An item that does exist was not recognised.
￭ The entity does not have the control over the future
economic benefits of an item that was recognised as a
an asset.
￭ The entity does not have an obligation to an external
party for an item that was recognised as a liability.
￭ An item(s) that exists was recorded at the wrong value.
￭ A item (s) was classified wrongly
￭ Items were incorrectly presented in the Balance Sheet
20

Transaction Related Financial Reporting Transaction Related Financial Reporting

Assertions for Sales Assertions for Sales
Recorded sales occurred and Sales are recorded in
Occurrence Cut-off
pertain to the entity correct period

All sales transactions that Transactions recorded as

Classification
Completeness occurred during the period sales are classified correctly
were recorded
Sales transaction are
Sales amounts are recorded Presentation
Accuracy appropriately presented
accurately
21 22

What does this mean?

￭ If sales are misstated it is because of one
The Sales Process
or more of the following problems: Customer
places Credit Supplier
￭ A sale(s) that did not occur was recorded. check is
an order ships
￭ A sale(s) that did occur was not recorded. for goods performed goods to
by the
￭ A sale that occurred was recorded inaccurately. with a
supplier
customer
supplier
￭ A sale(s) that occurred in the next period was
recorded in the current period.
Supplier
￭ A sale that occurred in the current period was Supplier Supplier
creates a
recorded in the following period. Supplier makes crates
Sales
updates entry in draft
￭ A sale(s) was classified wrongly Invoice
Financial
Ledger Sales
￭ Sales were incorrectly presented in the Income and sends
Journal Statements
to customer
Statement
23 University of Adelaide 24

4
 The Sales Process Balance Related Financial Reporting
Customer
Assertions for Inventory
places Credit
Customer Supplier
an order check is
cancels ships Inventory recognised
for goods performed
the goods to Existence
with a by the
order customer
in the Statement of
supplier supplier Financial Position exists

Supplier
Supplier Supplier All Inventory of the entity is
creates a
Supplier makes crates
Sales Completeness recognised in the Statement
updates entry in draft
Invoice of Financial Position
Ledger Sales Financial
and sends
Journal Statements
to customer
University of Adelaide 25 26

Balance Related Financial Reporting Balance Related Financial Reporting

Assertions for Inventory Assertions for Inventory
Inventory Inventory has been
Rights and recognised in the Statement properly classified in the
Classification
of Financial Position is Statement of Financial
Obligations
owned by the entity Position

The required disclosures

Inventory is recognised about Inventory have
Accuracy Presentation
in the is Statement been made in the Statement
Valuation and
Allocation of Financial Position at of Financial Position
the appropriate amount
27 28

What does this mean?

￭ If inventory is misstated it is because of one Recording Inventory
or more of the following problems:
￭ Inventory that does not exist was recorded.
￭ Inventory that exists was not recorded. Inventory Record
￭ Recorded inventory was not owned by the
entity. Date Balance
￭ Inventory was recorded at an inappropriate
value. 30/6/15 3
￭ Inventory was classified wrongly.
￭ Inventory was incorrectly presented in the
Statement of Financial Position.
29 University of Adelaide 30

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 Lecture Illustration: Assertions
Recording Inventory Extract from Balance Sheet of Ace Ltd at 30/6/2017

$m
Cash 205
Receivables 45
Inventory Record Inventory 16
Other 70
Date Balance Current assets 336

PP&E. 1200
30/6/15 2 Intangible assets 670
Deferred tax assets 100
Other 45
Non-current assets 2015
Total assets 2351
University of Adelaide 31 University of Adelaide 32

Lecture Illustration: Assertions Lecture Illustration: Assertions

￭ Assets
Current Assets
Inventory…$16,000,000
￭ In recognising this item, management is asserting:
￭ The inventory exists
￭ It is correctly valued
￭ All inventory is included (the record is complete)
￭ The entity has the right to it (owns the inventory)
￭ Inventory has been properly classified and the
necessary disclosures have been made.
￭ The auditor tests these management assertions.
33
￭ If inventory is misstated it is because of one or
more of the following reasons:
￭ The inventory does not exist.
￭ It is incorrectly valued.
￭ Not all inventory is included (the record is
incomplete).
￭ The entity does not own (has right to) the
inventory.
￭ Inventory has not been properly classified.
￭ The necessary disclosures have not been
made.
34

Lecture Illustration: Assertions Lecture Illustration: Testing

Extract from Balance Sheet of Ace Ltd at 30/6/2017
￭ The audit test (lower of cost and NRV)
￭ Valuation of Inventory…$16,000,000
￭ In recognising this item, management is required
to apply the measurement rule from AASB 102,
which states that inventory must be measured at
the lower of cost and net realisable value (NRV).
￭ The auditor tests the valuation made by
management.
35
Extract from Balance Sheet of Ace Ltd at 30/6/2017
￭ Identify the inventory
￭ Ascertain existence and condition of inventory
￭ Attend stock take - inspect and inquire
￭ Ascertain market price
￭ Client’s price list; prices of competitors
￭ Ascertain costs of selling the inventory
￭ Compare
￭ Decide: is the inventory fairly stated, or is an
adjustment required?
36

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 The Auditor’s Use of
Financial Report Assertions
Is the financial report prepared
in accordance with the applicable
financial reporting framework?
AUDIT
Identify financial report assertions
EVIDENCE
Specify the audit objectives

Test the assertions

University of Adelaide 37 University of Adelaide 38

Audit Evidence Audit Evidence

Underlying
“Information used by the auditor in arriving
accounting
at the conclusions on which the auditor’s
data
opinion is based. Audit evidence includes
both information contained in the
Corroborating
accounting records underlying the financial
information
report and other information.” [AUASB Glossary]
39 University of Adelaide
￭ Books of original entry
￭ General and subsidiary ledgers
￭ Related accounting manuals
￭ Worksheets, e.g. cost
allocations
￭ Documents such as invoices.
￭ Information from inquiry,
observation and inspection
￭ Confirmations and other written
representations.
40

Audit Evidence Types of Audit Evidence

Corroborating Underlying Accounting
Information Data ￭ Accounting information system
ABC Ltd Tax Invoice No. 00231 Sales Journal (ABC Ltd) ￭ Documentary evidence
Date Description Debit Credit
Date: July 24 2014 (copy 2)
24/7 Accounts Rec 6,000 ￭ Third party representations
To: XYZ Ltd Deliver To:
Account Customer
Order No.
Salesperson
Sales 6,000
￭ Physical evidence
241 J.L. To record a credit sale of 10 TVs
4537
Code Description Qty Price Total ￭ Computations
Ledger Account (ABC Ltd)
￭ Data interrelationships
34 TV 10 600 6,000
Sales Accounts Receivable
6,000 6,000
￭ Client representations
Delivery Instructions Amount 6,000
Due

University of Adelaide 41 42

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 Audit Evidence Audit Evidence
Accounting information system and physical
Third party representation evidence
XYZ Pty Ltd ASSET REGISTER
Bank Confirmation ID Description Model Serial Purchase Purchase Carrying Acc. Location
No. No. No. value Date Amount Dep
CREDIT ACCOUNT BALANCES (held in favour of the client)
Account Name BSB No. Account No. Currency Balance A 8 Tip Truck 567 VXR $250,000 01/07/15 $250,000 $0 Quarry
623 876
Auditor/ client to complete know details in shaded area. Bank to complete unshaded areas

Ace Pty Ltd 065-345 1087456 AUD $495,000

University of Adelaide 43 University of Adelaide 44

Audit Evidence Audit Evidence

Computations Computations

University of Adelaide 45 University of Adelaide 46

Audit Evidence Audit Evidence

Data Interrelationships Client Representations
Management Oral Representation
Representation Letter
Information xxxxxx x xxx
Completeness xxxxxx x xxx
Adjusting entries xxx x xxx
Acknowledgement xxx xx
Disclosures xxxxx x xxx xx
Signed……Date: xx/xx/xxxx

University of Adelaide 47 48

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Extract from Balance Sheet of Ace Ltd Internal Sources of Audit Evidence
Accounting Documentary
information evidence Accounting
Third party
System representations information
$m
system
Cash 205
Physical Receivables 45 Physical
evidence Inventory 16 Documents assets
Computations
Other 70
Markets Current assets 336
Personnel
Data
Client interrelationships
representations
49 University of Adelaide 50

External Sources of Audit Evidence

Markets SUFFICIENT
Third
Parties Industry APPROPRIATE
Sources

Databases
EVIDENCE
University of Adelaide 51 University of Adelaide 52

Sufficient Appropriate Sufficiency and Appropriateness

Audit Evidence of Audit Evidence

“The auditor shall design and perform • Sample size

Quantity
audit procedures that are appropriate • Items to select
in the circumstances for the purpose
• Reliability
of obtaining sufficient appropriate Quality
evidence” [ASA 500.6] • Relevance
University of Adelaide 53 University of Adelaide 54

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Reliability of Audit Evidence Independence
Cash (at Bank)
(See ASA 500.A31) Date Entry Dr Cr Balance
June 29 2 10,000 490,000
￭ Independence June 29 3 1,000 489,000
June 30 4 2,000 491,000
￭ Internal Control
June 30 8 6,000 497,000

￭ Direct Knowledge Bank Confirmation

CREDIT ACCOUNT BALANCES (held in favour of the client)
￭ Objectivity Account Name BSB No. Account No. Currency Balance
Auditor/ client to complete know details in shaded area. Bank to complete unshaded areas
￭ Origin
Ace Pty Ltd 065-345 1087456 AUD $495,000

55 56

Internal Control Direct Knowledge

57 58

Objectivity
Sales Contract
Date: xx/xx/xxxx
Agreement between: xxx
xxxx xxxxxx xxxxxxxx x.
Being for: xxxxx xxxx
xxx x xxx xxxxx
xxxxxxxxxxxxxxxx. x.
Origin
Sales Contract
Date: xx/xx/xxxx
Agreement between: xxx
xxxx xxxxxx xxxxxxxx x.
Being for: xxxxx xxxx
xxx x xxx xxxx
xxxxxxxxxxxxxxx.

59 60

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 Relevance of Audit Evidence
See ASA 500.A 27-A30 Direction of Testing
Tracing
￭ Evidence must be related to the audit
objective. Vouching
￭ Direction of testing Draft
Customer Shipping Sales Sales
￭ Timeliness Order Order Invoice Journal
Ledger Financial
Statements

￭ Appropriateness of procedure
the audit trail
61 62

Relevance of audit evidence: Direction of Testing:

direction of test Completeness (Understatement)
Completeness
Completeness
Start
Start

Customer Shipping Sales Sales Draft Customer Shipping Sales Sales Draft
Ledger Financial Ledger Financial
Order Order Invoice Journal Statements Order Order Invoice Journal Statements

Occurrence
Evidence of what Evidence of what
Start
actually occurred was recorded

University of Adelaide 63 University of Adelaide 64

Completeness of a Transaction Direction of Testing:

Tracing
Occurrence (Overstatement)
Occurrence
Ace Shipping Note No. 20163215 Sales Journal page no.104
Date: October 5 2015 (copy 2) Start
(Ace Pty Ltd)
Ship To: King Ltd Bill To: King Ltd
Date Description Dr Cr
Acc. # Customer Salesperson
Order # K.H. 9/10/15 Acc. Receivable 6,000 Customer Shipping Sales Sales Draft
78
0234 Sales 6,000 Ledger Financial
Order Order Invoice Journal Statements
No. Qty Item Description
Code To record credit sale of 6
1 6 24 Desk desks to King Pty Ltd
Checked by Jim Driver Date 5/9 Evidence of what Evidence of what
Bob
Time 2.34
actually occurred was recorded

University of Adelaide 65 University of Adelaide 66

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 Occurrence of a Transaction
Direction of Testing
Vouching

Ace Shipping Note No. 20163215 Sales Journal page no.104

Tracing
Date: October 5 2015 (copy 2)
(Ace Pty Ltd)
Ship To: King Ltd Bill To: King Ltd Date Description Dr Cr
Vouching
Acc. # Customer Salesperson
Order # 9/10/15 Acc. Receivable 6,000
78 K.H.
0234 Sales 6,000
Purchase Receiving Purchases Draft
No. Qty Item Description
Order Ledger Financial
Code To record credit sale of 6 Report Journal Statements
1 6 24 Desk desks to King Pty Ltd
Checked by Jim Driver Date 5/9
Bob the audit trail
Time 2.34

University of Adelaide 67 68

Relevance of audit evidence: Direction of Testing:

direction of test Completeness (Understatement)
Completeness
Completeness
Start
Start

Draft Purchase Receiving Purchases Draft

Purchase Receiving Purchases
Ledger Financial Ledger Financial
Order Report Journal Statements
Order Report Journal Statements

Occurrence
Evidence of what Evidence of what
Start
actually occurred was recorded

University of Adelaide 69 University of Adelaide 70

Completeness of a Transaction Direction of Testing:

Tracing Occurrence (Overstatement)
Ace Receiving Report No.20163215 Purchases Journal page no.96 Occurrence
Date: October 5 2015 (copy 2) Start
(Ace Pty Ltd)
Received from: Date Description Dr Cr
Queen Ltd
Customer 5/10/15 Inventory 3,000 Draft
Acc. # Salesperson Purchase
Order # Accounts Payable 3,000 Receiving Purchases
64 K.H. Ledger Financial
0123 Order Report Journal Statements
No. Qty Item Description To record purchase of 6
Code cupboards from Queen Pty
1 6 30 Cupboards
Ltd
Checked by Jim Store- Date 5/10 Evidence of what Evidence of what
man actually occurred was recorded
Bob Time 2.34

University of Adelaide 71 University of Adelaide 72

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 Completeness of a Transaction Completeness of an Asset
(Inventory)
Vouching

Ace Receiving Report No.20163215 Purchases Journal page no.96

Date: October 5 2015 (copy 2)
(Ace Pty Ltd) Inventory Record
Received from:
Date Description Dr Cr
Queen Ltd Date In Out Balance
Acc. # Customer Salesperson 5/10/15 Inventory 3,000
Order # Accounts Payable 3,000
26/6/15 10 300
64 K.H.
0123
27/6/15 5 295
No. Qty Item Description To record purchase of 6
Code 28/6/15 10 285
cupboards from Queen Pty
1 6 30 Cupboards 29/6/15 20 305
Ltd
Checked by Jim Store- Date 5/10
man
30/6/15 10 295
Bob Time 2.34

University of Adelaide 73 University of Adelaide 74

Existence of an Asset Timeliness

(Inventory)

Plan audit End of Issue

Inventory Record Start of
& conduct
Fin Yr Fin Yr Audit
Date In Out Balance 1/7
preliminary 30/6 Report
26/6/15 10 300 ARPs
27/6/15 5 295
28/6/15 10 285
29/6/15 20 305 Conduct Conduct
Interim substantive
30/6/15 10 295
TOC tests

University of Adelaide 75 76

Summary
￭ The auditor views the financial statements
as a set of assertions by management.
￭ The auditor tests management assertions
on the basis of evidence.
￭ Audit evidence comes in many forms.
￭ Audit evidence must be reliable and
relevant.
￭ The auditor must test a sufficient amount
of evidence, and the evidence must be of
good quality.
77 University of Adelaide 78

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