THE CONCEPT OF AUDIT STRATEGY AND AUDIT EVIDENCE

PRESENTATION OUTLINE

Audit Strategy
Introduction
Audit strategies
Audit procedure
Audit plan
Benefits of planning for an audit
Audit strategy memorandum
Content of audit strategy memorandum
Audit planning steps

Audit Evidence
Introduction
Sources of audit evidence
Reliability of audit evidence
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PRESENTATION OUTLINE CON’D
Procedures for generating audit evidence
Audit tests
Audit working papers
Purpose for preparing working papers
Qualities of good audit working papers
Contents of audit working papers
Current audit file
Permanent audit file
Ownership of working papers
Retention of audit working papers
Expert evidence
Reliance on experts

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PRESENTATION OUTLINE CON’D
Computer-Assisted Audit Tools and Techniques (CAATTS)
CAATTS defined
Uses of CAATTS to perform audit
Types of CAATTS
Audit software
Test data
Steps in using CAATTS

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AUDIT ENGAGEMENT STRATEGY

Introduction
Audit approach is a methodology that focuses on the strategies adopted to gather audit evidence through up to
date understanding of the client’s business. Audit approach helps in planning for an audit to reduce audit risk.

Audit strategies
Audit strategy is a plan directed to the gathering of relevant and reliable audit evidence in order to support
the expression of an opinion on financial statements.

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AUDIT PROCEDURE
According to ICAN, the Auditor should:
1. Consider his responsibilities as defined in the terms of engagement;
2. Familiarise himself with the client’s business and organisation;
3. Obtain a preliminary understanding of the principal features of the client’s accounting system and internal
control procedures;
4. Determine and record the audit strategy to be adopted;
5. Obtain a more detailed description of the accounting system and internal control procedures
6. Review critically and evaluate those aspects of the client’s accounting system, procedures and internal
controls on which he intends to place some reliance;
7. Discuss any weakness in the system with the client in order to ascertain whether they are compensated by
some other controls;
8. Test the system to determine whether the controls on which he intends to place reliance were operating
during the period;
9. Report apparent weakness and breakdown in internal control to the client in a management letter; and
10. Based on the results of the work described above, carry out a programme of audit work to substantiate the
amounts appearing in the accounts and related notes.
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Audit plan
Audit plan is the strategy designed to conduct an audit assignment in the most effective and efficient manner. In
order to ensure a high standard of performance, it is important that the Auditor should prepare adequately for his
work. Planning for an audit ensure the successful completion for an audit assignment.

Benefits of planning for an audit

• Audit planning has the following benefits:
• Ensuring that appropriate attention is devoted to important areas of the audit;
• To ensure that potential problems are identified and resolved on a timely basis;
• To ensure that the audit work is properly organized;
• To ensure proper control of audit activities;
• To ensure the coordination of work done by other auditors and experts.
• To guarantee a valid audit opinion;
• To facilitate review;

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Audit strategy memorandum

Audit strategy memorandum is a document that details the points involved in the audit planning process and the
important planning decisions that have been reached.

Content of audit strategy memorandum

• Objective of the audit and the nature of reports to be issued;

• Modes of communication with the client (through reports or meetings);

• Accounting locations. Where there are a number of accounting locations, the strategy to be adopted to visit
and audit each location;

• Staff needed for the audit, allocation of staff between audit team;

• Budget for the audit assignment;

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Content of audit strategy memorandum cont’d

• Likely risk areas and measures to be put in place to solve them should they occur;
• The need for an expert opinion;
• Audit programme;
• Analytical review showing key ratios from the previous year’s financial statements;
• Major changes in the organisation’s business or external changes that affects the client’s business;
• Audit approach to be adopted;
• Reliance on the work of the internal auditor;
• Audit fees to be charged.

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SOURCES OF AUDIT EVIDENCE

Introduction
The International Standard on Auditing 500 requires an Auditor to obtain relevant and reliable audit evidence
sufficient to enable him draw reasonable conclusions therefrom. The Auditing Guidelines on Audit evidence
gives guidelines on what constitutes adequate audit evidence. Audit evidence is information, written or oral,
obtained by the Auditor to support the conclusions on which he bases his opinion on the financial statements.

Sources of audit evidence

 Client’s accounting system,
 Underlying documentation,
 Management
 Other employees,
 Customers,
 Suppliers and
 Other third parties who have dealings with, or knowledge of, the client’s business.

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Reliability of audit evidence
According to ISA 500, the general principles of what constitutes reliable information are as follows:
• Documentary evidence is more reliable than oral evidence;
• Evidence obtained from independent sources is more likely to be reliable than that secured from the client;
• Evidence originated by the Auditor from his analytical reviews and physical inspection is more reliable than
evidence obtained from others;
• Original document are more reliable than photocopies;
• Internally generated audit evidence is more reliable when the related controls are effective.

Procedures for generating audit evidence

• Inspection
• Observation
• Enquiry
• Confirmation
• Recalculation
• Reperformance
• Analytical review Prepared by Daniel O. Okyere 10
Inspection: This involves physical examination of supporting accounting documentation, contracts,
records and board of director minutes. It also includes physical examination of the assets. This enables the
Auditor to verify the existence but not necessarily ownership and valuation of assets.
Observation: This involves looking at a process or procedure being performed by others. For instance,
observing of payment of wages and salaries, physical count of inventory or opening of mail. This helps the
Auditor to have an assurance whether official procedures are followed.
Enquiry: This consists of seeking information of knowledgeable person inside or outside the entity. It may
range from formal written inquiry to oral inquiries.
Confirmation: This consists of corroborating evidence from third parties with the internal evidence. For
instance the Auditor may verify accounts receivables by circularizing the debtors/receivables by
circularizing the debtors.
Recalculation: This involves checking the arithmetical accuracy of source documents and accounting
records or of performing independent calculations.
Reperformance: This process involves carrying out procedures and controls, which were originally
performed by the client.
Analytical procedures: This involves analysis of significant accounting ratios and trend performance
including investigations of fluctuations that occur between the current financial performances with the
previous one and check whether other information is consistent with such relationship. For example, the
Auditor may investigate why electricity appeared in last year’s income statement but failed to feature in the
current year’s income statement.
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Audit tests
Compliance tests
Compliance tests are those designed to provide evidence as to whether the internal control procedures are being
operated as planned; and

Substantive tests
Substantive tests are those designed to substantiate the validity, accuracy and completeness of amounts
appearing in the financial statements and related notes.

Audit working papers

A working paper is any document or record containing a report, correspondence and any other information that
an Auditor collects or any record which the Auditor produces in the course of the audit procedures to discharge
his professional duty to clients. There are two types of audit working papers: current audit files and
permanent audit files.

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Purpose for preparing working papers
• To provide continuity in the case of audit staff leaving midway through the audit engagement;
• To enable an independent review of the audit work;
• To provide support for the audit opinion expressed;
• To provide a permanent record of tests and procedures carried out;
• To provide a guide for the planning of future audits. For subsequent audit engagements, the Auditor may refer
to previous working papers as a guide of the procedure to be carried out.
• May be used as evidence in the event of litigation against the Auditor. Working papers are valid documents
which the Auditor may need to present as evidence of the work he has carried out in the event of litigation.
• To confirm that all aspects of the work have been completed. Working papers serve as effective checklist that
all aspects of the work have been carried out.

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Qualities of good audit working papers
A good audit working paper should:
• Each working paper should be clearly headed with the client’s name;
• have the audit objective clearly stated;
• be clearly dated so as not to be confused with other period’s documents;
• be prepared on standard stationery;
• have details of work done so as not to leave no doubt in the minds of readers;
• be serially numbered and suitably arranged in the audit files;
• state the full extent of tests carried out;
• have conclusions reached to be consistent with tests performed;
• be signed and dated by the person who prepared it;
• be signed and dated by the manager or partner who reviewed it;

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Current audit file
This file contains information relevant to the year under consideration and it is based on the contents of this file,
that the Auditors form opinion on the client’s financial statements.
• The current file will typically contain the following documents:
• A copy of the trial balance and the financial statements being audited;
• The audit programme, which will contain the list of audit work to be done and the list of audit tests to be
conducted;
• Description of accounting system in place;
• Schedules of major items in the statement of profit or loss and other comprehensive income and the statement
of financial position;
• List of audit queries and their responses;
• List of matters requiring the engagement audit partner’s attention;
• Extracts of minutes of meetings of the board of director and management;
• A description of the internal control systems in operation;
• Letters of representations from management;
• Checklists for compliance with statutory disclosure requirements and accounting standards; and
• Management letter setting out internal control weaknesses in the system to the client.
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Permanent audit file
This file contains information of continuing importance, which will be required for more than one audit. With
the contents of this file, the Auditors will have a better understanding of the client’s operations and business.
The file will also typically contain the following information:
• Name and objects of the business;
• Sources of revenue and operating the industry within which the business operates;
• List of major accounting policies;
• Copies of statutes and regulations governing the entity’s accounts and audit;
• Names and addresses of the company’s directors including details of service contracts with them;
• The company’s regulations;
• Copies of documents of continuing importance and relevance, such as Legal Mortgages and Debenture deeds;
• The organisational chart of the business showing names of responsible officials and lines of reporting;
• Addresses of the registered office and all other premises, with a short description of the work carried on at
each;
• Names and addresses of the company’s subsidiaries and associated companies; and
• List of books, other records and where they are kept.

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Ownership of working papers

Working papers belong to the Auditor. It is important to distinguish between working papers and the client’s
books and records. In principle, the books and records of the business given to the Auditors to examine and
from which they compile their working papers belong to the client.

Retention of audit working papers

The International Standard on Auditing (ISA) did not make provision for the period by which working papers
must be kept, but the Ghana Limitation Act – 1972 (NRCD 54) will be beneficial:
• Actions to recover contribution or forfeiture, a sum by way of penalty or forfeiture, recoverable under any
enactment are barred after two years.
• An action claiming damages for negligence or breach of duty is barred after three years.
• Action under simple contract is barred after six years.

On the basis of the above provisions, it is advisable to retain working papers for a minimum period of six (6)
years.
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Expert evidence
Expert is defined as a firm or person possessing special skill, knowledge or experience in a particular field other
than accounting or auditing. Accountants are not expected to possess the specialist skills of a medical doctor,
engineer or a pharmacist. During the course of an audit, the Auditor may need to use audit evidence in the form
opinion on medicine, valuations or statement from experts such as valuers.

Circumstances under which the work and report of such experts may be used include the following:
1. Valuations of certain types of non-current assets including land and buildings;
2. The measurement of degree of completion on long term contracts for the purpose of revenue recognition;
3. Valuation of certain types of items such as diamond and gold.
4. Determination of mineral and petroleum reserves and the characteristics of those reserves;
5. Interpretation of legal documents;

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Reliance on experts
The factors to consider before relying on the works of an expert include:
• Competence and the integrity of the expert;
• The materiality of the item;
• Complexity of the items including the risk;
• Availability of alternative sources of audit evidence;
• Cost of the evidence versus the benefit to be derived from the evidence (cost befit analysis).

It is noteworthy that the Auditor is ultimately responsible for the use of an expert’s work.

Computer-Assisted Audit Tools and Techniques (CAATTs)

Computer-Assisted Audit Tools and Techniques (CAATTs) or Computer-Assisted Audit Techniques (CAATs) are
computer based tools and techniques which permit auditors to increase their productivity as well as that of the
audit function in gathering audit evidence by exploiting the power and speed of computer.

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Uses of CAATTs to perform audit
CAATTs are used to perform the following tasks:
• To perform analytical review procedures;
• To plan for audit work;
• To prepare audit working papers;
• To test the effectiveness of controls;
• To sample documents for audit testing;
• To prepare audit programme;
• To assess the risk level of clients;
• New calculation and analysis;
• Completeness checks;

Limitations of CAATTs
• High setup costs;
• Changes are costly;
• Not suitable for small installations;
• Expensive to keep the programme up-to-date.
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Steps in Using CAATTs
According to Karkar (2002), the major steps involved in using CAATTs are as follows:
• Set the objectives of the CAATTs application;
• Determine the content and accessibility of the entity’s files and data,
• Define the specific files or databases to be examined;
• Define the output requirements;
• Identify the personnel who may participate in the design and application of the CAATTs;
• Refine the estimates of costs and benefits;
• Ensure that the use of the CAATTs is properly controlled and documented;
• Arrange the administrative activities, including the necessary skills and computer facilities;
• Execute the CAATTs application;
• Evaluate the results.

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