Professional Documents
Culture Documents
Sandwich Week 6 & 7
Sandwich Week 6 & 7
Slide 4
Sources of Audit Evidence
Knowledge of the Client Outside Information
Gathered through: Gathered through:
• Previous audit work • Work of the audit team using market
• Client risk analysis data
• Client acceptance analysis • Independent analysis by specialists
Slide 5
Examples of Evidence :Internal Documents
• Internal documentation could be in the form of
- legal agreements (leases),
- business documents eg. purchase orders, receipts, memos
- accounting documents (depreciation and amortization schedules),
- planning and control documents etc.
Slide 8
Characteristics of Audit Evidence: Sufficiency and
Appropriateness Cont.
The auditor's judgement as to what is sufficient appropriate audit evidence is
influenced by a number of factors;
• The Risk assessed
• The nature of the accounting and internal control systems
• The materiality of the item being examined
• The experience gained during previous audits
• The auditor's knowledge of the business and industry
• The results of audit procedures
• The source and reliability of information available
Slide 9
Sufficiency of Audit Evidence
• The amount of evidence must be of sufficient quantity to convince the audit team of
the correctness or otherwise of an account balance
• The quantity of audit evidence required is affected by the level of risks of material
misstatement and also by the quality of such audit evidence.
Slide 11
Appropriateness of Audit Evidence
• Appropriateness is the measure of the quality of audit evidence; i.e. its
relevance and its reliability in providing support for the conclusions on
which the auditor’s opinion is based.
External Audit evidence from external sources is more reliable than that obtained from the
entity's records because it is from an independent source.
Obtained by Auditor Evidence obtained directly by auditors is more reliable than that obtained indirectly or
by inference
Obtained by Entity Evidence obtained from the entity's records is more reliable when the related control
system operates effectively
Written Evidence in the form of documents (paper or electronic) or written representations are
more reliable than oral representations, since oral representations can be retracted.
Originals Original documents are more reliable than photocopies or facsimiles, which can easily be
altered by the client.
Slide 14
Appropriateness: Reliability of Audit Evidence
• The reliability of audit evidence is judged by its ability to provide convincing
evidence related to the audit objective being evaluated.
• All assets, liabilities and equity interests that should have been recorded have
been recorded (completeness)
• The entity holds or controls the rights to assets, and liabilities are the obligations
of the entity (rights and obligations) Slide 16
Financial Statement Assertions Cont.
• Assets, liabilities and equity are included in the financial statements at
appropriate amounts and any resulting valuations are appropriately
recorded (valuation and allocation)
Slide 17
Audit Procedures for Gathering Evidence
• The objective of an audit procedure is to enable the auditor:
• - Understand the business entity and its environment including risk
- Test controls within the entity
- Detect material misstatements
• Audit procedures are used by auditors to determine the quality of the financial information
being provided by their clients. The exact procedures used will vary by client, depending on
the nature of the business and the audit assertions that the auditors want to prove. Here are
several general classifications of audit procedures:
Analytical procedures
Observation
recalculation\reperformance
Written representation
Inspection of assets/records
Enquiry
Third party confirmation
Slide 18
Specific Audit Procedures for Assessing Risk
• Inquiries of management and others within the entity.
• Analytical procedures.
• Observation and inspection.
• Discussions among the engagement team.
Slide 19
Specific Procedures for Testing Controls
• Walk-through tests-In this case the auditor will initiate a transaction to see
how well the system of control works.
• Observations
• Examining reports on the controls usually by the internal auditor.
• Inquiries
• Internal control questionaires
• Flowchart of processes
Slide 20
Practical Point to Note
• Auditors must always consider the client’s overall risk profile. If a client
is judged as “high risk”, auditors must be sure not to over-trust
management’s integrity, and should be cognizant that technology can be
used to make documents look as if they are from external independent
sources (when they are not).
Slide 21
Other forms of Evidence Gathering
• Management Representation
– If management refuses to provide a representation that the auditor considers
necessary, this constitutes a scope limitation and the auditor should express a
qualified opinion or a disclaimer of opinion
• Attendance at Physical Inventory Counting
• Inquiry Regarding Litigation and Claims
• Valuation and Disclosure of Long-term Investments
• Segment Information
• Related Parties
• External confirmations
Slide 22
Other sources of Evidence: External Confirmation
Obtaining evidence from external bodies/individuals with permission from
the client. Examples of such transactions for which auditors may externally
confirm include:
– Bank balances and other information from bankers.
– Accounts receivable balances.
– Stocks held by third parties at bonded warehouses for processing or on consignment.
– Property title deeds held by lawyers or financiers for safe custody or as security.
– Investments purchased from stockbrokers but not delivered at the balance sheet
date.
– Loans from lenders.
– Accounts payable balances.
Slide 23
Using the work of another Auditor
• Sometimes, an audit may require the use of another auditor for aspects of
the engagement.
• The auditor must determine who the principal auditor is.
• When the principal auditor uses the work of another auditor, the principal
auditor should determine how the work of the other auditor will affect the
audit.
• Division of Responsibility
• Cooperation
• Reporting Considerations
Slide 24
Evaluating the work of Another Auditor
• The materiality of the portion of the financial statements which the principal auditor audits.
• The principal auditor’s degree of knowledge regarding the business of the components.
• The risk of material misstatements in the financial statements of the components audited by the other
auditor.
• The performance of additional procedures regarding the components audited by the other auditor resulting
in the principal auditor having significant participation in such audit.
• The independence requirements regarding both the entity and the component and obtain written
representation as to compliance with them.
• The use that is to be made of the other auditor’s work and report and make sufficient arrangements for the
coordination of their efforts at the initial planning stage of the audit.
• The principal auditor would inform the other auditor of matters such as areas requiring special
consideration, procedures for the identification of intercompany transactions that may require disclosure
and the timetable for completion of the audit.
• The accounting, auditing and reporting requirements and obtain written representation as to compliance
with them Slide 25
Considering the work of Internal Auditor
• Understanding and Preliminary Assessment of Internal Auditing
• Timing of Liaison and Coordination
Slide 26
Evaluating the Internal Audit Function
• Organizational status
• Scope of function
• Technical competence
• Due professional care
• Sufficient appropriate audit evidence is obtained to be able to draw reasonable
conclusions.
• Conclusions reached are appropriate in the circumstances and any reports
prepared are consistent with the results of the work performed.
• Any exceptions or unusual matters disclosed by internal auditing are properly
resolved.
Slide 27
Using the Work of Experts
• When using the work performed by an expert, the auditor should obtain sufficient
appropriate audit evidence that such work is adequate for the purposes of the audit.
• In auditing, an expert is a person possessing special skills, knowledge and experience in a
particular field other than accounting and auditing.
• The auditor’s education and experience enables the auditor to be knowledgeable about
business matters in general, but the auditor is not expected to have the expertise of a person
trained for or qualified to engage in the practice of another profession or occupation, such as
an actuary or engineer.
• An expert may be:
– Contracted by the entity.
– Contracted by the auditor.
– Employed by the entity.
– Employed by the auditor.
Slide 28
Determining the Need to Use the Work of an Expert
• In obtaining an understanding of the entity and performing further procedures in response
to assessed risks, the auditor may need to obtain, in conjunction with the entity or
independently, audit evidence in the form of reports, opinions, valuations and statements of
an expert.
• The engagement team’s knowledge and previous experience of the matter being considered.
• The risk of material misstatement based on the nature, complexity, and materiality of the
matter being considered.
• Assumptions and methods used and their consistency with prior periods.
• Results of the expert’s work in the light of the auditor’s overall knowledge of the business
and of the results of other audit procedures
• Making inquiries regarding any procedures undertaken by the expert to establish whether
the source data is relevant and reliable.
• The key reason for having audit papers therefore is that they provide
evidence of work done. They may be required in the event of litigation
arising over the audit work and opinion given.
Slide 32
Audit Documentation Cont.
• Work performed by each assistant should be reviewed by personnel of appropriate experience
to consider whether:
– The work has been performed in accordance with the audit programme
– The work performed and the results obtained have been adequately documented
– Any significant matters have been resolved or are reflected in audit conclusions
– The conclusions expressed are consistent with the results of the work performed and support the audit
opinion
Slide 33
Purpose of Audit Documentation
• Assist the audit team to plan and perform the audit
• Assist members of the engagement team responsible for supervision, to direct and
supervise the audit work
• Enable the conduct of quality control reviews and inspections in accordance with ISQC1
Slide 34
Nature of Audit Documentations
Examples of audit documentation include:
• Audit programs.
• Analyses.
• Issues memoranda.
• Summaries of significant matters.
• Letters of confirmation and representation.
• Checklists.
• Correspondence (including e-mail) concerning significant matters
Slide 35