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Seminar 4 Financial statements assertions and audit evidence Part 1 -…

- - - - 3 stages in accounting process (1) collection of original data (2) allocations and reclassifications of accounting data (3) presentation of results of the accounting process
    - - (i.e. internal controls)
    - - The auditor needs to understand the entity’s business strategy, its business environment and the risks it faces to determine whether these might affect the financial report. Auditors use their understanding of the client’s business, industry and risks to develop a more efficient and effective audit
- - - - Occurrence - transactions and events that have been recorded or disclosed have occurred and pertain to the entity.
      - Completeness - all transactions and events that should have been recorded have been recorded and all related disclosures that should have been included in the financial report have been included.
      - Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately and related disclosures have been appropriately measured and described.
      - 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.
  - - - 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.
      - Accuracy, valuation and allocation - assets, liabilities and equity interests are included in the financial report at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded, and related disclosures have been appropriately measured and described.
      - Classification - assets, liabilities and equity interests have been recorded in the proper accounts.
      - Presentation - assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable.
- - - - AEIOU
        
        Analytical procedures
        
        based on the dual nature of business transactions (reflected in the double-entry bookkeeping system) and the interrelationships between the variables of business operations. They involve the investigation of fluctuations in relationships to ascertain whether there are inconsistencies in relation to other relevant information or variations from predicted amounts
        
        Enquiry
        
        The auditor must ask many questions during the course of an examination. The question-and-answer process includes interviewing and obtaining written statements from management and employees. Explanations of significant variations in accounting data are frequently obtained from employees. However, the auditor cannot rely on unsupported answers, but must obtain support for the reasonableness of the answer given.
        
        One formal application of the procedure of enquiry is the use of an internal control questionnaire to gain information about the prescribed control activities
        
        External confirmation
        
        type of enquiry by which an auditor normally obtains written statements from outside parties such as banks, solicitors or debtors on information that they are qualified to give. The independent party questioned must be reliable and knowledgeable about a subject of interest to the auditor. In some cases, the object of interest may be held by the outside party. For example, the auditor typically confirms cash on deposit in banks. In other cases, an auditor may need information concerning an item that does not have a physical existence, such as an obligation owed to the client. Thus, an auditor often confirms accounts receivable.
        
        The statement of the outside party should be communicated directly to the auditor. The possibility of influence or change of information by the client’s employees should be avoided. Steps must therefore be taken to maintain control over confirmations. This issue is further complicated by the need to have the request for confirmation come from the client. The outside parties have engaged in transactions with the client and will not disclose information about their dealings with that client to someone else who asks for it. If the client makes the request, cooperation is much more likely. This necessitates the following controls over confirmation requests:
        
        (1) The confirmation request is prepared by the client’s personnel and given to the auditor for inspection and mailing. (2) The auditor inserts the confirmation request in an envelope bearing the auditor’s return address and mails it personally. (3) Included with the confirmation request is a stamped return envelope addressed to the auditor.
        
        Inspection
        
        involves the examination of documents, records or tangible assets. The reliability of inspection of records or documents depends on their nature and source and on the effectiveness of internal control over their processing.
        
        need to inspect original documents rather than photocopies. The inspection of tangible assets provides reliable audit evidence concerning their existence but not necessarily their valuation, completeness or ownership.
        
        Observation
        
        involves the auditor observing the behaviour of operating personnel and the functioning of the business in operation. These observations are made from the perspective of their effects on accounting and their implications for auditing, such as evidence of control activities being carried out.
        
        U for
        
        Reperformance
        
        The auditor may independently execute (or re-perform) procedures or controls that were originally performed as part of the entity’s internal control.
        
        Recalculation
        
        The arithmetical accuracy of the many calculations required in the processing of data can be proven by recalculating the results. Examples of typical calculations include additions of ledger account balances, depreciation or amortisation calculations and inventory extensions and additions.
  - - - However, where evidence from a prior audit is used the auditor must perform audit procedures to ensure its continuing relevance.