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Seminar 4 Financial statements assertions and audit evidence Part 2 -…
Seminar 4 Financial statements assertions and audit evidence Part 2
LO 4.4 Sufficient appropriate audit evidence
Procedures selected should provide
sufficient appropriate audit evidence
for auditor to form the auditor's opinion
auditor can only give reasonable assurance due to inherent limitations
audit evidence is persuasive and not conclusive
sampling is used - not all items are checked, audit has to be completed within a reasonable period of time and at reasonable cost
difficult to determine whether all info has been include and difficult to identify sophisticated and well-concealed fraud
Sufficient
quantity of audit evidence necessary to provide the auditor with a reasonable basis for an opinion on the financial report.
The quantity of audit evidence required is affected by the risk of material misstatement and the quality of the audit evidence
Appropriate
quality of the audit evidence
must be both
relevant
and
reliable
relevant
a matter of the relationship between the evidence and the financial report assertion involved.
For example, if the related assertion concerns the existence of an asset, the auditor may select items included in the account balance and physically examine or confirm the items.
However, these particular audit procedures are not relevant to verifying the completeness assertion. To achieve an audit objective related to completeness, the auditor must select from evidence indicating that an item should be included in the account balance and see whether it is included.
reliable
influenced by its nature and its source
refer to printout
LO 4.7 Types of audit tests (Fig 4.11)
Tests of controls
performed to obtain evidence about either (1) the effectiveness of the design of the policies or procedures in internal control, or (2) the operating effectiveness of those policies or procedures. These tests may produce evidence to support a lower assessed level of control risk
Substantive test/procedures
performed to obtain evidence about the validity and the propriety of the accounting treatment of transactions and balances or, conversely, of errors or irregularities therein. These tests reduce detection risk
Substantive analytical procedures
these procedures involve the study and comparison of relationships between accounting data and related information. They focus on the reasonableness of relationships and also identify unusual fluctuations for investigation
used for three purposes
to assist the auditor in planning other audit procedures
as a substantive test to obtain evidence about an assertion
as an overall review of the financial information near the end of the audit
It is important to recognise that analytical procedures are substantive tests that may achieve specific audit objectives if the evidence is considered persuasive by the auditor.
Test of details
involve obtaining evidence on the items (or details) included in an account balance, class of transactions or disclosure
Tests of balances
- tests applied directly to the details of balances in general ledger accounts. (e.g. the balances in the accounts receivable ledger are confirmed with individual customers)
Tests of transactions
- The auditor tests the processing of individual transactions by inspecting the relevant documents and accounting records. (e.g. a sample of shipping documents is traced to the sales journal to see whether shipments have been recorded as sales.)
Tests of disclosures
- These tests are applied to disclosures in the financial report. (e.g. audit procedures are performed to evaluate whether the overall presentation of the financial report, including disclosures, is in accordance with the applicable reporting framework)
Tests of transactions (substantive tests) and tests of controls that leave a documentary trail may both involve the inspection of documents that support transactions. For this reason, these tests are often applied together to the same group of documents. In that case, the test is referred to as a dual-purpose test