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Objectives Obj i
Understand the relationship between audit evidence and the auditors report Understand the management assertions about classes d d h i b l of transactions and events, account balances at the period end, presentation and disclosure Learn the basic concepts of audit evidence Understand audit procedures used for obtaining audit evidence Understand the objectives of audit documentation
Auditor reaches a conclusion b l i based d on the evidence Provide evidence on the fairness of the financial statements
Audit procedures d
Management Assertions
Illustration: the nancial statements show a net sales gure of $10 million management asserts that
the sales exist (existence assertion) all sales conducted within the current time frame (cutoff assertion) recorded in their correct amounts (accuracy assertion)
Management Assertions
Audit Procedures
Specific acts S ifi t performed by the auditor to gather evidence about whether specific assertions are being met. g
Test of controls
Substantive procedures
Audit Procedures
Risk assessment procedures i k d
Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the nancial statement and relevant assertion levels.
Test of controls
Test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level.
Substantive procedures
Detect material misstatements at the relevant assertion level, including tests of details of classes of transactions, account balances and disclosures, and substantive analytical procedures
Audit Program
set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit program. p g
Audit Program for Accounts Receivable Management Assertions g Examples of Audit Procedures p Existence Confirm receivables. Rights and obligations Inquire if receivables have been sold or pledged. Completeness p Agree controlling account with total of subsidiary accounts. g g y Select shipping documents immediatley prior to year end and ensure sales invoices were recorded. Valuation or allocation Trace accounts from aged trial balance to subsidiary accounts. Test the adequacy of the allowance account. Presentation and disclosure Look for amounts due from related parties. Evaluate receivables for footnote disclosure.
A
Audit evidence
All the information, from whatever source, used information source by the auditor to support his/her audit opinion. Auditors gather evidence by conducting Audit Procedures to TEST MANAGEMENT ASSERTIONS.
Relevance
How the evidence is related to the assertion or to the objective of the control being tested. ( g (Relates to whatever y are testing) you g)
Illustration
To check the completeness assertion for recording sales transactions Are all goods shipped to customers are recorded in the sales journal? j l trace a sample of shipping documents to the related sales invoices and entries in the sales journal
Q Question
Which of the following sources of evidence are more reliable: 1. Inquiry of an accounts receivable clerk regarding the acco nts receivable balance or acco nts accounts recei able accounts receivable conrmations sent to a sample of customers. 2. Physical examination of lumber inventory performed by the external auditor or physical examination of inventory performed by internal auditors.
Illustration: ll i
If auditor decides to mail accounts receivable conrmations to 50 of the largest customers of a client, h must gather sufcient evidence on each of the 50 accounts f li he h f i id h f h
In evaluating a clients response to an audit inquiry, the auditor must not allow any client s inquiry personal factors to inuence the evaluation of the clients response
Observation
observe a process or procedure being performed by others
Inquiry
seek information of knowledgeable persons (both nancial and non nancial) throughout the entity or outside the d i l) h h h i id h entity
Recalculation
checking the mathematical accuracy of documents or records.
Reperformance
independent execution by the auditor of procedures or controls that were originally performed by company personnel
Audit Procedures
Audit Documentation
The auditors principal record of the p p audit procedures performed, evidence obtained, and conclusions reached.
Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the planning, performance, and supervision of the audit audit.
Understand the nature, timing, extent, and results of audit p o d procedures, evidence ob , d obtained, d, and conclusions reached.
Determine who performed and reviewed the work, as well as the dates d of the work and reviews.
Homework
PR 4-24 PR 4 25 4-25 PR 4-28 PR 4 32 4-32