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Audit Evidence

Explain why the auditor divides the financial statement into


components or segements in order to test management assertion?
Auditors typically divide the financial statements into components or segments
in order to make the audit more manageable. A component can be a financial
statement account of a transaction process. This approach allows the auditor to
gather evidence by examining the processing of related transactions through the
accounting systems from their origin to their ultimate disposition in the
accounting journals and ledgers. Thus, the auditor can examine the accounting
transactions from the time it is initiated by the entity until its final recording in
the financial statement accounts.
How do management a ssertions relate to financial statements?
There is a top down relationship from the financial statements to the audit
procedures statement components. The auditos test whether the assertions are
being met. The reults from applying audit procedures provide the evidence that
supports the fair presentation of the managements assetions and the auditors
report
List & define the audit procedures for obtaining audit evidence
The types of audit procedures and their definitions are
1) Inspection of records or documents consists of examining internal and
external records or documents that are in paper form, electronic form, or
other media.
2) Inspections of physical assets consists of physical examination of assets
3) Reperformance is the auditors independent execution of the procedures or
controls that were originally performed as part of the entitys internal
control, either manually or through the use of Accounting Technicians.
4) Recalculation consists of checking the mathematical accuracy of
documents and records
5) Scanning is the review of data to identify significant or unusual items.
6) Inquiry consists of seeking information of knowledgable persons both
financial and non-financial, throughout the entity an outside the entity.
7) Observation consists of looking at a process or procedure being performed
by others
8) Confirmations is the process of obtaiing a representation of information of
an existing condition directly from a third party
9) Analytical procedures consist of evaluations of financial information made
by a study of plausible relationships among both financial and nonfinancial data
Audit Planning and Documentation
What procedures concerning clients should auditors perform before accepting
the engagement

Prioir to acceptance of the engagement, auditors whoyld have communicated


with the predecessor auditor regarding
1. Facts that might bear on the integrity of the management
2. Disagreement with the management concerning accounting principles,
auditing procedures or other significant matters
3. The predecessor understanding about the reason for the change
4. Any other information that should be of assistance in determining whether
to accept the engagement
What additional procedures should the auditor consider performing during the
planning phase of the audit(after accepting the engagement) that would not be
performed during the audit of a continuing client
Additional procedures to be performed prior to the beginning of the field work are
1.
2.
3.
4.
5.
6.
7.

Reading the current years interim financial statements


Discussing the scope of examination with the management of the client
Establishing the timing of the audit work
Arranging with the client for adequate working space
Coordination the assistance of client personnel in data preparation
Establishing and coordinating staff in requirements including time budget.
Holding a planning conference with assistants assigned to the
engagement and discuss possible fraud related issues
8. Determining the extent of involvement, if any, of consultants experts and
internal auditors
9. Considering the effects of applicable accounting and auditing
pronouncements particularly recents ones
10.Considering the need for an appropriate engagement letter
11.Preparing documentation setting forth the preliminary audit plan
12.Making a preliminary judgement about materiality
13.Making a preliminary judgement about control risk
14.Updating the prior years written audit plan

Audit Sampling
Define audit sampling. Why do auditors sampel instead of examining
every transactions
Audit sampling is the application of an audit procedure to less than 100 per cent
of the items within an account balance or class of transactions for the purpose of
evaluating some characteristic of the balance or class. The justification for
accepting some uncertainty from sampling is due to the trade-off between the
cost to examint all of the data and the cost of making and incorrect decision
based on a sample of the data.
Benefits of Audit Sampling

Flaws of audit sampling