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AUDITING IV 2013

Audit Evidence

----------------------------------------------------------------------------------------------------------------Dana Josset (CA) SA, University of the Witwatersrand School of Accountancy

Lecture Outline

The following will be addressed Audit Evidence in relation to:


i.

Service Organisations

ii.

External Confirmations

iii.

Bank Confirmations

iv.

Litigation & claims

These need to be understood and considered in all


aspects of the audit from audit planning to concluding &
reporting

References

ISA 402 Audit considerations relating to an


entity using a service organisation

ISA 505 -

SAAPS 1100 Bank Confirmations

SAAPS 4 Enquiries regarding litigation and claims


ISA 501 (Par 9-11 & A17-A25)

External Confirmations

(i) Service Organisations


Overview:

Concept of outsourcing

Service level agreement (SLA)

Auditors objectives & responsibility when auditing


an entity using services of a services organisation

Effect on the audit / audit procedures / audit


report

ISA 402

Service organisations Outsourcing


Auditor needs to understand / evaluate:

Significance
Nature
Transactions
Processes
Procedures / degree of interaction
Controls
Accounting records
Financial reporting

Objectives of Auditor

Obtain understanding of services provided


(ISA 315)

Nature, significance, materiality.


Sources of information (ISA 402 - A1/A2)

Risks of material misstatement

Objectives of auditor

Needs to consider:

SLA -

Effect on audit risk

Effect on Audit strategy / audit plan

Nature & extent of audit testing / procedures

What has been included in SLA

If unable to obtain sufficient understanding:

Contact/visit service organisation

Use another auditor

Obtain a report

(Report Type 1 or 2)

Responsibility of auditor

Sufficiency & appropriateness of evidence


provided by report:

Competence/independence

Standards

Period of report

Relevance

Responding to the assessed risks:


Determine audit evidence
Perform further procedures eg.?

Tests of controls

Obtaining report period/relevance


Appropriate tests
Using another auditor

Fraud / Non-compliance with laws &


regulations

Audit reporting

Opinion

Reference to other auditor

ii) External
Confirmations

Written response obtained directly from third


party, in paper or electronic format, that may be
used by auditor as an effective way of obtaining
sufficient appropriate audit evidence in relation to
clients account balances, contracts, terms of
agreement or specific arrangements with a third
party.

ISA 505

Examples?

Design of the confirmation request


based on?

Types of Requests?

Negative
Positive

Process of sending confirmation request

Management involvement
Concerns (eg.electronic)?

Responses to Request

Consider Relationship to entity


Exceptions
No response or process cannot be performed?

Debtors Circularisation

Objective

Selecting debtors for process

Considerations? (materiality, risks, population,


CAATS)

Deciding on the type of confirmation

Considerations
audit risks
nature of balances
errors expected
nature of respondents.

Negative/positive/combination more likely for?

Practical considerations

Timing

Roll-forwards

Responses
Professional scepticism - low/no response
Exceptions

iii) Bank Confirmations

Standardised Bank Confirmation letterAppendix to SAAPS 1100.

The confirmation process

Authority
Timing

The importance of the use of bank confirmations extends


beyond the verification of the actual cash balance/s

Inclusions in Bank confirmation:


a) Interest paid and received
b) Overdraft facilities
c) Authorised signatories
d) Pledged / ceded balances
e) Contingent liabilities
f) Forward Contracts
g) Banks a/cs closed during year
h) Completeness of bank accounts
NB. How do these aspects assist in obtaining audit evidence?

iv) Litigation and claims

Audit procedures may include sending an attorneys


representation letter to the clients lawyers/ legal advisors, to
obtain confirmation of any pending litigation and claims,
estimates of liabilities, likelihood that liabilities will realise and
costs associated with litigation.

SAAPS 4 Appendix - illustrative Attorneys representation


letter

The Confirmation process


Refusals?

Use of an attorneys representation letter


Audit evidence in regard to:

All litigation and claims


Adequacy of accounting treatment
Reasonableness of managements provisions
and estimated amounts
Disclosure
Legal costs

Other substantive audit procedures


performed in regard to litigation & claims