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Chapter 4 Audit evidence and audit documentation. In this chapter you will understand the concept of audit risk, learn the form and components of the audit risk model, understand how to use the audit risk model, understand the auditors risk assessment process, learn how the auditor assesses the risk of material misstatement, understand the fraud risk assessment process,...
Chapter Four Audit Evidence and Audit Documentation © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Relationship of Audit Evidence to the Audit Report Financial Financial statements statements Audit Audit report report Management Management assertions assertions about about elements elements of of financial financial statements statements Auditor Auditor reaches reaches aa conclusion conclusion based based on on the the evidence evidence Audit Audit procedures procedures © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Provide Provide evidence evidence on on the the fairness fairness of of the the financial financial statements statements Management Assertions Occurrence Occurrence Completeness Completeness Classification Classification Assertions about classes of transactions and events for the period under audit Cut-off Cut-off Authorisation Authorisation © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Accuracy Accuracy Management Assertions Existence Existence Completeness Completeness Assertions about end-of-the-period account balances Rights Rights and and obligations obligations © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Valuation Valuation and and allocation allocation Management Assertions Occurrence Occurrence and and rights rights and and obligations obligations Assertions about presentation and disclosure Accuracy Accuracy and and valuation valuation Completeness Completeness Classification Classification and and understandability understandability © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Management Assertions © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures Specific acts performed by the auditor to gather evidence to determine if specific assertions are being met Risk Risk assessment assessment procedures procedures Test Test of of controls controls © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Substantive Substantive procedures procedures Audit Procedures A A set set of of audit audit procedures procedures prepared prepared to to test test assertions assertions for for aa component component of of the the financial financial statements statements is is referred referred to to as as an an audit audit plan plan © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Evidence All All the the information, information, from from whatever whatever source, source, used used by by the the auditor auditor in in arriving arriving at at the the conclusions conclusions on on which which the the audit audit opinion opinion is is based based © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin The Concepts of Audit Evidence Nature Nature of of audit audit evidence evidence Sufficiency Sufficiency and and appropriateness appropriateness of of audit audit evidence evidence Evaluation Evaluation of of audit audit evidence evidence © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures for Obtaining Audit Evidence Inspection Inspection of of tangible tangible assets assets Physical examination of a tangible asset Observation Observation The process of watching a process or procedure being performed by others © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures for Obtaining Audit Evidence Inquiry Inquiry In In conducting conducting inquiry, inquiry, the the auditor auditor should: should: •• Consider Consider the the knowledge, knowledge, objectivity, objectivity, experience, experience, responsibility, responsibility, and and qualifications qualifications of of the the person person to to be be questioned questioned •• Ask Ask clear, clear, concise, concise, and and relevant relevant questions questions •• Use Use open open or or closed closed questions questions appropriately appropriately •• Listen Listen actively actively and and effectively effectively •• Consider Consider the the reactions reactions and and responses, responses, then then ask ask follow-up follow-up questions questions •• Evaluate Evaluate the the response response © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures for Obtaining Audit Evidence Confirmation Confirmation The process of obtaining a representation of information of an existing condition directly from a third party The reliability of evidence obtained through confirmations is directly affected by factors such as: • The form of the confirmation • Prior experience with the entity • The nature of the information being confirmed • The intended respondent © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures for Obtaining Audit Evidence Confirmation Confirmation © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures for Obtaining Audit Evidence Recalculation Recalculation Determining the mathematical accuracy of documents or records The auditor’s independent execution of procedures or Reperformance Reperformance controls that were originally performed as part of the internal control system © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Procedures for Obtaining Audit Evidence Analytical Analytical procedures procedures Scanning Scanning Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data Review of accounting data to identify significant or unusual items © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Reliability of Types of Evidence © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Documentation The The auditor’s auditor’s principal principal record record of of the the audit audit procedures procedures performed, performed, evidence evidence obtained, obtained, and and conclusions conclusions reached reached Provides Provides also also the the basis basis for for the the review review and and inspection inspection of of the the quality quality of of the the audit audit work work © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Content of Audit Documentation Audit Audit documentation documentation should: should: Provide Provide aa sufficient sufficient and and appropriate appropriate record record of of the the basis basis for for the the auditor’s auditor’s report report Provide Provide evidence evidence that that the the audit audit was was planned planned and and performed performed in in accordance accordance with with ISAs ISAs and and applicable applicable legal legal and and regulatory regulatory requirements requirements © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Content of Audit Documentation Audit Audit documentation documentation should: should: Include Include the the overall overall audit audit strategy strategy and and audit audit plan plan Enable an experienced auditor to understand: • The nature, timing, extent of the audit procedures performed to comply with ISAs and applicable legal and regulatory requirements • The results of the audit procedures performed and the audit evidence obtained • Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgements made in reaching those conclusions (ISA 230) © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Content of Audit Documentation Most Most audit audit firms firms maintain maintain audit audit documentation documentation in in two two types types of of files files Current Current files files Permanent Permanent files files Corporate Corporate charter charter Chart Chart of of accounts accounts Organisation Organisation chart chart Accounting Accounting manual manual Important Important contracts contracts Internal Internal control control documentation documentation Terms Terms of of stock stock and and bond bond issues issues Prior Prior years’ years’ analytical analytical procedures procedures © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Content of Audit Documentation Most Most audit audit firms firms maintain maintain audit audit documentation documentation in in two two types types of of files files Permanent Permanent files files Overall Overall audit audit strategy/ strategy/ audit audit plan plan Working Working trial trial balance balance Minutes Minutes of of meetings meetings Current Current files files Current Current financial financial statements/audit statements/audit report report Adjusting/reclassification Adjusting/reclassification journal journal entries entries Working Working papers papers supporting supporting accounts accounts © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Format of Audit Documentation Heading Heading Client Client name name Title Title of of the the working working paper paper Client’s Client’s year-end year-end date date Indexing Indexing and and cross-referencing cross-referencing Notations Notations that that provide provide aa trail trail from from financial financial statements statements to to audit audit documents documents Tick Tick marks marks Notations Notations made made next next to to work work paper paper items items indicating indicating auditor/reviewer auditor/reviewer actions actions © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin Audit Documentation Audit Audit documentation documentation should should be be organised organised so so that that audit audit team team members members and and others others can can find find evidence evidence supporting supporting financial financial statement statement accounts accounts All All audit audit documentation documentation is is the the property property of of the the auditor, auditor, including including documents documents prepared prepared by by the the client client at at the the auditor’s auditor’s request request ISQC1 ISQC1 requires requires audit audit documentation documentation to to be be retained retained ordinarily ordinarily for for minimum minimum five five years years from from the the date date of of the the auditor’s auditor’s report report © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin End of Chapter © The McGraw-Hill Companies 2010 McGraw-Hill/Irwin ... McGraw-Hill/Irwin Content of Audit Documentation Audit Audit documentation documentation should: should: Include Include the the overall overall audit audit strategy strategy and and audit audit... McGraw-Hill/Irwin The Concepts of Audit Evidence Nature Nature of of audit audit evidence evidence Sufficiency Sufficiency and and appropriateness appropriateness of of audit audit evidence evidence Evaluation... McGraw-Hill/Irwin Higher Higher quality quality audit audit evidence evidence results results in in aa lower lower quantity quantity of of audit audit evidence evidence Appropriateness of Audit Evidence