audit fieldwork and substantive testing

audit evidence

is all the information, whether obtained from audit procedures or other sources, that is used by the auditor in arriving at the conclusions on which the auditor's opinion is based.

2 things audit evidence consists of

(1) Management's assertions regarding the financial statements and internal controls over financial reporting, and/or
(2) Information that contradicts such assertions

5 financial assertions

• estience or occurrence

• completeness

• valuation or allocations

• rights and obligations

• presentation and disclosure

existence or occurence

Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period.

completeness

All transactions and accounts that should be presented in the financial statements are so included.

valuation or allocation

Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.

rights and obligations

The company holds or controls rights to the assets, and liabilities are obligations of the company at a given date.

presentation and disclosure

The components of the financial statements are properly classified, described, and disclosed

sufficiency

the measure of the quantity of audit evidence.

The quantity of audit evidence needed is affected by

• risk of material misstatement

• quality of the audit evidence obtained

relevance

refers to its relationship to the assertion or to the objective of the control being tested

reliability

evidence depends on the nature and source of the evidence and the circumstances under which it is obtained

know how to identify something w low and high reliability

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underlying accounting data

consists of the books or original entry, the general and subsidiary ledgers, related to accounting manual and informal and memorandum records

corroborating evidence matter

includes documentary material (e.g., checks, invoices, contracts, and minutes); confirmations and other written representations by knowledgeable people; information obtained by the auditor from inquiry, observation, inspection, and physical examination; and other information developed by, or available to, the auditor that permits conclusions through valid reasoning.

3 major areas of audit

planning , field work, reporting

fieldwork

The on-site phase of an audit where they actively gather evidence. The primary purpose of the collection of evidence is to test management’s assertions related to the balances reported on the financial statements.

The sufficiency and competence of required evidence are judged by the auditor based on

the acceptable level of detection risk

audit procedures

the specific actions and techniques an auditor performs during an audit to obtain evidence and comply with auditing standards, ultimately determining the credibility

Audit procedures can be classified into 2 categories

1. risk assessment procedures

2. further audit procedure

confirmation

the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions

negative confirmation

no news is good news

requests the recipient to respond only if they disagree with the information stated.

nature of audit tests

Relates to the types of tests the internal auditor performs to achieve his or her objectives.

extent of audit tests

Pertains to how much audit evidence the internal auditor must obtain to achieve his or her objectives.

timing of audit tests

Pertains to when the tests are conducted, and the period of time covered by the tests

substantive tests

are audit procedures designed to test for monetary misstatement directly affecting the correctness of financial statement balances

two categories of substantive tests

• substantive analytical procedures

• tests of detail

vouching direction

backwards, tests existence, starts with financial statements

tracing

forward, completeness, supporting documents

accounting estimate

in historical financial statements approximates an element, item, or account by measuring the effects of past transactions or events or the current status of an asset or liability.

key characteristics of accounting estimates

subjectivity

measurement uncertainty

impact on financial statement

audit sampling

is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

audit risk

The risk of reaching invalid audit conclusions and/or providing faulty advice based on audit work conducted

sampling risk

Incorrect conclusion because IA only looked at part of the population rather than the whole

type 2 error risk (beta risk)

The risk of overreliance where the auditor incorrectly assumes the control is effective when indeed it is not. The risk that the IA will overstate the reliance on a control to reduce residual risk to an acceptable level.

type 1 error (alpha risk)

The risk of under-reliance where the auditor incorrectly assumes the control is not effective when indeed it is.  The risk that the IA will understate the reliance on a control to reduce residual risk to an acceptable level.

non-sampling risk

Occurs when the auditor fails to perform his or her work  correctly or an incorrect conclusion for other reasons such as human error/mistake in design and implementation of testing procedures

types of sampling

attributes (internal)

substantive (external)

random

every item has equal chance of selection

attributes

Used to determine the proportion of items in a population that have an attribute of interest

variable, aka substantive

Variables sampling techniques are used to measure the value of an account balance

statistical

provides an objective method of determining sample size and selecting the items to be examined. Unlike judgmental sample, it also provides a means of quantitatively assessing precision and reliability

judgmental

uses the auditor’s subjective judgment to determine sample size and sample selection

audit working papers

provide the principal record of work and the conclusions reached and should be designed to meet the circumstances of a particular engagement

working trial balance

is ordinarily used to record the year-end ledger balances prior to audit.

lead schedules

summaries of detailed schedules

permanent files

schedules documents, and records with continuing audit significance for a specific

current files

include schedules and analyses that relate to the current year audit