Audit Procedures and Internal Control Framework

Occurrence

ALL Transactions or events that have been recorded have occurred.

Completeness (Transactions)

All transactions and events that should have been recorded have been recorded.

Authorization

All transactions and events have been properly authorized.

Accuracy

Amounts and other data relating to recorded transactions and events have been recorded properly.

Cut-off

Transactions and events have been recorded in the correct accounting period.

Classification (Transactions)

Transactions and events have been recorded in the proper amounts.

Presentation

Transactions and events are appropriately aggregated or disaggregated and clearly described.

Existence

Assets, liabilities, and equity interests exist.

Completeness (Account Balances)

All assets, liabilities, and equity interests that should have been recorded have been recorded.

Rights and obligations

The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Valuation + allocation

Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts and any valuation or allocation adjustments have been appropriately recorded.

Classification (Account Balances)

Assets, liabilities, and equity interests have been recorded in the proper accounts.

Presentation (Account Balances)

Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described.

Audit evidence

Lowers audit risk and supports audit opinion.

Nature of audit evidence

What we look at, including accounting records and corroborating evidence.

Sufficiency

The amount of evidence collected to answer our question.

Appropriateness

Quality of evidence, including relevance and relationship with assertion or account.

Relevance

Relationship with assertion or account (under vs. overstatement).

Corroborating evidence

Evidence that gives validity to account data.

Materiality

The significance of an amount, transaction, or discrepancy.

Auditors knowledge

The expertise and understanding that auditors possess.

Source/reliability

The origin and trustworthiness of the evidence collected.

Reliability

The degree to which audit evidence can be trusted, influenced by factors such as nature and source, with external evidence being more reliable than internal.

Direct Evidence

Evidence obtained directly by the auditor, such as getting a cash statement directly from the bank, which is considered more reliable.

Strong Internal Controls (IC)

Internal controls that are effective and robust, leading to higher reliability of audit evidence compared to weak internal controls.

Written Evidence

Documentation that is in written form, which is generally more reliable than oral evidence.

Original Documents

The actual documents rather than photocopies, which are more reliable, although originals are not always necessary.

Professional Skepticism

An attitude that includes a questioning mind and a critical assessment of audit evidence.

Types of Audit Evidence

Categories of evidence ranked from least reliable to more reliable, including inquiry and observation.

Inquiry

A method of obtaining audit evidence by asking the client, which alone is not sufficient due to potential biases.

Observation

A method where the auditor is present to watch processes, providing direct personal knowledge but may have weaknesses.

Scanning

Looking for 'red flags' in the audit process.

Analytical procedures

Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.

Confirmation

Process of getting positive or negative confirmation from outside source.

Inspection of documents

External documentation is prioritized over internal documentation.

Inspection of tangible assets

Auditor inspects assets such as inventory.

Tracing

Moving from Source Document to General Ledger, deals with completeness.

Vouching

Moving from General Ledger to Source Document, deals with occurrence and existence.

Recalculation

Recalculating the math involved in financial statements.

Reperformance

Auditor reperforms all steps (procedures/controls) to verify accuracy.

Audit documentation

If it is not documented, it is not done.

Nature, timing, extent of procedures

Key elements an experienced auditor should understand about the audit process.

Analytical procedures timing

Three times analytical procedures are performed: preliminary, execution phase, and final.

Step 1: Develop an expectation

Take financial/operational data to set expectation based on various analyses.

Disaggregation

The more detailed the level of expectation, the greater the precision.

Plausibility and Predictability of Relationships

Concerns whether the relationship being tested makes sense.

Data Reliability

Depends on independence of source, effectiveness of internal controls, and auditors' personal knowledge.

Tolerable difference

The difference we are willing to tolerate for a test.

Step 3: Compare expectation to recorded amount

If observed difference is less than tolerable difference, auditor accepts amount.

Step 4: Investigate differences

Involves inquiry, accounting change, economic change, fraud, or error.

Step 5: Document

What the expectation was and explanations for significant differences.

Trend analysis

Least precise analytical procedure, observing changes over time.

Ratio analysis

Compares entity ratio with industry averages and recognizes limitations.

Reasonableness analysis

Most precise type of analytical procedure based on an explicit expectation.

Test of controls

Audit procedures performed to test the operating effectiveness of controls.

Substantive procedures

Audit techniques used to gather evidence of material misstatements.

Internal controls

A process designed to provide reasonable assurance regarding achievement of objectives.

Control environment

A set of standards, processes, and structure that provide basis for internal controls.

Risk assessment

Management's identification and analysis of internal and external risks.

Control activities

Policies and procedures that address identified risks.

Information and communication

How the organization communicates internally and externally.

Monitoring Activities/Controls

Management's process to evaluate the effectiveness of internal controls.

Reliance Strategy

Auditors rely on the entity's internal controls to reduce the extent of substantive procedures.

Substantive Strategy

Auditors rely minimally on internal controls and emphasize substantive testing procedures.

Scanning

Looking for 'red flags' and big picture evidence.

Tracing

Moving from Source Document to General Ledger, dealing with completeness.

Vouching

Moving from General Ledger to Source Document, dealing with occurrence and existence.

Analytical procedures timing

Three times we do analytical procedures: preliminary, execution phase, and final.

Develop an expectation

Take financial/operational data to set expectation using budgets, forecasts, and industry analysis.

Define a tolerable difference

The difference we are willing to tolerate for a test based on materiality.

Compare the expectation to the recorded amount

If observed difference is less than tolerable difference, auditor accepts amount.

Investigate differences greater than the tolerable difference

Steps include inquiry, accounting change, economic change, fraud, or error.

Document

What the expectation was and explanations for significant differences.

Ratio analysis

Comparison of entity ratio with industry averages, recognizing limitations.

Reasonableness analysis

Most precise type of analytical procedure based on explicit expectation.

Internal controls

A process designed to provide reasonable assurance regarding the achievement of objectives.

Control environment

A set of standards and processes that provide the basis for internal controls.

Step by step

Understand the Control Environment through walkthrough.

Sufficiency of evidence

Quantity of evidence collected to answer our question.

Appropriateness of evidence

Quality of evidence, including its relevance and reliability.

Reliability of evidence

Higher reliability when evidence is obtained directly, from external sources, or when strong internal controls are in place.

Evaluation of audit evidence

Professional skepticism and the ability of evidence to be unbiased, objective, and thorough.

Types of audit evidence

Includes inquiry, observation, scanning, analytical procedures, confirmation, inspection of documents, inspection of tangible assets, recalculation, and reperformance.

Inquiry

Asking the client for information, which alone is not sufficient.

Observation

Present to watch the process, which may lead to biased results.

Scanning

Looking for red flags based on the experience and expertise of the auditor.

Analytical procedures

Evaluations of financial information by studying plausible relationships among data.

Confirmation

Process of obtaining positive or negative confirmation from an outside source.

Inspection of documents

External documentation is more reliable than internal.

Inspection of tangible assets

Auditor inspects physical assets like inventory.

Recalculation

Recalculating figures to verify accuracy.

Reperformance

Auditor reperforms all steps of procedures or controls.

Audit documentation

Documentation is essential; an experienced auditor should understand the nature, timing, extent of procedures performed.

Analytical procedures timing

Performed at preliminary, execution, and final stages of the audit.

Developing an expectation

Using financial/operational data to set expectations for comparison.

Defining a tolerable difference

Size depends on significance of account and level of precision.

Comparing expectation to recorded amount

Auditor investigates if observed difference exceeds tolerable difference.

Investigating differences

Includes inquiry, accounting changes, economic changes, fraud, or error.

Documenting expectations

Explanations for significant differences must be documented.

Trend analysis

Least precise analytical procedure, looking at changes over time.