Chapter 8: Introduction to audit evidence

Audit Evidence

• Sufficient

• Appropriate

  • relevant

  • reliable

Sufficient

Quantity - sufficient to support the audit opinion

Factors to consider are:

• Risk assessment

• Nature of accounting and internal control systems

• Materiality of the item

• Experience gained during previous audits

• Results of audit procedures

• Source and reliability of information available

Appropriate

• Relevant

  • The evidence gathered must cover the financial statement assertions

• Reliable

  • external better than internal

  • auditor generated better than client generated

  • Internal more reliable when controls effective

  • Written/documentary evidence better than oral

  • Original documents more reliable than copies/faxes

Assertions about class of transactions and event and related disclosures (OCCCAP)

• Occurrence:

  Transactions and events that have been recorded or disclosed have occurred and pertain to the entity.

• Completeness:

  All transactions and events that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included.

• Cut-off:

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

• Classification:

  Transactions and events have been recorded in the proper

  accounts.

• Accuracy:

  Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described.

• Presentation:

  Transactions and events are appropriately aggregated or disaggregated and are clearly described, and related disclosures are relevant and understandable ni the context of the requirements of the applicable financial reporting framework.

Assertions about account balances at the period end (COVECP)

• Completeness:

All assets, liabilities and equity interests that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included.

• Obligations and rights:

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

• Valuation, accuracy and allocation:

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

• Existence:

Assets, liabilities, and equity interests exist.

• Classification:

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

• Presentation:

Assets, liabilities and equity instruments are appropriately aggregated or disaggregated and are clearly described, and related disclosures are relevant and understandable ni the context of the requirements of the applicable financial reporting framework.

Procedures for obtaining audit evidence

Tests of control: evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level

Substantive procedures: audit procedures designed to detect material misstatements at the assertion level. Substantive procedures comprise:

• (a) Tests of details (of classes of transactions, account balances, and disclosures);

• (b) Substantive analytical procedures

audit procedure (AEIOU)

• Analytical procedures (Substantive procedure)

• Enquiry (and confirmation)

  • Enquiry - both

  • Confirmation - substantive procedure

• inspection - Both

• observation - Test of controls

• recalculation (and performance)

  • Recalculation - substantive procedure

  • Re-performance - test of controls

The use of analytical procedures as a substantive procedure

• Variance analysis

  The review of current year financial information in comparison to prior period or budgeted information

• Ratio analysis

  The calculation of ratios and analysis and investigation of significant differences

• Proof in total

  the use of interrelationships between data (financial and non-financial) to estimate an expected value in the financial statements, again with the investigation of significant differences

Factors to consider when using analytical procedures

• The suitability of analytical procedures to a particular assertion

• The reliability of the data from which the expected amounts or ratios are developed

• Whether the expectation is sufficiently precise to identify a material misstatement

• The amount of any difference that is acceptable without further investigation being required

Tests of details

• Inspection of invoices to verify the accuracy of the amounts recorded ni the financial statements

• Physical inspection of non-current assets and inventory to verify their existence

• Review of board meeting minutes for evidence of any provisions for legal claims which should be included in the financial statements

• Review of after-date monies received per the cash book in order to gain evidence over the valuation of receivables