Audit Reasoning

Audit reasoning sequence

Identify the account and assertion, describe what could go wrong, identify a relevant client control, test that control if relying on it, perform substantive procedures, evaluate exceptions, and document the conclusion.

What could go wrong

A specific error or fraud that could cause a financial statement assertion to be misstated.

Connecting procedures to assertions

Explain what is being tested, why it is being tested, and what evidence will show whether the balance is fairly stated.

Fictitious credit sale

An invented sale overstates revenue and accounts receivable; it violates revenue occurrence and receivable existence.

Vouching

Start with recorded transactions or balances and examine supporting source evidence, usually to test occurrence or existence and detect overstatement.

Tracing

Start with source evidence and follow it into accounting records, usually to test completeness and detect understatement.

Direction of testing

The starting population and direction of comparison determine which assertion a procedure addresses; the document name alone does not determine the assertion.

Design versus implementation versus operation

Design asks whether a control could address a risk; implementation asks whether it is in use; operating effectiveness asks whether it worked consistently during the relevant period.

Control evidence versus monetary evidence

Inspecting payment approval tests a control; vouching the payment to an invoice and receiving report directly tests the recorded transaction.

Dual purpose test

A procedure designed to test both control operation and monetary amounts; each objective needs its own supported conclusion.