Audit evidence and financial statement assertions - PowerPoint Presentation

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Audit evidence and financial statement assertions

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Learning objectives

Explain the assertions contained in the financial statements

Explain the principles and objectives of transaction testing, Account balance testing, and disclosure testing

Explain the use of assertions in obtaining audit evidence

Discuss the source and relative merits of the different types of evidence availableDiscuss the quality of evidence obtained.

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Overview

Audit evidence

Quality of evidence Financial or management assertionsSources of evidenceUse of assertions in obtaining audit evidence

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introduction

When undertaking an audit or a review assignment the auditor need to find evidence through testing of processes, Transactions, account balances and data to support the findings of his report

ISA 500 Audit evidence

outlines the requirements when conducting an external audit under International standard of Auditing.4Slide5

ISA 500 Says:

The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain

SUFFICIENT

, APPROPRIATE audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion

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Quality of evidence

Audit evidence is the information obtained by the auditor in arriving at the conclusion in which audit opinion is based.

The auditor should obtain sufficient and appropriate evidence to be able to draw reasonable conclusions on which to base the audit opinion.

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The extract from ISA 500 tells us TWO things:

Evidence has to be sufficient and appropriate.

That the auditors do not have to audit everything because their conclusion have only to be reasonable not absolute.

Sufficiency

: The measure of the amount of evidence gathered (quantity)

Appropriateness

: The measure of the quality of evidence, its fitness for purpose. (quality)

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sufficient EVIDENCE

SUFFICIENT: sufficient to support the audit opinion

Factors to consider are:

Risk assessmentNature of accounting and internal control systemsMateriality of the item

Experience gained during previous audits

Results of audit procedures

Sources and reliability of information available

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APPROPRIATE EVIDENCE

Relevance - The evidence gathered must cover the financial statement assertions

Reliable (if it is not in writing it doesn’t exist)

External better than internal evidenceInternal evidence more reliable when controls are effective

Auditor generated evidence is better than client generated

Documentary evidence is better than oral

Original documents more reliable than copies/faxes

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NOTE:

If the auditor is unable to obtain sufficient appropriate evidence, then he should consider the implications of the audit report

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SOURCES OF AUDIT EVIDENCE

Sources of audit evidence include that derived from within the organisation’s

Accounting systems Accounting recordsDocuments

Management and staff

And from outside the organisation through:

Customers

Suppliers

Lenders

Professional advisers, etc

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The sources and amount of evidence required by the auditors will depend on the:

Materiality

Relevance ; and

R

eliabilityOf the evidence available from a source.

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Sources of evidence CONTINUED…….

TYPES OF PROCEDURES

Audit evidence is obtained from appropriate mix of the following types of procedures:

Risk assessment procedures Procedures to obtain an understanding of the entity and its environment, including its internal controls to assess the risk of material misstatements at the financial statements and assertion levelsTest of controlsProcedures to test the operating effectiveness of controls in preventing and correcting material misstatements at the assertion levels

Substantive procedures

Procedures to detect material misstatements at the assertion level and include test of details of classes of transactions, account balances and disclosures and analytical procedures

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Procedures of obtaining evidence (

a e I o u)

1.

A

nalytical proceduresEvaluation of financial information made by a study of plausible relationships among financial and non financial data and the investigation of identified fluctuations and relationships inconsistent with other information:2. E

nquiry and confirmation directly

seeking information of knowledgeable persons throughout the entity or outside the entity and obtaining representations from a third party

3.

I

nspection

Examining records, documents and tangible assets

4.

O

bservation

Looking at a process or procedure being performed by others

5. Recalc

U

lation

Checking the arithmetical accuracy of documents or records.

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THE USE OF MANAGEMENT ASSERTIONS IN OBTAINING EVIDENCE

Definition of Assertions.

Implicit statements made by management in preparing financial statements which state that the financial

statements do not contain any material error or misstatements with regard to assets and transactions.15Slide16

The Assertions in ISA 315 are a series of statements which deal with the underlying bases on which the financial statements are prepared and deal with the measurement, presentation and disclosure of the various elements of financial statements and related disclosures.

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ISA 315 splits the assertions into three (3) Categories as follows:

Assertions about classes Of transaction and events for the period under review

( Statement of profit or loss and other comprehensive income)

OCCURRENCE-

Transactions and events that have been recorded relate to the company being audited and not to another organisation.

COMPLETENESS

All transactions that should have been recorded have been recorded

ACCURACY

Amounts and all other data relating to recorded transactions have been recorded appropriately

CUT- OFF

Transactions and events have been recorded in the correct accounting period

CLASSIFICATION

Transactions and events have been recorded in the proper accounts (in the books and records)

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2.

Assertions about account balances at the period end: (

Statement of financial position)Existence Assets , liabilities and equity interest (shareholders) exist.

Rights and obligations

The company holds or controls the rights to assets, and all liabilities are those of the company

Completeness

All assets , liabilities and equity interest that should have been recorded have been recorded

Valuation and allocation

Assets ,liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are properly recorded.

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Assertions about presentation and disclosure

Occurrence and rights and obligations

Disclosed events, transactions and other matters have occurred and pertain to the company.

CompletenessAll disclosures that should have been included in the financial statements have been included

Classification and understandability

Financial information is appropriately presented and described and disclosures are clearly expressed

Accuracy and valuation

Financial and other information is disclosed fairly and at appropriate amounts

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ALL ASSERTIONS ( ACCA COVER)

A

CCURCY COMPLETENESS C

UT- OFF

A

LLOCATION

C

LASSIFICATION

O

CCURRENCE

V

ALUATION

E

XISTENCE

R

IGHTS AND OBLIGATIONS

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USING THE WORK OF THE EXPERT TO OBTAIN AUDIT EVIDENCE

ISA 620 Using the work of an auditors expert states

The auditor has

sole responsibility

for the audit opinion expressed and that responsibility is not

reduced

by the auditor’s use of the work of an auditors expert. Nonetheless if the auditor using the work of an auditor’s expert concludes that the work of that expert is adequate for the auditor’s purpose, the auditor may accept that experts findings or conclusions in the experts field as

appropriate audit evidence

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What is an expert?

ISA 620 defines an expert as:

An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert ( who is a partner or staff including temporary staff of the auditors firm or network firm) or an auditor’s external expert.

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Examples of experts

Valuers

Quantity surveyors ActuariesGeologists Stock brokers

Lawyers

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Points to consider

In deciding whether to engage an expert

Knowledge and ability of audit team

The risk of material misstatementThe quantity and quality of other audit evidence which can be obtained

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FACTORS WHICH MAY INFLUENCE AUDITOR TO RELY UPON THE EXPERT

The competence of the expert

The Experience of the expert

Independence of the expert25Slide26

E N D

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