Download Completeness

AUDIT 4 - 2015
AUDIT EVIDENCE
EVIDENCE
Support for audit opinion
Is all the information the auditor uses to arrive at
the conclusions on which the audit is based.
To support auditor’s opinion
Must be obtained to support:
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Risk assessment procedures
Tests of controls
Substantive procedures
Other audit procedures
Types of Audit Evidence
– Accounting records – books & records (analytical,
recalculation, & reconciliation)
– Corroborative evidence – checks, invoices, sales
orders, PO, contracts, minutes, confirmations,
observation, inquiry & inspection – gives validity to
the accounting data
– Evidence in electronic form – consider the time
during which information exists
Sufficient Appropriate Audit Evidence
Must persuade the auditor that the ending balances are
fairly presented
Reasonable assurance only
Persuasive rather than conclusive
The auditor must exercise professional judgment
Cost-benefit alone is not a valid basis
Sufficiency of Evidential Matter
The auditor’s decision regarding the sufficiency of
the evidence is influenced by the following:
– The risk of material misstatement – (greater risk =
more evidence)
– Quality – less audit evidence may be required when
that evidence is of higher quality
Appropriateness of Audit Evidence
Must be reliable and relevant.
• Circumstances under which it is gathered
• Source of the evidence
• Nature of the evidence
Appropriateness of Audit Evidence
• Auditor’s direct personal knowledge – provides persuasive
evidence than evidence obtained indirectly (observation,
recalculation, inspection)
• External evidence – provides greater assurance than
internally generated evidence.
– Sent directly to the auditor (confirmations, legal letters,
bank cut-off statements)
– Received and held by the client (bank statements,
contracts, invoices)
• Internal evidence (purchase orders, sales orders, receiving
reports) – internal controls
• Oral evidence – least reliable form of evidence
Hierarchy of Audit Evidence
(From most reliable to least reliable)
1. Auditor’s personal knowledge
2. External evidence
3. Internal evidence
4. Oral evidence
Evaluation of Audit Evidence
– Evaluate management assertions
– Detect material misstatements
The evaluation of audit evidence must take into
consideration the achievement of audit objectives
Substantive Procedures = $ balances
Tests of details – to gather evidence to support the
account balances as reflected in the F/S
– Performed on ending balances
– Performed on the details of transactions
Analytical procedures – ratios, %, comparisons. The
auditor looks for unusual relationships,
discrepancies, or variances.
– Planning – required (understanding)
– Substantive tests – Not required (audit evidence)
– Final review – required (overall reasonableness)
Analytical Procedures
Documentation requirements:
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Auditor’s expectation
Factors considered in the development
Results of the comparison
Additional procedures performed in response to
significant unexplained differences
– Results of such additional procedures
Types of analytical:
– Vertical / horizontal analysis
– Ratio analysis
Analytical Procedures
Limitations:
– Differences do not necessarily indicate errors or fraud.
– Differences simply indicate the need for further
investigation
Substantive Procedures – Tests of Details
A. Directional testing
– If a test starts with items in the accounting records, the
proper assertion is most likely to be existence
(vouching).
– If a test starts with source documents, it is most likely
related to the completeness assertion (tracing).
Substantive Procedures – Tests of Details
B. External confirmation
– Direct written response from a third party
• Positive vs. negative
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The auditor should maintain control
Non responses
Oral responses
Exceptions – difference reported
C. Standard Auditing Procedures
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Footing, crossfooting, and recalculation – math accuracy Valuation
Inquiry – both internal sources & external sources
(attorneys & bankers) – Presentation & disclosure
Vouching –support for what has been recorded- Existence
Examination/Inspection – careful examination of
documents & records (minutes, contracts, invoices) 0Existence
Confirmation – written verification - Existence
Analytical procedures - Completeness
Reperformance – Valuation
Standard Auditing Procedures
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Reconciliation – substantiates the existence &
valuation of accounts. It involves comparing
financial amounts from two independent sources
for agreement.
Observation – direct personal knowledge.
(existence or occurrence)
Tracing – starts with the source documents and
traces forward to provide assurance that the event
is being given proper recognition in the books &
records (completeness)
Cutoff review of year end transactions –Completeness, Rights &
obligations
Standard Auditing Procedures
• Auditing related accounts simultaneously (LTD/
Interest)
• Representation letter - Presentation and disclosures
• Subsequent events review - Valuation
Relevant Assertions
1. Account balances
– Completeness
– Valuation
– Existence
– Rights and obligations
Relevant Assertions
2. Transactions and events
– Completeness
– Cut-off
– Valuation
– Existence
– Understandability & classification
Relevant Assertions
3. Presentation & disclosure
– Completeness
– Valuation
– Rights and obligations
– Understandability and classification
Selection of Items
1. Selecting all items – small number of
high dollar value items
2. Selecting specific items – all items that
have a specific characteristic
3. Audit sampling – less than 100% (to be
discussed in chapter #5)
Procedures to Assertions
• Completeness
• Tracing from source
documents to the
financial statements
• Analytical review
procedures
• Observation of
processes and
procedures
Procedures to Assertions
• Cut-off
• Cut-off procedures
Procedures to Assertions
• Allocation &
Valuation
• Recalculation
(allowance)
• Reconciliation of
schedules to G/L
Procedures to Assertions
• Existence
• Confirmations
• Observation,
inspection, and
examination
Procedures to Assertions
• Rights & Obligations
• Inspection of
documentation
supporting
transactions,
inspection of contracts
Procedures to Assertions
• Understandability and
classification
• Review of all related
disclosures for
compliance with
GAAP
• Inquiry of
management regarding
disclosures for the
account
Audit Procedures by Transaction
Cycle
Cycles
Revenue
Sales revenues, receivables, and cash receipts
Expenditure
Purchases, payables, and cash disbursements
Inventory
Perpetual inventory, physical counts, and manufacturing
costs
Investments
Investments in debt and equity, and the income from
investments
Property, plant & equipment Acquisitions and disposals, and depreciation expense
Payroll & personnel
Payroll & personnel
Financing
Debt & equity financing, repayment, interest expense,
and dividends
Revenue Cycle – Fraud Risk
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Early revenue recognition
Holding books open
Fictitious sales
Failure to record sales returns
Side agreements to sell more inventory than needed
Understating the allowance
Revenue Cycle
Sales Department
– Receipt of a customer purchase order
– Serially numbered sales order
– Sent to credit department for approval
Credit Department
– Approval of sales order
– Copy sent to:
• Shipping department
• Billing department
• Accounting department
Revenue Cycle
Shipping Department
– A serially numbered bill of lading is prepared
– Copy is sent to customer
– Goods are shipped and a receivable arises
Billing Department
– Prepares a serially numbered sales invoice
– Shipping documents, sales order & invoices are
compared for completeness & mathematical
accuracy
– Invoice is sent to customer and to A/R Dept
Revenue Cycle
Accounts Receivable Department
– Sales is entered into the sales journal, and a receivable is recorded
– Periodically, an independent person should reconcile the G/L and
the A/R subsidiary records
– When payment is received, the receivable is eliminated
– Uncollectible are sent to Credit Manager for follow up
– Treasurer should authorize write-offs
– Serially numbered receiving report may be used as to sales
returns
– Sales discounts procedures and records should be reviewed to
ensure that discounts are properly given and recorded
Cash Receipts
Collection of cash receipts
Incoming mail must be opened by a person who does not
have access to the A/R ledger
Receipts should be listed in detail
– A copy & actual receipts sent to the cashier for bank deposit
– Another copy to the A/R Dept. for entry in the A/R ledger
– Another copy to the accounting dept. for entry into the G/L
Cash collections should be restrictively endorsed upon receipt
and deposited daily
Devices such as cash registers or lock boxes should be used
as safeguards
Substantive Procedures - Revenue Cycle
1. Auditing accounts receivable –
– Completeness – obtain an aged trial balance of accounts
receivable & trace the total to the general ledger control
account
– Valuation, allocation & accuracy – examine the results
of confirmations and test the adequacy of the allowance
– Existence & occurrence – confirm a sample of accounts
receivable
– Rights & obligations – review bank confirmations and
debt agreements for liens. Also, inquire management
Substantive Procedures - Revenue Cycle
2. Auditing sales transactions –
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Completeness – trace a sample of shipping documents to the sales
invoices, and to the sales journal and accounts receivable ledger
Cut-off – compare a sample of invoices from shortly before and
after year end with the shipment dates & with the dates the sales
were recorded
Valuation, allocation & accuracy – compare prices on a sample of
invoices with price lists and terms
Existence & occurrence – vouch a sample of sales transactions
from the sales journal to the customer order and shipping
documents
Understandability & classification – examine a sample of
invoices for proper classification into revenue accounts
A/R - Confirmations
Confirmations is considered a required procedure
unless:
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Receivables are immaterial
Confirmation would be ineffective
Inherent & control risks are very low & evidence
provided by other procedures is sufficient
Provides evidence regarding existence and rights &
obligations
Evidential Procedures – A/R
Positive confirmations (existence):
• Large accounts, expected errors, or items in
dispute, and when internal control is weak.
• May be blank confirmations / detail
• Confirmations received electronically
• Non responses should be followed up with 2nd
and 3rd requests
• Alternative procedures
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Subsequent collections
Invoices / shipping documents
Evidential Procedures – A/R
Negative confirmations (existence):
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The combined assessed level of inherent & control
risk is low
A large # of small account balances are being
confirmed
There is no reason to expect that recipients of the
requests will be unlikely to give them consideration
Expenditure Cycle
Purchases
• Purchase requisition – should be approved
and pre-numbered
• Purchase orders – prepared only after proper
approval. Should be sent to:
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Requisitioning department
Vendor
Receiving department
Accounting department
Expenditure Cycle
Receiving Department
The PO serves as an authorization to accept
the goods when they arrive
Forced to count
A pre-numbered receiving report is prepared
Expenditure Cycle
Accounts payable Department
Recording the payable after comparing PO,
RR & invoice
Records as inventory and records a payable
After matching and close to due date,
documents are sent to the Treasurer
Expenditure Cycle
Treasury Department
Treasurer prepares, signs, and mails the
checks and cancel all supporting documents
after payment.
Paid vouchers are returned to the accounting
department for posting of the payment and
filing of the documents
Substantive Audit Procedures - Expenditures
1. Auditing accounts payable
• Completeness
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Agree accounts payable listing to G/L
Obtain a sample of vendor statements and agree to the
vendors accounts
Perform a search for unrecorded liabilities
Valuation, allocation, & accuracy
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Foot the A/P listing and agree totals to the general ledger
– Obtain a sample of vendor statements and agree to
the vendors accounts
– Review the results of accounts payable
confirmations
Substantive Audit Procedures – A/P
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Existence and occurrence
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May confirm accounts payable balances (not required)
Vouch selected amounts to the voucher packages
Rights & obligations
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Review a sample of voucher packages for the presence of the
purchase requisition, purchase order, receiving report, and
vendor invoice to verify ownership
Auditing Purchase Transactions A/P
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Completeness
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Trace a sample of vouchers to the purchase journal
Cut-off
Valuation, allocation, & accuracy
– Recompute mathematical accuracy of a sample of
vendors invoices
• Existence
– Test a sample of vouchers for authorization and the
presence of a receiving report
• Understandability & classification
– Verify the account classification of a sample of
purchases
Auditing Presentation & Disclosure A/P
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Completeness
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Payables by type
Purchase contracts & commitments
RPT
Expenses by segment
Valuation, allocation, & accuracy
– Determine whether the info is accurate and
presented at the appropriate amounts
• Rights & obligations
– Compare disclosures to other audit
• Understandability & Classification
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Read all notes to make sure they are understandable
CASH Fraud Risk
Lapping – theft is concealed by failing to
account for cash receipts
– Prevent using a lock-box system
Kiting – to cover a cash shortage or to pad a
company’s cash position
– Detect preparing a “Bank Transfer Schedule”
CASH Audit Procedures
1. Auditing the ending cash balance
– Completeness, valuation & existence
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Bank confirmation
Bank reconciliation
Cut-off bank statement
2. Auditing cash receipts and disbursements
– Completeness – trace a sample of remittance advices to
the cash receipts journal and deposit slips
– Cut-off – perform tests
– Valuation – Foot the deposit slips and agree to the cash
receipts journal and bank statement
CASH Audit Procedures
3. Auditing Presentation & Disclosure
– Completeness - ensure disclosure of:
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Policy defining cash and cash equivalents
Restrictions
Compensating balances
– Valuation – read the footnotes
– Rights & obligations – compare disclosures to other
evidence
– Understandability & classification – read the disclosure
Evidential Procedures - Inventory
Internal control - segregation of purchasing,
receiving, storage, and shipping functions
Observation is an auditing procedure. Alternative
procedures can be used.
Well-kept perpetual inventories – before, during, or
after the end of the audit period (internal control)
Substantive Procedures – Inventory Balance
Completeness
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Inventory observation
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Tracing test counts
Valuation
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Test math accuracy of listing
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Inquire about obsolete or slow moving
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Examine vendors invoice
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Perform price tests
Existence
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Verify existence at the observation
Rights & obligations
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Analyze consigned goods
Cut-off
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To verify proper period
Understandability & classification
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Disclosures
Evidential Proc. - LTI
Completeness
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Confirm securities or count securities
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Test dividend and interest income
Valuation
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Obtain listing – foot & trace to G/L
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Compared values to prices published
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Recalculate ending values
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Evaluate impairment
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Recalculate gain / losses
Existence
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Confirm securities and/or count securities
Rights & obligations
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Verify ownership
Cut-off
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To verify proper period
Understandability & classification - disclosures
Evidential Proc. – PP&E
Internal controls: Acquisition, subsidiary ledgers, physical
security, written policies, disposition
Audit procedures:
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Completeness
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Cut-off
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Review purchases and dispositions near year end
Valuation
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Review depreciation / amortization / gain or losses / impairment
Existence
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Obtain & foot fixed asset schedule & trace to G/L
Review the Repairs & Maintenance expense account
Trace sample of purchase requisitions to receiving reports and the fixed
asset subsidiary ledger
Vouch a sample of purchases to receiving report & invoice
Understandability & classification - disclosures
Substantive Proc. - Payroll
Completeness
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Test completeness of accruals
Valuation
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Recalculate year end payroll accruals
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Compare total recorded payroll with total checks issued
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Test extensions and footings
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Verify pay rates
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Recalculate gross and net
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Existence
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Vouch amounts from the client’s calculation of the payroll accrual to
supporting documentation
Rights & obligations
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Verify that the payroll accrual is an obligation of the entity
Cut-off
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Trace a sample of time cards to the payroll register
Evidential Proc. – Debt & Equity
Completeness
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Review Board of Directors minutes
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Obtain new debt agreements
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Trace all to financials
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Review interest expense
Valuation
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Examine new debt agreements for proper recording
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Recompute any interest payable & recompute amortization
Existence
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Confirm with creditors
Rights & obligations
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Examine agreements to verify
Cut-off
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Proper period
Evidential Proc. - Capital
Completeness:
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Confirmations
Examine stock certificate book
Valuation
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Recompute the value assigned to stock transactions
Retained earnings – analyze movement.
Existence
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Vouching transactions to minutes
Understandability & classification
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Review restrictions on retained earnings resulting
from loans, agreements, or state laws.
OTHER AUDIT PROCEDUES
Related Party Transactions
Related party transactions – responsible for identifying any
related party transactions encountered & for determining
whether the transactions are given proper disclosure.
Determining existence of RPT’s:
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Evaluating the company’s procedures for identifying &
accounting for
Asking management for the names and activities during the
year
Reviewing filings & other regulatory reports
Reviewing material transactions for RPT evidence
Reviewing prior years’ audit documentation or predecessor
Evidential Proc. – RPT’s
Once a related party transaction has been identified, the
auditor should obtain an understanding of the business
purpose of the transaction and test the amounts to be
disclosed (per GAAP).
Indicative of a RPT:
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Compensatory balances
Loan guarantees
Unusual non-recurring entries
Non monetary transactions
Not in the ordinary course of business
Evidential Proc. – Estimates
Auditor’s Responsibilities:
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Assess written policies & practices regarding the development
and use of estimates
Verify that all material estimates have been developed
Determine that the accounting estimates are reasonable
Ensure that estimates are properly disclosed in accordance with
GAAP
Procedures:
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Review & test procedures used by management
Develop an independent estimate
Review subsequent events & transactions
Evidential Proc. – Fair Values
Management is responsible for making fair value
measurements & disclosures in accordance with GAAP
Auditor’s responsibility:
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Understand the entity’s process and controls
Assess risk of material misstatements
Evaluate conformity with GAAP, including disclosures
Consider need for a specialist
Test fair value measurements & disclosures
Evaluate the sufficiency, competency, & consistency of
evidence
Obtain management representations
Communicate relevant matters to the audit committee
Evidential Proc. – Fair Values
The auditor may:
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Determine whether significant assumptions provide a
reasonable basis for fair value measurements.
Consider intent and ability.
Evaluate the valuation model.
Test the underlying data for accuracy, completeness,
relevancy, and consistency
Develop independent fair value estimates
Review subsequent events and transactions
Evidential Proc. – Litigation
The auditor must obtain competent evidential matter
pertaining to litigation, claims, and assessments.
Inquiry to management
Review documents, such as minutes, invoices from lawyers,
contracts, loan agreements, leases, correspondence from
tax authorities.
Legal letter (signed by client, received by auditor)
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Substantial attention
Refusal to respond
Refusal to permit inquiry
Evidential Proc. – Litigation
Specific inquiry:
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Nature of the matter, including period of occurrence.
The progress of the case to date.
The degree of possibility of an unfavorable outcome.
The amount or estimate of potential loss.
Evaluating Audit Findings
Perform analytical review procedures
Evaluate audit findings – professional judgment
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Size of misstatement
Effects
Aggregate of known and likely
Prior period adjustments
Qualitative considerations
Communication to Management
All misstatements
– Distinguish between known & likely
– Request management to make appropriate
corrections
– Reevaluate the misstatement, after management
has made adjustments
Documentation requirements:
– Materiality & tolerable misstatements
– Known & likely misstatements
– A summary of uncorrected misstatements
Reviewing the Work of Others
Consideration of whether:
1. In accordance with applicable standards
2. Significant findings need further
consideration
3. Appropriate consultation
4. Procedures are appropriate
5. Supports the conclusion
6. Evidence is sufficient and appropriate
7. The objectives have been achieved
Reviewing the Work of Others
Engagement partner review
– Critical areas
– Significant risks
– Other important areas
Documentation requirements
– Who performed the work and when
– Who reviewed the documentation and the date
Engagement Quality Review - PCAOB
Partner not otherwise associated with the
engagement
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Hold discussions with the audit team & review
Evaluate judgments
Evaluate assessments
Evaluate independence
Review financials and report
Evaluate communications
Evaluate documentation in general
Engagement Quality Review - PCAOB
Approval only if no significant deficiencies
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Failed to obtain appropriate evidence
Reached an inappropriate conclusion
Report is not appropriate
Not independent
Preguntas?