Audit Tutorial 5

Question 1

a) Briefly describe financial statements assertions made by the management.

Notes:

Financial assertions the auditor used (ACCA): 2 categories

A) Classes of transactions and events and B) Account balance and related disclosure
related disclosure
 Data entry of transaction  SOFP
o SOPL / SOFP o Assets, liabilities and equity
1) Accuracy 1) Existence
2) Occurrence 2) Right and obligation
3) Completeness 3) Completeness
4) Classification 4) Classification
5) Cut off 5) Cut off
6) Presentation 6) Presentation
7) Accuracy, Valuation and allocation

 Management assertions / financial statements assertions / financial assertions

 Must provide each financial assertions with relevant examples!!!
1) Occurrence
 Transactions and events that have been recorded, have been occurred and pertain to the
entity.
2) Accuracy
 Amount and other data relating to the recorded transactions and events have been recorded
precisely.
3) Classification
 Transactions have been recorded in the proper account.
4) Completeness  SOFP
 There are no unrecorded assets, liabilities, transactions events or undisclosed items which
are material to the financial statements.
5) Presentation
 The financial information is appropriately presented and described and disclosed clearly.
 Related disclosures are relevant and understandable in the context of the requirements of
the applicable financial reporting framework.
6) Valuation and allocation  SOFP
 Assets, liabilities and equity are included in the financial statements at appropriate amounts
and any resulting valuation or allocation adjustments are appropriately recorded.
 Assets, liabilities and equity interests in the Statement of financial positions is allocated at
appropriate amounts.
 Revenue or expenses in Statement of profit and loss account is allocated to the proper
financial period.
7) Cut off  SOFP
 Transactions and events have been recorded in the correct accounting period.
8) Right & obligation  SOFP
 The entity holds or controls the rights to assets. Liabilities are the obligation of the entity.
 9) Existence  SOFP
 Assets, liabilities and equity interest do exists.

b) Name the appropriate financial statements assertion that matches with each of the
following description.
(i) Depreciation is provided for all assets with a limited useful life.
 Valuation and allocation.

(ii) Assets, liabilities, transactions and events are not understated.

 Completeness.

(iii) The entity owns the assets.

 Right & Obligation.

Question 2

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

a) Explain the term of “audit evidence”.

 Audit evidence means the information obtained by the auditor in arriving the
conclusions on which the audit opinion is based.
 Required to support financial statement assertions.
 It is any information used by the auditor to determine whether the information
being audited is stated in accordance with the established criteria.

b) Discuss the quality of the following types of audit evidence.

(i) Evidence originated by the auditor.
1) More reliable as auditors re-perform client’s procedures to obtain an independent
evidence.
2) Example:
a) Computation and reperformance of bank reconciliation.
b) Reperformance of Reconciliation of Account Receivables.
c) Physical inspection of tangible assets.

(ii) Evidence created by third parties.

1) In general, more reliable as third party is independent from the client to confirm the
amount.
2) However, reliability depends on whether is independent party or related party.
i) More reliable  independent evidence
ii) Less reliable  related party evidence
o However, reliability depends on the internal control and integrity of
management.
3) Example:
a) Bank Confirmation  CA Cash at bank
b) Receivable Confirmation  CA Trade Receivables
c) Payables Confirmation  CL Trade Payables
d) Confirmation from solicitor  Risk Management  Going concern issue

(iii) Evidence created by the management of the client

 1) In general, less reliable because this is an internal source of evidences which subject
to risk of client’s manipulation.
2) However, it depends on the internal control system & integrity of management.
 More reliable if strong internal control and integrity of management.
3) Example:
a) Financial Statement
b) Sales invoice
c) Purchase order

Question 3

Explain, the following audit procedures to obtain audit evidence:

i) Physical examination
 Physical review or examination of records, documents and tangible assets.
 Physical Inspection of documents  more reliable if external source of
documents  only confirm the ownership  cannot confirm the existence.

Example:

a) Acquisition of land  inspection of document  inspect the original land title  obtain a
copy of land title as audit evidence  to validate the ownership  occurrence / right and
obligation.
b) Acquisition of motor vehicles  inspection of document  inspect the original car
registration card  obtain a copy of car registration card as audit evidence  to validate
occurrence / right and obligation.
 Physical inspection or count by the auditor of a tangible assets  more reliable  only
confirm the existence  cannot confirm the ownership.

Example:

a) Cash in hand  physical inspection of tangible asset  Cash count  obtain a copy of
physical cash count report from audit client  To validate existence.
b) Inventory balance  physical inspection of tangible asset  inventory count  obtain a
copy of physical inventory count report from audit client  To validate existence.
c) PPE balance  physical inspection of tangible asset  PPE count  obtain a copy of
physical PPE count report from audit client  To validate existence.

ii) Observation
 Just watching how a procedure being performed. Observation can just confirm that the
procedure took place.
 Example:
i) To obtain sales process flow report  Auditor observed the segregation of duties
between the person receiving payments from customer and the person recording those
payments in the accounts receivable ledger  To validate occurrence.
Example: Observe SO (creating)  DO (recording)  SI (Recording)  Receive money 
Official Receipt (Recording)
ii) To obtain purchasing process flow report  Auditor observed the segregation of duties
between the person order goods from supplier and the person make payment in the
accounts payables ledger  To validate occurrence.
 Example: Observe PO (creating)  GRN (recording)  PI (Recording)  Payment
(Recording)

iii) Confirmation
 This involves seeking confirmation from another source of details in client’s accounting
records.
 Since evidence were produced by third party, it shall be more reliable.
 Example:
a) Obtain bank confirmation latter from bank  To confirm bank balances in Statement of
Financial Position  To validate accuracy.
b) Obtain customer confirmation letter from customers  to confirm balances in Trade
Receivables in Statement of Financial Position  To validate accuracy.

iv) Reperformance
 As done by the auditors this form of evidence is more reliable than those from management.
 Reperformance refers to re-perform the control procedure.
 Reperformance includes computation, i.e. to check the mathematic accuracy of source
documents and accounting records such as compute the total depreciation charge.
 Example:
a) Re-perform the bank reconciliation and obtain bank reconciliation from audit client
 compared auditor’s bank reconciliation and audit client’s bank reconciliation 
To validate accuracy.
b) Re-perform the trade receivable reconciliation and obtain trade receivable
reconciliation from audit client  compared auditor’s trade receivable reconciliation
and audit client’s trade receivable reconciliation  To validate accuracy.

Question 4:

Documentary is one of the key evidence that auditor may obtain during the course of audit.

i) Briefly differentiate internal and external documents.

1) Internal source of documents
 In general  documents provided by management  less reliable  risk of
manipulation.
 However  reliability  How strong the internal control system and integrity of
the management. Auditor needs to gather different types of evidence to cross
check against each other to ensure consistency of internal generated
documents.
o If the internal control system is strong and integrity of the management
 the documents are reliable.
 Example: Financial Statement, sales invoice, budget etc.

2) External source of documents

 Reliability of external source of documents provided by external parties 
independent parties or related party.
 High reliability if the documents generated by independent parties.
 However  related parties evidence  more reliable  strong internal control
and integrity of management.
 Example: Bank Statement, invoice from supplier etc.
 ii) Briefly explain TWO (2) factors each that may affect the reliability of internal and external
documents.
i) Reliability of internal documents.
a) The integrity of management.
b) Effectiveness of internal control system.
ii) Reliability of external documents.
a) Whether confirming party is related to client.
 Higher reliability if the confirming party is independence parties, i.e. no
relationship (100% independence) between the client and 3 rd party.
 However  related parties evidence  more reliable  strong internal
control and integrity of management.
b) Whether the evidence collected by the auditors themselves without inference
from the client.
 Reliability will be lesser if the external documents collected gone
through the client.

iii) Briefly describe that audit techniques of vouching and tracing and its audit objectives.
1) Tracing
 Tracing refers to first select a transaction and then following it into the journal or
ledger.
 The direction is from source to ledger or journals.
 Testing this direction ensures that the transactions are completely recorded in the
accounting records  F/S assertion: Completeness.
 Example: Auditor selects a sample of shipping documents and traces to the sales
invoices and to the sales journals. Then, auditor would have an evidence of
completeness of sales.
2) Vouching
 Vouching refers to first select an item from the ledger or journals and then
examining back the original source documents.
 The direction is from ledger / journals to source documents.
 This direction testing is to ensure the transaction is actually occurred or valid 
Occurrence.
 Example: Auditor select a sales transaction in sales ledger to vouch to customer sales
order to ensure a genuine sales transaction.

Flow chart:

Tracing (Completeness)

Source Documents Accounting Ledger or Journal

Vouching (Occurrence)

Example: Purchased of Fixed Assets

Tracing Capex  PR  PO  GRN  PI  GL (Fixed assets account)  Completeness

Vouching GL (Fixed Assets Account)  PI  GRN  PO  PR  Occurrence