Module 3
Module 3
Auditors perform field work to collect sufficient appropriate evidence to base their
opinion on
Fieldwork = Gathering, analyzing, and evaluating evidence
Auditors must: Identity assertions of management reflected in FS, consider evidence
that support or contradict assertions, select method of obtaining evidence, collect
and evaluate evidence required to form opinion on validity of assertions.
Evidence must be sufficient and appropriate. Sufficient = quantity. Appropriateness
= relevance and reliability.
Evidence more reliable when: obtained from independent source outside of entity.
Internal evidence more reliable when inter controls are effective. Evidence obtained
directly by the auditor. Written evidence more reliable than oral. Original evidence
more reliable than photocopies.
level controls and influence how the operate. Also know as pervasive controls.
Only controls that the auditor has determined are suitably designed to prevent, or detect
and correct, a material misstatement in an assertion are tested
Test of controls has two main objectives:
1. Obtain evidence on whether controls operate in accordance with auditors understanding
and as document during the risk process
2. To confirm whether controls functioned effectively throughout the period
Deviation = When control fails to function effectively
Tests of Controls Procedures pg 176
- Improve the audit process when evaluating controls by extracting and examining data
- Allows to analyze large volumes of data. Tests all transactions rather sampling.
- Disadvantage: Only limited to data saved on files using a systematic pattern. Big data is
not documented this way. CAAT should be used to complement auditors techniques.
- Two Major CAATS for testing controls are:
1. Test Data
Involved auditor creating simulated dummy transactions to test specific controls in
computer software and logic and procedural operations of client computerizes
application.
Use to assess independently existence, effectiveness, and continuity of software
controls. Provide evidence of the integrity of the system.
Eg. If software control is set up so payroll hours per week cannot exceed 50, auditor
will do dummy transactions with one employee with 50 hours and another 51. This
gives direct evidence of software control. Inspection/observation/enquiry does not.
2. Integrated test facilities
Similar to Test Data approach but takes one step further. Auditor establishes a
dummy entity then enters transactions
- 100% examination
- Selective examination of items (High value or key items; all items over a certain amount)
- Audit Sampling
- Includes tests of transactions and account balances to obtain direct evidence to reduce the risk
of material misstatements for particular account
- Each material account balance, class of tranasctions, and disclosure is required to be audited
regardless of assessed risk of MM
- Purpose: agreeing info to the FS, reconciling info in disclosures with info with general and sub
ledgers, addressing management override, examining material journal entries
- Tests of detail need to be designed and performed to provide high audit assurance to significant
risks
- Can test the transactions that make the account balances or the account balances themselves
- Testing account balances are easier to test and as such more reliance is placed on them
- Types of Test of Account balances:
1. External confirmations, Bank confirmations
2. Attendance at physical inventory counts
- External confirmations:
Provide evidence about completeness of liability and the existence of an asset. Also
provide evidence amounts accurately recorded. However less relevant to valuation and
allocation assertion because does not provide evidence on recoverability of obsolesce of
inventory.
Positive confirmation requests: Provides a very reliable form of evidence. Preferred
when inherent and control risk is high. If no response is given to positive confirmation
request the should apply alternate procedures. If cant alternate producer then should
be treated as material MM
Negative confirmation requests: Less reliable then positive. Used where a large number
of induvial account balances are relatively small or where inherent and control risk is
low
Bank confirmations page 194
- Auditor required to evaluate sample results and whether use of sampling has provided a
reasonable basis to conclude on the population
- The following steps should be carried out when analysis results:
Analyse the deviations detected (is it timing differences or actual error?)
Project the errors found in the sample to the population
Assess the risks of an incorrect conclusion
Evidence gathering in an E-commerce environment pg 204
- Component Auditors pg 210: Using the work done by Auditors for audits completed work of
for subsidiary/ group companies of the entity being audited
- Internal Auditors pg 211.
- Audit expert page 213
- Management expert page 213