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Module 3

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0% found this document useful (0 votes)
14 views15 pages

Module 3

Uploaded by

Glaiza Ortiguero
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Module 3 Preforming the Audit Of Historical Information

Sufficient Appropriate Audit evidence pg 171

 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.

Audit Procedures pg 173

 Once Auditor identities assertions containing a risk of material misstatement,


auditor then undertakes audit procedures to rest risk to acceptable level.
 Two types of Audit Procedures: Test of controls & Substantive procedures
 Test controls: Establish reliance please on the internal control system, therefore
support an assessed level of control risk
 Substantive tests: Performed to detect material misstatements in the FR assertions
and there reduce auditor’s detection risk to acceptable level.
 Audits use a combination of test of controls and substantive procedures.

Tests of Controls pf 174

 As discussed in Module 2 – Auditors gains understanding of control environment and


identities controls that they may rely on
 Assertion level controls = directly relate to prevention of detection and correct of
misstatements (known as Control Activities)
 Financial level controls = (such as control environment) provide foundation for assertion

level controls and influence how the operate. Also know as pervasive controls.

Objectives of Tests of Controls pg 175

 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

 The Major tests are:


- Inspection: eg: checking dates and signatures on documents i.e testing physical evidence
- Observation: Auditor observes the actual control being performed
- Enquiry: Auditor using questioning skills to determine how the control is being
completed and whether being carried our properly
- Reperformance: Auditor reperforms control to test its effectiveness
- Computer-assisted audit techniques (CAAT): Software packages to import entity data
file so it can be tested

Using CAAT for test of controls pg 178

- 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

Sampling technique for Testing Controls pg184

- 100% examination
- Selective examination of items (High value or key items; all items over a certain amount)
- Audit Sampling

Selection of Sample pg 185

- Three types of sampling:


 Random Selection
 Systematic selection. Every “nth” item
 Haphazard selection

Evaluation of test of Control Sample Results pg 185

Substantive Audit Procedures pg 186

- There are two types of analytical procedures.


1. Performed as risk assessment procedures - Used at the planning stage to identify high risk
areas
2. Substantive analytical procedures – Gathering evidence concerning individual items of
financial information

Designing and performing substantive analytical procedures pg 187


- Designed to substantiate financial statement balances by using predictable relationships
among financial and non-financial data
- Most suited to large volumes of transactions that tend to be predictable over time
- When designing and performing substantive analytical procedures, the auditor will need to
consider:
 Suitability of substantiative analytical procedures for given assertions pg 187
Premised that relationships among data exists. Suitability depends on auditor’s
assessment of how effective at picking up material misstatements.
 The reliability of data pg 188
 Whether a sufficiently precise expectation can be developed
 Whether the amount of difference from an expectation is acceptable. What to do if
not pg189

Test of details: pg191

- Includes tests of transactions and account balances to obtain direct evidence to reduce the risk
of material misstatements for particular account

Nature of tests pg 191


- Depends on the type of account: eg confirm existence of asset = physically verify. Confirm
existence of bank account = letter from bank

Designing and performing tests of details : pg192

- 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

Tests of Transactions and Account Balances pg 192

- 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

- Attendance at physical inventory counts: p 195


 Assertion being tested determines whether vouching or tracing should be tested
 Vouching: involves testing accounting records to the source document or underlying
asset. Tests for existence by vouching items in the general ledger to the physical stock.
 Tracing: Testing from the source document or underlying asset to the accounting
records. Testing for completeness by comparing physical count to ledger.
 Page 196 has Table 3.5 which shows relationships between assertions, specific audit
objectives and substantive procedures for inventories.
Using CAATS for substantive Testing pg 197

Three types of CAATS:


- General audit software : page 197
- Purpose written programs: pg 198
- Utility Programs and systems Management programs: pg 198

Advanced Audit Data Analytic Techniques pg.200

- Ability to analyse complete data sets (Big Data)


- Can be used at planning stage and at evidence gathering stage
- Ability to analyse complete populations, of data, identify patterns, correlations, and
deviations from the expected results
- Advantages: Improves financial statement audits by. 1. Testing complete sets of data rather
than sampling, 2. Aiding risk assessment through identification of anomalies, 3. Provide audit
evidence by analysing all transactions that comprise an account balance
- Disadvantages: Analysing data not relevant to audit may negatively impact audit , testing
100% doesn’t change the meaning of reasonable assurance, 3. Does not replace professional
scepticism or judgment, 4. Can lead to over confidence by the auditor

Sampling techniques in substantive procedures pg 201

- When designing sample, auditor may wish to consider using stratification


- Stratification: dividing population into discrete subpopulations that have an underlying
characteristic such a dollar value. Sample size decreases but doesn’t increase sample risk.
- Sampling techniques:
 Monetary Unit Sampling
Evaluation of Substantive Procedures Sample results pg 202

- 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

- Two major types of e-commerce environment


1. Business to business
2. Business to customer
- Authorisation controls help ensure authenticity of transactions
- Related controls testing when evaluating the integrity of electronic eviidence are
 Record integrity checks
 Electronic date snaps
 Digital signatures
 Version controls

- Substantive Tests in ecommerce environment: pg 205


- Using CAATS in E-commerce environment: pg 205
- Advanced Audit Data Analytics in E-Commerce Enviroment pg 205
- Audit Procedures for related parties pg 207

Using Work of other Auditors and experts

- 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

Evaluate of Audit Evidence pg 219

- Misstatements During the Audit page 219


- Sufficiency of appropriateness of evidence

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