2 The Third Standard of Field Work Sufficient appropriate evidential matter is to obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
3 Management Assertions Embodied in the Financial Statements Existence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred.Completeness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included.Rights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements.Valuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles.Presentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided.Accuracy – Amounts and other data relating to recorded transactions have been recorded properly.Cutoff – Transactions have been recorded in the proper accounting period.22
4 Relationship of Financial Statement Assertions and the Audit Management AssertionsAudit ObjectivesAudit EvidenceAudit Report on Financial StatementsFinancial Statements (GAAP)Audit Procedures
5 Audit Evidence Evidential matter: any information that corroborates or refutes an assertion
7 Types of Evidence Physical Evidence Evidence that can actually be seen by auditors.This type of evidence is generally effective for supporting the existence assertion.
8 Types of Evidence Third Party Representations ConfirmationsLawyers’ LettersReports of Specialists
9 Types of Evidence Documentary Evidence Four basic types (helps determine competence):Created by outside parties and transmitted directly to auditorCreated by outside parties and held by clientCreated and held by clientElectronic documents
10 Types of Evidence Computations Computations are:performed independently by auditorused to verify mathematical accuracy of client’s analyses and records
11 Types of Evidence Data Interrelationships Data interrelationships (i.e., analytical procedures) rely on plausible relationships among financial and non-financial data.Effective for testing “reasonableness” of certain account balancesCan be used as primary or corroborating evidence, depending on the nature of account
12 Types of Evidence Oral and Written Client Representations Responses to questions and inquiries to clients during an audit constitute audit evidence.Oral representations are generally not sufficient as primary evidence, but may provide corroboration for other evidence.Written representations (representation letter) are required, but should not be used as a substitute for other audit procedures.
13 Types of Evidence Accounting Records Clients’ accounting records (e.g. ledgers and journals) may provide worthwhile evidence in themselves.Depends on the effectiveness of internal controls
15 Competence of Evidential Matter To be competent evidence must be:RelevantMust relate to the audit objectiveValid (Reliable)Independent sources have greater reliability than those within the client organization.Strong internal control increases reliability of evidence created within the client organization.Directly obtained evidence is more reliable than evidence obtained second hand.77
16 Reliability of Certain Types of Audit Evidence RELIABILITY TYPE EXAMPLEHigh Physical Inventory ObservationDocumentaryExternal Cutoff Bank StatementExternal/Internal Purchase InvoiceInternal Sales InvoiceLow Client Representations Management RepresentationLetter88
17 Basic Approaches to Auditing Accounting Estimates Review and test management’s process for developing the estimate.Independently develop an estimate to compare to management’s estimate.Review subsequent events or transactions bearing on the estimate.1010
18 Functions of Working Papers Provide support for the auditors’ opinionDocument the auditors’ compliance with generally accepted auditing standards, especially the standards of field workProvide a means of assigning and coordinating audit workAid in supervising and reviewing the audit workAid in planning and conducting future audits1122
19 Types of Working Papers Audit Administrative Working PapersWorking Trial BalanceLead Schedules (Grouping Sheets)Adjusting and Reclassification Journal EntriesSupporting SchedulesAccount AnalysisReconciliationsComputational Working PapersCorroborating Documents1233
20 Types of Working Files Current files Permanent files Typically arranged and indexed around accounts in clients’ financial statementSupport current year’s audit reportPermanent filesDocument items of concern over multiple yearsProvide summary of policies and organization of clientTo preserve working papers that have little change over time.44
23 SARBOX PerspectiveSARBOX requires the creation and maintenance, for a period of no less than seven years, of audit working papers sufficient to support the audit report.Deliberate destruction of the audit documentation within the seven year period constitutes a criminal offense.
24 More on Analytical Procedures Required during planning and review stages of an auditAnalytical procedure processDevelop an expectation (amount or ratio)Vertical analysis (common-size statements)Horizontal (trend) analysisCross-sectional (industry) analysisDetermine acceptable differenceCompare actual results with expectationInvestigate significant differences