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The Elements of Auditing
Types of Audit Evidence Real Evidence – Physical (eg. building, inventory) – Nonphysical (eg. goodwill, rights) Documentary Evidence – External Direct (eg. confirmation) Indirect (eg. bank statements) – Internal (eg. sales invoice) Circumstantial Evidence (eg. internal control, management motivation, ratio analysis, economic environment)
Auditing Procedures Physical Examination Confirmation Inspection Vouching Tracing Reperformance Scanning Inquiry Observation Analytical Procdures
Evidential Matter UNDERLYING ACCOUNTING DATA – books and records of original entry – general and subsidiary ledgers – related accounting manuals – spreadsheets support cost allocations, computations, reconciliations, etc. CORROBORATING INFORMATION – internal and external documents – confirmation and other representations – information from inquiry, observation, inspection and examination – other information developed or obtained by auditor
Financial Statement Assertions
Financial Statement Assertions (continued)
Components of Audit Risk Inherent Risk Control Risk Detective Risk AR = IR x CR x DR
Types of Audit Tests n Compliance Tests (Tests of Controls) (Tests of Controls) –Design –Operating effectiveness n Substantive Tests –Analytical procedures –Tests of details of transactions or balances
Overview of Audit n Understanding the client n Understanding the internal control structure n Tests of transactions n Direct tests of balances n Completion and review
Work Papers: Function n Facilitate audit planning and supervision n Document the audit procedures performed n Demonstrate sufficient competent audit evidence obtained to form opinion
Work Papers: Content PERMANENT FILES n n History of company n n Organization structure of company n n Fixed asset file CURRENT FILES n n Audit program n n Working trial balance n n Lead schedule n n Account analysis n n List or trial balance n n Reconciliation schedule n n Comparison schedule n n Procedure description or results
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