1. SPECIFIC TYPES OF AUDIT EVIDENCE

2. References ISA 505 – External confirmations
“SAICA Handbook” or IFAC website
ISA 540 – Auditing accounting estimates
ISA 520 – Analytical procedures “
It is imperative for topics relating to ISA 540 & ISA 520 that the
standards themselves are used for study purposes.

3. Learning Outcomes Explain the auditor’s responsibility relating to:
external confirmations (ISA 505)
the audit of accounting estimates(ISA 540)
the performance of analytical procedures (ISA 520)
in regard to account balances at the end of the financial year being
audited.
Describe the audit procedures that the auditor should carry out to
discharge his/her responsibility regarding:
the use of external confirmations(ISA505)
the estimates included in account balances(ISA540)
analytical procedures (ISA520)
Explain the reliability of external confirmations in a given scenario in
terms of the appropriateness of audit evidence(ISA505)

4. External Confirmations – ISA 505

5. External Confirmations
1. Introduction
– ISA505 para 2
Use of
External Confirmations
Bank information
Accounts receivable (e.g. trade debtor balances)
Investments
Inventory held by third parties
Loan amounts/outstanding debt
Documents held in safe custody
Legal matters
Title Deeds
to obtain
Audit evidence and reliability:
Source: external / internal; level of authority.
Obtained direct or indirect/by inference.
Form: documentary (paper/electronic) / verbal.
For which assertions can audit evidence be obtained through external confirmations? (i.t.o. account balances)
Existence, Rights / Obligations, Valuation and/or Completeness?

6. 2. Requirements – ISA505 para 7
2.1 When performing external confirmation; procedures:
- Control over process
- What Information?
- Confirming party?
Design request
Send
NB: obtain management permission to send beforehand

7. 2. Requirements – ISA505 para 8
2.2 If management refuses permission to confirm:
Reason? Reasonable?
Impact on risk assessment (RMM) /risk of fraud?
Alternative procedures...
Objective: must regardless, obtain sufficient appropriate
audit evidence! What if can’t?

8. 2. Requirements – ISA505 para 9
2.3 Doubts as to reliability of audit evidence from external
confirmation
Impact on risk assessment (RMM)/risk of fraud?
Alternative procedures
Evidence , then impact on audit opinion

9. 2. Requirements – ISA505 para 06
2.4 Types of External Confirmation Requests
Positive confirmation request
Respond if agree or disagree
Negative confirmation request
Respond only if disagree
Which offers more reliable audit evidence?

10. Examples Example of a bank confirmation (SAAPS 1100)
Examples of alternative audit procedures
If cannot confirm a debtor’s balance?
If cannot confirm a creditor’s balance?

11. Auditing Accounting Estimates – ISA 540

12. Auditor’s Responsibility/Objective
Introduction
– ISA 540 para 6
Definition
“An approximation of a monetary amount in the absence of a precise means of measurement.”
Examples
Auditor’s Responsibility/Objective
Allowance for doubtful debts, allowance for inventory obsolescence,warranty obligations, depreciation or asset useful life, outcome of long term contracts, cost arisng from litigation or judgements,provisions against the carying amount of the investment if recoverability uncertain
Sufficient appropriate audit evidence about:
(a) accounting estimates reasonable;
(b) related disclosures in the financial statements are
adequate.

13. Definitions – ISA 540 para 7 Other Definitions
“Auditor’s point estimate – The amount, or range of amounts, respectively, derived from audit evidence for use in evaluating management’s point estimate.” - ISA540 para7(b)
“Estimation uncertainty – The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.” - ISA540 para 7(c)
“Management bias - A lack of neutrality by management in the preparation of information” - ISA540 para 7(d)
“Management’s point estimate – The amount selected by management for recognition or disclosure in the financial statements as an accounting estimate.” - ISA540 para 7(e)
“Outcome of an accounting estimate – The actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting estimate.” - ISA540 para 7(f)

14. Nature of Accounting Estimates – ISA 540 para 2
Risk of material misstatement in accounting estimates varies:
dependent on the level of estimation uncertainty of the estimate involved, in turn dependent on:
Complexity of the business activities of the entity;
Frequency at which the estimate is made (routine/non-routine transactions);
Availability (“Observability”) of data;
Ease at which the method of measurement is applied, as
prescribed by IFRS;
“Model” used to measure the estimate.

15. Requirements – ISA 540 para 8-11
1. Risk Assessment Procedures: ID and Assess RMM
Auditor’s considerations when determining the risks associated with estimates:
The requirements of the financial reporting framework (e.g. IFRS)?
How management identifies indicators that give rise to the need for
estimates?
How does management make the estimate? On what data is it based?
The method used
Relevant controls
Whether an expert was used
Underlying assumptions
Changes in the method used from the prior period
How management has assessed the effect of estimation uncertainty 
What is the estimation uncertainty associated with the estimate?
Is there a significant risk associated with the estimate?

16. Requirements – ISA 540 para 12-14
2. Responses to the Assessed Risk of Material Misstatements
Put risk assessment into action (i.e. respond to the information obtained as per the previous slide):
Auditor determines whether:
Requirements of the applicable financial reporting framework have been applied appropriately?
Expert is needed in assisting with valuation?
Controls were in place when management made estimate?
Auditor tests whether:
Methods used by management are appropriate and have been applied consistently;
Assumptions used are reasonable;
Management’s point estimate reasonable compared to auditor’s.

17. Requirements – ISA 540 para 21-22
Indicators of Possible Management Bias
Review the judgments/decisions made by management to identify whether there are indicators of possible management bias.
Written Representations
Obtain written representations from management whether they believe significant assumptions are reasonable.

18. Analytical
Procedures
ISA 520
RO/RGO302

19. There are two ways to accumulate audit evidence.
APPLICABILITY
There are two ways to accumulate audit evidence.
Test the controls
and/or
Perform substantive tests on the transactions and the balances
Test of detail
Analytical procedures
ISA -520

20. When would we as auditors make use of ISA 520 ?
APPLICABILITY
ISA 520 para 1 and 3.
When would we as auditors make use of ISA 520 ?
1. As a substantive procedure
During an audit
For relevant , reliable evidence, as to an assertion/s
Alone/in combination with other substantive tests of detail.
To corroborate conclusions formed at the end of the audit
Suggestion of responsibility to perform in the final conclusion of
the audit
3. Risk assessment ( but this is covered by ISA315)

21. What is an analytical procedure?
ANALYTICAL REVIEW DEFINED
ISA 520 para 4.
What is an analytical procedure?
Comparison /
Relationship
Evaluation

22. Comparison/Relationship
ANALYTICAL REVIEW DEFINED
ISA 520 para 4. and A1. to A3.
Comparison/Relationship of
to other
Financial ,non financial and operating data of
Current financial
transactions/
balances
individually
aggregated
dissembled
Prior periods
Budgets
Same/similar industry
Auditors expectations
etc.

23. Comparison/Relationship
ANALYTICAL REVIEW DEFINED
ISA 520 para 4. and A1. to A3
Comparison/Relationship
This can take the form of :
Ratios
Percentages
Volumes
Averages
GP%
Payroll costs to number of employees etc.

24. Evaluation ANALYTICAL REVIEW DEFINED The auditor would need to:
ISA 520 para 4. and 5 and A15. to A21.
Evaluation
The results must be evaluated against
predetermined expectations
The auditor would need to:
Get explanations from management as to why any results differ from the expected
Corroborate these explanations
Perform further substantive tests of detail if still not satisfied

25. DESIGNING & PERFORMING PROCEDURES
ISA 520 para. 5 and A12 to A16
In designing Analytical Procedures the auditor should consider:
Suitability of actual analytical procedure
Reliability of data
Predetermined expectations
Need to determine an amount of acceptable difference based on materiality and desired level of assurance

26. material misstatement
DESIGNING & PERFORMING PROCEDURES
ISA 520 para. 5 and A6. to A10.
1.Suitability?
Degree of reliance
Of procedure for
purpose
Assessed risk of
material misstatement
Predictable

27. DESIGNING & PERFORMING PROCEDURES
ISA 520 para. 5 and A12
2.Reliability?
Preparation
Independent Source
Nature & relevance eg Not relevant if comparing to budget and budget goal driven as opposed to realistic
Comparing motor industry to banking
Comparability
Nature and relevance

28. DESIGNING & PERFORMING PROCEDURES
ISA 520 para. 5 and A15
3.Predetermined expectation!
Detection of material
misstatement
Precision of results ?
Nature & relevance eg Not relevant if comparing to budget and budget goal driven as opposed to realistic
Comparing motor industry to banking
Dissembling of information

29. EXAMPLE
A typical , basic analytical procedure that one may perform for a dairy’s sales (Financial year end 31 December)
First : Dissemble the information e.g.
Ice cream sales
Milk sales
Cream sales etc.
Second: Determine expectations e.g.
Sales increased 8% on previous year, increase occurring on 1January 2013 (management’s documented price increase policy)
Higher sales in summer and the holiday seasons
Lower sales in winter

30. EXAMPLES

31. EXAMPLE
A typical , basic analytical procedure that one may perform for a dairy’s sales
Third: Accumulate data
Fourth: Analyse data e.g. ask management why
April and May are lower than last year ?
June through to July are lower than last year ?
Fifth: Corroborate management’s reasons
Perform additional tests if necessary

32. DESIGNING & PERFORMING PROCEDURES
SUMMARY
Corroborate expectations if necessary
Predetermined Expectation!
Gather & dissemble data
Ensure data agrees to the financial records
Compare data to expectations
Determine reasons for any differences
Nature & relevance eg Not relevant if comparing to budget and budget goal driven as opposed to realistic
Comparing motor industry to banking
Corroborate reasons

33. END
THANK YOU!
BAIE DANKIE!
ENKOSI KAKHULU!