Audit procedure and standard 500

audit procedure and standard 500

1. Auditing Name: Haris Shahid Sap ID : 7355

2. Audit Procedure S teps performed by auditors to get all the information regarding the quality of the financials provided by the company, which enable them to form an opinion on financial statement whether they reflect the true and fair view of organization financial position. They are identified and applied at the planning stage of the audit after determining audit objective, scope, approach, and risk involved.

3. Audit Procedure Methods Substantive Audit Procedures: Substantive procedures are processes, steps, tests performed by auditors C reates conclusive evidence regarding accuracy, completeness, existence, disclosure, rights, or valuation of assets/ liability, books of accounts or on  financial statement.

4. Analytical Audit Procedures: Analytical procedures can be defined as tests/ study/ evaluations of financial information through analysis of plausible relationships among both financial and non-financial data . In simple language, certain checks/tests conducted by auditor based on study/ knowledge/ previous year figures to check and form an opinion on financial statements. Depending on the audit area, the analytical audit procedure may differ.

5. Types of Audit Procedures Inspection : Inspection is the most commonly used method. Under this auditor checks every transaction/ document as against written steps, procedures so as to ensure accuracy. Observation: Under this technique of audit, the auditor usually tries to inspect others doing performing a particular process. For e.g. an auditor may observe steps followed in processing GRN  against goods purchased. Confirmation: This type is applied to ensure the correctness of financial statement either from internal sources within auditee organization or from external sources. Recalculation: Under this audit method, the auditor usually crosses checks information presented by the client. This is generally used in case of checking mathematical accuracy. Re-performance : Using this procedure, the auditor re-perform entire process is performed by the client so as to find out gaps, audit findings, etc.

6. Reliability on audit evidence standard 500 A31 . The reliability of information to be used as audit evidence, and therefore of the audit evidence itself, is influenced by its source and its nature, and the circumstances under which it is obtained, including the controls over its preparation and maintenance where relevant. Therefore , generalizations about the reliability of various kinds of audit evidence are subject to important exceptions. Even when information to be used as audit evidence is obtained from sources external to the entity, circumstances may exist that could affect its reliability.

7. While recognizing that exceptions may exist, the following generalizations about the reliability of audit evidence may be useful: The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. 
 The reliability of audit evidence that is generated internally is increased when the related controls, including those over its preparation and maintenance, imposed by the entity are effective. 
 Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control). 
 Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed).

8. AUDIT TECHNIQUES---SA 500 Audit techniques stand for the methods that are adopted by an auditor to obtain evidence. Audit evidence – Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records Underlying the financial statements and other information. Appropriateness (of audit evidence) – The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

9. Inspection of Records Internal or external documents in paper form, electronic form, or other media forms Two issues: Reliability of records or documents Internal & external documents Relationship to specific assertions o Occurrence and completeness assertions o Direction of testing

10. Observation Procedures performed by others Processes that do not leave an audit trial Ex: entities personnel & control activities Limitations: Point in time Unreliable

11. Inquiry Consists of seeking information of knowledgeable persons throughout the entity or outside the entity Helps to identify the outside environment An inquiry alone does not provide sufficient audit evidence Can be very informal

12. Confirmation The process of obtaining information directly from a third party Must be written requests from the third party Helps provide reliable evidence of existing assets Example: an auditor can send a confirmation to a consignee to verify that a client’s inventory has been cosigned

13. Recalculation Checking the mathematical accuracy of documents or records May use electronic file forms Includes reconciling subsidiary ledgers and testing postings from the journal ledgers Since the auditor calculates this evidence it is viewed as reliable

14. Reperformance Definition in AU 326.39: “Reperformance is the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of CAATs *, …” Example: Re-performing the aging of accounts receivable Highly reliable audit procedure since the independent auditor creates the evidence

15. Analytical procedure Definition in SAS No. 56: “For the purposes of generally accepted auditing standards, the term analytical procedures means evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.” 􏰀 Auditor compares special data with the financial data and attempts to gather evidence by examining the plausibility of the results Examples : Comparing revenue and costs of materials of different financial years Comparing personnel costs and the number of employees of different financial years

16. Relevance and Reliability Relevance deals with the logical connection with, or bearing upon, the purpose of the audit procedure and, where appropriate, the assertion under consideration. The relevance of information to be used as audit evidence may be affected by the direction of testing. The reliability of information to be used as audit evidence, and therefore of the audit evidence itself, is influenced by its source and its nature, and the circumstances under which it is obtained, including the controls over its preparation and maintenance where relevant.