Neway-Auditing principle-I-chapter-4-PPT.pdf

Auditing procedures and principles one for exit exam reading and the best PowerPoint presentation

1. Audit Responsibility, Objectives,
Evidence and Recording the Audit
ISA:-240, 250, 260, 265, 230, 500, 501,505
CHAPTER FOUR

2. Definition of Audit evidence
Auditevidencereferstothenecessaryinformation
thatanauditorgathersinordertoformacredible
opinionontheassertionsbytheclient’smanagement
thatareinherentinthefinancialstatements
Suchevidencewillthereforeoftenincludeinformation
relatingtocompleteness,reliabilityandaccuracytothe
recordedvalueofassets,liabilitiesandequityofthe
clientbusinessentity
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3. Cont’…
Followingaresomeexamplesofauditevidences:
Intheclientacceptance/rejectionstage,auditevidencewill
includeinformationthatwillenabletheauditorto
determinewhethertoacceptorrejectanentityasaclient.
Intheauditplanningstageauditevidenceincludes
informationthatwillenabletheauditortodeterminethe
auditapproachsuchasinformationrelatingtothelikely
effectivenessofparticularinternalcontrolprocedures.
Inthecontroltestingstage,auditevidenceincludes
informationthatwillassisttheauditorindetermining
whetherornotinternalcontrolsareeffectiveintheir
operation,suchasinformationastowhetheraparticular
controlprocedureisorisnotsupervised.
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4. Cont’…
Inthesubstantivetestingstage,auditevidence
includesinformationastowhetheraparticular
accountbalanceiscomplete,validandaccurate,such
asevidencethattheassetactuallyexists.
Intheopinionformulationstage,auditevidence
includesinformationrelatingtothecompleteness,
validityandaccuracyoffinancialstatementsasa
whole,suchasinformationrelatingtoconsistencyof
thefinancialstatementswiththeauditor’sknowledge
ofthebusiness.
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5. Cont’….
Amajordecisionfacingeveryauditorisdeterminingthe
appropriatetypesandamountofevidencetoaccumulate
tobesatisfiedthatthecomponentsoftheclient’sfinancial
statementsandtheoverallstatementsarefairlystated
Theauditor’sdecisionsonevidenceaccumulationcanbe
brokenintothefollowingsubdivisions:
Whichauditproceduretouse?
Whatsamplesizetoselectforagivenprocedure?
Whichitemstoselectfromthepopulation?
Whentoperformtheprocedures?
5

6. Cont’….
Auditprocedures:auditprocedureisthedetailed
instructionforthecollectionofatypeofaudit
evidencethatistobeobtainedatsometimeduringthe
audit
Samplesize:onceanauditprocedureisselected,itis
possibletovarythesamplesizefromonetoallthe
itemsinthepopulationbeingtested
Thesamplesizeforanygivenprocedureislikelyto
varyfromaudittoaudit
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7. Cont’…
Itemstoselect:afterthesamplesizehasbeen
determinedforanauditprocedure,itisstillnecessary
todecidewhichitemsinthepopulationtotest
Iftheauditordecides,forexample,toselect200
checksfromapopulationof6,600checksstubsfor
comparisonwithcashpaymentsjournal
severaldifferentmethodscanbeusedtoselectthe
specificcheckstobeexaminedlike(a)aweekand
examinethefirst200checks,(b)select200checks
fromthelargestamounts,(c)selectthechecks
randomly,or(4)selectthosechecksthattheauditor
thinksaremostlikelytobeinerror
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8. Cont’….
Timing:thetimehorizonforfinancialstatementsusually
coversaperiodsuchasayear,andanauditisusually
notcompleteduntilseveralweeksormonthsafterthe
endofthefiscalperiod
Intheauditoffinancialstatementstheclientnormally
wantstheauditcompletedonetothreemonthsafter
theyearend
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9. Evidence Related to F/S assertions
Theconformityofaclient’sfinancialstatementstoGAAPis
judgedaccordingtofivedifferentfinancialstatement
assertions:existenceoroccurrence,completeness,rightsand
obligations,valuationorallocation,presentation,and
disclosure
ExistenceorOccurrence:existencerelatestobalance
sheetaccounts.Didtheassets,liabilities,andequitywhich
appearonthebalancesheet,equallyexistonthebalance
sheetdate?
Occurrenceontheotherhand,relatesincomestatement
accounts.Didthetransactionsgivingrisetotherevenueand
expensesactuallyoccurduringtheperiodcoveredbythe
incomestatement?
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10. Cont’….
Anotherwayofexpressingthisassertionistosay
‘noneoftheaccountsonthebalancesheetorincome
statementsareoverstated
Theexistenceoroccurrenceobjectiveismost
importantwithregardtoassetsandrevenues
Overstatingthosetwotypesofaccountsmakesthe
client’sresultslookbetter
Theclientwillhavelessbenefittooverstateliabilities
orexpenses,exceptperhapswhenpresentingfinancial
statementstothetaxauthorities
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11. Cont’…..
Completeness:completenessrelatedtobothbalance
sheetandincomestatementaccounts
Anotherwayofexpressingthisassertionistosay
‘noneoftheaccountsonthebalancesheetorincome
statementsareundervalued
Thecompletenessobjectiveismostimportantwith
regardtoliabilitiesorexpenses.Understatingthose
twotypesofaccountsmakestheclient’slookbetter.
Theclientwillhavelessincentivetounderstateassets
orrevenues,exceptperhapswhenpresentingfinancial
statementstothetaxauthorities
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12. Cont’…
RightsandObligations:thisassertionsaysthatthe
clienthaslegalrightstoallitsassetsandlegal
obligationstoallitsliabilities
Thisassertionisespeciallyimportanttoassets
physicalexistenceontheclient’spremisesdoesnot
necessarilymeanownership
Forexample,equipmentmaybeleasedtothebusiness,
orinventoriesmaybeconsigned.
Obligationmaybeofgreaterconcerninasmall
businesswheretheownermaylistsomeofhis/her
personalliabilitiesasliabilitiesofthebusiness
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13. Cont’…
ValuationorAllocation:Valuationismoreconcern
forbalancesheetaccounts.Forexample,havethe
fixedassets,receivables,andinventoriescorrectly
valuedbasedonthestandards?
Allocationhasmoretodowithincomestatement
accounts
Suchas,haverevenuesandexpensesbeenallocatedto
theproperperiodaccordingtothematchingprinciple?
Havefactoryoverheadcostsbeenallocatedtoproducts
ininventoryratherthanchargedasexpenses?
13

14. Cont’….
PresentationandDisclosure:presentationhastodo
withclassificationoftheaccountsonthefinancial
statements.Forinstance,areinventoriesforsale
presentedascurrentassets?Arebondspayable
presentedaslong-termliabilities?
Whereas,disclosurereferstothenotestothe
financialstatements
Havesignificantaccountingpoliciesbeenexplained?
Havecontingentliabilitiesbeennoted?
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15. Sufficient &competent evidential matter
Thefollowingaresomeoftherequirementstobethe
auditevidencepersuasiveorconvincing:
1.Sufficiency:
Sufficiencyisthepresenceofenoughfactualand
convincingevidencetosupporttheauditor’sfindings,
conclusions,andrecommendations
2.Competence:
Tobecompetent,evidenceshouldbevalidandreliable.
Inevaluatingthecompetenceofevidence,theauditors
shouldcarefullyconsiderwhetherreasonsexisttodoubt
itsvalidityandcompleteness.
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16. Cont’…..
3.Quality:
Competenceofevidencealsorelatedtoitsquality.
Evidenceissaidtobecompetentifitisbothvalidandrelevant
Factorsthataffectthequalityofevidence.
Thesourceoftheauditevidence:evidencesobtainedfrom
independentsourcesoutsidetheclientaremorereliablethan
evidencesobtainedfromtheclient
Thestrengthoftheclient’sinternalcontrol:thequalityand
reliabilityofauditevidenceincreasesiftheclienthasstrong
internalcontrol
Theabilityoftheauditortogatherfirsthandinformation:
informationobtainedbyauditorsthroughpersonalobservation,
computationorusingothertechniquesincreasesthereliabilityof
evidences
16

17. Cont’….
4. Relevance: Relevance refers to the relationship of
evidence to its usethat is, consistent with the audit
objectives
To be the audit evidence relevance, the audit procedure
should directly related with the audit objective
For instance evidences obtained by direct observation are not
relevant to check the ownership of the client’s assets OR
evidences obtained by inspection of documents are not
relevant to test the physical existence of the clients assets
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18. Types of audit evidence
Auditevidenceiscategorizedasfollows:physical,
documentary,testimonial,andanalytical
1.Physicalevidence:isobtainedbydirectinspectionor
observationlikeactivitiesofpeople,existenceofproperty,or
events.Suchevidencemaybedocumentedintheformof
Memorandasummarizingthemattersinspectedorobserved,
Photographs,Charts,Maps,andActualsamples.Suchevidences
areusefulfortheauditortoverifythephysicalexistenceofassets.
2.Documentaryevidence:thedocuments,forms,journals,or
reportsmayoriginatewithintheclientorganizationormaycome
fromaninternalsource.Examplesareletters,contracts,charts,
regulations,budgetinformation,accountingrecords,and
managementinformationperformance&othersupporting
documents
18

19. Cont’…
Documentaryevidencesareusefulfortheauditorstocheckthe
reliabilityofauditevidencesobtainedbythethem
Threecategoriesofdocumentaryevidencesdependingon
theirsourceandreliability:
A.Documentaryevidencecreatedoutsidetheclient
organizationandtransmitteddirectlytotheauditors
suchasconfirmationletter;
B.Documentaryevidencecreatedoutsidetheclient
organizationandheldbyclientsuchasbank
statements,vendors’invoicesandstatementsofnotes
receivable,contractsnotesreceivables,contracts,
customer’spurchaseorders,stockandbondcertificates
and
C.Documentaryevidencecreatedandheldwithinthe
clientorganizationsuchassalesinvoices,shipping
notices,purchaseorder,receivingreportsandcredit
memorandaandpaidcheck
19

20. Cont’….
3.Testimonialevidences(inquiry):-areevidencesobtained
fromothersthroughstatementsreceivedinresponseto
inquiryorthroughinterviews
4.Evidencefromanalyticalprocedures:analyticalevidence
istheresultofanalysisandverification
AuditorscancompareandcontrastvariousF/Sdata
Exampleofanalyticalproceduresincludecomparisonof
revenueandexpenseamountsforthecurrentyeartothose
ofpriorperiods,toindustryaverages,tobudgetedlevels,
andtorelevantnonfinancialdata
Inadditiontotheabovementionedtypesofevidence,
auditorsmayobtainevidencefromspecialistssuchas
geologists,engineers,attorneys,etc.forperformanceof
auditinareasthatdorequirehighlyspecializedknowledge
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21. Audit Evidence gathering Techniques
Thevariouswaysofevidenceaccumulationtechniquesarediscussed
below
A.Physicalinspection:theauditormayphysicallyinspectorobservethe
actualexistenceofcertainassetsorhe/shecanobserveinwhatwaythe
client’semployeesperformtheirdutiesandresponsibilities
B.Examinationofdocuments:theauditormaycollectrelevantdataby
examiningrelateddocumentstocheckownershipofassetsorthe
happeningoftransactions
Examinationofdocumentscanbeperformedthrough:
Vouching:-examiningdocumentsstartedwiththerecordedtransactions
(journals,ledger,F/S)backtosourcedocuments,calledtestof
occurrence.
Tracing:-determiningwhethersourcedocumentshavebeenproperly
recordedintheaccountingrecords,calledtestofcompleteness
Scanning:-verifyingdocumentsthroughquickorselectivereadingofthe
recordeddocumentsoftheclient.
Mechanicalaccuracy:-arechecksofworkperformedbyotherssuchas
verifyingclientcomputationsofthebalanceofaccounts.Forexample,re
calculatingthebalanceofA/P,A/R,cash,etc.
21

22. Cont’…
C.Questionnaires(Inquiry):Theauditorcancollectrelevant
informationthroughpreparingquestionnairesfromrelated
employees
D.Confirmationletter:Theauditormayobtainevidencesthrough
confirmationfromthethirdpartiessuchasbanks,debtors,and
creditorsaboutthebalanceofsomeaccounts.Therearetwo
confirmationletters-positiveandnegative.
Positiveconfirmationletter:-ispreparedwhentheclientasks
his/heroritsbusinessassociatessuchasbanks,creditors,ordebtors
togiveresponsetotheauditorwhetherornotthebalanceofthe
concernedaccountissimilarordissimilar.Forinstance,theclient
mayaskthecreditoraboutthesimilarityordifferenceinthe
balanceofAccountsReceivableandtogivearesponsetothe
auditorfortheauditor’saddress
Negativeconfirmationletter:-ispreparedwhentheclientasks
itsbusinessassociatestogivearesponsetotheauditoronlyifthere
isdifferenceinthebalanceofaccounts
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23. Cont’…..
E.Analyticalreview:theauditorcancomputesignificant
ratios,carryoutatrendanalysisorcompareandcontrast
differentaccountingdatainordertogathernecessary
evidenceforhis/heraudittask
Thecomparisonmaybebetweencurrentandpastdata,
currentandanticipated(budgeted)data,company
informationandindustryaverage,orcurrent
informationwithcurrentinformation
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24. Audit documentation
Duringthecourseofaudit,auditorsshouldmaintain
allrelevantdocumentsandrecordsintheformofboth
hardandsoftcopycalledauditworkingpapers
Auditworkingpapersarethosepaperswhichcontain
essentialfactsaboutaccountswhichareunderaudit
Theauditworkingpaperscontainsthefileofall
analysis,summaries,comments,andcorrespondence
builtupbytheauditorsduringthecourseofthe
fieldworkofanauditengagement
Itisthedutyofauditorstomaintainauditworking
papersastheysupporttheauditreport
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25. Theauditworkingpapersprovidethefollowingpurposestothe
auditor:
Toshowtheextenttowhichaccountingprinciplesandauditing
standardshavebeenadhered.
Toprovideessentialsupportfortheauditors’opinionincluding
evidencethattheexaminationwasconductedinaccordancewith
GAAS
Torevealhowtheworkwasperformedbytheauditstaffandthus
helpstotheauditorsinforminganopinionabouttheirefficiency
Toassistauditorsinjustifyingtheirpositionagainstcriticismand
canbeserveaslegalevidenceifthelegalactionisbroughtagainst
theauditorsduetonegligenceinperformingtheauditwork
Helpauditorsinfinalizingtheauditreportwithoutmuchdelay
Theyenabletheauditorstoknowtheweaknessoftheinternalcheck
systeminoperationandtheinefficiencyoftheaccountingsystem,if
any
Theyserveasaguidetotheauditorsforauditsofthesameclientin
thesucceedingyears
25

26. Cont’…..
Workingpapersshouldbecarefullypreparedastheyarethe
basesofconclusionsandsummarizationsshownbytheauditorin
his/herreport
Eachcompleteworkingpapershouldbesignedanddatedbythe
personsperformingtheworkandwillhelpinfixing
responsibilities
Theyshouldbeproperlyorganized,arranged,anddocumented
Workingpapersshouldbestored/filed/inasecureplaceand
protectedfromunauthorizeduse
Currenttechnologyallowsforworkingpaperstobestored
electronicallyoncomputers,CDS,flash,etc.
Workingpapersshouldbestoredforaslongastheauditorhasa
potentialliabilityforthefinancialstatementopinions,whichthe
workpaperssupport
26

27. Cont’….
Generalworkingpaperspreparationguidelines
Workingpapersmustbeclean,neat,andlegible
Allquestionsandexceptionsnotedintheworkingpapers
shouldberesolved,hopefullybeforetheendofthefield
work,andcarefullybeforethereportisissued.
Onlystatementsoffactandprofessionaljudgmentshould
appearontheworkingpapers.
Bracketsshouldbeusedtoshownegativenumbersinstead
ofredink.
Timeshouldbeeconomizedasmuchaspossibleinthe
preparationofworkingpapers
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28. Cont’….
Ownership of working papers
Apertinentquestionarisesastowhomtheownerof
theseworkingpapers
Theauditorclaimsthepossessionongroundsthat
he/shehascollectedtheinformationforthepurposeof
discharginghis/herduties
Thesepaperscanbeproducedbytheauditortodefend
him/herselfattimeswhenthereisanylegalclaim
Assuch,theseworkingpapersshouldnotbehanded
overtotheclientevenaftertheauditceased
28

29. Cont’….
Ontheotherhand,theclientclaimsthatsincetheauditor
actasitsagent,he/shehasnorighttokeepthesepapers
withhim/her
Inthefirstcase,itwasheldthattheworkingpapers
belongingtotheauditorbecausetheywereindependent
contractsandnotagentoftheclient
Inthesecondcase,itwasheldthattheworkingpapers
preparedbytheauditorforthesolepurposeofproducing
financialstatementsbelongedtotheauditorandnottothe
client.
Itcantherefore,beconcludedthattheworkingpapers
preparedbytheauditororhis/herstafftocarryoutthe
assignmentsarehis/herpropertyandtheclienthasnoclaim
onsuchpapers
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30. Cont….
Auditworkingpapersareconfidentialinnature
Theinformationcollectedbytheauditororhis/her
staffshouldnotbeexposedtoanyunrelatedparty
otherthanhis/herclientwithouttheconsentofhis/her
clientorotherwisethanasrequiredbyanylawforthe
timebeinginforce
30