Process
of Assurance: Evidence and Reporting
BSA 500: Evidence
Definition
All of the information used
by the auditor in arriving at the conclusions on which audit opinion
is based.
Audit Evidence includes:
•
all
the information contained within the accounting records underlying the
financial statements and
•
other
information gathered by the auditors
Importance
The evidence gathered by
auditors, to enable to express an opinion of reasonable assurance on financial
statements.
Audit requires a reasonable
level of assurance to be given and correspondingly detailed audit evidence
needs to be obtained.
In a lower level of assurance
engagement, less evidence will be required to support the conclusion.
Management
is responsible for the preparation of
financial Statements that give true and fair view, but what does it
really mean?
For each item in the financial
statements, management is making assertions
Assertions like:
Ø
PPE
is owned by the company
Ø
The
receivable rely do owe us this money and will pay fairly soon
Ø
The
payroll expenses was for the company’s genuine employees working on the
company’s business
Procedures to gather Audit
Evidence
To express a professional
opinion, the auditors need to gather evidence from various sources.
There are potentially two types of test which they will carry
out:
•
tests
of controls
and
•
substantive
procedures.
Tests of Controls
Performed to obtain audit
evidence about the effectiveness of controls in preventing,
or detecting and correctingmaterial misstatements at the assertion
level.
When the auditors carry out
test of controls, they are seeking to rely on the good operation of the control
system that the company has in place to draw a conclusion that the financial
statements give a true and fair view.
To Test “Test of Control”:
Auditor must use inquiry along
with Re-performance, Recalculation and Inspection
Substantive Procedures
Audit procedures
performed to detect material misstatements at the assertion level. They
include:
•
Tests
of detail of classes of transactions, account balances and disclosures.
•
Substantive
analytical procedures.
•
When
the auditors carry out substantive procedures, they are testing whether
specific items within balances or transactions in the financial statements are
stated correctly. BSAs require that the auditors must always carry out some
substantive procedures, because the limitations in internal control systems
mean that the control system can never be fully relied on.
What kind of Audit Evidence
requires?
Auditors require sufficient
appropriate audit evidence to be able to draw reasonable conclusions on
which to base the audit opinion.
Sufficiency and appropriateness
are interrelated and apply to both tests of controls and substantive
procedures.
Ø
Sufficiency
is the measure of the quantity of audit evidence.
Ø
Appropriateness
is the measure of the quality or reliability of the audit evidence.
Auditor must always carry out
substantive procedures on material items
Quantity of Audit Evidence
Depends on the level of
assurance being offered in an engagement.
q
The
quantity of audit evidence required is affected by the level of risk in the
area being audited. It is also affected by the quality of evidence obtained.
q
If
the evidence is high quality, the auditor may need less than if it were poor
quality.
q
Obtaining
a high quantity of poor quality evidence will not cancel out its poor quality.
Quality of Audit Evidence
|
External
|
Audit evidence from external
sources is more reliable than that obtained from the entity’s records.
|
|
Auditor:
|
Evidence
obtained directly by auditors is more reliable than that obtained indirectly
or by inference.
|
|
Entity
|
Evidence obtained from the
entity’s records is more reliable when related control systems operate effectively.
|
|
Written:
|
Evidence in the form of
documents (paper or electronic) or written representations are more reliable
than oral representations.
|
|
Originals
|
Original documents are more
reliable than photocopies or facsimiles.
|
Financial Statement Assertions
The financial statements
assertions are representations by management, explicit or otherwise,
that are embodied in the financial statements.
The auditor should use assertions
for
§
classes
of transactions
§
account
balances and
§
Presentation&disclosures
Assertions about classes of
transactions and events for the period under audit
|
Occurrence
|
Transactions and events that
have been recorded have occurred and pertain to the entity.
|
|
Completeness
|
All transactions and events
that should have been recorded
|
|
Accuracy
|
Amounts and other data
relating to the recorded transactions and events have been recorded
appropriately
|
|
Cut-off
|
Transactions and events have
been recorded in the correct accounting period.
|
|
Classification
|
Transactions and events have
been recorded in the proper accounts.
|
Assertions about account
balances at the period end
|
Existence
|
•
Assets,
liabilities and equity interests exist.
|
|
Rights and Obligations
|
The
entity holds or controls the rights to assets, and liabilities are the obligations
of the entity
|
|
Completeness
|
All assets,
liabilities and equity interests that should have been recorded
|
|
Valuation and
Allocation
|
Assets,
liabilities and equity interests are included in the financial statements at
appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded
|
Assertion about presentation
and disclosure
|
Occurrence and
Right & Obligations
|
Disclosed events,
transactions and other matters have occurred and pertain to the entity.
|
|
Completeness
|
All
disclosures that should have been included in the financial statements have
been included.
|
|
Classification
and Understandability
|
Financial
information is appropriately presented and described and disclosures are
clearly expressed.
|
|
Accuracy and
Valuation
|
Financial and
other information are disclosed fairly and at appropriate amount.
|
Audit procedures for obtaining
Audit Evidence
1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Re-performance
6. Analytical Procedures
7. Inquiry
Inspection
Inspection involves examining
records or documents, whether internal or external, in paper form,
electronic form, or other media or a physical examination
of an asset. An example of inspection used as a test of controls is
inspection of records for evidence of authorization. Inspection
of tangible assets may provide reliable audit evidence with respect to their existence,
but not necessarily about the entity’s rights and obligationsorvaluations
of assets.
Observation
Observation consists of looking
at a process or procedure being performed by others. Examples include
observation of the counting of inventories by the entity’s
personnel and observation of the performance of control activities.
External Confirmation
An external confirmation represents
audit evidence obtained by the auditor as a direct written response to
the auditor from a third party (the confirming party), in paper form,or
by electronic or other medium. For example, the auditor may ask
direct confirmation of receivables by communication with debtors.
Recalculation
Recalculation consists of checking
the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
Re-performance
Re-performance involves the
auditor’s independent execution of procedures or controls
that were originally performed as part of theentity’s internal
control.Recalculation may be performed manually or electronically,
for example, re-performing the ageing of accounts receivable.
Analytical Procedures
Analytical procedures consist
of evaluation of financial information through analysis of plausible relationships
among both financial and non-financial data. Analytical
procedures also encompass such investigation of identified
fluctuations or relationships that are inconsistent with other
relevant information or that differ from expected
Inquiry
Inquiry consists of information
of knowledgeable persons, both financial and non-financial,
within the entity or outside the entity. Inquiry is
used extensively throughout the audit in addition to other audit procedures.
Inquiries may range from formal written inquiries to informal oral
inquiries. Evaluating responses to inquiries is an integral part
of the inquiry process.
BSA 700: Reporting
•
The
Independent Audtor’s Report on a complete set of General Purpose Financial
Statements
- Audit Report
1.1.
Unmodified Report
1.2.
Modified
1.2.1.
Emphasis
of matter
1.2.2.
Qualified
Report
1.2.2.1.
Based
on Scope Limitation
1.2.2.2.
Based
on Disagreement
1.2.3.
Disclaimer
of Opinion
1.2.4.
Adverse
Opinion
|
Material
& Pervasive
|
Scope
Limitation
|
Disagreement
|
|
Less
|
Qualified: Except
for
|
Qualified:
Except for
|
|
More
|
Disclaimer
|
Adverse
|
Basic Elements/ Contents of the
Auditor’s Report
The auditor’s report includes
the following basic elements ordinarily in the following layout:
|
Title
|
What kind of
report
|
|
Addressee
|
Report to whom
|
|
Introductory
Paragraph
|
Identification of the
Financial Statements audited
A statement of the
responsibility
|
|
Scope Paragraph
|
A reference to the BSAs or
relevant national standards or practices
A description
of the work the auditor performed
|
|
Opinion Paragraph
|
Reference
to the financial reporting framework used to prepare the financial statements
An expression of
opinion on the financial statements
|
|
Date of the report
|
Date of the
signed by auditor
|
|
Auditor’s Address
|
Address of the
firm
|
|
Auditor’s
Signature
|
Who is
responsible for ie: Audit Firm
|
Expectation Gap
The expectation gap is defined
as the difference between the apparent public perceptions of the
responsibilities of auditor’s on the one hand and the legal and professional
reality on the other.
This definition is not
definitive. But some issues can be
highlighted.
Misunderstanding
of the nature of audited financial Statements.
§
The
financial position provides a fair valuation of the reporting entity
§
The
amounts in the financial statements are stated precisely
§
The
audited financial statements will guarantee that the entity concerned will
continue to exits
Misunderstanding
as to the type and extent of work undertaken by auditors.
§
All
items in financial statements are tested
§
Auditors
will uncover all errors
§
Auditors
should detect all fraud
Misunderstanding
about the level of assurance provided by auditors
•
The
auditors provide absolute assurance that the figures in the financial
statements are correct.
Thank
You
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