Auditing &

Investigations II

Introduction to Audit Evidence

Key issues

 Audit Strategy
Audit Strategy

 Risk based auditing

 Balance Sheet Based

 Directional Testing

 Analytical Procedures
 Risk based Approach
 This approach is linked to the audit risk based
models.

 The auditor assesses the level of inherent and control

within the audit.

 The strategy enables the auditor to select techniques

which target the items in the financial statements
which are most likely to be misstated.

 The approach has the advantage of focusing the

auditor on the root causes of risk (e.g. business risks)
and allow the auditor to gain greater understanding
of the business.
Balance Sheet based
 This approach work on accounting
assumptions.

 Profit of the year is difference between two

balance sheet.

 Therefore, the auditor should focus on

validating balance sheet figures at the end of
the year.

 This approach tend to be used on small

businesses.
 The approach require a lot of substantive
testing
Directional Testing
 Is an approach that recognises that the direction of that
test sets the conclusion that can be drawn from the
results of the test.

 E.g. test one document after the other. Double entry

system.

 For example, checking from purchase ledger o invoice

will provide evidence that the ledger entries are
accurately recorded.

 Directional testing tend to be used within transaction

cycles.

 Advantage of Directional testing is that audit work will

focus on the risks associated with the individual balance.
Analytical Procedures
 The approach is most widely used throughout the audit by
focusing on relations between comparable items.
 The approach can be used at: (a) planning stage; (b)
substantive procedures and (c) Review stage.

The focus is to identify:

 Consistencies and predicted patterns

 Significant fluctuations and unexpected relationships.

The main focus of the audit will be to investigate fluctuations

and unexpected results by looking at:
 Legitimate business reasons
 Errors
 Deliberate falsifications
Views of Audit Evidence
Need for audit evidence
 Basis for reaching an opinion;

 Confirmation that audit procedures have been carried

out.

 Compliance with ISA500

 Basis for considering whether relevant facts have been

considered in the audit process.

 Facts for supporting conclusions on assertions that be

made on the financial statements.
Methods of obtaining audit
evidence
According to ISA500, evidence can be obtained through:

 Inspection – involves physical inspection of assets.

 Observation - involves observation of procedures such as

attendance at the inventory count.

 Enquiry and Confirmation involves information obtained

orally or in writing from persons inside or outside the
enterprise.

 Computation involves checking the arithmetical accuracy

of accounting records.

 Analytical Procedures involves ratio analysis on financial

statements.
Sources of Audit Evidence
 Management representation – oral testimonies or
representation by management which tend to be
form of letters or reports.

 Work of experts – reports of expert who will have

performed tasks in a areas that required highly
qualified people.

 Internal audits – reports of internal audits

 Company records – these could financial statement

or accounting records.

 Accounting Processes – steps taken in processing

transactions.
Question/Exercise

Can you identify the method

(s) that could be used to
obtain evidence in each of
the sources in the slide
below?

(10 Minutes)
Questions
Sources Methods

Management Representation

Work of an expert

Internal Audits

Company records

Internal Controls Systems

Accounting process
Financial Statement Assertion
Financial statement assertions (proclamation)
are the representations made by the directors in
relation to an account item or a class of
transactions that are embodied in the financial
statements.
Assertion that can be made by directors:
 Existence: an asset or a liability exists.
 Rights and obligations: an asset or a liability
pertains to the entity.
 Occurrence: a transaction took place
pertaining to the entity.
 Completeness: there are no unrecorded
assets, liabilities, transactions or events.
 Valuation: an asset or liability is recorded at
an appropriate carrying value.
Financial Statements
Assertion
 Measurement: a transaction is recorded at the
proper amount and the revenue or expense is
allocated to the proper period.

 Presentation and disclosure: disclosure and

classification are in accordance with the
applicable reporting framework (eg IASs, IFRSs)
Auditors Assertions
 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 have been
recorded.
 Accuracy: Amounts and other data relating
to 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.
 Audit of Small Entities
 The auditor is likely to find less sophisticated
internal control systems in smaller entities, to carry
out more substantive testing and less compliance
testing than in an audit of a larger entity.

 However audit evidence should still be able to be

gathered to support all the financial statement
assertions.

 IAASB has issued an International Auditing Practice

Statement IAPS 1005 The special considerations in
the audit of small entities to provide guidance to
auditors in carrying out the audit of small businesses
in accordance with ISAs.
Auditing Accounting
Estimates
 Financial statements contain a number of items that
are subject to the judgement of the directors and
cannot be measured precisely.

 E.g. Inventories, receivables and depreciation.

 “Accounting estimate” means an approximation of

the amount of an item in the absence of a precise
means of measurement”

 Directors and management are responsible for

making accounting estimates included in financial
statements
ISA540 – Audit of Accounting
Estimate
 ISA 540 sets out the rules of good practice which
requires that:

 “The auditor should obtain sufficient

appropriate audit evidence regarding accounting
estimates.”
Audit Procedures
ISA540 requires that
 “The auditor should adopt one or a combination
of the following approaches in the audit of an
accounting estimate:

A. review and test the process used by

management to develop the estimate;

B. use an independent estimate for comparison

with that prepared by management; or

C. review subsequent events which confirm the

estimate made.”
 Review and testing the process
used by management

(a)evaluationof the data and

consideration of the assumptions on
which the estimate is based;
(b)testingof the calculations involved in
the estimate;
(c)comparison, when possible, of
estimates made for prior periods with
actual results of those periods; and
(d)consideration
of management’s
review and approval procedures.
Evaluation of the results of
audit procedures

 thereasonableness of the
estimate.
 consistency with other evidence.
 anysignificant differences
between management’s
estimates and audit evidence.
 theimpact of any differences
individually and cumulatively.
ISA 402 – Service
organisations
 Many businesses employ or outsource
specialist organisations to carry out
special tasks.

 E.g. Payroll processing, Accounting

services, Share registration services for
shares listed on a Stock Exchange.

 ISA provide guidance to auditors on how

to deal with outsourced services from a
risk perspective.
ISA 402 – audit issues

“The auditor should

determine the
significance of service
organisation activities
to the client and the
relevance to the audit.”
Procedures and Collecting
audit evidence

 Inspection of records.
 Assessing controls.
 Obtaining representations on
transactions and balances and
any assets or documents held
as custodian.
 Performing analytical review on
records or returns made by the
organisation.
Continued

 Visiting the organisation to discuss

critical issues with management.
 Obtaining confirmations from the
auditors of the service organisation.
 Requesting the internal or external
auditors to perform necessary audit
procedures.
 Inspection of progress reports on
the adherence to the SLA as part of
a normal dialogue between
contractor and contractee.
Using the work of an expert
(ISA 620)
 Auditors frequently rely on evidence generated by
third parties with special training or skills.

 Experts may be engaged by the client or by the

auditor.

 An “expert” in this context means a person with

special skills in a particular field other than
accounting and auditing.

 Examples of expert work: Valuations of assets, mineral

deposit explorations, legal opinions
 ISA 620 requirements
 “The auditor should obtain sufficient
appropriate audit evidence that the
scope of the expert’s work is
adequate for the purposes of the
audit.”

 The auditor should assess the

appropriateness of the expert’s work
as audit evidence regarding the
financial statement assertion being
considered.”
Issues the auditor must
consider

Professional qualification
or certification.
Experience and
reputation.
Financial dependence on
the client.
Assessing the work of an
expert
The following must be considered:
 the source data used;
 the assumptions and methods used;
 when the expert carried out the work;
 the reasons for any changes in assumptions
and methods compared with those used in
the prior period; and
 the results of the expert’s work in the light
of the auditors’ overall knowledge of the
business and the results of other audit
procedures.
 Referring to the work of
others in the audit report
 the auditor is 100% responsible for the
audit report, ISA 620 requires that the
auditor should not refer to the work of an
expert, when issuing an unmodified audit
report.

 when issuing a modified report, it may be

appropriate to refer to the work of an
expert in explaining the nature of the
modification.
 End

Thank you