AUDIT EVIDENCE AND FINANCIAL STATEMENT ASSERTIONS 1

LEARNING OBJECTIVES  Explain the assertions contained in the financial statements  Explain the principles and objectives of transaction testing, Account balance testing, and disclosure testing  Explain the use of assertions in obtaining audit evidence  Discuss the source and relative merits of the different types of evidence available  Discuss the quality of evidence obtained. 2

OVERVIEW  Audit evidence  Quality of evidence  Financial or management assertions  Sources of evidence  Use of assertions in obtaining audit evidence 3

INTRODUCTION When undertaking an audit or a review assignment the auditor need to find evidence through testing of processes, Transactions, account balances and data to support the findings of his report ISA 500 Audit evidence outlines the requirements when conducting an external audit under International standard of Auditing. 4

ISA 500 Says: The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain SUFFICIENT, APPROPRIATE audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion 5

QUALITY OF EVIDENCE  Audit evidence is the information obtained by the auditor in arriving at the conclusion in which audit opinion is based.  The auditor should obtain sufficient and appropriate evidence to be able to draw reasonable conclusions on which to base the audit opinion. 6

The extract from ISA 500 tells us TWO things: 1.Evidence has to be sufficient and appropriate. 2.That the auditors do not have to audit everything because their conclusion have only to be reasonable not absolute.  Sufficiency: The measure of the amount of evidence gathered (quantity)  Appropriateness: The measure of the quality of evidence, its fitness for purpose. (quality) 7

SUFFICIENT EVIDENCE SUFFICIENT: sufficient to support the audit opinion Factors to consider are: Risk assessment Nature of accounting and internal control systems Materiality of the item Experience gained during previous audits Results of audit procedures Sources and reliability of information available 8

APPROPRIATE EVIDENCE  Relevance - The evidence gathered must cover the financial statement assertions  Reliable (if it is not in writing it doesn’t exist) o External better than internal evidence o Internal evidence more reliable when controls are effective o Auditor generated evidence is better than client generated o Documentary evidence is better than oral o Original documents more reliable than copies/faxes 9

NOTE: If the auditor is unable to obtain sufficient appropriate evidence, then he should consider the implications of the audit report 10

SOURCES OF AUDIT EVIDENCE Sources of audit evidence include that derived from within the organisation’s  Accounting systems  Accounting records  Documents  Management and staff And from outside the organisation through:  Customers  Suppliers  Lenders  Professional advisers, etc 11

The sources and amount of evidence required by the auditors will depend on the:  Materiality  Relevance ; and  Reliability Of the evidence available from a source. 12

SOURCES OF EVIDENCE CONTINUED……. TYPES OF PROCEDURES Audit evidence is obtained from appropriate mix of the following types of procedures: 1.Risk assessment procedures Procedures to obtain an understanding of the entity and its environment, including its internal controls to assess the risk of material misstatements at the financial statements and assertion levels 2.Test of controls Procedures to test the operating effectiveness of controls in preventing and correcting material misstatements at the assertion levels 3.Substantive procedures Procedures to detect material misstatements at the assertion level and include test of details of classes of transactions, account balances and disclosures and analytical procedures 13

PROCEDURES OF OBTAINING EVIDENCE ( A E I O U) 1. Analytical procedures  Evaluation of financial information made by a study of plausible relationships among financial and non financial data and the investigation of identified fluctuations and relationships inconsistent with other information: 2. Enquiry and confirmation directly  seeking information of knowledgeable persons throughout the entity or outside the entity and obtaining representations from a third party 3. Inspection  Examining records, documents and tangible assets 4. Observation  Looking at a process or procedure being performed by others 5. RecalcUlation  Checking the arithmetical accuracy of documents or records. 14

THE USE OF MANAGEMENT ASSERTIONS IN OBTAINING EVIDENCE Definition of Assertions. Implicit statements made by management in preparing financial statements which state that the financial statements do not contain any material error or misstatements with regard to assets and transactions. 15

The Assertions in ISA 315 are a series of statements which deal with the underlying bases on which the financial statements are prepared and deal with the measurement, presentation and disclosure of the various elements of financial statements and related disclosures. 16

ISA 315 splits the assertions into three (3) Categories as follows: 1.Assertions about classes Of transaction and events for the period under review ( Statement of profit or loss and other comprehensive income)  OCCURRENCE- Transactions and events that have been recorded relate to the company being audited and not to another organisation.  COMPLETENESS All transactions that should have been recorded have been recorded  ACCURACY Amounts and all other data relating to recorded transactions 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 (in the books and records) 17

2. Assertions about account balances at the period end: ( Statement of financial position)  Existence Assets, liabilities and equity interest (shareholders) exist.  Rights and obligations The company holds or controls the rights to assets, and all liabilities are those of the company  Completeness All assets, liabilities and equity interest that should have been recorded 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 properly recorded. 18

3.Assertions about presentation and disclosure  Occurrence and rights and obligations Disclosed events, transactions and other matters have occurred and pertain to the company.  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 is disclosed fairly and at appropriate amounts 19

ALL ASSERTIONS ( ACCA COVER) ACCURCY COMPLETENESS CUT- OFF ALLOCATION CLASSIFICATION OCCURRENCE VALUATION EXISTENCE RIGHTS AND OBLIGATIONS 20

USING THE WORK OF THE EXPERT TO OBTAIN AUDIT EVIDENCE ISA 620 Using the work of an auditors expert states The auditor has sole responsibility for the audit opinion expressed and that responsibility is not reduced by the auditor’s use of the work of an auditors expert. Nonetheless if the auditor using the work of an auditor’s expert concludes that the work of that expert is adequate for the auditor’s purpose, the auditor may accept that experts findings or conclusions in the experts field as appropriate audit evidence 21

WHAT IS AN EXPERT? ISA 620 defines an expert as: An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert ( who is a partner or staff including temporary staff of the auditors firm or network firm) or an auditor’s external expert. 22

EXAMPLES OF EXPERTS  Valuers  Quantity surveyors  Actuaries  Geologists  Stock brokers  Lawyers 23

POINTS TO CONSIDER 1.In deciding whether to engage an expert  Knowledge and ability of audit team  The risk of material misstatement  The quantity and quality of other audit evidence which can be obtained 24

FACTORS WHICH MAY INFLUENCE AUDITOR TO RELY UPON THE EXPERT  The competence of the expert  The Experience of the expert  Independence of the expert 25

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