Prof. Joshua Onome Imoniana University of são paulo SCHOOL OF ECONOMICS, ADMINISTRATION & ACCOUNTING Audit evidence & analytical procedures Prof. Joshua Onome Imoniana

Today’s Objectives Overall Theme of Module II: Rich client knowledge  Well informed expectations  High quality risk assessments  High quality audits. Strategic Systems Auditing: Guides us in developing well-informed expectations & assessing risk that illuminate audit risk implications. We develop well informed expectations by using analytical procedures and evidence. We achieve high quality audits by making conclusions based on sufficient, appropriate audit evidence.

What Do We Know So Far? High Quality Audits = High Quality Risk Assessment Recursive, evidence-driven, belief-based risk assessment The objective of the auditor is to conduct the audit of financial statements in a manner that reduces Audit Risk to an acceptably low level. AR = RMM x DR  Planned_DR = Acceptable_AR/RMM We want to use the best available methods to assess risk and plan audits.

The Strategic Systems Auditing (SSA) Process SSA provides us guidance on how to obtain a rich understanding of our client’s strategy, business processes and risks for the purpose of: Expectations formation; Risk assessment; and Audit planning. Understand and link these components & risks to form audit risk implications.

The Strategic Systems Auditing (SSA) Process Evidence from three fundamental sources are used to inform our risk assessments: Entity Business States (EBS); Management Information Intermediaries (MII); and Management Business Representations (MBR).

EBS, MII & MBR EBS are all of the client's business strategies, conditions, processes and economic actions/events, as well as past, current and likely future business relationships with other entities. Management builds and maintains a bridge (MII) between EBS and its financial statement representations e.g. internal control, information systems, documentation, and human information processing These intermediaries gather intelligence about, capture, measure and, typically, transform various EBS into a variety of management business representations (MBR). e.g. journals, ledgers, F/S So the question for the auditor becomes, how can you judge the fairness of a business state without an understanding of a business state? Auditors attempt to provide high assurance about the extent to which management's financial statement representations (MBR) fairly depict select entity business states (EBS).

Relationship of Audit Evidence to the Audit Report LO# 1 Relationship of Audit Evidence to the Audit Report Financial statements Audit report Management assertions about components of financial statements Auditor reaches a conclusion based on the evidence Audit procedures Provide evidence on the fairness of the financial statements 5-7

Management Assertions LO# 2 Management Assertions Valuation (& allocation) Existence Completeness Management assertions about components of f/s Presentation & Disclosure Rights and Obligations 5-8

* 07/16/96 Audit Evidence All the information, from whatever source, used by the auditor in arriving at the conclusions on which the audit opinion is based. Core characteristics of audit evidence: Nature of audit evidence Sufficiency & appropriateness of audit evidence Evaluation of audit evidence *

Nature of Audit Evidence * 07/16/96 Nature of Audit Evidence Accounting records: initial entries, checks, records of EFTs, invoices, contracts, general & sub ledgers, journal entries, work sheets, spreadsheets supporting cost allocations, computations & reconciliations. Other information: minutes of meetings, confirmations, analyst reports, competitor data, controls manuals & results of audit procedures (e.g. inquiry, observation & inspection). Your knowledge of the client is also an important source of audit evidence. *

Sufficiency of Audit Evidence Sufficiency is the measure of the quantity of audit evidence. Greater risk of misstatement requires a higher quantity of audit evidence. Higher quality audit evidence results in a lower quantity of audit evidence.

Appropriateness of Audit Evidence LO# 3 Appropriateness of Audit Evidence Relevance Appropriateness is a measure of the quality of audit evidence. Reliability Original documents Auditor’s direct personal knowledge Independent source of the evidence Effectiveness of internal control Documentary evidence 5-12

Evaluation of Audit Evidence * 07/16/96 Evaluation of Audit Evidence Proper evaluation of evidence requires an understanding of the: Relative reliability of available evidence. Types of evidence available. An auditor should be thorough in searching for evidence and unbiased in its evaluation. *

* 07/16/96 Audit Procedures Specific acts performed by the audit to gather evidence about whether specific assertions are being met. Audit program: a set of audit procedures prepared to test assertions for a component of the f/s. Audit procedure categories: Risk assessment procedures (assess RMM) Test of controls (confirm/refute CR assessments) Substantive procedures (achieve planned DR) *

Tests of Controls vs. Substantive Tests * 07/16/96 Tests of Controls vs. Substantive Tests Tests of Control Objective: test the operating or design effectiveness of management’s controls (i.e. how well controls detect, prevent, or correct material misstatements). Substantive Tests Objective: detect material misstatements of monetary amounts (i.e. transactions or account balances), if they exist. *

Audit Procedure Examples * 07/16/96 Audit Procedure Examples Inspection (tangible assets, records or documents) Observation Inquiry Confirmation Recalculation Reperformance Analytical procedures Scanning *

Audit Procedure Examples * 07/16/96 Audit Procedure Examples *

Analytical Procedures: Steps to Follow * 07/16/96 Analytical Procedures: Steps to Follow Develop an understanding of factors likely to influence the representation of interest based on evidence (EBS, MII, & MBR). Develop an expectation to compare to the amount represented by mgmt. that is asserted to fairly and reliably reflect select EBS. Define a significant/tolerable difference (quantitative & qualitative). Compare your expectation to observation/represented amount. If necessary, develop a strategy for investigating the probable cause of significant differences. The cause either will be that your mental model is incomplete or incorrect somehow (leading to an inaccurate expectation) or that there is a heightened risk of material misstatement. Document the steps along the way. 2. Develop a model? *

Our Client: UDUB Limited Group Activity Developing Informed Expectations & Risk Assessment through Analytical Procedures: Our Client: UDUB Limited

Today’s Objectives Overall Theme of Module II: Rich client knowledge  Well informed expectations  High quality risk assessments  High quality audits. Strategic Systems Auditing: Guides us in developing well-informed expectations & assessing risk that illuminate audit risk implications. We develop well informed expectations by using analytical procedures and evidence. We achieve high quality audits by making conclusions based on sufficient, appropriate audit evidence.

For Next Class Internal Control Evaluation Pay attention to Assertions Relevant readings for next class: MGP: Chapter 6 & 7