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

2. 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.

3. 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.

4. 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.

5. 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).

6. 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).

7. 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

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

9. *
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 *

10. Nature of Audit Evidence*
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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. *

11. 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.

12. 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

13. 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. *

14. *
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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) *

15. 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. *

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

17. Audit Procedure Examples*
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Audit Procedure Examples *

18. Analytical Procedures: Steps to Follow*
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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? *

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

20. 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.

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