Agenda. 1. Auditor s Objectives. 2. Assertions CEAVOP. 3. Audit Procedures. 4. Audit Evidence

Transcription

1 Audit Evidence

2 Agenda 1. Auditor s Objectives 2. Assertions CEAVOP 3. Audit Procedures 4. Audit Evidence

3 Agenda 1. Auditor s Objectives 2. Assertions CEAVOP 3. Audit Procedures 4. Audit Evidence

4 Auditor s Objectives As per ISA 200 In conducting an audit of financial statements, the overall objectives of the auditor are: To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error,, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework 4

5 Remember the Overall Objectives of an Auditor What does the auditor obtain in order to express an opinion on the financial statements? The auditor obtains Sufficient Appropriate Audit Evidence. 5

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7 Agenda 1. Auditor s Objectives 2. Assertions CEAVOP 3. Audit Procedures 4. Audit Evidence

8 Assertions The management of an entity is responsible for the preparation and fair presentation of the entity s financial statements that are free from material misstatement, whether due to fraud or error. In preparing financial statements management applies certain assertions about the financial statements. 8

9 Assertions Completeness Existence and Occurrence Accuracy Valuation Obligation and Rights Presentation and Disclosure 9

10 Assertions Assertion Balance Sheet Account balances Income Statement Transactions and events Completeness Existence (balance sheet) Occurrence (income statement) All assets, liabilities and equity interests that should have been recorded have been recorded. Assets, liabilities and equity interests exist. All transactions and events that should have been recorded have been recorded in the correct accounting period. Transactions and events that have been recorded have occurred, and have been recorded in the correct accounting period. 10

11 Assertions Assertion Balance Sheet Account balances Income Statement Transactions and events Accuracy (Accuracy) Amounts and other data relating to recorded assets, liabilities and equity interests have been recorded correctly. (Accuracy) Amounts and other data relating to recorded transactions and events have been recorded correctly. (Classification and Allocation) Assets, liabilities and equity interests have been classified and allocated to the appropriate accounts. (Classification and Allocation) Transactions and events have been classified and allocated to the appropriate accounts. 11

12 Assertions Assertion Balance Sheet Account balances Income Statement Transactions and events Valuation Obligations and rights Assets, liabilities and equity interests have been recorded at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.. The entity holds or controls the rights to assets. Liabilities and equity interests are the obligations of the entity. Transactions and events have been recorded at appropriate amounts. The entity has the rights and obligations to transactions and events that they have recorded. 12

13 Assertions Assertion Presentation and disclosure Balance Sheet Account balances Income Statement Transactions and events Financial information is appropriately presented in the financial statements. Events, transactions, balances and other matters disclosed in the financial statements: Are clearly expressed Have occurred and/or are relevant to the accounting period Pertain to the entity Are disclosed at appropriate amounts All events, transactions, balances and other matters that should have been disclosed in the financial statements have been disclosed. 13

14 Fixed Asset Register - Vehicles Asset Description Cost AccDepn NBV Gold Saloon Model 206i * 15,000 9,000 6,000 Silver Sports Car Model CDE 15,000 9,000 6,000 Silver Sports Car Model CDX 18,000 7,200 10,800 Black Saloon Model SLA 71,500 14,300 57,200 Silver Classic Model ABC * 40,000 16,000 24,000 White Classic Model XYZ 27,150 5,430 21,720 Black Classic Model ZZ3 69,000 27,600 41,400 Red Sports Car Model QPR * 20,000 4,000 16,000 Total 275,650 92, ,120 * New purchases in 20X2 Note: There is also a GL account called Alfa Romeo, listed as an Accounts Receivable with a balance of US$ 18,000 14

15 Misstatements in Fixed Asset Register - Vehicles Vehicle Misstatements Assertion affected Green Sport Car APR Gold Saloon 206i Silver Sports Car CDE Black Saloon SLA Silver Classic ABC Silver Cabriolet 123i Excluded from the FA register. Does not exist and was not purchased in the year Recorded at the wrong cost Is not worth what it is carried at Is leased, not owned Is recorded as a receivable, at cost and not net book value 15

16 Misstatements in Fixed Asset Register Vehicles (solution) Vehicle Misstatements Assertion affected Green Sport Car APR Gold Saloon 206i Silver Sports Car CDE Excluded from the FA register Does not exist and was not purchased in the year Recorded at the wrong cost Completeness Existence Accuracy Black Saloon SLA Silver Classic ABC Silver Cabriolet 123i Is not worth what it is carried at Is leased, not owned Is recorded as a receivable, at cost and not net book value Valuation Obligation and Rights Presentation & Disclosure and Accuracy 16

17 Agenda 1. Auditor s Objectives 2. Assertions CEAVOP 3. Audit Procedures 4. Audit Evidence

18 Audit procedures to obtain audit evidence Audit procedures to obtain audit evidence can include: Inspection Observation Confirmation Recalculation Re-performance and Analytical procedures, often in some combination, in addition to inquiry. 18

19 Audit procedures to obtain audit evidence 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. Observation Observation consists of looking at a process or procedure being performed by others, for example, the auditor s observation of inventory counting by the entity s personnel, or of the performance of control activities. 19

20 Audit procedures to obtain audit evidence 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. Recalculation Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically. 20

21 Audit procedures to obtain audit evidence Re-performance Re-performance involves the auditor s independent execution of procedures or controls that were originally performed as part of the entity s internal control. Analytical Procedures Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. 21

22 Audit procedures to obtain audit evidence Inquiry Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity. Inquiries may range from formal written inquiries to informal oral inquiries. 22

23 Agenda 1. Auditor s Objectives 2. Assertions CEAVOP 3. Audit Procedures 4. Audit Evidence

24 What is Audit Evidence? Information used by the auditor in arriving at the conclusions on which the auditor s opinion is based. Includes both information contained in the accounting records underlying the financial statements and other information. 24

25 Audit Evidence The Auditor s Objective 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. 25

26 Audit Evidence Sufficiency is the measure of the quantity of audit evidence The quantity of audit evidence needed is affected by the auditor s assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required). 26

27 Audit Evidence The quantity of audit evidence is also affected by the quality of audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality. Appropriateness is the measure of quality of audit evidence, its reliability, & its relevance in providing support for, or detecting, misstatements in transactions, balances, disclosures and related assertions 27

28 Audit Evidence Relevance of evidence is the logical connection of the evidence to the audit objective being tested. Family Reliability is the quality of information when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. 28

29 Audit Evidence Sufficient and Appropriate Quantity Quality Relevance Reliability The quality of all audit evidence is affected by the relevance and reliability of the information upon which it is based. 29

30 Sufficiency - Question 1 You are asked to audit the significant account operating expenses made up of 1500 amounts. You select the 5 largest amounts and agree these to supporting documentation. Do you think the audit work above will provide sufficient audit evidence over the significant account operating expenses? Answer: It Depends! 30

31 Sufficiency - Question 2 You are asked to audit the significant account revenue for a client with a December year end. You perform audit work up to the end of September but perform no further work that provides evidence over the revenue significant account after September. Do you think the above audit work will provide sufficient audit evidence, for the significant account revenue, in order to conclude on the year end balance at December? Answer: No! 31

32 Relevance What factors would you consider when deciding whether a piece of audit evidence is relevant? The relevance of information to be used as audit evidence may be affected by the direction of testing. For e.g., if the purpose of an audit procedure is to test for overstatement in the existence or valuation of accounts payable, testing the recorded accounts payable may be a relevant audit procedure. On the other hand, when testing for understatement in existence or valuation of accounts payable, testing such information as subsequent disbursements, unpaid invoices, suppliers statements, and unmatched receiving reports may be relevant. 32

33 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS A You obtain a client listing of all vehicles (i.e. the fixed asset register). Relevant controls over authorizing and recording fixed asset additions and disposals have been identified and tested and have been found to be designed and implemented effectively and to be operating effectively. You obtain a client listing of all vehicles (i.e. the fixed asset register). Your evaluation of the design of controls has shown that there are no formal procedures in place for authorizing and recording fixed asset additions or disposals. CEA 33

34 Reliability - Example CASE EVIDENCE WHY MORE RELIABLE? A Evidence 1 You obtain a client listing of all vehicles (i.e. the fixed asset register). Relevant controls over authorizing and recording fixed asset additions and disposals have been identified and tested and have been found to be designed and implemented effectively and to be operating effectively. The reliability of audit evidence that is generated internally is increased when the related controls, including those over its preparation and maintenance, imposed by the entity are effective. 34

35 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS B You agree the proceeds for the disposal of a vehicle during the year to the cash book. You agree the proceeds for the disposal of a vehicle during the year to the bank statement. AEO 35

36 Reliability - Example CASE EVIDENCE WHY MORE RELIABLE? B Evidence 2 You agree the proceeds for the disposal of a vehicle during the year to the bank statement. The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. 36

37 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS C Based on your enquiry of why 3 vehicles could not be located in the company car park, the Fixed Asset Accountant tells you that there are three company cars in the customer car park because there was not enough room to park them in the staff car park. Based on your enquiry of why 3 vehicles could not be located in the company car park, the Fixed Asset Accountant shows you the three company cars in the customer car park. EC 37

38 Reliability - Example CASE EVIDENCE WHY MORE RELIABLE? C Evidence 2 The Fixed Asset Accountant shows you the three company cars in the customer car park. Physical evidence is more reliable than evidence obtained orally. Similarly, audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally. 38

39 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS D You inquire from the holder of the vehicle lease contract of their understanding of the terms. You obtain a copy of the vehicle lease contract confirming the terms. CEAO 39

40 Reliability - Example CASE EVIDENCE WHY MORE RELIABLE? D Evidence 2 You obtain a copy of the vehicle lease contract confirming the terms. Original documentary evidence is more reliable than a subjective interpretation of that documentation. 40

41 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS E The Finance Director, Fixed Asset Clerk and Personnel Manager separately state that company vehicles are all the same make. The Finance Director states that company vehicles are all the same make. V 41

42 Reliability - Example CASE EVIDENCE WHY MORE RELIABLE? E Evidence 1 The Finance Director, Fixed Asset Clerk and Personnel Manager separately state that company vehicles are all the same make. Corroborated inquiry is more reliable than uncorroborated inquiry. 42

43 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS F You obtain confirmation directly from the insurers that the Sales Director s car (which was involved in an accident two weeks prior to year end) is now valued at $20,000. The Finance Director gives you a letter from the insurers sent to the company that the Sales Director s car (which was involved in an accident two weeks prior to year end) is now valued at $20,000. V 43

44 Reliability - Example CASE EVIDENCE F Evidence 1 You obtain confirmation directly from the insurers that the Sales Director s car (which was involved in an accident two weeks prior to year end) is now valued at $20,000. WHY MORE RELIABLE? Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference (as the risk of manipulation of documents has been mitigated). The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. 44

45 Reliability - Example CASE EVIDENCE 1 EVIDENCE 2 RELEVANT ASSERTIONS G You agree an intercompany transfer of a vehicle to another company by telephoning the other company s auditors. You agree an intercompany transfer of a vehicle to another company by telephoning the other company s finance team. EA 45

46 Reliability - Example CASE EVIDENCE WHY MORE RELIABLE? G Evidence 1 You agree an intercompany transfer of a vehicle to another company by telephoning the other company s auditors. The reliability of audit evidence is increased when it is obtained from independent sources outside the entity, compared to audit evidence obtained from a related party. 46

47 Audit Evidence Audit evidence is cumulative and comprises both information that supports and corroborates management s assertions, and any information that contradicts such assertions. Information may come from other sources such as: a) previous audits or b) firm s quality control procedures for client acceptance and continuance. c) also, information that may be used as audit evidence may have been prepared using the work of a management s expert. 47

48 Information to be used as audit evidence If information to be used as audit evidence has been prepared using the work of a management s expert, the auditor shall, to the extent necessary, having regard to the significance of that expert s work for the auditor s purposes: (a) Evaluate the competence, capabilities and objectivity of that expert; (b) Obtain an understanding of the work of that expert; and (c) Evaluate the appropriateness of that expert s work as audit evidence for the relevant assertion. 48

49 Information to be used as audit evidence Competence, Capability and Objectivity Competence relates to the nature and level of expertise of the management s expert. Capability relates to the ability of the management s expert to exercise that competence in the circumstances. Factors that influence capability may include, for example, geographic location, and the availability of time and resources. Objectivity relates to the possible effects that bias, conflict of interest or the influence of other may have on the professional or business judgment of the management s expert. 49

50 Information to be used as audit evidence Understanding of the work An understanding of the relevant field of expertise may be obtained in conjunction with the auditor s determination of whether the auditor has the expertise to evaluate the work of the management s expert, or whether the auditor needs an auditor s expert for the purpose. 50

51 Information to be used as audit evidence Understanding of the work Aspects of the management s expert s field relevant to the auditor s understanding may include: Whether that expert s field has areas of specialty within it that are relevant to the audit. Whether any professional or other standards, and regulatory or legal requirements apply. What assumptions and methods are used by the management s expert, and whether they are generally accepted within that expert/s field and appropriate for financial reporting purposes. The nature of internal and external data or information the management s expert uses. 51

52 Information to be used as audit evidence Appropriateness of the work This may include: The relevance and reasonableness of the expert s findings or conclusions, their consistency with other audit evidence, and whether they have been appropriately reflected in the financial statements; If that expert s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods: and If that expert s work involves significant use of source date, the relevance, completeness, and accuracy of that sources data. 52

53 Inconsistency in, or Doubts over Reliability of, Audit Evidence If : (a) audit evidence obtained from one source is inconsistent with that obtained from another; or (b) the auditor has doubts over the reliability of information to be used as audit evidence, the auditor shall determine what modifications or additions to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit. 53

54 What Have You Learned? We obtain sufficient appropriate audit evidence to draw reasonable conclusions on which to base the auditor s opinion. C E A V O P Audit procedures to obtain audit evidence. Sufficient appropriate audit evidence. Follow up inconsistencies and corroborate explanations. 54

55 Audit Documentation Objective As mentioned in the ISA 230, the objective of the auditor is to prepare documentation that provides: a) A sufficient and appropriate record of the basis for the auditor s report; and b) Evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements. 55

56 Audit Documentation ISA 230 also specifically mentions that the auditor shall prepare audit documentation that is sufficient to enable an experience auditor, having no previous connection with the audit, to understand: a) The nature, timing and extent of audit procedures performed to comply with the ISAs and applicable legal and regulatory requirements; b) The results of the audit procedures performed, and the audit evidence obtained; and c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. 56

57 QAB Instances Sales Verification Verification of Sales was made in such a way that only amounts and invoices given in the ledger sheet were ticked. There was no evidence of application of test of controls and test of details. Although it depends on the nature of client business, however, normally revenue consists of several transactions throughout the year, therefore, ideally in this case after documenting the risk assessment of the revenue transactions, the auditor should have carried out tests of controls to determine the nature, timing and extent of substantive procedures to be carried out on revenues. 57

58 QAB Instances Depending on the results of the tests of controls, substantive procedures should have been carried out after selection number of transactions to be tested by using sampling techniques. Considering the nature of revenue transactions, substantive analytical procedures along with tests of details and tests of controls could provide sufficient appropriate audit evidence. For e.g. in cases of entities where price slabs are almost fixed through out the year the quantity sold can be multiplied with average price which prevailed during the year and compared with total sales during the year. If the difference is within materiality threshold this can provide a reasonable satisfaction over sales during the year. 58

59 QAB Instances Due from Directors Due from directors was classified as current asset but there was no agreement available in the files which could evidence that the amount would be received by the company during the next twelve months. Lack of sufficient appropriate audit evidence. 59

60 QAB Instances Subsequent Events It was observed that there was no document to evidence performance of audit procedures for identification of significant events after the balance sheet date. The Audit Team had verbally inquired and also documented through management representation letter. ISA 560 Subsequent Events require the auditor to perform audit procedures to identify events which may require adjustment or disclosure. 60

61 QAB Instances Payment of Dividend During the year dividend was paid but it was noted that no audit program was prepared for the area and no documentation was available to show as to what audit procedures were planned, applied and what conclusions were drawn by the auditor. The Audit Team replied it is submitted that although no specific audit program was prepared but we have verified the payment of dividends from dividend warrants and their encashment from the concerned dividend bank account-and satisfactory conclusions were drawn. Tax and Zakat was properly deducted and not a single mistake was pointed out during the audit hence satisfactory conclusions were drawn. 61

62 QAB Instances Dividend Payable It was observed that dividend payable to directors was clubbed into long term loans from directors. Dividend payable is a current liability and should be presented in the current liabilities. Audit Team responded that as per directions of the directors and according to the policy of the company the dividend payable to directors net of tax is credited to their long term loan accounts. 62

63 QAB Instances No such policy can be adopted by a company which is in contravention of its accounting framework/applicable laws and regulations. Companies Ordinance, 1984 specifically prohibits the directors to withhold or defer the payment of dividend. Further, fourth schedule specifically requires unpaid dividend to be disclosed separately. 63

64 QAB Instances Long Term Loan from Associated Companies In respect of long term loan from associated companies, it was observed that repayment terms were disclosed in the financial statements but no document such as copies of agreements etc. was available to support such disclosures. 64

65 QAB Instances Physical Count It was noted that there was no evidence of observing physical stock count of Raw Materials, Work in Process and Finished Goods available in the working papers. No evidence of observing physical count was available. Copies of stock sheets were available showing some unexplained ticks, quantities and values which were not signed by any company s official or audit team member. Audit evidence regarding Existence have not been documented. 65

66 QAB Instances Investment in Unquoted Shares It was observed that Long term investment in unquoted shares of associate amounting to was carried at cost in the balance sheet. There was no evidence of reviewing the financial statements of the associate to ensure that investment was not impaired. Non testing of impairment means that the audit evidence relating to assertion relating to Valuation was either not obtained or not documented. 66

67 QAB Instances Investment Property Investment property was classified as non-current assets Investment property - available for sale The said property was classified as non-current last year and further there also was no document in the audit working papers for the above reclassification under IFRS-5. Further there was no document in files to evidence that the auditor had verified the specific conditions stated in IFRS-5 to classify the above asset as Held for Sale. Audit evidence relating to assertion relating to Presentation and Disclosure was either not obtained or not documented. 67

68 QAB Instances Date on audit documentation Most of the planning documents were undated and did not identify preparer(s). ISA 230 Audit Documentation specifically requires that in documenting the nature, timing and extent of audit procedures performed, the auditor shall record: a) The identifying characteristics of the specific items or matters tested; b) Who performed the audit work and the date such work was completed; and c) Who review the audit work performed and the date and extent of such review. 68

69 Thank You 69