AUDITING IV 2013

Audit Evidence

-----------------------------------------------------------------------------------------------------------------Dana Josset (CA) SA, © University of the Witwatersrand School of Accountancy

Lecture Outline The following will be addressed - Audit Evidence in relation to:

i. Service Organisations

ii. External Confirmations

iii. Bank Confirmations

iv. Litigation & claims

These need to be understood and considered in all aspects of the audit from audit planning to concluding & reporting

References

ISA 402 – Audit considerations relating to an entity using a service organisation

ISA 505 - External Confirmations

SAAPS 1100 – Bank Confirmations

SAAPS 4 – Enquiries regarding litigation and claims ISA 501 (Par 9-11 & A17-A25)

3

(i) Service Organisations

Overview:

Concept of outsourcing

Service level agreement (SLA)

Auditors objectives & responsibility when auditing an entity using services of a services organisation

Effect on the audit / audit procedures / audit report

ISA 402

Service organisations - Outsourcing Auditor needs to understand / evaluate:

Significance Nature Transactions Processes Procedures / degree of interaction Controls Accounting records Financial reporting

Objectives of Auditor Obtain understanding of services provided

(ISA 315) Nature, significance, materiality…. Sources of information (ISA 402 - A1/A2)

Risks of material misstatement

Objectives of auditor Needs to consider:

SLA - What has been included in SLA

Effect on audit risk

Effect on Audit strategy / audit plan

Nature & extent of audit testing / procedures

If unable to obtain sufficient understanding:

Contact/visit service organisation

Use another auditor

Obtain a report (Report Type 1 or 2)

Responsibility of auditor Sufficiency & appropriateness of evidence

provided by report:

Competence/independence

Standards

Period of report

Relevance

Responding to the assessed risks:

Determine audit evidence Perform further procedures eg.?

Tests of controls Obtaining report – period/relevance… Appropriate tests Using another auditor

Fraud / Non-compliance with laws & regulations

Audit reporting

Opinion

Reference to other auditor

ii) External Confirmations Written response obtained directly from third

party, in paper or electronic format, that may be used by auditor as an effective way of obtaining sufficient appropriate audit evidence in relation to client’s account balances, contracts, terms of agreement or specific arrangements with a third party.

ISA 505

Examples?

Design of the confirmation request – based on?

Types of Requests? Negative Positive

Process of sending confirmation request – Management involvement Concerns (eg.electronic)?

Responses to Request Consider Relationship to entity Exceptions No response or process cannot be performed?

Debtors Circularisation

Objective

Selecting debtors for process Considerations? (materiality, risks, population,

CAATS…)

Deciding on the type of confirmation

Considerations audit risks nature of balances errors expected nature of respondents….

Negative/positive/combination more likely for?

Practical considerations

Timing

Roll-forwards

Responses Professional scepticism - low/no response… Exceptions

iii) Bank Confirmations Standardised Bank Confirmation letter-

Appendix to SAAPS 1100.

The confirmation process Authority Timing…

The importance of the use of bank confirmations extends beyond the verification of the actual cash balance/s

Inclusions in Bank confirmation:

a) Interest paid and received b) Overdraft facilities c) Authorised signatories d) Pledged / ceded balances e) Contingent liabilities f) Forward Contracts g) Banks a/c’s closed during yearh) Completeness of bank accounts

NB. How do these aspects assist in obtaining audit evidence?

iv) Litigation and claims

Audit procedures may include sending an attorney’s representation letter to the client’s lawyers/ legal advisors, to obtain confirmation of any pending litigation and claims, estimates of liabilities, likelihood that liabilities will realise and

costs associated with litigation.

SAAPS 4 Appendix - illustrative Attorney’s representation letter

The Confirmation process Refusals?

Use of an attorney’s representation letter Audit evidence in regard to:

All litigation and claims Adequacy of accounting treatment Reasonableness of managements provisions

and estimated amounts Disclosure Legal costs

Other substantive audit procedures performed in regard to litigation & claims…

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