Audit Evidence and Documentation. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All...
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Transcript of Audit Evidence and Documentation. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All...
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Management Assertions
Existence or OccurrenceExistence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred.
CompletenessCompleteness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included.
Rights and ObligationsRights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements.
Valuation or AllocationValuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles.
Presentation and DisclosurePresentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided.
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Audit Risk
Risk of Material Risk That the Audit Risk = Misstatement * Auditors Fail to the Misstatement
= Inherent Control Detection Risk * Risk * Risk
Inherent RiskInherent Risk--Risk of a material misstatement occurring in an assertion assuming no related internal controls.
Control RiskControl Risk--Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control.
Detection RiskDetection Risk--Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist.
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Audit Risk Formula
AR = IR * CR * DR
AR = Audit riskIR = Inherent riskCR = Control riskDR = Detection risk
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Competence of Evidential Matter
To be competent evidence must be: Valid Relevant
Principles Independent sources have greater reliability than
those within the client organization. Strong internal control increases reliability of
evidence created within the client organization. Directly obtained evidence is more reliable than
evidence obtained second hand.
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Reliability of Certain Types of Audit Evidence
RELIABILITY TYPE EXAMPLEHigh Physical Inventory Observation
DocumentaryExternal Cutoff Bank StatementExternal/Internal Purchase InvoiceInternal Sales Invoice
Low Client Representations Management Representation Letter
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Types of Evidence
Accounting information system Documentary evidence Third-party representations Physical evidence Computations Data interrelationships Client representations
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Audit Procedures Accounting information system Documentary evidence
Tracing Vouching Inspection Reconciliations
Third-party representations--Confirmation Physical examination Computations—Reperformance Data interrelationships—Analytical procedures Client representations
Inquiries Letters of representations
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Basic Approaches to Auditing Accounting Estimates
Review and test management’s process for developing the estimate.
Independently develop an estimate to compare to management’s estimate.
Review subsequent events or transactions bearing on the estimate.
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Auditing Fair Values
If the item is traded on an organized market, fair value may be obtained from market prices
If the item does not trade on an organized market determine fair value by: Analyzing to a similar market is possible Using a valuation model
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Sufficiency of Audit Documentation
Audit documentation should be sufficient to enable members of the audit team: To understand who performed and reviewed
the work To understand what work was performed To show that the accounting agree or
reconcile to the financial statements
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Functions of Working Papers
Provide a means of assigning and coordinating audit work
Aid in supervising and reviewing the audit work
Provide support for the auditors’ opinion Document the auditors’ compliance with
generally accepted auditing standards, especially the standards of field work
Aid in planning and conducting future audits
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Types of Working Papers
Audit administrative working papers Working trial balance Lead schedules Adjusting journal entries and reclassification
entries Supporting schedules Analysis of a ledger account Reconciliations Computational working papers Corroborating documents