8/9/2019 The Third Standard of FW

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The third standard of FW:sufficient appropriate (competent) evidence (of managements assertions)

Appropriateness/Competence (Quality)

-Relevance-Validity SOURCE of the data

#1 Auditor developed (e.g., observation)#2 Outside source (confirms)#3 Outside/inside (prepd externally,but the client touched it)#4 Client (Can never rely solely on the client)

Sufficiency (Quantity)

ASSUMING APPROPRIATENESS/COMPETENCE

Depends on ICs (ICS functioning as

intended test controls with ARCCS) Cost benefit considerations

Managements assertions:

U & C Disclosures are understandable, Accounts and transactions are appropriately Classified

R&O R ights to assets; Obligations to creditors (liabilities)

Accuracy Dollar amounts of transactions are correctly captured and reported

Completeness The tendency to understate liabs and expenses and overstate assets and revenues.

E&O E usually deals with the BS and O usually deals w/ the IS

Cutoff Proper periodic reportingVal/All. V- Usually more important for assets; A e.g., Proper matching

Audit objectives substantiate managements assertions using the following substantive audit procedures(e.g., NTE orsubstantive tests - $$$):

TESTS OF DETAILS

Confirm Usually from SOURCE #2 and usually proves E&O, R&O, V, AccuracyAny asset not under the clients roofCash confirm: bank tells us cash balances. Also tell us of any O/S debt

(Completeness undisclosed liabilities)

Observe Usually SOURCE #1 and usually proves E&O

Tangible assetsIs inventory that isnt moving obsolete? (Val/All, Accuracy)

Recalculate Usually proves Val/All, Cutoff, and Accuracy (SOURCE depends on whose #s you recalculate)Recalc BS balancesReasonableness tests: do the interest test for undisclosed liabilitiesCan also do reasonableness tests for taxes, assets, liabs, sick pay, vacation accrual.

Inspect documents Usually proves all of URACECV (SOURCE depends on what you look at)We inspect contracts and major agreements like sales agreementsIs Invty at LCM? see price lists and invoices (Val/All, Accuracy)Invty completeness sales cutoff testing (Completeness, Cutoff)Rights to invty? Paid invoices? Received goods? (R&O)check BOD mins to see if AR is factored (R&O, Val/All, Accuracy)Is the lease capital or optg? Title tfr, BPO, 75% of useful life, 90% of PV of lease pmts? (U&C)

Debt any loan covenants? Inspect the BOD mins. Is the debt callable or current? Ratios met?(UInquire Usually proves Completeness and Val/All. (SOURCE depends on who you are asking)

RPTs inquire of everyone

Analytical Procedures(Not technicallya T.O.Detail, but is

used as a substantive test)

Usually proves C, Val/All, Cutoff, Accuracy. (SOURCE depends on whose #s you are using)CY-PYCY-budgetIndustryAPs are used to determine reasonableness; used 3X in the audit.

(NOTE: my examples are NOT meant to be comprehensive in any way they are just examples).