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procedures to obtain evidence

Terms in this set (37)

standard procedures used in audits as risk assessment procedures, tests of controls, substantive procedures (C the FIVE CARROT WARS)
1. confirmation
2. footing, cross-footing and recalculation
3. inquiry
4. vouching
5. examination and inspection
6. cutoff review
7. analytical procedures
8. re performance
9. reconciliation
10. observation
11. tracing
12. walk-through
13. auditing related accounts simultaneously
14. representation letter
15. subsequent events review
confirmation
confirmation is a specific type of inquiry that involves obtaining representations from independent external third parties about account balances, transactions, events or terms of agreements

external confirmations must be obtained from the independent third parties as a direct written response (paper or electronic form) NOT oral responses

EXTERNAL EVIDENCE
examples of confirmations
1. bank confirmations of the amount on deposit or of a loan outstanding
2. confirmation from a customer regarding AR balance at specific date
footing, cross-footing and recalculation
auditor may verify the mathematical accuracy of statements and schedules by adding down (footing), adding across (cross-footing) and recalculating amounts

AUDITOR'S DIRECT KNOWLEDGE
inquiry
inquiry involves requesting information from knowledgable parties both internally (managers, supervisors) and externally (attorneys, bankers)

inquiry is used extensively throughout most audits however inquiry of company personnel alone is generally considered insufficient and therefore should be used in conjunction with other audit procedures

examples include inquiry of pending litigation or pledged/obsolete inventories

ORAL EVIDENCE
in using inquiry the auditor should
1. consider specific characteristics (knowledge, objectivity, qualifications) of the person to whom inquiry is directed
2. ask appropriate questions
3. evaluate responses and take appropriate action (following up with additional inquiry or modifying planned audit procedures)
vouching
- vouching is directional testing in which the auditor examines support for what has been recorded in records and statements
- going from FS to supporting documents
- objective is to gather evidence regarding possible overstatements (making sure revenues and assets are not overstated)
- relates to existence and occurrence assertions
- INTERNAL EVIDENCE
examination and inspection
- auditor may examine or inspect documents, records or tangible assets
- documents and records may be internal, external in paper or electronic form
- provides evidence about existence assertion
- examination may also provide evidence of terms of contracts, loans and commitments
- procedure of inspecting documents is also referred to as examination of evidence and includes activities of scanning, scrutinizing and reading
- auditors should read minutes of BOD, stockholders and management meetings
- AUDITOR'S DIRECT KNOWLEDGE
cutoff review
- auditor should perform a cutoff review for year-end transactions especially for inventory, cash, purchases, sales and accruals
- ensure no backdating
- INTERNAL EVIDENCE
analytical procedures
- analytical procedures consist of evaluations of financial information made by a study of meaningful relationships among data to help highlight unusual transactions that could be the result of errors or fraud
- analytical procedures also include comparisons within current years FS for internal consistency (NI from IS should agree with increase in RE from stmt of RE)
- scanning may also be considered an analytical procedure- auditor uses professional judgement to search for large, significant or unusual items in the accounting records
- auditor should perform analytical review procedures relating to revenue cycle because improper revenue recognition is a risk in all audits
- combination of INTERNAL EVIDENCE and AUDITOR'S DIRECT KNOWLEDGE
main purpose of analytical procedures
auditor most likely would perform analytical procedures to identify unusual year-end transactions
reperformance
- re performance occurs when the auditor independently performs procedures or controls that were originally performed as part of the entity's internal control
- AUDITOR'S DIRECT KNOWLEDGE
reconciliation
- substantiates existence and valuation of accounts
- involves comparing financial information from 2 independent sources for agreement such as comparing physical inventory count to perpetual records or comparing cash balance per books with cash balance per bank
- INTERNAL EVIDENCE
observation
- observation occurs when the auditor looks at a process or procedure being performed by others such as the year end physical inventory count
- although observation provides the auditor with direct knowledge, the evidence obtained applies only to the point at which the observation occurred
- auditor should be aware that a process or procedure may be performed differently when client is aware the auditor is observing
- AUDITOR'S DIRECT KNOWLEDGE
tracing
- tracing is directional testing starting with source documents and tracing upward to provide assurance that events are properly recognized in books and records
- going from source documents to FS
- objective is to gather evidence regarding possible understatements (making sure expenses and liabilities are not understated)
- relates to completeness assertion
- INTERNAL EVIDENCE
walk-through
- a walk-through includes questioning an entity's personnel about their understanding of what is required by the entity's prescribed procedures and controls
- walk-through procedures may include a combination of observation, inquiry, inspection of documentation, recalculation and re performance
- combination of ORAL EVIDENCE and AUDITOR'S DIRECT KNOWLEDGE
auditing related accounts simultaneously
certain accounts can be audited simultaneously including:
- long-term liabilities and interest expense
- capital additions to PPE and repairs/maintenance expense
- investments and dividend/interest income
representation letter
- at conclusion of fieldwork the auditor must obtain a management representation letter from the client
- INTERNAL EVIDENCE
subsequent events review
- the auditor is required to perform procedures for the period after the BS date through the date of the auditor's report
- evidence that is not available at the close of the period generally becomes available before the auditor completes fieldwork and issues the report
- this evidence obtained after the BS date should be used in making judgements regarding the valuation of assets and liabilities on the BS date
- example: settlement of lawsuit after BS date could provide evidence that real liability existed on the BS date
- subsequent events could relate to contingencies, unrecorded liabilities and disclosures
substantive procedures
- substantive procedures are designed to detect material misstatements at the assertion level
- auditor conducts substantive procedures to verify:
transaction totals
account balances
disclosures
types of substantive procedures
1. tests of details applied to transactions, account balances, disclosures
2. substantive analytical procedures
tests of details
- performed to gather evidence to support the account balances as reflected in the FS
- can be performed on ending balances or details of transactions or a combination of the 2
tests of details performed on ending balances
- used if an account has a high turnover rate with many transactions occurring during the year
- when this approach is used the auditor must be satisfied that IC is strong
tests of details performed on details of transactions
used if account has relatively few transactions during the year (land and treasury stock)
analytical procedures
- evaluations of financial information made by a study of plausible relationships among financial and non financial data
- generally involve comparisons between recorded amounts and independent expectations developed by the auditor
- auditor is required to perform analytical procedures during planning and overall review of audit but may also choose to perform analytical procedures as substantive tests
analytical procedures during planning
- required
- to assist auditor in understanding the entity and its environment
- used during risk assessment to alert the auditor to problem areas requiring attention
analytical procedures used as substantive procedures
- not required
- performed to obtain audit evidence about specific assertions related to account balances/transactions
- evidence is circumstantial and generally additional corroborating evidence is required
analytical procedures during final review
- required
- to assist auditor in final review of overall reasonableness of account balances
when would analytical procedures be used as substantive procedures
when analytical procedures are a more effective and efficient means of gathering evidence than tests of details
positive confirmation
request that the confirming party respond directly to the auditor providing the requested information or by stating that the party agrees or disagrees with information in the request
negative confirmation
request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information in the request
external confirmation procedures
1. determine information to be confirmed/requested
2. select the appropriate confirming parties
3. design the confirmation requests considering
- assertion being addressed
- identified RMM including that of fraud
- layout and presentation (positive or negative)
- prior experience on the audit
- method of communication
- management's authorization or encouragement to confirming parties to respond to auditor
- ability of confirming parties to provide requested information
4. send requests including follow-up requests when necessary
if management refuses to allow the auditor to perform external confirmation procedures the auditor should
1. evaluate validity and reasonableness of management's refusal
2. evaluate effect of the refusal on RMM including that of fraud and the NET of other audit procedures
3. perform alternative procedures

if auditor determines that management's refusal is unreasonable or the auditor is unable to obtain sufficient appropriate audit evidence through alternative procedures the auditor should communicate with those charged with governance and determine implications for audit opinion
confirmation nonresponse
a non response is a confirmation request returned undelivered or a failure of the confirming party to respond or fully respond to a positive confirmation request

for each non response the auditor should perform alternative audit procedures- they may send additional confirmation requests

a non response may indicate a previously unidentified RMM
oral responses
oral responses to confirmation requests do not meet the definition of an external confirmation because it is not a direct written response

however if the auditor does not conclude that a direct written response to a positive confirmation is necessary to obtain sufficient appropriate audit evidence the auditor may take oral responses into consideration
exception
an exception is a response that indicates a difference between the information in the entity's records and information provided by the confirming party

all exceptions should be investigated to determine whether they are indicative of material misstatements, fraud or deficiencies in IC

exceptions that result from timing or measurement differences or clerical errors do not represent material misstatements
reliability of responses to confirmation requests
- all confirmation requests carry some risk of interception, alteration or fraud
- if the auditor determines that a response to a confirmation request is not reliable they should evaluate implications on RMM and NET of audit procedures
- when responses are received electronically the auditor should directly contact the confirming party to validate the identify of the sender and accuracy of information received
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