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Audit Procedures The evidence-gathering procedures in order of cost form most costly
to least are in general:
Audit procedures as to purpose:
Confirmation
a. Risk assessment procedures (RAP)- are the audit Inspection
procedures performed to obtain an understanding of the Recalculation
entity and its environment, including the entity’s internal Reperformance
control, to identify and assess the risks of material Observation
misstatement, whether due to fraud or error, at the financial Analytical procedures
statement and assertion levels, thereby providing a basis for
Inquiry (least costly)
designing and implementing responses to the assessed risks
of material misstatement; and Inquiry is the least most extensively used audit procedures. Although
b. Further audit procedures (FAP) which comprise: inquiry may provide important audit evidence, and may even produce
Tests of controls (ToC)- an audit procedure evidence, and may even produce evidence of a misstatement, inquiry
designed to evaluate the operating effectiveness alone ordinarily does not provide sufficient audit evidence of the
of controls in preventing, or detecting and absence of a material misstatement at the assertion level, nor of the
correcting, material misstatements at the assertion operating effectiveness of controls.
level; and
Substantive procedures (SP), including tests of Summary of audit procedures
details and substantive analytical procedures- an
audit procedure designed to detect material Purpose
misstatements at the assertion level. FAP
Types
RAP
ToC SP
Audit procedures as to type:
Inspection
a. Inspection- involves examining records or documents, Observation
whether internal or external, in paper form, electronic form, External
or other media, or physical examination of and asset. confirmation
b. Observation- consists of looking at a process or procedure Recalculation
being performed by others , for example, the auditor’s Reperformance
observation of inventory counting by the entity’s personnel, Analytical
procedures
or of the performance of control activities.
Inquiry
Application of analytical procedures Sufficiency is the measure of the quantity of evidence. The quantity
of audit evidence needed is affected by the auditor’s assessment of
In other words, it involves comparisons between the auditor’s the risks of misstatement (the higher the assessed risks, the more
expectations and the recorded (reported) amounts relating to the audit evidence is likely to be required) and also by the quality of such
entity’s financial statements. Examples of auditor’s expectations audit evidence (the higher the quality, the less may be required).
include: Obtaining more audit evidence, however, may not compensate for its
poor quality.
Financial information:
Comparable information for prior periods Appropriateness is the measure of the quality of audit evidence; that
Anticipated results (budgets or forecasts) is, its relevance and its reliability in providing support for the
Industry information conclusions on which the auditor’s opinion is based. The reliability of
Relationships: evidence is influenced by its source and by its nature, and is
Elements of financial information expected to dependent on the individual circumstances under which it is obtained.
have a predictable pattern (gross margin)
Between financial and non-financial information, Information to Be Used as Audit Evidence
(payroll costs to number of employees)
When designing and performing audit procedures, the auditor shall
The auditor should apply analytical procedures at the planning and consider the relevance and reliability of the information to be used as
overall review stages of the audit. Analytical procedures may help audit evidence. The quality of all audit evidence is affected by the
identify the existence of unusual transactions or events, and amounts, relevance and reliability of the information upon which it is based.
ratios, and trends that might indicate matters that have audit
implications. Unusual or unexpected relationships that are identified Relevance
may assist the auditor in identifying risks of material misstatement,
especially risks or material misstatement due to fraud. Relevance deals with the logical connection with, or bearing upon,
the purpose of the audit procedure, direction of testing and, where
However, when such analytical procedures use data aggregated at a appropriate, the assertion under consideration.
high level (which may be the situation with analytical procedures
performed as risk assessment procedures), the results of those Purpose of audit procedure
analytical procedures only provide a broad initial indication about
Audit procedures classified according to purpose are risks assessment
whether a material misstatement may exist. Accordingly, in such
procedures (RAP), test of controls (ToC) and substantive procedures
cases, consideration of other information that has been gathered when
(SP). These three procedures have different purposes such as, to
identifying the risks of material misstatement together with the
obtain understanding entity and its environment, including internal
results of such analytical procedures may assist the auditor in
control and to detect material misstatements in the financial
understanding and evaluating the results of the analytical procedures.
statements, respectively.
Types of Analytical Procedures
Assertion
The following are the types of typical analytical procedures applied
Audit evidence, to be relevant, must link directly t relevant
in a audit:
assertions. The auditor uses assertions in considering different types
a. Trend analysis- this type is based on the assumption that of potential misstatements that may occur in the financial statements.
performance will continue in line with previous It is the reason why audit objectives follow and are closely related
performance or industry trends unless something unusual is why audit objectives follow and are closely related to assertions. In
happening in the company. other words, assertions guide the auditor in the performance of
b. Ratio analysis- this type similar to financial statement auditor procedures as to what appropriate audit evidence to obtain.
analysis, and is highly effective technique to highlight
A given set of audit procedures may provide audit evidence that is
account balances that are out of line and may signal the
relevant to certain assertions, but not others. For example, inspection
potential for fraud.
of documents related to the collection of receivables after the period
c. Test of reasonableness- this type tests whether a recorded
end may provide audit evidence regarding existence and valuation,
amount is reasonable with regards to the auditor’s
but not necessarily cutoff.
expectation.
d. Regression analysis- this type involves time-series analysis Directional Testing
by examining trends in relationship with previous results.
The relevance of information to be used a audit evidence may be
Investigating Results of Analytical Procedures affected by the direction of testing. For example, if the purpose of an
audit procedure is to test for overstatement in the existence or
If analytical procedures identified fluctuations or inconsistent
valuation of accounts payable, testing the recorded accounts payable
relationships that differ significantly from expected values,
may be a relevant audit procedure. On the other hand, when testing
investigate differences by:
for understatement in the existence or valuation of accounts payable,
Inquiring of management and obtaining appropriate audit testing the recorded accounts payable would not be relevant, but
evidence relevant to management’s responses; and testing such information as subsequent disbursements, unpaid
invoices, suppliers’ statements, and unmatched receiving reports may
be relevant.
An effective test provides appropriate audit evidence to an extent Form, Content and Extent of Audit Documentation
that, taken with other audit evidence obtained or to be obtained, will
be sufficient for the auditor’s purposes. The auditor shall prepare audit documentation that is sufficient to
enable an experienced auditor, having no previous connection with
In selecting items for testing, the auditor determines the relevance the audit, to understand:
and reliability of information to be used as audit evidence; the other
aspect of effectiveness (sufficiency) is an important consideration in a. The nature, timing, and extent of the audit procedures
selecting items for testing are: performed to comply with the PSAs and applicable legal
and regulatory requirements;
All items (100% examination) b. The results of the audit procedures performed, and the audit
Specific items evidence obtained; and
Audit sampling c. Significant matters arising during the audit, the conclusions
reached thereon, and significant professional judgments
The application of any one or combination of these means may be made in reaching those conclusions.
appropriate depending on the particular circumstances, for example,
the risks of material misstatement related to the assertion being In documenting the nature, timing and extent fo audit procedures
tested, and the practicality and efficiency of the different means. performed, the auditor shall record:
Inconsistency in, or Doubts over Reliability of, Audit Evidence a. The identifying characteristics of the specific items or
matters tested;
Obtaining audit evidence from different sources or of a different b. Who performed the audit work and the date such work was
nature may indicate that an individual item of audit evidence is not completed; and
reliable, such as when audit evidence obtained from one source is c. Who reviewed the audit work performed and the date and
inconsistent with that obtained form another. This may be the case extent of such review.
when, for example, responses to inquiries of management, internal
audit, and others are inconsistent, or when responses to inquiries of Audit documentation, however, is not a substitute for the entity’s
those charged with governance made to corroborate the responses t accounting records. Oral explanations by the auditor, on their own,
inquiries of management are inconsistent with the response by do not represent adequate support for the work audited.
management. Specific documentation requirement if the auditor
identified information that is inconsistent with the auditor’s final Types of Audit Documentation
conclusion regarding a significant matter.
Auditors generally classify audit documentation into two types:
Audit documentation
a. Current files- relate specifically to the current period’s
Audit documentation (a.k.a. “working papers” or “workpapers”) is audit. They often include
the record of audit procedures performed, relevant audit evidence Reconciliation of accounting records to FSs
obtained, and conclusions the auditor reached. Lead schedules of major components of amounts
in the FSs and supporting detailed schedules
The auditor shall prepare documentation to provide: Documentation of substantive procedures
performed providing evidence corroborating or
a. A sufficient and appropriate record of the bases for the
contradicting management’s assertions
auditor’s report; and
The attorney’s letter and management’s
b. Evidence that the audit was planned and performed in
representation letter
accordance with PSAs and applicable legal and regulatory
Audit programs
requirements.
b. Permanent (continuing) files- relate to the company and
Audit documentation serves a number of additional purposes contain information with long-term significance. They are
including the following: of ongoing interest in any period under audit and often
include
Assisting the audit team to plan and perform the audit. Debt agreements and pension contracts
Assisting members of the audit team responsible for Articles of incorporation
supervision to direct and supervise the audit work, and to Flowcharts of internal control
discharge their review responsibilities. Bond indenture agreements and lease agreements
Enabling the audit team to be accountable for its work. Analysis of capital stock and owners’ equity
Retaining a record of matters of continuing significance to accounts
future audits.
STAGES
Planning and Risk Assessment
Testing (Fieldwork) Completion
Preliminary analytical procedures
Concluding (final or overall)
Procedure (as part of risk assessment Substantive analytical procedures
analytical procedures
procedure)
To obtain understanding the entity To detect material misstatements To form an overall conclusion that the
and its environment in order to and as part of auditor’s responses FS are consistent with the auditor’s
Objective
identify and assess risk of material to risk of material misstatement understanding of the entity
misstatement
Attention directing? Yes No Yes