Audit Report
Qunsl82020
AuditingUnit4.pptWelcome to ACCT325: Auditing
Instructor: Dr. Carla Hodge
Unit 4: The Audit Report
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A Framework for Audit Evidence
- Overview of Audit Evidence
- Assertion Model for Financial Statement Audits
- The Economics of Gathering Appropriate, Sufficient Evidence
- Nature of Audit Testing
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What is Audit Evidence?
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Audit evidence is all the information used by auditors in arriving at the conclusions on which the audit opinion is based. Auditors spend most of their time obtaining and evaluation evidence concerning the assertions contained financial statements and reports on internal control.
The evidence gathering and evidence-evaluation process is the core of an audit.
PCAOB’s AS No. 15 (para. 3) states
The objective of the auditor is to plan and perform the audit to obtain appropriate audit evidence that is sufficient to support the opinion expressed in the auditor’s report.
International Auditing and Assurance Standards Board
Sufficiency and Appropriateness of Audit Evidence (Ref: Para. 13(c))
A20. Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. It may, however, also include information obtained from other sources such as previous audits and a firm’s quality control procedures for client acceptance and continuance. Audit evidence comprises both information that supports and corroborates management’s assertions, and any information that contradicts such assertions. Most of the auditor’s work in forming the audit opinion consists of obtaining and evaluating audit evidence.
AICPA:
Concept of Audit Evidence
.02 Audit evidence is all the information used by the auditor in arriving at
the conclusions on which the audit opinion is based and includes the information
contained in the accounting records underlying the financial statements
and other information. Auditors are not expected to examine all information
that may exist.2 Audit evidence, which is cumulative in nature, includes audit
evidence obtained from audit procedures performed during the course of the
audit and may include audit evidence obtained from other sources, such as previous
audits and a firm's quality control procedures for client acceptance and
continuance.
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Appropriateness
The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based (ISA 500.5)
Sufficiency
The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditors assessment of the risks of material misstatements and also by the quality of such audit evidence.
Relevance – Evidence that provides insight on the validity of the assertion being tested, i.e., the evidence bears directly on the assertion being tested
Reliability – A measure of the quality of the underlying evidence. It is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.
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Legal cases are provided through inferences. These inferences, built in chains, must lead logically from point A to point B.
Evidence - the available body of facts or information indicating whether a belief or proposition is true or valid
Inference – relies on a chain of logic. It determines the strengths and weaknesses of the case.
Proof/Conclusion –
Evidence and Relevance
Evidence is relevant if it tends to either provide or dis-prove an issues in contention. A fact may not immediately appear to be relevant to the ultimate question at issue; however, when the ultimate question is broken down into its component sub-questions the relevance of the act become clearer.
Eight Types of Legal Evidence:
Best Evidence – Often referred to as primary evidence and is the evidence that is the most natural and reliable
Secondary Evidence – Is inferior to primary evidence and cannot be given the same reliance as Best or primary evidence.
Direct Evidence – Proves a fact without having to use presumptions or inference to establish that proof. The testimony of a witness to fact is direct evidence.
Circumstantial Evidence – Proves an intermediate fact(s) from which one can infer the existence of some primary fact that is significant to the issue under consideration. It proves a logical inference that it exists.
Conclusive Evidence – Incontrovertible evidence, irrespective its nature. It is strong so that it overbears all other evidence. It cannot be contradicted and needs no corroboration.
Corroborative Evidence- Additional evidence of a different character concerning the same point. It is evidence supplementary to that already given and tends to strengthen or confirm it.
Opinion Evidence – The opinion rule olds that a witness must ordinarily testify to fact only – to what they actually saw or heard. Opinions maybe biased, self-serving, or uninformed. However, experts are permitted to offer an opinion based on the facts.
Hearsay Evidence – The hearsay rule renders objectionable any statements made by someone, other than a witness, to prove the truth of the matter stated. It only refers to any oral or written evidence brought into court and offered as proof of things said out of court.
Further commentary regarding audit evidence:
Includes both internally generated and external information
Include information that both may support, or contradict, management’s assertions
Is influenced by management actions, e.g., not producing requested documentation, or not producing such documentation in a timely manner
Can be developed using outside experts, and
Can be obtained through other procedures that auditor normally presumes (analysis) of risk deciding whether to accept or continue a client, previous year’s audit data, and quality of a company's control system reflecting accuracy of internal processing)
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Physical examination
Confirmations
Documentation
Analytical Procedures
Inquiries of the Client
Reperformance
Observation
AICPA:
.03 Accounting records generally include the records of initial entries and
supporting records, such as checks and records of electronic fund transfers;
invoices; contracts; the general and subsidiary ledgers, journal entries, and
other adjustments to the financial statements that are not reflected in formal
journal entries; and records such as worksheets and spreadsheets supporting
cost allocations, computations, reconciliations, and disclosures. The entries in
the accounting records are often initiated, authorized, recorded, processed, and reported in electronic form. In addition, the accounting records may be part
of integrated systems that share data and support all aspects of the entity's
financial reporting, operations, and compliance objectives.
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What is an assertion?
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A positive statement about an action, event, condition, or the performance of an entity or product over a specified period of time; the subject of attestation services.
The following primary assertions are embodied in the financial statements.
Existence and occurrence
Assets, liabilities, and equity interest exist
Completeness
All assets, liabilities, and equity interest that should have been recorded have been recorded
Rights and Obligations
The entity hold or controls the rights to assets, and liabilities are the obligations of the entity
Valuation and allocation
Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation nor allocation adjustments are appropriately recorded
Presentation and disclosures
Assets, liabilities, and equity interests are appropriate classified on the financial statements, and area adequately described in the footnotes of the financial statements.
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How much time resources will we need?
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Directs tests of account balances and transactions are designed by determining the most efficient manner to substantiate the assertions embodied in the account of transactions.
Tests of Effectiveness of Internal Control
Dual-Purpose tests of Controls and Account Balances
Substantive Analytical Tests
Direct Tests of Account Balances
Direct Tests of Transitions
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