FINANCIAL AUDIT METHODOLOGY. PETER CARLILL UK NATIONAL AUDIT OFFICE. ROLE OF NAO. To provide independent information, assurance and advice to Parliament on the use of public resources To help promote better financial management and value for money. Our role. BODIES AUDITED.
FINANCIAL AUDIT METHODOLOGY
UK NATIONAL AUDIT OFFICE
THREE AREAS TO CONSIDER:
An audit needs to be planned and conducted so as to provide reasonable assurance that the financial statements are free from material misstatement.
A matter is considered material if its omission, concealment or misstatement could influence the decisions of users of the financial statements that were taken on the basis of the financial statements.
Usually a percentage (0.5% - 2%) of:
Or, if applicable:
Some items can be material because of their sensitivity or by their context, even though they may be small in value.
Plot on the Risk Mapping Diagram:
1. Computer crash leading to loss of all accounting records
2. Failure to estimate useful lives of PCs leading to incorrect depreciation charges
3. Risk of error in social security payments because of highly complex regulations and frequent changes of staff (Ministry’s only activity)
The Decision Tree
The Decision Tree provides a framework to determine the audit procedures to be used for each area of the account.
The starting point is our assessment of risk for the entity as a whole and for individual account areas. Where we have identified risks of material misstatement we should look to test controls that have been identified as mitigating the risks. Where we have identified no risks of material misstatement we should still look to test controls relevant to the account area to provide the majority of audit assurance.
Beyond controls testing the balance of assurance will come from substantive procedures, including analytical procedures (AP’s).
* If the account area/balance being audited is not material it may be sufficient to rely on an overall review of outtum only, without testing controls.
AUDIT PROCEDURES:CONCEPT AND DECISION TREE
HIGH LEVEL controls are those which affect > 1 transaction. For example:
Transaction testing is expensive, therefore use other methods first to reduce the numbers required.
But beware of sample sizes too low or too high