Standards on Auditing Audit Evidence and Documentation By CA Sanjeev Verma Lucknow Email : firstname.lastname@example.org. About Standards on Auditing. These Standards establish the independent auditors’ overall responsibility. It explains nature & scope of an audit
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Standards on AuditingAudit Evidence and DocumentationByCA Sanjeev VermaLucknowEmail: email@example.com
About Standards on Auditing • These Standards establish the independent auditors’ overall responsibility. • It explains nature & scope of an audit • It explains scope, authority & structure of the standards and include requirements establishing general responsibilities of independent auditor applicable in all audits. • These standards to be adopted as necessary in circumstances when applied to audits of other historical financial information
Audit Evidence and Documentation ICAI pronouncements:- • Audit Documentation- SA-230 (Revised) –effective for audit for period beginning from 1-4-2009 • Audit Evidence- SA-500 (Revised) –effective for audit for period beginning from 1-4-2009
Audit Evidence Audit Evidence dealt by following SAs- • SA 500 (Revised) “Audit Evidence” • SA 501 (Revised), “Audit Evidence—Specific Considerations for Selected Items” • SA 505 (Revised), “External Confirmations” • SA 510 (Revised) “Initial Audit Engagements – Opening Balances” • SA 520 (Revised) “Analytical Procedures” • SA 530 (Revised) “Audit Sampling” • SA 540 (Revised) “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” • SA 550 “Related Parties” • SA 560 (Revised) “Subsequent Events” • SA 570 (Revised) “Going Concern” • SA 580 (Revised)”Written Representations”
The Third Standard of Field Work Sufficient appropriateevidential matteris to obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
Management Assertions Embodied in the Financial Statements • Existence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred. • Completeness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included. • Rights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements.
Management Assertions Embodied in the Financial Statements • Valuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles. • Presentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided. • Accuracy – Amounts and other data relating to recorded transactions have been recorded properly. • Cutoff – Transactions have been recorded in the proper accounting period.
Financial Statements (GAAP) Management Assertions Audit Objectives Audit Evidence Audit Report on Financial Statements Audit Procedures Relationship of Financial Statement Assertions and the Audit
Audit Risk Risk of Material Risk that the Auditors Audit Risk = Misstatement * Fail to Detect the Misstatement = Inherent Control Detection Risk * Risk * Risk
Inherent Risk The risk of a material misstatement occurring in an assertion assuming no related internal controls. Related to: • Nature of the client or industry • Nature of the financial statement account
Control Risk Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control.
Detection Risk Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist. Detection risk restricted by performing substantive tests
Audit Risk Formula AR = IR x CR x DR AR = Audit risk IR = Inherent risk CR = Control risk DR = Detection risk
Audit Risk FormulaSolving for Detection Risk • Implications • Assuming constant, sufficiently low AR, detection risk is inversely related to IR and CR ↑ combined IR and CR ↓ allowed DR ↑ substantive evidence
Audit Evidence Evidential matter: Any information that corroborates or refutes an assertion
Audit Evidence Some Relevant Terms used in SA 500: • Accounting Records • Appropriateness(of audit evidence) • Audit Evidence • Management’s Expert • Sufficiency(of audit evidence)
Types of Evidence • Physical evidence • Third-party representations • Documentary evidence • Computations • Data Interrelationships • Client representations • Accounting records
Types of EvidencePhysical Evidence Evidence that can actually be seen by auditors. • This type of evidence is generally effective for supporting the existence assertion.
Types of EvidenceThird Party Representations • Confirmations • Lawyers’ Letters • Reports of Specialists
Types of EvidenceDocumentary Evidence Four basic types (helps determine competence): • Created by outside parties and transmitted directly to auditor • Created by outside parties and held by client • Created and held by client • Electronic documents
Types of EvidenceComputations Computations are: • performed independently by auditor • used to verify mathematical accuracy of client’s analyses and records
Types of EvidenceData Interrelationships Data interrelationships (i.e., analytical procedures) rely on plausible relationships among financial and non-financial data. • Effective for testing “reasonableness” of certain account balances • Can be used as primary or corroborating evidence, depending on the nature of account
Types of EvidenceOral and Written Client Representations Responses to questions and inquiries to clients during an audit constitute audit evidence. • Oral representations are generally not sufficient as primary evidence, but may provide corroboration for other evidence. • Written representations (representation letter) are required, but should not be used as a substitute for other audit procedures.
Types of EvidenceAccounting Records Clients’ accounting records (e.g. ledgers and journals) may provide worthwhile evidence in themselves. • Depends on the effectiveness of internal controls
Audit Procedures • Physical examination • Observation • Confirmation • Tracing • Vouching • Inspection • Reconciliation • Re-performance • Analytical procedures • Inquiry • Comparison Physical Evidence Third-Party Representations Documentary Evidence Computations Data Interrelationships Client Representations Accounting Records
Competence of Evidential Matter SA -Specific considerations for selected items • Inventory • When Inventory is material to financial statement, auditor to obtain sufficient audit evidence regarding existence and condition by i) Attendance at physical counting unless impracticable ii) Performing audit procedures to determine whether they actually reflect actual inventory count results. • If physical conducted on other date-perform audit procedures to obtain audit evidence for change in duration. • If auditor unable to attend physical counting, to make or observe on alternate date • If attendance not possible at all, to observe audit procedures to obtain sufficient appropriate audit evidence and if not possible to do so- to modify opinion in Audit Report in accordance with SA705 • Written representations. • Litigation and claims • Segment Informations
Competence of Evidential Matter SA -Specific considerations for selected items • Litigation and claims • auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: (a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel; (b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and (c) Reviewing legal expense accounts. • If: (a) management refuses to give the auditor permission to communicate with the entity’s external legal counsel/ external legal counsel refuses to respond appropriately or is prohibited from responding; and (b) the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, • the auditor shall modify the opinion in the auditor’s report in accordance with SA 705.
Competence of Evidential Matter SA -Specific considerations for selected items • Segment Informations • The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by: • (a) Obtaining an understanding of the methods used by management in determining segment information, and (i) Evaluating whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework; and (ii) Where appropriate, testing the application of such methods; and • (b) Performing analytical procedures or other audit procedures appropriate in the circumstances
Competence of Evidential Matter • To be competent evidence must be: • Relevant • Must relate to the audit objective • Valid (Reliable) • Independent sources have greater reliability than those within the client organization. • Strong internal control increases reliability of evidence created within the client organization. • Directly obtained evidence is more reliable than evidence obtained second hand.
Reliability of Certain Types of Audit Evidence • RELIABILITY TYPE EXAMPLE • HighPhysical Inventory Observation • Documentary • External Cutoff Bank Statement • External/Internal Purchase Invoice • Internal Sales Invoice • LowClient Representations Management Representation • Letter
Basic Approaches to Auditing Accounting Estimates • Review and test management’s process for developing the estimate. • Independently develop an estimate to compare to management’s estimate. • Review subsequent events or transactions bearing on the estimate.
Audit Documentation SA 230 Nature & Purpose of Audit Documentation • Evidence of the auditor’s basis for conclusion about the achievement of the overall objective of the auditor & • Evidence that the audit was planned and performed in accordance with SA’s and applicable legal and regulatory requirements
Audit Documentation SA 230 Serves number of additional purposes:- • Assist engagement team to plan & perform audit • Assist team members to direct & supervise and to discharge their review responsibilities. • Enable the team to be accountable for its work • Retaining a record of continuing significance to future audit • Enable the conduct of quality control review • Enable the conduct of external inspections in accordance with applicable legal, regulatory/other requirements
Functions of Working Papers • Provide support for the auditors’ opinion • Document the auditors’ compliance with generally accepted auditing standards, especially the standards of field work • Provide a means of assigning and coordinating audit work • Aid in supervising and reviewing the audit work • Aid in planning and conducting future audits
Types of Working Papers • Audit Administrative Working Papers • Working Trial Balance • Lead Schedules (Grouping Sheets) • Adjusting and Reclassification Journal Entries • Supporting Schedules • Account Analysis • Reconciliations • Computational Working Papers • Corroborating Documents
Types of Working Files • Current files • Typically arranged and indexed around accounts in clients’ financial statement • Support current year’s audit report • Permanent files • Document items of concern over multiple years • Provide summary of policies and organization of client • To preserve working papers that have little change over time.
Comparison with ISA 230 • ISA 230 prescribes minimum period of engagement documentation as 5 years while SA 230 prescribes as 10 years • Ownership of Audit Documentation- Not specified in ISA230 while SA230 provides that unless otherwise specified by law or regulation, audit documentation is property of the auditor.
SA500 & SA 230 Thanks For Patience Hearing & Interaction