SPECIFIC TYPES OF
AUDIT EVIDENCE
REFERENCES
ISA 505 – External confirmations
•“SAICA Handbook” or IFAC website
ISA 540 – Auditing accounting estimates
•“SAICA Handbook” or IFAC website
ISA 520 – Analytical procedures
•“SAICA Handbook” or IFAC website
“
It is imperative for topics relating to ISA 540 & ISA 520 that the
standards themselves are used for study purposes.
2
LEARNING
OUTCOMES
1. Explain the auditor’s responsibility relating to:
• external confirmations (ISA 505)
• the audit of accounting estimates(ISA 540)
• the performance of analytical procedures (ISA 520)
in regard to account balances at the end of the financial year being
audited.
2. Describe the audit procedures that the auditor should carry out to
discharge his/her responsibility regarding:
• the use of external confirmations(ISA505)
• the estimates included in account balances(ISA540)
• analytical procedures (ISA520)
3. Explain the reliability of external confirmations in a given scenario in
terms of the appropriateness of audit evidence(ISA505)
External Confirmations
– ISA 505
1. INTRODUCTION
– ISA505 para 2
Use of
External Confirmations
Bank
information
Investments
Title
Deeds
matters
Loan
amounts/outstanding
debt
Documents
held
safeparties
custody
Accounts receivable
Inventory
(e.g.
trade
held
debtor
byinLegal
third
balances)
to obtain
Audit evidence and reliability:
 Source: external / internal; level of authority.
 Obtained direct or indirect/by inference.
 Form: documentary (paper/electronic) / verbal.
For which assertions can audit evidence be obtained through
external confirmations? (i.t.o. account balances)
 Existence, Rights / Obligations, Valuation and/or Completeness?
2. REQUIREMENTS
– ISA505 para 7
2.1 When performing external confirmation; procedures:
- Control over process
- What Information?
- Confirming party?
- Design request
- Send
NB: obtain management permission to send beforehand
2. REQUIREMENTS
– ISA505 para 8
0
2.2 If management refuses permission to confirm:
Reason? Reasonable?
Impact on risk assessment (RMM) /risk of fraud?
Alternative procedures...
Objective: must regardless, obtain sufficient appropriate
audit evidence! What if can’t?
2. REQUIREMENTS
– ISA505 para 9
2.3 Doubts as to reliability of audit evidence from external
confirmation
Impact on risk assessment (RMM)/risk of fraud?
Alternative procedures
Evidence , then impact on audit opinion
2. REQUIREMENTS
– ISA505 para 06
2.4 TYPES OF EXTERNAL CONFIRMATION REQUESTS
 Positive confirmation request
 Respond if agree or disagree
 Negative confirmation request
 Respond only if disagree
Which offers more reliable audit evidence?
EXAMPLES
 Example of a bank confirmation (SAAPS 1100)
 Examples of alternative audit procedures
•If cannot confirm a debtor’s balance?
•If cannot confirm a creditor’s balance?
Auditing Accounting
Estimates – ISA 540
INTRODUCTION
– ISA 540 para 6
Definition
“An approximation of a monetary amount in the
absence of a precise means of measurement.”
Examples
Auditor’s Responsibility/Objective
Sufficient appropriate audit evidence about:
(a) accounting estimates reasonable;
(b) related disclosures in the financial statements are
adequate.
DEFINITIONS
– ISA 540 para 7
Other Definitions
“Auditor’s point estimate – The amount, or range of amounts, respectively, derived
from audit evidence for use in evaluating management’s point estimate.” - ISA540
para7(b)
“Estimation uncertainty – The susceptibility of an accounting estimate and related
disclosures to an inherent lack of precision in its measurement.” - ISA540 para
7(c)
“Management bias - A lack of neutrality by management in the preparation of
information” - ISA540 para 7(d)
“Management’s point estimate – The amount selected by management for
recognition or disclosure in the financial statements as an accounting estimate.” ISA540 para 7(e)
“Outcome of an accounting estimate – The actual monetary amount which results
from the resolution of the underlying transaction(s), event(s) or condition(s)
addressed by the accounting estimate.” - ISA540 para 7(f)
NATURE OF ACCOUNTING
ESTIMATES – ISA 540 para 2
Risk of material misstatement in accounting estimates varies:
 dependent on the level of estimation uncertainty of the estimate
involved, in turn dependent on:
• Complexity of the business activities of the entity;
• Frequency at which the estimate is made (routine/non-routine
transactions);
• Availability (“Observability”) of data;
• Ease at which the method of measurement is applied, as
prescribed by IFRS;
•“Model” used to measure the estimate.
14
REQUIREMENTS
– ISA 540 para 8-11
1. Risk Assessment Procedures: ID and Assess RMM
Auditor’s considerations when determining the risks associated with
estimates:
• The requirements of the financial reporting framework (e.g. IFRS)?
• How management identifies indicators that give rise to the need for
estimates?
• How does management make the estimate? On what data is it based?
 The method used
 Relevant controls
 Whether an expert was used
 Underlying assumptions
 Changes in the method used from the prior period
 How management has assessed the effect of estimation uncertainty
• What is the estimation uncertainty associated with the estimate?
• Is there a significant risk associated with the estimate?
REQUIREMENTS
– ISA 540 para 12-14
2. Responses to the Assessed Risk of Material Misstatements
Put risk assessment into action (i.e. respond to the information
obtained as per the previous slide):
Auditor determines whether:
 Requirements of the applicable financial reporting framework
have been applied appropriately?
 Expert is needed in assisting with valuation?
 Controls were in place when management made estimate?
Auditor tests whether:
 Methods used by management are appropriate and have been
applied consistently;
 Assumptions used are reasonable;
 Management’s point estimate reasonable compared to
auditor’s.
16
REQUIREMENTS
– ISA 540 para 21-22
Indicators of Possible Management Bias
 Review the judgments/decisions made by management to identify
whether there are indicators of possible management bias.
Written Representations
 Obtain written representations from management whether they
believe significant assumptions are reasonable.
Analytical
Procedures
ISA 520
APPLICABILITY
There are two ways to accumulate audit evidence.
Test the controls
and/or
Perform substantive
tests on the
transactions and the
balances
Test of detail
Analytical procedures
ISA -520
APPLICABILITY
ISA 520 para 1 and 3.
When would we as auditors make use of ISA 520 ?
1. As a substantive procedure
• During an audit
• For relevant , reliable evidence, as to an assertion/s
• Alone/in combination with other substantive tests of detail.
2. To corroborate conclusions formed at the end of the audit
Suggestion of responsibility to perform in the final conclusion of
the audit
3. Risk assessment ( but this is covered by ISA315)
ANALYTICAL
REVIEW
DEFINED
ISA 520 para 4.
What is an analytical procedure?
Comparison /
Relationship
Evaluation
ANALYTICAL
REVIEW
DEFINED
ISA 520 para 4. and A1. to A3.
Comparison/Relationship
of
Current financial
transactions/
balances
• individually
• aggregated
• dissembled
to other
Financial ,non financial
and operating data of
•
•
•
•
•
Prior periods
Budgets
Same/similar industry
Auditors expectations
etc.
ANALYTICAL
REVIEW
DEFINED
ISA 520 para 4. and A1. to A3
Comparison/Relationship
This can take the form of :
• Ratios
• Percentages
• Volumes
• Averages
• GP%
• Payroll costs to number of employees etc.
ANALYTICAL
REVIEW
DEFINED
ISA 520 para 4. and 5 and A15. to A21.
Evaluation
The results must be evaluated against
predetermined expectations
The auditor would need to:
•
•
•
Get explanations from management as to why any results
differ from the expected
Corroborate these explanations
Perform further substantive tests of detail if still not
satisfied
DESIGNING &
PERFORMING
PROCEDURES
ISA 520 para. 5 and A12 to A16
In designing Analytical Procedures the auditor should consider:
1. Suitability of actual analytical procedure
2. Reliability of data
3. Predetermined expectations
4. Need to determine an amount of acceptable
difference based on materiality and desired level of
assurance
DESIGNING &
PERFORMING
PROCEDURES
ISA 520 para. 5 and A6. to A10.
1.Suitability?
Degree of reliance
Of procedure for
purpose
Predictable
Assessed risk of
material misstatement
DESIGNING &
PERFORMING
PROCEDURES
ISA 520 para. 5 and A12
2.Reliability?
Independent
Source
Preparation
Nature and
relevance
Comparability
DESIGNING &
PERFORMING
PROCEDURES
ISA 520 para. 5 and A15
3.Predetermined
expectation!
Detection of
material
misstatement
Precision of
results ?
Dissembling of
information
EXAMPLE
A typical , basic analytical procedure that one may
perform for a dairy’s sales (Financial year end 31 December)
o First : Dissemble the information e.g.
• Ice cream sales
• Milk sales
• Cream sales etc.
o Second: Determine expectations e.g.
• Sales increased 8% on previous year, increase occurring
on 1January 2013 (management’s documented price
increase policy)
• Higher sales in summer and the holiday seasons
• Lower sales in winter
EXAMPLES
800
Monthly Ice Cream sales of Delly Dairy (Pty)Ltd
700
Rands
600
500
400
300
2012
2013
200
100
0
Months
EXAMPLE
A typical , basic analytical procedure that one may
perform for a dairy’s sales
o Third: Accumulate data
o Fourth: Analyse data e.g. ask management why
• April and May are lower than last year ?
• June through to July are lower than last year ?
o Fifth: Corroborate management’s reasons
• Perform additional tests if necessary
DESIGNING &
PERFORMING
PROCEDURES
SUMMARY
Predetermined
Expectation!
Corroborate expectations
if necessary
Gather &
dissemble data
Ensure data agrees to
the financial records
Compare data
to expectations
Determine reasons for
any differences
Corroborate
reasons
END
THANK YOU!
BAIE DANKIE!
ENKOSI KAKHULU!