ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Chapter 2 Corporate Governance and Audits
Corporate Governance is a process by which the owners and creditors of an
organization exert control and require accountability for the resources
entrusted to the organization. The owners (stockholders) elect a board of
directors to provide oversight of the organization’s activities and accountability
to stakeholders
Primary parties involved in corporate governance
o
o
o
o
o
o
o
o
Stockholders
Boards of Directors
Audit Committee
Management
Internal Audits
Self-Regulatory Accounting Organization (e.g. AICPA, FASB)
Regulatory Agencies (e.g. SEC, FDIC)
External Auditors
Principles of Good Corporate Governance
o The board’s fundamental objective should be to build long-term
sustainable growth in shareholder value for the corporation
o Successful corporate governance depends upon successful management
of the company, as management has the primary responsibility for
creating a culture of performance with integrity and ethical behavior
o Good corporate governance should be integrated with the company’s
business strategy and not viewed as simply a compliance obligation
o Transparency is a critical element of good corporate governance, and
companies should make regular efforts to ensure that they have sound
disclosure policies and practices
o Independence and objectivity are necessary attributes of board
members; however, companies must also strike the right balance in the
appointment of independent and non-independent directors to ensure
an appropriate range and mix of expertise, diversity, and knowledge on
the board.
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Role of Audit Committees
The audit committee is a standing committee of the board of directors whose
purpose is to oversee the accounting and financial reporting processes of the
company and the financial statement audits
That committee is designated as the “audit client” to whom the external
auditor should report
For public companies, the audit committee must be composed of outside
directors, i.e., directors who are not members of management and do not have
other relationships with the firm (e.g., as vendor, consultant)
The audit committee should include at least one financial expert who has an
understanding of GAAP and has relevant accounting and audit experience
The audit committee has three primary responsibilities related to the financial
reporting process:
1. Provide oversight of the accounting and financial reporting processes
and of the financial statement audits
2. Appoint, compensate, and oversee the external auditor including
approving any non-audit services to be provided by the external auditor
3. Ensure that the board establishes a whistleblower program
The audit committee will receive feedback from both the internal and external
auditors on a number of issues including the quality of internal controls over
financial reporting
The audit committee should review all regulatory audit findings, where
applicable, to determine if they provide important feedback on the quality of
controls, operational problem, or financial issues
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Corporate Governance and the Audit
Good governance is important to the conduct of an audit for one very simple
reason: companies with good corporate governance are less risky to audit
These companies generally have the following characteristics:
o Less likely to engage in ‘financial engineering’
o Have a cold of conduct that is reinforced by actions of top management
o Have independent board members who take their jobs seriously and
have sufficient time and resources to perform their work
o Take the requirements of good internal control over financial reporting
seriously
o Make a commitment to financial competencies needed
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Chapter 3 Judgmental and Ethical Decision-Making
To maintain the public’s trust, public accountants must act with professional
integrity
Ethical problem occurs when an individual is morally or ethically required to
take an action that may conflict with his or her immediate self-interest
Ethical dilemma occurs when there are conflicting moral duties or obligations
IFAC Ethics Principles
International Ethics Standards Board for Accountants (IESBA) Code of Ethics
requires accountants to adhere to five fundamental principles:
o
o
o
o
o
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behavior
Independence is the cornerstone of auditing profession
Auditors must be independent
o In fact-objective and unbiased in their actions
o In appearance-perceived by knowledgeable users of financial statements
as independent
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Major Threats to Independence
o
o
o
o
o
o
Compensation schemes
Who is the client?
Familiarity with the client
Time pressures
Rationalizing behavior
Providing non-audit services
Managing Threats to Independence
o
o
o
o
o
o
Establishing and monitoring corporate codes of conduct
Developing appropriate compensation schemes
Implementing high-level reviews of decisions to accept or retain clients
Separating consulting activities from audit activities
Performing within-firm reviews of audit work and audit documentation
Performing reviews and inspections within the profession
The Role of Professional Skepticism in Auditors’ Judgments
Professional skepticism is important because without it auditors are
susceptible to accepting weak or inaccurate audit evidence
An auditor who is professionally skeptical will do the following:
o
o
o
o
Critically question contradictory audit evidence
Carefully evaluate the reliability of audit evidence
Reasonably question the authenticity of documentation
Reasonably question the honesty and integrity of management
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
According to international stands, professional skepticism includes being alert
to, for example:
o Audit evidence that contradicts other audit evidence obtained
o Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence
o Conditions that may indicate possible fraud
o Circumstances that suggest the need for audit procedures in addition to
those required by the ISAs
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Chapter4 Audit Risk, Business Risk, and Audit Planning
Nature of Risk
Risk is a pervasive concept. Four critical components of risk that are relevant in
conducting an audit:
o Business risk-risk that affects the operations and potential outcomes of
organizational activities
o Financial reporting risk-risk that relates to the recording of transactions
and the presentation of the financial data in an organization’s financial
statements
o Engagement risk-risk that auditors encounter by being associated with a
particular client, including loss of reputation, inability of the client to pay
the auditor, or financial loss
o Audit risk-risk that the auditor may provide an unqualified opinion on
financial statements that are materially misstated
High-Risk Audit Clients
Characteristics of High-risk clients/companies
o
o
o
o
o
o
o
o
Inadequate capital
Lack of long-run strategic and operational plans
Low cost of entry into the market
Dependence on a limited product range
Dependence on technology that may quickly become obsolete
Instability of future cash flows
History of questionable accounting practices
Previous inquiries by the SEC or other regulatory agencies
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Purpose of Engagement Letter
The auditor and client should have a mutual understanding of the audit
process
The auditor should prepare an engagement letter to clarify the responsibilities
and expectations of each party, and to summarize and document this
understanding including the
o Nature of the services to be provided
o Timing of those services
o Expected fees and basis on which they will be billed (fixed fee, hourly
rates)
o Auditor responsibilities including the search for fraud
o Client responsibilities including preparing information for the audit
o Need for any other services to be performed by the firm
Managing Audit Risk
What is Materiality?
The auditor is expected to design and conduct an audit that provides
reasonable assurance that material misstatement will be detected
The FASB defines materiality as the
“Magnitude of an omission or misstatement of accounting information that, in
light of surrounding circumstances, makes it probable that the judgment of a
reasonable person relying on the information would have been changed or
influenced by the omission or misstatement”
Materiality has three significant dimensions:
o Size of the misstatement (dollar amount)
o Circumstances-some things are viewed more critically than others
o User impact-impact on potential users and the type of judgment made
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Determination of materiality is situation specific. Although this makes
determination more difficult, it allows the auditor to adjust the rigor of the
audit to reflect the risk of the engagement
The lower the dollar amount of set materiality, the more rigorous the
examination
Most firms have guidelines for setting materiality
o Guidelines usually involve applying percentages to some base
o Guidelines may also be based on nature of the industry or other factors
Auditors initially set planning materiality for the statements as a whole, and
then allocate this to individual accounts based on their susceptibility to
misstatement
Understanding the Audit Risk Model
What is Audit Risk?
The risk that the auditor may provide an unqualified opinion on materiality
misstated financial statements
The auditor assesses engagement risk first, then sets audit risk
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
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The Audit Risk Model
Inherent Risk-susceptibility of transactions to be recorded in error
Inherent risk is higher for some items:
o Complex transactions are more likely to be misstated than simple
transactions
o Estimated balances more likely to be misstated than fact based
balances
Control Risk-Risk that the client internal control system will fail to prevent or
detect a misstatement
o The quality of controls often varies between classes of transactions
Environment Risk-inherent and control risks combined
Detection Risk-risk that the audit procedures will fail to detect material
misstatements
o Relates to the effectiveness of audit procedures and their application
If the auditor is examining transactions with high inherent risk, or weak
controls, the auditor will set a low detection risk
Low detection risk means a low probability of NOT detecting material
misstatements
o To achieve low detection risk, the auditor will have to perform more
rigorous substantive testing
o For example, larger sample sizes, more reliable forms of evidence, assign
more experienced auditors, closer supervision, greater year-end (rather
than interim) testing
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Using Analytical Techniques to Identify Areas of Heightened Risk
Auditors use analytical procedures to develop expectations of account
balances
These expectations are compared to recorded book values to identify
misstatements
Sources of data commonly used:
o
o
o
o
Financial information for prior periods
Expected or planned results from budgets and forecasts
Expected or planned results from budgets and forecasts
Comparison of linked accounts relationships (such as interest expense
and debt)
o Ratios of financial information (such as common size financial
statements)
o Company and industry trends
o Relevant non-financial information
Process for Performing Analytical Procedures
Develop an expectation (informed expectation)
Determining the gap between auditor’s expectation and what the client has
recorded.
o The maximum acceptable difference is referred to as a threshold
o Differences in excess of the threshold will have to be investigated by the
auditor
Identifying the differences need to be investigated in greater detail
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
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Questions arising from comparing expectations to the client’s records
e.g. Why is this company experiencing rapid sales growth when the rest of the
industry is showing a downturn?
e.g. Why are a bank client’s loan repayments on a more current basis than
those of similar banks operating in the same region with the same type of
customers?
Types of Analytical Procedures
Techniques commonly used
Trend Analysis – includes simple year-to-year comparisons of account
balances, graphic presentations, and analysis of financial data, histograms of
rations, and projections of account balances based on the history of changes in
the account
Ratio Analysis
o Useful in identifying significant differences between the client results
and a norm (such as industry ratios) or between auditor expectations
and actual results
o Useful in identifying potential audit problems
o It has power to identify unusual or unexpected changes in relationships
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Chapter 5 Internal Control over Financial Reporting
Importance of Internal Control to Financial Statement Audits
The quality of internal control over financial reporting is an important part of
an organization’s commitment to good governance
Internal control processes must effectively address risks that are present
between an organization and the accomplishment of its objectives
Internal controls are needed because every organization faces significant risks
like:
o Corporate failure
o Misuse of corporate assets
o Incorrect or incomplete preparation of financial information
COSO: Framework for Internal Control
Internal control is a process designed to provide reasonable assurance of
achieving the following:
o Reliability of financial reporting
o Compliance with applicable laws and regulations
o Effectiveness and efficiency of operations
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
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(South-Western CENGAGE Learning)
Components of Internal Control [COSO]
An internal control system consists of five components
1. Risk assessment: process designed to identify and manage risks that may
affect its ability to achieve its objectives
2. Control environment: overall attitude, awareness, and actions of significant
internal groups to maintain a well-controlled organization (note at the top)
3. Control activities: policies and procedures established by management to
help ensure that internal control objectives are achieved and risks mitigated
4. Information and communication: process of identifying, capturing, and
exchanging information in a timely fashion to enable the organization to
achieve its objectives
5. Monitoring: process that assesses the quality of internal controls over time
Risk Assessment
Risk assessment involves the identification and analysis of the risks of material
misstatement in financial reports
Failure to identify risks, results in deficiencies in the control processes to
mitigate the risks
Risk assessment questionnaire is used for identifying the significant risks
related to financial reporting and documenting
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Control Environment
Factors an auditor should look at when evaluating an organization’s control
environment:
o
o
o
o
Integrity and ethical values
Board of directors and audit committee
Management’s philosophy and operating style
Organizational structure, including assignment of authority and
responsibility
o Commitment to financial reporting competence
o Authority and Responsibility
o Human resource policies and practices
Control Activities
Control activities are policies and procedures implemented across the
organization to reduce the risk of financial reporting misstatements
Control activities involve:
o The design of the control
o The operations of the control
The sources to misstatement includes:
o Transaction processing
o Accounting estimates
o Adjusting and closing entries
Control activities implemented in almost all accounting systems include:
o
o
o
o
Segregation of duties
Authorization procedures
Adequately documented transaction trail
Physical controls to safeguard assets
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
o Reconciliation of control accounts with subsidiary ledgers, of
transactions recorded with transactions submitted for processing, and of
physical counts of assets with recorded assets
Information and Communication
o Information and communication represent a company’s processes for
gathering key financial information to support the achievement of
financial reporting objectives
o Information must be communicated to the right people
o It must also be assured that substantive issues are report to audit
committee for investigation
Monitoring
Monitoring represents a company’s processes to determine whether internal
control over financial reporting is operating effectively
Ongoing monitoring processes are designed to identify control failures
Effective control system rely heavily on monitoring
Internal auditing is a highly effective monitoring control
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Material Weakness
Deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not
be prevented or detected on a timely basis
Significant Deficiency
Deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough
to merit attention by those responsible for oversight of the company’s
financial reporting
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Chapter6 Performing an Integrated Audit
Auditing standards No.5 (AS5) highlights the following significant and
important points about an integrated audit:
o Encourages management and auditors to implement a top-down, riskbased approach to identify significant accounts, relevant assertions, the
risk of misstatement, and the controls that are important to mitigating
those risks
o Indicates that a material weakness means that the control deficiency is
such that there is a reasonable possibility that a material misstatement
could occur, and not be detected, in the financial statements
o Recognized, that to some extent, the external auditor can rely on some
of the company’s evaluation and or testing of controls, particularly work
performed by a competent and independent internal audit function
o Emphasizes the need to document the auditor’s reasoning process
linking risk and control deficiencies to specific tests of account balances
o Increases audit efficiency by getting auditors to think through areas
where they can place greater reliance on effective internal controls in
reducing the amount of substantive tests of account balances
AS13, The Auditor’s Responses to the Risks of Material Misstatement,
reiterates that the auditor is required to perform the evaluation of internal
controls and the audit of the financial statements at the same time
Important Elements of the Integrated Audit
o Quality of internal control affects the reliability of financial statement
data
o Control environment is pervasive and affects the process of recording
transactions, making estimates, and making adjusting entries
o If the control environment is strong and the controls over transaction
processing, adjusting, and estimating are good, then both management
and the auditor would have a high degree of confidence that the
financial accounts are fairly stated and financial disclosure are adequate
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
o A potential for misstatements exists in inputting, processing, estimating,
or adjusting account balances
o There is always a need to perform some substantive testing of material
account balances, but the nature, timing, and extent of that testing will
depend on the quality of internal controls
o The auditor’s evidence is based on testing internal controls, testing
transactions, and substantive tests of account balances, including
substantive analytical procedures and direct tests of account balances
Steps in implement an Integrated Audit
Step1: Update information about various risks
This requires auditors to identify
o Account balances or related disclosures that are more likely to be
materially misstated
o Potential causes of the misstatement
o Important processes that may affect one or more account balances
Step2: Consider the possibility of account misstatements
Step3: Complete preliminary analytical procedures
Step4: Understand the client’s internal controls
o Documenting significant accounts (including the relevant assertions of
those accounts), the processes related to those accounts, and controls
within those processes
o Documenting the other COSO control components, especially the control
environment, risk assessment, and monitoring
o How management tests the effectiveness of important controls
o Identifying how management has corrected identified control
deficiencies, where applicable
o Understanding management’s monitoring of previously identified
effective controls
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Step5: Identify Controls to Test
o Formulating an opinion on the entity’s internal controls
o For reducing substantive testing for the financial statement audit
o Evaluating the Control Environment, Risk
Assessment, Information and Communication, and Monitoring
o Management’s Process of Evaluating Internal Control
In assessing whether the work of the internal auditor can be relied on, the
auditor considers
o The independence of the internal audit function from management
o The competency of the internal audit department
o The design and comprehensiveness of the internal audit testing
approach
o The documentation of the internal audit testing
o Corroborating evidence, for example, selected tests of the same controls
to validate the results achieved by internal audit
Step6: Make a plan to test the controls and execute that plan
Concepts affecting Control Testing
 Computerized Controls
 Manual Controls:
o Authorizations
o Reconciliations
o Segregation of duties
o Review for unusual
o Transactions
 Adjusting Entries
 Accounting Estimates
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Step7: Consider the Results of Control Testing
Potential outcomes, with associated alternative courses of action in the audit
If deficiencies are identified, assess those deficiencies to
o Determine whether they are significant deficiencies or material
weaknesses
o Determine whether the preliminary control risk assessment should be
modified and document the implications for substantive testing
o Determine the impact of these deficiencies, and any revision on the
control risk assessment, and on planned substantive audit procedures by
determining the types of misstatements that are most likely to occur
If no control deficiencies are identified, assess
o Whether the preliminary control risk assessment is still appropriate
o Determine the extent that controls can provide evidence on the
correctness of account balances, and
o Determine planned substantive audit procedures
- The level of substantive testing in this situation will be less than what
is required in circumstances where deficiencies in internal control
were identified
Step8: Conduct substantive audit tests
Identification of material account balance
o Input from the audit team’s brainstorming analysis regarding potential
for fraud
o Review of “market expectations’ of company performance
o Trends in performance, including trends in key business segments
o The size of the account balance
o The subjectivity used in making the accounting estimate
o Comparison of account balances with industry trends, averages
o Other important factors specific to the client
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Chapter7 Audit Evidence
The evidence gathering process is the core of audit; evidence is needed to
o Reduce audit risk
o Support the opinion
In deciding which evidence to gather, the auditor considers
o Risk associated with an account balance or other measures of
performance
o Types of evidence available
o Reliability of alternative sources of evidence
Characteristics of Audit Evidence: Appropriateness and Sufficiency
Appropriateness is defined as:
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
Sufficiency is defined as:
The measure of the quantity of audit evidence; the quantity of the audit
evidence needed is affected by the auditor’s assessment of the risks of
material misstatement and also by the quality of such audit evidence
Sources of Evidence
1. Knowledge of the Client
 Previous audit work
 Client risk analysis
 Client acceptance analysis
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2. Outside Information
 Work of the audit team using market data
 Independence analyses by specialists
3. Accounting systems
 Direct tests of account balances and transactions
 Analytical analysis
4. Quality of Internal Control
 Evaluation of the design of internal controls
 Evaluation of the operation of controls
The auditor gathers evidence to evaluate the management assertions
embodied in the financial statements and individual accounts
o
o
o
o
o
Existence or occurrence
Completeness
Rights and Obligations
Valuation or allocation
Presentation and disclosure
Because each audit is unique, there is no set amount or type of evidence that
must be gathered
When considering the best approach to gather evidence, the auditor needs to
consider factors affecting the reliability of the financial data:
o
o
o
o
o
Management integrity
Client economic risk
Quality of client’s information system
Client’s internal controls
Current market conditions and competitor actions
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
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Appropriateness:
Relevance of Audit Evidence
- Relevance deals with logical connection with, or bearing on, the purpose
of the audit procedure as related to the underlying assertion being
tested
- Some evidence is directly relevant to the assertion and is often referred
to as direct evidence
- Indirect evidence often requires more inferences and the logic for the
conclusion relies on more complex inferences
Reliability of Audit Evidence
- The reliability of audit evidence is judged by its ability to provide
convincing evidence related to the audit objective being evaluated
- Evidence obtained directly by the auditor is preferable to that obtained
indirectly
- Evidence from well-controlled information systems is preferable to that
from poorly systems
- Independent third-party evidence obtained from knowledgeable
individuals with adequate time and motivation to respond to audit
inquiries is preferable to internally generated information (that could be
fabricated) from the client
- Evidence supported by original documents is preferable to photocopied
documents
- Observable evidence is generally better than oral evidence (unless the
auditor can determine the oral evidence is not in some way biased)
Sufficiency
The amount of evidence must of sufficient quantity to convince the audit team
of the correctness or incorrectness of an account balance
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Commonly Used Audit Procedures
Auditors use a variety of procedures to gather evidence
For certain accounts or management assertions, certain procedures may be
more efficient or effective than other procedures
When writing audit programs, the auditor tries to use those procedures
The primary types of audit procedures include:
o
o
o
o
o
o
o
o
Physical examination of assets
Inquiry
Confirmations
Examination of documents
Re-computation of data
Reprocessing transactions
Vouching transactions
Analytical procedures
Physical examination of assets
- Useful in verifying existence of tangible assets
- May be useful in identifying potential obsolescence or wear and tear
- Does not provide evidence on completeness, ownership, or proper
valuation
Inquiry
- Used extensively, especially early in the audit to gain an understanding
- Efficient way to gather evidence
- Not considered persuasive, should be corroborated by other sources of
evidence
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Confirmations
- Auditor sends letter to outside party asking them to verify client
information
- Considered strong evidence because they come from external parties
- Limitations:
o Respondents may not adequately check information being
confirmed
o Respondents may not respond in a timely fashion
o Respondents may not challenge figures in their favor
Examination of Documents
- Much of the audit process involves examining documents
- Useful for evaluating all of the assertions
- Auditor should establish document authenticity in order to rely on it
Recalculation
- Includes footing, cross-footing, tests of extensions, re-computation
- Often used to test accuracy of estimated accounts and allowances
Test of transactions involve reconciling source documents with recorded
accounting information
Reprocessing
- Select sample of source documents and reprocess them to make sure
they have all been properly recorded
- Includes reviewing journalizing and posting of the transaction
- Helps establish completeness (all valid items have been recorded)
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Vouching
- Reverse of reprocessing
- Select sample of already recorded transactions and trace back to the
underlying source documents
- Helps establish that recorded transactions are valid (existence)
Analytics
- Compare recorded account balances (or ratios of balances) to
expectations developed by the auditor
- Sources used to develop these expectations include client’s prior period
information, industry data, expected results
Audit programs and Documenting Audit Evidence
Audit programs specify the audit objectives and procedures used to gather,
document, and evaluate evidence
Audit programs guide the conduct of the audit and provide an effective means
for:
o
o
o
o
Organizing and distributing audit work
Monitoring the audit process
Recording audit work performed
Reviewing the audit procedures performed and evidence gathered
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
The audit work papers include all forms of documentation including:
o Evidence of planning, including audit programs
o The client’s trial balance and any auditor adjustments
o Copied of selected internal and external documents including
confirmation and representation letters and abstracts of company
documents
o Schedules prepared or obtained by the auditor
o Results of analytical procedures and tests of client records
o Auditor analysis of account balance
Audit programs
The work papers are the primary evidence in support of audit conclusions and
should cover all relevant audit work, support the audit report, and leave no
significant points unresolved
The work papers aid in the conduct and supervision of the work, facilitate
performance of an effective review, demonstrate adherence to professional
and firm auditing standards and procedures, and assist in planning the
following year’s audit
ACT3641 Auditing1 Mid-term Chapter 2-7 Group: Nook
Textbook: Auditing, 8th Edition, Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)
Reference
Textbook: Auditing, 8th Edition
Audrey A. GRamling, Larry E. Rittenberg, and Karla M. Johnstone
(South-Western CENGAGE Learning)