2

Performing independent calculations or recalculating the client’s calculations.
Reperformance is applied in control testing, the auditor independently executes an internal control procedure
Looking at the application of policy or procedures by others.
3

External Confirmation:
Consists of (written) enquiry to verify accounting records.
Confirmation procedures:
•
Confirmations should be printed
•
Auditor needs to ensure that the address on the confirmation
•
The recipient should be able
•
The auditor must
•
Responses must be
Forms of confirmations:
•
Positive confirmations:
•
Negative confirmations:
4

Negative confirmations:
Typically, when negative confirmations are used, the auditor puts considerable emphasis on the effectiveness of internal control
Often used in audit of
In these situations more emphasis is placed on test of controls
5

•
Involves the collection of oral evidence from the client and independent third parties.
•
Looking at records, documents, or assets having physical substance.
6

Vouching:
•
Information is selected from an account or other summary of information and the auditor goes back through the control system to find the source documentation.
Source documents
Vouch Account or
Journal
Tracing:
•
Auditor selects source documents and proceeds forward through the control system to the final recording of the transaction.
Source documents
Trace
Account or
Journal
7

•
An eyes-open approach of looking for anything unusual.
•
.
•
Compare recorded amounts to expectations.
• Analysis is the “other” category in the list of audit techniques.
•
Analytical procedures are both important and effective.
•
Analysis is used in planning, execution, and completion of the audit.
•
Some typical analytic procedures:
8

9

For continuing audits, information about the client is available in the permanent files.
Observations and tour of company’s physical facilities
The auditor can study and review research databases, published materials, guides, and other reference materials on the industry and the client.
Internal auditors can assist by providing information
The auditor may employ or contract the services of an expert in certain fields.
10

Standards require auditors to obtain sufficient appropriate evidence.
To be considered appropriate, evidence must be relevant and reliable.
•
Relevant:
•
Reliable: reliability of audit evidence depends on nature and source.
Reliability combined with relevance determine the persuasiveness of evidence.
11

1.
Auditors direct, personal knowledge:
2.
External evidence:
•
Documentary evidence that is obtained directly from independent sources.
3.
External-internal evidence:
•
Documentary evidence that originates outside the client’s system
12

4.
Internal evidence:
• Evidence that is produced within the client’s system.
5.
Analytical procedures
•
Broad analytical procedures of general nature are not considered highly reliable.
6.
Spoken and written representations:
• Evidence that comes from the client’s officers, directors, management, and employees in response to enquiry.
13

Sufficiency of evidence is a question of how much appropriate evidence is enough.
Sufficiency and sample size
A good maximum sample size is usually 10% as long as it does not exceed 1000
But can auditors examine 1000 documents?
14

In order to reduce detection risk more evidence is required to support an opinion.
AR = IR x CR x DR
15

Audit planning is an on-going process
•
Planning is done
The planning memorandum:
• a summarization of the preliminary analytical review and the materiality and risk assessment with specific directions about the effect on the audit.
All planning becomes the basis for the audit program.
•
The audit program specifies procedures the auditor will use to guide the work
16

Audit programs set out the nature, timing and extent of the planned audit procedures.
•
Nature
•
Timing
•
Extent
17

Auditors use two general types of audit programs:
•
Examination of internal control:
•
A specification of procedures for obtaining and understanding the client’s business and control systems
•
• Balance-audit program:
•
A specification of substantive procedures for gathering direct evidence on assertions about dollar amounts and accounts.
18

Working papers are the auditors’ record of compliance with GAAS.
•
Working papers should
•
The auditor is the owner of the working papers.
•
There are three categories of working papers, generally stored in two files.
Permanent file:
•
Permanent file papers: information of continuing interest .
Current file:
•
Audit administrative papers
•
Audit evidence papers:
19

Information that will be used year after year.
•
Copies from the corporate charter or partnership agreements.
•
Contracts, including leases, bonds, other agreements.
•
Minutes from shareholders meetings.
•
Continuing schedules for share capital, retained earnings, capital assets.
20

Documentation of early planning phases.
•
Engagement letter
•
Staff assignments
•
Organization charts
•
Meeting notes
•
Overall Audit strategy
•
Internal control questionnaire
•
Audit plan and programs
•
Working trial balance
•
Adjusting and reclassification entries
•
Review notes
21

Audit evidence working papers are typically organized in sections.
•
Each section contains a lead sheet that shows the dollar amounts reported in the financial statements.
•
The lead sheet provides references to all the working papers related to that section.
•
Each working paper must show, through cross references, where it fits in the working paper file.
22

ABC Company Letterhead
ABC Company
1234 Main Street
Winnipeg, Manitoba
R3R 3R3
15 January, 201Z
To Whom it May Concern:
Please examine the accompanying statement carefully and either confirm its correctness or report any differences directly to our auditors
Black & White, LLP
P.O. Box 789
Hamilton, Ontario
L8C 2H5
Your prompt attention to this request will be appreciated. An stamped envelope is enclosed for your reply.
B3
Sincerely,
………
J. Fellows
…………
Jean Fellows, Controller
Confirmation
The balance receivable from us for $2,987.50 as of December 31, 201Y is correct except as noted below:
B2
__
The balance is correct
.______________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
ABC Company
23

ABC Company Letterhead
ABC Company
1234 Main Street
Winnipeg, Manitoba
R3R 3R3
15 January, 201Z
To Whom it May Concern:
Please examine the accompanying statement carefully and either confirm its correctness or report any differences directly to our auditors
Black & White, LLP
P.O. Box 789
Hamilton, Ontario
L8C 2H5
Your prompt attention to this request will be appreciated. An stamped envelope is enclosed for your reply.
B4
Sincerely,
………
J. Fellows
…………
Jean Fellows, Controller
Confirmation
The balance receivable from us for $3,500.20 as of December 31, 201Y is correct except as noted below:
B2
__
The balance is correct
.______________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
ABC Company
24

ABC Company Letterhead
ABC Company
1234 Main Street
Winnipeg, Manitoba
R3R 3R3
15 January, 201Z
To Whom it May Concern:
Please examine the accompanying statement carefully and either confirm its correctness or report any differences directly to our auditors
Black & White, LLP
P.O. Box 789
Hamilton, Ontario
L8C 2H5
Your prompt attention to this request will be appreciated. An stamped envelope is enclosed for your reply.
B5
Sincerely,
………
J. Fellows
…………
Jean Fellows, Controller
Confirmation
The balance receivable from us for $1,234.75 as of December 31, 201Y is correct except as noted below:
__
The balance is correct
B2
.______________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
ABC Company
25

ABC Aged Trial Balance as at December 31, 201Y
JFG . 1.31
201Z
B6
Company DEF
Company XYZ
Total uncollectible
> 60 days
500.00
X
>90days
400.00
Y
900.00
B1
^ = added
X = discussed with controller. Amount is in dispute. Examined letter from customer disputing the invoice
Y = discussed with controller. A confirmation was also sent to this customer. No reply was received.
26

ABC Accounts Receivable Trial Balance
As at December 31, 201Y
Company A B3 $2,987.50
Company B
Company C
…………...
…………...
…………...
B4
$3,500.20
B5 $1,234.75
…………
…………
…………
Total Balance $10,378.90
^
B1
^ = added
JFG . 1.31
201Z
B2
27

JFG . 1.31
201Z
B1
ABC Accounts Receivable Lead Sheet
December 31, 201Y
Accounts Receivable
Allowance for Doubtful Accounts
Accounts Receivable at NRV
^ = added
= agreed to last years working paper file
B2
B6
201Y 201X
10,378.90
9,980.12
900.00
875.00
9,478.90
9,105.12
F/S F/S
^ ^
Conclusion: In my opinion A/R present fairly
28

•
The working papers should also show:
29

Working papers (W/P) are grouped in order according to financial statement captions.
•
Cash – A
•
A/R – B
• Marketable Securities – C
•
Inventory – D
• PPE – E
•
A/P – AA
•
Etc.
•
So we have seen that each page in the file must have:
•
Index:
• Cross-referencing:
•
Heading:
•
Initials
• Dates:
•
Tick marks:
30

Specialized W/P software is becoming very popular. Advantages include:
• increase in productivity by automating tasks,
• integration with client database (extraction of trial balance or transactions), and
• facilitation of analysis, links to other databases, and websites.
31

Financial Assertions and Audit Procedures
You were engaged to examine the financial statements of Kingston Company for the year ended December 31.
Assume that on November 1, Kingston borrowed $500,000 from North Country
Bank to finance plant expansion. The long-term note agreement provided for the annual payment of principal and interest over five years. The existing plant was pledged as security for the loan.
Because of the unexpected difficulties in acquiring the building site, the plant expansion did not begin on time. To make use of the borrowed funds, management decided to invest in stocks and bonds, and on November 16 the $500,000 was invested in securities.
Required:
Describe a complete audit program for collecting relevant evidence for the audit of investments in securities at December 31.
Approach:
Develop specific assertions related to investments in securities at December 31 based on the five principle assertions.
32

Financial Assertions and Audit Procedures
You were engaged to examine the financial statements of Kingston Company for the year ended December 31.
Assume that on November 1, Kingston borrowed $500,000 from North Country
Bank to finance plant expansion. The long-term note agreement provided for the annual payment of principal and interest over five years. The existing plant was pledged as security for the loan.
Because of the unexpected difficulties in acquiring the building site, the plant expansion did not begin on time. To make use of the borrowed funds, management decided to invest in stocks and bonds, and on November 16 the $500,000 was invested in securities.
Required:
Describe a complete audit program for collecting relevant evidence for the audit of investments in securities at December 31.
Approach:
Develop specific assertions related to investments in securities at December 31 based on the five principle assertions.
33

Working Paper Review
The schedule on the following slide was prepared by the controller of World
Manufacturing Inc. for use by the independent auditors during their examination of World’s financial statements. All procedures performed by the audit assistant were noted in the bottom
“Legend” section, and it was initialed properly, dated and indexed, and then submitted to a senior member of the audit staff for review. Internal control was reviewed and is considered to be satisfactory.
Required: a.
What information essential to the audit of marketable securities is missing from the schedule?
b.
What essential audit procedures were not noted as having been performed by the audit assistant?
34

DESCRIPTION
OF
SECURITY
CORP.
BONDS
% YR.
DUE
Marketable Securities (World Manufacturing Inc., year ended December 31, 20X2)
SERIAL
No.
FACE
VALUE
OF
BONDS
GENERAL
LEDGER
1/1
PURCHASED
IN 20X2
SOLD IN
20X2
COST GENERAL
LEDGER
12/31
12/31
MARKET
PAY
DATE(S)
Dividend and Interest
AMT.
RECEIVED
ACCRUALS
12/31
A
D
6
4
09
03
21-7
73-0
10,000
30,000
9,400
27,500 a a
9,400
27,500
9,100
26,220
1/15
7/15
12/1
300 b,d
300 b,d
1,200 b,d
275
100
R
G
S c c
9
5
10
06
03
07
16-4
08/2
07-4
5,000
70,000
100,000
4,000 a
66,000 a
106,900 a,f a
100,000 e
100,000 e f
57,000
57,000 f b b
66,000
66,000 f
4,000
100,000
140,900 f,g
5,080
101,250
141,650 f
8/1
7/1
450 b,d 188 f
5,000
5,563
Stocks
P 1,000 shs
Common
U 50 shs
Common
1,044
8,530
75,00
9,700 a a
17,200 a a,f
Legends and comments relative to above a = beginning balances agreed to 20X1 working papers b = Traced to cash receipts c = Minutes examined (purchase and sales approved by the board of directors d = Agreed to general ledger entry to income amount e = confirmed by tracing to broker’s advice f = totals footed
7,500
9,700
17,200 f,g g = Agreed to general ledger
17,400 f
7,600
9,800
3/1
6/1
9/1
12/1
3/1
2/1
8/1
5,000 b,d
7,250 xyz f
750 d,b
750 d,b
750 d,b
750 d,b
750 d,b
800 d,b
800 d,b
4,600 d,b f
35 f
250
667
917