Standards on Auditing Audit Evidence and Documentation By CA Sanjeev Verma Lucknow Email: [e-mail]

1
Standards on AuditingAudit Evidence and
DocumentationByCA Sanjeev VermaLucknowEmail
taxverma_at_gmail.com
2
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

3
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

4
Audit Evidence

• Audit Evidence dealt by following SAs-
• SA 500 (Revised) Audit Evidence
• SA 501 (Revised), Audit EvidenceSpecific
  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

5
The Third Standard of Field Work

• Sufficient appropriate evidential matter is to
• obtained by performing audit procedures to
• afford a reasonable basis for an opinion
  regarding
• the financial statements under audit.

6
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.

7
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.

8
Relationship of Financial Statement Assertions
and the Audit
9
Audit Risk

Risk of Material Risk that the
Auditors Audit Risk Misstatement
Fail to Detect
the
Misstatement
Inherent Control Detection
Risk
Risk Risk
10
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

11
Control Risk

• Risk that a material misstatement in an
  assertion will not be prevented or detected on a
  timely basis by the companys internal control.

12
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
13
Audit Risk Formula
AR IR x CR x DR AR Audit
risk IR Inherent risk CR Control
risk DR Detection risk
14
Illustration of Audit Risk
15
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

16
Audit Evidence

• Evidential matter
• Any information that corroborates or refutes an
  assertion

17
Audit Evidence

• Some Relevant Terms used in SA 500
• Accounting Records
• Appropriateness(of audit evidence)
• Audit Evidence
• Managements Expert
• Sufficiency(of audit evidence)

18
Types of Evidence

• Physical evidence
• Third-party representations
• Documentary evidence
• Computations
• Data Interrelationships
• Client representations
• Accounting records

19
Types of EvidencePhysical Evidence

• Evidence that can actually be seen by auditors.
• This type of evidence is generally effective for
  supporting the existence assertion.

20
Types of EvidenceThird Party Representations

• Confirmations
• Lawyers Letters
• Reports of Specialists

21
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

22
Types of EvidenceComputations

• Computations are
• performed independently by auditor
• used to verify mathematical accuracy of clients
  analyses and records

23
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

24
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.

25
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

26
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
27
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

28
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 entitys
  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
  auditors report in accordance with SA 705.

29
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

30
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.

31
Reliability of Certain Types of Audit Evidence
RELIABILITY TYPE EXAMPLE High Physical Invent
ory Observation Documentary External Cutof
f Bank Statement External/Internal Purchase
Invoice Internal Sales Invoice Low Client
Representations Management Representation
Letter
32
Basic Approaches to Auditing Accounting Estimates

• Review and test managements process for
  developing the estimate.
• Independently develop an estimate to compare to
  managements estimate.
• Review subsequent events or transactions bearing
  on the estimate.

33
Audit Documentation SA 230

• Nature Purpose of Audit Documentation
• Evidence of the auditors basis for conclusion
  about the achievement of the overall objective of
  the auditor
• Evidence that the audit was planned and performed
  in accordance with SAs and applicable legal and
  regulatory requirements

34
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

35
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

36
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

37
Types of Working Files

• Current files
• Typically arranged and indexed around accounts in
  clients financial statement
• Support current years 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.

38
(No Transcript)
39
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.

40
SA500 SA 230

• Thanks
• For
• Patience Hearing
• Interaction