Audit Evidence General Audit Procedures 2 RecalculationReperformance Performing

Audit Evidence

General Audit Procedures 2

Recalculation/Reperformance: Performing independent calculations or recalculating the client’s calculations. Reperformance is applied in control testing, the auditor independently executes an internal control procedure Observation: 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

Enquiry: • Involves the collection of oral evidence from the client and independent third parties. Inspection: • 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

Scanning: • An eyes-open approach of looking for anything unusual. • . Analytical Procedures (Analysis): • 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

Effectiveness of Audit Procedures Audits are designed to provide reasonable assurance of • Soft procedures (enquiry and analysis) • Detail procedures are also effective. 9

Information About the Client 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

Sufficient Appropriate Evidence in Auditing 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

Reliability of Evidence 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 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

Audit Risk and Sufficiency of Evidence In order to reduce detection risk more evidence is required to support an opinion. AR = IR x CR x DR 15

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

Types of Audit Programs 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

Audit Working Papers 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

Permanent File Papers 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

Audit Administrative Papers 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 Papers 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 B 3 1234 Main Street Winnipeg, Manitoba R 3 R 3 R 3 15 January, 201 Z 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 L 8 C 2 H 5 Your prompt attention to this request will be appreciated. An stamped envelope is enclosed for your reply. Sincerely, J. Fellows………… Jean Fellows, Controller Confirmation The balance receivable from us for $2, 987. 50 as of December 31, 201 Y is correct except as noted below: The balance is correct. _______________________________________ B 2 __ ___________________________________________________________________________________________________________ ABC Company 23

ABC Company Letterhead ABC Company B 4 1234 Main Street Winnipeg, Manitoba R 3 R 3 R 3 15 January, 201 Z 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 L 8 C 2 H 5 Your prompt attention to this request will be appreciated. An stamped envelope is enclosed for your reply. Sincerely, J. Fellows………… Jean Fellows, Controller Confirmation The balance receivable from us for $3, 500. 20 as of December 31, 201 Y is correct except as noted below: The balance is correct. _______________________________________ B 2 __ ___________________________________________________________________________________________________________ ABC Company 24

ABC Company Letterhead ABC Company B 5 1234 Main Street Winnipeg, Manitoba R 3 R 3 R 3 15 January, 201 Z 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 L 8 C 2 H 5 Your prompt attention to this request will be appreciated. An stamped envelope is enclosed for your reply. Sincerely, J. Fellows………… Jean Fellows, Controller Confirmation The balance receivable from us for $1, 234. 75 as of December 31, 201 Y is correct except as noted below: The balance is correct. _______________________________________ B 2 __ ___________________________________________________________________________________________________________ ABC Company 25

JFG. 1. 31 201 Z B 6 ABC Aged Trial Balance as at December 31, 201 Y > 60 days Company DEF Company XYZ Total uncollectible >90 days 500. 00 X 400. 00 Y 900. 00 B 1 ^ 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. ^ = added 26

JFG. 1. 31 201 Z ABC Accounts Receivable Trial Balance As at December 31, 201 Y B 3 $2, 987. 50 Company A Company B B 4 $3, 500. 20 Company C B 5 $1, 234. 75 …………. . . ………… Total Balance $10, 378. 90 B 2 B 1 ^ ^ = added 27

JFG. 1. 31 201 Z B 1 ABC Accounts Receivable Lead Sheet December 31, 201 Y Accounts Receivable Allowance for Doubtful Accounts Receivable at NRV B 2 B 6 201 Y 10, 378. 90 900. 00 9, 478. 90 ^ F/S 201 X 9, 980. 12 875. 00 9, 105. 12 F/S ^ ^ = added = agreed to last years working paper file Conclusion: In my opinion A/R present fairly 28

The working papers must show the evidence gathered about them and the final decision reached. • The working papers should also show: 29

Working Paper Arrangement and Indexing 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

Audit W/P Software 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

Problem 8 -1, Page 319 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

Problem 8 -1, Page 319 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

Problem 8 -5, Page 320 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 noted as having been performed by the audit assistant? 34

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