ACCT 304 AUDITING

ACCT 304 AUDITING

Evaluation and Review of Audit Evidence

Evaluation and Review of Audit Evidence

• Must be done by a different person not engaged in the evidence gathering

• The person must have been identified at the planning stage of the audit

• The person must be senior to the team that gathered the evidence

• It is a continuous process

Using the Work of Another Auditor

• Sometimes, an audit may require the use of another auditor for aspects of the engagement.

• You must determine who is the principal auditor.

• When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit.

• Division of Responsibility

• Cooperation

• Reporting Considerations

Evaluating the Work of Another Auditor

• The materiality of the portion of the financial statements which the principal auditor audits.

• The principal auditor’s degree of knowledge regarding the business of the components.

• The risk of material misstatements in the financial statements of the components audited by the other auditor.

• The performance of additional procedures regarding the components audited by the other auditor resulting in the principal auditor having significant participation in such audit.

• The independence requirements regarding both the entity and the component and obtain written representation as to compliance with them.

• The use that is to be made of the other auditor’s work and report and make sufficient arrangements for the coordination of their efforts at the initial planning stage of the audit.

• The principal auditor would inform the other auditor of matters such as areas requiring special consideration, procedures for the identification of intercompany transactions that may require disclosure and the timetable for completion of the audit.

• The accounting, auditing and reporting requirements and obtain written representation as to compliance with them

Considering the Work of the Internal Auditor

• Understanding and Preliminary Assessment of Internal Auditing

• Timing of Liaison and Coordination

Evaluation of Internal Audit Function

• Organizational status

• Scope of function

• Technical competence

• Due professional care

• Sufficient appropriate audit evidence is obtained to be able to draw reasonable conclusions.

• Conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of the work performed.

• Any exceptions or unusual matters disclosed by internal auditing are properly resolved.

Using the Work of Experts

• When using the work performed by an expert, the auditor should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.

• In auditing, an expert is a person possessing special skills, knowledge and experience in a particular field other than accounting and auditing.

• The auditor’s education and experience enables the auditor to be

knowledgeable about business matters in general, but the auditor is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation, such as an actuary or engineer.

• An expert may be:

– Contracted by the entity.

– Contracted by the auditor.

– Employed by the entity.

– Employed by the auditor.

Determining the Need to Use the Work of an Expert

• In obtaining an understanding of the entity and performing further

procedures in response to assessed risks, the auditor may need to obtain, in conjunction with the entity or independently, audit evidence in the

form of reports, opinions, valuations and statements of an expert.

• Examples include the following:

– Valuations of certain types of assets, for example, land and buildings, plant and machinery, works of art, and precious stones.

– Determination of quantities or physical condition of assets, for example, minerals stored in stockpiles, underground mineral and petroleum reserves, and the

remaining useful life of plant and machinery.

– Determination of amounts using specialized techniques or methods, for example, an actuarial valuation.

– The measurement of work completed and to be completed on contracts in progress.

– Legal opinions concerning interpretations of agreements, statutes and regulations.

Evaluating Experts

• The engagement team’s knowledge and previous experience of the matter being considered.

• The risk of material misstatement based on the nature, complexity, and materiality of the matter being

considered.

• The quantity and quality of other audit evidence expected to be obtained.

• Competence and Objectivity of the Expert

• Scope of the Expert’s Work

Evaluating the Work of Experts

• Source data used.

• Assumptions and methods used and their consistency with prior periods.

• Results of the expert’s work in the light of the auditor’s overall knowledge of the business and of the results of other audit procedures

• Making inquiries regarding any procedures undertaken by the expert to establish whether the source data is relevant and reliable.

• Reviewing or testing the data used by the expert.

Reference to an Expert in the Auditor’s Report

• When issuing an unmodified auditor’s report, the auditor should not refer to the work of an expert.

• Such a reference might be misunderstood to be a

qualification of the auditor’s opinion or a division of

responsibility, neither of which is intended.

Audit and Review of Accounting Estimates

• Accounting Estimates

– Allowances to reduce inventory and accounts receivable to their estimated realizable value.

– Provisions to allocate the cost of fixed assets over their estimated useful lives.

– Accrued revenue.

– Deferred tax.

– Provision for a loss from a lawsuit.

– Losses on construction contracts in progress.

– Provision to meet warranty claims.

Audit Procedures of the Entity’s Accounting Estimates

• Review and test the process used by management to develop the estimate

• Review of subsequent events which provide audit

evidence of the reasonableness of the estimate made.

• Comparison of Previous Estimates with Actual Results

• Consideration of Management’s Approval Procedures

• Use of an Independent Estimate

• Evaluation of Results of Audit Procedures

Audit and Review of Fair Values

• The auditor must obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the entity’s applicable financial reporting framework.

• Management is responsible for making the fair value

measurements and disclosures included in the financial

statements

Audit Procedures for Fair Values

• The relevant control activities over the process used to determine fair value measurements, including, for example, controls over data and the segregation of duties

• The expertise and experience of those persons determining the fair value measurements.

• The role that information technology has in the process.

• The types of accounts or transactions requiring fair value measurements or disclosures

• The extent to which the entity’s process relies on a service organization to provide fair value measurements

• The extent to which the entity uses the work of experts in determining fair value measurements and disclosures.

• The significant management assumptions used in determining fair value.

• The documentation supporting management’s assumptions.

• The methods used to develop and apply management assumptions and to monitor changes in those assumptions.

• The integrity of change controls and security procedures for valuation models and relevant information systems, including approval processes.

• The controls over the consistency, timeliness and reliability of the data used in valuation models.

Review of Opening Balances

• Check if the previous audited accounts have been signed by the directors and the auditors

• Initial Engagement

For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:

– The opening balances do not contain misstatements that materially affect the current period’s financial statements.

– The prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated.

– Appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and

adequately presented and disclosed.

Audit Procedures for Opening Balances

• The accounting policies followed by the entity.

• Whether the prior period’s financial statements were audited, and if so whether the auditor’s report was modified.

• The nature of the accounts and the risk of material misstatement in the current period’s financial

statements.

• The materiality of the opening balances relative to the

current period’s financial statements.

Audit Reporting on Opening Balances

• If, after performing audit procedures, including those set out above, the auditor is unable to obtain sufficient appropriate audit evidence concerning opening

balances, the auditor’s report may issue one of these

opinions below:

A qualified opinion

“We did not observe the counting of the physical inventory stated at XXX as at December 31, 19X1, since that date was prior to our appointment as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date by other audit procedures.

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to observe the counting of physical inventory and satisfy ourselves as to the opening balance of inventory, the financial statements give a true and fair view of (present fairly, in all material respects,) the financial position of ... as at December 31, 19X2 and the results of its operations and its cash flows for the year then ended in

accordance with ...;”

A disclaimer of opinion

“We did not observe the counting of the physical inventory stated at XXX as at December 31, 19X1, since that date was prior to our appointment as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date by other audit procedures.

Because of the significance of the above matter in relation to the results of the Company’s operations for the year to December 31, 19X2, we are not in a position to, and do not, express an opinion on the results of its operations and its cash flows for the year then

ended. In our opinion, the balance sheet gives a true and fair view of (or ‘presents fairly in all material respects,’) the financial position of the Company as at December 31, 19X2, in accordance with ...”

Review of Comparatives

• The auditor should determine whether the comparatives comply in all

material respects with the financial reporting framework applicable to the financial statements being audited.

• Corresponding figures

– These are amounts and other disclosures for the preceding period which are

included as part of the current period financial statements, and are intended to be read in relation to the amounts and other disclosures relating to the current period (referred to as “current period figures”).

– These corresponding figures are not presented as complete financial statements capable of standing alone, but are an integral part of the current period financial statements intended to be read only in relationship to the current period figures.

• Comparative

• These are amounts and other disclosures for the preceding period which are included for comparison with the financial statements of the current period, but do not form part of the current period financial statements

Audit Procedures for Corresponding Figures

• The auditor must obtain sufficient appropriate audit evidence that the corresponding figures meet the requirements of the applicable financial reporting framework.

• Accounting policies used for the corresponding figures are consistent with those of the current period or whether

appropriate adjustments and/or disclosures have been made.

• Corresponding figures agree with the amounts and other disclosures presented in the prior period or whether

appropriate adjustments and/or disclosures have been made.

Incoming Auditor—Additional Requirements

• Prior Period Financial Statements Audited by Another Auditor – The predecessor auditor may reissue the auditor’s report on

the prior period with the incoming auditor only reporting on the current period; or

– The incoming auditor’s report should state that the prior period was audited by another auditor and the incoming auditor’s

report should indicate:

• That the financial statements of the prior period were audited by another auditor;

• The type of report issued by the predecessor auditor and

• if the report was modified, the reasons therefore; and

• The date of that report.

– Prior Period Financial Statements Not Audited

Prior Period Financial Statements Not Audited

• When the prior period financial statements are not audited, the incoming auditor should state in the auditor’s report that the comparative financial statements are unaudited.

• Such a statement does not, however, relieve the

auditor of the requirement to carry out appropriate

audit procedures regarding opening balances of the

current period.

Subsequent Events

• Subsequent events are events that occur between the date of the financial statements (referred to as the “balance sheet date”) and the date when the financial statements are authorized for issue.

• Two types of events can be and identified:

– Those that provide evidence of conditions that existed at the date of the financial statements.

– Those that are indicative of conditions that arose after the date of the financial statements.

Financial Reporting Dates

• Date of the Financial Statements

• Date of Approval of the Financial Statements

• Date of the Auditor’s Report

• Date the Financial Statements are Issued

Audit Procedures for Events Occurring up to the Date of the Auditor’s Report

• The auditor must perform audit procedures designed

to obtain sufficient appropriate audit evidence that all

events up to the date of the auditor’s report that may

require adjustment of, or disclosure in, the financial

statements have been identified.

Audit Procedures for Facts Discovered After the Date of the Auditor’s Report but Before the Date the Financial Statements are Issued

• The auditor does not have any responsibility to perform audit

procedures or make any inquiry regarding the financial statements after the date of the auditor’s report.

• During the period from the date of the auditor’s report to the date the financial statements are issued, the responsibility to inform the auditor of facts which may affect the financial statements rests with management.

• When, after the date of the auditor’s report but before the date the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor

should consider whether the financial statements need amendment, should discuss the matter with management, and should take the action appropriate in the circumstances.

Audit Procedures for Facts Discovered After the Financial Statements have been Issued

• After the financial statements have been issued, the

auditor has no obligation to make any inquiry regarding such financial statements.

• When, after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor’s report and which, if known at that date, may have caused the auditor to modify the auditor’s

report, the auditor should consider whether the financial

statements need revision, should discuss the matter with

management, and should take the action appropriate in

the circumstances.

Reporting Control Weakness

• During the evaluation and review stage of the audit, the auditor must draw the attention of management and those charged with governance to the weaknesses discovered on the systems of control.

• The weaknesses are those weaknesses which during the evidence gathering, management and those

responsible could not provide satisfactory answers.

• Management attention is drawn to these weaknesses

through a letter of weakness, which the auditor must

issue them.

Sample Management Letter

(Auditor’s Letterhead) (Date)

(Addressee)

Dear Sir/Madam, Letter of Weakness

Having completed the fieldwork relating to the audit of (name and year of engagement), we now call your attention to certain observations made in the course of the audit which with your consent will enable us close the audit and thereby render the related audit report.

Observation 1

We noted that the breakdown for staff cost in the notes did not agree with the total on the face of the account.

Implication

Such an anomaly could mean two things. Either of the figures could be right and this affects the profit and loss account.

Recommendation

In future, such an anomaly must be avoided. The two figures must always agree.

Management Response

………

………

Assessment of Going Concern

• Management’s Responsibility

– Management’s assessment of the going concern assumption involves making a judgment, at a particular point in time, about the future outcome of events or conditions which are inherently uncertain.

• Auditor’s Responsibility

– The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern assumption in the

preparation of the financial statements, and consider whether there are material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in the financial statements.

Audit Evidence on Going Concern

• Planning the Audit and Performing Risk Assessment Procedures

• Evaluating Management’s Assessment

• Period beyond Management’s Assessment

Audit Conclusions and Reporting

Condition Report

Going Concern Assumption Appropriate

but a Material Uncertainty Exists Unqualified opinion but modify the auditor’s report by adding an emphasis of matter paragraph that highlights the existence of a material uncertainty Going Concern Assumption

Inappropriate An adverse opinion if the financial statements have been prepared on a going concern basis

Unqualified opinion but modify the auditor’s report by adding an emphasis of matter paragraph

Management Unwilling to Make or Extend Its Assessment

modify the auditor’s report as a result of the limitation on the scope of the

auditor’s work.

Other Information Contained in Audited Financial Statements

• The auditor should read the other information to identify material inconsistencies with the audited financial statements.

• A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence

previously obtained and, possibly, about the basis for

the auditor’s opinion on the financial statements

• Access to Other Information

– In order that an auditor can consider other information included in the annual report, timely access to such information will be required.

– The auditor therefore needs to make appropriate arrangements with the entity to obtain such information prior to the date of the auditor’s

report. In certain circumstances, all the other information may not be available prior to such date.

• Consideration of Other Information

– The objective and scope of an audit of financial statements are

formulated on the premise that the auditor’s responsibility is restricted to information identified in the auditor’s report.

– Accordingly, the auditor has no specific responsibility to determine that other information is properly stated.

• Availability of Other Information after the Date of the Auditor’s Report

– When all the other information is not available to the auditor prior to the date of the auditor’s report, the auditor would read the other information at the earliest possible opportunity thereafter to identify material inconsistencies.

– If, on reading the other information, the auditor identifies a material

inconsistency or becomes aware of an apparent material misstatement of fact, the auditor would determine whether the audited financial statements or the other information need revision

– When revision of the other information is necessary but management refuses to make the revision, the auditor should consider taking further appropriate action.

– The actions taken could include such steps as notifying those charged with governance in writing of the auditor’s concern regarding the other information and obtaining legal advice.

• Material Inconsistencies

– If, on reading the other information, the auditor identifies a material inconsistency, the auditor should determine whether the audited financial statements or the other

information needs to be amended

• Material Misstatements of Fact

– While reading the other information for the purpose of identifying material

inconsistencies, the auditor may become aware of an apparent material misstatement of fact.

– A “material misstatement of fact” in other information exists when such information, not related to matters appearing in the audited financial statements, is incorrectly stated or presented.

– If the auditor becomes aware that the other information appears to include a material misstatement of fact, the auditor should discuss the matter with the entity’s management.

– When discussing the matter with the entity’s management, the auditor may not be able to evaluate the validity of the other information and management’s responses to the

auditor’s inquiries, and would need to consider whether valid differences of judgment or opinion exist.