AUDIT EVIDENCE II

1. AUDIT EVIDENCE II

2. MANAGEMENT ASSERTIONS • Assertions => expressed or implied representations by management that are reflected in the f/s components • E.g. Receivables in B/S amounting to RM5 mil • Mgt asserts – Receivables exists, net realisable value RM5 mil, acc. Receivables balance arose from selling goods or services on credit.

3. MANAGEMENT ASSERTIONS • ISA 500 – Mgt assertions have the following categories [Refer Table 4-2]: • Existence • Rights and obligations • Occurrence • Completeness • Valuation • Measurement • Presentation and disclosure

4. MANAGEMENT ASSERTIONS • Existence • Whether assets or liabilities of the entity exist at a given date. • E.g. mgt asserts = inventory shown on B/S physically exist and is available for sale. • Rights and Obligations • Whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. • E.g. mgt asserts = entity has legal title or right of ownership to the inventory shown on the B/S.

5. MANAGEMENT ASSERTIONS • Occurrence • Whether recorded transactions have occurred during a given period. • E.g. mgt asserts = revenues reported in I/S represent valid sales that occurred during the period. • Completeness • Whether all transactions and accounts that should be presented in the F/S are included. • E.g. Implicitly mgt asserts = amt shown for A/Payable on the B/S includes all such liabilities as of B/S date

6. MANAGEMENT ASSERTIONS • Valuation • Whether an asset or liability has been included in the F/S at an appropriate carrying value. • E.g. Mgt asserts = inventory is carried at the lower of cost or market value on the B/S. • Measurement • Whether a transaction is recorded at the proper amount and whether revenue or expense is allocated to the proper period. • E.g. Mgt asserts = cost of PPE is systematically allocated to appropriate acctg period by recognising depreciation charges.

7. MANAGEMENT ASSERTIONS • Presentation and Disclosure • Whether particular components of the F/S are properly disclosed, classified, & described in accordance with AAS & other legal & reg. reqmts • E.g. Mgt asserts = the portion of LT debt shown as a current liability will mature in the current yr.

8. Audit Objectives • To get evidence to support mgt assertions => auditor develops specific audit objectives that relate to each mgt assertion. • Audit objectives => test/examine components of F/S

9. Audit Objectives • Validity • Completeness • Cutoff • Ownership • Accuracy • Valuation • Classification • Disclosure

10. Audit Objectives • Validity • Relates to the existence or occurrence assertion • Whether trx in F/S = valid & exist • Main concern = acc bal not overstated due to fictitious amount, overstatement • E.g. test validity of AR = confirm the cust. Bal. or physical check • Cust acknowledgement – provides evidence on the validity

11. Audit Objectives • Completeness • Relates to the mgt assertion of completeness • Whether all trx are included in the acc • Failure to meet the completeness obj – understatement in an acc • E.g. compare total AR subs ledger to AR control acc

12. Audit Objectives • Cutoff • Related to completeness assertion • Whether the trx recorded in the proper period • E.g. examine a sample of shipping docs and sales inv for a few days before and after year-end.

13. Audit Objectives • Ownership • Whether the assets and liabilities belong to the entity & relates directly to mgt assertions about rights & obligations • E.g. inquire mgt whether any recorded AR have been sold & therefore no longer belong to the entity • E.g. jewellery store may have expensive, precious gem appear in inv – actually on consignment!

14. Audit Objectives • Accuracy • Relates to the valuation or allocation assertion and addresses proper accumulation of trx and amts from journals and ledgers. • E.g. examine aged trial bal • Test aged trial bal accuracy – trace selected cust acc from the aged trial bal to the AR subs ledger = for proper amt & aging

15. Audit Objectives • Valuation • Relates to the valuation or allocation assertion to ensure acc in F/S are recorded at the proper amt. • E.g. AR accounted for at net realisable val = indicate provision for doubtful debts is used to adjust gross debtors bal to the amt expected to be collected.

16. Audit Objectives • Classification • Trx be included in the correct acc and that acc be properly presented in the F/S • E.g. audit AR = auditor examine listing of AR to make sure rcvble from related co, directors or other related parties are classified separately.

17. Audit Objectives • Disclosure • Relates directly to the presentation and disclosure assertion and is concerned with ensuring that all F/S disclosures are made in accordance with AAS & reg rqmnt. • E.g. fixed assets are pledged as security for loans = info should be provided in F/S.

18. Main Categories of Audit Tests • Two general types of audit tests • Test of control • Substantive procedures

19. Test of Controls • Understand internal control • Test of controls = the category of procedures aimed specifically to test operating effectiveness of control in preventing, or detecting and correcting material misstatements at the assertion level.

20. Test of Controls • Auditor test of control • Ensure I/C operating in the manner intended & effective prevent or detect fraud. • If level of control risk (CR) low = less audit work • If level of CR high = more extensive audit work • Refer Table 4-4 p.111

21. Substantive Procedures • SP performed to detect material misstatements at the assertion level. • SP enable auditor to detect material misstatement = in acc bal, a transaction class, & disclosure comp of F/S • 3 categories of SP • Substantive tests of trx • Analytical procedures • Tests of acc balances

22. Substantive Procedures • Scope of SP directly related to results of test of control • Higher CR – SP increase • However, should perform SP for each material class of trx & acc balances

23. Substantive Procedures for Transactions • Test for error or fraud in individual trx • Examine each individual trx = provide evidence on the validity, completeness, valuation, accuracy & cutoff audit objectives. • E.g. examine a large purchase inv. • By testing COGS included on the supplier inv is properly recorded in the inventory & AP acc

24. Analytical Procedures • As in previous session!!!

25. Substantive Procedures for Account Balances • Concentrate on the details of amounts contained in an acc balance. • These tests = establish whether any material misstatements are included in the acc presented in F/S. • E.g. to test AP = auditor may examine a sample individual supplier’s inv to arrive the total amt. • Also, may get confirmation from suppliers.

26. Dual Purpose Tests • Test of control = look for deviations in the application of controls • Substantive test = concern with monetary errors • However, some audit tests is difficult to determine whether the audit procedure is a test of controls or a substantive procedure on trx.