The document discusses audit evidence and related concepts:
1. Audit evidence is information used by auditors to arrive at conclusions and includes accounting records and other corroborating evidence. Auditors must obtain sufficient and appropriate audit evidence through audit procedures.
2. Sufficient evidence is a measure of quantity based on risk, materiality, knowledge. Appropriate evidence is relevant and reliable based on source, documentation, and objectivity.
3. Audit procedures include inquiry, observation, inspection, confirmation, recalculation, and analytical procedures to obtain evidence for assertions about transactions, account balances, and disclosures.
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Auditing Evidence Guide
1. Auditing – Study Notes Chapter 3 Audit Evidence
CHAPTER THREE
AUDIT EVIDENCE
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PART A – AUDIT EVIDENCE
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PART B – AUDIT PROCEDURES
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Coverage from Question Bank:
After completion of this chapter, you will be able to attempt following questions in ICAP's Question
Bank:
Question # in ICAP’s
Question Bank
Type of Question
Question # in ICAP’s
Question Bank
Type of Question
Q. # 52 (Working papers) Concept Review Question Q. # 56 (Guava & Co) Concept Review Question
Q. # 64a (Glasses2Go) Concept Review Question Q. # 18c (Assertions) Concept Review Question
Q. # 16bii (….documentation) Concept Review Question Q. # 64c (Glasses2Go) Case Study
Q. # 18aii (Assertions) Concept Review Question
1 By: Muhammad Asif, ACA
2. Auditing – Study Notes Chapter 3 Audit Evidence
To obtain reasonable assurance, auditor shall:
obtain “Audit Evidence”
by performing “Audit Procedures” (also called “Audit Tests”) and
shall retain “Audit Documentation”.
PART A – AUDIT EVIDENCE
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Audit evidence is the information used by auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained in the accounting
records underlying the financial statements and other corroborative evidence.
CONCEPT REVIEW QUESTION
Explain what is meant by the term ‘audit evidence’ and state what it comprises. (03 marks)
(Certified Accounting Technician UK – December 2004)
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What is meant by Sufficient Evidence:
Sufficiency is the measure of the quantity of audit evidence. Sufficiency of the audit evidence is
affected by:
Assessed risk at financial statement level and assertion level (if risk is high, more evidence
is required)
Materiality and complexity of item (if item is highly material or complex, more evidence is
required)
Auditor’s knowledge and experience of business (the more knowledge and experience, the
less evidence will be required)
Quality of audit evidence (if quality is high, less evidence is required).
Nature of internal control (if internal control is strong, auditor may place reliance on it and
less evidence is required)
What is meant by Appropriate Evidence:
Appropriateness is the measure of the quality of audit evidence i.e. its relevance and its reliability in
providing support for the conclusion on which auditor’s opinion is based.
Relevance:
Relevance deals with the logical connection between audit evidence and assertion being tested.
Reliability:
Reliability of evidence depends on its source, nature, and circumstances under which it is obtained
e.g.
Evidence from independent external source is more reliable than internal evidence (e.g.
confirmation from customer is more reliable than a sales invoice)
Evidence in documentary form (whether paper, electronic or other medium) is more
reliable than evidence in oral form (e.g. a written confirmation from a debtor is more
reliable than a telephonic reply).
Evidence in the form of original document is more reliable than photocopy or fax.
2 By: Muhammad Asif, ACA
3. Auditing – Study Notes Chapter 3 Audit Evidence
Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly
or by inference (e.g. observation of application of a control is more reliable than inquiry
about application of a control)
Evidence generated internally is more reliable when related controls over its preparation
and maintenance are effective (e.g. pre-numbered documents are more reliable than
unnumbered documents because their numerical sequence can be checked).
CONCEPT REVIEW QUESTION
Explain the term “Sufficient and Appropriate Audit Evidence”. (04 marks)
(CA Inter - Autumn 2010)
List and explain FOUR factors that will influence the auditor’s judgement regarding the sufficiency
of the evidence obtained. (04 marks)
(ACCA F8 - June 2008)
Explain FOUR factors which influence the reliability of audit evidence. (04 marks)
(ACCA F8 - December 2015)
PART B – AUDIT PROCEDURES
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Audit procedures are methods and techniques used by the auditor to gather audit evidence.
1. Inquiry:
Inquiry consists of seeking information from knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
Examples:
1. Inquiring management about any change in accounting policy or change in financial
reporting framework or legal requirements.
2. Inquiry of management about legal cases against company and assessment about their
outcomes.
2. Observation:
Observation consists of looking at a process or procedure (e.g. controls) being performed by others.
Examples:
1. Observing inventory counting by the entity’s personnel to ensure that proper control and
counting procedures are being followed.
2. Observing cash receiving process to ensure segregation of duties between receiving and
recording of money.
Exam Tip
A mnemonic to remember the reliability criteria of evidence is that evidence
should be “CODED” i.e. Controlled, Original, Documentary, External and Direct.
3 By: Muhammad Asif, ACA
4. Auditing – Study Notes Chapter 3 Audit Evidence
3. Inspection:
Inspection involves examining records or documents (whether internal or external), or a physical
examination of an asset.
Examples:
1. Inspection of purchase invoices for evidence of authorization.
2. Physical examination of individual inventory items to verify existence of inventory.
4. External Confirmation:
External confirmation is a process of obtaining evidence by auditor directly from a third party in
written (on paper, electronic or other medium).
Examples:
1. Circularization of sample of customers to confirm the existence of trade receivable balances
2. Send confirmation letter to banks to confirm the balances and other information.
5. Recalculation:
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
Examples:
1. Recalculation of sales invoices or purchase invoices.
2. Recalculate the profit or loss on disposal for a sample of fixed assets disposed during the
year to ensure accuracy.
3. Recalculate valuation for a sample of inventory items to ensure correct calculation of cost.
6. Reperformance:
Reperformance means auditor independently performing procedures or controls that were
originally performed by entity as part of its internal control.
Examples:
1. Reperforming ageing of accounts receivable balances.
2. Reperforming the extraction of a trial balance from company’s general ledger.
7. Analytical Procedures:
Analytical Procedures means evaluating financial data through analysis of plausible relationship
among financial and non-financial data. It also includes investigation of unusual differences of
recorded amounts with expected amounts.
Examples:
1. Calculate gross profit ratio and compare with last year to assess its reasonableness.
2. Develop expectation of salaries expense, taking into account joiners and leavers to assess its
reasonableness. Compare it with actual expense and investigating unusual difference.
CONCEPT REVIEW QUESTION
Briefly explain any six methods for collecting audit evidence. (12 marks)
(CA Inter, Autumn 2013)
4 By: Muhammad Asif, ACA
5. Auditing – Study Notes Chapter 3 Audit Evidence
Describe each of the procedures listed below, used to obtain audit evidence, and for each procedure
give TWO examples of when it may be used during the audit of the financial statements of an audit
client.
(i) Observation; (04 marks)
(ii) Inquiry; (05 marks)
(iii) Confirmation; (05 marks)
(iv) Reperformance. (05 marks)
(Certified Accounting Technician UK – June 2007)
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Above procedures/methods/techniques can be performed for different purposes:
1. If they are performed to assess risk of misstatement, they are called Risk Assessment
Procedures.
2. If they are performed to test operating effectiveness of internal control, they are called Test
of Controls (also called Compliance Tests).
3. If they are performed to detect misstatement in financial statements, they are called
Substantive Procedures.
Risk Assessment Procedures (RAPs):
Definition/Objective:
Risk Assessment Procedures are auditor’s procedures to obtain understanding of the entity and its
internal control to assess the risk of material misstatement (whether due to error or fraud) at
financial statement level and at assertion level.
Examples:
1. Inquiries of:
a. management (e.g about any change in accounting policy or change in financial
reporting framework or legal requirements),
b. internal audit function (e.g. about issues which have been raised with BOD), and
c. others within the entity (e.g. to legal counsel about any litigation, to sales personnel
about trend of sales).
2. Analytical procedures. (e.g. identification of unusual ratios and relationship by comparing
financial and non-financial information)
3. Observation and inspection (e.g. observation of entity’s operations, inspection of internal
control manuals, inspection of entity’s premises).
Applicability/When are these procedures performed:
ISAs require auditor to perform risk assessment procedures in every audit.
Tests of Controls (TOC):
Definition/Objective:
Objective of TOC is to confirm the operating effectiveness of internal control in preventing,
detecting and correcting misstatements at assertion level.
Examples:
1. Approval of Sales Invoices or Purchase Invoices for evidence of authorization.
2. Observing cash receiving process to ensure segregation of duties between receiving and
recording of money.
5 By: Muhammad Asif, ACA
6. Auditing – Study Notes Chapter 3 Audit Evidence
Applicability/When are these procedures performed:
ISAs require auditor to perform Tests of Controls if:
auditor assesses that control risk is assessed less than maximum (i.e. controls are operating
effectively and he plans to rely on internal control in his risk assessment), or
substantive procedures alone do not provide sufficient appropriate audit evidence.
Substantive Procedures:
Definition/Objective:
Objective of Substantive Procedures is to detect misstatements in financial statements at assertion
level. These include Analytical Procedures and Tests of Details.
Examples:
1. Develop expectation of salaries expense, taking into account joiners and leavers. Compare it
with actual expense and investigate unusual difference.
2. Recalculate the profit or loss on disposal for a sample of fixed assets disposed during the
year to ensure accuracy.
Applicability/When are these procedures performed:
ISAs require auditor to perform substantive procedures for all material areas.
CONCEPT REVIEW QUESTION
Describe the following methods used to obtain audit evidence by providing at least two examples of
each:
(i) Tests of controls (05 marks)
(ii) Substantive procedures (05 marks)
(ICMAP - 2014 August )
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Financial statements are classified into different types of assertions and ISAs require auditor to
obtain evidence for every assertion.
Study Tip
ICAP’s syllabus requires that you should have skills:
1. To identify inherent risks from a given set of (financial and non-financial)
information about entity (to be learnt in Chapter # 10).
2. To assess whether controls in an area are strong or weak. If controls are
assessed strong, you should be able to recommend tests of controls to
confirm their operating effectiveness (to be learnt in Chapter # 11).
3. To recommend Substantive Procedures for important areas of financial
statements (to be learnt in Chapter # 12).
6 By: Muhammad Asif, ACA
7. Auditing – Study Notes Chapter 3 Audit Evidence
Assertions/Management Assertions/Financial Statement Assertions:
Assertions are representations by management, explicit or otherwise, that are embodied in the
financial statements. These are used by the auditor:
to consider different types of misstatements that may occur and
to obtain evidence supporting these assertions.
There are three types/categories of assertions i.e.
1. Assertions about classes of transactions and events for the period
2. Assertions about account balances at the period end
3. Assertions about Presentation and Disclosures
Assertions about classes of transactions and events for the period:
Misstatements Possible
in income statement
What to verify to detect such misstatements
(i.e. relevant assertion to verify)
Recording fake
transactions.
Occurrence i.e. all transactions and events, that have been recorded,
have actually occurred and pertain to the entity. (in other words,
there is no overstatement)
Omitting genuine
transactions
Completeness i.e. all transactions and events, that should have been
recorded, have been recorded. (in other words, there is no
understatement)
Recording transactions
with wrong amount.
Accuracy i.e. amounts and other data relating to transactions and
events have been recorded appropriately.
Recording transactions in
wrong account.
Classification i.e. transactions and events have been recorded in the
proper accounts.
Recording transactions in
wrong period.
Cutoff i.e. transactions and events have been recorded in correct
accounting period.
Assertions about account balances at the period end:
Similarly, following assertions are used to obtain evidence that balance sheet items are free from
material misstatements:
1. Existence i.e. recorded assets, liabilities, and equity actually exist.
2. Completeness i.e. all assets, liabilities and equity interests, that should have been recorded,
have been recorded.
3. Valuation and allocation i.e. assets, liabilities, and equity are included in the financial
statements at appropriate amounts; and adjustments relating to valuation/allocation have
been recorded.
4. Rights and obligations i.e. entity holds or controls the rights to assets, and liabilities are
obligations of entity.
Assertions about Presentation and Disclosures:
Similarly, following assertions are used to obtain evidence that notes to the accounts are free from
material misstatements:
1. Occurrence and rights and obligations i.e. disclosed events, transactions, and other
matters have occurred and relate to the entity.
2. Completeness i.e. all necessary disclosures have been included in financial statements.
3. Accuracy and valuation i.e. disclosures are made at appropriate amounts.
4. Classification and understandability i.e. financial information is correctly categorized,
and disclosures are clearly expressed.
7 By: Muhammad Asif, ACA
8. Auditing – Study Notes Chapter 3 Audit Evidence
CONCEPT REVIEW QUESTION
Briefly describe the assertions used by the auditors in respect of the following:
(i) account balances
(ii) classes of transactions; and
(iii) presentation and disclosures (07 marks)
(CA Inter, Spring 2009)
Identify and explain FOUR assertions relevant to accounts payable at the year-end date. (06 marks)
(ACCA F8 - December 2009)
PART C – AUDIT DOCUMENTATION
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Purposes/Objectives/Benefits of Preparation of Audit Documentation:
Primary Purposes:
Audit documentation, which is prepared in accordance with ISAs, provide evidence that:
audit is planned and performed in accordance with ISAs and regulatory requirements, and
auditor has appropriate basis for conclusion about audit report and achievement of overall
objectives.
Additional Purposes:
Audit documentation also helps to:
a) assist engagement team in planning and performance of audit.
b) assist engagement team in direction, supervision and review of audit to discharge their
review responsibilities.
c) enable quality control reviews (whether internal or external).
d) enable accountability of engagement team for its work.
e) retain a record of matters of continuing significance to future audits.
Timely prepared documentations (prepared at time when work is performed) enhance audit
quality and are more accurate.
Ownership, Confidentiality and Retention of Audit Documentation:
Audit documentation is the property/ownership of auditor. However, he is also required to
observe confidentiality of these documents.
Each firm should establish its own policies and procedures for retention of documentation.
However, minimum period for retention is atleast 5 years from date of auditor’s report or
group auditor’s report, whichever is later.
Audit Documentation/Working Papers:
Audit Documentation is the written record of audit procedures
performed, evidence obtained and conclusions reached by auditor.
8 By: Muhammad Asif, ACA
9. Auditing – Study Notes Chapter 3 Audit Evidence
CONCEPT REVIEW QUESTION
You work as assistant manager in one of the leading firm of chartered accountants. Your partner
has asked you to prepare a presentation for some of the newly recruited staff. As part of this
presentation, you are required to explain the nature and objectives of maintaining ‘Audit
Documentation.’ (10 marks)
(CA Inter -Autumn 2009)
Explain the reasons for preparing and keeping audit working papers. (06 marks)
(ICAEW - June 2001)
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Audit Files:
“Audit Files” are folders or other storage media (in physical or electronic form) containing audit
documentation for an engagement.
There are two types of audit files i.e. Current File and Permanent File.
Current File:
Definition:
This file contains documents relevant to current audit only. Primarily, it contains the evidence on
which the conclusion of the current audit is based.
Examples of documentation in Current File:
Identified risk of material misstatement at financial statement level and at assertion level
Audit planning material (i.e. Audit Strategy and Audit Plan)
Working papers showing the procedures performed for each audit area (including Lead
Schedule).
Evidence of auditor’s communication with different parties e.g. Professional Clearance Letter,
Confirmation Letter, Representation letter, Audit Report, Letter of Weakness/Management
Letter
Abstracts or copies of client’s documents e.g. Copy of trial balance and current year’s financial
statements, Agreements (e.g. sales agreement, purchase agreements).
Summary of corrected and uncorrected misstatements.
Lead schedule is a document which shows final figures to be included in financial statements,
conclusion of auditor on area and cross-reference to relevant working papers.
Permanent File
Definition:
This file contains documents of continuance relevance i.e. relevant to current as well as future
audits.
Examples of documentation in Permanent File:
Engagement Letter
Long term loan agreements.
Documentation of accounting and internal control systems (narrative notes, questionnaire,
flowcharts etc.)
Minutes of meetings of shareholders and directors.
Previous years’ financial statements
Constitutional documents (e.g. memorandum and articles)
Copies of Legal and Tax Status of client.
Organizational hierarchy chart
9 By: Muhammad Asif, ACA
10. Auditing – Study Notes Chapter 3 Audit Evidence
CONCEPT REVIEW QUESTION
Briefly describe various types of audit files and state at least five contents of each type of audit file
maintained by an audit firm. (08 marks)
(ICMA Pakistan, Summer 2005)
What are the contents of:
a) Permanent file (05)
b) Current audit working paper files (05)
(CA Inter -Autumn 2000)
What documentation would you as a final reviewer expect to be included in a set of completed
working papers relating to the audit of a limited company. (You are not required to state the
documentation specific to individual components of the financial statements). (10 marks)
(CA Final, Summer 1987)
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Experienced Auditor Principle:
Audit documentation should be self-explanatory i.e. audit documentation shall be sufficient to
enable an Experienced Auditor (having no previous connection with the ongoing audit) to
understand:
Nature, timing and extent of audit procedures performed
Evidence obtained and conclusion reached.
Significant matters and significant judgments in reaching conclusions.
Factors affecting Form, Content and Extent of Audit Documentation:
Form, content and extend of audit documentation to be prepared is a matter of professional
judgment of auditor, and will depend on following factors:
i. Assessed risk of material misstatement
ii. Size and complexity of entity
iii. Audit methodology and tools used
iv. Nature and significance of:
a. audit procedures performed
b. evidence obtained
c. exceptions identified
v. Whether a conclusion is readily determinable from documentation of work performed.
CONCEPT REVIEW QUESTION
As the preparation of working papers is an integral part of the auditor's responsibilities.
Identify the factors that the auditor should consider while determining the form, content and extent
of audit working papers. (04 marks)
(ICMAP - August 2015)
10 By: Muhammad Asif, ACA
11. Auditing – Study Notes Chapter 3 Audit Evidence
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Changes during file assembly period:
Following types of changes can be made during file assembly period:
1. Deleting or discarding superseded documentation.
2. Sorting and cross-referencing working papers.
3. Signing off on completion checklists relating to the file assembly process.
4. Documenting audit evidence that the auditor has obtained before the date of the auditor’s
report.
Time period for assembly of final audit file:
ISAs require firms to establish their own policies and procedures for timely completion of assembly
of audit files. However, an appropriate time limit is within 60 days from the date of auditor’s report.
If changes are necessary after file assembly period:
After the assembly of the final audit file has been completed, the auditor shall not delete or discard
audit documentation of any nature before the end of its retention period.
However, auditor may modify the existing document or add new documents after file assembly
period if it is necessary (e.g. as a result of quality control review).
In this case, auditor shall document following:
The specific reasons for making change.
When and by whom changes were made and reviewed.
If exceptional circumstances arise after the date of auditor’s report:
Auditor may perform new audit procedures or draws new conclusions after the date of auditor’s
report if there are exceptional circumstances (e.g. subsequent discovery of misstatement in
financial statements).
In this case, auditor shall document following:
The specific reasons for making change.
The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report.
When and by whom changes were made and reviewed.
CONCEPT REVIEW QUESTION
While reviewing the final audit file of XYZ Limited for the year ended 30 June 2014, you have
identified that certain amendments were made in the final audit file after the date of the auditor’s
report.
Required:
Comment on the above situation in the light of International Standards on Auditing. (07 marks)
(CA Inter, Spring 2015)
In how many days after the date of auditor’s report, the auditor is required to complete the
assembly of his final audit file.
(CA Inter -Spring 2008)
11 By: Muhammad Asif, ACA
12. Auditing – Case Studies Chapter 3 Audit Evidence
CHAPTER THREE
AUDIT EVIDENCE
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Structure of the Case on Sufficiency:
In exam, you may be given a situation in which, after performing some procedures, a team member
have concluded that, a certain area is fairly stated. You will be required to comment whether
sufficient evidence has been obtained or not in the given situation.
Suggested Approach:
Check whether all assertions of the area has been verified. If any of the assertion is not addressed,
sufficient evidence has not been obtained.
Structure of the Case on Relevance:
In exam you may be given:
An audit procedure and may be required to identify relevant assertion being addressed, or
An assertion and may be required to identify relevant audit procedure.
Suggested Approach:
Some auditor procedures address more than one assertions. Similarly, some assertions can be
addressed by more than one audit procedures. So, you may have many correct options to answer
such types of questions.
Structure of the Case on Reliability:
In exam, you may be given a list of evidences from different sources (e.g. from client, from third
parties, or developed by auditor himself). You will be required to:
1. Comment on reliability of an evidence.
2. Compare two evidence to identify which evidence is more reliable.
3. Rank more than two evidence in order of reliability.
Suggested Approach to Answer:
Apply the rules of reliability learnt in the chapter and conclude whether reliability of evidence is
high, moderate or low.
o For External and Direct evidence, reliability is high.
o For External and indirect evidence, reliability is moderate.
o For Internal evidence, reliability is moderate if controls are strong (and low if
controls are weak).
o For verbal evidence or representation from management, reliability is low.
Don’t forget to mention factors of reliability with your conclusion.
1 By Muhammad Asif, ACA
13. Auditing – Case Studies Chapter 3 Audit Evidence
Model Case Study From Examination Questions:
Case Study 1:
Comment on the Relevance and Reliability of following evidences:
1. A letter from bank, confirming bank balance at year end, directly received by auditor.
2. Creditors' monthly statements of accounts prepared by Accounts Payable Department of the
company.
3. Shipping documents sent by company and received back after acknowledgment of customer.
4. Title documents about company's properties held by client.
5. A bank statement from client's file.
Solution:
Sr.
#
Relevance
(i.e. provides evidence about)
Reliability Reason
1.
Existence and Rights and
Obligation of Bank Balance
High
External documentary evidence,
directly obtained by auditor
2. Completeness of Creditors
Moderate (if internal
controls are strong)
Internal documentary evidence,
created and held by client
3.
Occurrence of Sales
Transactions
Moderate
Internal documentary evidence,
created and held by client. However
also circulated externally.
4.
Rights & Obligations of
Properties
Moderate
External documentary evidence, but
not direct
5. Existence of Bank Balance Moderate
External documentary evidence, but
not direct
Case Study 2:
You are the audit senior on the audit of Orio (Private) Limited, a large manufacturing company, for the year
ended 30 June 2015. You are reviewing the audit working papers prepared by the audit assistant, Bisma.
(a) You notice that on 30 June Bisma attended the stocktake and observed that the client followed the
stocktake instructions. She selected numerous items for test counting from the client’s inventory sheets and
all were found to be correct. Cut-off details were noted and subsequently checked and found to be correctly
treated. Bisma concluded that the inventory was fairly stated.
(b) You also noticed that advertising expenses are material, although only 50 per cent of last year’s
balance. Bisma selected a large sample of entries and agreed them to supporting documents. No
errors were found. Bisma concluded that advertising expenses were reasonable.
Required:
Indicate whether sufficient appropriate audit evidence was obtained to support the conclusions reached. Give
reasons.
Solution:
(a) Sufficient appropriate evidence has not been obtained as only one assertion relating to Inventory has been
verified (i.e. Existence). No work has been performed to test “Completeness” and “Valuation and Allocation”
assertions.
(b) Sufficient appropriate evidence has not been obtained as Bisma has tested assertion of “Occurrence” only.
2 By Muhammad Asif, ACA
14. Auditing – Case Studies Chapter 3 Audit Evidence
Whereas, primary risk in advertisement was of “Completeness” (considering 50% reduction is compared to
last year). , Therefore, Bisma should also have tested unrecorded amounts in advertising expense.
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Structure of the Case:
In exam, you may be given a list of procedures, and may be required to identify whether:
1. Technique to which it relates (i.e. whether inquiry, observation etc)
2. Each procedure is a Test of Control or Substantive Procedure. (requires advanced
understanding of the topic to be covered in later chapters of Tests of Controls and
Substantive Procedures.)
3. Assertion which it verifies.
Suggested Approach to Answer:
To attempt these types of questions, you should be familiar with audit procedures performed in
major areas of financial statements alongwith relevant assertions verified by each procedure.
Model Case Study From Examination Questions:
CASE STUDY OF AUDIT PROCEDURES – AN EXAMPLE
Case Study:
You are working on the audit of Butter Cookies Limited, for the year ending 30 June 2015. You are reviewing
the audit plan of “Sales” which includes relevant assertions and the detailed procedure you are about to
perform.
An extract from the Audit Plan is reproduced below:
Item Assertion Detailed Audit Procedure
1. Completeness
Select a sample of sales invoices from the sales journal and ensure each sales
invoice has been matched by the sales staff to an authorized delivery note and
approved customer order.
2. Accuracy
Select a sample of sales invoices from the sales journal and agree the sale price to
the authorised price list.
Study Tips
Most of the inquiries are Risk Assessment Procedures, and most of the
observations are Test of Control.
If analytical procedures involve use of Ratios/Percentages, these are Risk
Assessment Procedures. If analytical procedures involve development of
expected amounts, these are Substantive Procedures.
If you are verifying information included in financial statements, it is
substantive procedure, otherwise it is Test of Control.
3 By Muhammad Asif, ACA
15. Auditing – Case Studies Chapter 3 Audit Evidence
Required:
For each of the items 1 to 2 above:
(a) Indicate whether the audit procedure is a test of control or substantive procedure.
(b) Indicate whether the audit procedure addresses the given assertion and if the audit procedure does not
address the given assertion, state the assertion that is addressed.
Solution:
Item # Type of Procedure Is stated assertion correct?
1. Test of control No, correct assertion is Occurrence.
2. Substantive Procedure Yes.
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Structure of the Case:
In exam, you may be given a statement or situation dealing with Preparation, Ownership, Retention,
Confidentiality, Change after auditor’s report of audit documentation.
You will be required to comment whether the statement/situation violates any requirement of ISAs.
Suggested Approach to Answer:
Keep in mind relevant requirements which you have studies and apply relevant requirements to
case.
Model Case Study From Examination Questions:
CASE STUDY OF AUDIT DOUCMENTATION – AN EXAMPLE
Case Study:
The partnership of Smith, Frank & Clark, a CPA firm, has been the auditor of Greenleaf, Inc., for many years.
During the annual audit of the financial statements for the year ended December 31, 20X2, a dispute
developed over whether certain disclosures should be made in the financial statements. The dispute resulted
in Smith, Frank & Clark’s being dismissed and Greenleaf’s engaging another CPA firm. Greenleaf demanded
that Smith, Frank & Clark turn over all working papers applicable to the Greenleaf audits or face a lawsuit.
Smith, Frank & Clark refused. Greenleaf has instituted a suit against Smith, Frank & Clark to obtain the
working papers.
Will Greenleaf succeed in its suit? Explain.
(AICPA, adapted)
Solution:
No, because auditor is the owner of working papers prepared by him and it is not obligatory on him to give
them to any other person unless this is mutually agreed between client and auditor.
4 By Muhammad Asif, ACA