Audit Documentation and Audit Evidence – CA Inter Audit Question Bank | Auditing and Ethics for CA Intermediate PDF Download

Audit Working Papers

• Meaning: Audit working papers, according to SA-230 (i.e. Audit Documentation), are documents suggested or obtained by the auditor and kept in connection with the audit performance.
• Provides for:
  • Means of controlling current audit work.
  • Supervision and review of the audit work.
  • Evidence supporting the auditor's opinion.
  • Information about the business being audited, including recent history.

Ownership and Custody of Working Papers

• Facts: Per SA-230 "Audit Documentation," working papers belong to the auditor. The auditor may, at their discretion, share parts or extracts with the client and is entitled to keep them (Chantrey Martin and Co. Vs Martin).
• Analysis: In this scenario, the managing director of a company requests copies of the working papers from the auditor. However, the managing director does not have the right to access these papers as they belong to the auditor. The auditor can choose to provide portions or extracts to the managing director of R K & Company.

Summarized Educational Content: Audit Documentation and Working Papers

Audit Documentation

• Allows for quality control reviews and inspections.
• Facilitates external inspections as required by law or regulations.
• Ensures accountability of the engagement team for their work.
• Records important information for future audits.
• Assists in planning and performing the audit.
• Helps in supervision and review responsibilities.

Importance of Working Papers

• Guides audit staff on checking schedules.
• Assigns responsibility to staff members for checked schedules.
• Serves as evidence in legal proceedings.
• Aids in audit planning and time estimation.
• Documents audit work across different periods.
• Supports drawing conclusions from evidence.
• Standardizes documentation for audit efficiency.
• Facilitates delegation of work for quality control.
• Ensures custody and confidentiality of working papers.

It is important for auditors to follow proper procedures for the custody and confidentiality of their working papers, retaining them for the necessary period to meet professional and legal requirements.

• Audit Working Papers
  • These papers in the current audit files hold information specific to a single audit period, detailing the nature, timing, and extent of audit procedures conducted along with the outcomes.
  • Contents of the Current Audit File typically include:
    • Correspondence related to the acceptance of annual reappointment.
    • An analysis of transactions and balances.
    • Evidence of the audit planning process and the audit program.
    • Proof that assistants' work is supervised and reviewed.
    • Summaries of important matters from Board and General Meetings minutes relevant to the audit.
    • Copies of communications with other auditors, experts, and third parties.
    • Letters of representation or confirmation from the client.
    • Auditor's conclusions on significant audit aspects, including the resolution of exceptions and unusual matters.
    • Copies of financial information being reported and related audit reports.
    • Details of auditing procedures performed and the outcomes.
    • Management's representations on significant matters.
    • Working papers serve as evidence in legal proceedings if the auditor is accused of negligence.
• Auditor's Lien
  • An Auditor's Lien refers to the right an auditor has to retain a client's documents or records until their fees are paid.
  • It acts as a form of security for auditors to ensure they are compensated for their services.
  • For example, if an auditor completes an audit but the client fails to pay the agreed-upon fee, the auditor can withhold the audit report until payment is received.
  • This right is recognized under common law and grants auditors the ability to hold onto client information until their financial obligations are fulfilled.

Meaning of Auditor's Lien

• Any individual with lawful possession of another person's property can keep the property if not paid for services rendered on it.

Auditor's Lien

• An auditor can claim a lien on books and documents in their possession if the client hasn't paid fees for work done on those materials.

Conditions for Exercising Lien by the Auditor

• Documents retained must belong to the client who owes money.
• Documents must have been received through legal means authorized by the client.
• The auditor can retain documents only if work has been done on them.
• Documents related to unpaid work can be retained.

Lien Possibility in Companies

• Books of accounts of a company are to be kept at the registered office as per Section 128(1) of the Act, 2013.
• The Board can authorize handing over books to the auditor with Registrar notification.
• Reasonable inspection facilities must be provided under Section 128.

Lien on Working Papers

• Lien is not applicable to a client's working papers as they are the client's property.

Factors Affecting Audit Documentation

• As outlined in SA-230 on "Audit Documentation," the form, content, and extent of audit documentation are influenced by various factors:
• Nature and complexity of the entity's operations.
• Risks of material misstatement.
• Size of the entity and its organizational structure.
• The need for supervision, review, and quality control.

Purposes of Audit Documentation as per SA-230

• The entity's size and complexity play a crucial role in determining audit procedures.
• Audit procedures are tailored based on identified risks of material misstatement.
• Audit evidence's significance influences the conclusions drawn.
• Exceptions identified impact the nature and extent of the audit process.
• Documentation is necessary when a conclusion is not readily determinable from the evidence.
• Audit methodology and tools utilized are vital components of the process.

Purposes of Audit Documentation According to SA-230

• Audit documentation aids in planning and executing the audit.
• It assists in supervising the audit work and fulfilling review responsibilities.
• Documentation ensures accountability within the engagement team.
• Retains records of ongoing significance for future audits.
• Enables quality control reviews, inspections, and external assessments as required.
• Records working papers to demonstrate audit work continuity year over year.
• Facilitates standardization of audit procedures for enhanced efficiency.
• Guides audit staff in checking schedules and delegating work effectively.
• Acts as legal evidence in case of negligence charges against the auditor.

Understanding the Auditor's Right of Lien

• The auditor's right of lien is not unconditional and is subject to specific conditions.
• An auditor can exercise lien on client books and records under certain circumstances.
• This right is not absolute and is governed by legal and ethical considerations.
• Conditions for exercising lien may vary based on the jurisdiction and engagement specifics.

Audit Engagement Documentation Requirements

• The document must belong to the client who owes the money.
• Documents must have been obtained by the auditor with the client's permission.
• There should be outstanding fees for work performed.

Statement Examination

• Statement: Audit Engagement documentations should typically be retained by the auditor for a minimum of six years from the date of the auditor's report or, if later, the date of the group auditor's report.
• Answer: Incorrect. In specific cases, audit engagement documents must be retained for not less than seven years from the date of the auditor's report or, if later, the date of the group auditor's report.

Completion Memorandum Importance

• Question: Why is a "Completion Memorandum" beneficial in audit documentation?
• Answer: According to SA 230, 'Audit Documentation,' a completion memorandum can be useful in summarizing significant audit matters and how they were addressed. This summary aids in the effective review and inspection of audit documentation, particularly for intricate audits. It also helps the auditor in considering significant matters and whether any specific SA objective is unachievable, potentially hindering the overall audit objectives.

Audit Evidence and Techniques

• Methods for collecting audit evidence include techniques like Posting Checking, Casting Checking, and Physical Examination.
• Auditors use various means such as confirmation, inquiry, and re-computation for accumulating audit evidence.
• Substantial Review involves examining accounts of significant value and importance to gather evidence effectively.
• Bank reconciliation is also a crucial technique used by auditors for evidence gathering.

Compliance Procedures vs. Substantive Procedures

• Compliance procedures aim to ensure that internal controls are functioning effectively for audit reliance.
• On the other hand, Substantive Procedures focus on verifying the completeness, accuracy, and validity of data generated by the accounting system.

Assertions in Substantive Procedures

• Substantive Procedures are conducted to validate the completeness, accuracy, and validity of the information produced by the accounting system.

Understanding the Reliability of Audit Evidence

• Types of Audit Tests:
  • Test of details of transactions and balances.
  • Analysis of significant ratios and trends, including investigation of unusual fluctuations.
• Assertions in Substantive Procedures:
  • Existence: Assets or liabilities exist as of a specific date.
  • Rights and Obligations: Assets represent rights and liabilities are obligations of the entity.
  • Occurrence: Transactions or events directly relate to the entity.
  • Completeness: No unrecorded assets, liabilities, or transactions.
  • Valuation: Assets or liabilities are correctly valued in the records.
  • Measurement: Transactions are accurately recorded, and revenue or expenses are correctly allocated.
  • Presentation and Disclosure: Items are disclosed, classified, and described as per accounting policies and legal requirements.
• Reliability of Audit Evidence:
  • Source, Nature, and Circumstances: Audit evidence reliability is influenced by these factors.

Understanding the Reliability of Audit Evidence

• Definition of Reliability:
  • Reliability of audit evidence is impacted by its source, nature, and the conditions under which it is acquired.
  • Controls Over Preparation: The controls in place during the information's creation and maintenance affect its reliability.
• Factors Affecting Reliability:
  • Source: The origin of the information plays a crucial role in determining its reliability.
  • Nature: The inherent characteristics of the evidence influence its trustworthiness.
  • Circumstances: The context under which the evidence is obtained can impact its reliability.
• Significance of Reliability:
  • Reliable evidence enhances the credibility and validity of the audit process.
  • Errors or discrepancies in unreliable evidence can lead to incorrect audit conclusions.

Audit Evidence: Reliability and Generalizations

Factors Influencing the Reliability of Audit Evidence:

• Source of evidence (internal and external)
• Nature of evidence (visual, documentary, or oral)
• Circumstances under which evidence is obtained
• Consistency of evidence from different sources or nature
• Nature of assertion obtained and its materiality

Generalizations for Assessing Reliability:

• External evidence (e.g., confirmation from a third party) is more reliable than internal evidence
• Internal evidence is more reliable when related internal controls are satisfactory
• Documents and written representations are usually more reliable than oral representations
• Auditor-obtained evidence is more reliable than entity-obtained evidence

Distinguishing Internal and External Evidence:

Question 20: Distinguishing Internal and External Evidence (Nov 2008, 4 marks)

In this question, students are asked to differentiate between internal and external evidence based on various criteria such as meaning, use for accounting, auditor's role, reliability, and examples.

Management Representation as Audit Evidence:

• Statement: Taking management representation as prime audit evidence when direct access is possible
• State with reasons (in short) whether the statement is True or False
• Answer: False - It is essential for the auditor to independently verify transactions rather than solely relying on management representation

Question 21: Management Representation as Audit Evidence (May 2009, 2 marks)

Students are required to evaluate the statement regarding the use of management representation as audit evidence and provide reasons for their assessment.

• Substantive Procedures:
  • Meaning: Substantive tests aim to provide evidence regarding the completeness, accuracy, and validity of an amount or account balance.
  • Purpose: Auditors conduct substantive tests across all financial statement aspects to gather relevant and reliable evidence for forming their opinion.
  • Types:
    • Tests of details of transactions and balances, such as vouching and verification.
    • Analysis of significant ratios and trends, including investigation of unusual fluctuations and items.
  • Examples: Substantive tests are performed in areas lacking internal control, like stock valuation or provision for doubtful debts.
• Sufficient Appropriate Audit Evidence:
  • Meaning: According to SA 200, auditors must gather sufficient appropriate audit evidence to draw reasonable conclusions for forming their opinion on financial information.
  • SA 500: This standard further explains the interrelation of sufficiency and appropriateness in evidence obtained from compliance and substantive procedures.

Sufficiency and Appropriateness of Audit Evidence

Sufficiency refers to the amount of audit evidence acquired, while appropriateness pertains to its pertinence and reliability. In most cases, auditors prefer evidence that is convincing rather than conclusive. They often gather evidence from various sources or of different types to corroborate the same assertions.

Factors Influencing Sufficient and Appropriate Audit Evidence

• The materiality of the item
• The type of information available
• The trends indicated by accounting ratios and analysis
• The experience gained from past audits
• The findings of auditing procedures, including detected fraud and errors
• The level of risk of misstatements influenced by factors like item nature, internal control adequacy, business size and nature, external influences on management, and the entity's financial position

Auditors collect evidence through compliance and substantive procedures to validate the assertions in the financial statements.

Audit Evidence and Procedures

Methods to Obtain Audit Evidence

• Inspection: This method involves examining documentation, records, or assets to gather evidence.
• Observation: The auditor directly observes processes or procedures to obtain relevant information.
• Inquiry and Confirmation: This method includes seeking information from internal or external sources and confirming details.
• Computation: Calculations and analysis are performed to validate financial data or other information.

Inquiry and Confirmation

• Inquiry Definition: Inquiry is the act of requesting information from knowledgeable individuals within or outside the organization.
• Types of Inquiries:
  • Formal Inquiries: These are written requests directed at third parties.
  • Informal Inquiries: Oral questions posed to individuals within the company.
• Response to Inquiries:
  • Information Gathering: Provides new data or supports existing information.
  • Confirmation: Verifies details found in accounting records, such as balances through direct communication.
• Importance of Corroboration: While corroborating evidence is crucial, understanding management's intent and history is essential to support inquiries.

Audit Evidence and Procedures

In auditing, obtaining and evaluating audit evidence is a crucial process to form an opinion on financial statements. Let's delve into key concepts related to audit evidence and procedures:

Written Representations in Auditing

• In certain situations, auditors may request written representations from management and, when applicable, those overseeing governance to validate responses provided verbally.

Compliance Procedures

• Compliance procedures serve as tests conducted to gather audit evidence concerning the completeness, accuracy, and validity of data generated by accounting systems.
• These tests aim to ensure that internal control systems, which auditors rely on, are functioning effectively.
• They play a vital role in verifying the integrity of the internal control system.

Substantive Procedures

• Contrary to the statement, substantive procedures are designed to assess the accuracy and validity of account balances in financial statements.
• They provide substantial evidence regarding the correctness of amounts reported in financial statements.

Audit Techniques

• Various methods are utilized by auditors to accumulate audit evidence, known as audit techniques.
• Some common audit techniques include Posting Checking, Casting Checking, Physical Examination, Confirmation, and more.
• Substantial review, a technique focusing on accounts with significant value and importance, aids in gathering substantial evidence.
• This method involves a detailed examination of accounts with substantial monetary value.

Management Representation

• Meaning: Management representation refers to confirmations made by the management, either written or oral, concerning financial statement matters.
• Preparation: The representation can be initiated by the management itself or outlined by the auditor and then confirmed by the management.
• Formalities: It should be dated, signed by a competent authority, and addressed to the auditor.
• As Evidence: Management representation serves as important evidence for auditors and is documented in working papers.
• Auditor's Duty: Auditors must ensure that management discloses all known actual or possible non-compliance with laws and regulations affecting financial statement preparation.
• Basic Elements of Management Representation Letter:
  • It is a written statement confirming certain matters or supporting audit evidence.
  • Excludes financial statements, their assertions, or supporting records.
  • Management should confirm fulfilling responsibilities in financial statement preparation.
  • Representations should cover all relevant financial statements in the auditor's report.

Audit Evidence: Sources and Reliability

• Sources of Audit Evidence:
  • Internal Evidence: Evidence originating, used, and retained within the client's organization, such as employee wage sheets, sales invoices, receipts, and minutes books.

External Evidence

• External evidence originates outside the client's organization and is typically generated in the usual course of business activities. It can also be obtained directly by the auditor.
• Examples of external evidence include purchase invoices, bank statements, and confirmations of balances of debtors, creditors, borrowers, etc.

Reliability of Audit Evidence

• The reliability of audit evidence, as per SA 500 on "Audit Evidence," is affected by its source, nature, and the circumstances under which it is acquired, including relevant controls over its preparation and maintenance.
• Generalizations about the reliability of audit evidence types are subject to exceptions, even when the information is from external sources.
• Factors influencing the reliability of audit evidence:
• Its nature, whether visual, documentary, or oral.
• Documents and written representations are generally more reliable than oral statements.
• Auditor-obtained evidence is more reliable than that obtained through the entity.

Question 31

Discuss the various points the auditor needs to consider when determining the appropriateness of using audit evidence about the operating effectiveness of controls obtained in previous audits and the time period before retesting.

Answer:

• In deciding whether to use audit evidence about the operating effectiveness of controls from prior audits and the timing of retesting, the auditor must consider:
• The relevance of past evidence to the current audit.
• The changes in the system or controls since the previous audit.
• The effectiveness of previous controls in the current period.
• The time elapsed since the previous audit.

Audit Procedure Considerations for Analytical Procedures

• The assessment of various elements of internal control, such as the control environment, control monitoring, and risk assessment processes of the entity;
• Evaluation of risks associated with the characteristics of the control, including whether it is manual or automated;
• Examination of the effectiveness of general IT controls in place;
• Review of the effectiveness and application of specific controls by the entity, including any historical deviations in control application observed during previous audits and the impact of personnel changes on control application;
• Assessment of whether the absence of changes in a particular control could pose risks under evolving circumstances;
• Evaluation of the risks of material misstatement and the level of reliance placed on the control.

Discussion on Audit Procedure for Analyzing Purchase Quantity and Price

• Audit procedure involves:
• Conducting a consumption analysis by comparing raw materials consumed as per the manufacturing account with previous years, considering closing stock, and investigating significant variations;
• Performing a stock composition analysis by obtaining reports on stock composition (e.g., raw materials as a percentage of total stock), comparing data with previous years, and investigating significant differences.

Key Concepts in Auditing

• Ratios in Audit

  • Auditors should compare the creditor's turnover ratios and stock turnover ratios of the current year with previous years.

• Quantitative Reconciliation

  • Auditors should review the quantitative reconciliation of closing stocks with opening stock, purchases, and consumption.

• Understanding Sufficiency in Audit Evidence

  • Question 33: Sufficiency is a measure of the amount of audit evidence available. (Jan 2021, 2 marks)

• Positive Confirmation Requests

  • Question 34: A positive confirmation request is where the confirming party responds directly to the auditor, indicating agreement or disagreement with the information provided. (May 2019, 2 marks)
  • Answer: A positive confirmation request requires a direct response from the confirming party regarding their agreement or disagreement with the information requested.

• True and Fair View in Auditing

  • Question 35: The concept of 'True and Fair' view is fundamental in auditing, where the auditor must express an opinion on the balance sheet and profit and loss account's true and fair character. (Various years, varying marks)
  • Answer: The 'True and Fair' view is a crucial concept in auditing, ensuring the accuracy and reliability of financial reports presented by a company.

Financial Statements Audit Requirements

When auditing financial statements, the auditor must thoroughly review the accounts to ensure that all assets, liabilities, income, and expenses are accurately presented in accordance with relevant accounting principles and policies. It is crucial to confirm that no significant amounts, items, or transactions have been left out.

Requirements as per Companies Act, 2013

• As per Section 129 of the Companies Act, 2013, modified by the Companies (Amendment) Act, 2017, financial statements must provide a true and fair view of the company's state of affairs.
• The financial statements must adhere to the accounting standards specified under Section 133 of the Companies Act, 2013.
• The format of the financial statements should align with the guidelines outlined in Schedule III for different classes of companies.

Compliance with Accounting Standards

• The items within the financial statements must comply with the applicable accounting standards.

Exemptions for Specific Companies

• Specific types of companies, such as insurance, banking, or electricity generation and supply companies, may have exemptions from certain disclosure requirements.
• Financial statements should not be deemed as misleading solely because they do not disclose specific information, such as matters not mandated by relevant Acts.

It is essential for auditors to ensure that financial statements are not only accurate but also provide a clear and comprehensive view of a company's financial position and performance.

Disclosure of Financial Statements by Companies

Consolidated Financial Statements

Summary and Explanation of Key Points

Preparation, Adoption, and Audit of Financial Statements

• The rules of this Act that relate to preparing, adopting, and auditing the financial statements of a holding company also apply, with necessary changes, to the consolidated financial statements mentioned in sub-Sec. (3).

Compliance with Accounting Standards

• If a company's financial statements do not follow the accounting standards as mentioned in sub-Sec. (1), the company must disclose in its financial statements:
  • The deviations from the accounting standards.
  • The reasons behind these deviations.
  • Any financial impacts resulting from such deviations.

Exemptions and Discretion of the Central Government

• The Central Government has the authority to exempt certain classes of companies, either on its own or upon application, from complying with specific requirements of this section or the related rules through a notification. This exemption can be granted in the public interest with or without conditions specified in the notification.

Penalties for Contravention

• If a company violates the provisions of this section:
  • The managing director, the full-time director responsible for finance, the Chief Financial Officer, or any other person designated by the Board to ensure compliance with this section could face punishment.
  • In the absence of the mentioned officers, all directors could be subject to:
    • Imprisonment for up to one year.
    • A fine ranging from fifty thousand rupees to five lakh rupees.
    • Both imprisonment and a fine.

Audit Requirements for Ensuring a True and Fair View

In the context of auditing a company, it is crucial for the accounts of a company to present a true and fair view. This entails disclosing all necessary information as mandated by Schedule III of the Companies Act, 2013, or any modifications specified by the Central Government. The auditor's responsibility is to confirm that the accounts are prepared in accordance with Schedule III provisions and include all essential disclosures. For companies regulated by specific Acts, compliance with the disclosure criteria of the governing Act is essential. It is important to note that these legal requirements represent the minimum standards.

To ascertain a true and fair view, an auditor must ensure the following:

• Assets are valued correctly based on relevant accounting principles.
• No significant assets are excluded.
• Detailed disclosure of any charges on assets.
• Adequate representation of material liabilities.
• Comprehensive disclosure of necessary information in the profit and loss account and balance sheet.
• Consistent application of accounting policies.
• Separate disclosure of any unusual, exceptional, or non-recurring items.

Importance of Casting and Totaling in Auditing

Casting or totaling plays a vital role in the auditing process. It involves calculating the total of specific accounts to identify any errors in totaling. Detecting such errors is crucial for the auditor to form an opinion on the accuracy and fairness of the financial statements. Therefore, casting and totaling serve as essential audit techniques that aid the auditor in their assessment.

Contents of Audit Notebook

• Nature of the business carried on
• Important provisions affecting its functioning like memorandum and Articles of Association, Partnership deed etc.
• Structure of the financial and administrative organization
• List of the books of account
• Name of principal officers, their duties, and responsibilities
• Particulars of the system of accounts and internal control which are in operation
• Particulars of the accounting and financial policies followed
• Important contracts to which the client is a party e.g. collaboration contracts, Royalty contracts, etc.

Significant Matters in Audit Notebook

• Audit queries not cleared immediately, e.g. missing receipts, vouchers etc.
• Mistakes or irregularities observed during the course of audit e.g. failure to comply with requirements of the Companies Act, or the provisions of the memorandum or Articles, change in the basis of valuation of finished stock and WIP or in computation of depreciation, failure to provide adequate depreciation, etc.
• Unsatisfactory bookkeeping arrangements, costing method Internal or financial administration or organization
• Important Information about the company which is not apparent from the accounts
• Special points requiring consideration at the time of verification of final accounts
• Important matters for future reference

Precautions in Applying Test Check Technique

Test checking technique is a common auditing procedure used in large organizations with numerous transactions. Here are the precautions to be taken:

• Ensure accuracy and reliability of the sample selected for testing
• Document the rationale behind selecting specific transactions for testing
• Verify that the sample size is adequate to draw meaningful conclusions
• Consider the risk associated with the transactions being tested

Auditor Precautions in Test Checking Technique

• Auditor precautions are crucial when employing test checking techniques during audits.
• Test checking is commonly used in large business organizations with numerous similar transactions.
• Precautions help ensure accuracy and effectiveness in the audit process.

Audit Documentation

• Audit documentation, often referred to as working papers, is a vital part of the audit process.
• It includes records of audit procedures, relevant findings, and the auditor's conclusions.
• Documentation provides evidence that the audit was conducted in compliance with standards and regulations.

Purposes of Audit Documentation

• Assisting the engagement team in planning and executing the audit efficiently.
• Enabling accountability for the engagement team's work.
• Facilitating quality control reviews and inspections.
• Not meant for helping management in drafting the letter of engagement.

Audit Documentation and Retention

Content and Extent of Audit Documentation

• Factors influencing audit documentation include:
  • The size and complexity of the entity
  • The identified risks of material misstatement
  • The significance of audit evidence obtained and the nature and extent of exceptions identified
  • The requirements under investigation

Audit File Definition

• An audit file can be described as one or more folders or storage media that contain the records forming the audit documentation for a specific engagement.
• It can exist in:
  • Physical form
  • Electronic form
  • Both physical and electronic forms

Completion of Final Audit File

• The appropriate time limit to complete the final audit file is typically not more than 60 days after the date of the audit report.

Retention Period for Audit Engagement Documents

• The retention period for audit engagement documents is usually not less than 7 years from the date of the auditor's report.
• It extends from the:
  • Auditor's report
  • Group Auditor's report
  • Auditor's report or, if later, the date of the group auditor's report

Audit Documentation Summary

• Audit Documentation Summary is also known as Completion Memorandum. It serves as a comprehensive record of the audit process.
• Audit Documentation Summary describes the significant matters identified during the audit and how they were addressed. This summary helps in understanding the key aspects of the audit.
• Audit Documentation Summary aids in effective and efficient review and inspection of audit documentation for large and complex audits. It also assists auditors in considering significant matters and achieving relevant objectives.

Ownership and Sharing of Audit Documentation

• Generally, audit documentation belongs to the Auditor, ensuring confidentiality and integrity of the audit process.
• An auditor may choose to share parts of the audit documentation with clients, ensuring that such disclosure does not compromise the work conducted or the auditor's independence.

Nature of Auditing

• Auditing is a Logical process that involves a systematic examination of financial records and statements to provide an independent assessment of their accuracy and fairness.
• An auditor is responsible for assessing the actualities of a situation, reviewing financial statements, and providing a general opinion regarding their truth and fairness.

Audit Evidence Concepts

• Definition of Audit Evidence:
  • Audit evidence refers to the information utilized by auditors to form conclusions, upon which their opinions are based.
• Types of Audit Evidence:
  • Audit evidence is collected by auditors during the audit process.
  • It is crucial in supporting the auditor's opinion and final report.
• Importance of Audit Evidence:
  • Audit evidence is essential for reducing audit risk.
  • It is necessary to facilitate the audit work effectively.
• Sufficiency and Appropriateness of Audit Evidence:
  • The sufficiency and appropriateness of audit evidence are interrelated.
• Relationship Between Audit Risk and Audit Evidence:
  • Audit risk and the quantity of audit evidence are directly related.
• Factors Affecting Auditor's Judgement:
  • Auditor's judgement on sufficiency can be influenced by various factors like the size and characteristics of the population, materiality, and the risk of material misstatement.
• Components of Audit Evidence:
  • Audit evidence may include confirmations from third parties, analysts' reports, comparable data about competitors, or any other relevant information.

Audit Procedures Overview

• Materiality: Refers to the level set by the auditor below which items are not considered significant. It helps in determining the importance of transactions, account balances, or disclosures.
• Observation: Involves visually inspecting a process or procedure being carried out by others to gather audit evidence.
• External Confirmation: Procedures used to verify the absence of certain conditions by obtaining confirmation from external sources.
• Recalculation: Checking the accuracy of documents or records through mathematical verification.
• Re-Performance: Auditor independently re-executes procedures or controls originally performed as part of the entity's internal control.
• Analytical Procedure: Involves evaluating financial information by studying relationships among financial and non-financial data.
• Inquiry: Seeking information from knowledgeable persons, both within and outside the entity, to gather relevant audit evidence.

Audit Procedures and Evidence

Test of Controls

• Audit procedure designed to evaluate the operating effectiveness of controls in preventing or detecting material misstatements at the assertion level.

Testing Controls Reliance

• The auditor shall test controls that they intend to rely on to provide a suitable basis for their intended reliance.

Audit Evidence Sufficiency

• Audit evidence may be sufficient for the auditor's purpose only up to a certain point in time.

Significant Risk Procedures

• When a significant risk of material misstatement is identified, the auditor must perform substantive procedures that are specifically responsive to that risk.

Internal vs. External Evidence

• Evidence originating within the audited organization is considered internal evidence.
• Examples of external evidence include purchase invoices, supplier's challans, debit/credit notes, and quotations.

Audit Evidence and Written Representations

Audit Evidence

• Audit evidence can be categorized based on its nature into three types: visual, oral, and documentary.
• Visual evidence includes observations made by the auditor through sight.
• Oral evidence consists of statements or explanations given verbally.
• Documentary evidence refers to written records, contracts, invoices, and other tangible documentation.
• Audit evidence can come from any of these sources, depending on the circumstances.

Reliability of Audit Evidence

• The reliability of audit evidence increases when it is obtained from independent sources, in documentary form, or directly by the auditor.
• Independent sources provide more credible evidence due to their unbiased nature.
• Documentary evidence, such as invoices and contracts, is generally more reliable and verifiable.
• Auditors should carefully consider the source and reliability of the evidence they gather during an audit.

Written Representations

• Written representations are defined as statements provided by management to confirm certain matters or support other audit evidence.
• These representations are typically provided by management to the auditor.
• They may include financial statements, assertions therein, or supporting books and records.
• Written representations, when accurate and reliable, can serve as important audit evidence.

Role of Written Representations

• Written representations act as necessary information that the auditor requires in connection with the audit of the entity's financial statements.
• They help provide additional support and confirmation of the information presented in the financial statements.
• Written representations play a crucial role in ensuring the completeness and accuracy of the audit process.
• They are considered a key component of the audit documentation and can provide valuable insights into the entity's financial position.

The Role of an Auditor

• Auditors have several objectives during an audit:
• To obtain written representations.
• To support other evidence.
• To respond appropriately.
• All of the above objectives are crucial in ensuring a thorough audit process.

Written Representations

• Written representations are typically requested by both the auditor and TCWG (those charged with governance).
• They serve as essential documentation during the audit process.
• They are requested from both management and TCWG to ensure comprehensive audit coverage.

Management Acknowledgment

• Management may be asked by the auditor to reaffirm their acknowledgment and understanding of their responsibilities in written representations.
• This practice helps in confirming that management is aware of and acknowledges their duties.
• It is important for ensuring transparency and accountability in the audit process.

Audit Evidence

• The auditor's objective is to obtain sufficient appropriate audit evidence regarding various aspects:
• Existence and condition of inventory.
• Completeness of litigation and claims involving the entity.
• Presentation and disclosure of segment information in accordance with financial reporting standards.
• All of the above aspects are critical in forming a comprehensive audit opinion.

Physical Inventory Counting

• Physical inventory counting is a vital part of the audit process.
• It involves inspecting inventory to confirm its existence and evaluate its condition.
• One key activity during this process is performing test counts to ensure accuracy.

Auditor's Attendance

• If the auditor is unable to attend physical inventory counting due to unforeseen circumstances:
• Alternative arrangements should be made to verify inventory counts.
• Physical counts may need to be made or observed on an alternative date.
• Audit procedures on intervening transactions should be performed to compensate for the absence.

Audit Procedures and Concepts

Audit Procedure for Identifying Litigation and Claims

• Review legal expense accounts to identify potential risks of material misstatement.
• Examine minutes of meetings of those charged with governance and communications with external legal counsel.
• Engage in discussions with management, including in-house legal counsel, to gain insights.
• All of the above steps are essential to identify risks effectively.

Alternative Audit Procedure in Communication Restrictions

• If restrictions prevent direct communication between external legal counsel and auditors:
• Adopt alternative audit procedures to ensure thorough examination.
• This guarantees compliance with legal boundaries while maintaining audit integrity.

External Confirmation of Audit Evidence

• Obtaining audit evidence directly from a third party in written or electronic form is external confirmation.
• This evidence adds credibility to the audit process and enhances reliability.

Negative Confirmation Requests

• Requesting a response only if there is disagreement with the information provided is a negative confirmation request.
• It helps validate information by highlighting discrepancies or errors effectively.

Non-Response in Confirmation Requests

• When the confirming party fails to respond or responds inadequately, it's termed as non-response.
• Non-response poses challenges to the audit process by creating uncertainties in the information obtained.

Audit Confirmation Procedures

• External Confirmation Procedures:
  • These procedures involve maintaining control over external confirmation requests.
  • The steps include:
    • Determining the information to be confirmed or requested and selecting the appropriate confirming party.
    • Sending the requests to the confirming party, including follow-up requests when necessary.
• Factors in Designing Confirmation Requests:
  • Considerations like specific identified risks of material misstatement, the layout of the request, and prior audit experience are crucial.
  • However, defining the audit plan and preparing audit procedures is a factor that should not be overlooked.
• Initial Audit Engagement:
  • This engagement is necessary in scenarios where the financial statements for the prior period were not audited or were audited by a predecessor auditor.
• Objective of Conducting an Initial Engagement:
  • The main goal is to gather sufficient appropriate audit evidence regarding the opening balances.
  • This evidence helps in determining if the opening balances contain material misstatements affecting the current financial statements and if appropriate accounting policies have been consistently applied.

Related Party Transactions

• Definition of Related Party

  A related party refers to a person or entity that holds significant control or influence, either directly or indirectly through intermediaries, over the reporting entity.

• Types of Related Party Relationships

  • Associates
  • Co-owners
  • Third Parties
  • Related Parties

• Complexity of Related Party Transactions

  Related parties can engage in transactions through a variety of intricate relationships and structures, leading to an increase in the complexity of these transactions.

• Auditor's Responsibilities

  Auditors are responsible for conducting audit procedures to identify, assess, and respond to the risk of material misstatement arising from the entity's handling of related party relationships, transactions, or balances.

• Relevance to Fraud Risk Assessment

  Understanding an entity's related party relationships and transactions is crucial for auditors when evaluating the presence of fraud risk factors, as stipulated by SA-240.

• Challenges in Detecting Misstatements

  When dealing with related party transactions, auditors face challenges due to inherent limitations. These include:

  • Management may lack awareness of all related party relationships.
  • Related party relationships can provide opportunities for collusion, concealment, or manipulation by management.

Auditing Concepts

• True and Fair Concept:
  • The true and fair concept in auditing is fundamental, ensuring that financial statements provide a faithful representation of the entity's financial position.
• Opinion Formation and Reporting:
  • Forming an opinion and reporting on financial statements aligns with SA-700 standards.
• Auditor's Responsibilities:
  • An auditor ensures that assets are neither undervalued nor overvalued based on accounting principles.
  • No material assets are omitted, and any changes are appropriately disclosed.
  • Unusual, exceptional, or nonrecurring items must be disclosed separately.
• Subsequent Events:
  • Events occurring between financial statement date and auditor's report are termed subsequent events.
  • Auditors consider risk assessment, understanding procedures, management inquiries, and reviewing interim financial statements.
• Going Concern Assumption:
  • Financial statements are prepared assuming the entity will continue operating for the foreseeable future.
  • The going concern concept implies the entity will operate without the intention of liquidation.

Summary and Explanation:

Auditor's Ability to Detect Material Misstatements:

• Limitations on the auditor's ability to detect material misstatements can have significant implications for future events or conditions that might lead an entity to cease operating as a going concern.
• These limitations are discussed in detail in SA-200, which outlines the auditor's responsibilities in terms of understanding and addressing inherent limitations.

Events Casting Doubt on an Entity's Ability to Continue as a Going Concern:

• Various events or conditions can raise significant doubt regarding an entity's ability to continue as a going concern.
• These events include indications of creditor withdrawal of financial support, adverse key ratios, loss of key management without replacement, and non-compliance with regulatory requirements such as solvency or liquidity obligations for financial institutions.
• SA-210 provides further insights into these events and their implications for the entity's financial standing.

Remember, it is crucial for auditors to be aware of these concepts and events to ensure a thorough assessment of an entity's financial health and going concern status.