Você está na página 1de 10

CHAPTER10-SUBSTANTIVE TESTING PSA 500- Audit Evidence- the auditor shall design and perform audit procedures that

are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. Audit evidence- used by the auditor in arriving at the conclusions on w/c the opinion is based and includes the information contained in the accounting records underlying the FS and other information. Evidence Gathering- used to refer to the acquisition of evidence regarding the assertions embodied in the year-end FS balances and disclosures. - represents most of the acts performed by auditors to form an opinion as to fairness of FS. - includes the assessment of inherent and control risk. *auditor will not attempt to obtain evidence that would provide absolute or complete assurance, even if that were possible rather, the auditor evaluates the sufficiency and appropriateness of evidence to decide whether it meets the reasonable assurance standard. * The measure of the appropriateness of such evidence for audit purposes lies in the judgment of the auditor. * audit evidence differs from legal evidence, which is circumscribed by rigid rules. Why Gather Audit Evidence? -to support the auditors opinion and report. -to acquire data and information to be used as a basis for concluding whether an entitys financial statements are presented fairly in accordance with an identified financial reporting framework. 3 Categories of Procedures for Gathering audit evidence a.) Risk Assessment Procedures used for obtaining an understanding of the client entity and its environment, including internal control. - performed during the audit planning and internal control phases of the audit. b.) Test Of Controls- used to test the operating effectiveness of controls in preventing, detecting and correcting material misstatements. c.) Substantive test-used to detect material misstatements in account balances, classes of transactions and disclosures.

NATURE OF AUDIT EVIDENCE -cumulative in nature and primarily obtained from audit procedures performed during the course of the audit. -may include information obtained from other sources such as previous audits (auditor has determined whether changes have occurred since the previous audit that may affect its relevance to the current audit.)

-other sources, firms quality control procedures for client acceptance and continuance. Corroborating evidence- refers to evidence which complements or supports an assertion which is already supported by another type of evidence. * The auditor obtains some audit evidence by testing the accounting records-through analysis and review, re-performing procedures followed in the financial reporting process, reconciling related types and applications of the same information. Relationship of Audit Evidence to Management Assertions (read page 338) SUFFICIENCY AND APPROPRIATENESS OF EVIDENTIAL MATTER Sufficiency- measure the quantity of audit evidence. Appropriateness- measure the quality of audit evidence, relevance and its reliability. *The auditors judgment as to what is sufficient appropriate evidential matter is influenced by such factors as: 1.) The degree of risk of misstatement- higher risk, higher quantity. 2.) The materiality of the item in relation to the FS taken as a whole. Lower the Materiality, higher quantity. 3.) the experience gained during the previous audits. 4.) The result of auditing procedures 5.) The type of information available Sufficiency -quantity of audit evidence needed is affected by the risk of misstatement- greater risk, more audit evidence _quality of evidence- higher the quality, less may be required. *Sufficiency and appropriateness of audit evidence are interrelated. *obtaining more audit evidence may not compensate for its poor quality.

Cost-Benefit Considerations *auditor typically works within economical limits: opinion must be economically useful, must be formed within reasonable length of time and cost. *guiding rule: there should be a rational relationship between the cost of obtaining evidence and usefulness of information obtained. * rely on audit evidence that is persuasive rather than conclusive. Appropriateness of Evidential Matter

-must be both valid and relevant *Relevance - evidence must affect the auditors ability to accept/reject a specific FS assertion. -each piece of evidence is evaluated in terms of its usefulness either in corroborating/contradicting an assertion by mngt/ in the auditors evaluation of evidence obtained at other stages of the audit period. -evidence is relevant to the extent that it serves either of those purposes. *Reliabilty -if its to be useful to the auditor. -quality of information that assures that information is free from error and bias and faithfully represents what it purports to represent. -influenced by its source and nature, dependent on the individual circumstances. *Generalizations about th reliability 1.) Independence of the source- independent sources outside the client is usually more reliable. *evidence arising from inquiries of client personnel from inspecting documents provided by mgnt is usually less reliable from the auditors view point. 2.) Qualifications of the Source- evidence must be obtained from people who are competent and have qualifications to make the information free from error. -should not necessarily conclude that the higher a persons position in the client, the better qualified that person is to provide evidence. -should challenge their own qualifications when evaluation evidence they have gathered. 3.) Internal control- generated internally, more reliable when the related controls imposed by the entity is effective. 4.) Nature of Evidence- evidence obtained directly by the auditor (fact based) is more reliable than obtained indirectly or by inference (opinion based). 5.) Form of the Evidence- more reliable when it exists in documentary form, paper, electronic.. -it need not be mentioned that audit evidence provided by original documents is more reliable than audit evidence provided by photocopies/facsimilies. Authentication of Documentation (read page342) *Information produced by the Entity/Management Expert When information to be used as evidence has been prepared by management experts, auditors shall: -evaluate the competence, capabilities and objectivity of that expert -Obtain an understanding of the work of that expert. -evaluate the appropriateness of that experts work as audit evidence for the relevant assertion. Shall evaluate whether the information is sufficiently reliable, consider the ff: -obtaining audit evidence about the accuracy and completeness of the information -evaluating whether the information is sufficiently precise and detailed for the auditors purposes. Considerations when evaluating the appropriateness of the mngt.experts work as audit evidence:

-relevance and reasonableness of that experts findings/conclusions, their consistency w/ other evidence, and whether they have been appropriately reflected in the FS. - if that expert work involves use of significant assumptions and methods, relevance and reasonableness of those assumptions. -involves significant use of source data the relevance, completeness and accuracy of that source data. *read page 343 Other Consideration 2-fold goal in performing an audit 1.) to achieve the necessary assurance to support the audit opinion 2.) to perform the audit as efficiently as possible. *auditor must also consider the availability (evidence may not be readily available), timeliness (may not permit auditor to consider a particular source of evidence) and cost (different types of evidence have different costs, must consider cost benefit trade) EVALUATING AUDIT EVIDENCE (READ PAGE 344) RELATIONSHIPS AMONG ASSERTIONS, OBJECTIVES AND PROCEDURES *in obtaining evidential matter in support of fs assertion, the auditor develops specific audit objectives in the light of those assertions. *in developing objectives, the auditor should consider the specific circumstances of the entity, nature of its economic activity and accounting practices unique to its industry. * auditor considers the type of evidence to be obtained, and the audit procedures necessary to obtain the evidence. NATURE, TIMING AND EXTENT OF PROCEDURE (READ PAGE345) AUDIT PROCEDURES ACCORDING TO PURPOSE The auditor obtains audit evidence to draw reasonable conclusions on w/c to base the audit opinion by performing audit procedures to: 1.) Obtain an understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement at FS and assertion levels (risk assessment procedures) 2.) When necessary or when the auditor has determined to do so, test the operating effectiveness of controls in preventing or detecting and correcting, material misstatements at the assertion level (test of controls) 3.) Detect material misstatements at the assertion level (substantive procedures) *risk assessment procedures always perform, to provide a satisfactory basis for the assessment of risk but do not provide sufficient appropriate audit evidence. *test of controls are necessary in 2 circumstances: w/ an expectation of operating effectiveness of controls, required to test those controls to support the risk assessment. When do not provide sufficient appropriate evidence, required to perform test of controls to obtain audit evidence.

*because of inherent limitation of internal control, substantive procedures always required to obtain sufficient appropriate audit evidence. AUDIT PROCEDURES ACCORDING TO NATURE Inspection of records / documents -consist of examining records or documents -provides audit evidence of varying degrees of reliability, depending on their nature and source and, in case of internal records and documents, on the effectiveness of the controls over their production. Inspection of Tangible asset -physical examination of asset. - may provide reliable audit evidence with respect to their existence but not necessarily about the entitys right and obligations or the valuation of asset.

Direction of the Test -important in establishing the assertion being tested by a certain procedure. *vouching procedures-examination of supporting documents of transactions. From acctg.records to source documents. It test the assertions of occurrence and existence. *Tracing- tracing of documents to acctg records. Establishes the completeness assertion Observation -looking at a process/procedures being performed by the others. -provides audit evidence about the performance of a process/procedure, but it is limited to the point in time at w/c the observation takes place and by the fact that the act of being observed may affect how the process/procedure is performed. Inquiry -seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity -audit procedure that is used extensively throughout the audit and often complementary to performing other audit procedures. -may range from formal to informal oral inquiries. -evaluating responses to inquiries is an integral part of the inquiry process. -responses to inquiries may provide information not previously possessed or with corroborative audit evidence, differs significantly from other information that the auditor has obtained, provide basis for the auditor to modify or perform additional audit procedures. -ordinarily does not provide sufficient audit evidence to detect material misstatement and not sufficient to test the operating effectiveness of controls. -corroboration of evidence obtained is often importance *auditor obtains written representations from management to confirm responses to oral inquiries. Recalculation

-checking the mathematical accuracy of documents/records. -can be performed through the use of IT. Reperformance -auditors independent of execution of procedure/ controls that were originally performed as part of the entitys internal control.

Confirmation -specific type of inquiry, process of obtaining a representation of information or of an existing condition directly from a third party. -frequently used in relation to account balances and their components -designed to ask if any modifications have been made to the agreement and what are the relevant details are. - used to obtain audit evidence about the absence o certain conditions. Analytical Procedures -evaluations of financial information made by a study of plausible relationship among financial and non financial data. -encompass the investigation of identified fluctuations and relationships that are inconsistent w/ other relevant information/deviate significantly from predicted amounts. EXTERNAL CONFIRMATION -process of obtaining and evaluating audit evidence through representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the Financial statements or related disclosure. - considers characteristics of the environment in which the entity being audited operates and the practice of respondents in dealing with requests for direct confirmation. Assertions addressed by Confirmation *external confirmation of an AR provides reliable an d relevant audit evidence regarding the existence of the account as at a certain date. -Provides audit evidence regarding the operation of cutoff procedures -does not ordinarily provide all necessary audit evidence relating to the valuation assertion, since it is not practicable to ask the debtor to confirm detailed information relating to its ability to pay the account. Forms of Confirmation Requests 1.) Positive External Confirmation request -asks the respondent to reply to the auditor in all cases either by indicating the respondents agreement with the given information, or by asking the respondents to fill in information. - response to this is expected to provide reliable audit evidence. -risk: w/o verifying that information is correct.

- reduce risk by using positive confirmation request that do not state the amount (other information) on the confirmation request, but ask the respondents to fill in the amount or furnish other information. -blank confirmation request may result in lower response rates because of additional effort is required of the respondents. 2.) Negative External Confirmation Request -asks the respondent to reply only in the event of disagreement with the information provided in the request. -when no response, auditor remains aware that there will be no explicit audit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. -provides less reliable audit evidence than positive and the auditor considers performing other substantive procedures to supplement the use of negative confirmation. *may be used to reduce risk of material misstatement to an acceptable level when: -the assessed risk is Material misstatement is lower - a large number of small balances is involved - substantial number of errors is not expected - has no reason to believe that respondents will disregard these requests. Management Request Not to Confirm Information -auditor should consider whether there are valid grounds for such request and obtain audit evidence to support the validity of management requests. -if auditor agree, he shall apply alternative audit procedure to obtain sufficient appropriate evidence regarding the matter -if not, and prevented him from carrying out the confirmations, there is a limitation of auditors work and he shall consider the possible impact on the auditors report. Auditor Control -auditor should maintain control over the process of selecting those to whom request will be sent, preparation and sending of confirmation request, response to those request. ANALYTICAL REVIEW PROCEDURES -consist of evaluation of Financial Information made by a study of plausible relationships among financial and non-financial data. -used as planning tool, substantive test, and overall review of FS at the completion test. *Typical Approach: 1.) Develop an expectation for the account balance. 2.) Determine the amount of difference from the expectation that can be accepted w/o investigation. 3.) Compare the companys account balance/ratio with expected account balance. 4.) Investigate significant differences from the expected account balance. *when developing an expectation, the auditor must attempt to identify plausible relationship Principal Limitations Analytical Procedures

1.) The guidelines for evaluation may be inadequate 2.) It is difficult to determine whether a change is due to a misstatement or is result of random change in account. 3.) It present only Circumstantial evidence in that a significant difference will lead to additional audit procedures as opposed to direct detection of a misstatement. SUBSTANTIVE PROCEDURES (SUBSTANTIVE TESTS) 2 General types of substantive tests: a.) test of details of transaction, balances and disclosure- used to examine the actual details making up various account balances. b.) Analytical Review Procedures. Timing of Test of Details - often desirable to perform test of details before year-end (early substantive testing) -auditor should assess the difficulty of controlling the incremental audit risk so that it will not impair the effectiveness of the audit. - efficient to perform substantive testing on related accounts as of common date. -if early substantive testing is done, the auditor will have to obtain satisfaction that, for the balances tested early, the risk of material misstatement is low during the intervening period between the early testing date and year-end. -in certain circumstances, the auditor might obtain satisfaction about transactions during the intervening period by examining evidence of operation of special procedures established by the client for that period. Interim Testing: Other Considerations *If early substantive testing is performed, the auditor should link the balances tested early to year-end balances by one or more of the ff procedures: - review key performance indicators and mngt information for unexpected variations in account balances at b/s date and investigate any material fluctuations and unusual activity. - scan entries in the relevant GL accounts or review summary of transactions to determine whether any expected entries have been omitted, whether the entries appear to be reasonable in relation to the normal level of activity. -Review any special procedure the client has carried out in year end. - Review reconciliations of individual ledgers balances to control accounts, investigate any unusual items. -ensure that any relevant matters brought forward -reassess any valuation accounts FRAUD OR ERROR

*Intention behind the misstatement- distinguish factor between fraud and error. *Error- refers to unintentional misstatements in FS, omission of an amount or disclosure, such as: -mistake in gathering/processing data from w/c FS are prepared. - incorrect accounting estimate arising from oversight/misinterpretation of facts. - mistake in application of actg. Principles relating to measurement, recognition, classification, presentation or disclosure. *Fraud- intentional act by one or more individuals among mngt., those charged with governance, employees or 3rd parties involving the use of deception to obtain an unjust or illegal advantage. Management fraud- fraud involving one/more members of management Employee fraud- fraud involving employees of the entity. *in either case, there may be collusion with 3rd parties outside the entity. * fraud involves motivation to commit fraud and a perceived opportunity to do so. Auditors consideration of fraud 1.) Misstatement resulting from fraudulent financial reporting -involves intentional misstatements or omissions of amounts or disclosures in FS to deceive users. 2.) Misstatement resulting from misappropriation of assets -involves the theft of an entitys asset.

Responsibilities -primary responsibility: rests with those charged in governance and management of an entity. -audit is conducted to provide reasonable assurance that the FS taken as a whole are free from material misstatement, whether cause by fraud or error. -auditor cannot be held responsible for the prevention of fraud/error. Inherent Limitations of An Audit -risk of not detecting a misstatement resulting from fraud is higher than misstatement resulting from error because fraud may involve sophisticated and carefully organized schemes to conceal it. -collusion may cause the auditor to believe that evidence is persuasive but in fact, false. -misstatement resulting from mngt.fraud is greater than for employee fraud. *audit procedures that are effective for detecting error may be ineffective for detecting fraud. *subsequent discovery of material misstatement resulting from fraud/error, does not indicate: -failure to obtain reasonable assurance - inadequate planning, performance and judgment -absence of professional competence and due care - failure to comply with PSAs.

Professional Skepticism