4.3 Analytical procedures in audit planning Discussion: In initial planning process, it is essential for auditor to obtain reasonable idea of what happened in the period of audit and obtain a preliminary view of any possible problem. Auditor can use analytical procedure to develop expectations of account balances. Common source of data used by the auditor to perform analytical procedures are: Financial information from prior period Expected or planned results from budgets and forecasts Comparison of linked accounts relationship such as interest expense and debts Ratios of financial information Relevant non-financial information 4.4 Risk assessment Audit Risk: Definition: Risk that the auditor may express an inappropriate audit opinion such as issuing an unqualified audit opinion when the financial statement contains material misstatement. ISA 200 stated that the auditor should plan and perform the audit to reduce audit risk on an acceptably low level that is consistent with the objective of an audit Level of risk: The determination of audit risk involves considerable judgement on the part of the auditor. Auditors need to consider risks of material misstatements at 2 levels which are: Overall financial statements level: often relates to the entity control environment Assertion level: relate to the individual account's balances and classes of transactions Limiting factors: Auditor cannot expect to eliminate the audit risk completely because there are certain inherent limitations that affect the detection of material misstatement. Limiting factors include: The use of sampling method which do not examine 100% of population The limitation of internal control such as collusion and management override The conclusion draws from the audit evidence which is persuasive rather than conclusive DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 4 4
Discussion: Auditor is required by the auditing standards to plan and perform the audit properly to reduce the audit risk to acceptable low level Auditor can control the level of audit risk by the effectiveness and the extent of the audit work conducted Auditor can conduct an audit in accordance with approved standards on auditing and issue an unqualified opinion, but the financial statement might still contain material misstatement Business Risk: Definition: Risk of auditor being exposed to loss or injury to his or her professional practice from litigation, adverse publicity, or other events arising in connection with the financial statements audited and audit report prepared Consideration: Business risk is more likely to be considered if: The audit client is in an industry that is experiencing problems The audited financial statements are heavily relied There is a likelihood that the client will experience difficulties after the audit report is issued There is a question about management integrity Indicators: The conditions and events that may indicate to the existence of business risk are: Significant changes in entity such as large acquisition and restructuring Significant changes in the industry in which entity operates Significant changes in product and line of business Significant changes in IT environment New location High degree of complex regulations DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 4 5
4.5 Types of audit risks Audit Risk Model Acceptable Audit Risk (AAR) = IR x CR x DR 1) Inherent risk or Natural risk (IR) Refer to the likelihood of the financial statement's assertion have the risk of material misstatement before considering the effectiveness of any clients related internal control If auditor concludes that there is a high likelihood of a misstatement, then auditor will conclude that the inherent risk is high and need to collect more evidence EXAMPLE: Risk of decrease of sales due to the global economic problem 2) Control risk (CR) Refer to the risk that the client’s internal control will fail to prevent or detect material misstatement If auditor concludes that the control risk is high, then auditor needs to accumulate more evidence to satisfy auditor’s opinion EXAMPLE: Risk the CCTV in the warehouse is unable to detect stocks embezzlement 3) Environment risk Refer to the combination of inherent risk and control risk 4) Detection risk (DR) Refer to the risk that the audit procedure will fail to detect a material misstatement Auditors needs to accumulate more evidence to reduce the detection risk EXAMPLE: Risk the audit procedures designed by audit team unable to detect fraud and error 4.6 Concept of materiality Definition: Materiality is involved the adjustment of amount, classifications, presentation, or disclosure where in the auditor judgment it is necessary for the financial statements to be fairly presented in true or fair view DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 4 6
Things that effect materiality: Size of the items: Most common application of materiality Nature of the items: Consideration of a qualitative characteristic Circumstances: Based on the occurrence of error Concepts: 1) Amount is immaterial Whenever a misstatement in the financial statement exists but it is unlikely to affect the decisions of a reasonable user EXAMPLE: The insurance expenses overstated in the account, but the amount is only RM10 2) Amount is material but not pervasive Whenever a misstatement in the financial statement would affect user’s decision but the overall financial statements still present true and fair view EXAMPLE: The large misstatements of inventory but not material as a whole financial statement since inventory is not major account 3) Amount is material and pervasive Whenever a misstatement in the financial statement would most likely affect users to make inappropriate decisions EXAMPLE: The large misstatements in inventory as the largest balances in the financial statements which will impact the opinion on the financial statements as a whole Steps in applying materiality on an audit: STEP 1: Establish a preliminary judgment about materiality Maximum amount that auditor believe could be misstated and still not affect the decision of reasonable users Setting of lower materiality will set higher volume of evidence needed STEP 2: Allocate the preliminary judgment about materiality to account balances or class of transaction Refer to the tolerable misstatement for the individual account in the financial statement without causing the whole financial statement to be materially misstated The purpose of allocating is to plan the scope of audit procedure for each individual account DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 4 7
STEP 3: Estimate likely misstatement and compare total misstatements to the preliminary judgment about materiality Judgment must be made from the total projection estimate of misstatement Auditor can conclude that the FS are fairly stated when the likelihood of misstatements is less Relationship between materiality, audit risk and audit evidence: There is an inverse relationship between materiality and the level of audit risk Higher the audit risk will lead to the lower of materiality level then, audit evidence to be accumulate is higher To lower the audit risk, auditor may reduce the level of assessed control risk and reducing the detection risk by apply appropriate audit procedures Impact of audit materiality: Affect the nature of audit procedure Time taken in obtaining the audit evidence Process and time in designing the audit plan Presentation on financial statement report Influence the economic decision of the user 4.7 Factors influencing the determination of materiality 1) Relative rather than absolute concept Since the same ringgit of misstatements will give different impact on different businesses, it is not absolute concept EXAMPLE: Misstatement of RM5,000 may considered high for grocery store but not material corporation like Genting Bhd 2) Basis for evaluation of materiality It is necessary to have a basis of evaluation in order to decide whether misstatement is material or not as the materiality is a relative concept EXAMPLE: The use of net income before taxes amount to compute the materiality level of the engagement DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 4 8
3) Qualitative factors that affects materiality i) Amount involving fraud and error Amount that involved in fraud considered as more critical because it reflects the reliability of the management and other personnel EXAMPLE: When auditor notice that there is a fraud in revenue accounts, the materiality will be set lower to ensure more audit evidence will be tested ii) Consequences of contractual obligations A minor misstatement could be considered as material if the misstatement could influence the contractual obligation EXAMPLE: If the bank set RM 2,000 as minimum working capital for loan approval and the company has overstated its working capital by RM150 that cause the bank to approve the loan, then that RM 150 considered as material iii) Misstatement affects the trends in earning Immaterial amount can be considered as material if it affects the earning trends EXAMPLE: The company reported income has increase by 3% annually for the past 5 years but income for the current year has declined by 1%, then those changes considered as material DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 4 9 END OF CHAPTER
PRACTICE MAKES PERFECT 1 Show TWO (2) contents of the engagement letter. 4 Marks 2 Explain THREE (3) risks involved in conducting audit based on the audit risk model. 6 Marks 3 List FOUR (4) types of risks. 4 Marks 4 Explain the issues and relevant considerations when planning an audit as below with an example: i) Staff requirements and use of expert ii) Identify related parties 6 Marks 5 Analyze the situation below to the relevant factor influencing the determination of materiality with explanation: Justine as an audit manager has review the Statement of Financial Position and Statement of Comprehensive Income provided by client. Based on the analysis performed, he decided to use Net Income Before Taxes as a determination for materiality. 3 Marks DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T P L A N N I N G & A U D I T R I S K | 5 0 6 Analyze the situation below to the relevant factor influencing the determination of materiality with explanation: DAT Corporation is one of the successful companies in Malaysia. For business expansion purposes, DAT Corporation plan to apply for a loan financing from Bank JP amounted of RM5 million. As a requirement from bank, DAT Corporation must have a minimum asset of RM50 million. Since the approval of loan is based on the assets, auditor has classified each account balances under asset as material. 3 Marks 7 Define materiality. 3 Marks
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CHAPTER 5 Documentation & Sampling
5.1 Types of audit files 1) Permanents audit file Keep historical data about the company that are continuing relevance to the audit Used more than one financial year and continuously used as reference Give basic information about nature of organization and usual transactions EXAMPLE: Memorandum and Articles of Association of the company, chart of accounts, organizational chart and letter of engagement 2) Current audit file Keep information and data related specifically to the current year’s engagement Relevant only for the year of audit period Must be prepare by client and relates to the audit of particular set of accounts for the year EXAMPLE: Copy of financial statements and auditor’s report, audit plan and audit programme, copies of minutes and committee meetings, working trial balance, adjusting and reclassification journal entries 5.2 Audit documentation and audit working paper Definition: Audit documentation includes records of the of the work performed, obtained, and reached by the auditor. It is covered under ISA 230. Also, to facilitates the planning, performance, supervision of engagement and the basis for review. Purpose: Assisting the engagement team to plan and perform the audit Assisting members of the engagement team whom responsible for the supervision to direct and supervise the audit work Enabling the engagement team to accountable for their work Enabling the conduct of quality control review and inspections in accordance with ISQC 1 or national requirements as demanding Enabling the conduct of external inspections in accordance with applicable legal, regulatory and other requirement Retaining a record of matters of continuing significance of future audits DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 3
Audit working paper: Records gathered by auditor to document all audit work with details in audit process, time taken, name auditor who carried out work, findings and conclusion on test result by auditor Covers all files content accumulated in audit work as proof showing the audit methods and compliance with audit standards Must be prepared completely and systematically because it will prove that the audit has been done professionally and based on audit standard Owned by the audit firm Cannot be disclosed by any other party especially third party except with court order Can be done by keeping it in a separate file or special schedule The file or schedule should always be under observation and need to be completed as soon as possible A separate file must be prepared to record mistakes and weaknesses in the system Content of audit working paper: 1) Company name Must be written on as registered in Registrar of Business EXAMPLE: For the audit of Petronas, auditor must write the full name which is Petronas Dagangan Bhd 2) Balance sheet date Must be written according to the company’s year ended and not auditor’s deadline EXAMPLE: Write the year end as per trial balance which is 31 December 2022 3) Signature of preparer Auditor that carries out audit must sign to show the working paper is provided by auditor involved either one or more than one EXAMPLE: Audit assistants must write their name as a preparer of the audit working paper DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 4
4) Signature of reviewer/checker Auditor that reviews the audit working paper must sign to show the working paper is completed and revised by the superior who responsible for it EXAMPLE: Audit partner must write their name as a reviewer of the audit working paper 5) Date and reason for preparing working paper Preparer and reviewer must show the date of when the audit working paper has been prepared and reviewed with the reason of preparing the audit working paper EXAMPLE: Audit partner must write the date of review in the audit working paper 6) File reference All working paper must have sequential file reference number to make it easier for the auditor to search for specific working paper EXAMPLE: Audit team to mark A1 for the first working paper for assets Factors affect the content of audit working paper: 1) Client’s entity size Larger entity size will lead to more working paper due to the various accounts involved 2) Complexity client’s entity The entity with more complex transactions will lead to the larger contents of audit working paper 3) Auditor experience on client’s entity Entity with particular problems in prior year audit will have special column for the reviewing of continuity of that problem 4) Client’s environment Entity that deals with more debtors, creditors, banks and subcontractors may have more contents in audit working paper 5) Efficiency on client’s internal control system Efficient internal control system practiced by client can reduce auditing procedures and reduce audit working paper DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 5
Audit programme: Definition: Audit programme is a listing of all audit procedures to be performed for each audit area. It is an action plan for auditors on what procedures to be performed throughout the audit process, from risk assessment to reporting. Elements in audit programme: 1) Audit purpose Enable auditor to give opinion of financial statement whether it comply with Accounting Principle in Malaysia and it consistently from previous year Assist auditor for early planning purposes and choose suitable procedure or carry out some alteration 2) Brief explanation on accounting system Simple explanation on accounting system and related calculation Verified the method use by the client on the computation made through the system 3) Weak internal control aspects Auditors need to focus more on weak internal control aspects by choose and implement suitable audit procedure in order to achieve the audit objective Strong internal control also can be combined in the implementation of audit program to reduce the audit sample for audit efficiency 4) Audit methodology Need to be discuss briefly, completely and systematically Prepared special column to write reference or index from working paper that showed related method been carried out, time period use to carry out audit and when the method is carried out 5) Audit conclusion Auditor who are responsible for the entire audit must analyze their job performance as to ensure audit objective is achieved Includes opinion related to the financial statements presentation made by client whether it followed the financial principle or consistently make some mistakes DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 6
6) Records to be used in the next audit cycle Record the different or deviation between actual time and budgeted time in order to help auditor to plan better in next audit Make sure poor internal control has been identified and being revamped as to minimized audit examination scope Advantages and disadvantages of audit programme: DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 7 ADVANTAGES DISADVANTAGES Ensure all important work implemented and minimize mistake Audit assistant will assume that it must be as a routine programme that must be done, and that programme may encourage useless audit programme without proper examination Audit partner can find out real audit situation at any time and allocate jobs at any level of staff Responsibility is clearly stated because every auditor assistant need to put signature for programme implemented by him Audit programme and working paper that well compile will be a proof in case of some legal action towards auditor If there have been changes on item in audited account, audit programme could not give effective result Audit programme may help to reduce confusion or misunderstanding if there have changes on audit assistant 5.3 Audit sampling Definition: Audit sampling is the application of audit procedures to examine less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis to draw conclusions about the entire population Definition: Population is the entire set of data from which a sample is selected, and about which auditor wishes to draw conclusions. A population may be divided into strata or subpopulations which each stratum being examined separately
Definition: Sample size is the number of populations items selected when a sample is drawn from a population. Therefore, the auditor should determine a sample size sufficient to reduce sampling risks to an acceptably low level Definition: Expected error is the amount of error in sample size that the auditors planned for and expected Purpose of audit sampling: To obtain the evidence needed to prove the auditor with the required degree of assurance on which to base on the audit opinion To evaluate audit evidence on particular criteria of a population for audit conclusion To provide a reasonable basis for auditor to draw conclusions about the population from which the sample is selected To reduce time as the sampling more economical rather than testing whole population To be an alternative for testing of total population as sometimes it is impossible to be acquired whole population for testing Audit sample selection method: 1) All items selection method Also known as 100% examination Unlikely use in the test of controls as this method is more common for tests of details Appropriate to be use when: i) The population constitutes a small number of large value items ii) There is a significant risk and other method do not provide sufficient appropriate audit evidence iii) There is a repetitive nature of a calculation and process which 100% examination is cost effective 2) Specific selection Auditor may decide to select specific items from a population based on such factors as the auditors understanding of the entity, the assessed risk of material misstatement and the characteristic of the population being tested The judgmental selection of specific items is subject to non-sampling risk, which is the risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 8
The specific selection may include: i) High value or key items – selection of high amount, suspicious and unusual items ii) All items over certain amount – selection of items which more than certain amount iii) Items to obtain information – selection of items to obtain deep information on nature iv) Items to test control activities – selection of specific items to ensure control is being performed appropriately 5.4 Sampling approach Statistical sampling: Sampling method that utilizes probability techniques Requires auditor to establish a systematic way to select audit sample so that every unit in a population has an equal chance to be selected Eliminates bias and provide better evidence To be use when the population is large, homogenous, identifiable, accessible and the internal control is reliable 1) Simple random sample selection Normally used to sample a population that is not segmented for audit purposes Can be done is 2 ways which are random number tables and computerized generation of random numbers EXAMPLE: Auditor will put the number of sample desired for a population that have 1,000 items, then the system will generate which samples are being selected 2) Systematic selection Also known as Interval Sample Selection which require auditor to calculate or assign an interval and then methodically select the sample items based on the size of this interval This technique is easy to use and can be drawn quickly in most populations EXAMPLE: Auditor select interval of 100 and if auditor start with item number 20th, next items that will be choose is 120th, 220th and so on DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 5 9
3) Stratified sample selection The purpose of this technique is to permit the auditor to emphasis certain population items and de-emphasize the others This technique divides the population into two or more subpopulations (stratum) by size EXAMPLE: Auditor divides revenue into 2 subpopulations which are below than RM5,000 and more than RM5,000 and testing each stratum separately based on the number of sample desired Non-Statistical sampling: 1) Haphazard selection This technique allows the auditor to select the sample items without a conscious biasness since it is done without looking at their size, source or any other established criteria Auditor is critical to be completely unbiased, but they are tending to become biased due to their self-experience, training, culture or norms EXAMPLE: Auditor will select any items from the population to be tested 2) Block selection This technique allows the auditor to do some selection of several items in sequence based on block If the first sample items in the block are selected, the remainder items of the block will be chosen automatically EXAMPLE: Auditor divides each item of population into several blocks and the selection of 1st items in any of block will lead to the testing of all items in the same blocks 3) Directed sample selection Auditor choose the sample based on the criteria that has been set up to them Criteria commonly to be used as a selection are items that most likely contain misstatements and items that have large monetary coverage EXAMPLE: Auditor select types of revenue that constantly have misstatements in the record of accounting system DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 6 0
5.5 Sampling risk and non-sampling risk 1) Sampling risk Risk that the auditor reached an incorrect conclusion because the sample is not representing the population To control the risk by increase sample size and use appropriate method of selecting sample items 2) Non-sampling risk Risk that the audit tests do not uncover existing exception in the sample Normally caused by boredom, exhaustion and ineffective audit procedures 5.6 Sampling for audit test 1) Sampling for test of control Also known as compliance test to examine the effectiveness of client’s internal control Usually conducted by auditor by performing observations, enquiries of clients, inspections and reperformance EXAMPLE: Auditor inspects the issuance of the payment by the client either it is based on the internal authorization process or not 2) Sampling for substantive test To test and verify the reasonableness of items in the financial statements by focusing on the monetary error Usually conducted by auditor by performing recalculations, confirmations, and analytical procedures EXAMPLE: Auditor inspects the sales invoice to ensure the amount stated is agreed with what has been recorded in the accounting systems DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 6 1 END OF CHAPTER
PRACTICE MAKES PERFECT 1 The information and documents used by the auditors while performing audit has been gathered into the audit files. Compare TWO (2) categories of audit files with example. 6 Marks 2 Discuss THREE (3) contents of audit working paper. 6 Marks 3 Audit program is a listing of all procedures to be performed for each audit area. Discuss ONE (1) advantages and disadvantages of audit program. 4 Marks 4 Define audit sampling. 5 Marks DPA 40123 Audit 1 l Politeknik Mukah Sarawak D O C U M E N T A T I O N & S A M P L I N G | 6 2 7 Explain TWO (2) purposes of audit sampling. 4 Marks 5 Discuss ONE (1) method of sampling that utilizes probability technique with an example. 3 Marks 6 Explain the sampling risk and non-sampling risk with 2 appropriate examples for each risk. 4 Marks 9 Adeline, the auditor of Cast Holdings is currently doing audit for the revenue account transaction. As an audit procedure, Adeline has divided the revenue into 4 subcategory based on the the nature for the sampling. Analyse the technique of sample selection used by Adeline. 3 Marks 8 Explain TWO (2) elements in audit programme. 4 Marks 10 List FOUR (4) factors that affect the contents of audit working paper. 4 Marks
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CHAPTER 6 Audit Evidence & Audit Procedures
6.1 Introduction to audit evidence Definition: Information used by auditor in arriving at the conclusion on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statement and other information Audit evidence can be accumulated through: Audit procedures performed during the course of audit Information obtains from other sources such as previous audits Other sources inside and outside the company such as company’s accounting records Information prepared using the work of outside expert Auditor’s quality control procedures for client acceptance and continuance Decision on what evidence to be accumulate by auditor: Which audit procedures to be used What sample size to select Which items to select from the population When to perform the procedures 6.2 Types of audit evidence Audit evidence measuring quantity: 1) Invoice Provide a business with a record of sales Demonstrate a customer obligation to pay for goods or services Payment terms may be outlined on invoice, as well as the information relating to any discounts, early payment details or finance charges assessed for late payment 2) Financial statements Obtain evidence through inspection, inquires, observation, 3rd party confirmation, testing of selected transactions and procedures Use the financial statements from management before audited Statement of Financial Position and Statement of Comprehensive Income DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 6 5
3) Payment voucher Must be serially number Amount should be written both in figures and words Name of the person issued, date and amount should be included 4) Receipt Proof of purchase Usually needed to make a return and often plays a vital in a company’s return and exchange policy Auditing receipt involve randomly selecting receipts and going to the original supplier’s invoice to check if the receipts is real and the price is correct Audit evidence measuring quality: 1) Video Eletronic medium for recording, copying, playback, broadcasting and display of moving media (either real time or recording) Some flexibility and ingenuity are desirable Provide a weak source of audit evidence, but might be appropriate when the subject matter is not material 2) Audio Described any sound or noise in a range that the human ear is capable of hearing Auditor must ensure that the audio recording is legal, includes ensuring that person being recorded knew that the meeting was being recorded and gave their consent 3) Verbal interview Procedures designed to obtain information from a person through oral responses or oral inquiries Objective is to capture factual information about the process being audited 4) Email Widely used features of the internet that allows to send and receive message to and from everyone with an email address globally To maintain the value of evidence, email must be maintained in a good manner and prevents it from being altered or manipulated DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 6 6
Consideration when collecting evidence: Audit evidence is subjective and depending on the situation which influenced the audit Limited time to complete the audit may force auditor to accept the evidence not as perfect as planned during planning stage Cost involved might be higher to gather the quality audit evidence 6.3 Characteristic of audit evidence 1) Relevance Is the appropriateness of evidence to the audit objective being tested Deals with the logical connection, the purpose of the audit procedures and the assertion under consideration EXAMPLE: For the audit of revenue for financial year ended 31 December 2022, auditor should get evidence from 1 January to 31 December 2022 2) Reliability Is the quality of information when it is free from material error and bias Influenced by its sources and its nature and circumstances which including the control over its preparation and maintenance EXAMPLE: Audit evidence from external and independent sources is more reliable than the internal sources Factors influencing auditor’s judgment of sufficiency 1) Risks of misstatements Whereby higher risks lead to more audit evidence is required 2) Materiality of the accounts Whereby more evidence is required for accounts that is material to the financial statements 3) Quality of the evidence Whereby the higher the quality of evidence, the less evidence is required 4) Size of a population Whereby the number of items in the accounts will be the basis for sampling DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 6 7
6.4 Introduction to audit procedures Definition: Details instruction that explain the audit evidence to be obtain during the audit. It is common to explain these procedures in sufficiently specific term so an auditor may follow this instruction during the audit 6.5 Types of audit procedures 1) Inspection of records or documents Auditor inspection of the client’s documents and records to substantiate the information that included in the FS Documents examined by auditor are the records used by the clients to provide information for conducting its business in an organized manner EXAMPLE: Auditor inspect the sales invoice recorded by the client 2) Inspection of tangible assets Physical examination to verify the existence of the assets recorded Most associated with inventories and cash EXAMPLE: Auditor tour the factory to inspect the existence of machinery recorded in the accounts 3) Observation Use of senses like sight, hearing, touch and smell to assess client’s activities Observation is rarely sufficient by itself because of the risk of client personnel changing their behavior because of the auditor’s presence EXAMPLE: Auditor tour the client’s office to see the behavior of the staff according to the SOPs 4) Inquiry Obtaining of written or oral information from the clients in response to questions from the auditor Normally necessary to obtain other evidence to support it as it has been obtained from the internal parties inside the company which is not independent EXAMPLE: Auditor interview sales manager for the huge decrease of sales compare to the prior year DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 6 8
5) Audit confirmation Is a direct written response from a third party verifying the accuracy of information that was required by the auditor May be in electronic or paper form EXAMPLE: Auditor to send confirmation to the bank to confirm the amount of bank balances recorded in client’s accounting system 6) Recalculation Involves rechecking a sample of calculation mad by clients Consists of testing the client's arithmetical accuracy EXAMPLE: Auditor to recalculate the depreciation computed by the client 7) Reperformance Auditor independent tests of clients accounting procedures or controls Procedures or controls that are part of the entity’s accounting and internal control system EXAMPLE: Auditor to re-perform the aging of trade receivables prepared by the client 8) Analytical procedures Can reduce Detailed Audit Tests From the application of analytical procedures, certain audit procedures can be eliminated, and sample size can be reduced EXAMPLE: Auditor to compare financial and non-financial information to audit the reduction of sales compared to the prior year DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 6 9
6.6 Classification of audit procedures 1) Test of control (TOC) Performed to gather evidence about the effectiveness of client’s design and operations of internal control policies and procedures Internal control is expected to be able to prevent, detect or correct material misstatement errors or fraud from occurring Audit procedures used are inspection of records and documents, inspection of tangible assets, observations, inquiries of clients and reperformance 2) Substantive procedures Performed when auditor want to gather evidence underlying assertions in account balance and class of transactions Included test of details (TOD) and analytical procedures TOD of transactions is performed to address whether particular types of transactions have been properly recorded and accounted for during the period TOD of account balances is performed to address whether there is misstatements in the ending balances of an account TOC of presentation and disclosure is performed to address whether FS disclosures is properly presented DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 7 0
6.7 Relationship between management assertion, audit procedures and types of evidence DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 7 1 Assertion Procedures Complete Existence Accuracy & Cut-off Valuation Types of Evidence Inspection / / / / Document, Physical Observation / / / Physical, Process Inquiry / / Written Representation Confirmation / / / Confirmation Recalculation / / Mathematical Reperformance / / Process Analytical Procedures / / / / Analytical END OF CHAPTER
PRACTICE MAKES PERFECT 1 Define audit evidence. 5 Marks 2 Explain THREE (3) examples of audit evidence in measuring quantity that are commonly used by the auditor during the audit field work. 6 Marks 3 “The audit evidence is the information used by auditor in arriving the basis of the audit opinion. It can be classified into 2 categories which are quality and quantity” Based on the above statement, examine the quality of audit evidence related to the relevant and reliability characteristics by applying appropriate example. 4 Marks DPA 40123 Audit 1 l Politeknik Mukah Sarawak A U D I T E V I D E N C E & A U D I T P R O C E D U R E S | 7 2 5 Ahmad, the auditor of JB Corp has requested to the management to tour the client’s office and factory to see the compliance of staff to the operating procedures listed by the the top management. Apply the appropriate audit procedures performed by Ahmad. 3 Marks 4 The purpose of audit procedure is to provide details instruction that explain the audit evidence to be obtain during the audit. Explain with example TWO (2) types audit procedure as below: i) Recalculation ii) Inspection of tangible assets 6 Marks 6 For the financial year ended 31 March 2021, Japel Sdn Bhd, a tourist agency has generated a significant reduce in sales. To get an idea on the main reason of the reduce, Stainley, the auditor of Japel Sdn Bhd has requested to interview the sales manager, Mr Singh. Apply the appropriate audit procedures performed by Stainley. 3 Marks
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MODULE AUDIT 1