BUS165 - Week 6

• Audit Documentation


  • Purpose: Provide proof that we have carried out audit work and gives the basis for our audit report
  • Gives evidence that the audit was planned and performed in accordance with auditing standards and regulatory requirements
  • Allows the audit to be reviewed and supervised
  • Ensures the audit team are accountable for the work done and conclusions made
  • Aids future audits
• Audit Documentation


  • Working papers may be paper or electronic
  • If legal action is taken against an auditor, audit files will be used in court to prove or disprove negligence
• Content of working papers

  • Documentation must be sufficient to allow an experienced auditor with no connection to the audit to understand
  • Work performed
  • Evidence obtained
  • Significant matters
  • Conclusions drawn
• All working papers should include

  • Client name
  • Year end date
  • File reference
  • Name of preparer and date
  • Name of reviewer and date
  • Subject
  • Objective of test
  • Source of information
  • Sample size
  • 10)Work performed
  • 11) Conclusion made
  • 12) Errors
• Audit work is confidential so working papers should be kept secure
• All working papers should be kept for 5 years from the date of the audit report
• Sufficient (Audit Evidence)


  There must be enough evidence, i.e. Quantity
• Appropriate (Audit Evidence)


  It must be reliable and relevant, i.e. Quality
• More evidence will be needed if

  • Risk is higher
  • Items are material
  • Internal controls are weak
  • The evidence is not as reliable
• Auditor generated or third party evidence

  More reliable than client generated evidence
• Client generated evidence


  More reliable if it generated from strong internal controls
• Original or written evidence

  More reliable than a copy or oral evidence
• Relevant evidence


  Proves one or more of the financial statement assertions
• Financial Statement assertions (Profit and Loss)

  • Occurrence - Have transactions occurred and relate to the entity
  • Completeness - Have all transactions been recorded
  • Accuracy - Have amounts been recorded appropriately
  • Cut off - Have transactions been recorded in the correct period
  • Classification - Have transactions been recorded in the correct account
  • Presentation - Are transactions and disclosures adequate
• Financial Statement assertions (Statement of Financial Position)

  • Completeness - as before
  • Classification - as before
  • Presentation - as before
  • Existence (rather than occurrence) - do assets, liabilities and equity exist
  • Rights & Obligations - Does entity own assets / have rights to obligations
  • Accuracy & Valuation - Assets, liabilities and equity are recorded at appropriate values
• Types of Procedures


  • Tests of control - Designed to test if controls are operating effectively in preventing or detecting material misstatements
  • Substantive Testing - Designed to test the figures in the financial statements and detect material misstatements
  • Test of detail - Test individual transactions and balances
  • Analytical Procedures - Evaluate the financial statements through analysis of plausible relationships
• Tests of Control


  1. Understand how the system operates

  2. Document the system

  3. Test the controls to assess their effectiveness

  4. Determine the impact on the audit
• To rely on the controls as part of the audit we need to
• Substantive Procedures


  Test the numbers in the financial statements
• Auditors may choose to rely 100% on substantive procedures
• Small business


  Controls are weak
• ISA 330 - Requires an auditor to carry out the following substantive procedures


  • Checking the financial statements to the underlying records
  • Examining material journals and transactions
  • Examining adjustments made in the financial statements
• Types of audit tests - How do we gather evidence

  • Inspection of assets or documents
  • Observation
  • Inquiry
  • Confirmation
  • Recalculation
  • Re-performance
  • Analytical review
• Using the work of others

  Eg: Property valuations, work in progress, legal provisions
• ISA 620 'Using the work of an Auditor's expert' states that an auditor should obtain sufficient and appropriate evidence that the work of the expert is adequate for audit purposes
• Assess the experts competence

  • enquiring about qualifications, experience and membership of professional bodies
• Objectivity (of an expert)

  can be assessed by enquiring if there are any business or personal relationships between the expert and the client
• The work of the expert must be agreed
• The work must be evaluated to ensure it is consistent with other evidence and auditors are comfortable with the methods and assumptions used by the expert
• Relying on the work of internal audit

  Auditors may be able to cooperate with the client's internal audit department and place reliance on their work
• Areas where auditors may rely on internal audit work

  • Tests of control
  • Risk assessments
  • Fraud investigations
  • Compliance with laws and regulations
• ISA 610 'Using the work of Internal Auditors' states that auditors must assess the effectiveness of the internal audit function and if their work is adequate for audit purposes
• The external auditor must re-perform some of the internal audit team's procedures to ensure they would have reached the same conclusions
• The extent of the checks on internal auditor's work depends on

  • Amount of judgement involved
  • Risk of material misstatement
• Service Organisations


  ISA 402 'Audit Considerations Relating to an Entity Using Service Organisations' deals with the auditor's responsibility to obtain sufficient appropriate audit evidence when a client outsources functions to service organisations
• Examples of service organisations

  • Payroll
  • Receivables
  • The entire finance function
• What the auditor should do for service organisations

  • Gain an understanding of the services being provided
  • Assess the design and implementation of the internal controls of the service provider
  • Visit the service provider and perform tests of control
  • Contact the service provider's auditor to obtain an opinion on the systems and the suitability of controls
• Sampling


  Definition - The application of audit procedures to less than 100% of the items within a population such that all items have a chance of selection in order to provide a reasonable basis to draw conclusions about the whole population
• An auditor must choose a representative sample so that same conclusion is drawn from the sample as would have been drawn if the whole population had been tested
• To reduce audit risk

  Sample size can be increased or stratification can be used