ISA (UK) 500: Audit Evidence

 The primary goal of an auditor's job in an audit engagement is to achieve reasonable assurance that the financial statements as a whole are free of material misstatement so that the auditor can make an opinion on the financial statements and reflect accordingly in the auditor's report. The auditor must develop and implement audit processes to acquire sufficient relevant audit evidence to be able to draw reasonable inferences on which to base the auditor's opinion, which is a high but not absolute level of certainty.

Audit evidence — Information used by the auditor to reach the conclusions that constitute the basis of the auditor's opinion. Information from the accounting records that underpin the financial statements, as well as information gathered from other sources, are included in audit evidence.

The relevance and reliability of the information on which all audit evidence is based have an impact on its quality. The logical link with, or impact on, the goal of the audit method and, where appropriate, the assertion under consideration is referred to as relevance. The source and nature of the information to be used as audit evidence, as well as the conditions under which it is received, including the controls over its production and maintenance if applicable, all influence the audit evidence's reliability.

Obtaining and assessing audit evidence, which is generally produced from audit processes carried out during the engagement but can also be obtained from other sources, is a substantial component of the effort involved in performing an audit. For example, past audits; provided that any modifications that have occurred in the meantime have been properly considered; or the firm's quality control methods, particularly those relating to customer acceptance and continuation.

The auditor obtains audit evidence by performing: 

(a) risk assessment procedures; and 

(b) additional audit procedures, which include:

(i)         controls tests, when required by the ISAs (UK) or when the auditor chooses to do so; and

(ii)   substantive procedures, including tests of details and substantive analytical procedures.

The auditor must decide how to pick things for testing that are successful in satisfying the purpose of the audit method while creating controls and detail tests. If: (a) audit evidence obtained from one source differs from that obtained from another, or (b) the auditor has doubts about the reliability of information to be used as audit evidence, the auditor must determine what changes or additions to audit procedures are required to resolve the issue, as well as the impact of the issue, if any, on other aspects of the audit.

Practice:

The auditor may use inspection, observation, external confirmation, recalculation, reperformance, analytical procedures, inquiry, etc. as risk assessment procedures, tests of controls, or substantive procedures, depending on the context in which they are applied by the auditor.

 

Reference:      https://bit.ly/37TwybO

https://bit.ly/3M7quLh

Audit Method: Written Representations

A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context do not include financial statements, the assertions therein, or supporting books and records (ISA-580).

Written representations are audit evidence and are necessary information to arrive at audit conclusions. However on their own they can not be relied upon for audit evidence to support audit conclusions therefore they do not affect the nature and extent of other audit evidence that is to be obtained by the auditor. It should be obtained only from management who has responsibility for preparing and presenting financial statements and is knowledgeable about the relevant matters.

ISA 580 requires the auditor to request management to provide written representations that it has fulfilled certain of its responsibilities. It may therefore be appropriate to make management aware that receipt of such written representations will be expected, together with written representations required by other ISAs and, where necessary, written representations to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements.

The following issues may be documented in a written representation letter obtained from the management:

1. Assessment of risk of fraud by management
2. Management’s knowledge of identified or suspected non-compliance with laws and regulations
3. Related parties identification by the management
4. Consideration of all aggregated uncorrected misstatements to be immaterial
5. Assumptions used in making accounting estimates are reasonable
6. Consideration of subsequent events by management
7. Consideration of all possible matters and contingencies in going concern review
8. Any restatement made to correct a material misstatement in prior period financial statements that affect the comparative information.

Recommendation

My recommendation to the audit team would be to gather a list of issues about which it is appropriate to require a written representation. During finalization stage of audit, the audit team should write to the client confirming the issues about which they need a written representation from the management. The client must formally write the representation letter including all the issues pointed out along with other necessary representations, sign it and send it to the auditor. The written representation should be dated as nearly as possible, but not after, the date of audit report. 

Audit Exam Ultimate Pass Key

Last summer I successfully passed ACCA exam, P7 “Advanced Audit & Assurance”. While preparing for the exam, I designed succinct and universal “question tackling plan”, which helped to structure my ideas on auditing. In this post I would like to share my knowledge just before coming ACCA examination session.  

I believe it would be useful for all exams related with financial audit. So the candidates for qualifications like CPA or ICAEW are welcomed to utilize it as well. J

The logic is simple: the plan consists of common subjects/questions and points suggested to be addressed.

Question Tackling Plan

1.      Ethics area question

1.1.   Technical competence;

1.2.Objectivity/Independence (possible threats: self-review, familiarity, intimidation, self-interest, advocacy)

1.3.   Professional behavior;

1.4.   Integrity;

1.5.   Confidentiality.

Mnemonic: TOPIC

2.      Professional (audit business) area question

2.1.   Competence;

2.2.   Resources/costs;

2.3.   Reputation;

2.4.   Staff quality;

2.5.   Quality control: Acceptance; Directorship; Supervision; Review; Consulting; Disputes.

3.      Audit Opinion related question

3.1.   Clarity;

3.2.   Details (standards, amounts, scope);

3.3.   Structure (is heading on the right place?) of opinion and its Consistency (starts like “except for” and finishes like adverse opinion);

3.4.   Types of appropriate opinions. This depends on evidences (sufficient, mistake material and pervasive?);

3.5.   Prior year opinion.

4.      Audit Matters (audit evidence/process) question

4.1.   Materiality;

4.2.   Standard breached (IFRS, recognition, valuation criteria etc.);

4.3.   Risks of misstatement;

4.4.   Impact on Audit Opinion;

4.5.   Reliability (source of evidence).

5.      Audit Evidence question

Mnemonics:

Sources of evidence -  DADA3: Document Asset Director (interview/representations) Accounting record 3rd Party

Procedures AE IOU: Analytical (plausibility/predictability)   Enquiry & Confirm (written/verbal)     Inspection (documents/assets)       Observation (assets, process) RecalcUlation (opening balance check)

Elements of evidence:

5.1.   General: budgets/plans, accounting policy;

5.2.   Calculations: rates, models, risks, probabilities, impairment reviews, useful lives, assumptions reasonableness explanation;

5.3.   Disclosure: draft notes;

5.4.   Documents types:

5.4.1.      Bank statements, invoice, bill, dispatch/delivery note;

5.4.2.      Contract, agreement, insurance policy, title deed;

5.4.3.      Claim litigation copy, insurance claim;

5.4.4.      Log books, time-sheets;

5.4.5.      Minutes, orders, policies;

5.4.6.      Correspondence, letters;

5.4.7.      Tax returns;

5.5.   Reconciliations (with tax authority, debtor), confirmations;

5.6.   Record of discussion, interview, talk with employees;

5.7.   Valuation reports, surveys;

5.8.   Breakdowns (check for misclassification), samples.

Golden Rule:

Your answer should be always close to the question scenario: (1) the answer should be relevant; (2) the question text contains hint for answer.

You are welcomed to share your tips for audit exams. Good Luck! J

          Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".