Evidence

Evidence- Collection of evidence required in Second attestation standard and third audit fieldwork standard.
Management prepares financial statements as per GAAP. Assertions made by management are:
Presentation and disclosure F components are properly classified described and disclosed.
Existence and occurrence Assets and !iabilities e"ist at a given date and transactions during t#e period$
Rights and Obligations At a given date t#e assets are rig#ts and liabilities are obligations$
Completeness All transactions and accounts are included$
aluation or allocation !- F components are included at appropriate amounts$
E"istence is t#e amount is legitimate and Completeness is t#e amount is recorded$
Second attestation standard suggests %& searc# and verification 'inspecting assets etc$& and (& internal inquiries and
comparisons 'discussion )it# firm reps and analytical procedures$
Examination is #ig#est level of assurance$ Audit e"amination of financial statements$ Audit procedures are done
to see if assertions suc# as PE*C+ is met$
Review gives limited assurance or negative assurance$ Composed of internal inquiries and comparisons$ ,f
assertions seem incomplete t#en searc# and verification procedures are performed$
"greed upon procedures -#e report is t#e summary of findings$ -#e user specifies e"tent of procedures$
Compilations are not attest services and no assurance is provided$ Material .no)n misstatements s#ould be
disclosed in t#e report$
Presumption on evidence
%& Evidence from independent source provides more assurance t#an evidence from )it#in t#e entity$
(& ,nfo from direct personal .no)ledge is more persuasive t#an t#at obtained from indirect sources$
/& Assertions developed under effective internal control are more reliable t#an t#ose developed in t#e
absence of internal control$
Competent and Sufficient Evidential matter Amount of evidence necessary depends upon t#e type of
accountant0s engagement$ ufficient evidence #as been gat#ered )#en attestation ris. or audit ris. is at an acceptable
level i$e$ t#e auditor s#ould be able to form an opinion at a reasonable time at a reasonable cost$ Auditors use
professional 1udgment to determine t#e e"tent of tests necessary$ Auditors must consider materiality and in#erent ris.$
ometimes auditor may #ave to rely on evidence t#at is persuasive rat#er t#an convincing$ Competent evidential
matter is reliable$ -o be competent t#e evidential matter must be bot# valid and relevant$ For sufficient competent
evidence for estimates auditors ob1ectives are to see t#at all estimates %& #ave been developed2 (& are reasonable2 /&
follo) GAAP$ Approac#es for testing t#e reasonableness of t#ese estimates are %& revie) management0s process of
deriving estimates2 (& develop one0s o)n estimate and compare it to t#e management and /& revie) subsequent
events or transactions occurring prior to t#e completion of t#e field)or. )#ic# bear on t#e estimate
#$pes of evidence -- %nherent Risk in some accounts are ris.ier t#an ot#ers e$g$ cas#$ Auditors assess it by
performing overall revie) tec#niques and using auditing .no)ledge$ Control risk is assessed t#roug# auditor0s
consideration of ,C$ &etection ris. is restricted by auditor0s substantive tests$ As acceptable level of detection ris.
increases substantive tests increase 'auditor modifies t#e nature2 timing and e"tent of tests&$
'ature 3se more effective procedures$
#iming Perform tests at t#e year-end rat#er t#an at interim period$
Extent 3se larger sample si4e$
(nderl$ing accounting data 1ournal2 subsidiary and general ledgers2 accounting manuals and )or.s#eets
supporting cost allocations2 computations and reconciliation$
Corroborating evidence supporting documentation t#at is t#e basis of transaction recorded in ledgers etc$
"uthoritative documents titles invoices etc.
%nterrelationships )it#in data e$g$ interest e"pense and interest payable.
Calculations li.e depreciation e"pense and ta" liability support GAAP$
Ph$sical existence is observation and count.
"uthoritative statements by client provide support for treatment and recording certain data$ Aut#oritative statements
by t#ird parties e$g$ confirmations provide evidence for e"istence of transactions$
Subse)uent events confirm t#e status of estimates and assertions at t#e financial statement date$
For competent evidence auditor must use professional 1udgment for )#ic# evidence is appropriate$ 5e s#ould attempt
to get sufficient quantity of competent evidence at a minimum cost$ Audit procedures are underta.en to obtain
corroborating evidence discussed above$ 6ifferent procedures are first four are from t#e t#ird standard of field)or.
and last five from A3 /(7$
%nspection 'of documents and reports&
Observation of an activity e$g$ inventory count$
%n)uir$ 'of client personnel&
Confirmation 'of information e$g$ A*&
Reperformance - of an activity 'e$g$ recalculation of depreciation&
Ph$sical Examination 'of assets e$g$ mar.etable securities and fi"ed assets&
"nal$tical Procedures 'comparing interrelations#ips&
ouch recorded entry to support
#race support to recorded entry
8t#er procedures are
Agree balances to G!
Analy4e account transactions
Compare beg balance )it# last years audited figures
Count cas# etc$ E"amine aut#oritative documents
Foot totals Prove totals
*ead minutes of directors meeting
*econcile cas# balances
*evie) disclosures2 legal documents
can for unusual items
Substantive tests assist t#e auditor in deciding )#et#er t#e F follo) GAAP$ Auditor tries to estimate t#e total error
in t#e F and tries to assess )#et#er it e"ceeds a material amount. -#ese tests are of t)o types$
*+ "nal$tical procedures GAA requires AP in planning and overall revie) and not for substantive tests$ E$g$ of
AP are ratios2 regression and time series analysis$
Planning used to determine t#e nature timing and e"tent of tests$ Generally data aggregated at a #ig# level used$
Substantive testing for )#ic# overall comparisons are #elpful$
Overall review assess conclusions reac#ed and evaluate overall F preparation$ 3sed to see adequacy of evidence
for unusual or une"pected balances identified during planning or during audit$ 3sed to see c#ec. for unusual or
une"pected balances not previously identified$ Approac# for AP is
%& 6evelop e"pectation of account balance$ 'From info in prior periods2 anticipated results suc#
as budgets and forecasts2 industry info and relevant non-financial information$
(& 6etermine amount different from e"pectation t#at can be accepted )it#out investigation.
/& Compare company0s account balance )it# t#e e"pected account balance$
9& ,nvestigate significant differences from t#e e"pected account balance$
*elations#ips differ in t#eir predictability
%& *elations#ips in an unstable environment are less predictable t#an t#at in a stable
environment$
(& *elations#ips involving balance s#eet accounts are less predictable t#an income statement
accounts because : accounts are balances at one point in time$
/& *elations#ips regarding management discretion are sometimes less predictable$
Presumption on evidence
9& Evidence from independent source provides more assurance t#an evidence from )it#in t#e entity$
;& ,nfo from direct personal .no)ledge is more persuasive t#an t#at obtained from indirect sources$
Assertions developed under effective internal control are more reliable t#an t#ose developed in t#e absence of internal
control$
,n AP t#e use of data t#at #as been sub1ected to testing and data from a variety of sources increases t#e reliability of
data used in t#e analysis$
!imitation of Analytical Procedures-
%& -#e guideline for evaluation may be inadequate$
(& ,t is difficult to determine )#et#er c#ange is due to misstatement or is t#e result of random
c#ange in account$
/& Cost based accounting records #inder comparison bet)een firms of different ages and asset
compositions$
9& Accounting differences #inder comparison bet)een firms e$g$ one uses !,F8 and anot#er
F,F8$
;& Analytical procedures present only circumstantial evidence in t#at a significant difference
)ill lead to additional audit procedures as opposed to direct detection of a misstatement$
#est of details of transactions and balances are used to e"amine t#e actual details ma.ing up t#e various account
balances$ <#en auditor confirms t#e balances of a percentage of A* accounts t#en #e tests t#e e"istence of accounts
and )#en #e e"amines t#e cas# receipts subsequently to year end on individual accounts t#en #e tests t#e e"istence
and valuation of t#e account$
%n gathering sufficient competent evidential matter auditors seek an efficient and effective combination of *+
test of controls ,+ anal$tical procedures -+ tests of details f transactions to afford a reasonable basis for an
opinion.
Substantive test audit programs- is a detailed list of audit procedures to be performed in t#e course of an audit$
Auditors s#ould prepare an audit program for eac# audit area e$g$ inventory$
.inancial Statements
%
"ssertions
%
"udit ob/ectives %mplicit or Explicit
%
"udit procedures formulated to meet audit ob/ectives and listed in audit programs
%
"udit programs
-)o approac#es for auditing an account %& -est of balances for #ig# turnover accounts e$g$ A*2 AP cas# etc$
,+ -ests of inputs and outputs during t#e year for lo) turnover accounts e$g$ fi"ed assets$ -#e
emp#asis #ere )ill be on vouc#ing additions and retirements for a continuing audit$ Auditor
generally uses a combination of approac#es$
-ypical procedures in audit program-
Presentation and disclosure
Review disclosure. ,nclude general disclosure requirement related to compliance )it# GAAP.
%n)uire about disclosure. Consider specific disclosure requirements for t#e account as )ell as related account e$g$
for A* factoring2 pledging etc$
Existence and Occurrence!
Confirmation. Cas# from ban.2 debtor for receivables2 stoc. registrar and transfer agent for stoc. aut#ori4ed and
outstanding$
Observation. 8bservation of item itself or a legal document representing t#e item$ E$g$ cas# on #and2 inventory and
loan documents$
#race0ouch transactions. 6irectional testing e$g$ for A* auditor may e"amine s#ipping documents2 invoices and
credit memos$
Rights and Obligations-
Cutoffs$ -o confirm t#at t#e transactions #ave been reported in t#e proper period$ Cas# cutoff relates to *eceipts
and disbursement of cas#$ *eceivables cutoff relate to sales and cas# receipt$ Cutoffs also directly apply to
e"istence=occurrence and completeness assertions$
"uthori1ation$ ,f any transactions require specific aut#ori4ation$ -#is relates to )#et#er proper rig#ts and
obligations #ave been establis#ed$ E$g$ receivables2 debt and o)ners equity accounts$
Completeness-
"nal$tical Procedures. ,nclude analytical procedures and mention specific procedures for t#e account being audited$
*atios for A*- A* -urnover2 Gross profit rate2 A* to credit sales and interest revenue to notes receivable$
*atios for ,nventory- ,nventory turnover and gross profit margin by product$
*atios for investment securities- interest to dividend income2 compute interest and compute dividend$
*atios for PP>E--otal cost of PP>E to C8G2 comparison of repairs and maintenance on mont#ly and annual basis
and comparison of acquisitions for t#e current year )it# t#e prior year$
AP for prepaid comparison )it# prior year prepaid and obtain e"planation for significant c#anges$
AP for Payables- AP to purc#ases and AP to total liabilities$
!ong -erm debt verify overall reasonableness of long-term debt and interest e"pense$
8)ners Equity perform analytical procedures to confirm reasonableness of dividends$
*evenue-
E"pense!
Omissions$ Consider #o) transactions could be improperly from t#e account$ E$g$ inventory count s#eets not
included2 accruals not made and debt not recorded$
aluation
.oot schedules. Foot and cross foot actual sc#edules.
"gree schedule balances to general ledger balances.
"gree financial statement balances to schedules. :alance G!2 subsidiary and sc#edules.
Consider evaluation method of account. Consider t#e accounting met#od used )#et#er it is properly applied$ E$g$
!,F8 or F,F8 etc$
Consider related accounts. Audit program for : accounts )ill include procedures used to audit related income
statement accounts$ :ad e"pense for A*2 recalculating interest e"pense for long term debt2 recalculating depreciation
e"pense and AP to repairs and maintenance e"pense for valuation of PP>E$
Audit 8b1ectives-8ne of more ob1ectives for eac# F assertions e$g$ ob1ectives of long term are-
%& 6etermine t#at ,C is adequate$
(& 6etermine )#et#er long-term debt disclosures comply )it# GAAP P of PE*C+$
/& 6etermine )#et#er recorded long-term debt e"ists at year-end E of PE*C+$
9& 6etermine )#et#er long-term debt represents an obligation to t#e firm at year-end * of
PE*C+$
;& 6etermine )#et#er all long-term debt #as been completely recorded at year end- C of
PE*C+$
7& 6etermine )#et#er all long term #as been valued properly at year end- + of PE*C+$
A Prescribed procedures-
pecific Procedures
A3 /%? ,llegal acts
A3 //9 *elated Parties
A3 //? !itigation '!oss Contingencies&
!imited procedures
A3 ;;@ 8t#er info in documents containing audited statements
A3 ?(( ,nterim *evie)s
A* %@@ Compilations and *evie)s
upplemental info required by FA:
A3 ;;A General Procedures
Areas in )#ic# audit procedures are required
A3 //@ *eceivables
A3 //% ,nventories
A3 //( ,nvestment ecurities
A3 ;7@ ubsequent events
8t#er
A3 ;9/ 8t#er Auditors involved
A3 B@% Public <are#ouses
A3 //% Public <are#ouses
2orking Papers or &ocumentation-
a+ upport for auditors report and #elps to conduct and supervise t#e audit$
b+ #ould s#o) standard of field)or. #ave been observed i$e$ P,E$
c+ <ritten audit program required$
d+ *evie)er must understand t#e procedures done2 t#e results obtained and t#e team member
)#o performed t#e procedures$
e+ Property of auditor2 confidential2 useful reference source for client$
f+ Cept for time to meet t#e needs of #is practice and to satisfy applicable legal and regulatory
requirements$
2orking #rial 3alance- !ist of all G! accounts including : and , )it# t#e last year ending balance and current
balance and columns for ad1usting and reclassifying entries$
4ead Schedules- ummary of li.e accounts )it# t#e summary being transferred to t#e )or.ing trial balance$
%ndex- Combination of letters and numbers given to pages for identification$
Cross! Reference <#en same info is included in t)o )or. papers auditors include on eac# )or. paper t#e inde" of
t#e ot#er )or. paper$
Current work paper files! Contains info regarding current year audit.
Permanent work paper files contains info t#at is e"pected to be used in future audits also e$g$ copies of articles of
incorporation and byla)s2 debt agreements and ,C$
pecific Evidence
%& Cash a& Citing is a fraud t#at overstates cas# as it is in t)o ban. accounts at t#e same time$
May be detected by preparing a ban. transfer sc#edule2 by preparing four-column ban. rec
for valley account and by obtaining a cutoff statement for First City account$
b& :an. transfer sc#edules-s#o)s t#e date of transfer of cas# among clients various ban.s by using t#e statements
before and after closing$ 5elps to detect .iting$
c& :an. reconciliation- t)o or four column prepared to reconcile all cas# receipts and disbursements )it# t#e
ban. statements to boo.s and vice versa$ Four columns )ill not allo) auditor to c#ec. )#et#er c#ec.s )ere
)ritten for t#e )rong amounts and so recorded in t#e boo.s and ban. statement and unrecorded c#ec.s and
deposits e"ist t#at #ave not cleared t#e ban.$
d& :an. cutoff statements-for A to ten days after t#e year-end$ ,t is sent by ban. directly to t#e auditor and )ill
#elp t#e auditor to verify t#at 8= c#ec. #ave been completely and correctly recorded at t#e year-end$
e& tandard confirmation form- to request info on deposits and loans$ *equests financial institutions to indicate
any e"ceptions to t#e info noted and to confirm any additional account or loan t#at comes to t#eir attention$
P revie) disclosures for GAAP and restrictions on cas# 'disclosed )#en material&$
E- end confirmation letters2 count cas# at year end2 ma.e :an. transfer sc#edules for last )ee. of year end and
first )ee. of ne"t year to detect .iting2 *evie) :an. cutoff statements to see cas# is recorded in correct period$
*-*evie) ban. statements to verify balance to )#ic# client #as rig#ts$
Perform AP2 revie) year end rec2 obtain cutoff stmt2 foot summary of sc#edules and reconcile to G!$
(& Receivables a& !apping -cas# receipts from deposited in ban. late$ May be detected by AP2
c#ec. )rite-offs etc$
C#ec. deposit slip )it# remittances2 :oo..eeping system compare remittance advice )it# info recorded2 verify non
cas# credits to A*2 Foot totals and reconcile G! to customer accounts and compare copies of mont#ly stmt to
customers account b& Confirmations done unless A* is immaterial2 or ,* and A* are lo)$ -#ey test e"istence and
may be positive or negative or blan.$ ,f no reply to positive confirmation is received t#en second is sent and t#en
alternative procedures are done e$g$ c#ec.ing of s#ipping documents$
P- revie) disclosures for GAAP and inquire about pledging or discounting of A*$ *evie) loan agreements for
pledging or factoring A*$
E- end confirmation letters for A* and notes receivable directly to debtors$ ,nspect notes on #and and for t#ose not
on #and get confirmation from vendors ' imp for negotiable notes&2 +ouc# receivables to customers order2 sales order2
invoices2 s#ipping documents and credit memos$
*- *evie) cutoff of sales and cas# receipts around year-end to see t#ey are recorded in t#e proper period$ ales cutoff
affects A*2 sales C8G and inventory$ ,nquire about factoring to confirm client #as rig#ts to accounts$
Perform AP to A*2 sales2 Dotes * and interest revenue2 foot accounts and reconcile subsidiary to G!2 c#ec. cas#
receipts after year end and aging for adequacy of allo)ance for doubtful accounts$
+- discuss adequacy of allo)ance for doubtful accounts )it# management2 credit department and compare to
#istorical e"perience$
/& %nventor$ a& observation if client uses statistical met#ods auditor must be satisfied )it# its validity2
good ,C may allo) counting of inventory before year-end$ ,f it is auditors first audit )it# client t#en #e
did not count inventory at beginning of t#e year so cannot determine C8G unless adequate evidence is
available$ ,f not auditor may #ave to qualify #is report due to scope limitation on , and : )ill be
unaffected$ ,f auditor is engaged late and missed inventory count t#en alternate procedures may be useful
to establis# t#e accuracy of inventory count$
P- revie) disclosures for GAAP and inquire about pledging of inventory and verify t#e adequacy of disclosure$
*evie) purc#ase and sales commitment if t#ey need to accrue a loss or provide disclosure 'commitments are
disclosed only )#en t#ey are uneconomic and client needs to accrue significant losses e$g$ due to price c#anges$
Confirm consigned inventory and inventory in )are#ouse$ Confirm )it# custodian t#at consigned inventory is #eld$
E- observe p#ysical inventory and do test counts$
*- *evie) cutoff of sales2 sales returns2 purc#ases and purc#ase returns round year end to confirm boo.ed in correct
period$ 8b1ective is to include inventory )it# legal title at year-end$ 6o not include any inventory #eld for consigner$
Perform AP2 account for all inventory tags and count s#eets2 foot sc#edules and reconcile to G!2 inventory-costing
met#od )#et#er it is consistent )it# prior years and )#et#er it is acceptable$ -est pricing )#et#er it is valued at lo)er
of cost or mar.et2 s#ould not be valued at e"cess of D*+$ ee quality2 condition and obsolescence of inventory2 c#ec.
)#et#er specialist is needed$
5+ %nvestment securities a& GAAP requirements$ ee )#et#er cost s#ould be ad1usted for fair value equity or
consolidated basis$ :& Audit approac# inspect securities #eld by client and confirm securities #eld by custodian$
Client employee s#ould be present to ta.e bac. securities2 c#ec. securities #eld are identical to t#e recorded securities
number2 face value etc$ +aluation of long-term investments may be obtained by e"amining investee audit financial
statements2 unaudited financial statements2 mar.et quotations etc$ c& simultaneous verification )it# cas# ban. loans
etc$ d& client controls treasurer s#ould aut#ori4e purc#ase up to a value and after t#at t#e board of directors2 (
people to access securities2 p#ysical c#ec.ing periodically s#ould be done by persons independent of function$
P- revie) disclosures for GAAP and inquire about pledging of securities2 revie) loan agreements for pledging of
securities$ *evie) mgmt classification of securities #eld$
E- obtain confirm of securities #eld by ot#ers$ C#ec. securities #eld are identical to t#e recorded securities number2
face value etc same as last year and no substitution2 if auditor is not able to inspect securities at ban. as. client to not
allo) access to anyone till securities are inspected$
+ouc# purc#ase and sale up to t#e year all assertions2
*- revie) cutoff of cas# receipts and disbursements for transactions affecting securities$
Perform AP2 reconcile dividends recd to publis#ed dividend records2 foot totals and reconcile to G!2 test
amorti4ations of premiums and discounts valuation2 find mar.et value of securities classified as trading or available
for sale2 revie) audited financial statements of ma1or investments to confirm t#at t#ey are properly valued$
6+ PP7E- ,n trade of used asset for similar asset no gain or loss is recogni4ed$ C#ec.$ Asset constructed for t#e
company for its o)n use may be 6ME6!E85$ ,nterest can be capitali4ed2 C#ec.$ ,f first t#en revie) reasonableness
of t#e entire account$ *evie) predecessors )or.ing papers$ For continuing client c#ec. additions and disposals for
t#e current year$ c& c#ec. any addition is not properly recorded2 analysis of repair and maint$ may detect an
understatement of PP>E$ Also analy4e PP>E to detect any overstatement of PP>E$ d&disposals due to retirement or
t#eft may be unrecorded$ C#ec. insurance policies2 property ta" files2 dr to accumulated depreciation and credit to
misc revenue account$ ,nquire for obsolete mac#inery from plant manager$
P- revie) disclosures for GAAP and inquire about liens and restrictions on PP>E$ revie) loan agreements for liens
on PP>E$
E- ,nspect ma1or additions to PP>E$
*- vouc# additions and retirement$
*- revie) leases for proper accounting capitali4edF earc# for unrecorded retirements and obsolete equipment$
*evie) minutes of meeting of board of directors$
Perform AP2 analysis of repair and maint$ and vouc# transactions$ foot totals and reconcile to G!2 recalculate
depreciation$
8+ Prepaid assets include insurance and deposits$ *ecalculate prepaid2 confirm policies2 vouc# payments2 if
material deposits t#en recalculate prepaid and e"amine available support$ b& elf insurance- inadequate or no
insurance may be disclosed in notes$
P- revie) disclosures for GAAP and revie) adequacy of insurance coverage$
E- Confirm deposits and insurance )it# t#ird parties$ +ouc# additions to account$
Perform AP2 foot totals and reconcile to G!2 recalculate prepaid portions of prepaid assets$
?& Pa$ables- a& confirmation may sometimes be sent to vendors but generally omitted as t#ere is ot#er evidence
available$ 3sed )#en bad ,C2 bad financial position2 sent to ma1or suppliers2 disputed accounts2 and sample of ot#er
suppliers$ :& C#ec. for understated payables$ E"amine vendor invoices and statements bot# before and after year
end$ E"amine cutoff for cas# disbursement2 purc#ases and unrecorded vouc#ers$ C& analytical P d& analy4e ,C$
P- revie) disclosures for GAAP and revie) purc#ase commitment for disclosure or maybe a need to accrue a loss$
Confirm payable from vendor E*C+$
E- ,nspect copies of notes and agreements$ +ouc# balance payables to selected creditors by inspecting purc#ase
orders and receiving reports$ 'valuation and little completeness also&$
*- *evie) cutoff of purc#ases and purc#ase returns around year-end to see t#ey are recorded in t#e proper period$
Perform AP2 perform searc# for unrecorded payables2 as. mgmt about completeness of payables2 foot totals and
reconcile to G!2 recalculate interest e"pense2 year-end accrual for payroll2 and ot#er accrued liabilities$
A& 4ong term debt AP on ending balance2 confirmations frequently used2 revie) minutes of board meeting for
aut#ori4ation of ne) borro)ings$ Proceeds of ne) borro)ings traced to cas# receipts 1ournal2 deposit slips and ban.
statement$ *epayments traced to cas# disbursement 1ournal2 cancelled c#ec.s and cancelled notes$ ,f a trustee is used
get confirmations for any repayment$
P- revie) disclosures for GAAP and inquire mgmt about pledging of assets related to debt$ *evie) debt agreements
for details on pledged assets and for events t#at may result in default of t#e loan$ Confirm long-term debts )it# payee
or appropriate t#ird parties$ ,nspect copies of debt agreements$
-race receipt of funds to t#e ban. account and to cas# receipts 1ournal$ *evie) t#e cutoff of cas# receipts and
disbursements t#roug#out t#e year to verify t#at transactions affecting debt are recorded in t#e correct period$ *evie)
minutes of t#e board of directors for proper aut#ori4ation$ Perform AP for reasonable of long term debt and interest
e"pense2 inquire mgmt of t#e completeness of debt and revie) ban. confirmations for any instance of unrecorded
debt$ foot accounts and reconcile subsidiary to G!2 c#ec. entries in long term debt account2 recalculate interest
e"pense and long term interest payable$
B& Owners E)uit$ a& control of capital stoc. transactions-,f stoc. certificate boo. is used t#en reconcile o=s s#ares
and par value )it# stubs$ Confirmations are sometimes sent out to t#e stoc. #olders$ ,f registrar and stoc. transfer
agent is engaged to manage t#e stoc. t#en t#ey )ill directly confirm t#e no of aut#ori4ed s#ares issued and
outstanding to t#e auditors$ b& *etained earnings-c#ec. dividends payment for dr to *E$ Any prior period ad1ustment
is e"amined to confirm t#at t#ey may be dr to *E$
P- revie) disclosures for GAAP and revie) articles of incorporation2 byela)s and minutes relating to stoc. options
and dividend restrictions$ Confirm stoc. issued and o=s )it# t#e independent registrar and stoc. transfer agent if
applicable or reconcile stubs of stoc. certificate boo. to o=s s#ares and par value$ +ouc# transactions and trace
receipt of funds to cas# receipts 1ournal$ *evie) minutes of board of directors or s#are#olders meeting to verify
aut#ori4ation$ inquire clients legal counsel for any unresolved legal issues$ Perform AP for reasonable of dividends2
inspect treasury stoc. and c#ec. transactions are completely recorded and client #as control of t#e certificates$ Agree
amounts t#at appear to G!2 vouc# dividend payments and entries affecting *E$ *ecalculate treasury stoc.
transactions$
%@& Revenue a& overall approac# revenue accounts generally verified )it# related asset or liability accounts e$g$
A*-ales2 D*-,nterest2 ,nvestments interest2 dividends2 gains or sales2 PP>E rent and gains on sales$ :&Criteria
for revenue recognition Persuasive evidence of an arrangement e"ists2 delivery #as occurred and services #ave been
rendered2 sellers price to t#e buyer is fi"ed or determinable2 collectibility is reasonably assured$ C& Problem areas-
i& :ill and #old transactions seller #as p#ysical possession till buyer requests s#ipment to designated locations$ c#ec.
buyer ma.es absolute commitment to purc#ase and #as assumed ris.s and a)ards of t#e product$ ii& ide agreements-
may create obligations t#at relieve t#e customer of t#e ris.s and re)ards of o)ners#ip and may preclude revenue
recognition$ iii& C#annel stuffing is a practice suppliers sometimes use to boost sales2 and induce distributors to buy
more t#an t#ey can sell by giving discounts etc$ -#is may increase sales returns$ iv& related party transactions may
cause a variety of misstatements to occur$
Perform AP related to revenue accounts2 8btain or prepare analyses of selected revenue accounts2 vouc# selected
transactions and determine t#ey represent proper revenue for t#e period$
%%& E"penses - overall approac# e"pense accounts generally verified )it# related asset or liability accounts e$g$ A*-
uncollectible accounts2 ,nventories purc#ases2 C8G2 payroll2 PP>E depreciation2 repairs and maintenance2
accrued liabilities commissions2 fees2 product )arranty e"penses$
Perform AP related to e"pense accounts2 8btain or prepare analyses of selected e"pense accounts2 vouc# selected
transactions$

*,+ Client Representation letter )ritten representation letters required for audit$ *! s#ould be addressed to t#e
auditor no later t#an t#e date of t#e auditors report2 it s#ould be signed by t#e CE8 and t#e CF82 *! are not a
substitute for ot#er audit procedures by t#e auditor2 *! s#ould be ta.en for all t#e periods under t#e audit$ *! s#ould
be ta.en for all period to be reported upon even if t#e mgmt )as not present$ ,f mgmt refuses to give a *! t#en t#e
auditor cannot give unqualified opinion2 results in a disclaimer2 or a qualified opinion in some cases$
%/& (sing work of a specialist may be needed in valuing of inventory 'diamonds&2 postemployment and
postretirement benefits2 environmental cleanup obligations2 fair value disclosures and derivatives$ Auditor s#ould
evaluate t#e specialist0s educational qualificationsG understand ob1ectives and scope of t#e auditors )or.2
appropriateness of t#e specialist0s )or. and t#e form and content of t#e specialist0s findings$ A3//7 applies )#en
using a specialist0s )or. and internal auditors are not specialists$ -o evaluate t#e specialists educational qualifications
consider professional certification2 reputation and e"perience in t#e type of )or. in consideration$ <or. of a
specialist )#o is a client employee may be used but evaluate t#e relations#ip to see if it impairs specialist ob1ectivity
and if so use ot#er met#od and maybe ot#er specialist$ pecialist is referred in t#e auditors report only if suc# a
reference #elps users to understand need for e"planatory paragrap# or departure from unmodified opinion$
%9& %n)uir$ of client9s law$er is primary source of info of loss contingencies$ Client prepares list of litigations2
assessments2 and unasserted claims pending against firm$ Auditor sends t#is info to la)yer )#o revie)s it and
provides additional input$ ,s la)yer refuses to reply it is a scope limitation ,f t#e la)yer is unable to estimate t#e
effect of litigations2 assessments2 claims pending against firm t#e uncertainity )ill also #ave an effect on t#e la)yers
report$ ,f client #as not disclosed some unasserted claims t#en t#e la)yer s#ould not include it in #is report but s#ould
inform t#e auditor of t#e omission and consider )it#dra)ing if t#e client fails to inform t#e auditor$
%;& .air alues as per GAAP is used for measuring2 presenting and disclosing various accounts e$g$ investments2
intangible assets2 derivatives and impaired assets etc$ F+ is t#e amount at )#ic# asset or liability could be boug#t or
sold bet)een )illing parties$ F+ is easy to determine for stoc.s publis#ed price$ ,f active price does not e"ist price
can be calculated t#roug# t#e use of valuation model )#ic# is based on forecasts and discounting of future cas#
flo)s$ For F+ calculation %& revie) and test managements process ')#et#er assumptions used by t#e management are
reasonable&2 (& independently develop an estimate and /& revie) subsequent events 'use info after year end to #elp
evaluate reasonableness&$ Auditors generally use a combination of t#e t#ree approac#es$ Auditors s#ould c#ec.
)#et#er disclosures of F+ required by GAAP #ave been fairly presented$
%7& Related Part$ transactions -#e price used s#ould not be t#e one used at arms lengt# bargaining$ C#ec. for
related party transactions )#et#er legitimate and )#et#er disclosed as per GAAP$
%?& :oing concern to be mentioned in audit but not in compilation or revie)$ 3se of accruals means t#e company
is a going concern$ Auditors testing appropriateness of PE*C+ 'AP2 subsequent events2 non compliance )it# debt
agreements2 reading of minutes2 inquiry of legal counsel2 confirmation of various organi4ations to maintain financial
support& may identify conditions indicating substantial doubt as to )#et#er an entity )ill remain a going concern$
-#en auditor must obtain management plans to deal )it# t#e situation and if auditor still #as doubts t#en it s#ould be
properly disclosed in t#e notes to t#e F and must eit#er add a e"planatory paragrap# to t#e unqualified report or
must disclaim an opinion$
%A& Subse)uent events and subse)uent discover$ of facts existing at the date of the audit report t#ey are (
types %& t#ose t#at provide additional evidence about conditions )#ic# e"isted at t#e : date$ (& t#ose events t#at
provide additional evidence about conditions )#ic# did not e"ist at t#e : date but arose subsequent to t#at date$
,nterim period ubsequent period
ubsequent events
-ype % -ype (
Conditions e"isting on or before : date Conditions arising after : date
Ad1ust F amounts Consider for note disclosure
:eg of year : 6ate !ast day of field)or. ,ssuance of Audit rep
Perform audit procedures responsible for only
-o searc# for subsequent events info coming to auditor attn$
%B& Omitted procedures discovered after report date if after issuance of audit report audit discovers some
procedure )as omitted during audit t#en assess its importance$ ,f important t#e procedure or alternate procedure
s#ould be applied and if misstatements are detected t#en auditor s#ould revie) #is responsibility on subsequent
discovery of facts e"isting at t#e audit s#eet date$ ,f t#e client does not allo) t#e auditor to apply t#e necessary
procedures t#e auditor s#ould consult #is attorney as to appropriate action$
Completing t#e audit procedures to be completed on or near t#e last day of field )o. include$
earc# for unrecorded liabilities$
*evie) minutes of meetings of s#are#olders2 board of directors and t#e audit committee$
Perform final revie) stage AP$
Perform procedures including inquiry of client0s la)yers to identify loss contingencies$
Perform revie) for subsequent events$
8btain representation letter$
Evaluate audit findings
Evaluate adequacy of disclosures 'using c#ec.list& required by GAAP and EC$
*evie) of )or.ing papers by manager2 partner and (
nd
partner if possible not involved in t#e
engagement to provide an independent opinion of )or.$ ,t #elps to assess t#at provide assurance
t#at audit ris. is lo)2 )or.ing paper documentation is adequate and evidence supports opinion
being rendered$
Communicate )it# audit committee$
Evaluate audit findings All misstatements found by auditors 'error or fraud& must be corrected by ad1usting entries
ot#er)ise t#e auditors cannot issue an unqualified opinion on t#e F$ 3nrecorded misstatements are combined as
total li.ely misstatements in t#e F and considered$
Compilation procedures! to perform a compilation an accountant must possess an understanding of t#e acctg
principles and practices in t#e clients industry and also possess a general understanding of t#e clients %& business
transactions2 (& accounting records2 /& Accounting personnel qualifications2 9& F accounting basis2 ;& F form and
content$ Acct s#ould read t#e compiled statements and consider )#et#er t#ey appear to be appropriate and free from
obvious material errors$ Acct does not #ave to ma.e inquiries2 perform procedures or get confirmation unless #e
becomes a)are of info t#at is incorrect2 incomplete )#en #e s#ould get additional or revised info$ ,f t#e entity refuses
to provide or correct suc# info #e s#ould )it#dra) from t#e compilation$
Review Procedures - ! to perform a revie) an accountant must
%& possess an understanding of t#e acctg principles and practices in t#e clients industry t#at )ill
t#roug# inquiry and AP give #im a reasonable basis for e"pressing limited assurance t#at no
material modification need to be made in t#e F$
(& Possess a general understanding understanding of t#e client0s organi4ation2 operating
c#aracteristics and assets2 liabilities2 revenues and e"penses$
/& AP s#ould include developing e"pectations by identifying relations#ips2 comparing recorded
amounts or ratios to e"pectations$
9& A& ,nquiries to mgmt t#at #ave financial=acctg responsibility about
<#et#er F prepared follo)ed GAAP$
Acctg principles follo)ed
3nusual or comple" situations t#at mig#t affect F$
ignificant transactions near end of reporting period$
tatus of uncorrected misstatement identified during previous engagement$
Huestions arising in course of applying procedures$
ubsequent events$
ignificant 1ournal entries$
Communications from regulatory agencies$
:& Concerning actions ta.en at meetings 'board2 s#are#olders etc$& t#at may affect F$
C& *ead F to consider )#et#er F appear to conform to GAAP$
6& 8btain reports from ot#er accountants2 if any t#at #ave audited or revie)ed significant components of
reporting entity$
;& *ead F to detemine t#ey follo) GAAP$
7& 8btain reports from ot#er accountants )#o #ave audited or revie)ed components$
?& 8btain a representation letter signed by management$
Review of public compan$ interim .S for t#e first t#ree quarters EC registrants report interim results reviewed
by t#eir acct$ !arge EC registrants must report summari4ed interim financial info in t#eir annual reports as
supplementary info or as unaudited notes to F$ 8b1ect of t#e revie) is for acct to c#ec. )#et#er #e is a)are of any
material modification t#at s#ould be made to t#e F for it to conform to GAAP$ *evie) procedures for a public
company is similar to a non public co but #as some additional requirements$
Consideration of ,C adequate to identify misstatements and select appropriate inquiries and
AP$
,nclusion of procedures related to revenue2 reconciliation of interim F to accounting records
and inquiry of mgmt concerning fraud$
Dot a compilation or revie) procedures procedure for detailed consideration of ,C and a detailed test of balances$
Also use of an engagement letter is more li.ely alt#oug# not required )#en performing a revie) t#an a compilation$
8perational auditing by internal auditors evaluates effectiveness and efficiency of various operational processes$
imilar to performance audits$