by: Kana Lou Cassandra Besana

Minutes of the meetings

Accounting records Confirmations from independent parties
Industry data
Inquiry
Observation
Inspection of documents

EVIDENCE THAT AUDITOR

OBTAINS GENERALLY
Checks, invoices, contracts
General and subsidiary ledgers Corroborating
Journal entries
Worksheets supporting cost allocations,
information
computations, reconciliations and disclosures
 1. Inspection of Documentation
2. Inspection of Assets
Types of 3. Observation

Audit 4. External Confirmation (PSA 505)

5. Recalculation

Procedures 6. Reperformance
7. Analytical Procedures (PSA 520)
8. Scanning
9. Inquiry
 TEST OF SUBSTANTIVE
CONTROLS PROCEDURES
Inspection of documentation Inspection of documentation
Observation Inspection of assets
Reperformance External Confirmation
Inquiry Recalculation
Analytical procedures
Scanning
Inquiry
(1) INSPECTION OF DOCUMENTATION
provides audit evidence of
varying degrees of reliability
Examining Documents
invoices
payroll time cards
bank statements
Read contracts
Use of original source documents
Types of Audit Procedures
(2) INSPECTION OF ASSETS
provides reliable evidence
with respect to the
existence of the asset
(but not necessarily about the clients rights and
obligations or completeness of the asset)

Types of Audit Procedures

 (3) OBSERVATION
looking at a clients process or procedure
observing the clients process of taking physical
inventory to establish existence and valuation

LIMITATIONS: Individuals who know they are being observed

processing on one day does not necessarily
may act differently
indicate how the transactions were processed on a
different day or over a relevant period of time

Types of Audit Procedures

(4) EXTERNAL CONFIRMATION
obtained as a direct written response to the auditor from a
third party
Bank balances Inventories
held

Terms of agreement
with third parties
ACCOUNTS Property title
deeds
TESTED
AP balances Investments
and terms under custody
Loans from of trustees
lenders Types of Audit Procedures
The AUDITOR should make sure that:

It is he who sends out the confirmation requests

The requests are properly addressed
All replies are sent directly to the auditor

Types of Audit Procedures

Auditors must not rely on external confirmations unduly

The auditor must assure that the outside party:

Exists
Is able to respond objectively and independently
Is likely to respond conscientiously, appropriately, and
in a timely fashion
Is unbiased in responding
Types of Audit Procedures
TYPES OF EXTERNAL CONFIRMATION:

POSITIVE NEGATIVE
CONFIRMATION CONFIRMATION
REQUEST REQUEST
Indicates agreement Respond directly
or disagreement on ONLY if confirming
the information party DISAGREES
Provides requested
information
Types of Audit Procedures
 Types of Audit Procedures

EXTERNAL CONFIRMATIONS
PSA 505
 EXTERNAL CONFIRMATION MANAGEMENTS REFUSAL TO ALLOW THE
PROCEDURES AUDITOR TO SEND A CONFIRMATION REQUEST

REQUIREMENTS
EVALUATING THE EVIDENCE OBTAINED

RESULTS OF THE EXTERNAL

NEGATIVE CONFIRMATIONS CONFIRMATION PROCEDURES
External Confirmation Procedures

(a)Determining the information to be confirmed or requested

(b) Selecting the appropriate confirming party
(c) Designing the confirmation requests
(d) Sending the requests to the confirming party
(a) Determining the information to be confirmed or requested

account terms of
balances agreements

transactions contracts
(b) Selecting the appropriate confirming party

KNOWLEDGEABLE
(c) Designing confirmation requests

F A C T O R S
Response rate
Assertion Method of communication
Reliability
Specific identified risk of Managements authorization
material misstatement Ability of the confirming party to

Layout and presentation
Nature confirm or provide the requested
Prior experience information
 POSITIVE CONFIRMATION REQUEST

Indicating Asking for

agreement information

!RISK!

Without Lower
verification response rates
(d) Sending the requests

Test the Validity

of the addresses

Follow-up on
confirmation request
GAME.
ENUMERATION

What will be the actions of the auditor if

the management refuses to allow the
auditor to send a confirmation request?
(a) Inquire as to managements reasons for the refusal
(b) Evaluate the implications
(c) Perform alternative audit procedures
TRUE OF FALSE

An oral response to a
confirmation request meets the
definition of an external
confirmation.
MODIFIED TRUE OF FALSE

When the auditor concludes that a

response is unreliable, the auditor
may need to revise the assessment of
the risks of material misstatement at
the assertion level and modify
planned audit procedures.
ENUMERATION

When is a response to a positive

confirmation request necessary
to obtain sufficient appropriate
audit evidence?
1. The information available to corroborate
managements assertion(s) is only available outside the
entity

2. Specific fraud risk factors prevent the auditor from

relying on evidence from the entity.
ENUMERATION

What are the instances/factors in

which exceptions may not represent
misstatements?
Timing
Measurement
Clerical errors
 Types of Audit Procedures

INTIAL AUDIT ENGAGEMENTS

Opening Balances
PSA 510

AUDIT
AUDIT
CONCLUSIONS AND
PROCEDURES REPORTING
Opening Balances
1. Determining whether the prior periods closing balances have
been correctly brought forward or have been restated
2. If the opening balances reflect the application of appropriate
accounting policies
3. Performing one or more of the ff:
Reviewing the predecessors working papers (prior FS were
audited)
Evaluating whether audit procedures performed in the CP
provide evidence relevant to the opening balances; or
Performing specific audit procedures
Unable to obtain sufficient express a QUALIFIED or
appropriate evidence DISCLAMER of opinion
 Consistency of Accounting Policies

Accounting policies
Current Periods
reflected in the openingCONSISTENT
financial statements
balances

properly accounted CHANGES presented & disclosed

express a QUALIFIED or
ADVERSE opinion
Modification to the Opinion in the Predecessors Report

EVALUATE
the effect in the current periods FS

relevant and material

MODIFY
GAME.
IDENTIFICATION

In case of a material misstatement,

how will the auditor express his/her
opinion when the effect of the
misstatement is not properly
accounted for or not adequately
presented or disclosed?
IDENTIFICATION

If the auditor is unable to obtain

sufficient appropriate audit
evidence regarding the opening
balances, the auditor shall express
a __________ or a __________.
MODIFIED TRUE OF FALSE

Relevant ethical and legal

requirements guide the current
auditors communications with
the predecessor auditor.
The objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether:

a. Opening balances contain misstatements that materially

affect the current periods financial statements
b. Appropriate accounting policies reflected in the opening
balances have been consistently applied in the current
periods financial statements, or changes thereto are
properly accounted for and adequately presented and
disclosed in accordance with applicable financial reporting
framework.
(5) RECALCULATION
to test the accuracy of the estimates

Footing
Cross-footing
Tests of extensions
Recalculating estimated amounts

Types of Audit Procedures

(6) REPERFORMANCE
involves the auditors independent execution of
controls that were originally performed as part of
the client internal control

Auditor should do what is necessary to determine that the

control actually worked
Types of Audit Procedures
(7) ANALYTICAL PROCEDURES

evaluations of financial
information through analyzing
plausible relationships among
both financial and nonfinancial
data

Types of Audit Procedures

(8) SCANNING
a type of analytical procedure involving the auditors
review of accounting data to identify significant or
unusual items to test

TEST OF DETAILS
Client inquiry
Inspection of documents/assets
Confirmations
Types of Audit Procedures
(9) INQUIRY
Seeking information from knowledgeable persons, both
financial and nonfinancial, throughout the entity or
outside the entity.
Accounting system
Managements plans
Pending or actual litigation against the organization
Changes in accounting procedures or accounting principles
Managements approach and assumptions used in the valuation of key
accounts
Managements or the controllers assessment of complex financial matters
Types of Audit Procedures
 1. Inspection of Documentation
2. Inspection of Assets
3. Observation
Types of 4. External Confirmation (PSA 505)

Audit 5. Recalculation
6. Reperformance

Procedures 7. Analytical Procedures (PSA 520)

8. Scanning
9. Inquiry
GAME.
Calculate the ratio of Cost of Goods
Sold to Sales as a test of overall
reasonableness of the balance for
Cost of Goods Sold

ANALYTICAL PROCEDURE
 Review a lease contract to
determine the items it covers and
its major provisions

INSPECTION OF DOCUMENTS
 Test the accuracy of sales invoice by
multiplying the number of items
shipped by the authorized price list to
determine extended cost. Foot the total
and reconcile it with the total invoiced.

RECALCULATION
Examine canceled checks returned with
the clients January bank statement as
support of outstanding checks listed on
the clients December year-end bank
reconciliation.

INSPECTION OF DOCUMENTATION
 Perform test counts of the
clients marketable securities
held in a safe deposit box.

INSPECTION OF DOCUMENTATION
Tour the plant to determine that
a major equipment acquisition
was received and is in working
condition.
OBSERVATION; INSPECTION OF ASSETS
 Request a statement from a major
customer as to its agreement or
disagreement with a year-end
receivable balance shown to be due
to the audit client.
EXTERNAL CONFIRMATION
Develop a spreadsheet to calculate
an independent estimate of the
clients warranty liability based on
production data and current
warranty repair expenditures.
RECOMPUTATION
 Obtain information about the
clients processing system and
associated controls by asking the
clients personnel to fill out a
questionnaire.
INQUIRY
Application of
Audit Procedures to
Management Assertions
Assessing the
Consistency of
Evidence
 Assessing the Consistency of Evidence

AS 15

If audit evidence obtained from one source

is inconsistent with that obtained from another, or if
the auditor has doubts about the reliability of
information to be used as audit evidence, the auditor
should perform the audit procedures necessary to
resolve the matter and should determine the effect, if
any, on other aspects of the audit.
 Assessing the Consistency of Evidence

In assessing the consistency of evidence, the

auditor should do the following:

Consider internal consistency of evidence

Consider the consistency of internal evidence generated
Expand evidence-gathering procedures for inconsistent areas
Document conclusions based on the evidence gathered
Cost-Benefit Considerations
When Selecting
Audit Procedures
 Cost-Benefit Considerations When Selecting Audit Procedures

Be profitable

Manage risk
 Cost-Benefit Considerations When Selecting Audit Procedures

AUDIT PROCEDURES

more rigorous
higher quality COST
 types of substantive procedures selected
DEPEND ON RISK
APPROPRIATE MIX
COST PROFITABILITY
OF EVIDENCE

AUDIT PROCEDURES
based on the auditors professional judgment about the expected
effectiveness and efficiency of available audit procedures
 Substantive Substantive
procedures test of details
appropriate appropriate

COMBINATION
most responsive

Perform substantive procedures for ALL relevant assertions

related to each material account balance & disclosure.
Timing Procedures
 Timing Procedures

Assessment of risk
Effective of internal control
Nature of the account
Availability of audit staff
 Timing Procedures

prior to the allows earlier completion

balance require less overtime
meet managements desire
sheet date

increases the risk of at an

material misstatements interim date
 Timing Procedures

(At an interim date.)

ISSUES
perform additional audit procedures

ROLL-FORWARD PERIOD
(the period between the interim date and the balance sheet date)

CUTOFF PERIOD
(usually several days before and after the balance sheet date)
 Timing Procedures

greatest risk

CUTOFF TESTS