Basic Audit

Prepared By: SAF

For Training HGK 2017
AGENDA
Audit Stage

Materiality Determination

Audit Evidence

Audit Documentation

Auditor Responsibilities

Audit Objective/Assertions

Code Ethics of Professional Accountant

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AUDIT STAGE
Four Phases of a Financial Statement
Audit
Three Main Reasons for Planning
 MATERIALITY
DETERMINTATION
 Guidance for Materiality
Determination
Step 1: Understand the Inherent Risk of the
Client
Step 2:Consider the Result of Internal
Control Questionairre
Step 3:Determine Materiality Level &
Benchmark
Step 4:Draw conclusion based on audit
sampling and judgement sample size
determination (JSSD) table
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Test of Control Frequency

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 Selecting Benchmark
• Total Assets or Revenue
• Net Assets
• Income Before Tax

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 JSSD Table
Risk Materiality Effective Assurance Expansion
Effective TOC? JSSD
Assessment SARP? Factor Factor

No n/a 3 1.9
No
Yes n/a 2.5 1.6
High
No n/a 1.6 1.5
Yes
Yes 5 to 15 1 1.3
No n/a 1.8 1.5
No
Yes 0 to 10 n/a
Low
No 4 to 10 n/a
Yes
Yes n/a n/a

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AUDIT EVIDENCE
 Nature of Evidence

Any information used by the auditor to

determine whether the information being
audited is stated in accordance with
established criteria

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,

and historians
 Audit Evidence Decisions

1. Which audit procedures to use

2. What sample size to select
for a given procedure
3. Which items to select from
the population
4. When to perform the
procedures (timing)
 Persuasiveness of Evidence
Two determinants:

Appropriateness Sufficiency

The persuasiveness of evidence can be evaluated only after

considering the combination of appropriateness and sufficiency
Six Characteristics of Reliable Evidence

1. Independence of provider
2. Effectiveness of client’s
internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness
 Types of Audit Evidence
Physical
Examination
Confirmation
Observation

Audit Documentation
Reperformance Evidence

Analytical
procedures
Recalculation
Inquiry
 Physical Examination

It is the inspection or count by the

auditor of a tangible asset.

This type of evidence is most often

associated with inventory and cash.
 Confirmations
Auditing Standards Requirements
United States Auditor must confirm
accounts receivable
Auditors control the mailing
and receipt of replies
Electronic confirmations
are permitted
International Confirmations are not required
Information often Confirmed
 Documentation

It is the auditor’s inspection of the

client’s documents and records.

Internal External
documents documents
 Analytical Procedures

 Understand the client’s industry and business

 Assess the entity’s ability to continue as a
going concern
 Indicate the presence of possible misstatements
in the financial statements
 Reduce detailed audit tests
 Inquiries of the Client

It is the obtaining of written or oral

information from the client in response to
questions from the auditor.
 Recalculation

It involves rechecking a sample of calculations

made by the client.
 Reperformance

It is the auditor’s independent tests of client

accounting procedures or controls that
were originally done.
 Observation

 Use one’s senses to assess

client activities.
 Tour plant to obtain a general
impression of client’s facilities.
 Observation is rarely sufficient
by itself.
 Often need to corroborate
with another kind of evidence.
Appropriateness of Types of Evidence
Terms and Types of Evidence
Terms Type of Evidence
Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Recalculation
Foot Recalculation
Trace Documentation/Reperformance
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch Documentation
AUDIT DOCUMENTATION
 Audit Documentation

Audit documentation is the principal record

of auditing procedures applied, evidence
obtained, and conclusions reached by
the auditor in the engagement.
Audit Documentation

 Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files

 Permanent Files

These files are intended to contain

data of a historical or continuing
nature pertinent to the current audit.
 Current Files

 Audit program

General information

Working trial balance

Adjusting and reclassification entries

Supporting schedules
Types of Supporting Schedules

 Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness
Types of Supporting Schedules

 Summary of procedures

Examination of supporting documents

Informational

Outside documentation
Preparation of Audit Documentation

Proper identification of each file

Files indexed and cross-referenced

Clear indication of work performed

Include sufficient information

State conclusions reached
Preparation of Audit Documentation
 AUDITOR
RESPONSIBILITIES
 Auditor’s Responsibilities

Material Reasonable
misstatements Assurance

Professional
Errors vs. Fraud
Skepticism
Fraudulent
reporting
vs.
theft of assets
©2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 6 - 38
Auditor’s Responsibilities for Discovering
Illegal Acts

Auditor suspects
Inquire of management
Consult client’s counsel or specialist
Consider accumulating evidence

Auditor knows
Consider effects on financial
statements
Consider effect on relationship
with management
Communicate with audit
committee or equivalent
AUDIT OBJECTIVE/
RESPONSIBILITIES
 Management Assertions

1. Assertions about classes of transactions and

events for the period under audit

2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

 Management Assertions for
Each Category of Assertions

Transactions and Events Account Balances Presentation and Disclosure

Occurrence Existence Occurrence and rights
and obligations
Completeness Completeness Completeness
Accuracy Valuation and Accuracy and
allocation valuation
Classification Classification and
understandability
Cutoff
Rights and
obligations
 PCAOB Assertions
Existence or Occurrence

Completeness
Valuation or
allocation
Rights and obligations

Presentation and
disclosure

Similar to U.S. GAAS as the first four assertions are applicable to

balances and transactions. Presentation is treated as a single assertion
 General Transaction-related Audit
Objectives

Recorded transactions
Occurrence
exist

Existing transactions
Completeness
are recorded

Recorded transactions
Accuracy are stated at the
correct amounts
 General Transaction-related Audit
Objectives

Transactions are included

Posting and
in the master files and
summarization
are correctly summarized.

Transactions are properly

Classification
classified.

Transactions are recorded

Timing
on the correct dates.
 General Balance-related
Audit Objectives

Existence Amounts included exist

Existing amounts are

Completeness
included

Amounts included are

Accuracy stated at the correct
amounts
 General Balance-related
Audit Objectives

Amounts are properly

Classification
classified

Transactions are recorded

Cutoff
in the proper period

Account balances agree

Detail tie-in with master file amounts,
and with the general ledger
 General Balance-related
Audit Objectives

Realizable Assets are included at

value estimated realizable value

Rights and
Assets must be owned
obligations
Code Ethics of Professional
Accountants
 AICPA Code of Ethics
1. Responsibilities
2. The Public Interest
3. Integrity
4. Objectivity & Independence
5. Due Care
6. Scope & Nature of Services

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 Thank You

• Any Question?

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