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132CHAPTER 5 - Audit Evidence and Documentation CHAPTER AN...

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1 Bob Anderson, UCSB CHAPTER 5-1 5 CHAPTER Audit Evidence and Documentation Bob Anderson, UCSB Intro & Chapter 5-2 AN AUDIT: SUMMARY Plan the engagement: Identify risks and areas where internal controls may be relied upon Where internal controls may be relied upon, test those controls to justify reliance Apply substantive procedures for everything else. ROUTINE VS. NON-ROUTINE TRANSACTIONS Bob Anderson, UCSB Intro & Chapter 5-3 Management Assertions EVERYTHING IN THE FINANCIAL STATEMENTS FALLS INTO ONE OR MORE OF THE FOLLOWING C ut-off E xistence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred. C ompleteness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included. R ights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements. V aluation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles. P resentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided. MEMORY TECHNIQUE: C onventionally E arly C onversations R emain V ery P olite Bob Anderson, UCSB Intro & Chapter 5-4 THIRD STANDARD OF FIELDWORK So management makes the C,E,C,R,V,P assertions. It is then the auditors responsibility to validate those assertions, as required by the third standard: Sufficient Appropriate Audit Evidence” is to be obtained to afford a reasonable basis for an opinion regarding the financial statements under audit” REQUIRES JUDGMENT RELEVANT & RELIABLE (or VALID)- see next slide
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2 Bob Anderson, UCSB Intro & Chapter 5-5 Competence of Evidential Matter To be appropriate evidence must be: Relevant- does it apply to the objective we are testing? Reliable- Is the evidence any good? Independent sources have greater reliability than those within the client organization. Strong internal control increases reliability of evidence created within the client organization. Directly obtained evidence is more reliable than evidence obtained second hand. Bob Anderson, UCSB Intro & Chapter 5-6 Types of Evidence Accounting information system Documentary evidence Third-party representations Physical evidence Computations Data interrelationships Client representations ANALYTICAL PROCEDURES USUALLY START WITH DATA INTER- RELATIONSHIPS, BUT LEAD TO OTHERS ANALYTICAL PROCEDURES Bob Anderson, UCSB Intro & Chapter 5-7 INTERNAL CONTROLS Many “classes of transactions” are very “routine” to a client. Accordingly the client may establish strong internal controls over those transactions to ensure that misstatements are Prevented or Detected in a timely fashion.
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