financial statements, several different procedures are usually necessary. For example, confirming a receivable provides reliable evidence of existence, but does not provide satisfactory evidence for valuation and allocation. For the valuation and allocation assertion, the collectability of account balances, and related procedures such as testing of subsequent receipts must also be considered. If you are not familiar with or wish to review your understanding of detailed substantive procedures of transactions, you should refer to an auditing textbook. Further information on textbooks is in the Segment Outline. Types of tests of account balances Tests of account balances are audit tests that substantiate the ending balance of a general ledger account. Thus, they are substantive tests that either provide reasonable assurance of the validity and propriety of the balance or identify monetary misstatements in it. The three types of test of balances discussed below are: • external confirmations; • bank confirmations; and • attendance at physical inventory counts. External confirmations The use of external confirmations in an audit is quite common. ISA SOS External Confirmations recognises that there are many items in a financial statement where external confirmations may be an appropriate method of obtaining sufficient and appropriate audit evidence. For example, an auditor may use external confirmations to obtain audit evidence of the terms and conditions· of transactions an entity has with third parties. (' ..
ADVANCED AUDIT AND ASSURANCE STUDY GUIDE 4.23 ISA SOS does not mandate the use of external confirmations. Rather, it recognises that confirmation of account balances should be determined based on an assessment of their effectiveness in providing audit evidence to support financial statement assertions. For this purpose, the standard sets out the matters that should be considered when determining whether and to what extent external confirmations are the most appropriate form of audit evidence. The reliability of the evidence obtained by external confirmations depends upon the auditor applying appropriate procedures in designing the external confirmation requests, performing the external confirmation procedures, and evaluating the results of these procedures. Factors affecting the reliability of external confirmations include: • the control the auditor exercises over confirmation requests and responses, • the characteristics of the respondents, and • any restrictions included in the response or imposed by management. ISA SOS details the role of both positive and negative confirmation requests and indicates that the choice between the two depends on the prevailing circumstances, including the assessment of inherent and control risks. A positive confirmation request provides a very reliable form of evidence. Therefore, it is preferred where individual account balances are relatively large or where inherent or control risks are assessed as high, and thus the risk of material errors is high. Where the positive confirmation request is used and the auditor receives no response, the auditor
You've reached the end of your free preview.
Want to read all 67 pages?
- One '19
- Financial audit