Assurance class note : SAS 106 (Audit evidence)
I. General
Audit evidence is all the information the auditor uses to arrive at the conclusions on which the audit opinion is based. It includes information in written or E-form as well as observable assets or activities, and it must be obtained to support auditor conclusions with respect to risk assessment, test of controls, and substantive testing.
II. Third standard of fieldwork
"The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit"
A. Reasonable basis for an opinion - objective is to detect material misstatement in F/S
The audit evidence must persuade the auditor that the ending balance in the F/S are fairly presented. The auditor usually must rely on avidence that is persuasive, rather than conclusive.
B. Sufficient of audit evidence (Valid & relevant)
Sufficiency is the measure of the quantity of audit evidence. (how much you need; it depedns on "confidence")
That is, the auditor's decision regarding the sufficiency of evidence is infulenced by: 1. The risk of audit misstatement: greater risk implies more evidence will be required. 2. The quality of audit evidence: less audit evidence may be required when that evidence is of higher quality.
C. Appropriateness of audit evidence
1. Reliability of Evidence is influenced by its source and nature. e.g.: direct personal observation and knowledge --> independent external evidence --> internal evidence --> oral evidence
2. Relevance of evidence : must relate to the f/s assertion under consideration.
III. Assertions used (talk later)
IV. Audit Procedures for obtaining audit evidence (stardard auditing procedures)
1. Observation: an auditor looks at a process or procedure performed by others. (client's internal control)2. Physical examination: seeing is believing. It may require specialized expertise to identify correctly.
3. Confirmations: a specific type of inquiry that involves obtaining representations from independent third parties about account balances and transactions.
4. Recalculation/ footing/ crossfooting: verify the mathematical accuracy of statements and schedules.
5. Reperformance: to assess whether internal controls are functioning as intended, rather than watching an employee performs.
6. Inspection of documents: provides evidence about the existence assertion, rather than about ownershio, rights, obligations, or valution.
7. Analytical procedures: evaluates financial information, such as historical trends, ratio analysis, or models.
8. Inquiry: rewuesting info from knowledgeable parties both internally and externally.
*Vouching: record --> resources (from F/S back to supporting documents.) --> for existence & occurrence
*Trace: resources --> record (forward to provide assurance) --> for completeness & coverage
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