chapter 6 iain gray audit igsm
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Chapter 6 Iain Gray Audit IGSMTRANSCRIPT
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
The search for evidence explained
Chapter 6
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
LEARNING OBJECTIVES
After studying this chapter you should beable to:
• Explain why the audit evidence search is a central concept of auditing.
• Identify the stages of the audit process and show that evidence has to be collected in different ways at each stage.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
LEARNING OBJECTIVES CONT'D
• Explain the relationship between audit evidence and audit risk.
• Show that there are different grades of audit evidence and that evidence may be up graded or downgraded.
• Explain the relationship between audit evidence and the application of audit judgement.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
LEARNING OBJECTIVES CONT'D
• Show to what extent the evidence-gathering process might be affected by a decision by the auditor to rely on the directors and the control environment they have introduced.
• Form conclusions on the basis of evidence available in selected scenarios.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
LEARNING OBJECTIVES CONT'D
• Explain the difference between an audit, a limited assurance engagement, a compilation engagement and an engagement involving agreed-upon procedures, and suggest how the evidence-gathering process may differ between them.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.222
The audit process is a search for evidence to forman opinion, based on a whole series of conclusionswith regard to: (a) accuracy and dependability of the accounting
records;
(b) validity of figures in financial statements;
(c) compliance with legislation and accounting and reporting standards.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.222 CONT'D
Relevant ISAs in the area are:
• ISA 500 – Audit evidence and• ISA 501 – Audit evidence: additional
considerations for specific items. The purpose of these standards is ‘to establish standards and to provide guidance on what constitutes audit evidence in an audit of financial statements, the quantity and quality of audit evidence to be obtained, and the audit procedures that
auditors use for obtaining that audit evidence.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
Figure 6.1 Evidence supporting reasonable conclusions
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.223
The words ‘sufficient’ and ‘appropriate’ areinterrelated, ‘appropriate’ having two furtherelements:
(a) ‘Relevant’, that is, pertinent to the matter in hand;
(b) ‘Reliable’, that is, trustworthy, with some grades of evidence more reliable than others.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.224
Evidence is persuasive rather than conclusiveand auditors seek evidence from different sources to support the same assertion (that is, to corroborate it). There is a link between persuasiveness and quantity as auditors seek to be persuaded that objectives have been met by accumulating evidence.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.224 CONT'D
Evidence is the cornerstone of the audit process – a prerequisite for forming an opinion.
Collecting and assessing it needs considerable imagination; the relevant evidence is frequently difficult to find, being often concealed (whether intentionally or unintentionally).
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.225
Management assertions may be classified in thefollowing three ways:
(1) genuine;
(2) accurate; and
(3) complete.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – pp.225–226
Trade debtors exist and owe the amounts stated in the debtors ledger to the company.
Trade debtors’ balances are fully collectible.
All amounts owed by the trade debtors are included in the amount attributed to trade debtors in the financial statements and relate to the correct period.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – pp.227–232
This approach enables auditors to set objectivesand place evidence search in a suitable context.
Guidelines for assessing evidence are as follows:
(a) Audit evidence is more reliable when it is obtained from independent sources outside the entity;
(b) Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective;
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – pp.227–232 CONT'D
(c) audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference;
(d) audit evidence is more reliable when it exists in documentary form;
(e) audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles;
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – pp.227–232 CONT'D
(f) evidence created in the normal course of business is better than evidence specially created to satisfy the auditor;
(g) the best informed source of audit evidence will normally be management of the company but management’s lack of independence reduces its value as a source of such evidence;
(h) Evidence may be upgraded by the skilful use of corroborative evidence;
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.234
Business risk approaches have resulted in greater reliance on management. As auditors align them-selves more with management, they begin to feel that they can judge individuals’ integrity.
This trust can result in a reduction in substantive testing, with a consequent reduction in audit cost to counterbalance the increased cost of time spent at the planning stage.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
ACTIVITY 6.1
Think about these matters and decide if it is wise to trust management in the way that the protagonists of the business risk approach to auditing believe is possible. Before you do this, go back to Chapter 1 and reread what we had to say about agency theory on pages 9–11.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.236
This approach might not be justified in the light of Enron and WorldCom, and the agency theorists may be right that it would be unwise for auditors to accept the word of management, without obtaining considerable corroborative evidence from elsewhere.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.236 CONT'D
But auditors do not start from a presumption that managements lack integrity. A major issue is that business risk may bring the auditor so close to management that independence may be threatened.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.240
Professional accountants carry out many kinds of engagement in relation to financial information.
Many engagements may result in lower levels of evidence being collected, so that a ‘true and fair’ form of opinion cannot be given.
Such audits are likely to be of value to users nonetheless.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.240 CONT'D
Examples of such engagements are: • compilation engagement;
• limited assurance engagement;
• agreed-upon procedures engagement.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.240 CONT'D
Compilation engagement is when professional accountants prepare financial statements using data and information provided by management and a compilation report is issued that gives no assurance as to truth and fairness, nor compliance with CA 1985 and accounting standards.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – pp.240–241 CONT'D
Limited assurance engagement is not a full audit but the professional accountant forms an opinion on the reasonableness of financial statements and obtains limited assurance that the financial statements comply with the CA 1985 and accounting standards. The review report contains a negative form of opinion.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
KEY POINTS – p.241
Agreed upon procedures engagement is similar to a review except that certain detailed procedures would be performed, as agreed with management, requiring the accountant to seek evidence that the items subject to the agreed procedures have been stated appropriately.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
ACTIVITY 6.2
Now that we have introduced you to the above engagements, do you believe that they will be of value to users?
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
CHAPTER SUMMARY
This chapter has attempted to show that:
• Evidence is the cornerstone of the whole audit process and the audit is an evidence-gathering process;
• Evidence is required to give the auditors assurance that they are forming proper conclusions;
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
CHAPTER SUMMARY CONT'D
• Evidence-gathering does not take place in a vacuum, but in real organizations and with the participation of real people;
• Sufficiency and appropriateness (relevance and reliability) with regard to audit evidence;
• Different factors that might affect reliability;
• Consistent audit evidence can affect the conclusions of the auditor.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning
Use with The Audit Process: Principles, Practice and Cases Third Edition by Iain Gray & Stuart Manson ISBN 1-86152-946-5
© 2005 Thomson Learning
FURTHER READING
The ISAs in the area, ISA 500 – Audit evidence, and ISA 501 – Audit evidence – additional considerations for specific items, are essential reading.
Use with The Audit Process 4th EditionBy Iain Gray & Stuart Manson ISBN 9781844806782
© 2008 Cengage Learning