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Financial Statement

Assertions Assertions about account balances

(Accounts)

Assertions about classes oftransactions and events

(Transactions)

Assertions about presentation anddisclosure (Disclosures)

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Financial Statement

AssertionsAccounts Transactions Disclosures

Existence ccurrence ccurrence

!i"#ts andobli"ations

!i"#ts andobli"ations

$ompleteness $ompleteness $ompleteness

%aluation andallocation

Accurac& Accurac& andvaluation

$uto' $lassication $lassication and

understandabilit&

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$ombined Assertions*sed in t#is Text

Existence or Occurrence--Assets+ liabilities+ and e,uit&interests exist and recorded transactions #ave occurred

Rights and Obligations--T#e compan& #olds ri"#ts to t#eassets+ and liabilit& are t#e obli"ations of t#e compan&

Completeness--All assets+ liabilities+ e,uit& interests+ and

transactions t#at s#ould #ave been recorded #ave beenrecorded Cutof Transactions and events #ave been recorded in

t#e correct accountin" period Valuation, Allocation and AccuracyAll transactions+

assets+ liabilities and e,uit& interests are included in t#enancial statements at proper amounts

Presentation and Disclosure--Accounts are describedand classied in accordance .it# "enerall& acceptedaccountin" principles+ and nancial statement disclosuresare complete+ appropriate+ and clearl& expressed

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Audit !is/

 !is/ of 0aterial !is/ T#at t#e

Audit !is/ 1 0isstatement Auditors Fail tot#e

0isstatement

1 n#erent $ontrol Detection  !is/ !is/ !is/

nherent Ris!""!is/ of a material misstatement occurrin" inan assertion assumin" no related internal controls4

Control !is/--!is/ t#at a material misstatement in anassertion .ill not be prevented or detected on a timel& basisb& t#e compan&s internal control4

Detection Ris!""!is/ t#at t#e auditors procedures .ill leadt#em to conclude t#at a material misstatement does not existin an assertion .#en in fact suc# misstatement does exist4

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Audit !is/ Formula

 

AR = IR * CR * DR

AR = Audit risk

IR = Inherent risk

CR = Control risk

DR = Detection risk

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Audit !is/

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 T#e T#ird Field 9or/Standard

 T#ird standard of eld .or/:  T#e auditor must obtain sufcient

appropriate audit evidence b& performin"

audit procedures to perform a reasonablebasis for an opinion re"ardin" t#e nancialstatements under audit

Su;cient audit evidence  T#e ,uantit& of audit evidence t#at must be

obtained

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Appropriateness of AuditEvidence

 To be appropriate audit evidence must be: !elevant !eliable

=rinciplesAudit evidence is ordinaril& morereliable .#en it is btained from /no.led"eable independent

sources outside t#e compan& rat#er t#annonindependent sources

>enerated internall& t#rou"# a s&stem of e'ective

controls rat#er t#an ine'ective controls4 btained directl& b& t#e auditor rat#er t#an

indirectl& or b& inference Documentar& in form rat#er t#an oral =rovided b& ori"inal documents rat#er t#an copies

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!eliabilit& of $ertain T&pes ofAudit Evidence

RELIABILITY TYPE EXAPLE

High Ph!sical Inventory Observation

Docu"entar!External Cutoff Bank Statement

External/Internal Purchase Invoice

Internal Sales Invoice

Lo Client Representations !anagement "e#resentation

Letter 

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 T&pes of Audit Evidence

Accountin" information s&stem

Documentar& evidence

 T#ird-part& representations

=#&sical evidence

$omputations Data interrelations#ips

$lient representations

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verall T&pes of Audit=rocedures

Ris! assessment proceduresTo obtainan understandin" of t#e client and itsenvironment+ includin" its internal control+to assess t#e ris/s of material misstatement

Tests o# controls9#en appropriate+ totest t#e operatin" e'ectiveness of controlsin preventin" material misstatements

$ubstanti%e proceduresTo detectmaterial misstatements at relevantassertion level4 Substantive proceduresinclude (a) anal&tical procedures+ (b) tests ofdetails of account balances+ transactionsand disclosures

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Audit =rocedures

Accountin" information s&stem Documentar& evidence

 Tracin" %ouc#in" nspection !econciliations

 T#ird-part& representations--$onrmation =#&sical examination

$omputations!eperformance Data interrelations#ipsAnal&ticalprocedures

$lient representations n,uiries etters of representations

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Anal&tical =rocedures--

Steps involved Develop expectation of account (or ratio) balance Determine amount of di'erence t#at can be accepted

.it#out investi"ation

$ompare t#e compan&s account (ratio .it# t#eexpectation nvesti"ate and evaluate si"nicant di'erences

Developin" an expectation =rior period information

Anticipated results !elations#ips amon" elements of nancial information.it#in a period

ndustr& information !elations#ips bet.een nancial information and

relevant nonnancial data4

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Anal&tical =rocedures--

$ate"ories of ratios i,uidit& (e4"4+ current ratio)

evera"e (e4"4+ debt to e,uit&)

=rotabilit& (e4"4+ "ross prot percenta"e)

Activit& (e4"4+ inventor& turnover)

Basic approac#es Coriontal anal&sisanal&e ratios of a compan& over

time

$ross sectional anal&sisanal&e ratios of similarrms at a point in time

%ertical anal&sisanal&e relations#ips .it#in a period $ommon sie statements prepared

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denti#ying Potential&isstatements

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Basic Approac#es to Auditin"Accountin" Estimates

!evie. and test mana"ementsprocess for developin" t#e

estimate4 ndependentl& develop an estimate

to compare to mana"ementsestimate4

!evie. subse,uent events ortransactions bearin" on t#eestimate4

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Auditin" Fair %alues

f t#e item is traded on an or"anied

mar/et+ fair value ma& be obtainedfrom mar/et prices

f t#e item does not trade on anor"anied mar/et determine fair

value b&: Anal&in" to a similar mar/et is possible *sin" a valuation model

Functions of Audit

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Functions of AuditDocumentation

=rimar& functions: Support t#e auditors compliance .it# auditin"

standards Support t#e auditors opinion

Secondar& functions: Assist continuin" and ne. audit team members in

plannin" and performin" t#e audit Serves as a record of matters of continuin" audit

interest Assists in supervision and revie. of t#e audit

Demonstrates t#e accountabilit& of team members Assists internal revie.ers+ external peer revie.ers+

=$AB inspectors+ and successor auditors inperformin" t#eir roles

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Su;cienc& of AuditDocumentation

Audit documentation s#ould be su;cientto: Enable an experienced auditor to understand

t#e .or/ performed and t#e si"nicantconclusions reac#ed

dentif& .#o performed and revie.ed t#e .or/ S#o. t#at t#e accountin" a"ree or reconcile to

t#e nancial statements

Audit documentation s#ould include allsi"nicant audit ndin"s and t#e actionsta/en to address t#em

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 T&pes of 9or/in" =apers

Audit administrative .or/in" papers 9or/in" trial balance ead sc#edules AdGustin" Gournal entries and

reclassication entries Supportin" sc#edules

Anal&sis of a led"er account !econciliations $omputational .or/in" papers $orroboratin" documents

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 T&pes of 9or/in" Files

$urrent les

=ermanent les

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=reparation of a 9or/in" =aper HFi"ure 548