AT: Evidence and Performance of Substantive Testing Suggested Readings PSA500 ‘Audit Evidence PSA501 ‘Audit Evidence — Additional Considerations on Specific Items PSA505 External Confirmations PSA 520 Analytical Procedures PSA.540 (Revised) Auditing Accounting Estimates, including FV Accounting Estimates and Related Disclosures Risk Assessment feicoaues doses Risk of Materia Misstatement (ROMM) Addresses Detection Risk (DR) tthe FS Leve sp vera Reaponae(pervash in aueyp NOTH AU State ead » Classes of At the ‘Transactions => Further Audit Procedures m=>Dete Audit Plan (Programs) Assertion > Account Balances » Test of Control Level » Presentation and » Substantive Procedures: Disclosures Gos ‘Affects all FS line item » Professional Skepticism > More experienced staff > Use of Experts » More supervision > Elements of Unpredictabiity } General Changes to procedures and Audit Approach inherent) (iGontroy Risk Risk Rene eu ace ies Procedures Level Risk Assessment Procedures] To obtain an undersiading of thy EEE F/S Level and Assertion Level ROMM Further Audit Test of Controls | To test the operating effectiveness of Procedures controls Substantive To detect material misstatements peserton Level Procedures Preparatory — for evidence gatheringTrifecta of Audit Procedures > Performed all through-out the audit (RAP, FAP: ToC, SP, and Conclusion) Efi Inguiry gbrsists of seeking information of knowledgeable persons inside or outside the entity Inspection ‘Consists of examining records, documents, or tangible assets (e.g., Vouching and Tracing) Observation _J | Consists of looking at a process or procedure being performed by others ‘Analytical ‘Analysis of significant ratios and trends including the resulting investigation of fluctuations and Procedures _| relationships that are inconsistent with auditor's expectations Reperformance _ | Involves the auditor's independent execution of controls performed within the entity External Direct communication from a third party Confirmation Recaleul ‘Checking the mathematical accuracy of documents, records, etc. (¢.g., Footing, Tracing, Cross-referencing, etc.) Risk Assessment Risk Response Conclusion and Reporting - PrelninanyPlaming Arava! |” Substanve Arabica |" Concuing Araya Procedures ; To determine whether evidence Purpose | tre ertlyandtsendonment | micsserents Gathered was sufient and ‘appropriate Level FIS Level ‘Assertion Level F/S Level Attention Bresting? Yes No Yes Risk Assessment: a.) FIS Level Output b.) Assertion Lev ‘Amount of misstatements _ | Accounts for which evidence is to be (whether High, Moderate, or towed Low) Required? Yes No. Yes Eos Poona em » Inquiry i =— Understanding the process flow for Risk Assessment Procedures | SN ures “What Can Go vena?" (WEG) > Walkthrough for confirmation of control understanding 5 pees Teaing sls transactions orcad Test of Controls | > pesca ersacts > Reperformance =| For ToO only Further Audit, 8 > Procedures > Observation Testing details of transactions in Substantive ; Substantive | Analytical Procedures supporting documents vs. Accounting > External Confirmation Records > Recalculationmens Bias Necessity Opteratcentrieraed | magia t) Evidence obtained [Poss of misstatement | eatane of mistaterent Aspect being evaluated _| Qualitative (“Attributes”) Quantitative ("How much?") Dependency Understanding of Controls Test of Controls Exceptions Deviations Misstatements Measurement In terms of % In terms of Php. ‘Assertions Basis of audit objectives -> Audit Procedures -> to gather audit evidence ‘Transactions and Events ‘SCI (VS) Assertions T-OCCAC. Qecurrence Completeness Classification Accuracy Cutoff Management | Aecount Balances representations in the F/S ‘SFP (B/S) Assertions A-CERV Completeness Existence Rights and Obligations Valuation and Allocation Presentation and Disclosures FS Assertions. (Notes) P-OCAC Qccurrence and Rights and Obligations ‘Completeness ‘Accuracy and Valuation Classification and Understandabilty Guetta eae To detect material misstatements Test of details of transactions, balances, and presentation and disclosures (Records vs. Supporting Documents) ‘Substantive Analytics (Records vs. Auditor's Expectations) g., Vouching and Tracing Audit > Procedur > es: > » Analytical Procedures > External Confirmation > Recalculation Paes Records vs. Auditor's Expectations Not required Financial and non-financial data More Recurring Transactions predictable: IS Accounts Non-discretionary accounts Stable environment vvvy ene Records vs. Supporting Documents, Required e.g., Vouching and Tracing Transactions, Balances, and Presentation and Disclosures May be: (Extent) > 100% > Specific Items (items above certain amount) > SamplingMure eee ROMM (Direct Relationship wi Quantity) Sufficient | Quantity Quality (Inverse Relationship w/ Quantity) Relevance |+ Audit : Evidence What is the purpose of the evidence/procedure? (RAP, ToC, SP) What is/are the assertions being validated? ‘What is the direction of the test? (from supporting documents/records) Appropriate | Quality Reliable External vs. Internal Effective Internal Control Directly vs. Indirectly Obtained ‘Written vs. Oral Original vs. Reproduced ‘SAAE is a matter of Professional Judgment Direction of Testing Record, Eien » Attend physical count, unless impracticable > Considerations: + Policies and Procedures + Observe count procedures + Inspect Inventory conditions + Perform Test Counts + Inventory held by third parties > Record vs. Actual Count > Roll forward or Roll-backward if other than year-end, > Test intervening transactions (purchases/production and sales) ‘Vouching Tracing > Existence/ | >» Completeness Oxcurrence | » Understatement > Overstatement | > Liabilities / > Assetfincome | Expenses ‘Support > Inquiry with management and in-house legal counsel, > Minutes of meetings of TCWG » Correspondence with external legal counsel > Legal Expense Account ¥ Legal Confirmation: + Likelihood/probabilty of outflow + Estimate of financial implications + General inquiry or Specific inquiryieee > Understanding of methods used by management » Evaluate if in accordance with Acceptable Financial Reporting Framework (AFRF) > Test application of methods > Perform Analytical Procedures round > Audit evidence obtained as direct written response to the auditor from a third party, in paper form or by electronic or other medium > Prepared by the audit client; signatory ~ management of the audit ent; mailed directly by the auditor > Effective for Existence and Rights and Obligations assertions > Ineffective for Completeness and Valuation assertions request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, OF providing the requested information Arequest that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. > High Risk > Low Risk > Small number of high value items > Large number of small value items > More reliable > Less reliable MrrLeen es > Higher Inherent Risk (susceptibility to bias) > Reasonableness of the estimate > Understand management's methods — consistent > Either: ‘+ Test whether method is applied * Make an independent estimate (or use an expert) + Review subsequent events that confirm the estimate tioned > Management Responsibility: identify and properly disclose Related Parties or Related Party Transactions » Main Concer: Adequacy of disclosure > Possibility of undisclosed RPs: ¢ Abnormal Terms + Loans with no maturity or interest + Incomplete documentation, biased processing and approval Using the work of an Auditor's Expert is a person or fim possessing special skill, knowedge and experience in a particular field the preparation of the FS Engaged by the auditor to assist the auditor in obtaining Sufficient Appropriate Evidence {understanding field of expertise, and terms > Do not refer to work of an expert in the auditor's report unless required by law or oe ‘ther than accounting and auditing Management Expert Engaged by the entity o assist in Auditor's Expert ron > Competence and objectvi consider: regulation