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HANDOUTS CHAPTER14

Chapter 14 discusses the hierarchy of audit evidence, emphasizing the importance of obtaining reliable and sufficient evidence for audit conclusions. It outlines various procedures for gathering audit evidence, including inspection, observation, confirmation, inquiry, recalculation, reperformance, and analytical procedures. Additionally, the chapter highlights special considerations for accounting estimates and related party transactions, detailing the auditor's responsibilities in these areas.

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5 views2 pages

HANDOUTS CHAPTER14

Chapter 14 discusses the hierarchy of audit evidence, emphasizing the importance of obtaining reliable and sufficient evidence for audit conclusions. It outlines various procedures for gathering audit evidence, including inspection, observation, confirmation, inquiry, recalculation, reperformance, and analytical procedures. Additionally, the chapter highlights special considerations for accounting estimates and related party transactions, detailing the auditor's responsibilities in these areas.

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abdulcader.nm810
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Chapter 14: Risk Response Part II Implementing Hierarchy of Evidential Matter (strongest to

the Designed Risk Response and Obtaining weakest)


Audit Evidence
1. Auditor’s direct, personal knowledge, obtained
Audit Evidence from physical observation and his or her own
mathematical computations
- All the information used by the auditor in arriving
at the conclusions on which audit opinion is based. 2. External evidence
- Cumulative in nature 3. External-Internal Evidence
Appropriateness (of audit evidence) – measure of 4. Internal Evidence
the quality of audit evidence; Relevance and
Reliability 5. Verbal and written representations

Audit evidence is more reliable when: Sufficiency of Evidence In exercising profession


judgment, auditors consider both the:
a. It is obtained from independent sources outside
the entity, a. Materiality

b. Obtained directly b. Relative risk of the item

c. It exists in documentary form Note:

d. Provide by original documents a. Competency of evidence – depends upon the


financial statement assertion under consideration.

Sufficiency (of audit evidence) – measure of the b. Sufficiency of evidence – at minimum cost.
quantity of audit evidence
Note: - Auditors rely on audit evidence that is Procedures for Obtaining Audit Evidence
persuasive rather than conclusive.
a. Inspection – examination of records, documents,
The auditor’s judgment as to what is sufficient or tangible assets.
appropriate evidence is influenced by such
factors as the: b. Observation - looking at a process or procedure
being performed by others.
a. Auditor’s assessment of the nature and level of
inherent risk at both financial statement level and c. Confirmation – obtaining a representation of
the account balance or class of transactions level. information or of an existing condition directly
from a third party.
b. Nature of accounting and internal control systems
and the assessment of control risk. • Positive external information –
respondent’s agreement
c. Materiality • Negative external information –
d. Experience gained during previous audits. respondent’s disagreement.

Competence or Appropriateness of Evidence d. Inquiry – seeking information both financial and


Refers to trustworthiness or believability – nonfinancial of knowledgeable persons inside or
outside of the entity.
Factors:
e. Recalculation – checking the mathematical
a. Relevance accuracy
b. Objectivity f. Reperformance – execution of procedures or
controls
c. Qualifications of the provider of the evidence
g. Analytical Procedures – evaluations of financial
d. Timeliness of the evidence information with a study of plausible relationships.
Written Representations - Auditor shall request B. RELATED PARTY TRANSACTIONS
written representations from management with
appropriate responsibilities and knowledge about Related parties include executives, directors, or
the matters concerned. affiliated companies. Concerns in auditing related
party transactions:
Special Considerations in Audit Evidence
 Transactions may not be at arm’s length
A.ACCOUNTING ESTIMATES – approximation  Economic substance may differ from the
of the amount of an item in the absence of a precise legal form of the transaction.
means of measurement; there is a greater risk of
material misstatement when estimates are involved. Auditor's actions:

Audit Procedures 1. Identify related parties from SEC filings,


shareholder listings, and corporate records.
The auditor should adopt one or a combination of 2. Examine terms and conditions to detect
the following approaches in the audit of an potential conflicts of interest.
accounting estimate:
3. Ensure proper disclosure in financial statements,
(a) Review and test the process used by including: ‌
management to develop the estimate;  Nature of the relationship
(b) Use an independent estimate for comparison  Description of the transaction. ‌
 Amounts
'with that prepared by management; or
(c) Review subsequent events which confirm the
estimate made.
Reviewing and Testing the Process Used by
Management
The steps ordinarily involved in reviewing and
testing of the process used by management are:
(a) Evaluation of the data and consideration of
assumptions on which the estimate is based;
(b) Testing of the calculations involved in the
estimate;
(c) Comparison, when possible, of estimates made
for prior periods with actual results of those periods;
and
(d) Consideration of management's approval
procedures.

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