AUDIT EVIDENCE

MBF 814 AUDITING AND ASSURANCE SERVICES

Cavendish University Uganda

Group Members:
1.Joseph Mukung Kimara- 150-865
Introduction

 In auditing, evidence plays a critical role in forming an opinion on the financial

statements of an organization. Audit evidence provides the basis for the auditor's
conclusions and helps to ensure that the financial statements are presented fairly and
accurately

 Audit evidence can be obtained from a variety of sources, including physical

observation, documentation, third-party confirmations, and analytical procedures. The
auditor must consider the relevance and reliability of the evidence obtained, ensuring
that it is directly related to the financial statements and that it can be relied upon to
support the audit opinion
Nature and Sources of Audit Evidence
The examination of evidence is fundamental to the audit process.

Audit evidence means the information obtained by the auditor in arriving at the conclusions
on which the opinion is based. Evidence includes information that is highly persuasive in the
extent to which it persuades the auditor whether financial statements are stated in
accordance with ISAs and IFRS and this can be obtained from:
 Source document

 Underlying accounting data Eg: Books of original entry General and subsidiary ledger
Related accounting manual Informal and memorandum records, such as worksheet,
computations and reconciliations.
 All corroborating information from other sources Eg. Documents such as cheques,
invoices, ,contracts, etc Confirmations and other written representations Information from
inquiry, observations, inspection and physical examination Other information obtained or
developed by the auditor.
 Internal control
Types of audit evidence
Physical evidence - this includes tangible items such as inventory, fixed assets, and cash. Auditors can observe and inspect these
items to verify their existence, condition, and accuracy.
Documentary evidence - this includes written or electronic records such as invoices, contracts, bank statements, and other
financial documents. Auditors can review and analyse these documents to support their conclusions about the accuracy and
completeness of financial information.
Analytical evidence - this includes the use of financial and non-financial data analysis techniques to identify trends, patterns, and
anomalies that may indicate potential issues or risks.

Testimonial evidence - this includes information provided by management, employees, or other third parties. Auditors can
interview individuals to gather information about the organization's operations, policies, and procedures.
Confirmatory evidence - this includes information obtained from third parties such as banks, customers, and suppliers. Auditors
can request confirmation of account balances and transactions from these parties to verify the accuracy of financial information.
Computation evidence - this includes the use of mathematical and statistical analysis techniques to test the accuracy of financial
information and calculations.
The Auditing standard pertaining to evidence
ISA500 R
ISA 500 R states that “The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusion on which to base the audit opinion.

 The objectives of the auditor’s examination and accumulation of evidence during the course of audit is
to obtain sufficient appropriate evidence through the performance of compliance and substantive
procedures to afford a reasonable basis for an opinion on the financial statements under examination.

 Evidence is available to the auditor from sources under his own control, from the management of the
company and from the third parties.

 Sources of audit evidence include the accounting data and underlying documentations, queries and
discussions with the client or third parties who have dealings with the business of the enterprise.
Gathering audit evidence
The procedures for obtaining audit evidence are:

1. Analytical procedures. Analytical procedures are used to evaluate plausible relationships between
financial and non-financial data including, calculating ratios and then comparing the amounts and ratios to
last year’s results, Budgets and Industries standards.

Analytical procedures may be used at three stages of the audit:

 Planning (ISAs 300 & 315) If last year’s inventory amounted to 34 days’ of supply and this year
amounted to 97, then you have identified an area that will need attention during the audit. Why has
inventory increased so much? Was this planned? Is there an error? Will it sell? What value should it
have?

 Substantive procedures (ISA 520) If last years collection period was 32 days and this years is 31.5,
then this gives some confidence that the figures this year are correct. Similarly if sales are very close to
budget, this implied some support for the figures being correct.

 Final review (ISA 520) Here, near the end of the audit, the partner stands back and looks at the
financial statements as a whole. Do the figure seem to make sense?
Cont.……
Note: Analytical procedures must be used at the planning stage to assess whether or not the financial
statements are consistent with the auditor's understanding of the entity. If they believed that the entity
was substantially dealing in cash transactions yet it had a large receivables balance they might wonder
why,

2. Enquiry and confirmation. For example, asking client staff what checks they do when goods are
received, or asking third parties (such as a bank) to confirm a balance.

3.Inspection. For example, the physical condition of inventories or non-current assets

4.Observation. For example, watch what staff do in the warehouse as deliveries are received.

5.RecalcUlation and re-performance. For example, recalculate the wage calculations to confirm they are
correct.
Sufficient, appropriate audit evidence

After knowing the various procedures to obtain audit evidence, but how much audit
evidence is needed? According to ISA 500 states that there should be Sufficient and
Appropriate audit evidence, to be able to draw reasonable conclusions on which to
base an audit opinion.

Sufficient concerns the quantity of audit evidence.

Appropriate concerns the quality of audit evidence - its relevance and reliability. With
respect to the reliability of audit evidence we can say that, in general:
Cont.……
 External evidence is better than the entity's records. For example, looking at a bank statement or a bank certificate is very
good evidence about how much cash was in the bank account at a particular date.

 Evidence obtained directly by the auditor is better than evidence passed on by the clients. The problem is that if the
evidence is passed on by the client you don’t know if it’s complete. The client could be suppressing information they don’t
want you to see.

 Audit evidence is better if there is an effective system of internal control. This should mean that the checking performed by
the client reduces the likelihood of fraud and error.

 Written evidence is much better than oral. Someone once said "oral evidence isn’t worth the paper it is written on”. If
evidence is oral what evidence can you, the auditor, show to prove you actually received it?

 Originals are better than photocopies. Nowadays with scanners and graphics programs it’s very easy to alter documents
and these alterations are very difficult to spot. Therefore original contracts and documents of title should be sighted. The
auditors may take a photocopy to keep on their audit file, but they should be taken from the original documents
The financial statement assertions

Essentially a financial statement assertion means whenever a figure appears in the financial statements it is making
certain claims proclamations or assertions for example saying am;
 Accurate.

 Complete. For example, that all receivables are included.

 Cut-off is correct. In other words, a receivable is present if a sale was made during the financial year and not yet paid for.

 Allocated. More to do with expense items that might need to be allocated properly into asset amounts (eg overheads included in
inventory).

 Classification and presentation. The transactions giving rise to the receivable have been recorded in the proper accounts and are
properly presented in the financial statements. For example trade receivables are distinguished from other receivables and any
non-current portion disclosed in the notes.

 Occurrence. The sales giving rise to the receivable occurred in the period. ๏ Valuation. That the receivable has been appropriately
measured, taking into account the risk of non-recoverability.

 Existence. That the receivable balance actually exists.

 Rights and obligations. That the client owns the receivable, that it hasn’t, for example, been assigned to a third party
AUDIT SAMPLING
Unless an audit client is very small almost all audit 'testing' relies on sampling. This is because there simply isn’t time to
examine all documents, transactions and balances and it wouldn’t be economically viable to do so.

The process involves:

 Sample design – includes specify the population (is it complete?)

 Sample size – must be sufficient to reduce sampling risk

 Sample selection – choose a selection method.

 Performing audit procedures – test the selected items. This will be either a test of controls or a test of details (a
substantive procedure).

 Evaluate sample results – investigate all ‘errors’ (see later) and conclude on the population. In statistical sampling:
๏ Sample selection must be regarded as random, and

 Probability theory must be used to evaluate sample results including measurement of sampling risk (which will
determine the sample size). If either of these conditions is not met, sampling is non-statistically.
Selection methods

 Random selection. The best way to remove bias and to obtain a representative sample is to adopt what’s called random selection.
The difficulty with this approach is that very often the population is not pre-numbered and to set out initially numbering all 20,000
invoices would be very time consuming.

 Systematic ('interval') selection. This is an approximation to pure random selection. Again, if with 20,000 invoices you wanted to
look at about 20 invoices you could do that by looking at every 1,000th invoice.

 Haphazard selection. This is frequently used because it is convenient. For example, the auditor opening a file at random and
picking the invoice at which the file is opened.

 Block selection. For example choosing 20 invoices all in a sequence. Depending on how they are filed, they could all from the
same supplier or may be from different suppliers, but all with the same date.

 Stratification means dividing your population into different sub-populations ('layers') with similar characteristics (usually monetary
amount). The results of testing each layer must be separately evaluated.

 Value-weighted selection. This is used in monetary unit sampling and is rather more complex as described on the next page
THE FINAL AUDIT – THE ASSERTIONS
Introduction
We now come to look at the final audit and consider some of the work that is
typically done to verify some of the assertions that are made about major items
in the client’s financial statements.
This part of the audit is still sometimes referred to as the ‘balance sheet audit’
because it tries to ensure directly that the amounts in the financial statements
are free from material misstatement.
In particular, ISA 315 states:
“…management…makes assertions regarding the recognition, measurement and
presentation of classes of transactions and events, account balances and
disclosures. Assertions used by the auditor to consider the different types of
potential misstatements that may occur fall into the following two categories ...
Assertions about classes of transactions and events and related
disclosures
These assertions relate to the period under audit:

 Occurrence – transactions and events that have been recorded or disclosed have occurred and pertain to the entity.

 Completeness – all transactions and events that should have been recorded/ disclosed have been
recorded/disclosed.

 Accuracy – amounts have been recorded appropriately and related disclosures have been properly measured and
described.

 Cut-off – transactions and events have been recorded in the correct accounting period.

 Classification – transactions and events have been recorded in the proper accounts.

 Presentation – transactions and events are appropriately aggregated (or disaggregated) and clearly described.
Related disclosures are relevant and understandable
Assertions about account balances and related disclosures
These assertions relate to the period end:

Existence – assets, liabilities and equity interests exist.

Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations
of the entity.

Completeness – all assets, liabilities and equity interests that should have been recorded have been
recorded and all related disclosures included.

Accuracy, valuation and allocation – assets, liabilities and equity interests are included at appropriate
amounts and any resulting valuation or allocation adjustments are appropriately recorded Related
disclosures are appropriately measured and described.

Classification – assets, liabilities and equity interests have been recorded in the proper accounts.

Presentation – assets, liabilities and equity interests are appropriately aggregated (or disaggregated) and
clearly described. Related disclosures are relevant and understandable.
TRADE RECEIVABLES
The relevant assertions
If you want to audit the receivables balance you have to find ways of testing each
assertion that the receivables balance makes: existence, rights and obligations,
completeness, accuracy, valuation and allocation, classification and presentation.

External confirmation

Assuming trade receivables are material, it’s almost universal to use external confirmation
procedures (a 'receivables circularization') to obtain audit evidence. This involves asking
customers to respond directly to the auditor to confirm what they owe.

This provides good evidence about the existence of a receivable and its accuracy, but it
says very little about the valuation of a receivable. It could well be that a customer who is
in trouble will verify that the receivable exists to play for time: they don’t want to arouse
suspicions.
There are two types of confirmation request:

Positive - requests a reply from everyone who has been written to, whether or not they agree with the
balance. This is most suitable where the risk of misstatement is high (e.g. weak internal controls, errors
expected or suspicion of irregularity or disputed amounts).

Negative - requests a reply only if the customer does not agree with the balance that they have been
asked to confirm. But if you don’t get a reply how do you know whether that person agrees with the
balance or whether they simply haven’t bothered replying? This type is appropriate when control risk is low
(i.e. errors are not expected), there is a large proportion of smaller balances and customers are not
expected to ignore the request.

For example confirmation of Cash-in-transit (ie payments by customers not received by the client);
Goods-in-transit (ie goods sent and invoiced by the client not received/recorded by the customer)
Other work on receivables

 Reconcile the sum of the balances on the receivables ledger to the balance on the receivables ledger
control account. The individual balances represent the individual assets and they have to be reflected in
the control account which in turn is what appears in the financial statements.

 Aged listings. These are essential for receivable valuations. The older the debt, the greater the risk of
non-payment. A general allowance for irrecoverable debts is calculated based on the age of the debts
(e.g. increasing percentages applied to balances more than 30/60/90/120 days overdue).

 Scrutiny of board minutes. Large receivables which look as though they might be going bad should
be reflected in board discussions and there should be records of that in the board minutes.

 On a test basis, test recent orders in the order file to dispatch notes and to copy invoices and to the
receivable ledger to obtain evidence of completeness of amount owing.

 On a test basis, trace items outstanding on customer’s accounts to the copy invoice, copy dispatch
note and order received from the customer. This provides evidence that the amount is a genuine
receivable.
Cont..
 Collection period, that is a number of days' sales in receivables. It is calculated as receivables divided by sales per
day. It is usually regarded as an indicator of the recoverability of receivables and also the efficiency of the credit
control operation. There may, of course, be good reasons why the collection period increases: the company might
have extended credit terms to be competitive or it may be making a greater proportion of sales abroad where
usually the collection period is longer. But all other things being equal, an increase in the collection period is usually
regarded as bad news.

 Correspondence with customers should be scrutinized. It may become clear that a customer disputes an invoice
and it will be difficult ever to receive that amount of money; they might be denying the goods were received; they
might be disputing the quality of the goods.

 Trace amounts showing as having been paid in customers’ accounts to cash book Dr entries to verify that they have
indeed been paid and should not be in receivables.

 Examine after-date cash receipts. An absolute proof that a receivable is good is if it is received after year end. If an
amount is not received maybe after two or three months, then there may be serious doubt as to the recoverability of
that amount against which a specific allowance should be made for irrecoverability.
Cont.…
 Scrutiny of credit notes issued after year end is very important. It is possible for a
company to debit a receivable account and credit sales just before year end, and then
very early in a new year to reverse that transaction by issuing a credit note.
 This gives a mechanism for the company to boost its income and profit for the year
which is then quietly reversed out.

Note:
The tests above fall into two types of substantive procedure:
 Analytical procedures: collection period, compare receivables to last year etc.
 Tests of detail: where the auditor traces and inspects the details which provide
evidence that an amount is free from material misstatement
TRADE PAYABLES
Introduction
Many of the audit procedures that are carried out on the payables balance are similar in principle to those
that are carried out on receivables balances. Note, however, that the auditor will be particularly worried
about the possible understatement of payables: how can the auditor detect a payable that is missing form
the financial statements?

It’s important to reconcile the sum of the individual payables balances to the balance on the control
account. In other words, the total of payables in the statement of financial position agrees to the detailed
amounts payable to each supplier.

Correspondence with suppliers and board minutes may allow identification of disputes or amounts
which might not be paid, or amounts which may not yet appear in the payables ledger, but which are been
claimed by suppliers or other parties. It’s often by reviewing correspondence in board minutes that
contingent liabilities are discovered. Contingent liabilities arise because of some event which has already
happened, but whose outcome is uncertain. For example, a legal claim. Later you will see how contingent
assets and contingent liability should be treated in the financial statements.
Cont.….
Trace from purchase orders to goods received notes (where relevant) to purchase invoices and credit entries in
suppliers’ - to ensure completeness and an accurate cut-off. Trace from credit entries in the accounts to purchase
invoices then back to goods received notes (where relevant) and purchase orders - to ensure existence.

Trace from cash book payments (before and just after year end) to suppliers’ accounts and vice versa - to ensure
accurate cut-off. Reviewing after-date payments may identify year-end liabilities; if not included in the payables
balance these will need to be accrued (see next Chapter).

Payment period, that is the number of days of purchases in payables. It is calculated as payables divided by
purchases per day. If the payables period increases, it may indicate that the company is being more careful about
when payments are made, but it could indicate that the company is having difficulty making payments as they
become due. By increasing the payables period, the company might begin to lose out on receiving cash discounts.
This can become quite an expensive source of finance and needs some explanation.

Carry out or reperform reconciliations of individual payables balances to suppliers' statements. If the client does
not receive regular monthly statements from suppliers, the auditor may use external confirmation procedures to
request direct evidence of amounts owing at the reporting date.
Cont..
Note; Suppliers' statement reconciliations are the main audit procedure to verify the completeness of trade
payables.

All reconciling items must be properly accounted for. For example:

‣ Cash-in-transit (i.e. payments by client not received by supplier) - confirm that payment appears on the
bank statements shortly after the year end;

‣ Goods-in-transit (i.e. goods invoiced by supplier not recorded by the client) - confirm that goods were
received after the year end or, if received before the year end, that the invoice has been accrued;

‣ Disputed invoices (e.g. not recorded by the client because the goods were refused or returned) - if
dispute is valid, invoice should be subsequently cancelled with a credit note from the supplier.
ACCRUALS AND PREPAYMENTS

Prepayments and accruals are likely to be small relative to receivables and payables, but they can
nevertheless be material and need to be audited.

Compare to last year. One of the first steps normally carried out is to compare this year’s accruals and
prepayments with last year’s. Many accruals and prepayments arise because of periodic payments whose
pattern doesn’t change very much from one year to the next. For example, if at the end of last December
two months of rent have been paid in advance, probably that is going to be the case this year because the
rent will be payable at particular times of the year.

Scrutinise payments made shortly after/shortly before year end. To identify accruals it is going to be very
important to look at payments made just after year end and to see whether or not any of those relate to
the period covered by the financial statements. Similarly, with respect to prepayments, looking at invoices
paid in the last few months of the year may identify some which partially relate to services which are not
going to be provided until after the year end.

Analytical procedures. The overall level of expenses can also be important. If an expense varies widely
from one year to another, one potential explanation is that there has simply been a difference in payment
date and that an accrual or prepayment is needed to ensure that the financial statements are drawn up
using the accruals or matching principle.
Cont..
Goods received - not invoiced' accrual. As mentioned in the previous chapter, there may be timing
differences between suppliers' statement balances and payables' balances. Since goods received before
the year end will be included in physical inventory, the corresponding purchase/liability must be recorded.
If the invoice has not yet been received, it must be accrued.

Letter of representation. We will cover this in more detail later. Suffice to say at the moment that it is a
letter from the directors to the auditors making certain representations, for example, that all liabilities have
been accounted for in the financial statements
INVENTORY
Introduction
Inventory is one of the more involved audit areas. It will usually be material for any business that
manufactures or sells goods. Remember also that inventory directly affects both the statement of financial
position (as a current asset) and reported profit (as closing inventory is deducted in calculating cost of
sales). In particular, the auditor has to check;

The quantity of the inventory and must make sure that it is properly described. If it’s not properly
described it is going to be difficult to decide what its value should be as its condition has to be assessed.
This includes not only its physical condition, but also whether the inventory is old and therefore not as
saleable, or perhaps there is too much inventory so that it will have to written down to net realisable value.

The value of the inventory. Cost can usually be ascertained by looking at purchase invoices/cost records,
but there can be considerable disagreement over whether or not the costs are lower or higher than the
inventory’s net realisable value, and indeed what the net realisable value should be.

Ownership. Just because an item of inventory is in a client’s warehouse doesn’t mean that it is owned by
the client. It may be third party inventory which is being held there, or the items may have been sold but
have not been despatched yet.
Year-end physical inventory counts ('stocktake')
The main aspects of the stocktake include the following:

Instructions. Remember, many stocktakes will take place only once a year and the procedures are
therefore not that well-known or practised by many staff members. It’s very important that there is careful
advance planning. Instructions have to be given out. Staff members have to be briefed. There may be
training sessions.

Preparation of the count area. The inventory area has to be prepared by tidying and sorting items. It’s
important that slow-moving, damaged, old and third-party inventories can be identified.

Pre-number each inventory location. All the shelves or inventory locations should be prenumbered,
ideally sequentially. Labels are often attached and the labels will have a number. They will describe the
inventory location. They may have space in which the type and quantity of inventory can be recorded and
there should be one or two spaces on the label which are signed off once the items have been counted
and checked.

Sequentially pre-numbered inventory sheets. The inventory is going to be listed on inventory sheets
and it’s essential that these are sequentially pre-numbered in order to check that all inventory sheets have
been returned and that the inventory is therefore likely to be complete.
Cont..

Count teams. Inventory counters or stock takers will often work in pairs. Staff who work in the warehouse should not count or record inventories for
which they are responsible, but staff who do not work in the warehouse may be unfamiliar with what they are seeing and counting. Probably the
best solution is to have a mixed team.

Note that it is not the responsibility of auditors to carry out the stocktake: it is their job to decide if the stocktake can be relied upon. What the
auditors should do is:

 Look at the instructions that are issued in advance and identify any shortcomings for discussion with management. ๏ On the stocktaking day ,
to observe and evaluate the conduct of the count.

 The auditor will make some counts himself, noting down the description of the items, the quantity, and the location. They will also note down
the number of the stock sheet in which that inventory item should be recorded.

 At some stage the auditor will have to make test checks on the accuracy of the count. The auditor will count some inventory quantities on the
shelves and trace this to the inventory sheets and will then pick some items on the inventory sheets and go back to the inventory location and
count the amount which is actually there to make sure that it agrees. Testing from 'physical to book' quantities relates to the completeness
assertion; from 'book to physical' relates to the existence assertion.

 Make a note of the last few goods received noted and dispatch notes of the year. This will be used later in cut-off tests.

 At the end of the count it is essential for the auditor to check that all inventory sheets are recovered to make sure that no inventory is left out
of a count.
Inventory valuation

Inventory sheets show the physical quantity and perhaps description of the inventories only. There is no
value there yet. After the stock take it is important to value inventory. You should know from your earlier
studies of financial reporting that cost may include:

Purchase price - agreed to suppliers’ invoices

Conversion costs (including production overheads) - agreed to costing records. There could be many
calculations to do here.

Note: The values of the individual items will be added up to form a grand total of the inventory. It’s very
important that these calculations are checked, including the addition of the final column. Remember any
value you like can be put in for closing inventory and the accounts will always balance, but for every dollar
added to the value of closing inventory there is a dollar added to the reported profit.
Cut-off: purchases

Cut-off is the assertion that classes of transactions (and events) have been recorded in the correct
accounting period. If a goods receive note is dated shortly before year end then, assuming those items
have not been sold already, we would expect them to be found in inventory and if they are recorded in
inventory, they should also be recorded in purchases and payables.

If they were counted in inventory but not in purchases and not in payables, the calculation of profit would
be incorrect. The purpose of the closing inventory adjustment is to adjust the purchases figure to give a
cost of sales figure.

If a goods received note, however, is dated after year end, the likely assumption should be that the goods
were not in inventory at the year end date and therefore were not counted. If they are not in inventory
they shouldn’t be in purchases and they shouldn’t be in payables

Part of what the auditor is likely to do when attending a physical stocktake at year end is to note down
the numbers of good received notes issued in the last few days of the year so that later the auditor can
check that the company has properly accounted for those items being purchased and being in payables
Cut-off: sales

Checking cut-off in sales is also important. If an item is recorded as having been sold, in other words it
has been debited to receivables and credited to sales, it should not also appear in inventories. To verify
this, at the stock take the auditor would normally note down details of the last goods dispatched notes
issued at the end of the year and perhaps the numbers of the first few issued after the year end.

If a goods dispatched note has been issued before year end then, generally speaking, we would say that
those goods been sold and the items should be in sales and receivables. Those goods should not be
included in inventories (even if physically still on the client’s premises because that haven’t yet been
delivered).

If a goods dispatched note was issued after year end then the normal assumption is that the goods have
not been sold at year end. The item should not be in sales, should not be in receivables but if it hasn’t
been sold, it should be counted in closing inventories.

Although shifting the saleable item from one financial year to another will alter the profits in those two
years, what’s really important in cutoff is consistency. If something is regarded as having been sold at the
year end it should not be counted in closing inventory; if it is not regarded as having been sold at the year
end, it should be in closing inventory
BANK AND CASH
Bank balance
The amount of cash at bank and/or bank overdraft is one of the most straightforward balances in the statement of
financial position to audit. Almost certainly the auditor will write it to the client’s bank to obtain a 'bank report for audit
purposes' ('bank certificate'). The bank certificate will certify the amounts in the various accounts of the client and it
should also tell the auditor about any security which the bank has for overdrafts and for loans, together with details of
any assets which the bank is holding on behalf of the client, such as share certificates. It should also show any accrued
interest or bank charges.

The auditor will make sure that the amount in the client’s cash book agrees with the amount on the statement of
financial position and will perform or reperform a bank reconciliation as evidence that that amount of cash is correct. In
reperforming a bank reconciliation the auditor will:

Agree the balance per the bank statement to the bank certificate.

Agree uncleared ('outstanding') deposits and unpresented cheques to the next month's bank statement to confirm
that they have 'cleared' the banking system.

Confirm that the balance per the bank statement as adjusted for reconciling items (essentially timing differences)
agrees to the client's cash book, general ledger balance and statement of financial position.
Cash in hand

If the client has a material amount of physical cash, for example if the client runs a chain
of shops each with a cash float, then at least some cash counts will be carried out to
confirm the existence and accuracy of the cash balance at the reporting date.

Even if balances are not material, the auditor may routinely count cash because of the
relatively high risk of theft. Where petty cash/a float is controlled using an imprest
system (i.e. cash + authorised vouchers = imprest balance), the auditor may carry out
tests of controls on the authorisation of vouchers and replenishment of the float during
an interim audit.
NON-CURRENT ASSETS
Relevant assertions
As for any account balance, the relevant assertions for non-current assets are existence, rights and obligations, completeness,
accuracy, valuation and allocation, classification and presentation.

Audit procedures

Physical inspection. Remember many non-current assets have a very high value. One of the simplest ways to check on the existence
of the asset is to actually see it. The direction of testing for existence is from the accounting records (non-current asset register) to the
physical assets. If an asset no longer exists, it must be derecognised (see disposals). In addition to checking whether the asset exists,
physical inspection may allow the auditor to detect if the asset needs to be written down (impairment) because it is damaged or no
longer used.

Purchase invoices and cash receipts. Additions of new non-current assets and disposals of old ones should be checked to invoices
and to receipts respectively. If the addition is material you would probably expect to trace it back to a purchase requisition and if it is
very material, it is likely that the acquisition will have been discussed in the board meeting and should be found in board minutes.
Similarly larger material disposals will often be discussed at board level.

Scrutiny of repairs and maintenance. A non-current asset addition should be capitalised whereas repairs and maintenance costs
should be expensed. Therefore it is important to scrutinise the repairs and maintenance account for items which should be more
properly recognised as non-current asset additions to ensure completeness
Cont..
 Reconciliation of the carrying amounts in the general ledger accounts to the non-current asset register. The
financial statement balances are supported by the detail in the non-current register and should reconcile to the cost
and accumulated depreciation amounts.

 Reperformance of depreciation calculations. It is important to check the accuracy of depreciation calculations.

This may be possible through a 'proof in total' or 'reasonableness test' (a substantive analytical procedure) on the
total depreciation expense for a class of assets. However, if there are fully-depreciated assets (on which there should
be no further depreciation) it may be necessary to reperform a sample of detailed calculations on individual assets in
the asset register.

 Check disposals. When checking disposals it is important to make sure that the non-current asset register is
properly adjusted, the cost of the item is taken out of the cost account and that the accumulated depreciation is
taken out of the accumulated depreciation account, and that the profit or loss of disposal is properly calculated.
Remember that where an asset is 'traded-in' in part exchange for a new asset, the fair value of the old asset should
be accounted for as disposal proceeds and included in the cost of the new asset.

 Inspect documents of title. This confirms ownership: physical inspection merely tells you the asset exists but how
do you know the company owns it? They could have sold an asset and could be renting it back. Therefore
documents of title are extremely important.
Revaluations

 Where an asset has been revalued, confirm that the requirements of IAS 16 Property, Plant and
Equipment have been met (e.g. all assets in the same class have been revalued).

 Agree the revaluation amount (e.g. to a valuation report or market data for similar assets).

 Confirm that the gain has been correctly accounted for in other comprehensive income and shown
separately in a revaluation surplus in the statement of changes in equity.

 Recalculate depreciation expense based on the revalued amount. Remember that an amount
equivalent to the additional depreciation expense on the revalued amount may be transferred from
the revaluation surplus to retained earnings (i.e. within equity) in accordance with IAS 16.
USING THE WORK OF OTHERS
Introduction to internal audit
The internal audit function is an appraisal and monitoring activity established by management and
directors for the review of internal control as a service to the entity.

Remember that the directors are required under corporate governance codes to review the need for
internal audit. Normally to achieve an element of independence from the executive directors, you would
expect internal audit to report to the audit committee, which is responsible for monitoring and reviewing
the effectiveness of internal audit.

The main function of the internal audit department is to examine, evaluate and report to management
and directors on the adequacy and effectiveness of internal control processes.
Internal audit functions

Here is the list of the typical functions of an internal audit department. There is nothing perhaps terribly
surprising here, read each of the bullet points and understand them.

 Helps achievement of corporate objectives (how could a company make profits if it doesn’t safeguard
its assets or properly record transactions?)

 Aids risk assessment and management. ๏ Improves efficiency, effectiveness and economy.

 Designs internal control system.

 Checks operation of internal controls system.

 Value for money audits.

 Tests IT controls.

 Liaises with external auditors/shares work

Using the work of internal audit
The external auditor may decide to use the work of internal audit provided that internal audit:

 Is objective and supported by organisational status (eg has direct access to TCWG); and

 Is competent – not only in terms of professional qualifications and experience but whether it has
adequate resources; and

 Applies a systematic and disciplined approach to planning, performing and documenting its activities,
including quality control. All three criteria must be met (ie a high level of objectivity cannot compensate
for a lack of competence, or vice versa). If the auditor decides to use the work of internal audit, the
auditor must evaluate whether the work of internal audit is adequate for audit purposes.
Using the work of experts

Using the work done by internal audit is one example of where auditors rely on the work of 3rd parties. Other examples

include:

 Relying on experts such as estate agents, actuaries, lawyers.

 Relying on the work of other external auditors (e.g. if some companies in a group have different auditors).

There are two classes of expert (ie expertise in a field other than accounting or auditing):

 Management’s expert – assists management in preparing the financial statements.

 Auditor’s expert – assists the auditor in obtaining sufficient appropriate audit evidence. May be internal or external

to the audit firm.

Cont..
If the work of management’s expert is to be used as audit evidence (ISA 500), the auditor must evaluate:

 The expert’s competence, capabilities and objectivity

 The appropriateness of their work to the relevant assertion(s)

 Whether it is sufficiently reliable for audit purposes (i.e. accurate and complete and sufficiently precise
and detailed). An auditor’s expert (ISA 620) may be needed:

 To evaluate the work of management’s expert

 If management does not have necessary expertise/a management expert. This should be determined at
the planning stage of the audit. The auditor must evaluate the competence, capabilities and objectivity
of the auditor’s expert (as for management’s expert).
The following matters must be agreed, in writing, with the
auditor's expert:
 Nature, scope and objectives of work

 Respective responsibilities

 Nature, scope and timing of communications

 That the expert observes confidentiality The auditor must evaluate the adequacy of the expert's work
including:

 Consistency with other evidence. For example, if a property valuer reported a decrease in the value of a
client’s property portfolio, yet the newspapers were full of news about a property boom, the auditor
should challenge the valuer’s results.

 Assumptions made. For example about future increases in property rentals that might affect the
valuation of an investment property. ๏ Use and accuracy of source data. To value property the valuer
must start with an up-to-date list of the properties the company owns.
Conclusion
In summary, audit evidence is a critical component of the audit process, as it
provides the basis for the auditor's opinion on the financial statements. The
auditor must obtain sufficient and appropriate audit evidence to support
their conclusions, and they should use a variety of sources and methods to
obtain this evidence.