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Lecture Principles of auditing and other assurance services (15/e): Chapter 5 - Whittington, Pany

Lecture Principles of auditing and other assurance services (15/e) - Chapter 5: Audit evidence and documentation. This chapter focuses on the concept of sufficient competent audit evidence and the manner in which this evidence is documented in the audit working papers. | Audit Evidence and Documentation Chapter 5 1 Management Assertions Existence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred. Completeness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included. Rights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements. Valuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles. Presentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided. 5- 2 2 Audit Risk Risk of Material Risk That the Audit Risk = Misstatement * Auditors . | Audit Evidence and Documentation Chapter 5 1 Management Assertions Existence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred. Completeness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included. Rights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements. Valuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles. Presentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided. 5- 2 2 Audit Risk Risk of Material Risk That the Audit Risk = Misstatement * Auditors Fail to the Misstatement = Inherent Control Detection Risk * Risk * Risk Inherent Risk--Risk of a material misstatement occurring in an assertion assuming no related internal controls. Control Risk--Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control. Detection Risk--Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist. 5- 3 3 Audit Risk Formula AR = IR * CR * DR AR = Audit risk IR = Inherent risk CR = Control risk DR = Detection risk 5- 4 4 Audit Risk 5- Competence of Evidential Matter To be competent evidence must be: Valid Relevant Principles Independent sources have greater reliability than those within the client organization. Strong internal control increases reliability of evidence created within the client organization. Directly obtained evidence is more reliable than evidence