AUDIT VERIFICATION- GENERAL PRINCIPLES

AUDIT VERIFICATION- GENERAL PRINCIPLES

CHAPTER OBJECTIVE

1. AUDIT VERIFICATION TECHNIQUES
2. AUDIT OBJECTIVES AND FINANCIAL STATEMENT ASSERTION
3. ACCOUNTING ESTIMATES

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1. AUDIT VERIFICATION TECHNIQUES

In verification work, the auditor will use substantive testing procedures to give evidence relating to the figures in the financial statements.
Audit-testing procedures available to the auditor are:
Inspection:
Physical review or examination of records, documents and tangible assets. Eg substantive testing examines purchase invoices recorded in financial statements.
Observation:
Applicable to tests of control, but may also used in substantive testing, for example, observe inventory count that inventory figure in financial statement.
Enquiry:
Seeking information from knowledgeable persons inside or outside the enterprise. Substantive testing asks management why a receivable balance has, or has not, as irrecoverable debt.

Confirmation:
Confirmation ( a specific type of enquiry) concerns obtaining a representation directly from a third party. For example, auditor may seek direct confirmation of receivable balances by writing to the debtors.
Recalculation:
Checking the arithmetical accuracy of records or performing independent calculations, for example computing or re-computing the depreciation expense for the year.
Reperformance:
Carrying out procedures or controls that were originally performed as part of the entity’s internal control system, for example reperforming the ageing of receivables balances in an aged debt analysis.
Analytical procedures
Mainly used in substantive testing rather than as a test of controls. Understand relationships between figures in the financial statements.

2.AUDIT OBJECTIVES AND FINANCIAL STATEMENT ASSERTION

Types of techniques used depend on the audit objectives.
The role of substantive testing is to verify assertions and in carrying out substantive audit tests (verification work), the auditor looks for evidence on income statement items, statement of financial position items and general presentation and disclosure:
1. Assertions about transactions for the period:
Occurrence: recorded transactions and events have occurred and pertain to the entity.
completeness: all transactions and events that should have been recorded have been recorded
Accuracy: recorded appropriately
Cut-off: recorded in the correct accounting period.
Classification: recorded in the proper accounts.
2. Assertions about account balances at the period end
Existence: assets, liabilities and equity interests exist
Rights and obligations: entity has 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
Valuation and allocation: assets, liabilities and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.
3. Assertions about presentation and disclosure
Occurrence and rights and obligations: all disclosed matters have occurred and pertain to the entity.
Completeness: all disclosures that should have been included in the financial statements have been included.
Classification and understandability: financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation: financial and other information are disclosed fairly and at appropriate amounts.
Question:
you are about to commence the audit of a client who has a large number of non-current assets. You are aware that one of the audit objectives in this area is ‘to ensure that all assets stated in the statement of financial position actually exist’.
What audit verification technique (s) would you use to satisfy this objective?

3.ACCOUNTING ESTIMATES

Definition: an accounting estimate is defined as approximation of the amount of an item in the absence of a precise means of measurement.
Example:
– Allowance to reduce inventories and receivables
– Accrued revenue
– Provisions for depreciation
– Provisions for losses on a legal dispute.
Directors and management are responsible for making accounting estimates, not the auditors.
Specific procedures:
– Use of an independent estimate
– Review of subsequent events
– Review and test the process used – analytical procedure , approval procedures, realistic and reasonable

Source:

1. Kaplan, FAU
2. Phnom Penh HR (www.pp-hr.com)