AAA – Nov 2018 – L3 – Q3 – Audit Completion and Final Review

Training new associates on procedures for gathering and assessing audit evidence

Question

You are the auditor in charge of the audit of Big Bank Plc. Two new associates who recently joined the firm have been assigned to your team, and you need to provide them on-the-job training on the audit process. The training should focus on audit evidence and testing procedures for gathering audit evidence.

Required:

a. Explain six procedures for gathering audit evidence. (6 Marks)

b. Explain to members of your team the terms “sufficient” and “appropriate” audit evidence. (2 Marks)

c. Explain four principles that an auditor uses in assessing the reliability of audit evidence in line with ISA 500. (4 Marks)

d. You have allocated the following audit areas to the two new associates on your team:

i. Bank and cash balances; and
ii. Payroll.

Identify the audit procedures that you will discuss with your team members for substantive testing of the audit areas mentioned above. (8 Marks)

Answer

a. Six Procedures for Gathering Audit Evidence:
1. Inspection: Examining records, documents, or tangible assets as evidence of a transaction or event.
2. Observation: Watching processes or procedures being performed by client personnel to verify their accuracy.
3. Inquiry: Asking questions of knowledgeable staff or management to obtain explanations or insights into particular transactions.
4. Confirmation: Obtaining direct verification from third parties, such as banks or suppliers, to corroborate information provided by the client.
5. Recalculation: Checking the mathematical accuracy of documents or records to ensure they reflect accurate figures.
6. Analytical Procedures: Comparing financial information with prior periods or industry benchmarks to identify unusual trends or variances.
b. “Sufficient” and “Appropriate” Audit Evidence:
- Sufficient: Refers to the quantity of audit evidence; enough evidence must be obtained to provide a basis for an auditor’s opinion.
- Appropriate: Refers to the quality of audit evidence; evidence must be relevant and reliable to effectively support the auditor’s findings.
c. Four Principles for Assessing the Reliability of Audit Evidence (ISA 500):
1. Source: Evidence obtained from independent sources outside the client organization is generally more reliable than evidence generated internally.
2. Nature: Direct evidence, such as physical verification, is often more reliable than indirect or oral evidence.
3. Effectiveness of Internal Controls: If the client’s internal controls are strong, evidence generated within the entity may be more reliable.
4. Consistency: Evidence that is consistent across different sources and periods strengthens its reliability.
d. Substantive Testing Procedures:
- i. Bank and Cash Balances:
  1. Bank Reconciliation Review: Verify the reconciliation of bank statements to ensure recorded balances match bank statements.
  2. Bank Confirmations: Obtain direct confirmation from banks to verify account balances and detect discrepancies.
  3. Physical Cash Count: Perform or observe a cash count at the client’s premises to verify cash holdings.
  4. Examination of Bank Statements: Review the client’s bank statements for unusual transactions or unauthorized payments.
- ii. Payroll:
  1. Review of Payroll Records: Inspect payroll records and verify calculations for accuracy in gross pay, deductions, and net pay.
  2. Analytical Procedures: Compare payroll expense trends with prior periods to identify anomalies.
  3. Employee Confirmation: Confirm the existence of employees through random sampling to verify there are no fictitious employees.
  4. Recalculation of Payroll Deductions: Recalculate payroll deductions for tax and benefits to verify their accuracy against statutory requirements.

Tags: Audit evidence, Bank Balances, ISA 500, Payroll, Substantive Testing
Level: Level 3

Topic: Audit Completion and Final Review

Uploader: Kofi