AAA – L3 – Q42 – Audit Evidence and Materiality

State audit testing procedures, criteria for using internal audit work, and materiality definition with audit stages.

Question

Required
(a) ISA 500 Audit Evidence identifies the different audit procedures that can be performed in order to obtain audit evidence.
Required
State, and briefly explain, five testing procedures that can be performed to obtain audit evidence.
(b) ISA 610 Using the Work of Internal Auditors explains when the work of the internal audit function can be used.
Required
State TWO criteria that the external auditor shall evaluate when assessing whether the work of the internal audit function can be used for the purposes of the audit.
(c) ISA 320 Audit Materiality provides guidance to the auditor on the concept of materiality and its relationship with audit risk.
Required
State a brief definition of materiality and state the two stages of the audit at which the auditor should consider materiality.

Answer

(a) Five Testing Procedures to Obtain Audit Evidence (ISA 500)

Inspection: Examining records, documents, or tangible assets to verify their existence, condition, or accuracy. For example, reviewing invoices to confirm purchase amounts.
Observation: Watching a process or procedure being performed, such as observing inventory counts to confirm the process is conducted accurately.
Inquiry: Seeking information from knowledgeable persons within or outside the entity, such as asking management about accounting policies, to gather evidence.
Confirmation: Obtaining direct written responses from third parties, like confirming bank balances with the bank, to verify account balances or transactions.
Recalculation: Checking the mathematical accuracy of documents or records, such as recalculating depreciation schedules to ensure correctness.

(b) Two Criteria for Using Internal Audit Work (ISA 610)

Objectivity: The external auditor must assess the internal audit function’s independence from management to ensure unbiased work. For example, whether the internal auditors report to the audit committee.
Competence: The external auditor must evaluate the qualifications, experience, and resources of the internal auditors to ensure their work is reliable.

Definition: Materiality is the magnitude of misstatements in the financial statements that could influence the economic decisions of users.
Stages:
1. Planning Stage: The auditor sets materiality levels to determine the scope and nature of audit procedures.
2. Evaluation Stage: The auditor assesses whether detected misstatements exceed materiality thresholds to form an opinion.

Tags: Audit Evidence, Audit Risk, Internal Audit, ISA 320, ISA 500, ISA 610, Materiality, Testing procedures
Level: Level 3

Topic: Audit Evidence, Internal Audit and Outsourcing

Uploader: Salamat Hamid