Evidence, assertions and audit procedures

Accounting Ahead | Original study resource | accountingahead.com.au

Evidence, assertions and audit procedures

MODULE 3 | 3.1 | STUDENT COMPANION

Every procedure has one purpose: sufficient appropriate audit evidence for the opinion. Sufficiency is

quantity; appropriateness is quality, meaning relevance and reliability. Relevance depends on the

assertion and on the direction of the test. There are seven types of procedure, and enquiry alone is

rarely enough. When evidence conflicts, the auditor resolves it with more evidence, and a confirmation

counts only if the auditor controls the whole process.

Sufficient and appropriate

Idea What it means In practice

Sufficiency The quantity of evidence More is needed where the assessed risk is higher; less

where the evidence is of better quality. But no amount of

poor evidence makes up for its quality

Relevance Whether the evidence bears on the

assertion being tested

A customer's confirmation shows the receivable exists,

not that the customer can pay it

Reliability Whether the evidence can be

trusted

Depends on its source, its nature and how it was

obtained, including whether the auditor controlled the

process

Information produced by the entity. Reports and listings from the client's own systems must be accurate and

complete enough for their purpose before the auditor tests anything with them. Suppose the team plans to use

Voltana's monthly report of installations completed to build an expectation of revenue. Before relying on it, the

team agrees the report's totals to the system, tests a sample of its lines back to signed completion forms, and

checks how the report was generated. A precise test built on an incomplete report gives false comfort.

Relevance depends on the assertion. Attending a stocktake shows that the batteries are there, but not that

Voltana owns them; a supplier's invoice and the shipping terms speak to ownership. So the plan is written

assertion by assertion, and each procedure is chosen for the assertion it actually supports.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Voltana's evidence plan, assertion by assertion

Revenue

Occurrence

Vouch recorded sales

back to signed

installation completion

forms

Inspection

Cut-off

Test sales either side of

30 June against

installation dates

Inspection

Receivables

Existence

Confirm balances with

partner electricians

External confirmation

Valuation

Review the ageing and

the cash received after

year end

Recalculation, inspection

Inventory

Existence

Attend the stocktake and

perform test counts

Observation, inspection

Valuation

Compare cost with prices

achieved after year end,

older models first

Inspection

Warranty provision

Valuation

Build an own range with

the engineer; check

claims paid after year

end and last year's

estimate against actual

claims

Recalculation, analytical

procedures, inspection

Related party lease

Presentation

Check how the lease is

described in the

statements

Inspection

Disclosures complete

and accurate

Agree the note to the

lease, the board's

approval and the

valuation

Inspection

One procedure can be strong for one assertion and say nothing about another

The seven types of audit procedure

1 Inspection

Examining records, documents or

a physical asset

e.g. a battery on the warehouse

floor

Occurrence and rights; existence

of assets

2 Observation

Watching others perform a

process or procedure

e.g. staff counting stock

Existence, at that point in time

3 External confirmation

A direct written reply from a third

party

e.g. a bank or a customer

Existence; sometimes rights and

obligations

4 Recalculation

Checking the arithmetic in

documents or records

e.g. recomputing depreciation

Accuracy

5 Reperformance

Independently redoing a

procedure or control of the entity

e.g. redoing a bank

reconciliation

Accuracy; whether a control

worked

6 Analytical procedures

Evaluating plausible relationships

between data

e.g. revenue against

installations

Reasonableness across a whole

population

7 Enquiry

Asking knowledgeable people,

inside or outside the entity

e.g. asking about June sales

Used in every audit, but almost

never enough alone

Enquiry is everywhere, but never alone. Asking knowledgeable people helps the auditor understand what

happened and where to look, and answers given in writing are better than conversations. But an answer is a

claim: it needs corroborating evidence from another type of procedure before it supports a conclusion.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Direction decides the assertion

A sale that was never recorded can't be found by examining recorded sales. To test for what is missing, the test

must start outside the records.

Assertion Start from Then look for Voltana example

Occurrence (and

existence)

What is recorded: the

sales ledger

Evidence that each item

really happened or exists

Vouch recorded June sales back

to signed completion forms

Completeness Independent evidence

that something happened

Each item in the records Trace installations on the

installation schedule forward into

recorded revenue

When evidence conflicts

Voltana's installation records show a battery installed on 2 July, but the revenue was recorded on 30 June, and

the sales manager says the job was really done in June and the record is wrong. The auditor believes neither

source yet. When evidence from different sources doesn't agree, or its reliability is in doubt, the auditor works

out which further or different procedures will resolve the matter, and considers what it means for the rest of the

audit.

Ask the customer, through the auditor, to confirm the installation date.

Check the installer's records, such as phone and route data for that day.

Look at the monitoring app, which shows when the battery first reported data.

Think wider: if the record was right and the sales manager wrong, how many other June sales look the

same, and what does that say about the manager's other answers?

A confirmation only counts if the auditor controls it

1. Select the items

The auditor chooses which

balances to confirm

2. Prepare the requests

Addressed by the auditor,

asking for replies to the auditor

3. Send them directly

Straight to the third party, not

through the client

4. Receive replies

directly

Back to the auditor, not to the

client

The auditor controls every step: the client handles none of it

Follow up non-responses

Chase the request, then use alternative

procedures, such as cash received after year

end

Investigate exceptions

Is a difference a timing difference or a

genuine misstatement?

Watch for replies that aren't genuine

Such as a reply from an unexpected address

If management refuses to let the

auditor send a request

Ask why, and evaluate whether the refusal is reasonable

Perform alternative procedures to get the evidence another way

Consider what the refusal suggests about the risk of fraud

Why control matters. Once a request or a reply passes through the client's hands, it could have been

intercepted, altered or invented, and it stops being independent evidence. Replies that arrive by email, by phone

or from an address the auditor didn't use need extra checking, for example by contacting the third party directly

using details the auditor has found independently.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.1 | STUDENT COMPANION

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Practice questions

MODULE 3 | 3.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Match the procedures

Lacewood Bridal Pty Ltd (imagined) runs eight bridal stores. Brides order gowns from the stores' samples and

pay a 50% deposit; the balance is paid when the gown is collected after its final fitting. The stores also sell

accessories over the counter, charge for alterations, and hold some designers' gowns on consignment. The year

ends on 30 June. For each procedure, name the type of procedure and the assertion it best supports.

Procedure Type of procedure Assertion it best

supports

(a) Watch staff count the veils and accessories at the city store on

30 June

(b) Ask the main gown designers to confirm directly to the auditor

what the chain owed each of them at 30 June, including designers

showing nothing owed

(c) Re-add the listing of customer deposits held at 30 June and

agree its total to the general ledger

(d) Compare each store's monthly gown revenue with the number

of gowns collected that month

(e) Read the consignment agreements with designers whose

gowns the stores hold

(f) Redo a store manager's end-of-day reconciliation of card and

cash takings to the sales system

(g) Ask the head seamstress how alterations are priced and

recorded

(h) Examine the sample gowns in a store for wear and damage

(i) For gowns collected in the last week of June and the first week

of July, compare the date on the signed collection form with the

date the revenue was recorded

(j) Recompute depreciation on the stores' fit-outs

ADVANCED AUDIT AND ASSURANCE | M3 | 3.1 | STUDENT COMPANION

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Question 2 - Occurrence and completeness of Lacewood's sales

Lacewood records each gown order and its deposit in an order system. Revenue from a gown is recognised

when the bride collects it and signs a numbered collection form. Accessories are sold through a point-of-sale

system, and alterations are charged from numbered job sheets. Design one test of occurrence and one test of

completeness for sales, showing where each test starts and which way it runs.

Assertion Start from (population) Direction and procedure

Occurrence

Completeness

Question 3 - Two pieces of evidence that don't agree

Lacewood's payables ledger shows that it owed Seraphine Atelier (imagined), a gown designer, $18,400 at 30

June. Seraphine's reply to the auditor's confirmation request says $31,600. The difference is one invoice for

$13,200, dated 26 June, for six gowns delivered to the city store. Lacewood's accounts manager says those

gowns are held on consignment, so nothing is owed until they are sold. How would you resolve the conflict, and

what else would you consider?

ADVANCED AUDIT AND ASSURANCE | M3 | 3.1 | STUDENT COMPANION

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Worked answers

MODULE 3 | 3.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Lacewood Bridal

Type of procedure Assertion it best supports

(a) Observation Existence of inventory, at that point in time (also how well the count is run)

(b) External confirmation Completeness of payables (and the obligations owed to designers)

(c) Recalculation Accuracy of the customer deposits liability

(d) Analytical procedures Occurrence and completeness of gown revenue: the overall reasonableness

of the total

(e) Inspection (of a document) Rights and obligations: consigned gowns stay out of inventory

(f) Reperformance Accuracy and completeness of takings recorded (and whether the

reconciliation control works)

(g) Enquiry Accuracy of alterations revenue, once corroborated with job sheets

(h) Inspection (of a physical asset) Valuation of inventory: worn samples sell at a discount

(i) Inspection (of documents) Cut-off of gown revenue

(j) Recalculation Accuracy, valuation and allocation of property, plant and equipment

Question 2 - Lacewood's sales (suggested)

Assertion Start from Direction and procedure

Occurrence Sales recorded in the ledger,

sampled across the year and

weighted to late June

Vouch backwards to the signed collection form and the

balance received, the alteration job sheet, or the

point-of-sale record and card settlement. A recorded gown

sale with no signed form may be a deposit wrongly treated

as revenue

Completeness Independent evidence of sales:

numbered collection forms and job

sheets, each store's daily takings

report

Trace forwards: check the number sequences for gaps,

then follow each form, job sheet and daily total into the sales

ledger in the right period. A collected gown with no recorded

sale is missing revenue

Question 3 - Seraphine Atelier (sample answer)

Find out which source is right. Does the consignment agreement cover these six gowns? An invoice payable in

30 days suggests a purchase, as consigned goods are usually invoiced only when sold. Check the delivery

docket, and whether the gowns were counted as Lacewood's stock.

Look after year end. Paying the $13,200 before any of the gowns was sold points to a purchase.

Ask Seraphine again, through the auditor, about the terms of that delivery. The accounts manager has an

interest in the answer, so the explanation alone is not evidence.

Decide what it is. Bought outright: payables are understated by $13,200, and the gowns belong in inventory if

they weren't counted. On consignment: leave them out of inventory and payables, and Seraphine's statement is

wrong. Then check the other designers' consignment stock and confirmations, and extend the search for

unrecorded liabilities.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.1 | WORKED ANSWERS

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