Once auditors cover all the material aspects of the client’s financial statements, they can present an opinion and provide an audit report. An audit trail is a chronological record providing a step-by-step account of the audit process, decisions, and actions taken. It facilitates the audit process and serves as a critical tool for any disputes or follow-up inquiries. Policy documents, for example, provide insight into the organization’s regulatory compliance and governance standards.
- Each technique has its place and purpose, from interviews and document reviews to technical testing and data analytics.
- Physical examinations are one of the main sources of audit evidence for fixed assets.
- However, in order to use analytical procedures effectively the auditor needs to be able to create an expectation.
- The appropriateness of audit evidence represents the relevance and reliability of audit evidence in providing support for the conclusions on which auditors base their opinion.
These ratios show how long, on average, companies take to collect cash from customers and pay suppliers and how long they hold inventory for. Ultimately companies should strive to reduce receivables and inventory days to an acceptable level and increase payables days because this strategy maximises cash flow. This involves checking the arithmetical accuracy of the client’s calculations, e.g. depreciation amounts. In the chapter ‘Audit procedures’ we will look in detail at how these procedures are applied in specific circumstances. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs.
As such, analytical procedures cannot be used in isolation and should be coupled with other, corroborative, forms of testing, such as enquiry of management. The information acquired during an inspection gives confidence in the accuracy of financial accounts. Auditors need to perform suitable audit procedures in order to obtain sufficient appropriate audit evidence. Auditors’ judgment of which type of audit procedure to perform is very important in producing a good quality audit.
Account balances:
To understand this, we need to know what is the standard that auditors use to audit the financial statements of the company. Generally, auditors use International Standards on Auditing or ISA to audit a general purpose financial reports. Such procedures include audit inquiry, audit observation, audit inspection, analytical procedure, audit recalculation, audit confirmation, and re-performance.
Following the path of a transaction from its source document through the accounting system to its final posting in the financial statements. Observing physical processes or activities to verify their alignment with reported information.For example, observing inventory counts or cash handling procedures. Inquiry involves asking questions of management or relevant types of audit evidence personnel to gather information.Confirmation entails obtaining external verification directly from third parties, such as banks or customers. For example, the auditors will normally attend to and observe the client’s annual inventory count to ensure the client has appropriate procedures or guidelines to conduct a complete and accurate inventory count.
To ensure a true and fair view of the financial statements, auditors have to be objective and cannot rely solely on management’s representation. Every claim presented by the entity to the auditor has to be cross-checked and verified. Inspection involves the examination of records, documents, and tangible assets.
Review Questions
The major reason an independent auditor gathers audit evidence is to support their conclusions related to financial statement items. For auditors’ work to be trustworthy, they must use proper procedures and techniques to evaluate the truthfulness and fairness of the financial statements. Therefore, they gather evidence to support these procedures and their opinion. It is considered sufficient when the auditors determine the quantity of the audit evidence enough on which they base their opinion. Therefore, sufficiency relates to the quantity of the audit evidence, rather than its quality. The appropriateness of audit evidence represents the relevance and reliability of audit evidence in providing support for the conclusions on which auditors base their opinion.
Audit procedures for obtaining audit procedures include all the different types of audit procedures that auditors can apply. Given below are the audit procedures used by auditors to obtain audit evidence. The next type of audit evidence that auditors can obtain is through observation. In observation, auditors observe various aspects of the client’s operations or processes. It can help auditors get a view of the client’s processes and analyze them for deficiencies. Observation is different from a physical examination as it focuses on processes rather than physical assets.
The Use of Assertions in Obtaining Audit Evidence:
External confirmations allow auditors to obtain third-party accounts of the balances recorded by the client in its financial statements. Analytical procedures include performing various analyses on the financial statements of the client to identify any trends or discrepancies. Similarly, analytical procedures can help obtain an overall view of the changes in the financial year. Finally, the importance of evidence also becomes apparent by considering its absence. In the absence of audit evidence, any audit opinion does not constitute a valid opinion.
This could include reviewing contracts, policies, system configurations, and physical verification of assets. Inspection provides concrete evidence and is essential in verifying the existence and accuracy of assets and information. It is the auditors’ responsibility to obtain sufficient and appropriate audit evidence in order to arrive at their audit opinion. Therefore, no reference should be made in the audit report regarding the use of others during the audit.