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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.2 Ways in which the external auditor may make use of the function for purposes of the audit.
While the objectives of an entity's internal audit function and the external auditor differ, the function may perform audit procedures similar to those performed by the external auditor in an audit of fi... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.3 Scope of SA 610
Standard on Auditing (SA) 610 deals with the external auditor's responsibilities if using the work of internal auditors. This includes
- (a) using the work of the internal audit function in obtaining audit evidence and
- (b) using internal auditors to provide direct as... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.4 External Auditor's Responsibility for the audit
The external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor's use of the work of the internal audit function or internal auditors to provide direct assistan... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.5 Objectives of the external auditor, where the entity has an internal audit function
The objectives of the external auditor , where the entity has an internal audit function and the external auditor expects to use the work of the function to modify the nature or timing, or reduce the ext... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6 Evaluating the Internal Audit Function
The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following:
- (A) The extent to which the internal audit function's organizational status and relevant policies ... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Objectivity and Competence
The external auditor exercises professional judgment in determining whether the work of the internal audit function can be used for purposes of the audit, and the nature and extent to which the work of the internal audit function can be used in the circumstances.
The ex... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6A Objectivity and its evaluation
Objectivity refers to the ability to perform those tasks without allowing bias, conflict of interest or undue influence of others to override professional judgments .
Factors that may affect the external auditor's evaluation in relation to O... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## For example
whether the internal audit function reports to those charged with governance or an officer with appropriate authority, or if the function reports to management, whether it has direct access to those charged with governance.
2. Whether those charged with governance oversee empl... | [
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-0.002395258285105228... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## For example
determining the appropriate remuneration policy.
3. Whether there are any constraints or restrictions placed on the internal audit function by management or those charged with governance, for example, in communicating the internal audit function's findings to the external auditor.
4. ... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6B Competence and its evaluation
Competence of the internal audit function refers to the attainment and maintenance of knowledge and skills of the function as a whole at the level required to enable assigned tasks to be performed diligently and in accordance with applicable professio... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Factors that may affect the external auditor's determination in relation to competence include the following:
1. Whether the internal audit function is adequately and appropriately resourced relative to the size of the entity and the nature of its operations.
2. Whether there are ... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Objectivity and competence may be viewed as a continuum.
Objectivity and competence may be viewed as a continuum. The more the internal audit function's organizational status and relevant policies and procedures adequately support the objectivity of the internal auditors and the higher the le... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6C Application of a Systematic and Disciplined Approach
The application of a systematic and disciplined approach to planning, performing, supervising, reviewing and documenting its activities distinguishes the activities of the internal audit function from other monitoring control activi... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.7 Circumstances When Work of the Internal Audit Function Cannot Be Used
The external auditor shall not use the work of the internal audit function if the external auditor determines that:
- (a) The function's organizational status and relevant policies and procedures do not... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.8 Determining the Nature and Extent of Work of the Internal Audit Function that Can Be Used
As a basis for determining the areas and the extent to which the work of the internal audit function can be used, the external auditor shall consider the nature and scope of the work that has bee... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.9 Circumstances in which the external auditor shall plan to use less of the work of the Internal audit function and perform more of the work directly
The external auditor shall make all significant judgments in the audit engagement and, to prevent undue use of the work of the internal audit func... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.10 Using the Work of the Internal Audit Function
If the external auditor plans to use the work of the internal audit function, the external auditor shall
- (A) discuss the planned use of its work with the function as a basis for coordinating their respective activitie... | [
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0.0033984847832471132... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Discussion and Coordination with the Internal Audit Function
In discussing the planned use of their work with the internal audit function as a basis for coordinating the respective activities, it may be useful to address the following:
1. The timing of such work.
2. The nature of the ... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Coordination between the external auditor and the internal audit function is effective when, for example;
1. Discussions take place at appropriate intervals throughout the period.
2. The external auditor informs the internal audit function of significant matters that may affect the function.
3. Th... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.11 Determining Whether, in Which Areas, and to What Extent Internal Auditors Can Be Used to Provide Direct Assistance
Direct assistance refers to the use of internal auditors to perform audit procedures under the direction, supervision and review of the external auditor.
The external ... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## The external auditor shall not use an internal auditor to provide direct assistance if:
- (a) There are significant threats to the objectivity of the internal auditor; or
- (b) The internal auditor lacks sufficient competence to perform the proposed work. | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## The external auditor shall not use internal auditors to provide direct assistance to perform procedures that:
- (a) Involve making significant judgments in the audit;
- (b) Relate to higher assessed risks of material misstatement where the judgment required in performing the relevant audit procedu... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Prior to using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall:
- (a) Obtain written agreement from an authorized representative of the entity that the internal auditors will be allowed to follow the external auditor's instructions, an... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.12 Basics of Internal Financial Control and Reporting Requirements
You have already read about basics of Internal Financial Control and regulatory/reporting requirements in Chapter 3 in detail. Now, we shall understand distinction between Internal Financial Control and Internal Control ov... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Distinction between Internal Financial Control and Internal Control over financial reporting
The term Internal Financial Controls (IFC) refers to the policies and procedures put in place by companies for ensuring reliability of financial reporting, effectiveness and efficiency of operat... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.1 Sampling: An Audit Procedure
No conscious effort in human society is divested of economic considerations and auditing is no exception. There is a growing realisation that the traditional approach to audit is economically wasteful because all the efforts are directed to check all transactions ... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.2 Meaning of Audit Sampling
According to SA 530 'Audit sampling', 'audit sampling' refers to the application of audit procedures to less than 100% of items within a population relevant under the audit, such that all sampling units (i.e all the items in the population) have a equal ... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Scope of SA 530
SA 530 becomes applicable when the auditor has decided to use audit sampling in performing audit procedures. This standard deals with the auditor's use of -
- ♦ Statistical and
- ♦ Non-statistical sampling
when designing and selecting the-
- (i) audit sample,
- (ii) performing ... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.3 Population
Population refers to the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.
The auditor should select sample items in such a way that the sample can be expected to be representative of the population. This req... | [
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0.02... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.3.1 Characteristics of Population
1. Appropriateness: The auditor will need to determine that the population from which the sample is drawn is appropriate for the specific audit objective. Appropriate means population from which the samples are drawn shall be relevant for th... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
If the auditor's objective were to test for overstatement of accounts receivable, the population could be defined as the accounts receivable listing. On the other hand, when testing for understatement of accounts payable, the population would not be the accounts payable listing, but rather... | [
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-0.06198487430810928,
-0.008098358288407326,
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0.01760491356253624,
0.06338237226009369,
0.043913669884204865,
-0.03152124956250191,
0.023304225876927376,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.4 Sampling Unit
The individual items that make up the population are known as sampling units. The population can be divided into sampling units in a variety of ways. It is a selection from the population that is used as an extrapolation of the population. Audit procedures are applied... | [
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0.00472297566011548,
0.03... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Sample must be representative
Whatever may be the approach non-statistical or statistical sampling, the sample must be representative. This means that it must be closely similar to the whole population although not necessarily exactly the same. The sample must be large enough to provide s... | [
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0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.5A Statistical SamplingMore Scientific
1. Audit testing done through this approach is more scientific than testing based entirely on the auditor's own judgment because it involves use of mathematical laws of probability in determining the appropriate sample size in varying circumstances.
2. S... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.5B Non-Statistical Sampling
Under this approach, the sample size and its composition are determined on the basis of the personal experience and knowledge of the auditor.
This approach has been in common application for many years because of its simplicity in operation. Traditiona... | [
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-0.010615242645144463,
0.008825170807540417,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.6 Sampling Vs Traditional method of Auditing
In most of the circumstances, the evidence available is not conclusive and the auditor always takes a calculated risk in giving his opinion. Even by undertaking hundred percent checking of the transactions, the auditor does not derive abso... | [
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0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
Mr. X may consider that in his estimation of stores valuation, an error of 2% may not be material; he also decides that he needs at least 98% reliability of the result. He is to pick up the requisite number of items of the stores for reliability of the result. The requisite number he ... | [
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0.06109859421849251,
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0.009962417185306549,
0.0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.7 Appropriateness of Sampling Approaches
In statistical sampling, the sample results are measurable as to the adequacy and reliability of the audit objectives whereas in non-statistical sampling the auditor's opinion determines the sample size but it cannot be measured how far the sample size w... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## The advantages of statistical sampling may be summarized as follows -
- (1) The amount of testing (sample size) does not increase in proportion to the increase in the size of the area (universe) tested.
- (2) The sample selection is more objective and thereby more defensible.
- (3) The method pr... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9 Sample Design, Size and Selection of Items for Testing
When designing an audit sample, the auditor shall consider the purpose of the audit procedures and the characteristics of the population from which the sample will be drawn. The auditor shall determine a sample size sufficien... | [
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0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.1 Sample Design
When designing an audit sample,
- i) the auditor's consideration includes the specific purpose to be achieved and the combination of audit procedures that is likely to best achieve that purpose.
2. ii) Consideration of the nature of the audit evidence sought an... | [
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0.0657515600323677,
0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
In a test of details relating to the existence of accounts receivable, such as confirmation, payments made by the customer before the confirmation date but received shortly after that date by the client, are not considered a misstatement. Also, a wrong posti ng between cu... | [
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0.006104390136897564,
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0.07859458029270172,
0.04609975963830948,
-0.00871913880109787,
0.030339382588863373,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
If the expected rate of deviation is unacceptably high, the auditor will normally decide not to perform tests of controls.
Similarly, for tests of details, the auditor makes an assessment of the expected misstatement in the population. If the expected misstatement is ... | [
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0.0317758247256279,
-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.1A Stratification and Value -Weighted Selection
In considering the characteristics of the population from which the sample will be drawn, the auditor may determine that stratification or value -weighted selection is appropriate.
SA 530 provides guidance to the auditor on the use of stratific... | [
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0.00062200921820476... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
20% of the items in a population may make up 90% of the value of an account balance. The auditor may decide to examine a sample of these items. The auditor evaluates the results of this sample and reaches a conclusion on the 90% of value separately from the remaining 10% (on which a furthe... | [
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0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.2 Sample Size
The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.
The level of sampling risk that the auditor is willing to accept affects the sample size required.
The lower the risk the auditor is willing to accept, the greater the samp... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.2A Examples of Factors Influencing Sample Size for Tests of Controls
The following are factors that the auditor may consider when determining the sample size for tests of controls. These factors, which need to be considered together, assume the auditor does n... | [
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-0.009... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.2B Examples of Factors Influencing Sample Size for Tests of Details
The following are factors that the auditor may consider when determining the sample size for tests of details. These factors, which need to be considered together, assume the auditor does not modify the ... | [
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-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## AUDIT EVIDENCE
- (ii) The more the auditor is relying on other substantive procedures (tests of details or substantive analytical procedures) to reduce to an acceptable level the detection risk regarding a particular population, the less assurance the auditor will require from sampling and, theref... | [
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0.06000663712620735,
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0.0004920412320643... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.3 Selection of Items for Testing
The auditor shall select items for the sample in such a way that each sampling unit in the population has a chance of selection.
With statistical sampling, sample items are selected in a way that each sampling unit has a known probability of being sele... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.9.3A Sample Selection Methods
Sample should be selected in such a manner that it is representative of the population from which the sample is being selected. It will necessitate that each item in the population has an equal chance of being included in the sample.
<!-- image -->
S... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
The population can be considered homogeneous, if say, trade receivables balances fall within the range of ` 55,000 to ` 2,25,000 and not in the range between ` 525 to ` 10,50,000.
- (ii) Stratified Sampling : This method involves dividing the whole population to be tested in a few separa... | [
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0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
1. In the above case, trade receivables balances may be divided into four groups as follows:-
2. (a) balances in excess of ` 10,00,000;
3. (b) balances in the range of ` 7,75,001 to ` 10,00,000;
4. (c) balances in the range of ` 5,50,001 to ` 7,75,000;
5. (d) balances in the range of ` 2,2... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
If in a population of branch sales, particular branch sales occur only as every 100th item and the sampling interval selected is 100. The result would be that either the auditor would have selected all or none of the sales of that particular branch.
If Accountant A is responsible to recor... | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
Take the first 200 sales invoices from the sales day book in the month of September , alternatively take any four blocks of 50 sales invoices. Therefore, once the first item in the block is selected, the rest of the block follows items to the completion.
There is a close similarity b... | [
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0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.10 Performing Audit Procedures
- (i) The auditor shall perform audit procedures, appropriate to the purpose, on each item selected.
- (ii) If the audit procedure is not applicable to the selected item, the auditor shall perform the procedure on a replacement item .
- (iii)
- selected i... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.11 Nature and Cause of Deviations and Misstatements
- (i) In analyzing the deviations and misstatements identified, the auditor may observe that many have a common feature , for example, type of transaction, location, product line or period of time.
- (ii) In such circumstances, th... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.12 Projecting Misstatements
- (i) The auditor is required to project misstatements for the population to obtain a broad view of the scale of misstatement but this projection may not be sufficient to determine an amount to be recorded.
- (ii) When a misstatement has been established as an ... | [
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0.038244083523750305,... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.13 Evaluating Results of Audit Sampling
The auditor shall evaluate-
- (a) The results of the sample; and
- (b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the population that has been tested.
Few Important terms to make the understanding ... | [
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0.018958084285259247,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 4
A company has stipulated a control through its automated software that interest @ 12% p.a. is charged in case of those customers who fail to make payment within a month of a sales transaction. The internal auditor of the company finds that during a certain ... | [
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0.019476162269711494,
-0.023... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 5
CA Sukesh is external auditor of an entity. He comes to know that there is also an internal auditor in the entity. However, he finds that internal auditor is not reporting directly to higher echelons of the management. CA Sukesh has also assessed risk of material misstate... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 6
An auditor, while conducting audit of an entity, has selected samples based upon his personal experience and knowledge . Later on, it turns out that selected samples were not representative and it has led to faulty selection of samples. The auditor contends that samples... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.1 Meaning of Audit Evidence- Specific Considerations for Selected Items
The auditor has to express his opinion on financial statements of an entity. For this, he has to examine the books of accounts. He needs evidence in support of transactions recorded in books of accounts. There a... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.2 Objective of the Auditor in respect of Specific Considerations for Selected Items
The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:
- (A) Existence and condition of inventory;
- (B) Completeness of litigation and claims involving the ent... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.3 Inventory
When inventory is material to the financial statements , the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
- (1) Attendance at physical inventory counting, unless impracticable, to:
2. (i) Evaluate manageme... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Attendance at Physical Inventory Counting Involves:
- (a) Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts;
- (b) Observing compliance with management's instructions and the performance of procedures for recording and controlling the ... | [
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-0.004643242806196213... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5 Matters Relevant in Planning Attendance at Physical Inventory Counting
Matters relevant in planning attendance at physical inventory counting include, for example:
- (a) Nature of inventory.
- (b) Stages of completion of work in progress.
- (c) The risks of material misstatement relate... | [
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0.017080157995224,
0.003415177809074521,... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.6 Physical Inventory Counting Conducted other than at the Date of the Financial Statements
If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the procedures required above, perform audit procedures... | [
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-0.0009814162040129304,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.7 If the auditor unable to Attend Physical Inventory Counting due to Unforeseen Circumstances
If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perf... | [
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0.021560270339250565,
-0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.8 Attendance at Physical Inventory Counting becomes impractical
If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of i... | [
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-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## For example
where inventory is held in a location that may pose threats to the safety of the auditor.
The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as explained in SA 200, t... | [
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0.008803093805909157,
-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.9 When inventory under the custody and control of a third party- What will the auditor do?
When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and co... | [
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0.028609836474061012,
0.003445730544626713,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## For Example
- Inspecting documentation regarding inventory held by third parties, for example, warehouse receipts.
- Requesting confirmation from other parties when inventory has been pledged as collateral.
- Attending, or arranging for another auditor to attend, the third... | [
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0.0636436939239502,
0.027669137343764305,
-0.006924980320036411,
0.024750059470534325,
-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
JK Exports Ltd is a manufacturer exporter having its own production capacity and also gets the job work done through various job workers. The auditor of JK Exports Ltd. Considers that inventory held with job workers is material to the financial statements. | [
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0.005859219003468752,
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0.0621144138276577,
0.01111264806240797,
0.017483865842223167,
0.027387777343392372,
-0.029707... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following:
- (a) Request confirma... | [
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0.016604656353592873,
0.06653858721256256,
0.011473216116428375,
0.006200606469064951,
0.006765193771570921,
-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.10 Litigation and Claims
The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:
- (a) Inquiry of management and, where applicable, others within th... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## For example
using information obtained through risk assessment procedures carried out as part of obtaining an understanding of the entity and its environment to assist the auditor to become aware of litigation and claims involving the entity.
Audit evidence obtained for purposes of identifying li... | [
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0.0719156339764595,
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0.01252096239477396,
-0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.11 If the Auditor Assesses a Risk of Material Misstatement regarding Litigation or Claims -Communication with the Entity's External Legal Counsel
If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed... | [
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0.01519039273262024,
-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 6
Parag India Ltd is a manufacturer of various FMCG (fast moving consumable goods) range of products. The company is having several cases of litigation pending in courts. The auditor wanted to identify litigation and claims resulting to risk of material misstatements. | [
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0.0009185743983834982,
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0.021837037056684494,
0.060656335204839706,
0.027689926326274872,
0.039949800819158554,
-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:
- (a) Inquiry of management and, where applicable, others within the entity, incl... | [
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0.0402383953332901,
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0.029800916090607643,
-0.0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 7
The audit procedures performed so far by auditor of a company indicate that there is a possibility that company has not disclosed all material litigation cases involving the company. Does such a situation warrant direct communication by auditor with external lawyer of the... | [
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-0.0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.13 Obtaining sufficient appropriate audit evidence regarding the presentation and disclosure of segment information
The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable ... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.14 Auditor's responsibility regarding the presentation and disclosure of segment information
The auditor's responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements taken as a whole. Accordingly, the auditor is not required to... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.15 Understanding of the Methods Used by Management
Depending on the circumstances, example of matters that may be relevant when obtaining an understanding of the methods used by management in determining segment information and whether such methods are likely to result in disclosure in accordanc... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.1 Introduction
SA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained.
It also includes the following generalisations applicable to audit evidence:
- Audit evidence is mo... | [
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... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.2 Scope of this SA
The Standard on Auditing (SA) 505 ' External Confirmations' deals with the auditor's use of external confirmation procedures to obtain audit evidence in accordance with the requirements of SA 500.
Accordingly, depending on the circumstances of the audit, audit evid... | [
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-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.3 Definition of External Confirmation:
External confirmation may be defined as an audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
<!-- image --> | [
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Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.4 Definitions of other terms:
Positive confirmation request -A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.
Negative confirmation... | [
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0.03234303370118141,
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0.024275565519928932,
0.00... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 7
During the financial year 2022-23, the auditor of Healthy and Wealthy Limited asked a Trade Receivable to respond directly to the auditor whether or not the amount they were required to pay to Healthy and Wealthy Limited was ` 1,23,000. That trade receivable confirmed to the audit... | [
0.01529561635106802,
-0.014102302491664886,
0.0031995747704058886,
0.05235128477215767,
-0.030059877783060074,
-0.009120689705014229,
0.030788881704211235,
0.015838751569390297,
-0.021627478301525116,
0.07056538015604019,
0.03697658330202103,
-0.004266990348696709,
0.03556452691555023,
0.0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The above-mentioned situation is an example of Positive Confirmation Request because in Positive Confirmation Request the party confirms the auditor of a company whether such party agrees or whether such party disagrees with the information for which the con... | [
0.02263769693672657,
-0.02030874975025654,
0.006672577001154423,
0.02714899182319641,
-0.013701303862035275,
-0.030448270961642265,
-0.010438241995871067,
0.018816649913787842,
-0.0024930553045123816,
0.08819004148244858,
0.032703183591365814,
-0.009520919062197208,
0.03830249235033989,
0.... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.5 External Confirmation Procedures adopted by the Auditor to Obtain Audit Evidence
When using external confirmation procedures, the auditor shall maintain control over external confirmation requests, including:
- (a) Determining the information to be confirmed or requested;
- (b) Selecti... | [
-0.007984017953276634,
-0.029102690517902374,
0.0071396916173398495,
-0.020181728526949883,
-0.022372571751475334,
0.00413954583927989,
-0.012218370102345943,
-0.008171788416802883,
-0.012805666774511337,
0.07985303550958633,
0.017997173592448235,
0.015051822178065777,
0.002672396367415786,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (a) Determining the Information to be Confirmed or Requested
External confirmation procedures frequently are performed to confirm or request information regarding account balances and their elements. They may also be used to confirm terms of agreements, contracts, or transactions b... | [
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-0.03198022022843361,
-0.00491172494366765,
0.009993943385779858,
-0.04510508105158806,
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0.02255372144281864,
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0.004864994436502457,
0.07339367270469666,
0.02753627859055996,
-0.013546908274292946,
-0.011656532995402813,
-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2. Factors to be considered by auditor when designing confirmation requests
Factors to consider when designing confirmation requests include:
- (i) The assertions being addressed.
- (ii) Specific identified risks of material misstatement, including fraud risks.
- (iii) The layout and presentatio... | [
0.00605796417221427,
-0.012621985748410225,
-0.0006360356346704066,
-0.007492211181670427,
-0.015220632776618004,
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0.03684751316905022,
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-0.039977140724658966,
0.07759919762611389,
0.0011975821107625961,
0.0026883722748607397,
0.03964395076036453,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3. Positive confirmation request
A positive external confirmation request asks the confirming party to reply to the auditor in all cases, either by indicating the confirming party's agreement with the given information, or by asking the confirming party to provide informati... | [
0.0019724771846085787,
-0.005959523841738701,
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0.025112763047218323,
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0.01964992843568325,
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0.07272898405790329,
0.021508052945137024,
-0.01686147414147854,
-0.0026378673501312733,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (d) Follow-Up on Confirmation Requests
The auditor may send an additional confirmation request when a reply to a previous request has not been received within a reasonable time.
For example , the auditor may, having re-verified the accuracy of the original address, send an additional or follow-up... | [
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0.012563507072627544,
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0.0014859660295769572,
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0.024636277928948402,
0.08122827112674713,
0.030979963019490242,
0.018736492842435837,
0.02998070791363716,
-... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.6 Management's refusal to allow the auditor to send a confirmation request -steps taken by the Auditor
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
- (a) Inquire as to management's reasons for the refusal, and seek audit evidence as to their va... | [
0.002539973706007004,
-0.027110807597637177,
-0.013655257411301136,
0.017198551446199417,
0.0034354033414274454,
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0.023306233808398247,
-0.01819806732237339,
0.12437795102596283,
0.015309065580368042,
-0.0031687181908637285,
0.027716249227523804,... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.6(a) Reasonableness of Management's Refusal
A refusal by management to allow the auditor to send a confirmation request is a limitation on the audit evidence the auditor may wish to obtain. The auditor is therefore required to inquire as to the reasons for the limitation.
A common... | [
0.01536562666296959,
-0.017711423337459564,
-0.017083225771784782,
0.02169133722782135,
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0.010482698678970337,
-0.003289018990471959,
0.006259360816329718,
-0.024879472330212593,
0.10266105085611343,
0.01902206800878048,
-0.016892679035663605,
0.004274867475032806,
-0... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.6(c) Alternative Audit Procedures
Examples of alternative audit procedures the auditor may perform include:
- For accounts receivable balances - examining specific subsequent cash receipts, shipping documentation, and sales near the period-end.
- For accounts payable balances - examinin... | [
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-0.016694113612174988,
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0.011109469458460808,
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0.00018407724564895034,
0.011487455107271671,
0.08990167081356049,
0.03170675039291382,
0.03462150692939758,
0.005595690105110407,
... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 8
While conducting the audit of AB Ltd, the auditor K of KLM and Associates, Chartered Accountants observes that there are large number of Trade payables and receivables standing in the books of accounts as on 31 st March. The auditor wanted to send confirmation request... | [
0.024217601865530014,
-0.03252182900905609,
0.009579653851687908,
0.03070811741054058,
-0.01316074002534151,
-0.031187046319246292,
0.019324280321598053,
-0.0010504862293601036,
-0.00613194378092885,
0.09888403862714767,
0.03440463915467262,
0.001341333263553679,
0.047317855060100555,
0.00... |
Inter_P5_Audit_Mod1_Chapter_4_Audit_Evidence.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
- (a) Inquire as to management's reasons for the refusal, and seek audit evidence as to their validity and reasonableness;
- (b) Evaluate the implications of management's refusal on the auditor... | [
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0.019017502665519714,
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0.006889929994940758,
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0.11977509409189224,
0.014873087406158447,
-0.007786192465573549,
0.032586514949798584,
... |
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