AUDITING IV 2013
Audit Evidence
-----------------------------------------------------------------------------------------------------------------Dana Josset (CA) SA, © University of the Witwatersrand School of Accountancy
Lecture Outline The following will be addressed - Audit Evidence in relation to:
i. Service Organisations
ii. External Confirmations
iii. Bank Confirmations
iv. Litigation & claims
These need to be understood and considered in all aspects of the audit from audit planning to concluding & reporting
References
ISA 402 – Audit considerations relating to an entity using a service organisation
ISA 505 - External Confirmations
SAAPS 1100 – Bank Confirmations
SAAPS 4 – Enquiries regarding litigation and claims ISA 501 (Par 9-11 & A17-A25)
3
(i) Service Organisations
Overview:
Concept of outsourcing
Service level agreement (SLA)
Auditors objectives & responsibility when auditing an entity using services of a services organisation
Effect on the audit / audit procedures / audit report
ISA 402
Service organisations - Outsourcing Auditor needs to understand / evaluate:
Significance Nature Transactions Processes Procedures / degree of interaction Controls Accounting records Financial reporting
Objectives of Auditor Obtain understanding of services provided
(ISA 315) Nature, significance, materiality…. Sources of information (ISA 402 - A1/A2)
Risks of material misstatement
Objectives of auditor Needs to consider:
SLA - What has been included in SLA
Effect on audit risk
Effect on Audit strategy / audit plan
Nature & extent of audit testing / procedures
If unable to obtain sufficient understanding:
Contact/visit service organisation
Use another auditor
Obtain a report (Report Type 1 or 2)
Responsibility of auditor Sufficiency & appropriateness of evidence
provided by report:
Competence/independence
Standards
Period of report
Relevance
Responding to the assessed risks:
Determine audit evidence Perform further procedures eg.?
Tests of controls Obtaining report – period/relevance… Appropriate tests Using another auditor
Fraud / Non-compliance with laws & regulations
Audit reporting
Opinion
Reference to other auditor
ii) External Confirmations Written response obtained directly from third
party, in paper or electronic format, that may be used by auditor as an effective way of obtaining sufficient appropriate audit evidence in relation to client’s account balances, contracts, terms of agreement or specific arrangements with a third party.
ISA 505
Examples?
Design of the confirmation request – based on?
Types of Requests? Negative Positive
Process of sending confirmation request – Management involvement Concerns (eg.electronic)?
Responses to Request Consider Relationship to entity Exceptions No response or process cannot be performed?
Debtors Circularisation
Objective
Selecting debtors for process Considerations? (materiality, risks, population,
CAATS…)
Deciding on the type of confirmation
Considerations audit risks nature of balances errors expected nature of respondents….
Negative/positive/combination more likely for?
Practical considerations
Timing
Roll-forwards
Responses Professional scepticism - low/no response… Exceptions
iii) Bank Confirmations Standardised Bank Confirmation letter-
Appendix to SAAPS 1100.
The confirmation process Authority Timing…
The importance of the use of bank confirmations extends beyond the verification of the actual cash balance/s
Inclusions in Bank confirmation:
a) Interest paid and received b) Overdraft facilities c) Authorised signatories d) Pledged / ceded balances e) Contingent liabilities f) Forward Contracts g) Banks a/c’s closed during yearh) Completeness of bank accounts
NB. How do these aspects assist in obtaining audit evidence?
iv) Litigation and claims
Audit procedures may include sending an attorney’s representation letter to the client’s lawyers/ legal advisors, to obtain confirmation of any pending litigation and claims, estimates of liabilities, likelihood that liabilities will realise and
costs associated with litigation.
SAAPS 4 Appendix - illustrative Attorney’s representation letter
The Confirmation process Refusals?
Use of an attorney’s representation letter Audit evidence in regard to:
All litigation and claims Adequacy of accounting treatment Reasonableness of managements provisions
and estimated amounts Disclosure Legal costs
Other substantive audit procedures performed in regard to litigation & claims…
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