AUDIT PROCESS AND EVIDENCE

Lecture 3 : Audit process and evidence


Terminology and explanations:
 Auditors must design their audit so as to have a ‘’reasonable assurance that the FS
taken as a whole are free of material misstatement whether caused by fraud or
error’’
 What is the reasonable assurance? NOT easy to define.
 Limitations:
 Not a concept in UK either in companies act, or in case law
 Does not appear in auditing standards
 Level of confidence that auditors, by exercising professional skill and care, are
expected to attain from the audit that the FS are not materially misstated.
 Embodies professional judgment, objectivity, integrity scepticism and whilst
need to follow professional standards and procedures, there is more to this
than just process.


Materiality:
 The purpose of an audit is to enhance the degree of confidence of intended users in
the financial statements. This is achieved by the expression of an opinion by the
auditor on whether the financial statements are prepared in all material respects. In
accordance with an applicable financial reporting framework
 Misstatements including omissions are considered to be material if they (individually
or in aggregate) could reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements
 Judgements about materiality are made in light of surrounding circumstances, and
are affected by the size or nature of a misstatement, or a combination of both
 Judgements about matters that are material to users of the financial statements are
based on a consideration of the common financial information needs of users as a
group.
 The term materiality needs to be understood in the context of users of the financial
statements as a group. It is also helpful to identify some characteristics that auditors
may assume the users process.
 Have a reasonable knowledge of business and economic activities and
accounting and also study the information in the FS with reasonable diligence
 Understand that FS are prepared presented and audited to levels of
materiality
 Recognise the uncertainties inherent in the measurement of FS amounts
based on the use of estimates, judgement and the consideration of future
events
 Make reasonable economic decisions on the basis of the information in FS.

,  Characteristics of Materiality:
 Deciding what is and what is not material in any given circumstance is a
matter of professional judgement.
 An item may be material by virtue of its size or its nature
 Materiality needs to be considered at both FS level and at the level of
individual account balances and other FS disclosures.




What is Internal Control?

 All companies should have controls built into their system to try to prevent, detect
or correct material misstatements. (more in lecture 6)
 Auditors test how effective these controls are. They look for evidence that they are
applied year round
 Examples of control activities:
 Segregation (division) of duties.
 Physical control(safeguarding assets/passwords)
 Account reconciliations
 authorisation
 id the auditor thinks controls are effective, they can rely on these-this reduces the
amount of the ’’substantive’’ testing needed
 also need to check the balances in FS – may do this by substantive testing




Overview of the Audit Process:
 the audit process comprises a series of logical steps, each step has a specific
objective or purpose and is performed using appropriate audit procedures
 step 4 of the audit process: ‘’Gain an understanding of the client, its activities,
circumstances and financial affairs. Plan the Audit’’.
 The objective of this step is to ensure the auditor gains an understanding of:
 Events, transactions and practises of the auditee which may have an impact
on the FS
 How the events and transactions are reflected in the FS and whether based
on the preliminary analysis of the FS anything looks ‘’wrong’’.