Chapter 7 • Audit planning

Audit planning and • Audit documentation

documentation

B P P L E A R N IN G M E D IA
 Syllabus learning outcomes 1

• Identify and explain the need for, and importance of, planning an
audit.
• Identify and describe the contents of the overall audit strategy and
audit plan.
• Explain and describe the relationship between the overall audit
strategy and the audit plan.
• Explain the difference between interim and final audit.
• Describe the purpose of an interim audit, and the procedures likely to
be adopted at this stage in the audit.

B P P L E A R N IN G M E D IA
 Syllabus learning outcomes 2

• Describe the impact of the work performed during the interim audit on
the final audit.
• Explain the need for, and the importance of, audit documentation.
• Describe the form and contents of working papers and supporting
documentation.
• Explain the procedures to ensure safe custody and retention of
working papers.

B P P L E A R N IN G M E D IA
 Overview

Audit planning and

documentation

The need for planning Audit documentation

The audit strategy and

Interim and final audit
the audit plan

B P P L E A R N IN G M E D IA
 Chronology of an audit

B P P L E A R N IN G M E D IA
 Audit planning 1

• ISA 300 Planning an audit of financial statements

• Why does an audit need to be planned?

So that the audit can be carried out in an effective manner.

• Let's look at the objectives of audit planning…

B P P L E A R N IN G M E D IA
 Audit planning 2

Audit planning:
• Helps the auditor devote appropriate attention to important areas of
the audit
• Helps the auditor identify and resolve potential problems on a timely
basis
• Helps the auditor properly organise and manage the audit so it is
performed in an effective manner
• Assists in the selection of appropriate team members and assignment
of work to them
• Facilitates the direction, supervision and review of work
• Assists in co-ordination of work done by auditors of components and
experts

B P P L E A R N IN G M E D IA
 Tackling the exam

• You need to learn and understand the reasons why auditors have
to plan the audit because you could be examined on this in the
exam.
• This could come up in either a multiple choice question linked to a
mini-scenario in Section A or as a requirement in a Section B
question (either in a 20-mark or a 30-mark question).

B P P L E A R N IN G M E D IA
 Audit planning 3

There are two key planning documents that need to be prepared at the
planning stage of the audit:

• Audit strategy

• Audit plan

We will look at each of these in more detail.

B P P L E A R N IN G M E D IA
 Audit planning 4

— General strategy
— Guidance for development of
Audit strategy audit plan

— Instructions to team
— Sets out the audit procedures
Audit plan

B P P L E A R N IN G M E D IA
 Audit planning 5

Audit strategy
High level document which sets the scope, timing and direction of the
audit and guides the development of the audit plan.
The overall audit strategy will:
• Identify the characteristics of the engagement that define its scope
• Ascertain the reporting objectives, to determine the timing of the audit
and nature of communications required
• Consider significant factors in directing the team's efforts
• Consider results of preliminary engagement activities and knowledge
gained on other engagements
• Ascertain nature, timing and extent of resources necessary
Let's look at each of these elements in turn.

B P P L E A R N IN G M E D IA
 Audit planning 6

Characteristics of the engagement

• Financial reporting framework
• Industry-specific reporting requirements
• Expected audit coverage
• Nature of business segments
• Availability of internal audit work
• Use of service organisations
• Effect of IT on audit procedures
• Availability of client personnel and data

B P P L E A R N IN G M E D IA
 Audit planning 7

Reporting objectives, timing of audit and nature of communications

• Entity's timetable for reporting
• Organisation of meetings with management and those charged with
governance
• Discussions with management and those charged with governance
• Expected communications with third parties

B P P L E A R N IN G M E D IA
 Audit planning 8

Significant factors, preliminary engagement activities and

knowledge gained on other engagements
• Determination of materiality
• Areas identified as having higher risk of material misstatement
• Results of previous audits
• Need to maintain professional scepticism
• Evidence of management's commitment to design, implementation
and maintenance of sound internal control

B P P L E A R N IN G M E D IA
 Audit planning 9

Significant factors, preliminary engagement activities and

knowledge gained on other engagements (continued)
• Volume of transactions
• Significant business developments
• Significant industry developments
• Significant changes in financial reporting framework
• Other significant recent developments

B P P L E A R N IN G M E D IA
 Audit planning 10

Nature, timing and extent of resources

• Selection of engagement team
• Assignment of work to team members
• Engagement budgeting

B P P L E A R N IN G M E D IA
 Audit planning 11

Consideration of disclosures
Further application guidance was added to ISA 300 in 2015, to highlight
the need for auditors to consider financial statement disclosures at the
planning stage. Considering disclosures early in the audit helps auditors
to identify:
• Changes in the entity’s environment, financial condition or activities
• Changes in the applicable financial reporting framework
• The need to involve an auditor’s expert (eg for disclosures related to
pension)
• The need to discuss matters with those charged with management
(eg changes in the entity’s environment or issues regarding the quality
of the disclosures, as covered under ISA 260)

B P P L E A R N IN G M E D IA
 Audit planning 12

Audit plan
The audit plan converts the audit strategy into a more detailed plan.
The audit plan includes the nature, timing and extent of audit procedures
to be performance by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably
low level.

B P P L E A R N IN G M E D IA
 Audit planning 13

What should the audit plan include?

• A description of the nature, timing and extent of planned risk
assessment procedures
• A description of the nature, timing and extent of planned further audit
procedures at the assertion level
• Other planned audit procedures required to be carried out for the
engagement to comply with ISAs

B P P L E A R N IN G M E D IA
 Audit planning 14

Examples of items included in the audit plan could include

• Materiality and performance materiality figures
• Audit procedures for each account area (eg non-current assets,
inventory, receivables etc)
• Timetable of planned audit work
• Allocation of audit work to specific team members

B P P L E A R N IN G M E D IA
 Audit planning 15

Documenting changes
A very important point to note is that the audit strategy and audit plan
must be updated and changed as necessary during the course of the
audit.
For example, materiality for the financial statements as a whole might
need to be amended as a result of new information. Therefore, any
changes to materiality must be documented accordingly.
As well as documenting the changes themselves, the reasons for any
changes must also be documented.

B P P L E A R N IN G M E D IA
 Interim vs final audit 1

• The external audit is rarely carried out during one visit. It is very
common to carry out an interim audit followed by a final audit.
• The interim audit usually occurs part way during the period being
audited.
• The purpose of the interim audit is to carry out procedures that would
be difficult to perform at the year end because of time constraints.
• The final audit usually happens after the period end.
• So what happens during each of these visits?

B P P L E A R N IN G M E D IA
 Interim vs final audit 2

Interim audit
• Risk assessment
• Documentation of internal control
• Tests of controls
• Some substantive audit procedures
• Identify issues that may have an impact on the amount and type of
work which is required at the final audit

B P P L E A R N IN G M E D IA
 Interim vs final audit 3

Final audit
• Substantive procedures
• Third party confirmations
• Analytical procedures
• Subsequent events review
• Going concern review
• Obtaining written representations
• Agreeing the financial statements to the accounting records
Final audit concludes with the auditor issuing a report which contains the
auditor's opinion expressed on the financial statements.

B P P L E A R N IN G M E D IA
 Interim vs final audit 4

Planning visit
1 January 31 December

Interim audit Final audit

B P P L E A R N IN G M E D IA
 Question:

Auditors usually carry out their audit work at different stages known
as the interim audit and the final audit.
Which of the following statements, if any, is/are correct?
1 Carrying out tests of control on the company's sales day
books would normally be undertaken during an interim audit.
2 Review of aged receivables ledger to identify balances
requiring write down or allowance would normally be
undertaken during a final audit.
A Neither 1 nor 2
B Both 1 and 2
C 1 only
D 2 only

B P P L E A R N IN G M E D IA
 Question:

[Please refer to slide 344 for the question scenario]

Required
(d)Explain the difference between an interim and a final audit.
(3 marks)
(e)Explain the procedures which are likely to be performed during an
interim audit of Milla and the impact which it would have on the
final audit. (4 marks)

B P P L E A R N IN G M E D IA
 Audit documentation 1

• Audit documentation is the record of audit procedures performed,

relevant audit evidence obtained and conclusions reached.
• Audit documentation may also be referred to as working papers or
workpapers.
• ISA 230 Audit documentation states that audit documentation must be
prepared on a timely basis.

B P P L E A R N IN G M E D IA
 Audit documentation 2

Objectives of audit documentation

• It provides evidence of the auditor's basis for a conclusion about the
achievement of the overall objective.
• It provides evidence that the audit was planned and performed in
accordance with ISAs and other legal and regulatory requirements.
• It assists the engagement team to plan and perform the audit.
• It assists team members responsible for supervision to direct,
supervise and review audit work.
• It enables the team to be accountable for its work.
• It allows a record of matters of continuing significance to be retained.
• It enables the conduct of quality control reviews and inspections (both
internal and external).

B P P L E A R N IN G M E D IA
 Audit documentation 3

How much needs to be documented?

Working papers need to be sufficiently complete and detailed to provide
an overall understanding of the audit.
ISA 230 provides the following general rule for the extent of working
papers required:
What would be necessary to provide an experienced auditor, with no
previous connection with the audit, with an understanding of the work
performed, the results of audit procedures, audit evidence obtained,
significant matters arising during the audit, and conclusions reached.

B P P L E A R N IN G M E D IA
 Audit documentation 4

Factors affecting the form and content of working papers:

• Size and complexity of the audit
• Nature of audit procedures to be performed
• Identified risk of material misstatement
• Significance of audit evidence obtained
• Nature and extent of exceptions identified
• Need to document a conclusion
• Audit methodology and tools used

B P P L E A R N IN G M E D IA
 Question: Audit working papers

Try and think of as many different examples of audit working papers

as you can.
Remember that working papers will include documents produced by
the auditor, the client and third parties, and they will include
documents from the planning stage of the audit as well as documents
produced during the final audit.

B P P L E A R N IN G M E D IA
 Audit documentation 5

B P P L E A R N IN G M E D IA
 Audit documentation 6

• For recurring audits, working papers may be split between

permanent audit files and current audit files.
• Permanent audit files contain information of continuing importance
to the audit.
• Current audit files contain information of relevance to the current
year's audit.

B P P L E A R N IN G M E D IA
 Audit documentation 7

Permanent audit files

• Engagement letters
• New client questionnaire
• The memorandum and articles
• Other legal documents such as prospectuses, leases, sales
agreement
• Details of the history of the client's business
• Board minutes of continuing relevance
• Previous years' signed accounts, analytical review and reports to
management
• Accounting systems notes, previous years' control questionnaires

B P P L E A R N IN G M E D IA
 Audit documentation 8

Current audit files

• Financial statements
• Accounts checklists
• Management accounts details
• Reconciliations of management and financial accounts
• A summary of unadjusted errors
• Report to partner including details of significant events and errors
• Review notes
• Audit planning memorandum
• Time budgets and summaries
• Representation letter

B P P L E A R N IN G M E D IA
 Audit documentation 9

Current audit files (continued)

• Report to management
• Notes of board minutes
• Communications with third parties such as experts or other auditors

B P P L E A R N IN G M E D IA
 Audit documentation 10

Current audit files must also contain working papers covering each audit
area (eg inventory, cash, revenue etc) and these should include:
• A lead schedule including details of the figures to be included in the
financial statements
• Problems encountered and conclusions drawn
• Audit programmes
• Risk assessments
• Sampling plans
• Analytical review
• Details of substantive tests and tests of control

B P P L E A R N IN G M E D IA
 Question: Robinson's Shoes Co

You are the audit senior responsible for the audit work on inventory in
the audit of Robinson's Shoes Co, a shoe retailer which runs seven
shops.
The final audit visit is almost over and you must submit your audit
working papers for review by your manager.
What sort of audit working papers might your file contain?

B P P L E A R N IN G M E D IA
 Audit documentation 11

Standardised audit working papers

Many audit firms use standardised working papers such as checklists
and specimen letters.

Advantages Disadvantages
Increased efficiency Mechanical approach
Less risk of overlooking key Audit judgement may be
procedures compromised

B P P L E A R N IN G M E D IA
 Audit documentation 12

Most firms now use automated working paper packages which make
documentation of audit work easier.
Advantages
• The risk of errors is reduced.
• The working papers will be neater and easier to review.
• The time saved will be substantial as adjustments can be made easily
to all working papers, including those summarising the key analytical
information.
• Standard forms do not have to be carried to audit locations.
• Audit working papers can be transmitted for review easily.

B P P L E A R N IN G M E D IA
 Audit documentation 13

Safe custody and retention of working papers

• Audit working papers belong to the audit firm, not the client.
• But how long should they be kept for?
• This is a matter of judgement but the ACCA recommends a minimum
of seven years.
• Remember the ethical principle of confidentiality?
• This applies to audit working papers. They shouldn't be disclosed to
the client if disclosure would undermine the independence or validity
of the audit process.
• Information should not be disclosed to third parties without the
permission of the client.

B P P L E A R N IN G M E D IA
 Tackling the exam

• Audit documentation is most likely to be tested as a knowledge-

based question in the exam, either in section A or section B.
• Although audit documentation is not a big part of the F8 syllabus,
it is relatively straightforward and presents you with a few easy
marks – they could be the difference between a pass and a fail.

B P P L E A R N IN G M E D IA
Chapter 8 • Audit evidence

Introduction to audit • Financial statement assertions

evidence

B P P L E A R N IN G M E D IA
 Syllabus learning outcomes

• Explain the assertions contained in the financial statements about:

classes of transactions and events and related disclosures; account
balances and related disclosures at the period end.
• Describe audit procedures to obtain audit evidence, including
inspection, observation, external confirmation, recalculation,
re-performance, analytical procedures and enquiry.
• Discuss the quality and quantity of audit evidence.
• Discuss the relevance and reliability of audit evidence.

B P P L E A R N IN G M E D IA
 Overview

Audit evidence Quality of evidence

Financial statement Procedures for

assertions obtaining evidence

Use of assertions in Tests of controls and

obtaining audit substantive
evidence procedures

B P P L E A R N IN G M E D IA
 Overview continued
Tests of controls and
substantive
procedures

Analytical procedures Inspection Recalculation

Confirmation Observation

Analytical procedures Inquiry Re-performance

B P P L E A R N IN G M E D IA
 Chronology of an audit

B P P L E A R N IN G M E D IA
 Audit evidence 1

• Audit evidence is all of the information used by the auditor in arriving

at the conclusions on which the auditor's opinion is based.
• ISA 500 Audit evidence
• Auditors need to design and perform audit procedures that are
appropriate in the circumstances for the purposes of obtaining
sufficient appropriate audit evidence.
• Two key attributes of audit evidence:
— Sufficiency
— Appropriateness
• Let's look at these attributes in more detail.

B P P L E A R N IN G M E D IA
 Audit evidence 2

Sufficient audit evidence

The sufficiency of audit evidence is the measure of the quantity of audit
evidence.
The quantity of audit evidence required is affected by the auditor's
assessment of the risks of material misstatement and also by the quality
of such audit evidence (ie the appropriateness of the evidence).

B P P L E A R N IN G M E D IA
 Audit evidence 3

Appropriate audit evidence

The appropriateness of audit evidence is the measure of the quality of
it, that is, its relevance and its reliability in providing support for the
conclusions on which the auditor's opinion is based.
Relevance deals with the logical connection with the purpose of the audit
procedure and the assertion under consideration.
Reliability is influenced by the source of audit evidence and the
circumstances under which it is obtained.

B P P L E A R N IN G M E D IA
 Audit evidence 4

This table considers the reliability of various sources of audit evidence:

QUALITY OF EVIDENCE
External Audit evidence from external sources is more reliable than
that obtained from the entity's records because it is from an
independent source.
Auditor Evidence obtained directly by auditors is more reliable than
that obtained indirectly or by inference.
Entity Evidence obtained from the entity's records is more reliable
when the related control system operates effectively.
Written Evidence in the form of documents (paper or electronic) or
written representations are more reliable than oral
representations, since oral representations can be retracted.
Originals Original documents are more reliable than photocopies or
families, which can easily be altered by the client.

B P P L E A R N IN G M E D IA
 Question: Audit evidence

Consider the following pieces of audit evidence. What do you think

about them? Do you think they are good sources of audit evidence or
not (sufficient and appropriate)?
• A verbal affirmation from the Finance Director that the company is
a going concern.
• A written statement from a major customer that it owes the
company a material amount at the year-end.
• A year-end bank reconciliation prepared by a junior member of the
client's staff which has not been reviewed by anyone.
• A verbal statement from the Financial Controller that all related
parties have been disclosed in the draft financial statements.

B P P L E A R N IN G M E D IA
 Question:
Balotelli Beach Hotel Co (Balotelli) operates a number of hotels
providing accommodation, leisure facilities and restaurants.
You are an audit senior of Mario & Co and are currently conducting
the audit of Balotelli for the year ended 31 December 20X4. During
the course of the audit a number of events and issues have been
brought to your attention:
Food poisoning
Balotelli’s directors received correspondence in November 20X4 from
a group of customers who attended a wedding at one of the
company’s hotels. They have alleged that they suffered severe food
poisoning from food eaten at the hotel and are claiming substantial
damages. Management has stated that based on discussions with
their lawyers, the claim is unlikely to be successful.

B P P L E A R N IN G M E D IA
 Question:
Required
In relation to the claim regarding the alleged food poisoning, which of
the following audit procedures would provide the auditor with the
MOST reliable audit evidence regarding the likely outcome of the
litigation?
A Request a written representation from management supporting
their assertion that the claim will not be successful
B Send an enquiry letter to the lawyers of Balotelli to obtain their
view as to the probability of the claim being successful
C Review the correspondence from the customers claiming food
poisoning to assess whether Balotelli has a present obligation as a
result of a past event
D Review board minutes to understand why the directors

B P P L E A R N IN G M E D IA
 Audit evidence 5

So what sources of evidence could an auditor use?

• Information prepared by a management's expert

• Information produced by the entity
• Auditor-generated evidence
• Prior audits
• Evidence from external third parties

Let's look at the first two of these in more detail…

B P P L E A R N IN G M E D IA
 Audit evidence 6

Management's expert
A management's expert is an individual or organisation possessing
expertise in a field other than auditing or accounting, whose work is used
by the entity to assist in the preparation of the financial statements.

Examples of management's experts

• Actuary (pension calculations)
• Lawyer (litigation claims)
• Surveyor (property valuations)

B P P L E A R N IN G M E D IA
 Audit evidence 7

If information produced by a management's expert is used as audit

evidence, the auditor must:
• Evaluate the competence, capabilities and objectivity of the expert
• Obtain an understanding of the work done
• Evaluate the appropriateness of the work done as audit evidence

B P P L E A R N IN G M E D IA
 Audit evidence 8

Information produced by the entity

Obviously during an audit, the auditors will have to use information
produced by the entity.
They need to evaluate whether it is sufficiently reliable for the purposes
of the audit. This involves getting evidence about its accuracy and
completeness.
This could be through signature by a senior member of staff to show that
a piece of information has been reviewed, for example.
They also need to evaluate whether it is sufficiently precise and accurate.
This could mean recasting the draft notes to the financial statements, for
example.

B P P L E A R N IN G M E D IA
 Exam link

• You could be asked to explain what a management's expert is and

provide examples, as a knowledge-based question.
• In a scenario question, a management's expert could be used by
an entity and you could be asked what factors you need to
consider before relying on the work done by that expert.

B P P L E A R N IN G M E D IA
 Question:

Vieri Motor Cars Co (Vieri) manufactures a range of motor cars and

its year end is 30 June 20X5. You are the audit supervisor of Rossi &
Co and are currently preparing the audit programmes for the year-
end audit of Vieri. You have had a meeting with your audit manager
and he has notified you of the following issue identified during the
audit risk assessment process:
Land and buildings
Vieri has a policy of revaluing land and buildings, this is undertaken
on a rolling basis over a five-year period. During the year Vieri
requested an external independent valuer to revalue a number of
properties, including a warehouse purchased in January 20X5.
Depreciation is charged on a pro rata basis.

B P P L E A R N IN G M E D IA
 Question:

Required
(a) Explain the factors Rossi & Co should consider when placing
reliance on the work of the independent valuer. (5 marks)

B P P L E A R N IN G M E D IA
 Approach:

• This question is worth 5 marks so you have just ten minutes to

answer it.
• Assume that there is one mark for each well explained point that
you make.
• Note the requirement to ‘Explain…' so a list of factors to consider
without sufficient explanation will not score very well.

B P P L E A R N IN G M E D IA
 Exam link

• We have introduced audit evidence and talked about the attributes

of good audit evidence.
• You are most likely to have to answer questions on audit evidence
in the context of a scenario and for a particular account area (non-
current assets, receivables, payables etc). We look at these in
more detail later in the relevant chapters.
• However, you could be examined on the knowledge-based
aspects of this topic in a multiple choice question so it is important
that you understand what 'sufficient' and 'appropriate' mean in
relation to audit evidence and can identify which examples of
evidence are more reliable than others.

B P P L E A R N IN G M E D IA
 Financial statement assertions 1

• Audit evidence is required to support financial statement

assertions.
• But what are financial statement assertions?

Financial statement assertions

The representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to consider
the different types of potential misstatements that may occur.

B P P L E A R N IN G M E D IA
 Financial statement assertions 2

ISA 315 requires that the auditor must use assertions for:
• Classes of transactions and events (ie statement of profit or loss) and
related disclosures
• Account balances at the period end (ie statement of financial position)
and related disclosures

We will look at each of these categories in turn.

B P P L E A R N IN G M E D IA
 Financial statement assertions 3

Classes of transactions and events and related disclosures

Financial statement assertion Explanation

Occurrence Transactions and events that have been

recorded or disclosed have occurred and
pertain to the entity.
Completeness All transactions and events that should
have been recorded have been recorded,
and all related disclosures that should have
been included in the financial statements
have been included.
Accuracy Amounts and other data relating to
recorded transactions and events have
been recorded appropriately, and related
disclosures have been appropriately
measured and described.

B P P L E A R N IN G M E D IA
 Financial statement assertions 3 (cont'd)

Financial statement assertion Explanation

Cut-off Transactions and events have been

recorded in the correct reporting period.
Classification Transactions and events have been
recorded in the proper accounts.
Presentation Transactions and events are appropriately
aggregated or disaggregated and are
clearly described, and related disclosures
are relevant and understandable in the
context of the requirements of the
applicable financial reporting framework.

B P P L E A R N IN G M E D IA
 Financial statement assertions 4
Account balances at the period-end and related disclosures
Financial statement assertion Explanation

Existence Assets, liabilities and equity interests exist.

Rights and obligations The entity holds or controls the rights to

assets, and liabilities are the obligations of the
entity.
Completeness All assets, liabilities and equity interests that
should have been recorded have been
recorded, and all related disclosures that
should have been included in the financial
statements have been included.

B P P L E A R N IN G M E D IA
 Financial statement assertions 5
Account balances at the period-end and related disclosures (cont.)
Financial statement assertion Explanation
Accuracy, valuation and allocation Assets, liabilities and equity interests have been
included in the financial statements at appropriate
amounts and any resulting valuation or allocation
adjustments have been appropriately recorded, and
related disclosures have been appropriately
measured and described.
Classification Assets, liabilities and equity interests have been
recorded in the proper accounts.
Presentation Assets, liabilities and equity interests are
appropriately aggregated or disaggregated and
clearly described, and related disclosures are
relevant and understandable in the context of the
requirements of the applicable financial reporting
framework.

B P P L E A R N IN G M E D IA
 Tackling the exam

• Financial statement assertions are a key syllabus area – you must

learn them and understand what they mean.
• You could be asked for audit procedures relating to a particular
assertion (eg how would you test for the completeness of
payables?).
• Questions could be knowledge-based or scenario-based. They
can appear both in Section A and in Section B of the paper.
• You will probably get an audit evidence question on each paper!

B P P L E A R N IN G M E D IA
 Financial statement assertions 6

• We have talked about audit evidence and what makes good audit
evidence.
• We have linked audit evidence to the financial statement assertions.
• Now we need to understand how we get the audit evidence to
support the financial statement assertions, ie what procedures does
the auditor need to undertake to obtain audit evidence.

B P P L E A R N IN G M E D IA
 Financial statement assertions 7

First we need to understand the two types of test an auditor can carry
out:
• Tests of controls
• Substantive procedures

We briefly mentioned these earlier.

B P P L E A R N IN G M E D IA
 Financial statement assertions 8

Tests of controls are performed to obtain audit evidence about the

operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.

B P P L E A R N IN G M E D IA
 Financial statement assertions 9

Substantive procedures are audit procedures performed to detect

material misstatements at the assertion level and include tests of detail of
classes of transactions, account balances and disclosures, and
substantive analytical procedures.
Remember, substantive procedures must always be carried out for
material classes of transactions, account balances and disclosures.

B P P L E A R N IN G M E D IA
 Question:

Auditors are required to obtain sufficient appropriate audit evidence.

Tests of controls and substantive procedures can be used to obtain
such evidence.
Required:
Define a 'test of control' and a 'substantive procedure'. (2 marks)

B P P L E A R N IN G M E D IA
 Financial statement assertions 10

Here are the ways in which external auditors obtain audit evidence:
• INSPECTION
• OBSERVATION
• INQUIRY
• CONFIRMATION
• RECALCULATION
• REPERFORMANCE
• ANALYTICAL PROCEDURES

Let's look at each of these in a bit more detail…

B P P L E A R N IN G M E D IA
 Financial statement assertions 11

INSPECTION
Inspection can be applied to tangible assets and also to
documentation or records.

B P P L E A R N IN G M E D IA
 Financial statement assertions 12

INSPECTION OF TANGIBLE ASSETS

Inspection of tangible assets that are recorded in the accounting records
confirms existence, but does not necessarily confirm rights and
obligations or valuation.
Confirmation that assets seen are recorded in the accounting records
provides evidence of completeness.

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 Financial statement assertions 13

INSPECTION OF TANGIBLE ASSETS – Example

For a sample of assets recorded on the non-current assets register,
physically inspect these to confirm their existence.
For a sample of physical assets, trace these back to the non-current
assets register and accounting records to confirm completeness.

B P P L E A R N IN G M E D IA
 Financial statement assertions 14

INSPECTION OF DOCUMENTATION OR RECORDS

Inspection of documentation or records can involve both internal and
external records and includes records held in paper, electronic or other
forms.
This procedure provides evidence of varying reliability, depending on the
nature, source and effectiveness of controls over production (if internal).
Inspection of documentation or records can provide evidence of
existence, but not necessarily of ownership or value.

B P P L E A R N IN G M E D IA
 Financial statement assertions 15

INSPECTION OF DOCUMENTATION OR RECORDS – Example

Inspect the minutes of board meetings held during the year to verify the
authorisation of new property purchased during the period.

B P P L E A R N IN G M E D IA
 Financial statement assertions 16

OBSERVATION
Observation involves watching a procedure or process being performed.
However, it is of limited use since it only confirms that the procedure took
place when the auditor was watching, and because the act of being
observed could affect how the procedure or process was performed.

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 Financial statement assertions 17

OBSERVATION – Example
Observe staff carrying out the year-end inventory count to provide
evidence that counters are adhering to the inventory count instructions
issued to them.

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 Financial statement assertions 18

INQUIRY
Inquiry involves seeking information from client staff or external sources.
The strength of evidence from this type of procedure depends on the
knowledge and integrity of source of information.
Inquiry alone does not provide sufficient audit evidence to detect a
material misstatement at the assertion level nor is it sufficient to test the
operating effectiveness of controls.

B P P L E A R N IN G M E D IA
 Financial statement assertions 19

INQUIRY – Example
Make inquiries of management to ascertain how slow-moving and
obsolete items of inventory are identified.

B P P L E A R N IN G M E D IA
 Financial statement assertions 20

CONFIRMATION
Confirmation is the process of obtaining a representation of information
or of an existing condition directly from a third party eg confirmation from
bank of bank balances.

B P P L E A R N IN G M E D IA
 Financial statement assertions 21

CONFIRMATION – Example
For a sample of year-end receivable balances, obtain external
confirmation from the customers of the balance outstanding at the year-
end date to confirm the existence and rights and obligations of the year-
end receivables' figure.

B P P L E A R N IN G M E D IA
 Financial statement assertions 22

RECALCULATION
Recalculation involves checking the mathematical accuracy of
documents or records and can be undertaken through the use of IT.

B P P L E A R N IN G M E D IA
 Financial statement assertions 23

RECALCULATION – Example
Recalculate the amounts on the non-current assets register to confirm
the accuracy, valuation and allocation of the figures disclosed in the draft
financial statements.

B P P L E A R N IN G M E D IA
 Financial statement assertions 24

REPERFORMANCE
Reperformance is the auditor's independent execution of procedures or
controls that were originally performed as part of the entity's internal
control.

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 Financial statement assertions 25

REPERFORMANCE – Example
Reperform the year-end bank reconciliation to confirm the accuracy and
completeness of the year-end cash at bank figure in the draft financial
statements.

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 Financial statement assertions 26

ANALYTICAL PROCEDURES
Analytical procedures can be used as substantive tests.
They involve evaluating and comparing financial/non-financial data for
plausible relationships.
They also include the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.

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 Financial statement assertions 27

ANALYTICAL PROCEDURES – Example

Perform a proof-in-total of the depreciation charge for the period.
Compare this to the actual charge in the draft financial statements to
assess whether the charge appears accurate and complete.

B P P L E A R N IN G M E D IA
 Tackling the exam

• It is imperative that you understand the difference between tests

of controls and substantive procedures.
• The F8 examining team will test both your knowledge and
application skills here.
• The examining team has previously commented that students
often confuse these and lose marks in the exam as a result.
• We will look at a past exam question on audit evidence and
financial statement assertions in the next slide.

B P P L E A R N IN G M E D IA
 Question:

Required:
(i) Identify and explain FOUR financial statement assertions
relevant to account balances at the year end.
(ii) For each identified assertion, describe a substantive procedure
relevant to the audit of year-end inventory. (8 marks)

B P P L E A R N IN G M E D IA
 Exam link

• The key areas your revision should focus on are financial

statement assertions and the distinction between tests of controls
and substantive procedures.
• These key areas let students down time and time again and this
has been acknowledged by the examining team in their
comments. It is likely that she will test these weak areas on a
frequent basis.
• The best revision you can do is to practise as many past exam
questions and exam-standard questions on audit evidence as you
can.

B P P L E A R N IN G M E D IA