In the past lectures we have been learning the early steps in the time structure of an audit:
• Accepting the appointment
• Planning, recording, controlling the audit
• Evaluation internal controls
• Testing the controls
By this stage, the auditor will have made a decision on the general approach to be taken to the audit work. If the controls systems are effective and operating as laid down, the amount of verification work will be reduced.
If the controls are weak or are not operating effectively, a high level of verification work will be performed. It is this verification work that we are dealing with in this and the next few lectures.
To verify means to establish the truth of something. This audit work involves the audit in gathering evidence this will lead to a conclusion as to whether classes of transactions, balances and disclosures reflected in the client’s financial statements are properly stated (true and fair). We have already discussed in detail the general audit verification principles; here we will have a brief over view of those.
Audit Verification Techniques:
As we have already discussed in the previous lectures that at the verification stage of the audit, the auditor is typically presented with a set of draft financial statements prepared by the client. The role of the auditor is to generate evidence to allow a conclusion to be reached as to whether the information contained in these financial statements, and the way the information is presented and disclosed, give a true and fair view.
We already know that audit evidences are generated by the auditor performing audit tests. Here, in verification work, the auditor will use substantive testing procedures, designed to give evidence relating to the figures in the financial statements, rather than control test, dealing with the systems that produced those figures. However, the testing procedures available to the auditor here are the same as those we saw earlier. As a reminder, audit-testing procedures available to the auditor are:
1. Inspection
This covers the physical review or examination of records, documents and tangible assets. An example in substantive testing is examining purchase invoices to ensure that they have been properly recorded and analyzed in the financial statements.
2. Observation
This procedure is mainly applicable to tests of control, but may also be used in substantive testing, such as the auditor observing the client's inventory count to gain evidence that the inventory figure in the financial statements had been arrived at accurately.
3. Enquiry
Seeking relevant information from knowledgeable persons inside or outside the enterprise. An example in substantive testing is asking management for an explanation as to why a receivable has, or has not, been treated as bad.
4. Computation
Checking the arithmetical accuracy of records or performing independent calculations, for example computing or re-computing the depreciation expense for the year.
5. Analytical procedures
You should note that these procedures are mainly used in substantive testing rather than as a test of controls. They may help the auditor to understand relationships between figures in the financial statements. This is sometimes referred to as the business approach to auditing.
Choice of Verification Techniques
There are no specific rules that exist as to the type(s) of techniques that the auditor should use in a given set of circumstances. This is principally a matter of audit judgment and the nature of the audit objective(s). The auditor has to look at each individual item in its own right, identify the audit objective(s) for that particular item and then decide the most reliable audit evidence available. The circumstances and evidence available will affect the type of technique(s) he uses.
Audit Objectives and Financial Statement Assertions
Audit Objectives and Financial Statement Assertions
As just stated the type(s) of technique(s) used depend on the audit objectives that the auditor is seeking to achieve. The general objective to be achieved by audit verification work is to establish whether the financial statements present a true and fair view. We can identify a number of more detailed objectives which underlie this overall objective. These more detailed objectives allow the auditor to design a series of substantive test on each audit area (inventory, receivables, etc) which will build up the overall bank of evidence necessary to support the overall audit opinion. In carrying out substantive audit tests (verification work) the auditor will be looking for evidence on different assertions at the financial statements level.
