Audit Synopsis | Course Paper

Unlock access to all the studying documents.

View Full Document

ACCY 342- ESSAY CHAN CHUN KIT 4095492

Synopsis

As auditors such as external auditors, are expected to ensure that the financial reports are in

accordance with Australian Accounting Standards and the Corporations Act 2001 (Moroney,

Campbell & F Hamilton 2014, pp164-189). The statement on ASA 500 (4) “the objective of auditor

is to design and perform audit procedures in such way as to enable the auditor to obtain sufficient

appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s

opinion”. Audit evidence was established to provide guidance to this statement.

Audit evidence means the information used by the auditor in arriving at the conclusions on

which the auditor’s opinion is based (Ghandar & Tsahuridu 2012, pp358-362). Audit evidence

includes both information contained in the records underlying the financial report and other

information and plays an important role as part of audit strategy and procedures (Ghandar &

Tsahuridu 2012, pp358-362). ASA 200 provides that reasonable assurance obtained when the

auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk the

auditor expresses an inappropriate opinion when the financial report is materially misstated) to an

acceptably low level. There has been a profound shift regarding the nature of audit evidence, and

this causes limitation on the initially plan evidence collection procedure to be effective (Marris

2010). A study was conducted years ago which showed that 80% of audits failed due to poor audit

evidence (Beasley, Carcello, & Hermanson, 2001). This exposed the challenges that are faced

collecting evidence procedure initially plan may be jeopardized and dominated with issues that will

be discussed.

ACCY 342- ESSAY CHAN CHUN KIT 4095492

1. Explain and discuss the key issues external auditors need to consider when determining the

nature, timing and extent of the audit evidence collection procedures they initially plan to

undertake in a financial report audit.

The issue that will be addressed is what constitutes sufficient appropriate evidence?

Sufficiency appropriate evidence is a core concept in auditing represents the persuasiveness of

evidence that is the degree to which that evidence supports the audit opinion in financial report

(Ghandar & Tsahuridu 2012, pp358-362). Sufficiency is the measure of the quantity of audit

evidence and appropriateness is the measure of the quality of audit evidence, that is, its relevance

and its reliability (competence) in providing support for the conclusions on which the auditor’s

opinion is based. Competence or reliability is the degree to which evidence can be considered

believable or worthy of trust (Arens & Alvin 2010, pp140-141). The sufficiency and

appropriateness of audit evidence are interrelated as the quality of evidence gathered will affect the

quantity required (Arens & Alvin 2010, pp140-141).

Both of these should be taken into account when assessing risks and planning the audit

evidence gathering procedure to undertake in a financial report audit (IAASB 2004). The objective

of a financial report audit is for the auditor to express an opinion about whether the financial report

is prepared in all material respects in accordance with a financial reporting framework (ASA 200

para 11). Risk assessment phase involves gaining an understanding of the clients, identifying factors

that may impact the risk of misstatement in the financial report, performing a risk and materiality

assessment and developing an audit strategy (Fogarty, Graham & Schubert 2007). The risk of a

material misstatement is the risk that the financial report includes a significant error or fraud

(Moroney, Campbell & F Hamilton 2014, pp164-189). Audit risk is the risk that an audit expresses

an inappropriate audit opinion when a financial report is materially misstated. Audit risk affects the

quantity and quality of evidence gathered by an auditor during the risk response phase of audit

ACCY 342- ESSAY CHAN CHUN KIT 4095492

(Moroney, Campbell & F Hamilton 2014, pp164-189). The higher the risk of material misstatement,

the quality of the audit evidence should be greater. If the quality of the evidence is high, the amount

of audit evidence needed is less (Marris 2010). ASA 300 requires the auditor to conclude whether

sufficient appropriate audit evidence has been obtained. Whether sufficient appropriate audit

evidence has been obtained to reduce the audit risk to an acceptably low level, thereby enable the

auditor to draw reasonable conclusions on which to base the auditor’s opinion, is a matter of

professional judgement. A well planned audit therefore ensure that sufficient appropriate evidence is

gathered for those account at most risk of misstatement A study was done on 45 public companies

with audit deficiencies mainly consisting of fraudulent financial reporting with a few cases of

misappropriations of assets (Beasley, Carcello, & Hermanson, 2001). The results showed that 80%

(36 of the 45 cases) did not gather sufficient audit evidence. 18 of the 45 cases (40%) relied too

much on inquiry as the form of evidence. It went on to state that management representations were

one example where the auditor did not obtain sufficient appropriate evidence; they did not

corroborate responses by managers to inquiries (Beasley, Carcello, & Hermanson, 2001).

Additionally, draft contracts were examined as supporting documentation instead of looking at the

final executed one (Haron et.al 2004).

There is a direct relationship between the risk of misstatement and the extent of quality

evidence gathered when testing transactions and balances (Moroney, Campbell & F Hamilton 2014,

pp164-189). The risk of misstatement may exist at two levels, that is the overall financial report

level and the assertion level for classes of transaction, account balances, and disclosures (Ghandar

& Tsahuridu 2012, pp358-362). Risk of material misstatements at the overall financial report level

refer to risks of material misstatement that relate pervasively to the financial report as a whole and

potentially affect many assertions. Bragg asserts that the greater the risk of material misstatement,

the greater the extent of substantive procedures required to collect audit evidence (Leung &

Philomena 2011, p422). He also adds that the auditors judgment as to what constitutes sufficient

ACCY 342- ESSAY CHAN CHUN KIT 4095492

audit evidence is influenced by significance of the potential misstatements in the relevant assertion

and likelihood of its having material effect. The degree of risk of misstatement may be affected by

the nature of item, adequacy of internal controls, nature and size of business carried on by entity,

situations which may exert an unusual influence on managers and financial position of the entity

(Leung & Philomena 2011, p422). Evidence is considered to be more appropriate if it provides

confirmation about an assertion most at risk of misstatement. Assertions are representations made

by management that are embodied as attestation principles or components (Burke 2014). The five

financial statement assertions include existence, completeness, valuation, rights and obligation, and

presentations and disclosures (Burke 2014).

In addition, the reliability of the source and type of evidence has to be considered as key

issues external auditor need to consider. Types or nature of audit evidence will be required to

determine initial plan for external audit evidence collection procedures in a financial audit (Gay &