Auditing Assurance

Review Question:

5.7 Management assertions refer to a set of information provided by those charged with governance and management in the preparation of the financial statements. Auditors should use these assertions to assess the potential fault and misstatements, which may occur in order to take on respective audit procedures.

According to ASA 315 (ISA 315), there are three types of management assertions, which are classes of transactions, account balances, and presentation and disclosure. These assertions are defined in more details in ASA 315.A11 (ISA 315.A11):

• Assertions about classes of transactions and events for the period under audit:

1. Occurrence

2. Completeness

3. Accuracy

4. Cut-off

5. Classification

• Assertions about account balances at the period end

1. Existence

2. Rights and obligations

3. Completeness

4. Valuation and allocation

• Assertions about presentation and disclosure

1. Occurrence and rights and obligations

2. Completeness

3. Classification and understandability

4. Accuracy and valuation

Auditors can use these management assertions as a framework to form specific audit objectives in terms of each material account balance class of transactions or disclosure.

5.8 The existence of audit trail is to provide a complete history of any given financial transaction. It enables auditors to identify each process from the initiation all the way through to the finalization of the transaction. The audit trail consists of all accounting documents and records such as the receipt of the invoice and the purchase orders that are used to prepare the final financial reports.

As stated in the textbook, "the direction of the tracing can be modified". An auditor can choose to start the audit process by creating an audit trail from the either the beginning or the completion of the transaction under consideration, or in the steps between the starting point and the finishing point of the transaction.

Some common audit procedures outlined in ASA 500.A14-25 are as below:

• Inspection: such as to inspect original documents and records

• Observation: such as to undertake stock take

• External confirmation: such as to obtain evidence (i.e. written statements) provided by a third party such as banks, solicitors or debtors that is involved in the specific transaction.

• Recalculation: to recalculate the data in financial statements such as the depreciation and amortization calculations.

• Re-performance: consists of the auditor's own discretion in executing the procedures or controls which were performed by the target entity.

• Analytical procedures: such as looking at the balance of different times.

• Inquiry: refers to requiring auditors to ask many questions as possible during the course of an examination.

5.14 As stated under ASA 200.5, there is no absolute level of assurance that the financial report is free from misstatements because of the existence of inherent limitation of an audit. But ASA 200.17 still requires an audit to undertake selected audit procedures to collect sufficient appropriate audit evidence to support the management assertions and embodied in financial reports and to provide qualitative audit opinion.

There are two aspects of appropriateness, which are relevance and reliability. These two aspects must be considered together in case of the lack of either of them.

While professional skepticism, according to ASA 200 A.18-22, is essential when assessing the audit evidence. The audit evidence is influenced by its source and nature as well. ASA 500.A 31 illustrates the following useful generalizations about the reliability of audit evidence:

• Evidence is more reliable when it's obtained from outside sources;

• Evidence is more reliable when internal control is strong and effective;

• Evidence