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Transcript of Copy of PA603 AUDITING AND ASSURANCE

Group 4
1. Discuss each type of audit test (vouching, verification, test of control, substantive test, walk-through test, depth test, weakness test and rotational test).
2. Explain the uses and purposes of each type of audit test.

Group 4 :


Test of control
Substantive test
Walk-through test
Depth test
Weakness test
Rotational test
A procedure performed by either an external or internal auditor in order to assess the accuracy of various financial statement assertions.
Two common categorizations of audit tests are
substantive tests and tests of internal controls
- used in external and internal audits in order to reach established audit objectives.

What is Audit Test?
Vouching is a technical term, which refers to the inspection of documentary evidence supporting and substantiating a transaction, by an auditor. It is the essence of Auditing.
It is the practice followed in an audit, with the objective of establishing the authenticity of the transactions recorded in the primary books of account.
• As for verification, auditors are normally required to see that the supporting documents are verified while auditing.

• Verification is normally done by a nominated person in the company which involves reviewing, inspecting and checking to ensure that the documents conform to specific requirements. On the other hand, there's another physical verification which is done by the auditors themselves. This is an auditing procedure whereby an auditor inspects the actual assets of the company to make sure that they are the same with the written records.

What is audit test?
Purposes & Uses of vouching
• The general objective to be achieved by audit verification work is to establish whether the financial statements present a true and fair view.

• Verification means to obtain and examine evidence in respect of an item of asset that:
o The asset exists on a given date.
o The asset is legally owned by the concern.
o There are no unrecorded assets.
o The assets are disclosed, classified, and presented in accordance with recognized accounting policies and the requirement of law.

• Audit techniques that may be used: physical inspection, observation and confirmation.

Objective of verification
Test of control

• Tests of Controls are audit procedures performed to test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level.

• An auditor might use inspection of documents, observation of specific controls, re-performance of the control, or other audit procedures to gather evidence about controls.

Purposes of test of control
• The objective of the tests of controls in an audit of internal control over financial reporting is to obtain evidence about the effectiveness of controls to support the auditor's opinion on the company's internal control over financial reporting.

• Tests of controls are usually “dual purpose.”
(1) To test compliance with an entity’s designed internal controls, formal or informal.
(2) To “re-perform” certain accounting system and internal control procedures.

Substantive procedures (or substantive tests) are those activities performed by the auditor to detect material misstatement or fraud at the assertion level.
A procedure used during accounting audits to check for errors in balance sheets and other financial documentation. A substantive test might involve checking a random sample of transactions for errors, comparing account balances to find discrepancies, or analysis and review of procedures used to execute and record transactions.

A walk-through test is a procedure used during an audit of an entity's accounting system to gauge its reliability. Walk-though tests trace the transaction step-by-step through the accounting system from its inception to the final disposition.
Also known as a combination of observation, documentation and inquiry in the form of a transaction walkthrough.
Involves the tracing of a few transactions through the accounting system.

Audit in depth involves the examination of books of accounts in depth. Such a system of checking is adopted in big business houses, where detailed examination of all the records in not possible. This system of checking is undertaken with a view to check the incidence of errors or frauds in the books of accounts.
Also known as “cradle-to-grave” tests, which means it involves taking a transaction or a number of transactions and following them through the accounting system from the start to the end or vice versa. It is similar to a walk-through test, except that depth test involves the testing of a larger number of transactions.
Once the depth test is completed, the auditor will be able to form a view regarding the number of errors or weaknesses noted in the depth test and take the necessary action to ensure that an adequate level of assurance is attained.
If the compliance test reveal weaknesses in the application of the system, additional tests (weakness test) that may be necessary to establish the extent of the weaknesses and their effect on the reliability of the accounting records.
This test only carried out in areas where material error could occur.
An idea of the adequacy of the client’s internal control system can be obtained from the previous year’s audit. The auditor needs to consider whether there is a need to carry out rotational tests and whether they should be performed on selected areas only.
This technique is useful where the client company has a large number of departments or branches.
This test may be applied as long as the controls identified have not changed since they were last tested and the assessed risk of material misstatement at the assertion level is not significant.
Purpose & Use:

To reveal monetary errors or misstatements in the recording or reporting of transactions and balances.

To determine whether transaction-related audit objectives have been satisfied (Existence, Completeness, Accuracy, Classification, Timing, and Posting and Summarization).

For example, an auditor may:
Physically examine inventory as evidence that inventory shown in the accounting records actually exists (existence assertion);

To establish reliability of client’s accounting and internal control procedures and to reveal system deficiencies and material weakness that need to be rectified at the earliest.

The auditor selects one or a few documents for the initiation of a transaction type and traces them step by step through the entire accounting process. The auditor is required to perform at least one walkthrough for each major class of transactions.
The walk-through procedure, documentation of the internal controls in flowcharts or internal control questionnaires, reading the general ledger and consideration of the prior year's control risk assessment may permit an assessment of control risk in the current period that is less than high.

Purposes & Uses of Depth Test
To provide audit evidence to assist the auditor in arriving at his opinion where the auditor is still unable to form an opinion from the results of the walkthrough test and to confirm the accuracy of client’s accounting system that involve only a small number of transactions.
To confirm the accuracy of client’s accounting system (walk-through checks) - involve only a small number of transactions.
To perform compliance test (the auditor may use a number of transactions, testing the control in depth at each stage). Such tests will provide evidence as to whether or not he may rely upon that control in planning later audit work.
To provide evidence of a substantive nature (to check that transactions have been properly recorded in the accounting records or in the financial statements.

The purpose of this test is to establish whether material errors have in fact occurred (if they have, an extended program of work on the verification of associated asset will be carried out).

Additional tests are done in view of the number of errors or weaknesses noted in the depth test.
Necessary in order to support conclusions drawn in a test of controls that the level of confidence or assurance required has been obtained.

• Proper Evidence
The purpose vouching is to note that proper evidence is available for every entry. The signatures, initials and rubber stamp are evidence that document has been authorized and checked.

• Proper Authority
The purpose of vouching is to note that there is proper authority behind every transaction. In the absence of any signature of manager the transaction are not acceptable at all.

• Right Period
The purpose of vouching is to check that date of the vouchers relate to accounting period. The adjustments in books are made on the basis of current year record of transactions.

• Correct Amount
The purpose of vouching is to check that correct amounts have been recorded in the entry. The vouching is useful to record only correct amounts in the books of accounts

• The purpose of this test is to improve audit approach efficiency, some firms rely to varying degrees on controls tested in previous engagements. Controls are therefore tested on a rotation basis.

• Where the system of internal controls is known from past experience to be sound, it is considered a useful technique to apply by carrying out tests on selected only.

• Where there is a large number of departments or branches, it is impractical to test procedures at all the departments or branches.

Inspect supporting documents like invoices to confirm that sales did occur (occurrence);
Arrange for suppliers to confirm in writing the details of the amount owing at balance date as evidence that accounts payable is a liability (rights and obligation assertion);
Make inquiries of management about the collectability of customers' accounts as evidence that trade debtors are accurate as to its valuation.

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