Audit procedures and assertions - Procedures to obtain evide...

Learning Outcomes

After studying this article, you will be able to describe the main procedures used by auditors to obtain audit evidence, explain the concept of management assertions, differentiate between types of audit testing, and relate specific audit procedures to assertions for both transactions and account balances. This will help you tackle ACCA FAU exam questions requiring practical understanding of audit evidence collection.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the audit procedures used to collect evidence and how these procedures relate to management assertions about transactions, account balances, and disclosures. This article supports revision of:

• The importance of audit evidence and the need for sufficient, appropriate evidence
• The nature and types of audit procedures (such as inspection, inquiry, external confirmation)
• The use of assertions in relation to transactions, account balances, and disclosures
• The distinction between tests of controls and substantive procedures
• How audit procedures are linked to specific audit objectives and assertions

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which audit procedure involves the auditor reviewing original documents or assets to support transactions?
   1. Inquiry
   2. Inspection
   3. Observation
   4. Recalculation
2. What is the purpose of management assertions in an audit?
   1. To ensure all invoices are paid
   2. To provide a framework for designing audit procedures
   3. To set materiality levels
   4. To prepare financial statements

3. True or false? A substantive procedure aims to detect material misstatements at the assertion level.

4. Match each assertion below to a relevant audit area: existence, completeness, accuracy.

5. Distinguish between tests of controls and substantive procedures with an example of each.

Introduction

Audit evidence forms the basis of every audit opinion. Auditors do not simply assume the financial statements are correct; they undertake specific procedures to gather reliable evidence that supports or challenges management’s assertions. Effective gathering of audit evidence relies on understanding the nature and purpose of audit procedures and their connection to assertions in the financial statements.

AUDIT EVIDENCE AND MANAGEMENT ASSERTIONS

Auditors plan and perform their work to obtain sufficient appropriate audit evidence to support their conclusions. Evidence must be both relevant and reliable in addressing risks of material misstatement.

Key Term: Audit procedures
Specific tasks performed by auditors to gather evidence about whether financial statements are free from material misstatement.

Key Term: Sufficient appropriate audit evidence
The quantity and quality of evidence needed to provide reasonable assurance that financial statements are fairly presented.

Key Term: Assertion
A statement by management related to recognition, measurement, presentation, and disclosure in the financial statements, which auditors test using defined procedures.

Assertions underpin the audit process. They guide auditors in deciding what needs to be checked. For example, management asserts that assets exist, all transactions are recorded, and values are accurately stated.

Management assertions cover:

• Classes of transactions and events (e.g., sales, purchases)
• Account balances (e.g., cash, inventory)
• Disclosures (e.g., accounting policies, related party transactions)

The main assertions are:

MAIN AUDIT PROCEDURES TO OBTAIN EVIDENCE

Auditors use a combination of procedures to obtain evidence adapted to the area being audited and the level of audit risk.

The principal audit procedures:

• Inspection: Examining records, documents, or tangible assets (e.g. reviewing invoices for purchase transactions, inspecting inventory).
• Observation: Watching an activity or process being performed (e.g. observing the year-end inventory count).
• Inquiry: Asking management, staff, or third parties about processes, figures, or balances.
• External confirmation: Obtaining evidence directly from third parties (e.g. sending confirmation letters to customers or banks).
• Recalculation: Checking the mathematical accuracy of documents or records (e.g., recalculating depreciation or invoice totals).
• Reperformance: Independently repeating procedures or controls originally carried out by the entity.
• Analytical procedures: Reviewing plausible relationships among financial and non-financial data to spot unusual trends or inconsistencies.

Key Term: Substantive procedure
An audit procedure designed to detect material misstatements at the assertion level, including tests of details and substantive analytical procedures.

Key Term: Test of control
An audit procedure to evaluate the effectiveness of controls in preventing, or detecting and correcting, material misstatements.

Linking audit procedures to assertions

Every procedure is chosen with the purpose of testing a related assertion. For example:

• Inspecting invoices for purchases checks the occurrence assertion for expenses.
• Observing inventory counts tests the existence assertion for stock.
• Sending receivables confirmations provides evidence for both existence and accuracy.
• Performing cut-off tests reviews cut-off and completeness assertions for sales and purchases.

Worked Example 1.1

Question: A company records high closing inventory in its financial statements for the year. How can the auditor obtain evidence supporting the existence and completeness assertions for inventory?

Answer:

• The auditor attends the inventory count (observation) and selects physical items in the warehouse to trace back to inventory records (existence).
• They select items from the count sheets and locate them in the warehouse (completeness).
• Any discrepancies are investigated, ensuring the records fairly represent the inventory present.

Worked Example 1.2

Question: The auditor wants to verify the accuracy of the salary expense for the year. What procedures are suitable and which assertion is being tested?

Answer:

• The auditor recalculates payroll totals using personnel records and employment contracts (recalculation).
• This checks the accuracy assertion, confirming salaries have been calculated and recorded correctly.

Tests of Controls vs Substantive Procedures

• Tests of controls: Performed to evaluate if internal controls are operating as intended (e.g., confirming that all purchase invoices are authorised before payment).
• Substantive procedures: Performed to detect material misstatements in transactions or balances (e.g., checking a sample of invoices to supporting documents for existence and value).

Exam Warning

Exam Warning Students often confuse tests of controls with substantive procedures. Remember: tests of controls assess how the system works, while substantive procedures focus directly on the numbers and disclosures in the financial statements.

Summary

Auditors apply a range of procedures—including inspection, inquiry, observation, confirmation, recalculation, and analytical review—to gather audit evidence. Each procedure is planned to test specific assertions about transactions, account balances, and disclosures. Selecting procedures that provide sufficient, appropriate evidence for the relevant assertion is central to effective auditing and is examined in the ACCA FAU exam.

Key Point Checklist

This article has covered the following key knowledge points:

• The need for sufficient appropriate audit evidence to support the audit opinion
• The main procedures to obtain audit evidence: inspection, inquiry, confirmation, observation, recalculation, reperformance, analytical review
• The meaning of management assertions and their categorisation by transactions, balances, and disclosures
• How audit procedures are selected based on the relevant assertion being tested
• The difference between tests of controls and substantive procedures, with examples of each
• The importance of linking audit work to specific audit objectives and assertions

Key Terms and Concepts

• Audit procedures
• Sufficient appropriate audit evidence
• Assertion
• Substantive procedure
• Test of control