Audit Tests

The purpose of the independent audit is to express an opinion about whether the financial statements prepared by the business management comply with the IFRSs.

Management assertions are claims made by members of management regarding certain aspects of a business. Th e concept is primarily used in regard to the audit of a company’s financial statements, where the auditors rely upon a variety of assertions regarding the business.

The five steps to develop audit objectives:

Understand objectives and responsibilities for the audit
Divide financial statements into cycles
Know management assertions about financial statements
Know general audit objectives for classes of transactions, accounts, and disclosures
Know specific audit objectives for classes of transactions, accounts, and disclosures

Management assertions are classified into two groups:
1. Management Assertions About Transactions and
Events and Related Disclosures
2. Management Assertions About Account Balances
and Related Disclosures

Six management assertions are related to classes of transactions and events and related disclosures, for the period under audit.
i. Occurrence—transactions and events that have been recorded have occurred and pertain to the
entity.
ii. Completeness—all transactions and events that should have been recorded have been recorded.
iii. Accuracy—amounts and other data relating to recorded transactions and events have been recorded
appropriately.
iv. Cutoff—transactions and events have been recorded in the correct accounting period.
v. Classification—transactions and events have been recorded in the proper accounts.

vi. Presentation—transactions and events are appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and understandable in the context of the requirements
of the applicable financial reporting framework.

Six management assertions are related to account balances and related disclosures, at the period end.
i. Existence – assets, liabilities and equity interests exist.
ii. Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
iii. Completeness – all assets, liabilities and equity interests that should have been recorded have been
recorded and all related disclosures that should have been included in the financial statements have
been included.
iv. Accuracy, valuation and allocation – assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have
been appropriately recorded and related disclosures have been appropriately measured and described.
v. Classification – assets, liabilities and equity interests have been recorded in the proper accounts.
vi. Presentation – assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

These two management assertions are similar; the difference is that occurrence is for income statement transactions while existence is for balance sheet items

The most efficient way to conduct audits is to obtain some combination of assurance for each class of transactions and for the ending balances in the related accounts

Audit objectives for each class of transactions include (Arens, 2017a):
1. Transaction-related audit objectives
2. Balance-related audit objectives
3. Presentation and disclosure-related audit objectives

Transaction-related audit objectives are classified into two groups: general and specific.

General Transaction-Related Audit Objectives-Six general transaction-related audit objectives are as follows.
i. Occurrence—Recorded transactions exist.
ii. Completeness—Existing transactions are recorded.
iii. Accuracy—Recorded transactions are stated at the correct amounts.
iv. Posting and Summarization—Recorded transactions are properly included in the master files and are correctly summarized.
v. Classification—Transactions included in the client’s journals are properly classified.
vi. Timing—Transactions are recorded on the correct dates

General Balance-Related Audit Objectives-Eight general balance-related audit objectives are as follows.
• Existence—Amounts included exist.
• Completeness—Existing amounts are included.
• Accuracy—Amounts included are stated at the correct amounts.
• Classification—Amounts included in the client’s listing are properly classified.
• Cut-off—Transactions near the balance sheet date are recorded in the proper period.
• Detail Tie-In—Details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total.
• Realizable Value—Assets are included at the amounts estimated to be realized.
• Rights and Obligations—Assets are owned or controlled by the entity, and liabilities are obligations of the entity

The purpose of audit tests, or audit procedures, is to allow the auditor to collect sufficient appropriate audit evidence to be able to conclude
with reasonable assurance that the financial statements (FS) are free of material misstatement.

Audit tests consist of risk assessment procedures, tests of controls,
substantive tests of transactions, substantive analytical procedures, and tests of details of balances.

The four phases of a financial statement audit;

Phase 1: Plan and design an audit approach based on risk assessment procedures
Phase 2: Perform tests of controls and substantive tests of transactions
Phase 3: Perform analytical procedures and tests of details of balances
Phase 4: Complete the audit and issue an audit report

In the first phase, -plan and design an audit
approach- an audit approach is designed to collect
sufficient and reliable evidence at the lowest cost.
In order to estimate the risks of misstatement
in the financial statements and to interpret the
information obtained during the audit, information
is obtained about the client’s business and its line of
business. In addition, the internal control system
of the business is examined and information about
the internal control system is collected

Substantive tests: Substantive tests are
performed to detect material fraud or
monetary misstatement on financial
statements at different management assertion
levels in a business

Risk Assessment Procedures: It is an audit
procedure to assess the risk that material
misstatement exists.

The audit risk model is a model that divides the risks that have to be managed in an audit into three basic parts. The three basic components of an audit risk model are (O’Neal, 2019):
• Control Risk
• Detection Risk
• Inherent Risk

To obtain sufficient appropriate evidence to support a reduced assessment of control risk, the auditor (Arens, 2017b):
• Make inquiries of appropriate client business’ personnel
• Examine documents, records, and reports
• Observe implementation of control-related activities
• Reperform implementation of control procedures by the auditor.
The amount of evidence needed for tests of controls depends on two things:
• The extent of evidence obtained in gaining the understanding of internal control
• The planned reduction in control risk

Dual Purpose Tests: Dual-purpose tests are used as both a test of controls and a substantive test

Tests of Details of Balances: Tests of details
of balances are specific procedures intended
to test for monetary misstatements in the
balances in the financial statements.