Text PAQ 5.36 Gathering evidence

Required:

(a) Discuss Susan’s comment that they have already started the audit. What evidence have they gathered so far?

(b) Explain what work is being done with the spreadsheets of financial data. Give some specific examples for this client. How is this type of work relevant to all stages of the audit?

(c) When Susan is touring the client’s premises, she is taking notes of equipment and furniture items she sees, especially anything that looks either newly purchased or older and unused. Why might she be doing this? Explain.

This suggested answer does not provide you with a reference to the applicable ASA which should guide your response … you should be able to locate the ASA and indicate which paragraphs are being illustrated by each type of evidence identified below.

(a) Susan has been gathering the following types of evidence:

• - Oral: Susan has been holding conversations with staff. During these conversations she will be discovering how they perform their duties, whether there are staff shortages in certain areas at various times, how management are communicating their attitudes towards control systems and profit targets, whether controls are overridden at various times.
• - Physical evidence: Susan has inspected physical assets of the company during her tours. She can see if assets exist, whether they are being protected, their condition, how they are used. For example, she can see if construction equipment appears to be new or well maintained. She can also observe staff performing their duties, both on the construction sites and in the offices.
• - Computational evidence: Susan is calculating ratios and reviewing the trial balance. She is looking for indicators of problems, such as unusual fluctuations, and whether the data appear to reflect the state of the business as described by management.

(b) The spreadsheets are reviewed to identify unusual patterns which could indicate problem areas for further investigation, and to calculate trends and ratios, including common size statements, to quantify the fluctuations. Susan will use the results of the analytical procedures to justify increased or decreased focus on specific areas, and the nature, timing and extent of further procedures.

For this type of business Susan will be using the data to determine if profitability is comparable to previous periods and with other similar clients. She will analyse the specific movement of physical materials used in construction and whether this is consistent with the financial data. For example, if the quantities of physical materials delivered to a site are lower because of slower construction progress, is the cost of materials also lower? Is the progress of the build consistent with the use of labour and machinery? Is revenue recognised on building in progress consistent with the progress and cost of the construction?

(c) Observing the assets during the tour provides a starting point for investigating the assertions of completeness (whether the items she observes are in the accounting records) and valuation (whether the items appear to be in poor condition, and thus have impaired values). The older items or unused items are more likely to be obsolete and thus either impaired in value or scrapped from the accounting records. The newer items are more likely to be of higher value, but could also be not recorded in the accounting records.