Audit and Assurance: Risk, Evidence and Reporting
Core concepts
Know the audit process from engagement acceptance through planning, risk assessment, evidence gathering, evaluation and reporting. Understand the concepts of materiality, audit risk (inherent, control and detection), professional scepticism, and the assertions tested for classes of transactions and account balances. Learn the hierarchy of evidence reliability, the distinction between tests of controls and substantive procedures, sampling, analytical procedures, and the going-concern assessment. Understand internal control components, the auditor's response to identified deficiencies, and the forms of modified opinion.
Traps
Questions test whether an auditor gives absolute or reasonable assurance, whether management or the auditor is responsible for internal control and fraud prevention, and whether a matter is pervasive enough to require an adverse or disclaimer opinion. Watch for confusion between a qualified opinion (material but not pervasive) and a disclaimer (material and pervasive, arising from inability to obtain evidence). Another trap is treating a management letter point as an audit qualification.
Rule of thumb
Decide first whether the issue is disagreement or scope limitation, then whether its effect is material and pervasive; that two-step test determines the opinion.
Worked example
An auditor cannot obtain evidence about a subsidiary representing 60 per cent of group assets. This is a scope limitation that is both material and pervasive, so a disclaimer of opinion is appropriate. If instead the same subsidiary were 5 per cent of assets, a qualified opinion would suffice.