Category: Audit rules and methodology

To audit going concern under ISA 570, the auditor should follow the principles and procedures of auditing going concern, which are the principles and procedures that govern the assessment of an entity’s ability to continue as a going concern.

The key steps in auditing going concern under ISA 570 are as follows:

1. Understand the entity and its environment: The first step in auditing going concern under ISA 570 is to understand the entity and its environment. The auditor should obtain an understanding of the entity’s business, its industry, and its economic environment. The auditor should also obtain an understanding of the entity’s financial position, its liquidity, and its capital structure.
2. Identify and assess the risks of going concern: The second step in auditing going concern under ISA 570 is to identify and assess the risks of going concern. The auditor should identify the risks that may impact the entity’s ability to continue as a going concern, such as financial difficulties, operational challenges, and regulatory changes. The auditor should assess the likelihood and the impact of the risks on the entity’s ability to continue as a going concern.
3. Obtain management’s assessment of going concern: The third step in auditing going concern under ISA 570 is to obtain management’s assessment of going concern. Management is responsible for preparing the financial statements and assessing the entity’s ability to continue as a going concern. The auditor should obtain management’s assessment of going concern, including the assumptions, judgments, and estimates used in the assessment.
4. Evaluate the adequacy of management’s assessment of going concern: The fourth step in auditing going concern under ISA 570 is to evaluate the adequacy of management’s assessment of going concern. The auditor should evaluate whether management’s assessment is reasonable and appropriate in the circumstances. The auditor should consider whether the assumptions, judgments, and estimates used in the assessment are reasonable and supported by the facts and circumstances.
5. Conclude on the going concern assumption: The fifth step in auditing going concern under ISA 570 is to conclude on the going concern assumption. Based on the auditor’s assessment of the risks of going concern and the adequacy of management’s assessment, the auditor should conclude on the appropriateness of the going concern assumption. If the auditor has concerns about the entity’s ability to continue as a going concern, the auditor should evaluate the implications for the financial statements and the audit.

To audit trade payables, the auditor should perform the following steps:

1. Understand the entity’s trade payables and the related business processes: The auditor should obtain an understanding of the entity’s trade payables, including the nature, timing, and amount of the payables, and the related business processes, such as the purchasing and payment processes.
2. Assess the risks of material misstatement in the trade payables: The auditor should assess the risks of material misstatement in the trade payables, taking into account the entity’s industry, the economic environment, the credit quality of the entity’s suppliers, and the entity’s internal controls.
3. Develop an audit plan and audit procedures for the trade payables: Based on the understanding of the trade payables and the risks of material misstatement, the auditor should develop an audit plan and audit procedures for the trade payables, including the nature, timing, and extent of the audit procedures.
4. Test the trade payables and evaluate the results: The auditor should test the trade payables and evaluate the results, using appropriate audit procedures, such as confirmation, observation, inspection, and recalculation. The auditor should also evaluate the entity’s accounting policies and estimates related to the trade payables, such as the accrual of unpaid expenses.
5. Conclude on the trade payables and communicate the findings: Based on the audit evidence obtained, the auditor should conclude on the trade payables and communicate the findings to the entity’s management and the audit committee. The auditor should also evaluate the entity’s disclosure of the trade payables in the financial statements.

To audit trade receivables, the auditor should perform the following steps:

1. Understand the entity’s trade receivables and the related business processes: The auditor should obtain an understanding of the entity’s trade receivables, including the nature, timing, and amount of the receivables, and the related business processes, such as the sales and billing processes.
2. Assess the risks of material misstatement in the trade receivables: The auditor should assess the risks of material misstatement in the trade receivables, taking into account the entity’s industry, the economic environment, the credit quality of the entity’s customers, and the entity’s internal controls.
3. Develop an audit plan and audit procedures for the trade receivables: Based on the understanding of the trade receivables and the risks of material misstatement, the auditor should develop an audit plan and audit procedures for the trade receivables, including the nature, timing, and extent of the audit procedures.
4. Test the trade receivables and evaluate the results: The auditor should test the trade receivables and evaluate the results, using appropriate audit procedures, such as confirmation, observation, inspection, and recalculation. The auditor should also evaluate the entity’s accounting policies and estimates related to the trade receivables, such as the allowance for doubtful accounts.
5. Conclude on the trade receivables and communicate the findings: Based on the audit evidence obtained, the auditor should conclude on the trade receivables and communicate the findings to the entity’s management and the audit committee. The auditor should also evaluate the entity’s disclosure of the trade receivables in the financial statements.

In auditing, sampling is the process of selecting a subset of items or transactions from a population for the purpose of testing and evaluating the population. Sampling is used in auditing to provide the auditor with sufficient appropriate audit evidence to support the audit opinion, while avoiding the need to test and evaluate the entire population.

There are two types of sampling methods used in auditing: statistical sampling and non-statistical sampling. Statistical sampling involves the use of mathematical techniques and probabilities to determine the sample size and the selection of items in the sample. Non-statistical sampling involves the use of the auditor’s professional judgment to determine the sample size and the selection of items in the sample.

In statistical sampling, the sample size and the selection of items in the sample are determined based on the auditor’s desired level of precision and the expected population characteristics, such as the expected mean and the expected standard deviation. The auditor uses statistical formulas and tables to determine the sample size and the selection of items in the sample, and to evaluate the results of the sample.

In non-statistical sampling, the sample size and the selection of items in the sample are determined based on the auditor’s professional judgment and experience, taking into account the nature of the population, the auditor’s assessment of the risks of material misstatement, and the auditor’s overall audit strategy. The auditor uses the sample to evaluate the population, and may use statistical techniques to evaluate the results of the sample.

Overall, sampling is an important concept in auditing, as it allows the auditor to obtain sufficient appropriate audit evidence to support the audit opinion, while avoiding the need to test and evaluate the entire population. The use of sampling in auditing requires the auditor to have a deep understanding of statistical techniques and probabilities, as well as the ability to use professional judgment and experience to determine the sample size and the selection of items in the sample.

Impact on audit work

For a small population it may be difficult to use statistical sampling, so we would normally use our judgement to pick the sample size and items, mainly picking risky/large items as well as a few other small items to ensure we cover a cross section of the population.

For a large population we would normally use the sample calculator to calculate the sample size, after selecting large and risky items. The results of the sample test can then be projected to the population.

In auditing, the concept of trivial refers to an item or matter that is insignificant or immaterial, and therefore does not require further attention or audit procedures.

An item or matter is considered trivial if it is small in relation to the overall size and nature of the financial statements, and if it does not have a significant impact on the financial statements. An item or matter is considered trivial if it is not material, and if it is not indicative of a potential material misstatement or error in the financial statements.

The determination of triviality is based on the auditor’s professional judgment, and takes into account the auditor’s assessment of the risks of material misstatement and the auditor’s tolerance for misstatements in the financial statements. The determination of triviality should be made on a case-by-case basis, and should be documented in the audit working papers.

For example, if an auditor is reviewing the accounts payable balance for an entity, and the auditor determines that a small account payable balance of $50 is not material and does not have a significant impact on the financial statements, the auditor may consider the account payable balance to be trivial and may not perform further audit procedures on the account.

Overall, the concept of triviality is an important concept in auditing, as it allows the auditor to focus on items or matters that are significant or material, and to avoid spending unnecessary time and resources on immaterial items or matters. The determination of triviality should be based on the auditor’s professional judgment, and should be documented in the audit working papers.

Audit assertions are the statements made by the management of an entity about the financial statements, and are the basis for the auditor’s audit procedures and conclusions. The International Standards on Auditing (ISAs) specify certain audit assertions that the auditor should consider when planning and performing the audit, in order to obtain sufficient appropriate audit evidence.

The ISAs specify three types of audit assertions: presentation and disclosure assertions, transaction and event assertions, and assertion about account balances.

Presentation and disclosure assertions relate to the overall presentation and disclosure of the financial statements, and include assertions such as the completeness of the financial statements, the classification of transactions and events, and the accuracy and completeness of the disclosures.

Transaction and event assertions relate to the recognition, measurement, and presentation of transactions and events, and include assertions such as the accuracy and completeness of the transactions, the existence and occurrence of the transactions, and the rights and obligations of the entity arising from the transactions.

Assertions about account balances relate to the accuracy and completeness of the account balances in the financial statements, and include assertions such as the accuracy and completeness of the account balances, the valuation and allocation of assets and liabilities, and the presentation and disclosure of the account balances.

The auditor should consider the relevant audit assertions when planning and performing the audit, in order to obtain sufficient appropriate audit evidence to support the audit opinion. The audit assertions should be discussed with the management of the entity, and any significant assumptions and estimates used by the management should be assessed by the auditor.