bea2004 notes unit 3 - audit risk methodology

BEA 2004 AUDITING 2007 Background Notes Unit 3 Audit Methodology and the Audit Risk Model The auditor of a UK company is required to give an opinion as to whether the financial statements prepared by the company show a true and fair view. This process requires the gathering of evidence to support this opinion. Over the years there have been significant changes in the manner in which auditors and audit firms have approached this task. Substantive audit Historically the audit was balance sheet orientated and the auditor sought to obtain direct evidence by means of substantive tests designed to support the existence, ownership and valuation of the assets and liabilities in the balance sheet. Such evidence might be derived from observation, checking of title documents, seeking evidence from third parties (for example circularising debtors and creditors), evidence from internal documentation and record keeping etc. There would also be quite detailed checking and vouching of transactions (although in the nineteenth century the courts effectively endorsed a sample based approach to audit testing in London General Bank (1895) 2 Ch.673). The greater emphasis on vouching of transactions was in part related to the manual nature of accounting procedures and the relatively rudimentary forms of internal check and systems of control. It may also have reflected the fact the in many early audit engagements the auditor was also fulfilling a ...