A mistatement that would likely have changed or influenced the decisions of a reasonable person using financial statements. 

Can be fraud related or manipulated by higher mangement.

Error: Unintentional

Fraud: Intentional, misappropriation of assets (theft, most susceptible cash), fraudlent financial reporting.

"Questioning mind and critical assesesment of audit evidence" 

ie. Do not assume that management is honest.

Direct Effect: tax evasions

Indirect effects: Insider trading (management not allowed to trade with non public info); EPA Violations

Deal with wheter asssets or liabilites exist at a given date and whether recoreded transactions have occurred during a given period. 

Example: Items on the inventory schedule exist at the balance sheet date.

Example: All transactions in the sales journal occurred during the current fiscal year.

Deal with wheter all transcations and accounts that should be presented in the financial statements are so included. Most important to look at is liabilites.

(Understatement Testing)

Example: All inventory items owned by the company are included on the inventory schedule.

Example: All transcations during the current fiscal year are included in the sales journal. 

Whether particular componenets of the financial statements are properlsy classified, described and disclosed. (Is inventory really intentory?)

Example : Inventory is properly classified on the blanace sheet.; Valuation method is disclosed in notes.

Example: Cost of goolds sold isappropriately distinguished from other expenses on the income statement. 

1. Plan and desig an audit approach.

2. Perform tests of controsl and substantive tests of transactions.

3. Perofmr analytical procedures and tests of detail balances.

4. Complete the audit and issue an audit report. 

Physical Exam

Confirmation

Documentation

Analytica Procedures

Inquiry of Client

Recalculation 

Reperformance

Observation

Auditor locates and examines a tangible asset. 

Example: inventory, equiptment. 

Reliabiltiy: depends on auditors expertise.

Auditor obtains written evidence from a 3rd party.

Example: bank blanace, accounts receivable.

Reliability: Depends on the qualifications of the provider.

Auditor examines relevant documentation to support financial statement assertions (most common type of audit evidence)

Example: vendor invoice, cancelled check, shipping document

Reliability: External doc. are more reliable than internal doc.

The reliability of internal doc. depends on the strength of internal controls.

Auditor examines reasonableness of recorded balances 

Examples: interest expense, payroll expense

Reliabilty: depends on the prcision of auditor's estimates. 

Auditors ask questions of the client. 

Example: internal control procdures, contingent liabilties. 

Reliability: must obtain other corroborating evidence. 

Auditor computes mathematical operations

Examples: foot trial blance, test invoice extentions

Reliabiltiy: very reliable 

Auditor wawthces client perform accounting related duties and reperforms the tasks to ensure they are done by GAAP.

Reliabiltiy: generally not very reliable. 

Physical exam and confirmation are most costly.

Documentation, analytical procedures and reperformance are relatively less costly than others. 

Observation, inquiry and recalc are the least costly.