2. BASIC AUDITING CONCEPTS: MATERIALITY, RISK ASSESSMENT, AND EVIDENCE
Part Two

3. CHAPTER 4
EVIDENTIAL MATTER, TYPES OF EVIDENCE, AND AUDIT DOCUMENTATION
Chapter 4

4. EVIDENTIAL MATTER
Third standard of field work states…. Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.
On a typical audit engagement, most of the auditor's work involves obtaining and evaluating evidence to test the fair presentation of the financial statements.

5. THE RELATIONSHIP OF EVIDENTIAL MATTER TO THE AUDIT REPORT
Financial
Statements
Audit
Report
Management
Assertions
Audit
Objectives
Audit
Procedures
Evidence

6. MANAGEMENT ASSERTIONS
Existence or occurrence
Completeness
Rights and obligations
Valuation and allocation
Presentation and disclosure

7. AUDIT OBJECTIVES FOR TESTING AN ACCOUNT BALANCE
Validity
Completeness
Cutoff
Ownership
Accuracy
Valuation
Classification
Disclosure

8. AUDIT PROCEDURES
Audit procedures are specific acts performed by the auditor to gather evidence to determine if specific audit objectives are being met.
A set of audit procedures prepared to test audit objectives for a specific component of the financial statements is referred to as an audit program.

9. BASIC CONCEPTS OF EVIDENTIAL MATTER
The nature of evidential matter
The competence of evidential matter
The sufficiency of evidential matter
The evaluation of evidential matter

10. THE NATURE OF EVIDENTIAL MATTER
Accounting data used to test audit objectives include the books of original entry, related accounting manuals, and records such as worksheets and spreadsheets that support the financial statements. Many times these data are in electronic form.
Corroborating evidential matter includes both written and electronic information such as checks, records of electronic funds transfers, invoices, contracts, minutes, confirmations, and written representations.

11. THE COMPETENCE OF EVIDENTIAL MATTER
Evidence is considered competent when it is both
Relevant - it refers to whether the evidence relates to the specific audit objective being tested.
Reliable - it refers to the diagnosticity of the evidence => does the evidence signal the true state of the assertion or audit objective.

12. GENERAL FACTORS FOR ASSESSING THE RELIABILITY OF EVIDENCE
Independence of the source of the evidence.
Effectiveness of internal control.
Auditor's direct personal knowledge.

13. SUFFICIENCY OF EVIDENTIAL MATTER
The auditor relies on evidence that is persuasive rather than convincing in forming an opinion on a set of financial statements. This occurs for two reasons:
Because of cost considerations, the auditor only examines a sample of the transactions that compose an account balance or class of transactions.
Due to the nature of evidence, the auditor must often rely on evidence that is not perfectly reliable.

14. EVALUATION OF EVIDENTIAL MATTER
The auditor should to be thorough in searching for evidence and unbiased in its evaluation.

15. TYPES OF AUDIT EVIDENCE
Physical examination
Reperformance
Documentation
Confirmation
Analytical procedures
Inquiries of client personnel or management
Observation

16. DOCUMENTATION The reliability of documentary evidence.
Internal versus external evidence
The relationship of evidence to specific audit objectives.
Vouching versus tracing

17. CONFIRMATION
The reliability of evidence obtained through confirmations is directly affected by factors such as
The form of the confirmation.
Prior experience with the entity.
The nature of the information being confirmed.
The intended respondent.

18. RELIABILITY OF THE TYPES OF EVIDENCE

19. RELATIONSHIP OF TYPES OF EVIDENCE TO AUDIT OBJECTIVES
Table 4-6 shows the relationship of the types of evidence to audit objectives

20. AUDIT DOCUMENTATION (WORKING PAPERS)
Working papers have two functions:
to provide support for the auditor's report and
to aid in the conduct and supervision of the audit.

21. TYPES OF WORKING PAPER FILES
Most CPA firms maintain working papers in two types of files:
permanent file
current file
In many cases, these files are kept in electronic form.

22. GENERAL CHARACTERISTICS OF AUDIT WORKING PAPERS
Heading
Indexing and cross-referencing
Tick marks

23. ORGANIZATION OF WORKING PAPERS
The auditor's working papers need to be organized in such a way that any member of the audit team (and others) can find the audit evidence that supports each financial statement account.
See Figure 4-3.

24. OWNERSHIP OF THE WORKING PAPERS
The working papers are the property of the auditor.
This includes not only working papers prepared by the auditor but also working papers prepared by the client at the request of the auditor.

25. CHAPTER 4
EVIDENTIAL MATTER, TYPES OF EVIDENCE, AND AUDIT DOCUMENTATION
Chapter 4