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Audit Evidence and Documentation

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Presentation on theme: "Audit Evidence and Documentation"— Presentation transcript:

1 Audit Evidence and Documentation

2 The Third Standard of Field Work
Sufficient appropriate evidential matter is to obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

3 Management Assertions Embodied in the Financial Statements
Existence or Occurrence--Assets, liabilities, and owners’ equity accounts reflected in the financial statements exist; the recorded transactions have occurred. Completeness--All transactions, assets, liabilities, and elements of owners’ equity that should be presented in the financial statements are included. Rights and Obligations--The client has rights to assets and obligations to pay liabilities that are included in the financial statements. Valuation or Allocation--Assets, liabilities, owners’ equity, revenues, and expenses are presented at amounts that are determined in accordance with generally accepted accounting principles. Presentation and Disclosure--Accounts are described and classified in the financial statements in accordance with generally accepted accounting principles, and all material disclosures are provided. Accuracy – Amounts and other data relating to recorded transactions have been recorded properly. Cutoff – Transactions have been recorded in the proper accounting period. 2 2

4 Relationship of Financial Statement Assertions and the Audit
Management Assertions Audit Objectives Audit Evidence Audit Report on Financial Statements Financial Statements (GAAP) Audit Procedures

5 Audit Evidence Evidential matter:
any information that corroborates or refutes an assertion

6 Types of Evidence Physical evidence Third-party representations
Documentary evidence Computations Data Interrelationships Client representations Accounting records 5

7 Types of Evidence Physical Evidence
Evidence that can actually be seen by auditors. This type of evidence is generally effective for supporting the existence assertion.

8 Types of Evidence Third Party Representations
Confirmations Lawyers’ Letters Reports of Specialists

9 Types of Evidence Documentary Evidence
Four basic types (helps determine competence): Created by outside parties and transmitted directly to auditor Created by outside parties and held by client Created and held by client Electronic documents

10 Types of Evidence Computations
Computations are: performed independently by auditor used to verify mathematical accuracy of client’s analyses and records

11 Types of Evidence Data Interrelationships
Data interrelationships (i.e., analytical procedures) rely on plausible relationships among financial and non-financial data. Effective for testing “reasonableness” of certain account balances Can be used as primary or corroborating evidence, depending on the nature of account

12 Types of Evidence Oral and Written Client Representations
Responses to questions and inquiries to clients during an audit constitute audit evidence. Oral representations are generally not sufficient as primary evidence, but may provide corroboration for other evidence. Written representations (representation letter) are required, but should not be used as a substitute for other audit procedures.

13 Types of Evidence Accounting Records
Clients’ accounting records (e.g. ledgers and journals) may provide worthwhile evidence in themselves. Depends on the effectiveness of internal controls

14 Audit Procedures Physical examination Observation Confirmation Tracing
Vouching Inspection Reconciliation Reperformance Analytical procedures Inquiry Comparison Physical Evidence Third-Party Representations Documentary Evidence Computations Data Interrelationships Client Representations Accounting Records 6 6

15 Competence of Evidential Matter
To be competent evidence must be: Relevant Must relate to the audit objective Valid (Reliable) Independent sources have greater reliability than those within the client organization. Strong internal control increases reliability of evidence created within the client organization. Directly obtained evidence is more reliable than evidence obtained second hand. 7 7

16 Reliability of Certain Types of Audit Evidence
RELIABILITY TYPE EXAMPLE High Physical Inventory Observation Documentary External Cutoff Bank Statement External/Internal Purchase Invoice Internal Sales Invoice Low Client Representations Management Representation Letter 8 8

17 Basic Approaches to Auditing Accounting Estimates
Review and test management’s process for developing the estimate. Independently develop an estimate to compare to management’s estimate. Review subsequent events or transactions bearing on the estimate. 10 10

18 Functions of Working Papers
Provide support for the auditors’ opinion Document the auditors’ compliance with generally accepted auditing standards, especially the standards of field work Provide a means of assigning and coordinating audit work Aid in supervising and reviewing the audit work Aid in planning and conducting future audits 11 2 2

19 Types of Working Papers
Audit Administrative Working Papers Working Trial Balance Lead Schedules (Grouping Sheets) Adjusting and Reclassification Journal Entries Supporting Schedules Account Analysis Reconciliations Computational Working Papers Corroborating Documents 12 3 3

20 Types of Working Files Current files Permanent files
Typically arranged and indexed around accounts in clients’ financial statement Support current year’s audit report Permanent files Document items of concern over multiple years Provide summary of policies and organization of client To preserve working papers that have little change over time. 4 4



23 SARBOX Perspective SARBOX requires the creation and maintenance, for a period of no less than seven years, of audit working papers sufficient to support the audit report. Deliberate destruction of the audit documentation within the seven year period constitutes a criminal offense.

24 More on Analytical Procedures
Required during planning and review stages of an audit Analytical procedure process Develop an expectation (amount or ratio) Vertical analysis (common-size statements) Horizontal (trend) analysis Cross-sectional (industry) analysis Determine acceptable difference Compare actual results with expectation Investigate significant differences

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