1. Chapter 5
Evidence and
Documentation

2. Relationship of Audit Evidence to the Audit Report
Financial statements
Audit report
Management assertions about elements of financial statements
Auditor reaches
a conclusion based
on the evidence
Audit procedures
Provide evidence on the fairness of the financial statements

3. Management Assertions
Completeness
Occurrence
Classification
Assertions about classes of transactions and events for the period under audit
Cut-off
Accuracy
Authorization

4. Management Assertions
Existence
Completeness
Assertions about
account balances at the period end
Valuation and allocation
Rights and obligations

5. Management Assertions
Occurrence and rights and obligations
Completeness
Assertions about presentation and disclosure
Accuracy and valuation
Classification and understandability

6. Management Assertions
Table 5–2 Summary of Management Assertions by Category
(continued)

7. Management Assertions

8. All the information, from
Audit Evidence
All the information, from
whatever source, used by the auditor in arriving at the conclusions on which the audit opinion is based.

9. The Concepts of Audit Evidence
Nature of audit evidence
Sufficiency and appropriateness
of audit evidence
Evaluation of audit evidence

10. Nature of Audit Evidence
Records of initial entries and supporting records
General and subsidiary ledgers
Spreadsheets supporting cost allocations
Minutes
from meetings
Benchmarking
Invoices
Analyst’s
reports
Worksheets
Contracts
Other computations, reconciliations and disclosures
Information
obtained from
audit procedures
Adjustments to financial statements

11. Sufficiency of Audit Evidence
Sufficiency is a measure of the quantity of audit evidence.
Greater risk of misstatement requires a higher quantity of audit evidence.
Higher quality audit evidence results in a lower quantity of audit evidence.

12. Appropriateness of Audit Evidence
Relevance
Appropriateness is a measure
of the quality of audit evidence.
Reliability
Original documents
Documentary evidence
Effectiveness of internal control
Independent source outside the entity
Auditor’s direct personal knowledge

13. Evaluation of Audit Evidence
Proper evaluation of evidence requires an understanding of the:
Relative reliability of available evidence.
Types of evidence available.
An auditor should be thorough in searching for evidence and be unbiased in its evaluation.

14. Audit Procedures
Specific acts performed by the auditor to gather evidence about whether specific assertions
are being met.
Risk assessment procedures
Test of controls
Substantive procedures

15. Audit Procedures
The set of audit procedures prepared to test assertions for an element of the financial statements is described in the audit plan.
Audit Plan for Accounts Receivable
Management Assertions
Example Audit Procedures
Existence
Confirm accounts receivable.
Rights and obligations
Inquire of management whether receivables have been sold.
Completeness
Agree total of accounts receivable subsidiary ledger to accounts receivable control account.
Valuation or allocation
Test the adequacy of the allowance for doubtful accounts.

16. Audit Procedures for Obtaining Audit Evidence
Inspection of records or
documents
Inspection of tangible assets
Observation
Inquiry
External
Confirmation
Recalculation
Reperformance
Analytical procedures
Scanning

17. Audit Procedures for Obtaining Audit Evidence
Inspection of records or
documents
Evidence obtained from external documents is more reliable than evidence obtained from internal documents.
Journal or
Ledger
Source Documents
Vouching (Occurrence)
Tracing (Completeness)

18. Audit Procedures for Obtaining Audit Evidence
Inspection of tangible assets
Physical examination of a tangible asset.
Observation
The process of watching a process or procedure being performed by others.

19. Audit Procedures for Obtaining Audit Evidence
In conducting inquiry, the auditor should:
Consider the knowledge, objectivity, experience, responsibility and qualifications of the person to be questioned.
Ask clear, concise and relevant questions.
Use open or closed questions appropriately.
Listen actively and effectively.
Consider the reactions and responses, and ask follow-up questions.
Evaluate the response.
Inquiry

20. Audit Procedures for Obtaining Audit Evidence
External
Confirmation
The process of obtaining a representation of information of an existing condition directly from a third party.
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.

21. Audit Procedures for Obtaining Audit Evidence
External
Confirmation 21

22. Audit Procedures for Obtaining Audit Evidence
Recalculation
Determining the mathematical accuracy of documents or records.
Reperformance
The auditor’s independent execution of procedures or controls that were originally performed by company personnel.

23. Audit Procedures for Obtaining Audit Evidence
Analytical procedures
Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data.
Scanning
Review of accounting data to identify significant or unusual items.

24. Reliability of Types of Evidence
Table 5–6 General Guidelines for the Reliability Hierarchy by Evidence Type

25. Audit Testing Hierarchy
Figure 5–3 Audit Testing Hierarchy: An Evidence Decision Process for Testing Significant Balances or Classes of Transactions

26. Filling the Assurance Bucket
Figure 5–4 Filling the Assurance Bucket

27. Example of Filling the Assurance Buckets for Each Assertion (Accounts Payable)
Figure 5–5 Accounts Payable Example of Filling the Assurance Buckets for Each Assertion

28. Audit Documentation
The auditor’s record of the audit procedures performed, evidence obtained and conclusions reached.
Audit documentation (working papers) has three functions:
1 To provide support for the audit report.
2 To aid in the planning, performance and supervision of
the audit.
3 To provide basis for quality reviews; to provide evidence
supporting the auditor’s significant conclusions.

29. Content of Audit Documentation
Audit documentation provides the principal support for the representations in the auditor’s report and should:
Demonstrate that the underlying accounting
records agreed or reconciled with the financial
statements.
Support the basis for the auditor’s conclusions
concerning each material financial statement
assertion.
Demonstrate how the audit complied with auditing
and related professional practice standards.

30. Content of Audit Documentation
Audit documentation should:
Include a audit plan detailing auditing procedures necessary to accomplish audit objectives.
Enable an experienced auditor to understand:
The nature, timing
and extent of
audit procedures
performed
Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgements made in reaching those conclusions
The results of the
audit procedures
performed

31. Content of Audit Documentation
Most public accounting firms maintain audit documentation in two types of files:
Permanent files
Current files
Corporate charter Important contracts
Chart of accounts Internal control documentation
Organization chart Terms of stock and bond issues
Prior years’ analytical procedures

32. Content of Audit Documentation
Most public accounting firms maintain audit documentation in two types of files:
Permanent files
Current files
Audit report Adjusting journal entries
Audit strategy and plan Reclassification journal entries
Working trial balance Current financial statements
Minutes of meetings Working papers supporting accounts

33. Format of Audit Documentation
Heading
Entity name
Title of the working paper
Entity’s year-end date
Indexing and cross-referencing
Notations that provide a trail from financial statements to audit documents.
Tick marks
Notations made next to work paper items indicating auditor/reviewer actions.

34. Audit Documentation
Audit documentation should be organized so that audit team members and others can find evidence supporting financial statement accounts.
All audit documentation is the property of the auditor, including documents prepared by the entity at the auditor’s request.
ISQC1 requires audit documentation to be retained
ordinarily for minimum five years from
the date of the auditor’s report.

35. Purposes of Analytical Procedures
Risk Assessment Procedures
Used to assist the auditor to better understand the business and to plan the nature, timing and extent of audit procedures.
Substantive Analytical Procedures
Used to obtain evidential matter about particular assertions related to account balances or classes of transactions.
Final Analytical Procedures
Used as an overall review of the financial information in the final review stage of the audit.

36. Purposes of Analytical Procedures (see Table 5-10)
Trend Analysis
Ratio Analysis
Reasonableness Analysis

37. Substantive Analytical Procedures Decision Process
Figure 5–7 Overview of the Auditor’s Decision Process for Substantive Analytical Procedures

38. Develop an Expectation
Auditing standards require the auditor to have an expectation whenever analytical procedures are used. An expectation can be developed using a variety of information sources such as:
Financial and operating data.
Budgets and forecasts.
Industry publications.
Competitor information.
Management’s analyses.
Analyst’s reports.

39. Define a Tolerable Difference
The size of the tolerable difference depends on:
The significance of the account.
The desired degree of reliance on the substantive analytical procedures.
The level of disaggregation in the amount being tested.
The precision of the expectation.
But the amount should generally not exceed performance materiality!

40. Compare and Investigate
Compare the expectation to the recorded amount and investigate any differences greater than the tolerable difference.

41. The Investigation of Differences for Risk Assessment and Final Analytical Procedures
Risk Assessment Procedures Differences
Final Analytical Procedures Differences
Corroborating evidence is not required
Corroborating evidence is required

42. Short-Term Liquidity Ratios
Current Ratio
Quick Ratio
Operating Cash Flow Ratio

43. Days Outstanding in Accounts Receivable Days of Inventory on Hand
Activity Ratios
Receivables Turnover
Days Outstanding in Accounts Receivable
Inventory Turnover
Days of Inventory on Hand

44. Gross Profit Percentage
Profitability Ratios
Gross Profit Percentage
Profit Margin
Return on Assets
Return on Equity

45. Coverage Ratios
Debt to Equity
Times Interest Earned