1. Evidence and Documentation
Chapter 5
Evidence and Documentation
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Management Assertions
LO# 5
Management Assertions
Financial statements issued by management contain explicit and implicit assertions. Table 5-1
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3. Relationship of Audit Evidence to the Audit Report
LO# 1
Relationship of Audit Evidence to the Audit Report
Financial statements
Audit report
Management assertions about components of financial statements
Auditor reaches
a conclusion based
on the evidence
Audit procedures
Provide evidence on the fairness of the financial statements
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4. All the information, from
LO# 3
Audit Evidence
All the information, from
whatever source, used by the auditor in arriving at the conclusions on which the audit opinion is based.
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5. The Concepts of Audit Evidence
LO# 3
The Concepts of Audit Evidence
Nature of audit evidence
Sufficiency and appropriateness
of audit evidence
Evaluation of audit evidence
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6. Nature of Audit Evidence
LO# 3
Nature of Audit Evidence
Spreadsheets supporting cost allocations
Records of initial entries and supporting records
General and subsidiary ledgers
Invoices
Contracts
Adjustments to financial statements
Other computations, reconciliations, and disclosures
Worksheets
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7. Sufficiency of Audit Evidence
LO# 3
Sufficiency of Audit Evidence
Sufficiency is the 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.
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8. Appropriateness of Audit Evidence
LO# 3
Appropriateness of Audit Evidence
Relevance
Appropriateness is a measure
of the quality of audit evidence.
Reliability
Original documents
Auditor’s direct personal knowledge
Independent source of the evidence
Effectiveness of internal control
Documentary evidence
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9. Evaluation of Audit Evidence
LO# 3
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 unbiased in its evaluation.
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10. LO# 4
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
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11. LO# 4
Audit Procedures
A set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit program.
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12. Audit Procedures for Obtaining Audit Evidence
LO# 4
Audit Procedures for Obtaining Audit Evidence
Inspection of records and
documents
Evidence obtained from external documents is more reliable than evidence obtained from internal documents.
Journal or
Ledger
Source Documents
Vouching (Occurrence)
Tracing (Completeness)
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13. Audit Procedures for Obtaining Audit Evidence
LO# 4
Audit Procedures for Obtaining Audit Evidence
Inspection of tangible assets
Physical examination of a tangible asset.
The process of watching a process or procedure being performed by others.
Observation
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14. Audit Procedures for Obtaining Audit Evidence
LO# 4
In conducting inquiry, the auditor should:
Consider the knowledge, objectivity, experience, responsibility, and qualifications of the individual to be questioned.
Ask clear, concise, and relevant questions.
Use open or closed questions appropriately.
Listen actively and effectively.
Consider the reactions and responses, then ask follow-up questions.
Evaluate the response.
Inquiry
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15. Audit Procedures for Obtaining Audit Evidence
LO# 4
Audit Procedures for Obtaining Audit Evidence
The process of obtaining a representation of information or of an existing condition directly from a third party.
External
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.
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16. Audit Procedures for Obtaining Audit Evidence
LO# 4
Audit Procedures for Obtaining Audit Evidence
External
Confirmation
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17. Audit Procedures for Obtaining Audit Evidence
LO# 4
Audit Procedures for Obtaining Audit Evidence
Recalculation
Determining the mathematical accuracy of documents or records.
The auditor’s independent execution of procedures or controls that were originally performed as part of the internal control system.
Reperformance
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18. Audit Procedures for Obtaining Audit Evidence
LO# 4
Audit Procedures for Obtaining Audit Evidence
Analytical procedures
Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.
Scanning
Review of accounting data to identify significant or unusual items.
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19. Reliability of Types of Evidence
LO# 5
Reliability of Types of Evidence
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20. Purposes of Analytical Procedures
LO# 9
Purposes of Analytical Procedures
Preliminary 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.
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21. Types of Analytical Procedures (See Table 5-10)
LO# 9
Types of Analytical Procedures (See Table 5-10)
Trend Analysis
Ratio Analysis
Reasonableness Analysis
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22. LO# 9
Substantive Analytical Procedures Decision Process Figure 5-7 Overview of the Auditor’s Decision Process for Substantive Analytical Procedures
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23. LO# 9
Investigate Differences for Risk Assessment and Final Analytical Procedures
Preliminary Analytical Procedures (Risk Assessment Procedures) Differences
Final Analytical Procedures Differences
Corroborating evidence
is not required
Corroborating evidence
is required
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24. Audit Testing Hierarchy Figure 5-3 Audit Testing Hierarchy: An Evidence Decision Process for Testing Significant Balances or Classes of Transactions
LO# 6
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25. Filling the Assurance Bucket
LO# 6
Filling the Assurance Bucket
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26. LO# 6
Example of Filling the Assurance Buckets for Each Assertion (Accounts Payable)
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27. LO# 7
Audit Documentation
The auditor’s principal record of the audit procedures performed, evidence obtained, and conclusions reached.
Audit documentation (working papers) have two functions:
 To provide support for the audit report.
 To aid in the planning, performance, and supervision of
the audit.
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28. Content of Audit Documentation
LO# 8
Content of Audit Documentation
Audit documentation 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.
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29. Content of Audit Documentation
LO# 8
Content of Audit Documentation
Audit documentation should:
Include a written audit program detailing auditing procedures necessary to accomplish audit objectives.
Enable a knowledgeable and experienced reviewer to:
Understand the nature, timing, extent, and results of audit procedures, evidence obtained, and conclusions reached.
Determine who performed and reviewed the work, as well as the dates of the work and reviews.
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30. Content of Audit Documentation
LO# 8
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
Accounting manual Prior years’ analytical procedures
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31. Content of Audit Documentation
LO# 8
Content of Audit Documentation
Most public accounting firms maintain audit documentation in two types of files:
Permanent files
Current files
Audit plan, audit report Adjusting journal entries
Audit programs Reclassification journal entries
Working trial balance Current financial statements
Minutes of meetings Working papers supporting accounts
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32. Format of Audit Documentation
LO# 8
Heading
(Exhibit 5-2, p. 153)
Client name
Title of the working paper
Client’s year-end date
Indexing and cross-referencing
(Figure 5-6, p. 155)
Notations that provide a trail from financial statements to audit documents.
Tick marks
(Exhibit 5-2, p. 153)
Notations made next to work paper items indicating auditor/reviewer actions.
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33. Audit Documentation Audit Plan Audit Program Working Trial Balance
Overall strategy for audit (e.g. understanding client, risks, accounts, audit hours)
Audit Program
Audit procedures to be performed; for example, one program for each business process and/or account
Working Trial Balance
Exhibit 5-1 (p. 152) – adjustments ($ changes); reclassification (changes in classification of accounts)
Account Analysis
Exhibit 5-2 (p. 153) – activities in account
Account Listing (Lead Schedule)
Figure 5-6 (p. 155) – items left in ending balance
Audit Memoranda
Documents auditor’s work; e.g. errors identified, discussions with clients

34. Audit Documentation
LO# 8
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 client at the auditor’s request.
The Sarbanes-Oxley Act of 2002 requires audit documentation to be retained for seven years from the completion date of the engagement.
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