1. Chapter 4 Audit Evidence and Audit Documentation McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 4-2 Relationship of Audit Evidence to the Audit Report Management assertions about components of financial statements Financial statements Audit procedures Audit report Evidence on the fairness of the financial statements LO# 1

3. 4-3 Management Assertions Assertions about classes of transactions and events for the period under audit Occurrence Completeness Authorization Accuracy Cutoff Classification LO# 2

4. 4-4 Management Assertions Assertions about end-of-the-period account balances Rights and Obligations Valuation and allocation Completeness Existence LO# 2

5. 4-5 Management Assertions Assertions about presentation and disclosure Occurrence and rights and obligations Classification and understandability Accuracy and valuation Completeness LO# 2

6. 4-6 Financial Statement Assertions (The Assurance Bucket)  Existence or Occurrence  Completeness  Rights and Obligations  Valuation or Allocation  Presentation and Disclosure

7. 4-7 Audit Procedures Specific acts performed by the auditor to gather evidence to determine if specific assertions are being met. Risk assessment procedures Test of controls Substantive procedures LO# 3

8. 4-8 Audit Procedures  Observation  Documentation  Confirmation  Comparisons  Inquiries  Test of Data  Computation  Tracing

9. 4-9 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. LO# 3

10. 4-10 Audit Evidence All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. LO# 4

11. 4-11 Understanding the Conduct of an Audit via Audit Evidence Nature of audit evidence Sufficiency and appropriateness of audit evidence Sufficiency and appropriateness of audit evidence Evaluation of audit evidence LO# 4

12. 4-12 Nature of Audit Evidence Records of initial entries and supporting records Invoices Contracts General and subsidiary ledgers Adjustments to financial statements Worksheets Spreadsheets supporting cost allocations Other computations, reconciliations, and disclosures LO# 4

13. 4-13 Competence of Audit Evidence Measures Quality of Evidence Relevant Reliable LO# 4

14. 4-14 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. LO# 4

15. 4-15 Appropriateness of Audit Evidence Relevance Reliability Independent source of the evidence Effectiveness of internal control Auditor’s direct personal knowledge Documentary evidence Original documents LO# 4 Appropriateness is a measure of the quality of audit evidence. Appropriateness is a measure of the quality of audit evidence.

16. 4-16 Evaluation of Audit Evidence Proper evaluation of evidence requires an understanding of the Types of evidence available. Relative reliability of available evidence. An auditor should be thorough in searching for evidence and unbiased in its evaluation. LO# 4

17. 4-17 Audit Procedures for Obtaining Audit Evidence Inspection of records and documents Inspection of records and documents Recalculation Observation Inquiry Scanning Inspection of tangible assets Confirmation Reperformance Analytical procedures LO# 5

18. 4-18 Audit Procedures for Obtaining Audit Evidence Inspection of records and documents Inspection of records and documents Evidence obtained from external documents is more reliable than evidence obtained from internal documents. Ledger Source Documents Vouching (Occurrence) Tracing (Completeness) LO# 5

19. Reliability of Records Internal vs. External

20. 4-20 Audit Procedures for Obtaining Audit Evidence Inspection of records and documents Inspection of records and documents 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, then ask follow-up questions. Evaluate the response. 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, then ask follow-up questions. Evaluate the response. Inquiry LO# 5

21. 4-21 Audit Procedures for Obtaining Audit Evidence Inspection of records and documents Inspection of records and documents Inquiry Confirmation LO# 5

22. 4-22 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 as part of the internal control system.

23. 4-23 Audit Procedures for Obtaining Audit Evidence  Observation - The process of watching a process or procedure being performed by others.  Inspection of Intangible Assets - Physical examination of a tangible asset.

24. 4-24 Audit Procedures for Obtaining Audit Evidence  Scanning - Review of accounting data to identify significant or unusual items.  Analytical Procedures - Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.

25. 4-25 Reliability of Types of Evidence LO# 6

26. 4-26 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 conduct and supervision of the audit. Audit documentation (working papers) have two functions:  To provide support for the audit report.  To aid in the conduct and supervision of the audit. LO# 7

27. 4-27 Content of Audit Documentation Audit documentation should: Demonstrate how the audit complied with auditing and related professional practice standards. Demonstrate how the audit complied with auditing and related professional practice standards. Support the basis for audit conclusions concerning every material financial statement assertion. Show that the underlying accounting records agreed with the financial statements. LO# 8

28. 4-28 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. LO# 8

29. 4-29 Content of Audit Documentation Most public accounting firms maintain audit documentation in two types of files Permanent files Current files Corporate charterImportant contracts Chart of accountsInternal control documentation Organization chartTerms of stock and bond issues Accounting manualPrior years’ analytical procedures Corporate charterImportant contracts Chart of accountsInternal control documentation Organization chartTerms of stock and bond issues Accounting manualPrior years’ analytical procedures LO# 8

30. 4-30 Content of Audit Documentation Most public accounting firms maintain audit documentation in two types of files Permanent files Current files Audit plan, audit reportAdjusting journal entries Audit programsReclassification journal entries Working trial balanceCurrent financial statements Minutes of meetings Working papers supporting accounts Audit plan, audit reportAdjusting journal entries Audit programsReclassification journal entries Working trial balanceCurrent financial statements Minutes of meetings Working papers supporting accounts LO# 8

31. 4-31 Format of Audit Documentation Heading Indexing and cross-referencing Tick marks Client name Title of the working paper Client’s year-end date Client name Title of the working paper Client’s year-end date Notations that provide a trail from financial statements to audit documents. Notations made next to work paper items indicating auditor/reviewer actions. LO# 8

32. 4-32 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 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. LO# 8

33. 4-33 Audit Documentation Audit Plan Audit Programs Working Trial Balance Written memos Audit Plan Audit Programs Working Trial Balance Written memos Account Analysis Lead Sheet Detail Account Analysis Lead Sheet Detail Adjusting Entries Reclassification Entries Adjusting Entries Reclassification Entries LO# 8

34. 4-34 Workpaper Index

35. 4-35 End of Chapter 4