Chapter 4Chapter 4
Audit Evidence and Audit Documentation
Obj iObjectives
Understand the relationship between audit evidence • Understand the relationship between audit evidence and the auditor’s report
d d h i b l• Understand the management assertions about classes of transactions and events, account balances at the period end, presentation and disclosure
• Learn the basic concepts of audit evidence
• Understand audit procedures used for obtaining audit evidence
• Understand the objectives of audit documentation
Relationship of AuditEvidence to the Audit Report
Financialstatements
Auditreport
Management assertionsb t t f
Auditor reaches l i b dabout components of
financial statementsa conclusion based
on the evidence
Auditd
Provide evidence on thefairness of theprocedures financial statements
WHAT ARE ASSERTIONS?
• Management is responsible for the fair presentation of the financial statements.presentation of the financial statements.
• Assertions are expressed or implied p prepresentations by management regarding the recognition, measurement, presentation, and d l f f h fi ldisclosure of information in the financial statements and related disclosures (AU 326.14).
Management Assertions Management Assertions Classification
1. Assertions about classes of transactions and events for the period under audit events for the period under audit.
2. Assertions about account balances at the period end. period end.
3. Assertions about presentation and disclosure.
Management AssertionsManagement Assertions
• Illustration: the financial statements show a net sales figure of $10 million management net sales figure of $10 million management asserts that▫ the sales exist (existence assertion)the sales exist (existence assertion)▫ all sales conducted within the current time frame
(cutoff assertion)▫ recorded in their correct amounts (accuracy
assertion)
Assertions about Classes of Transactions & Events during the Periodg
1. Authorization2 Accuracy2. Accuracy3. Completeness4 Classification4. Classification5. Cutoff6 Occurrence6. Occurrence
Assertions about Account Balances at the Period End
1 Completeness1. Completeness
2. Existence
3. Rights and Obligations
V l ti d All ti4. Valuation and Allocation
Assertions about Presentation and Disclosure
1. Completeness
2. Occurrence and Rights and Obligations
Cl ifi ti d U d t d bilit3. Classification and Understandability
4. Accuracy and Valuation
Management Assertions
Audit ProceduresAudit Procedures
S ifi tSpecific actsperformed by the auditorto gather evidence about to gather evidence about
whether specific assertionsare being met.g
Risk assessmentprocedures
Test of controls
Substantiveproceduresprocedures controls procedures
Audit Procedures
i k d• Risk assessment procedures• Obtain an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial statement and relevant assertion levels.
• Test of controls• Test of controls• Test the operating effectiveness of controls in preventing or detecting
material misstatements at the relevant assertion level.
• Substantive procedures• Detect material misstatements at the relevant assertion level, including
tests of details of classes of transactions, account balances and disclosures, and substantive analytical procedures
Audit ProgramAudit Program
A set of audit procedures prepared to testA set of audit procedures prepared to testassertions for a component of the financial
statements is referred to as an audit program.p g
Management Assertions Examples of Audit ProceduresAudit Program for Accounts Receivable
g pExistence Confirm receivables.Rights and obligations Inquire if receivables have been sold or pledged.Completeness Agree controlling account with total of subsidiary accounts. p g g y
Select shipping documents immediatley prior to year end and ensure sales invoices were recorded.
Valuation or allocation Trace accounts from aged trial balance to subsidiary accounts.Test the adequacy of the allowance account.
Presentation and disclosure Look for amounts due from related parties.Evaluate receivables for footnote disclosure.
Audit evidence
All the information from whatever source used • All the information, from whatever source, used by the auditor to support his/her audit opinion.
• Auditors gather evidence by conducting Audit Procedures to TEST MANAGEMENT ASSERTIONS.
3 Concepts of Audit Evidence3 Concepts of Audit Evidence
Nature of audit evidence
Sufficiency and appropriateness of audit evidence
Evaluation of audit evidence
N f A di E idNature of Audit Evidence• The nature of the evidence refers to the form or
type of information including
accounting records▫ the records of initial entries and supporting
drecords
other available informationother available information▫ minutes of meetings; ▫ confirmations from third parties;co at o s o t d pa t es;▫ industry analysts’ reports;▫ etc…
What types of EVIDENCE must be What types of EVIDENCE must be collected?
• Collect SUFFICIENT and APPROPRIATE evidence.▫ Sufficiency is the measure of the quantity of audit evidencey q y
▫ Appropriateness is a measure of the quality of audit
evidenceevidence
GREATER RISK i HIGHER QUANTITY f dit GREATER RISK requires HIGHER QUANTITY of audit
evidence
HIGHER QUALITY audit evidence RESULTS in a LOWER
QUANTITY of audit evidence
When is evidence considered APPROPRIATE?
Evidence is considered appropriate when it provides pp p pinformation that is both relevant and reliable
Relevance▫ How the evidence is related to the assertion or to the objective of
the control being tested. (Relates to whatever you are testing)g ( y g)
• Illustration▫ To check the completeness assertion for recording sales
transactions ▫ Are all goods shipped to customers are recorded in the sales
j ljournal? trace a sample of shipping documents to the related sales
invoices and entries in the sales journal
When is evidence considered APPROPRIATE?
li biliReliability• If a particular type of evidence can be relied upon to signal the true state
of an assertion.
▫ Knowledgeable independent source of the evidence
Evidence obtained directly by the auditor from a knowledgeable
independent source outside the entity is more reliable than evidence
obtained solely from within the entityobtained solely from within the entity
▫ Effectiveness of internal control.
If the client’s internal control is assessed effective, ,evidence generated by f ff , , g y
that accounting system is viewed as reliable
When is evidence considered APPROPRIATE?
R li bilitReliability▫ Auditor’s direct personal knowledge
E id b i d di l b h di i ll id d Evidence obtained directly by the auditor is generally considered to
be more reliable than evidence obtained indirectly or by inference
D t id▫ Documentary evidence
Audit evidence is more reliable when it exists in documentary
formform
▫ Original documents
Audit evidence provided by original documents is more reliable Audit evidence provided by original documents is more reliable
than audit evidence provided by photocopies or facsimiles
QuestionQ
• Which of the following sources of evidence are more Which of the following sources of evidence are more reliable:
1. Inquiry of an accounts receivable clerk regarding the acco nts recei able balance or acco nts the accounts receivable balance or accounts receivable confirmations sent to a sample of customers.
2. Physical examination of lumber inventory performed by the external auditor or physical examination of inventory performed by internal examination of inventory performed by internal auditors.
E l ti f dit idEvaluation of audit evidence
A di h ld b h h i hi f An auditor should be thorough in searching for
evidence and unbiased in its evaluation.
ll i Illustration:
If auditor decides to mail accounts receivable confirmations to 50 of the largest
f li h h ffi i id h f hcustomers of a client, he must gather sufficient evidence on each of the 50 accounts
In evaluating a client’s response to an audit inquiry the auditor must not allow anyIn evaluating a client s response to an audit inquiry, the auditor must not allow any
personal factors to influence the evaluation of the client’s response
Audit Procedures forAudit Procedures forObtaining Audit Evidence
• Evidence is commonly categorized into the • Evidence is commonly categorized into the following types:
1. Inspection of records or documents 2. Inspection of tangible assets 3. Observation 4. Inquiry 5 Confirmation5. Confirmation6. Recalculation 7. Reperformance8. Analytical procedures 9. Scanning
Audit Procedures forAudit Procedures forObtaining Audit EvidenceInspection of records or documents
• Inspection consists of examining internal or • Inspection consists of examining internal or
external records or documents that are in paper
form, electronic form, or other media
▫ the reliability of such evidence ▫ the reliability of such evidence
▫ its relationship to specific assertions
Audit Procedures forAudit Procedures forObtaining Audit Evidence
Inspection of tangible assetsphysical examine of the assetsp y
Observation observe a process or procedure being performed by others
Inquiry seek information of knowledgeable persons (both fi nancial
d fi i l) h h h i id h and nonfi nancial) throughout the entity or outside the entity
Audit Procedures forAudit Procedures forObtaining Audit EvidenceConfirmation
obtaining a representation of information or of an g pexisting condition directly from a third party
Recalculationchecking the mathematical accuracy of documents or records.
ReperformanceReperformanceindependent execution by the auditor of procedures or controls that were originally performed by company controls that were originally performed by company personnel
Audit Procedures forAudit Procedures forObtaining Audit EvidenceAnalytical procedures
- an important type of evidence on an auditp yp- evaluations of financial information made by a study of plausible relationships among both fi nancial and nonfi nancial data
iScanningreview of accounting data to identify i ifi t l itsignificant or unusual items
Audit Procedures forAudit Procedures forObtaining Audit Evidence
Audit Procedures
Audit DocumentationAudit Documentation
The auditor’s principal record of thep paudit procedures performed, evidence
obtained, and conclusions reached.
Audit documentation (working papers) have two functions:Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the planning, performance, and supervision of
the auditthe audit.
Content of Audit DocumentationContent of Audit Documentation
Audit documentation should:Audit documentation should:
Demonstrate how the audit complied with auditing Demonstrate how the audit complied with auditing and related professional practice standards.
Support the basis for audit conclusions concerningeach material financial statement assertion.
Demonstrate that the underlying accountingrecords agreed with the financial statements.
Content of Audit DocumentationContent of Audit Documentation
Audit documentation should:Audit documentation should:
Include a written audit program detailing auditingd t li h dit bj tiprocedures necessary to accomplish audit objectives.
Enable a knowledgeable and experienced reviewer to:Enable a knowledgeable and experienced reviewer to:
Understand the nature, timing,extent, and results of audit
procedures, evidence obtained,
Determine who performedand reviewed the work,
as well as the datesp o d , d ob d,and conclusions reached.
dof the work and reviews.
Homework
• PR 4-24PR 4 25• PR 4-25
• PR 4-28• PR 4 32• PR 4-32
• GROUP ASSIGNMENT : Earth Wear Case –• GROUP ASSIGNMENT : Earth Wear Case page 140