Chapter 5

Evidence and
Documentation

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 Relationship of Audit
Evidence to the Audit Report
Financial Audit
statements report

Management assertions Auditor reaches

about elements of a conclusion based
financial statements on the evidence

Provide evidence on the

Audit
fairness of the
procedures
financial statements

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 Management Assertions

Completeness
Occurrence Classification

Assertions about
classes of transactions
and events for the
period under audit

Cut-off Accuracy
Authorization

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Management Assertions

Existence Completeness

Assertions about
account balances
at the period end

Rights and Valuation

obligations and allocation

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 Management Assertions

Occurrence and
rights and obligations

Assertions Accuracy and

Completeness about presentation valuation
and disclosure

Classification and
understandability
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Management Assertions
Table 5–2 Summary of Management Assertions by Category

(continued)
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Management Assertions

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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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The Concepts of Audit
Evidence

Nature of audit evidence

Sufficiency and appropriateness

of audit evidence

Evaluation of audit evidence

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 Nature of Audit Evidence

Records of General Spreadsheets

initial entries and and subsidiary supporting cost
supporting records ledgers allocations

Minutes
from meetings Benchmarking
Invoices
Analyst’s
Worksheets Contracts reports

Adjustments Other
Information
to financial computations,
obtained from
statements reconciliations and
audit procedures
disclosures
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 Sufficiency of
Audit Evidence

Sufficiency is a measure of
the quantity of audit evidence.

Greater risk of Higher quality

misstatement requires audit evidence results
a higher quantity in a lower quantity
of audit evidence. of audit evidence.

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Appropriateness of
Audit Evidence
Relevance
Appropriateness is a measure
Reliability of the quality of audit evidence.

Independent source outside the entity

Effectiveness of internal control

Auditor’s direct personal knowledge

Documentary evidence

Original documents
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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 be unbiased in its evaluation.

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 Audit Procedures

Specific acts
performed by the auditor
to gather evidence about
whether specific assertions
are being met.

Risk assessment Test of Substantive

procedures controls procedures

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 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.
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 Audit Procedures for
Obtaining Audit Evidence
Inspection Inspection
of records or of tangible Observation
documents assets

External
Inquiry Recalculation
Confirmation

Reperformance Analytical
procedures Scanning

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 Audit Procedures for
Obtaining Audit Evidence

Evidence obtained from

Inspection
external documents is more
of records or
reliable than evidence obtained
documents
from internal documents.

Vouching
(Occurrence) Journal
Source
or
Documents Tracing Ledger
(Completeness)
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 Audit Procedures for
Obtaining Audit Evidence

Inspection
Physical examination of a
of tangible
tangible asset.
assets

The process of watching a

Observation process or procedure being
performed by others.

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 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
Inquiry questions.
• Use open or closed questions
appropriately.
• Listen actively and effectively.
• Consider the reactions and responses,
and ask follow-up questions.
• Evaluate the response.

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 Audit Procedures for
Obtaining Audit Evidence
The process of obtaining a
External representation of information of an
Confirmation 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.

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 Audit Procedures for
Obtaining Audit Evidence

External
Confirmation

Information Frequently
Confirmed by Auditors Source of Confirmation
Cash balance Bank
Accounts receivable Individual customers
Inventory on consignment Consignee
Accounts payable Individual vendors
Bonds payable Bondholders/trustee
Common stock outstanding Registrar/transfer agent
Insurance coverage Insurance company
Collateral for loans Creditors

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 Audit Procedures for
Obtaining Audit Evidence

Determining the mathematical

Recalculation accuracy of documents or
records.

The auditor’s independent

Reperformance execution of procedures or
controls that were originally
performed by company
personnel.

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 Audit Procedures for
Obtaining Audit Evidence

Evaluations of financial
Analytical information made by a study of
procedures plausible relationships among both
financial and non-financial data.

Review of accounting data to

Scanning
identify significant or unusual
items.

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

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

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Filling the Assurance Bucket

Figure 5–4 Filling the Assurance Bucket

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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

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 Audit Documentation

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.

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 Content of Audit
Documentation
Audit documentation provides the principal support for the
representations in the auditor’s report and should:

Demonstrate how the audit complied with auditing

and related professional practice standards.

Support the basis for the auditor’s conclusions

concerning each material financial statement
assertion.

Demonstrate that the underlying accounting

records agreed or reconciled with the financial
statements.
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 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:

Significant matters arising

The nature, timing The results of the
during the audit, the conclusions
and extent of audit procedures
reached thereon, and significant
audit procedures performed
professional judgements made
performed in reaching those conclusions
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 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
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 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
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 Format of Audit
Documentation
Entity name
Heading Title of the working paper
Entity’s year-end date

Notations that provide a trail

Indexing and
from financial statements to
cross-referencing
audit documents.

Notations made next to

Tick marks work paper items indicating
auditor/reviewer actions.
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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.

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 Purposes of Analytical
Procedures
Risk Used to assist the auditor to better
understand the business and to plan the
Assessment nature, timing and extent of audit
Procedures procedures.

Substantive Used to obtain evidential matter about

Analytical particular assertions related to account
balances or classes of transactions.
Procedures

Final Used as an overall review of the financial

Analytical information in the final review stage of the
audit.
Procedures
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 Purposes of Analytical
Procedures (see Table 5-10)

Trend Analysis

Ratio
Analysis

Reasonableness
Analysis

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

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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.

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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!

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Compare and Investigate

Compare the expectation to the recorded amount

and investigate any differences greater than the
tolerable difference.

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 The Investigation of Differences for Risk
Assessment and Final Analytical Procedures

Risk Final
Assessment Analytical
Procedures Procedures
Differences Differences

Corroborating Corroborating
evidence evidence
is not required is required

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Short-Term Liquidity Ratios

Current Ratio

Quick Ratio

Operating Cash
Flow Ratio

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 Activity Ratios

Days
Receivables Outstanding in
Turnover Accounts
Receivable

Days of
Inventory
Inventory on
Turnover
Hand

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Profitability Ratios

Gross Profit Profit Margin

Percentage

Return on Return on
Assets Equity

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Coverage Ratios

Debt to Equity

Times Interest Earned

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