4-1

Chapter Four
Audit Evidence
and Audit Documentation

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 4-2

Audit Evidence

Information used
by the auditor in arriving at
the conclusions on which the
audit opinion is based.

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 4-3

Relationship of Audit
Evidence to the Audit Report

Financial Audit
statements report

Management assertions
about components of
financial statements

Evidence on the
Audit
fairness of the
procedures
financial statements
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 4-4

Management Assertions

Completeness

Occurrence Classification
Assertions about
classes of transactions
and events for the
period under audit
Cutoff Accuracy

Authorization
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 4-5

Management Assertions

Rights and Valuation

Obligations and allocation

Assertions about
end-of-the-period
account balances

Existence Completeness

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Management Assertions
Classification and
understandability

Assertions
Accuracy and
about presentation Completeness
valuation
and disclosure

Occurrence and
rights and obligations
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 4-7

Audit Procedures

Specific acts
performed by the auditor
to gather evidence to determine
if specific assertions are
being met.

Risk assessment Test of Substantive

procedures controls procedures

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 4-8

Audit Procedures

A set of audit procedures prepared to test

assertions for a component of the financial
statements is referred to as an audit plan.
Audit Plan for Accounts Receivable
Management Assertions Audit Procedures
Existence Confirm receivables.
Rights and Obligations Ask if receivables have been sold.
Completeness Agree controlling account with total of subsidiary accounts.
Examine sales invoices immediately before and after year-end
for proper cutoff.
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 note disclosure.
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The Concepts of Audit

Evidence

Nature of audit evidence

Appropriateness of audit evidence

Sufficiency of audit evidence

Evaluation of audit evidence

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Nature of Audit Evidence

Records of
initial entries and Invoices
supporting records
Spreadsheets
supporting cost
General allocations
and subsidiary
ledgers Worksheets

Other
Adjustments computations,
to financial Contracts reconciliations, and
statements disclosures
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 4-11

Appropriateness of
Audit Evidence
Relevance

Reliability
Independent source of the evidence

Effectiveness of internal control

Auditor’s direct personal knowledge

Documentary evidence

Original documents
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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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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 be thorough in searching

for evidence and unbiased in its evaluation.

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 4-14

Audit Procedures for

Obtaining Audit Evidence
Evidence obtained from
Inspection
external documents is more
of records and
reliable than evidence obtained
documents
from internal documents.

Vouching
(Occurrence) Ledger
Source
Documents Tracing
(Completeness)
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Audit Procedures for

Obtaining Audit Evidence
In conducting inquiry, the auditor should:
Inspection
• Consider the knowledge, objectivity,
of records and
experience, responsibility, and
documents qualifications of the person to be
questioned.
• Ask clear, concise, and relevant
questions.
Inquiry
• Use open or closed questions
appropriately.
• Listen actively and effectively.
• Consider the reactions and responses,
then ask follow-up questions.
• Evaluate the response.
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 4-16

Audit Procedures for

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

Confirmation

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 4-17

Audit Procedures for

Obtaining Audit Evidence
Inspection
of records and Recalculation Observation
documents

Inspection
Inquiry Scanning of tangible
assets

Analytical
Confirmation Reperformance
procedures

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 4-18

Reliability of Types
of Evidence

Level Of Reliability Type of Evidence

High Inspection of tangible assets
Reperformance
Recalculation
Medium Inspection of records and documents
Scanning
Confirmation
Analytical procedures
Low Observation
Inquiry

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 4-19

Audit Documentation

The auditor’s principal record of the

audit procedures performed, evidence
obtained,and conclusions reached.

Provides the basis for the review and

inspection of the quality of the audit work.

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 4-20

Content of Audit
Documentation
Audit documentation should:

Provide a record of the basis for

the auditor’s report.

Provide evidence that the audit was performed

in accordance with auditing standards
and applicable regulations.

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 4-21

Content of Audit
Documentation
Audit documentation should:

Include the overall audit strategy and audit plan.

Enable an experienced auditor to understand:

The nature, timing, The results of audit procedures

extent, and results of the audit and evidence obtained,
procedures performed to comply and conclusions reached on
with ISAs and applicable regulations. significant matters.
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 4-22

Content of Audit
Documentation
Most audit 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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 4-23

Content of Audit
Documentation
Most audit firms maintain
audit documentation in two types of files

Permanent files Current files

Overall audit strategy Adjusting journal entries

Audit plan, Audit report Reclassification journal entries
Working trial balance Current financial statements
Minutes of meetings Working papers supporting accounts
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 4-24

Format of Audit
Documentation
Client name
Heading Title of the working paper
Client’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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 4-25

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.

ISQC1 requires
audit documentation to be retained for minimum five
years from the date of the auditor’s report.
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 4-26

End of Chapter 4

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