Chapter 5

Evidence and
Documentation

© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd

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

Management
Management assertions
assertions Auditor
Auditor reaches
reaches
about
about elements
elements of
of aa conclusion
conclusion based
based
financial
financial statements
statements on
on the
the evidence
evidence

Provide
Provide evidence
evidence on on the
the
Audit
Audit fairness
fairness of
of the
the
procedures
procedures financial
financial statements
statements

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 Management Assertions

Completeness
Completeness
Occurrence
Occurrence Classification
Classification

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

Cut-off
Cut-off Accuracy
Accuracy
Authorization
Authorization
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Management Assertions

Existence
Existence Completeness
Completeness

Assertions about
account balances
at the period end

Rights
Rights and
and Valuation
Valuation
obligations
obligations and
and allocation
allocation
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 Management Assertions

Assertions Accuracy
Accuracy and
and
Completeness
Completeness about presentation valuation
valuation
and disclosure

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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
All the
the information,
information, from
from
whatever
whatever source,
source, used
used
by
by the
the auditor
auditor in
in arriving
arriving at
at
the
the conclusions
conclusions on on which
which the
the
audit
audit opinion
opinion isis based.
based.

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The Concepts of Audit
Evidence

Nature
Nature of
of audit
audit evidence
evidence

Sufficiency
Sufficiency and
and appropriateness
appropriateness
of
of audit
audit evidence
evidence

Evaluation
Evaluation of
of audit
audit evidence
evidence

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 Nature of Audit Evidence

Records General
General
Records of of Spreadsheets
Spreadsheets
initial and
and subsidiary
subsidiary
initial entries
entries and
and supporting
supporting cost
cost
supporting ledgers
ledgers
supporting records
records allocations
allocations
Minutes
Minutes
from Benchmarking
Benchmarking
Invoices
Invoices from meetings
meetings
Analyst’s
Analyst’s
Worksheets
Worksheets Contracts
Contracts reports
reports

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

Sufficiency
Sufficiency is
is aa measure
measure ofof
the
the quantity
quantity of
of audit
audit evidence.
evidence.

Greater
Greater risk
risk of
of Higher
Higher quality
quality
misstatement
misstatement requires
requires audit
audit evidence
evidence results
results
aa higher
higher quantity
quantity in
in aa lower
lower quantity
quantity
of
of audit
audit evidence.
evidence. of
of audit
audit evidence.
evidence.

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

Independent
Independent source
source outside
outside the
the entity
entity

Effectiveness
Effectiveness of
of internal
internal control
control
Auditor’s
Auditor’s direct
direct personal
personal knowledge
knowledge
Documentary
Documentary evidence
evidence
Original
Original documents
documents
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Evaluation of Audit Evidence

Proper
Proper evaluation
evaluation of
of evidence
evidence
requires
requires an
an understanding
understanding of
of the:
the:
Types
Types of
of evidence
evidence available.
available.

Relative
Relative reliability
reliability of
of available
available evidence.
evidence.

An
An auditor
auditor should
should be
be thorough
thorough in in searching
searching
for
for evidence
evidence and
and be
be unbiased
unbiased in
in its
its evaluation.
evaluation.

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 Audit Procedures

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

Risk
Risk assessment
assessment Test
Test of
of Substantive
Substantive
procedures
procedures controls
controls procedures
procedures

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 Audit Procedures
The
The set
set of
of audit
audit procedures
procedures prepared
prepared to to test
test
assertions
assertions for
for an
an element
element ofof the
the financial
financial
statements
statements isis described
described in
in the
the audit
audit plan.
plan.
Audit Plan for Accounts
Receivable
Management Assertions Example Audit Procedures
Existence Confirm accounts receivable.
Agree balance of accounts receivable control
account to individual balances of accounts
receivable subsidiary ledger (vouching)
Agree individual balances of accounts receivable
subsidiary ledger to sales invoices to shipping
document (vouching)
Rights and obligations Inquire of management whether receivables have
been sold. © 2017 McGraw-Hill Education (Malaysia) Sdn Bhd
 Audit Procedures for
Obtaining Audit Evidence
Inspection
Inspection Inspection
Inspection
of
of records
records or
or of
of tangible
tangible Observation
Observation
documents
documents assets
assets

External
External
Inquiry
Inquiry Recalculation
Recalculation
Confirmation
Confirmation

Reperformance
Reperformance Analytical
Analytical
procedures Scanning
Scanning
procedures

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 Audit Procedures for
Obtaining Audit Evidence

Evidence obtained from

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

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

Inspection
Inspection Physical examination of a
of
of tangible
tangible tangible asset.
assets
assets

The process of watching a

Observation
Observation process or procedure being
performed by others.

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 Audit Procedures for
Obtaining Audit Evidence
In
In conducting
conducting inquiry,
inquiry, the
the auditor
auditor should:
should:
•• Consider
Consider the
the knowledge,
knowledge, objectivity,
objectivity,
experience,
experience, responsibility
responsibility andand
qualifications
qualifications ofof the
the person
person to
to be
be
questioned.
questioned.
•• Ask
Ask clear,
clear, concise
concise and and relevant
relevant
Inquiry
Inquiry questions.
questions.
•• Use
Use open
open oror closed
closed questions
questions
appropriately.
appropriately.
•• Listen
Listen actively
actively and
and effectively.
effectively.
•• Consider
Consider the
the reactions
reactions and
and responses,
responses,
and
and ask
ask follow-up
follow-up questions.
questions.
•• Evaluate
Evaluate the
the response.
response.
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 Audit Procedures for
Obtaining Audit Evidence
The process of obtaining a
External
External representation of information of an
Confirmation
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.

© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd

 Audit Procedures for
Obtaining Audit Evidence

External
External
Confirmation
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
Recalculation accuracy of documents or
records.

The auditor’s independent

Reperformance
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 information

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

Review of accounting data to

Scanning
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
Audit documentation
documentation (working
(working papers)
papers) has
has three
three functions:
functions:
11 To
To provide
provide support
support for
for the
the audit
audit report.
report.
22 To
To aid
aid in
in the
the planning,
planning, performance
performance and and supervision
supervision ofof
the
the audit.
audit.
33 To
To provide
provide basis
basis for
for quality
quality reviews;
reviews; to
to provide
provide evidence
evidence
supporting
supporting the the auditor’s
auditor’s significant
significant conclusions.
conclusions.

© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd

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

Demonstrate
Demonstrate how
how the
the audit
audit complied
complied with
with auditing
auditing
and
and related
related professional
professional practice
practice standards.
standards.

© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd

 Content of Audit
Documentation
Audit
Audit documentation
documentation should:
should:

Enable
Enable an
an experienced
experienced auditor
auditor to
to understand:
understand:

Significant matters arising

The
The nature,
nature, timing
timing The results of the
during the audit, the conclusions
and
and extent
extent of
of audit procedures
reached thereon, and significant
audit
audit procedures
procedures performed
professional judgements made
performed
performed in reaching those conclusions
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 Content of Audit
Documentation
Most
Most public
public accounting
accounting firms
firms maintain
maintain
audit
audit documentation
documentation in
in two
two types
types of
of files:
files:

Permanent
Permanent files
files Current
Current files
files

Corporate
Corporate charter
charter Important
Important contracts
contracts
Chart
Chart of
of accounts
accounts Internal
Internal control
control documentation
documentation
Organization
Organization chart
chart Terms
Terms ofof stock
stock and
and bond
bond issues
issues
Prior
Prior years’
years’ analytical
analytical procedures
procedures
© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd
 Content of Audit
Documentation
Most
Most public
public accounting
accounting firms
firms maintain
maintain
audit
audit documentation
documentation in
in two
two types
types of
of files:
files:

Permanent
Permanent files
files Current
Current files
files

Audit
Audit report
report Adjusting
Adjusting journal
journal entries
entries
Audit
Audit strategy
strategy and
and plan
plan Reclassification
Reclassification journal
journal entries
entries
Working
Working trial
trial balance
balance Current
Current financial
financial statements
statements
Minutes
Minutes ofof meetings
meetings Working
Working papers
papers supporting
supporting accounts
accounts
© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd
 Format of Audit
Documentation
Entity
Entity name
name
Heading
Heading Title
Title of
of the
the working
working paper
paper
Entity’s
Entity’s year-end
year-end date
date

Notations
Notations that
that provide
provide aa trail
trail
Indexing
Indexing and
and from
from financial
financial statements
statements to to
cross-referencing
cross-referencing audit
audit documents.
documents.

Notations
Notations made
made next
next to
to
Tick
Tick marks
marks work
work paper
paper items
items indicating
indicating
auditor/reviewer
auditor/reviewer actions.
actions.
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Audit Documentation

Audit
Audit documentation
documentation should
should be
be organized
organized soso
that
that audit
audit team
team members
members andand others
others can
can find
find
evidence
evidence supporting
supporting financial
financial statement
statement accounts.
accounts.

All
All audit
audit documentation
documentation is is the
the property
property of
of the
the
auditor,
auditor, including
including documents
documents prepared
prepared
by
by the
the entity
entity at
at the
the auditor’s
auditor’s request.
request.

ISQC1
ISQC1 requires
requires audit
audit documentation
documentation to to be
be retained
retained
ordinarily
ordinarily for
for minimum
minimum fivefive years
years from
from
the
the date
date ofof the
the auditor’s
auditor’s report.
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

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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.

© 2017 McGraw-Hill Education (Malaysia) Sdn Bhd

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 Analytical
Assessment
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 Outstanding
Receivables in Accounts
Turnover 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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