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Auditing and Assurance Chapter 5
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Chapter 5 Evidence and
Documentation
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
“In our reasonings concerning matter of fact, there are all imaginable degrees of assurance, from the highest certainty to the lowest species of moral evidence. A wise man, therefore, proportions his belief to the evidence.” ― David Hume
Generally Accepted Auditing Standards- Fieldwork
1. The auditor must adequately plan the work and must properly supervise any assistants.
2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.
3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
Relationship of Audit Evidence to the Audit Report
Management assertions about components of financial statements
Financial statements
Audit procedures
Audit report
Provide evidence on the fairness of the
financial statements
LO# 1
Auditor reaches a conclusion based
on the evidence
5-3
Management Assertions
Assertions about classes of transactions
and events for the period under audit
Occurrence
Completeness
Authorization
Accuracy Cutoff
Classification
LO# 2
5-4
Management Assertions
Assertions about account balances at the period end
Existence Completeness
Valuation and allocation
Rights and Obligations
LO# 2
5-5
Management Assertions
Assertions about presentation
and disclosure
Occurrence and rights and obligations
Classification and understandability
Accuracy and valuation Completeness
LO# 2
5-6
Audit Evidence
All the information, from whatever source, used
by the auditor in arriving at the conclusions on which the
audit opinion is based.
LO# 3
5-8
The Concepts of Audit Evidence
Nature of audit evidence
Sufficiency and appropriateness of audit evidence
Evaluation of audit evidence
LO# 3
5-9
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# 3
5-10
Sufficiency of Audit Evidence
Sufficiency is the 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# 3
5-11
Appropriateness of Audit Evidence
Relevance
Reliability
Independent source outside the entity
Effectiveness of internal control
Auditor’s direct personal knowledge
Documentary evidence
Original documents
LO# 3
Appropriateness is a measure of the quality of audit evidence.
5-12
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# 3
5-13
Audit Procedures
Specific acts performed by the auditor to gather evidence about
whether specific assertions are being met.
Risk assessment procedures
Test of controls
Substantive procedures
LO# 4
5-14
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# 4
Audit Program 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.
5-15
Audit Procedures for Obtaining Audit Evidence
Inspection of records and
documents
Evidence obtained from external documents is more
reliable than evidence obtained from internal documents.
Journal or Ledger
Source Documents
Vouching (Occurrence)
Tracing (Completeness)
LO# 4
5-16
Audit Procedures for Obtaining Audit Evidence
The process of watching a process or procedure being performed by others.
Observation
Inspection of tangible
assets
Physical examination of a tangible asset.
LO# 4
5-17
Audit Procedures for Obtaining Audit Evidence
In conducting inquiry, the auditor should: • Consider the knowledge, objectivity, experience, responsibility, and qualifications of the individual to be questioned. • Ask clear, concise, and relevant questions. • Use open or closed questions appropriately. • Listen actively and effectively. • Consider the reactions and responses and ask follow-up questions. • Evaluate the response.
Inquiry
LO# 4
5-18
Audit Procedures for Obtaining Audit Evidence
Confirmation
LO# 4
The process of obtaining a representation of information or of an existing condition directly from a third party.
5-19
Audit Procedures for Obtaining Audit Evidence
Determining the mathematical accuracy of documents or records.
Reperformance
Recalculation
The auditor’s independent execution of procedures or controls that were originally performed by company personnel.
LO# 4
5-20
Audit Procedures for Obtaining Audit Evidence
Review of accounting data to identify significant or unusual items.
Scanning
Analytical procedures
Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.
LO# 4
5-21
Purposes of Analytical Procedures Risk
Assessment Procedures
Used to assist the auditor to better understand the business and to plan the
nature, timing, and extent of audit procedures.
Substantive Analytical
Procedures
Used to obtain evidential matter about particular assertions related to account
balances or classes of transactions.
Final Analytical
Procedures
Used as an overall review of the financial information in the final review stage of the
audit.
LO# 9
5-22
McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies,
Inc. All rights reserved.
Audit Documentation Defined Definition
The written record of the basis for the auditor’s conclusions that provides the support for the auditor's representations, whether those representations are contained in the auditor's report or otherwise.
Objectives Improve audit quality Enhance public confidence
Contents Planning and performance of the work Procedures performed Evidence obtained Conclusions reached by the auditor
Audit Documentation The auditor’s record of the
audit procedures performed, evidence obtained, and conclusions reached.
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.
LO# 7
5-27
Content of Audit Documentation
Audit documentation 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.
LO# 8
5-28
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
5-29
McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies,
Inc. All rights reserved.
Audit Documentation Files Current
Audit Administrative Files - contain documentation of the early planning phases of the audit.
Audit Evidence Files – contain the specific assertions under audit, a record of the procedures performed, the evidence obtained, and decisions made in the course of the audit. The most important facet of audit evidence is showing decision problems and conclusions.
Permanent file contains information
of continuing audit significance over many years.
Prior Year Working Papers
Format of Audit Documentation
Heading
Indexing and cross-referencing
Tick marks
Entity name Title of the working paper
Entity’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
5-31
McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies,
Inc. All rights reserved.
Illustrative Audit Documentation Information on Workpaper
Name, date, purpose, page number
Procedures performed and conclusions reached by the auditor Evidence that
auditor followed general standards and standards of field work
Tick Mark Legend Reviewers’ initials
Insert Exhibit 4.7
McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies,
Inc. All rights reserved.
Current Audit Documentation File Format
Documentation is grouped behind the trial balance
according to balance sheet and income statement captions.
Current assets usually appear first, followed by fixed assets,
other assets, liabilities, equities, income, and expense accounts.
A lead schedule is a summary of the accounts or components in an account group. Amounts on
these schedules should agree with adjusted ledger and
financial statement balances.
McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies,
Inc. All rights reserved.
Documentation Completion and Retention PCAOB regulations require that all documentation must
be finalized within 45 days of the audit report’s release SOX requires that audit documentation, including
workpapers and other documents that form the basis of the engagement, be retained for seven years following the conclusion of the engagement (usually the audit report date).
Additions/Amendments Documentation may not be deleted or discarded
after report release date. Additions must indicate
Date the information was added, Name of preparer Reason
McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies,
Inc. All rights reserved.
Audit Documentation Ownership and Confidentiality
Ownership Auditors maintain ownership, even after
auditor-client relationship is over. Confidentiality
Only can be made public with permission, or if subpoenaed, or as part of a peer review of firm practices, or as part of an ethics investigation of firm personnel.
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