Chap 5 Lecture Slides

Chapter 5 Evidence and

Documentation

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“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

http://www.goodreads.com/author/show/45726.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

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Management Assertions

Assertions about classes of transactions

and events for the period under audit

Occurrence

Completeness

Authorization

Accuracy Cutoff

Classification

LO# 2

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Assertions about account balances at the period end

Existence Completeness

Valuation and allocation

Rights and Obligations

LO# 2

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Assertions about presentation

and disclosure

Occurrence and rights and obligations

Classification and understandability

Accuracy and valuation Completeness

LO# 2

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Management Assertions LO# 2

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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.

LO# 3

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The Concepts of Audit Evidence

Nature of audit evidence

Sufficiency and appropriateness of audit evidence

Evaluation of audit evidence

LO# 3

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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

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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

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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.

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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 unbiased in its evaluation.

LO# 3

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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

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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.

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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

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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

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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

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Confirmation

LO# 4

The process of obtaining a representation of information or of an existing condition directly from a third party.

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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

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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

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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

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Reliability of Types of Evidence

LO# 5

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Filling the Assurance Bucket LO# 6

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Example of Filling the Assurance Buckets for Each Assertion (Accounts Payable)

LO# 6

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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

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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

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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

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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

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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



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.



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



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.

End of Chapter 5

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