Module 3: Audit Objectives, Evidence, Procedures, and Documentation

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Module 3: Audit objectives, evidence, procedures, and documentation

Overview
Module 3 explains the difference between the objective of an audit (which is to express an opinion on the financial statements) and
specific audit objectives (which are to identify the relevant management assertions embodied in the financial statements and to
ensure that those assertions are not materially misstated). You learn what is required for evidence to be sufficient and appropriate
to afford a reasonable basis for supporting the content of the auditors report, as well as the general audit procedures used to
gather evidence. This module also covers the requirements for the form and content of working papers so that evidence can be
properly documented, as well as pre-engagement activities.
When you have completed this module, you should have a good understanding of both the auditors and managements
responsibilities. Throughout the module, you apply what you have learned about the audit objectives and evidence to mini-scenarios
that outline situations faced by auditors.
Assignment reminder: Assignment 1 in Module 5 is due at the end of Week 5 (see Course Schedule). You may wish to take a look at
the assignment now to familiarize yourself with the requirements and to prepare for any work that may be required in advance.
Test your knowledge

Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of study required.
Learning objectives
3.1
Audit objectives
Describe the auditors responsibility to consider fraud and error and

the consequences of illegal acts, in order to achieve the objective of
financial statement audits. (Level 2)
3.2
Specific audit objectives
Explain the various types of management assertions and their

relationship to specific audit objectives. (Level 1)
3.3
Audit evidence
Explain how an auditor determines what and how much evidence is

required. (Level 1)
3.4
Evidence-gathering audit procedures
Identify and apply evidence-gathering audit procedures commonly

used to obtain audit evidence, and describe the strengths and
weaknesses of each procedure. (Level 1)
3.5
Documentation
Explain the purpose and key elements of audit working papers, and
describe the form and content of documentation required in a
professional engagement. (Level 1)
3.6
Pre-engagement arrangements
Identify the main pre-engagement activities and the factors to

consider when deciding whether to accept a new audit engagement.
(Level 1)
3.7
Engagement letters
Describe the purpose and main features of an engagement letter.

(Level 2)
Module summary
Print this module
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3.1 Audit objectives

Learning objective
Describe the auditors responsibility to consider fraud and error and the consequences of illegal acts, in order to
achieve the objective of financial statement audits. (Level 2)
Required reading
Chapter 9, pages 348350, Auditors Responsibility to Report Internal Control Deficiencies and Fraud Risks
Chapter 17, pages 682686, Auditors Responsibility to Consider Fraud and Error in an Audit of Financial Statements
and Illegal Acts by Clients
CAS 260.10.13 (CICA Handbook
Assurance
,
paragraphs 5751.17.19)
CAS 200 (CICA Handbook
, section 5090)
CAS 240 (CICA Handbook,
section 5135)
section 5136)
Reading 3-1: AuG-8, The Auditors Responsibility for the Detection of Fraud and Other Irregularities
Reading 3-2: AuG-9, The Auditors Responsibility for the Detection and Reporting of Illegal Acts
LEVEL 2
Overall objective of an audit

The objective of an audit is to express an appropriate opinion as to whether the financial statements present fairly, in all
material respects, the financial position, the results of operations, and the cash flows of the auditee. To say that the financial
statements present fairly, in all material respects, is equivalent to stating that they are free from material misstatements
whether due to error, fraud, or as a consequence of an illegal act by the client.
Responsibility to detect errors or fraud

Management is responsible for producing the financial statements and for implementing controls that will prevent and detect
errors or fraud. The auditor is responsible for detecting material misstatements from errors or fraud in order to achieve the
objective of the audit.
Professional skepticism requires the auditor to be alert to any factors that could increase the risk of material misstatements,
paragraphs
whether caused by fraud or error (CAS 240.12.14; CICA Handbook
5135.023.024 and CAS 200.15 and 200.A18A22; CICA Handbook
paragraphs 5090.04.06).
For example, while conducting an audit, an auditor reviews an original copy of a $5 million sales agreement and it appears
that the terms of the sale may be falsified. The auditor would respond with a heightened level of professional skepticism and
would seek additional evidence to confirm or dispel the concern about falsification. This could be done by directly confirming
the terms of the contract with the customer.
Scenario 3.1-1
Lazlo, CGA and auditor for World Communications Inc., has scheduled a meeting with the CFO during the initial stages of the
audit engagement. In addition to other information, the CFO tells Lazlo that no significant capital assets were acquired during
the year. In accordance with CAS 200 (CICA Handbook
section 5090), should Lazlo believe the
CFO and not bother checking the facts himself?
Solution
Responsibility to detect illegal acts
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Management is responsible for identifying and complying with laws and regulations that affect the entity, as well as
preventing and detecting illegal acts.
CAS 250.A7 explains how the auditor can obtain an understanding of the laws and regulations that, if violated, could result in
, paragraph 5136.09) requires that the
material misstatement. CAS 250.13 (CICA Handbook
auditor design procedures so as to obtain sufficient evidence regarding compliance with the provisions of those laws and
regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the
financial statements. The auditor must reduce the risk of not detecting a material misstatement to an acceptably low level,
recognizing that such a misstatement may arise from the consequences of an illegal act. CAS 250.A9 and 250.A15.A16
(CICA Handbook
, paragraphs 5136.11.22) provide guidance on how to reduce this risk to an
acceptably low level.
Scenario 3.1-2
Natasha, CGA and auditor for Rose Industries Inc., discovers that a relatively small bribe is paid in a foreign country to a
government official of that country. Even though the bribe is not material, Natasha considers assessing the impact on the
financial statements because of this illegal act. Do you agree with her?
Solution
Responsibility to communicate material misstatements

If the auditor obtains evidence confirming that a misstatement does exist, the auditor should promptly communicate the
misstatement to the appropriate level of management and to the audit committee (or equivalent). See CAS 240.40.42 and
CAS 260.A20 (CICA Handbook,
paragraphs 5135.093.101 and 5751.17), if applicable.
Discovery of possible illegal acts should be communicated to the audit committee and other appropriate levels of
management. The auditor is also required to advise the audit committee (or equivalent) of any questions regarding
management competence and integrity.
3.2 Specific audit objectives

Learning objective
Explain the various types of management assertions and their relationship to specific audit objectives. (Level 1)
Required reading
Chapter 6, pages 195202

CAS 315.A105.A112 (CICA Handbook
, paragraph 5300.21)
LEVEL 1
Auditors usually find it more efficient to audit components all the related accounts in a cycle with coordinated
procedures, instead of performing separate audit procedures on each account in isolation.
CAS 315 provides a detailed listing of audit assertions, which may be about
classes of transactions (income statement balances)

balance sheet items
presentation and disclosure
In the conduct of an audit, the auditor will assess the risk of material misstatement at the account balance and assertion
level.
Be sure you understand the difference between the overall objective of an audit and the audit objective itself. The following
exhibit summarizes the relationship between the objective and its place within the audit.
Exhibit 3.2-1: Audit objectives
Objective type
What it relates to
What it refers to
Objective of an audit
Expressing the appropriate

opinion on the financial
statements.
The audit as a whole.
Audit objectives
The definition of auditing, which

states that auditing is a
systematic process of objectively
obtaining and evaluating evidence
regarding assertions about
economic actions and events to
ascertain the degree of
correspondence between the
assertions and [GAAP] (text,
page 7).
The financial statements that

embody the following management
assertions:
existence (occurrence)
completeness
ownership (rights and
obligations)
valuation and allocation
(accuracy and
measurement)
cut-off
classification and
understandability
statement presentation
(disclosure)
Specific audit objectives
The auditors goals in examining

account balances and
transactions in each cycle.
Obtaining and evaluating evidence

about each account balance, class
of transaction, or disclosure at the
assertion level.
In preparing financial statements, management makes assertions about the amounts and disclosures contained in those
statements. For example, when the balance sheet shows accounts receivable at $400,000, management is asserting that
these amounts actually exist, that they reflect appropriate allowances for uncollectible accounts, and that the company does
indeed own the receivables.
Occurrence and existence assertions are closely related. Occurrence relates to authentic transactions experienced during
the period (for example, recorded sales transactions made to actual customers), and existence relates to an account
balance at a point in time (for example, all customer receivable balances at year end).
Accuracy relates to transactions during the period, and valuation pertains to an account balance at a point in time (for
example, merchandise inventory transactions are measured at actual cost for recording, and the year-end inventory account
balance is valued at net realizable value for reporting).1
Scenario 3.2-1
Elise, CGA and auditor for More Productions Ltd., makes note of the objective Obtain evidence to ensure completeness
(ensure liabilities are not understated) as she prepares the audit working papers for the accounts payable section. What
procedure could Elise use to support this objective?
Solution
T. Shasti and R. Chandra, Independent Audit and

Review Services: Theory and Practice
(University of Windsor, 1997), pages 111 and 177.
3.3 Audit evidence

Learning objective
Explain how an auditor determines what and how much evidence is required. (Level 1)
Required reading

5300.01.22)
Assurance
, paragraphs
LEVEL 1
What is appropriate evidence?

Audit objectives are achieved by gathering and evaluating evidence about management assertions. Auditors need to obtain
evidence on a cost-effective basis, and consequently, the nature of audit evidence is persuasive rather than conclusive. Just
as it is not possible to eliminate the risk that financial statements contain material misstatements, it is not feasible to expect
to obtain evidence that conclusively supports each assertion. For that reason, the auditor often uses evidence from different
sources to support the same assertion.
Scenario 3.3-1
Mohan, CGA and auditor for Active Building Inc., notes the objective Obtain evidence to ensure completeness (ensure
liabilities are not understated) in preparing the audit working papers for the accounts payable section. One of the
procedures Mohan would use is to examine invoices paid after year end to make sure those invoices related to the year
under audit are properly included as accounts payable. What other procedures could Mohan perform?
Solution
Appropriateness and sufficiency of evidence

The appropriateness and sufficiency of evidence are interrelated and a matter of auditor judgment (CAS 500.6, CAS 500.A1.
A6, and CAS 500.A27.A33; CICA Handbook,
paragraphs 5300.07.09).
Appropriateness of audit evidence is related to the nature and timing of audit procedures. Appropriateness (that is, the
quality of evidence) is achieved if the evidence obtained is relevant and reliable.
There are various degrees of reliability that can be achieved; not all evidence is equally strong. Exhibit 8-5 on Page 290 of
the text presents a hierarchy of sources and characteristics of evidence from strongest to weakest. Timeliness is also an
important dimension of appropriateness. Clearly, observing an inventory count three months after year-end (without
additional roll-back auditing procedures) would not provide appropriate evidence regarding the amounts in inventory at yearend.
Sufficiency of evidence relates to the extent of audit procedures and the quantity of evidence obtained. How many questions
should the auditor ask through enquiry? How many confirmations should be sent? How many different audit procedures
should be used to support the valuation assertion?
The concept of sufficiency arises from the fact that the auditor does not examine all the evidence available. You should be
aware of the reasons for accumulating limited amounts of evidence, which are outlined in CAS 500.A1500.A6
paragraphs 5300.14.16). Sufficiency is achieved through an adequate
(CICA Handbook
quantity of evidence obtained by testing specific items and representative items.
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3.4 Evidence-gathering audit procedures

Learning objective
Identify and apply evidence-gathering audit procedures commonly used to obtain audit evidence, and describe the
strengths and weaknesses of each procedure. (Level 1)
Required reading

paragraphs 5300.30.42)
Assurance,
, paragraphs 5301.10.24)
, paragraphs 5303.11.13)
, section 5305)
, section 5310)
LEVEL 1
Pages 275281 of the textbook covers the evidence-gathering audit procedures used to obtain and evaluate audit evidence.
Exhibit 8-1 on page 275 shows the type of evidence obtained and gives an example of a specific audit procedure.
paragraphs
As you read through the text and CAS 500.A10A.25 (CICA Handbook,
5300.30.42), you should understand the nature of each method, its strengths and weaknesses, and the types of assertions
supported by the evidence each method produces. For example,
The nature of observation is to look at the application of procedures and policies at a given point in time.
Evidence produced by computation mainly supports the assertions of existence and valuation.
One of the weaknesses of enquiry is that it produces evidence that is rarely sufficient to support an assertion by
itself.
The other three techniques are explained below.

Confirmation is a method of obtaining evidence from third parties regarding specific balances, contractual terms, titles to
assets, and pending litigation. The text mentions that the main assertions supported by evidence from confirmation are
existence and ownership, but it also supports completeness when confirmations are used to obtain evidence about liabilities
(for example, accounts payable).
Positive and negative confirmations are described in CAS 505.15, 505.A5, and 505.A23 (CICA
Handbook
, paragraphs 5303.11.13). However, you do not need to read the rest of CAS 505
(CICA Handbook,
section 5303) until Module 8, when you learn the details of how
confirmations are applied to the audit of cash and accounts receivable.
Inspection
The three principal means of inspection are vouching, tracing, and scanning. One important concept to note from the texts
explanation is that of direction.
Analysis
In this topic, you focus on analysis used to provide audit evidence. CAS 520.5 and 520.A4.A10 and 520.A20.A21
(CICA Handbook
, paragraphs 5301.15 and .20) outline what the auditor must do if the analysis
is used as primary evidence. If the analysis is used as primary evidence (the main or only evidence, as opposed to
corroborating evidence), the results must provide higher assurance than if it is used in conjunction with other procedures.
Consider the situation in the following example.
Example 3.4-1: ABC Company
ABC Company invested $1,000,000 in treasury bills at the beginning of the year and at year end. None of this money was
used by the company during the year; that is, the company made no withdrawals. The average yield on 90-day treasury bills
during the year was 6%.
Based on these facts, the auditor could reasonably assume that the relationship between the average yield rate and the
investment balance at year end could provide reasonable expectations about the interest revenue earned by ABC during the
year.
In this case, the auditor would choose to perform analysis to provide primary evidence regarding the occurrence of interest
revenue ($1,000,000 6% = $60,000).
Because there were no fluctuations in investment (that is, $1,000,000 throughout the year), the high level of assurance
provided by the auditors expectations on revenue would be consistent with the objective of the analytical procedure used,
which is to provide primary evidence.
paragraph 5301.14) outlines matters that are relevant in making
the assessments described here. In addition to making the assessments regarding expectations and levels of assurance, the
auditor also needs to consider the reliability of the data used to perform the analysis.
Accounting estimates and service organizations

section 5305) provides guidance for auditing managements
estimates, perhaps one of the more difficult aspects of the audit. Read that section carefully. CAS 402 (CICA
Handbook
, section 5310) provides guidance for obtaining evidence when the enterprise uses a service
organization, such as using a bank or trust company to provide custodial services, or using a data centre to provide data, section 5310) has been revised to expand on
processing services. CAS 402 (CICA Handbook
the requirements for an auditor who uses a service auditors report when planning the audit, assessing control risk, using
audit evidence obtained from substantive procedures performed by service auditors, and evaluating audit evidence.
3.5 Documentation
Learning objective
Explain the purpose and key elements of working papers in auditing, and describe the form and content of
documentation required in a professional engagement. (Level 1)
Required reading

Reading 3-3: AuG-5, Auditor Working Paper Files
Assurance,
section 5145)
LEVEL 1
Under new auditing standards (CAS 230; CICA Handbook,

section 5145), auditors are
required to document matters that, in their professional judgment, are important in providing evidence to support the content
of the audit report (CAS 230.5; CICA Handbook
Assurance,
paragraph 5145.04). CAS 230.6 (CICA Handbook,
paragraphs 5145.05.14) describes the
purpose of audit working papers (documentation) and outlines matters affecting the form and content of working papers.
Working papers document the work done during the audit and support the conclusions based on that work. The auditors
working papers are an integral part of the audit. Documentation should not be hurried and incomplete; such practices are
inefficient and risky. Problems are caused by incomplete documentation for the following reasons:
The auditor is forced to rely on memory to support decisions made and conclusions reached during the audit, and the
auditor may make errors in assessing the accumulated evidence, thus rendering an inappropriate opinion on the
financial statements.
It is difficult to defend work done and demonstrate due care or lack of negligence in court without a record of the
work performed.
A meaningful file review becomes almost impossible. The reviewer must rely on the memories of the staff who
conducted the audit and their memories may be faulty; major problems may never come to the reviewers attention.
Planning for the current years audit may not lead to the most efficient and effective audit possible because the
current years auditors will not be able to take advantage of the experience gained by last years audit team.
If problems discovered during the prior years audit were not recorded, the current years audit staff will not be able
to take them into account. No matter how well planned and executed the current years audit is, it would be deficient.
Form and content of documentation

The form and content of documentation included in working paper files are covered on pages 296 to 302 of the text, CAS 230
(CICA Handbook,
section 5145), and CGA Auditing Guideline No. 5 (Reading 3-3).
All working papers should be neat, understandable, accurate, concise, and complete. A working paper should stand on its
own that is, an adequate trail should be provided to find the details supporting the information on the working paper.
As a minimum, each working paper should contain certain key elements, which are highlighted in Exhibit 8-8 on page 300 of
the text.
Computer-generated working papers

Electronic working papers using specialized working paper software can boost audit productivity by automating many
documentation tasks (for example, automatically carrying over adjustments to related working paper documents and the
financial statements). For example, a working paper program can directly import a trial balance from Sage Accpac ERP and
generate leadsheets automatically.
Common working paper software used in public practice includes CaseWare, WISPR, and IDEA. In Public
Practice Audit Case [BC2]
, you will learn to use working paper
software to prepare your audit file.
3.6 Pre-engagement arrangements

Learning objective
Identify the main pre-engagement activities and the factors to consider when deciding whether to accept a new audit
engagement. (Level 1)
Required reading
LEVEL 1
The auditor needs to determine whether it is feasible to accept a new audit or continue an existing one, then to formalize the
terms of the engagement and gain a preliminary understanding of the clients business in order to identify potential obstacles
to accepting an engagement.
Accepting or continuing an engagement

The first consideration in accepting a new audit client is to determine why or if a client needs audit services (notwithstanding
statutory requirements). A CICA study entitled The First Audit
Engagement
states that an audit may not be called for in the following circumstances:
The owners of the business participate actively in management and exercise effective control over operations.
It is not required to satisfy creditors and other financing sources.
There is no reason to believe that audited financial statements will be required in the near future in order to meet
requirements, statutory or otherwise.
As a CGA, you are required to act in the best interest of your clients; accordingly, you need to provide professional advice
that is best suited to your clients needs. In many cases, a less costly review engagement provides sufficient assurance,
depending on the clients circumstances.
Assuming that the clients circumstances do warrant an audit, the auditor must then decide whether or not it is feasible to
accept the engagement. Before accepting the engagement, auditors must ensure that they are independent in fact (mental
attitude) and in appearance (avoiding financial and managerial relationships). Auditors must be able to maintain financial,
investigative, and reporting independence as long as a professional relationship exists. They would also review available
financial information primarily to assess the size of the client and the types of the financial statements users. Finally, auditors
would look at prior years audit reports for any reservations resulting from scope limitations or GAAP departures.
One of the most important activities before accepting an audit engagement is the communication with the predecessor
auditor. The rules of professional conduct and the Canada Business
Corporations Act
require the successor to enquire about the predecessor auditors
understanding of the reasons for changing auditors. Also, an auditor cannot accept an engagement until the client has
formally terminated its relationship with the predecessor. The information obtained from the predecessor auditor is very
useful for deciding whether or not to accept the engagement. This information includes
any scope limitations imposed by the client
significant differences over applicability of accounting principles
difficulties in collecting audit fees from the client
indications of unethical management practices, and
managements attempt to influence the audit report (such as opinion shopping)
In the majority of cases, a change of auditors arises from legitimate circumstances such as
a change in ownership
concerns over audit fees
company growth beyond the resources available to the current auditors
company requirement to periodically change auditors
A meeting should be arranged between the auditor and the client to determine the complexity of the companys organization
and business transactions. This knowledge will affect the requirement for specialized staff on the audit team and help the
auditor to consider potential scope limitations, anticipated form of opinion, and time constraints.
The auditor is not obligated to accept undesirable clients. The most common reasons for rejecting clients include the
following:
business and/or financial relationships between the accounting firm personnel (or their immediate families) and the
client (that is, self-interest or familiarity threat to independence)
lack of client integrity (part of the audit process relies on the belief that the client will act and provide information in
good faith)
high business risk faced by the client
likelihood of significant reservations in the audit report
Activity 3.6-1
A CGA who is approached by a prospective client to perform an audit engagement can immediately accept the engagement,
provided the CGA has the knowledge and skill necessary to conduct the audit in an effective and efficient manner. Is this
statement true or false?
Solution
3.7 Engagement letters

Learning objective
Describe the purpose and main features of an engagement letter. (Level 2)
Required reading

CAS 210 and Appendix 1 (Example of an Audit Engagement Letter) (CICA Handbook
Assurance
, section 5110 and Appendix, Example of an engagement letter)
LEVEL 2
An engagement letter defines the terms of the audit engagement that have been agreed to, in principle, during meetings
and conversations with the client. Engagement letters are essential to minimize the risk of misunderstanding between the
auditor and the client. They should be obtained for any new client and also for existing clients if the nature of the
engagement changes over time. For example, a significant change in management or in the nature, size, or structure of the
organization may require a new engagement letter.
Exhibit 6-1 on text page 176 and Appendix 1 in CAS 210 (the Appendix to CICA Handbook
section 5110) provide examples of engagement letters for audit engagements that can be used in practice. As you read these
examples, notice that engagement letters typically refer to
the nature of a financial statement audit and its objective
the fact that management is responsible for the financial statements and for adequate internal controls
the scope of the audit with reference to the applicable professional standards, which will be GAAS in most cases
the risk that a material misstatement may not be detected because the audit is conducted on a test basis, together
with the inherent limitations of internal control
details regarding the fee structure for the performance of the audit
confirmation of acceptance of the terms of the engagement from the client
The engagement letter will vary from client to client, but the elements listed above would normally be included. Details
regarding client assistance in the preparation of working papers, arrangements with outside specialists, communication with
the predecessor auditor, and the expected form of the audit report are sometimes included in the engagement letter.
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Module 3 summary
Describe the auditors responsibility to consider fraud and error and the consequences of
illegal acts, in order to achieve the objective of financial statement audits.
Misstatements can arise from error or fraud. (Fraud may be either fraudulent financial reporting or misappropriation
of assets.)
It is the auditors responsibility to detect material misstatements, however caused.
If an auditor detects a misstatement (that is, either a misstatement resulting from a non-trivial error, or one
indicating a serious weakness in internal controls), the auditor should immediately bring it to the attention of the
appropriate level of management and the audit committee (or equivalent).
Any evidence of fraud discovered or suspected should be communicated to the appropriate level of management and
the audit committee (or equivalent).
Any questions regarding management competence and integrity should be communicated to the audit committee (or
equivalent).
The CICA Handbook
defines illegal acts as violations of domestic or foreign statutory
law or government regulation attributable to the entity under audit, or to management or employees acting on the
entitys behalf.
Management is responsible for identifying and complying with laws and regulations that affect the entity, as well as
preventing and detecting illegal acts. Management is responsible for establishing policies and procedures to
accomplish this aim.
The auditor should attempt to identify laws and regulations that, if violated, could be expected to result in a material
misstatement in the financial statements.
Discovery of possible illegal acts should be communicated to the audit committee and other appropriate levels of
management.
Explain the various types of management assertions and their relationship to specific
audit objectives.
Assertions about classes of transactions and events for the period under audit include
occurrence
completeness
accuracy
cut-off
classification
Assertions about account balances at the period end include
existence
rights and obligations
completeness
valuation and allocation
Assertions about presentation and disclosure include
occurrence
rights and obligations
completeness, classification, and understandability
accuracy and valuation
Specific audit objectives are to obtain and evaluate sufficient appropriate evidence about each assertion.
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Explain how an auditor determines what and how much evidence is required.
The appropriateness and sufficiency of evidence are a matter of judgment and are influenced by the following factors:
materiality
inherent risk and control risk considerations
experience from prior audits
the persuasiveness of the evidence
error or fraud found during the audit
Identify and apply evidence-gathering audit procedures commonly used to obtain audit
evidence, and describe the strengths and weaknesses of each procedure.
Audit procedures (also called techniques or methods) include computation, observation, confirmation, enquiry, inspection
(including tracing, scanning, and vouching), and analysis.
Computation by the auditor is strong evidence for the valuation assertion but does not provide evidence of
existence or completeness. Computation can be evidence for existence when the financial statement element is one
that is principally a calculation, for example, amortization.
Observation by the auditor is strong evidence for the assertion of existence. Observation, however, does not
provide evidence on any other level. The existence of an asset, for example, does not prove ownership.
Confirmation from third parties (if the auditor has control over mailing and receipt) constitutes strong evidence of
existence and valuation because of the independent form of the evidence. If, however, the auditor does not have
control over mailing and receipt, then the clients opportunity to alter the responses lessens the strength of the
evidence obtained by the procedure.
Direct enquiry by the auditor to third parties can be strong evidence, but direct enquiry of internal parties is
considered weaker evidence. An assessment of the source on the basis of integrity, independence from the entity,
and knowledge of the audit entity must always accompany the use of direct enquiry.
Inspection consists of looking at records and documents or at assets having physical substance. It encompasses the
following procedures:
Vouching is used to examine documents that provide evidence supporting the assertion of existence.
Tracing provides evidence of completeness. Documents held by third parties (bank loan documents on file at the
bank, for example) are most reliable. Third-party documents held internally are less reliable, and documents
prepared by the entity and held by the entity are the least reliable as they can be subject to manipulation.
Scanning alerts auditors to unusual items and events in the clients documentation.
When using analysis, the auditor must ensure that there really is a meaningful relationship between amounts in the
data to allow the development of reasonable expectations. It is also important to ensure that the level of assurance
that the expectations provide is consistent with the objective of the analytical procedure. Analysis is best used to
highlight areas in the financial statements that require further investigation and is less valuable as hard evidence.
Explain the purpose and key elements of audit working papers, and describe the form
and content of documentation required in a professional engagement.
Working papers document the work done during the audit and the conclusions based on that work.
They provide evidence that the audit was carried out in accordance with generally accepted auditing standards.
Good working papers should normally include
evidence of adequate audit planning

a description of audit evidence obtained
evidence of adequate supervision and review
evidence that the financial statements agree with the supporting records
evidence of evaluation and disposition of misstatements

copies of correspondence with the client
The form and content of documentation included in working paper files are covered on pages 296 to 301 of the text, CAS 230
section 5145), and CGA Auditing Guideline No. 5 (Reading 3-3).
(CICA Handbook,
The form and content of working papers are affected by such factors as
the
the
the
the
terms of the engagement and the type of report required

nature and complexity of the clients business
nature and condition of the clients control environment and control system
need for review and supervision of work carried out by assistants
Identify the main pre-engagement activities and the factors to consider when accepting
a new audit engagement.
The main pre-engagement activities performed before accepting an engagement include
1.
2.
3.
4.
5.
6.
assessing independence between the firm and client

obtaining information such as past financial statements and annual reports
communicating with the previous auditor
communicating with the clients bankers, lawyers, and so on
considering any special requirements or risks related to the engagement
assessing if the firm has the necessary resources to complete the assignment
The factors to consider when deciding to accept a new engagement include
business and/or financial relationships between the firms personnel and the client
client integrity
business risk facing the client (that is, risk of business failure), and
the likelihood of significant reservations in the auditors report.
Describe the purpose and main features of an engagement letter.

An engagement letter defines the terms of the audit engagement to which the auditor and the client have agreed. They
usually refer to
the nature and objectives of the audit

managements responsibility for the financial statements
the risk that the audit will not identify all material misstatements
the fee structure
a list of working papers for the client to prepare
a confirmation of the terms of engagement by the client
Assurance,
section 5110), Terms
of Engagement, provides guidance on establishing an understanding of, and agreement on, the terms of the engagement for
the audit of financial statements.
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Scenario 3.1-1 solution
That the client tells the auditor that no significant capital assets were acquired during the year should not prevent the auditor
from reviewing other evidence to make sure that the clients claim is truthful. This could include a review of the minutes of
directors meetings noting approvals for investments in capital assets, a review of the repairs and maintenance account to
identify capital items expensed in error, or a tour of the facilities with an operations manager in order to corroborate the
CFOs statement. To detect material misstatements, the auditor needs to maintain an attitude of professional skepticism.
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The bribe may not be material, but should the foreign government discover the bribe, the loss to the company could be
significant (for example, confiscation of the companys assets). In addition, there may be domestic legislation in the client
companys home country that forbids bribery abroad. Thus, per CAS 250 (CICA Handbook
section 5136), Misstatements Illegal Acts, it is not the illegal act itself but the consequences of the illegal act that may
affect the financial statements.
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Elise could use the audit procedure of examining invoices paid after year-end to make sure those invoices related to the year
under audit are properly included as accounts payable. (She could also review suppliers statements as of the companys yearend and compare them to recorded amounts.) Thus, it is the audit objective related to an assertion that dictates the type of
audit procedures to be used in examining financial statement items.
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To support the assertion of completeness of accounts payable, Mohan may obtain confirmations from vendors for whom the
companys accounts payable records show a zero balance at year-end, while at the same time looking at cash disbursements
made subsequent to year-end. Audit evidence may be documentary, oral, or visual, and it can come from the auditors, the
entity, or third parties.
Activity 3.6-1 solution
This statement is false. As set out on page 175 of the text, if a CGA is replacing another auditor, the CGA must contact the
predecessor, before accepting the engagement, to inquire whether there is any reason why the appointment should not be
accepted.
In addition, if the CGA immediately agrees to perform the audit without some investigation of the nature of the business, it is
unlikely that he or she would have adequate information to determine whether the engagement could be performed
effectively and efficiently.
file:///F|/Courses/2010-11/CGA/AU1/06course/m03selftest.htm
Module 3 self-test
Question 1
Evidence-gathering audit procedures, or methods, are used to produce evidence about the principal management assertions
embodied in the financial statements. Some of these procedures are useful for producing evidence about certain assertions,
while others are more useful for producing evidence about other assertions. Appropriateness of evidence requires the auditor
to choose the procedure(s) that will best support the assertion being audited.
Required
Prepare a two-column table with the general audit procedures listed on the left. (Refer to text, Exhibit 8-1, page 275.)
Opposite each one, write the management assertion(s) most usefully audited by using each procedure.
Solution
Question 2
You are engaged to audit the financial statements for Great Big Corporation Ltd. (GBC) for the year ending December 31,
20X0. The unaudited balance sheet shows that, at year end, GBC has $285,950 worth of capital assets (net of amortization).
Required
a. What is the overall objective for the audit of GBC?

b. Describe the auditors specific audit objectives with respect to the capital assets.
Solution
Question 3
Evaluate the statement: Its not what you do on an audit; its how you document it thats important.
Solution
Question 4
Problem EP 7, page 311
Solution
Question 5
Analysis seems to be a cost-effective way of obtaining evidence. When analysis is used to obtain primary evidence to support
financial statement amounts, the level of assurance provided from analysis must be consistent with that purpose. Describe
some difficulties the auditor may encounter when using analysis to gain a level of assurance consistent with the objective of
primary evidence.
Solution
Question 6
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Discussion Case 2, page 211

Solution
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Self-test 3
Solution 1
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Self-test 3
Solution 2
a. The objective for the audit of GBC is to express an opinion about whether GBCs financial statements present fairly, in
all material respects, the companys financial position as of December 31, 20X0, and the results of operations and
changes in financial position for the year then ended. In doing so, the overall objective is to detect material
misstatements in the most effective and efficient manner.
b. The auditors specific audit objectives with respect to capital assets are to ensure that all relevant management
assertions are supported by appropriate audit evidence. The relevant assertions are as follows:
The assets represented by the amount indicated ($285,950) actually exist (existence).
The amount shown ($285,950) includes all assets acquired (completeness).
The company has clear title to the assets represented by the amount shown ($285,950); any liens or other
encumbrances have been disclosed (rights or ownership).
The assets are accurately valued at $285,950; the cost is correct and accumulated amortization has been
deducted (valuation).
The capital assets and accumulated amortization, including appropriate information on useful life and
amortization rates, have been properly disclosed (presentation and disclosure).
Self-test 3
Solution 3
The statement is an oversimplification, but it does convey an important point: documentation on an audit is very important. If
a junior does the wrong tests in a particular area but documents what was done, the person reviewing the file can ascertain
that the wrong tests were done and remedy the situation. If the junior did not properly document what he or she did, the
reviewer would not be made aware that there was a problem, and the situation would not be corrected. In addition, if the
audit work done is ever challenged, it is only the working papers that will provide evidence that adequate work was done in
accordance with GAAS.
Self-test 3
Solution 4
Self-test 3
Solution 5
In considering whether analysis provides a level of assurance consistent with the objective of primary evidence, the auditor
must first ensure that meaningful relationships exist and can be properly evaluated. Such a relationship might not exist, and
if it does, its nature may be such that the auditor could not develop reasonable expectations that provide a level of assurance
adequate for primary evidence. For example, the relationships may exist only in dynamic circumstances, such as unstable
sales levels throughout the period, fluctuating balances in investments, and fluctuating cash flows. Another problem may be
that relationships can only be considered at highly aggregated levels and would not be able to detect offsetting material
misstatements occurring at a more disaggregated level.
For analysis to provide the appropriate level of assurance, the auditor must choose the right analytical procedure(s). In
certain circumstances, this choice may be difficult to make. For example, where an auditor lacks the experience and
appropriate professional judgment, he or she may be unable to select the procedures consistent with the level of assurance
required.
Furthermore, the auditor can only obtain the appropriate level of assurance from analysis when the data used to develop
expectations are reliable. It may be difficult, or even impossible, for the auditor to find sufficiently reliable data for the
purpose of analysis as primary evidence. For example, the data may be available only from within the entity as opposed to
from independent sources; the data may be produced by systems lacking appropriate internal controls; or the data may
never have been subject to audit in either the current or prior period.
Note: The auditor may use analysis as the only procedure (primary evidence) to audit some account balances because of
their nature (low or negligible risk of misstatement) and size (small and immaterial in amount) in relation to other account
balances.
Self-test 3
Solution 6
a. The sources of information and types of enquiries are listed below.

Financial information prepared by the prospective client:
annual reports to shareholders

interim financial statements
securities registration statements
reports to regulatory agencies
Enquiries directed to the prospects business associates:
banker
legal counsel
underwriter
other persons, for example, customers and suppliers
Predecessor auditors communication, if any, regarding:
integrity of management
disagreements with management
Analysis:
special or unusual risk related to the prospect

need for special skills (such as computer or industry expertise)
Internal search for relationships that would compromise independence.

b. No, but quality control standards require firms to investigate prospective audit clients. The Auditing Assurance
Standards Board (AASB) has issued standards [CAS 220 (section 5030)] that are relevant to quality control at both
firm and assurance engagement level. The standards provide guidance on the acceptance and continuance of client
relationships and specific assurance engagements.
c. This acceptance question could be decided either way, although the brief facts prejudice the conclusion toward nonacceptance. Consider that your own firm decided to resign only 10 years ago, presumably over matters of ownermanager integrity. Yet, Mr. Shine appears to be a respected member of his new community. Maybe his "fast and
loose" accounting past is behind him, but maybe not.

Module 3: Audit Objectives, Evidence, Procedures, and Documentation

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file:///F|/Courses/2010-11/CGA/AU1/06course/m03intro.

Module 3: Audit objectives, evidence, procedures, and documentation

Test your knowledge

Describe the auditors responsibility to consider fraud and error and

Specific audit objectives

Explain the various types of management assertions and their

Explain how an auditor determines what and how much evidence is

Evidence-gathering audit procedures

Identify and apply evidence-gathering audit procedures commonly

Identify the main pre-engagement activities and the factors to

Describe the purpose and main features of an engagement letter.

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3.1 Audit objectives

Overall objective of an audit

Responsibility to detect errors or fraud

Responsibility to detect illegal acts

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Responsibility to communicate material misstatements

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3.2 Specific audit objectives

Chapter 6, pages 195202

classes of transactions (income statement balances)

Expressing the appropriate

The audit as a whole.

The definition of auditing, which

The financial statements that

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Specific audit objectives

The auditors goals in examining

Obtaining and evaluating evidence

T. Shasti and R. Chandra, Independent Audit and

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3.3 Audit evidence

Chapter 8, pages 288291

What is appropriate evidence?

Appropriateness and sufficiency of evidence

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3.4 Evidence-gathering audit procedures

Chapter 8, pages 275281

The other three techniques are explained below.

Accounting estimates and service organizations

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Chapter 8, pages 296301

Under new auditing standards (CAS 230; CICA Handbook,

Form and content of documentation

Computer-generated working papers

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3.6 Pre-engagement arrangements

Chapter 6, pages 172175

Accepting or continuing an engagement

It is not required to satisfy creditors and other financing sources.

any scope limitations imposed by the client

significant differences over applicability of accounting principles

difficulties in collecting audit fees from the client

indications of unethical management practices, and

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managements attempt to influence the audit report (such as opinion shopping)

concerns over audit fees

company growth beyond the resources available to the current auditors

company requirement to periodically change auditors

high business risk faced by the client