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Chapter 4 Audit Evidence and Audit Documentation

Objectives Obj i
Understand the relationship between audit evidence and the auditors report Understand the management assertions about classes d d h i b l of transactions and events, account balances at the period end, presentation and disclosure Learn the basic concepts of audit evidence Understand audit procedures used for obtaining audit evidence Understand the objectives of audit documentation

Relationship of Audit Evidence to the Audit Report


Financial statements Audit report

Management assertions about components of b t t f financial statements

Auditor reaches a conclusion b l i based d on the evidence Provide evidence on the fairness of the financial statements

Audit procedures d

WHAT ARE ASSERTIONS?


Management is responsible for the fair presentation of the nancial statements. Assertions are expressed or implied p p representations by management regarding the recognition, measurement, presentation, and disclosure of information in the nancial d l f f h l statements and related disclosures (AU 326.14).

Management Assertions Classification


1. Assertions about classes of transactions and events for the period under audit audit. 2. Assertions about account balances at the period end. 3. Assertions about presentation and disclosure.

Management Assertions
Illustration: the nancial statements show a net sales gure of $10 million management asserts that
the sales exist (existence assertion) all sales conducted within the current time frame (cutoff assertion) recorded in their correct amounts (accuracy assertion)

Assertions about Classes of Transactions & Events during the Period g


1. 2. 2 3. 4. 4 5. 6. 6 Authorization Accuracy Completeness Classification Cutoff Occurrence

Assertions about Account Balances at the Period End


1. 1 Completeness 2. Existence 3. Rights and Obligations 4. V l ti and All ti Valuation d Allocation

Assertions about Presentation and Disclosure


1. Completeness 2. Occurrence and Rights and Obligations 3. Cl ifi ti and U d t d bilit Classification d Understandability 4. Accuracy and Valuation

Management Assertions

Audit Procedures
Specific acts S ifi t performed by the auditor to gather evidence about whether specific assertions are being met. g

Risk assessment procedures

Test of controls

Substantive procedures

Audit Procedures
Risk assessment procedures i k d
Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the nancial statement and relevant assertion levels.

Test of controls
Test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level.

Substantive procedures
Detect material misstatements at the relevant assertion level, including tests of details of classes of transactions, account balances and disclosures, and substantive analytical procedures

Audit Program
set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit program. p g
Audit Program for Accounts Receivable Management Assertions g Examples of Audit Procedures p Existence Confirm receivables. Rights and obligations Inquire if receivables have been sold or pledged. Completeness p Agree controlling account with total of subsidiary accounts. g g y Select shipping documents immediatley prior to year end and ensure sales invoices were recorded. 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 footnote disclosure.
A

Audit evidence
All the information, from whatever source, used information source by the auditor to support his/her audit opinion. Auditors gather evidence by conducting Audit Procedures to TEST MANAGEMENT ASSERTIONS.

3 Concepts of Audit Evidence


Nature of audit evidence

Sufficiency and appropriateness of audit evidence

Evaluation of audit evidence

Nature of A di E id N f Audit Evidence


The nature of the evidence refers to the form or type of information including accounting records
the records of initial entries and supporting records d

other available information


minutes of meetings; co conrmations from t d parties; at o s o third pa t es; industry analysts reports; etc

What types of EVIDENCE must be collected?


Collect SUFFICIENT and APPROPRIATE evidence.
Sufciency is the measure of the quantity of audit evidence y q y Appropriateness is a measure of the quality of audit evidence GREATER RISK requires HIGHER QUANTITY of audit i f dit evidence HIGHER QUALITY audit evidence RESULTS in a LOWER QUANTITY of audit evidence

When is evidence considered APPROPRIATE?


Evidence is considered appropriate when it provides pp p p information that is both relevant and reliable

Relevance
How the evidence is related to the assertion or to the objective of the control being tested. ( g (Relates to whatever y are testing) you g)

Illustration
To check the completeness assertion for recording sales transactions Are all goods shipped to customers are recorded in the sales journal? j l trace a sample of shipping documents to the related sales invoices and entries in the sales journal

When is evidence considered APPROPRIATE?


Reliability li bili
If a particular type of evidence can be relied upon to signal the true state of an assertion. Knowledgeable independent source of the evidence
Evidence obtained directly by the auditor from a knowledgeable independent source outside the entity is more reliable than evidence obtained solely from within the entity

Effectiveness of internal control.


If the clients internal control is assessed effective, ,evidence generated by f ff ,, g y that accounting system is viewed as reliable

When is evidence considered APPROPRIATE?


Reliability R li bilit
Auditors direct personal knowledge Evidence obtained di E id b i d directly b the auditor i generally considered to l by h di is ll id d be more reliable than evidence obtained indirectly or by inference D Documentary evidence t id Audit evidence is more reliable when it exists in documentary form Original documents Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles

Q Question
Which of the following sources of evidence are more reliable: 1. Inquiry of an accounts receivable clerk regarding the acco nts receivable balance or acco nts accounts recei able accounts receivable conrmations sent to a sample of customers. 2. Physical examination of lumber inventory performed by the external auditor or physical examination of inventory performed by internal auditors.

Evaluation f dit id E l ti of audit evidence


An di A auditor should be thorough i searching f h ld b h h in hi for evidence and unbiased in its evaluation.

Illustration: ll i
If auditor decides to mail accounts receivable conrmations to 50 of the largest customers of a client, h must gather sufcient evidence on each of the 50 accounts f li he h f i id h f h

In evaluating a clients response to an audit inquiry, the auditor must not allow any client s inquiry personal factors to inuence the evaluation of the clients response

Audit Procedures for Obtaining Audit Evidence

Evidence is commonly categorized into the following types:


1. 2. 3. 4. 5. 5 6. 7. 8. 9. Inspection of records or documents Inspection of tangible assets Observation Inquiry Conrmation Recalculation Reperformance Analytical procedures Scanning

Audit Procedures for Obtaining Audit Evidence


Inspection of records or documents Inspection consists of examining internal or external records or documents that are in paper form, electronic form, or other media
the reliability of such evidence its relationship to specic assertions

Audit Procedures for Obtaining Audit Evidence


Inspection of tangible assets
p y physical examine of the assets

Observation
observe a process or procedure being performed by others

Inquiry
seek information of knowledgeable persons (both nancial and non nancial) throughout the entity or outside the d i l) h h h i id h entity

Audit Procedures for Obtaining Audit Evidence


Conrmation
obtaining a representation of information or of an g p existing condition directly from a third party

Recalculation
checking the mathematical accuracy of documents or records.

Reperformance
independent execution by the auditor of procedures or controls that were originally performed by company personnel

Audit Procedures for Obtaining Audit Evidence


Analytical procedures - an important type of evidence on an audit p yp - evaluations of nancial information made by a study of plausible relationships among both nancial and non nancial data Scanning i review of accounting data to identify signicant or unusual it i i t l items

Audit Procedures for Obtaining Audit Evidence

Audit Procedures

Audit Documentation
The auditors principal record of the p p audit procedures performed, evidence obtained, and conclusions reached.
Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the planning, performance, and supervision of the audit audit.

Content of Audit Documentation


Audit documentation should:
Demonstrate how the audit complied with auditing and related professional practice standards. Support the basis for audit conclusions concerning each material financial statement assertion. Demonstrate that the underlying accounting records agreed with the financial statements.

Content of Audit Documentation


Audit documentation should:
Include a written audit program detailing auditing procedures necessary t accomplish audit objectives. d to li h dit bj ti Enable a knowledgeable and experienced reviewer to:

Understand the nature, timing, extent, and results of audit p o d procedures, evidence ob , d obtained, d, and conclusions reached.

Determine who performed and reviewed the work, as well as the dates d of the work and reviews.

Homework
PR 4-24 PR 4 25 4-25 PR 4-28 PR 4 32 4-32

GROUP ASSIGNMENT : Earth Wear Case page 140