2.
More material à More evidence
Audit Evidence, Procedures, and
Working Papers
CLIENT ASSERTIONS
• representations by mgmt. that are embodied in the
FS, presented in the FS
• Auditor must verify the validity of these assertions,
must obtain and evaluate audit evidence that will
prove or refute mgmt. representations
Existence or occurrence
- assets and liab presented actually exist as of the
balance sheet date
- transactions were recorded in the appropriate
accounting period
Completeness
- all transactions that occurred during the period
under audit were recorded
Rights and Obligation
- assets are rights of the company while the
recorded liab are actual obli of the company as of a
given date
Valuation or Allocation
- amounts are in the FS at appropriate amounts
Presentation and Disclosure
- accounts and info in the FS are properly classified,
described and discussed
AUDIT EVIDENCE
NATURE OF AUDIT EVIDENCE
• Evidence – data or info assembled by an auditor
that corroborates or refutes an item under audit
– any info used by the auditor to determine
whether the info being audited is in accordance w
the established criteria (PFRS)
– used to help draw conclu about a subject matter
under study
• Evidence may consist of:
1. Underlying accounting data
a. Books of original entries (journals)
b. Ledgers
c. Worksheets w computations, ie. cost
allocation, reconciliation, etc
2. Corroborating information (Confirm)
a. Checks
b. invoices
c. confirmation replies
d. minutes of meetings
e. Contracts on file
f. Data obtained by the auditor from inquiries,
observation, physical examination,
recomputations, etc.
• No evidence = No audit
SUFFICIENCY OF AUDIT EVIDENCE
• quantity of evidence auditor should obtain to
support their opinion on FS
• Guidelines in deciding:
1. More competent à Less evidence
3. Greater audit risk à More evidence
4. Prior years’ experience with client
COMPETENCE OF AUDIT EVIDENCE
• quality or reliability of evidence to support opinion
on FS
• Guidelines:
1. Obtained outside > Obtained within
2. Good IC > Weak IC
3. Obtained directly > Obtained indirectly
4. Written > Oral
DESIRABLE CHARACTERISTICS OF AN EVIDENCE
Relevance
- evidence must support or refute acct info
Freedom from Bias
- evidence should not tend to unduly support one
decision to the disadvantage of another possible
decision
Objectivity
- capability of an evidence to enable diff authors to
arrive at similar decision based upon the same set
of evidence
Persuasiveness
- sufficient & appropriate to form opinion
- can be evaluated only after considering the
combination of appropriateness & sufficiency
- applies to the judgment
- Guidelines:
1. Satisfaction of auditor
a. Depreciation expense
b. Bad debts, doubtful accounts
c. Estimated liability for product warranty
2. Within cost limits, obtained at a reasonable
cost and within reasonable time.
§ auditor’s goal: obtain a sufficient amt of
appropriate evidence at lowest total cost
3. Continue gathering evidence to remove
substantial doubt on material items on FS
4. Not examine based on 100%, only a selective
test (Sampling)
TYPES OF AUDIT EVIDENCE
1. Physical Evidence
- inspection/count of a tangible asset
- satisfies existence but not valuation and rights
& obli
- requires:
o examination of assets
o observation of client’s procedures
- normally for cash, inventories, equipment,
investments, bldgs., etc.
- provides assurance as to existence and should
be supplemented by other evidence to
determine ownership, valuation and quality of
condition
- Existence: verifies that an asset actually exists
Completeness: determine whether the assets
physically examined are actually recorded on
the books
2. Mathematical Recomputations
 - recheck the accuracy of computations by client à the client using the confirmation form
- except those needing other experts template prepared by the auditor
- Ex: extending sales invoices and inventory, Who sends the confirmation request?
adding journals and subsidiary records and à the auditor
checking calculations of Dep Exp To whom should the third party reply?
3. Documentation à Directly to the auditor.
- examination of supporting docus of recorded - Positive or Negative Confirmation
transactions and info appearing in FS 5. Representation by Client Personnel
- matching recorded transactions w - statements in answer to queries posed by
corresponding documents auditors
- Classifications: - obtaining of written or oral info from the client in
a. From outside client company and used by response to questions from the auditor
client (vendor’s invoices, insurance - has very limited reliability value, not usually
policies) regarded as conclusive evidence, must
b. From inside client company and used by corroborated w other types of procedures to
outside org (checks, sales invoices, debit obtain sufficient appropriate evidence
and credit memos) 6. Data Interrelationship from Analytical Review
c. From inside client company and used by Procedures
client (journals, vouchers, payroll record) - examination and comparison of relationships
- Internal Documents among data
§ prepared and used w/in the client’s org and - understand the client’s industry and business
are retained wo ever going to an outside - assess the entity’s ability to continue as a going
party concern
§ Ex: duplicate sales invoices, official - Indicate the presence of possible
receipts, employees’ time reports, and misstatements in the financial statements
receiving reports - Reduce detailed audit tests
- External Documents 7. Internal Control
§ handled by someone outside the client's - adequate and operating IC policies &
org who is a party to the transac being procedures enhance the reliability
documented but w/c are either currently - adequate IC = strong evidence of validity
held by the client or readily accessible - Caution:
§ Ex: vendors’ invoices, insurance policies, 1) Not rely completely on IC structure to
board resolutions under the custody of a gather evidence, but to merely restrict the
third party legal counsel appointed as application of audit procedures
corporate secretary 2) To restrict audit procedures = not to
§ more reliable than internal eliminate entire audit procedures
4. Representation by Third Parties or Confirmations 8. Subsequent Events
- from outside client company and sent directly to - events or transactions occurring subsequent to
auditor the BS date but before the issuance of audited
- More reliable than documentation FS and auditor’s opinion
- Examples: Release of
a. Bank confirmation Bal Sheet Subsequent
Date Events Audited FS &
b. AR confirmation Opinion
c. AP confirmation
d. Bond trustees Adjusting Non-Adjusting
- Success depends on ff factors: Events Events
1) parties requested to confirm are
knowledgeable Adjusting Events Non-Adjusting Events
2) auditor had a free hand in selecting parties provide addt’l evidence w provide evidence w
or samples respect to conditions respect to conditions not
3) auditors personally and directly mailed the existed on the BS date existing on the BS date
confirmation requests and affect the estimates but occur subsequent to
4) replies or returned requests are received inherent in the process of that date
directly by auditor wo interception by client prep of FS
5) exceptions expressed by third parties are Contingent Liab Addt’l issues of stocks
verifies by the auditor and discussed w after BS date
client
- Requirements: 9. Reperformance
a) Auditor must confirm AR - auditor’s independent tests of client acct
b) Auditors control mailing & receipt of replies procedures or controls that were originally done
c) Electronic confirmations are permitted 10. Observation
- Who prepares the confirmation request? - Use one’s senses to assess client activities.
 - Tour plant to obtain a general impression of and does not provide reasonable assurance
client’s facilities. that the balances are accurate
- Observation is rarely sufficient by itself. - Negative Confirmation
- Often need to corroborate w another kind of o third party is requested to respond directly
evidence only if the auditor disagrees w the info in
- rarely sufficient because of the risk of client request
personnel changing their behavior because of o high risk of arriving at incorrect conclu
the auditor’s presence o used when: amount to be confirmed is small
or when IC structure is effective and provides
a reasonable assurance that balances are
accurate
3. Vouching
- examination of supporting documents of
transactions
- from the books of accounts to source docus
- “tracing back”
- from accounting records to supporting docu
- existence
4. Tracing
- tracing of docus to acct records w/c follows
reverse rule of vouching
- from sources docus to records
- from supporting docu to the accounting records
- completeness
5. Reperformance
- reviewing the work done by client staff to check
its accuracy
6. Observation
- witnessing the activities of client’s staff
7. Reconciliation
- determining agreement between sets of records
- independently maintained but related records
8. Inquiry
- asking questions to facilitate performance of
subsequent audit steps
9. Inspection
AUDIT OBJECTIVES - critical examination of forms and docus to
• developed by auditor to ensure only relevant determine proper treatment in acct records &
evidence will be obtained FS
• Ex: Inventory balance 10. Analytical Review Procedures
- study of relationships, rations and trends
AUDIT TECHNIQUES AND PROCEDURES 11. Scan
• Audit Techniques: to achieve audit objectives 12. Read
• Audit Procedures: 13. Foot
o to verify mgmt. assertions 14. Compare
o to obtain sufficient competent evidence that
will prove the truth or falsity of the assertions AUDIT PROCEDURES ACCORDING TO PURPOSE
in the FS Test of Controls Substantive Tests
o Examples: (Compliance Test)
1. Physical Examination To determine To verify assertions of
- to gather physical evidence effectiveness of design & mgmt. re. FS components
- Ex: cash & securities counts ope of IC structure
2. Confirmation
- involves requesting a third party to affirm EXAMPLES OF AUDIT PROCEDURES
accuracy of items per records maintained by the Existence or Occurrence
client 1. Inv existence: inventory observations, test counts
- Positive Confirmation 2. AR existence: confirmation
o third party is requested to respond directly to 3. Cash existence: cash counts, bank recon
the auditor regardless of whether former 4. Sales/Exp: examine relevant docus, analytical
agrees or disagrees w info in request review procedures
o used when: amount to be confirmed is Completeness
material or when IC structure is inadequate 1. Cash count
2. Bank recon and cut-off bank statements
3. Year-end accrual for payroll
4. Unrecorded liab by examining payments in next year
Rights and Obligations
1. Passbooks and bank statements
2. Loan agreements w creditors
3. Evidence proving ownership of properties and equip
4. Cost of capitalized lease and lease contract
Valuation or Allocation
1. Conversion rate for foreign currency
2. Recalculate prepaid expenses
3. Allowance for doubtful accounts
4. Inventory pricing
Presentation & Disclosure
1. Significant assets pledged as collaterals for liab, and
if so, properly disclose in the notes to FS
2. Restriction by creditors
3. Propriety of accounts classified into CA,
Investments, PPE, etc.
4. Naming of accounts (RE vs. Earned Surplus)
examination was made in accordance w
GAAS/PSA
Actions to be taken where the auditor suspects errors or
irregularities
Material:
1. Discuss w mgmt. or w BOD + addt’l investigation
2. Obtain further evidence to know if fraud or
irregularities exist
3. Consult client’s counsel involving law
4. Make necessary corrections
5. Qualify opinion, disclaim or withdraw
6. If withdraw, consult their own counsel
Immaterial:
1. Discuss w mgmt. (at least one rank higher those
involved)
2. Pursue a conclu
3. Consider possibility of errors or irregularities in
other control procedures

TYPES OF SUBSTANTIVE TESTS WORKING PAPERS

Analytical Review Test of Details • documents accumulated showing procedures
Procedures performed, audit testing applied, info obtained, &
Study of relationships Examination of items or conclusions
among financial & non- details in acct balance or • connecting link among client’s acct records, FS, &
financial data transaction class. audit report
Provides evidence on Obtain evidence that will • only tangible evidence of compliance w generally
reasonableness of acct either substantiate or accepted auditing standards after the audit
balance identify misstatements
A. Test of Balances PURPOSES OF WORKING PAPER PREPARATION
- tests that make up the Primary
acct balance 1. To aid auditor in conduct & supervision
B. Test of Transactions 2. To provide proof of compliance w the standards of
- test to support entries in field work, i.e., planning, supervision, IC structure.
the acct 3. Principal support for auditor’s opinion
- debit or credit side Secondary
1. To aid in planning & conducting future audits
ERRORS & IRREGULARITIES 2. To provide info useful in MAS
3. To provide info needed for income tax return
Error Irregularities 4. To provide defense in case of litigation for
Unintentional mistakes Intentional manipulation malpractice
of records or FS for the
benefit of the entity under DESIRABLE QUALITITES OF AUDIT WP
audit, mgmt., employees, 1) Adequate planning & supervision of audit
third parties engagement
Fraudulent financial 2) Study & eval of IC structure and its NTE of audit
reporting (Mgmt.) procedures applied
Misappropriation of 3) Sufficiency & competence of evidence gathered to
assets (employees) support auditor’s opinion
• Auditors has to plan examination to search for
errors and irregularities that materially distort FS. CLASSIFICATIONS OF AUDIT WORKING PAPERS
A. Permanent File
Expectation Gap - info of continuing significance to auditor in
Auditors conduct examination: performing recurring & current audits
1. Based on selective tests (sampling) - mostly accumulated during initial audit
2. Subject to inherent risks - reference source for new staff members in
3. To express opinion on the fairness of FS, not to knowing client and for more experienced auditor
discover errors/irregularities in planning current year’s audit
4. Subject to inherent limitations of IC structure - intended to contain data of a historical or
• undetected material errors/irregularities do not continuing nature pertinent to the current audit
mean negligence of auditor as long as the - usual contents:
 1. Articles of incorporation and by-laws bb. Detailed analysis & compu of Prep Exp
2. Copies of significant contracts (loan agreements, bond L. Investments & related dividend & Int Income:
indenture, pension plans, etc.) aa. Analysis of ledger accounts
3. Summary indicating: bb. Analysis showing composition properly reconciled
A. Audit report requirements cc. Securities count sheet
aa. To the BOD or stockholders dd. Confirmation replies
bb. To banks M. AP & Accrued Expense:
cc. To gov’t regulatory agencies aa. Analysis of ledger accounts
B. Description of company and its ope bb. Schedule of creditors’ balances
C. Company ownership cc. Summary of confirmation results
D. Company mgmt. dd. Confirmation replies
4. Org chart N. NP & related Int Exp:
5. Chart of accounts aa. Analysis of ledger accounts
6. Copy of company acct procedures and control manual (IC) bb. Schedule of notes & related int reconciled
7. Continuing analyses of: cc. Confirmation replies
A. PPE related to AccDep O. Analysis of significant Inc Statement Accts
B. Long-term liab 4. Tax folder
C. SH’s equity accounts A. Letter to and from the BIR
8. Results of analytical procedures from previous years’ audits B. Pending tax assessments, if any
C. Draft of audit report to accompany ITR
B. Current File D. Draft of ITR
E. Peculiar accounts form inc tax computations
- evidence gathered & conclu reached relevant to aa. Non-taxable items
the audit of particular year bb. Non-deductible items
- audit program, general info, working trial cc. Credible income tax withheld
balance, adjusting and reclassification entries, dd. New BIR pronouncements or regulations
5. Supporting Schedules
supporting schedules
A. Analysis
- usual contents: B. Trial Balance or List
1. Administrative folder: C. Reconciliation of amounts
A. Engagement letter D. Tests of reasonableness
B. Audit memorandum, including: E. Summary of procedures
aa. Special audit risk F. Examination of supporting documents
bb. Accts/areas requiring special emphasis G. Informational
cc. Expected client’s assistance H. Outside documentation
dd. Use of internal auditor’s work
ee. Anticipated reliance on IC
ff. ICQ & flowcharts relative to study & eval of IC SOME BASIC CONCEPTS ON AUDIT WP
gg. Audit program Ownership & Custody
hh. Special disclosures required in the notes to FS • property of auditor
2. Correspondence folder:
A. Copies of letters to and from mgmt. • may be useful to client but not theirs
B. Management letter
C. Lawyer’s letter Client-Prepared Working Papers
D. Management representation letter • client & auditor agree that some schedules,
3. Ledger accounts folder
A. Draft of audit report analyses, reconciliations and computations are to
B. Draft of FS be prepared by client’s staff for submission to the
C. Working trial bal auditor
D. Adjustments
E. Reclassification entries
• Advantages:
F. Cash account: 1. Auditors relieved of unimportant tasks and are
aa. Lead schedule for cash able to devote more time to significant work
bb. Cash count sheets 2. Audit fees reduced
cc. Bank recon
dd. Bank confirmation replies
G. AR: Lead Schedule
aa. Analysis of ledger acct • to combine similar accounts for a summarized
bb. Schedule of customers’ balances forwarding to the working trial balance
cc. Summary of confirmation results
dd. Confirmation replies
ee. Analysis of ADA Tick marks
H. NR & related interest: • symbols to indicate audit procedures performed
aa. Analysis of ledger accounts
bb. Schedule of NR & related interest account - footings checked
cc. Summary of confirmation results - traced from general ledger
dd. Confirmation replies - confirmation
I. Advances to officers and employees and other rec.
aa. Analysis of ledger accounts - reconciled
bb. Schedules of receivables reconciled w controlling
cc. Confirmation replies Sign Off
J. Inventories:
aa. Summary showing quantity, cost, market & final • signatures or initials of preparer/reviewer affixed &
valuation dated on the working papers
bb. Copy of inventory summary submitted w the BIR
cc. Confirmation replies Filing and Indexing
K. Prepayments
aa. Analysis of ledger accounts • Filing
 o sequence of working papers in arrangement
• Indexing & Cross-Indexing
o by using numbers, alphabet or both
o facilitates control, assembly and review of WP
GUIDELINES IN PREPARATION OF WP
Senior, Semi-Senior and Junior Auditors
à accumulating working papers
Senior Auditor
à overall responsibility for completeness
Manager
à review of all wp
Partner-in-Charge
à may review on a selective basis before report is signed
Contains:
a. Client’s name
b. Ledger account title
c. Balance sheet date for real accounts and year
covered for operating accounts
d. Dates and initials of preparers and reviewers
e. Audit procedure applied by tick marks & legend
f. Identification of docus examined or source of info
g. Appropriate cross referencing to other WP
AUDIT EVIDENCE DECISIONS
1. Which audit procedures to use
o audit procedure – detailed instruction that
explains the audit evidence to be obtained
2. What sample size to select for a given procedure
o Once a procedure is selected, auditors can
vary the sample size from one to all the items
in the population being tested
3. Which items to select from the population
o auditor can select (a) sales transactions within
a particular week or month or (b) examine the
first 50 checks or (c) select 50 checks with the
largest amounts, or (d) select the checks
randomly or (e) select those checks that the
auditor thinks are most likely to be in error. The
procedures for the selection of samples will be
discussed further in Audit Sampling
4. When to perform the procedures (timing)
o interim phase or year-end
AUDIT PROGRAM
• action guide for auditors in performing the FS audit
• lists the detailed procedures to be performed for a
particular FS account (e.g. cash, receivables, PPE)
or a transaction cycle (e.g. revenue cycle,
expenditure cycle)
CHARACTERISTICS OF RELIABLE EVIDENCE
1. Independence of provider
o outside source > within
2. Effectiveness of client’s IC
o effective IC > weak IC
3. Auditor’s direct knowledge
o directly through physical exam, observation,
recalculation, and inspection > indirectly
through inquiries or exam of supporting
schedules or docu prepared by the client
4. Qualification of indiv providing info
o the evidence will not be reliable unless the
individual providing it is qualified to do so
o For ex, info about the computation of an entity’s
pension liability should come from an actuary
that possesses qualifications, skills and
experience
5. Degree of objectivity
o Objective evidence > evidence that requires
considerable judgment to determine whether it
is correct
6. Timeliness
o when it is accumulated or to the period covered
by the audit
o For ex, evidence is more reliable for balance
sheet accounts when it is obtained as close as
the balance sheet date as possible. For income
statement accounts, evidence is more reliable
if there is a sample that will cover the trans that
happened during the year such as selecting
sample of sales transac for each mon in a year.
AUDIT EVIDENCE AND PERSUASIVENESS
Audit Evidence Qualities Affecting Persuasiveness
Decisions of Evidence
Audit Appropriateness
procedures & - Relevance
timing - Reliability
> Independence of provider
> Effectiveness of IC
> Auditor's direct knowledge
> Qualifications of provider
> Objectivity of evidence
- Timeliness
> When procedures are performed
> Portion of period being audited
Sample size & Sufficiency
items to select Adequate sample size
Selection of proper popu items
AUDIT DOCUMENTATION
• principal record of auditing procedures applied,
evidence obtained, and conclusions reached by the
auditor in the engagement
• to aid the auditor in providing reasonable assurance
that an adequate audit was conducted in
accordance with auditing standards
• WORKING PAPER (See page 4)
I. Purpose of Audit Documentation
• As a basis for planning the audit
• As a tool to summarize and record the evidence
accumulated and conclusion reached therein
during the conduct of the audit.
• As a basis for quality control procedures.
• As a basis to comply with the auditor’s
professional responsibilities
II. Ownership of Audit Files
• Auditor’s
III. Confidentiality of Audit Files
• An auditor shall not disclose any confidential info
obtained in the course of a professional
engagement except w the consent of the client, or
if there is legal need to do so.

SARBANES-OXLEY ACT
• requires auditors of public companies to prepare &
maintain audit working papers for a period of no less
than seven years
• SEC rules require the auditor to maintain copies of
memos, correspondence, communications, other
documents and records, including electronic
records, related to the audit or review

PREPARATION OF AUDIT DOCUMENTATION

• Each audit file should be properly identified
• Documentation should be indexed and cross-
referenced
• Completed documentation must clearly indicate the
audit work performed
• It should include sufficient information
• It should plainly state the conclusions reached

EFFECT OF TECHNOLOGY
• Audit evidence is increasingly in electronic form
• Auditors must evaluate how electronic info affects
their ability to gather evidence
• Auditors use computers to read and examine
evidence
• Software programs are typically Windows-based