PROFE04- AUDITING AND ASSURANCE_PRINCIPLES AND SPECIALIZED INDUSTRIES

CHAPTER 3 AUDIT OBJECTIVES, PROCEDURES, EVIDENCE, AND

DOCUMENTATION

LEARNING OBJECTIVES:
Learn to distinguish audit evidence.
Determine audit evidence – additional considerations on specific items.
Discuss external confirmations.
Understand audit documentation.

PSA 500(REVISED) AUDIT EVIDENCE

1. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion
2. “Audit Evidence” is all the information used by the auditor in arriving at the
conclusions on which the opinion is based, and includes the information
contained in the accounting records underlying the financial statements and other
information
3. Accounting records generally include:
 The records of initial entries and supporting records, such as
checks and records of electronic fund transfers;
 Invoices
 Contracts
 The general and subsidiary ledgers, journal entries and other
adjustments to the financial statements that are not reflected in
formal journal entries; and
 Records such as work sheets and spreadsheets supporting cost
allocations, computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
 Minutes of the meetings
 Confirmations from third parties
 Analysts’ reports
 Comparable data about competitors (benchmarking)
 Control manuals

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 Information obtained by auditors from such audit procedures as

inquiry, observation, and inspection; and
 Other information developed by, or available to, the auditor that
permits the auditor to reach conclusions through valid reasoning

Sufficient appropriate evidence

1. Sufficiency is the measure of the quantity of audit evidence
2. Appropriateness is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for, or detecting material
misstatements in, the classes of transactions, account balances, and disclosures
and related assertions.
3. The following generalizations can be made about the reliability of audit evidence:
a. Audit evidence I more reliable when it is obtained from independent
sources outside the entity
b. Audit evidence that is generated internally is more reliable when the
related controls imposed by the entity are effective
c. Audit evidence obtained directly by the auditor (for example,
observation of the application of a control) is more reliable than audit
evidence obtained indirectly or by inference (for example, the inquiry
about the application of control)
d. Audit evidence is more reliable when it exists in a documentary form,
whether paper, electronic, or other medium (for example,
contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of the matters discussed)
e. Audit evidence provided by original documents is more reliable than
audit evidence provided by photocopies or facsimiles
4. An audit rarely involves the authentication of documentation, nor is the auditor
trained as or expected to be an expert in such authentication
5. When information produced by the entity is used by the auditor to perform audit
procedures, the auditor should obtain audit evidence about the accuracy and
completeness of the information
6. In forming an audit opinion, the auditor does not examine all the information
available because conclusions ordinarily can be reached by using sampling
approaches and other means of selecting items for testing.

The use of assertions in obtaining audit evidence

1. Management is responsible for the fair presentation of financial statements that
reflect the nature and operations of the entity.
2. In representing that the financial statements are presented fairly, in all material
respects, in accordance with the applicable financial reporting framework,
management implicitly or explicitly makes assertions regarding the recognition,

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measurement, presentation, and disclosure of the various elements of financial

statements and related disclosures
3. The auditor should use assertions for classes of transactions, account balances,
and presentation and disclosures in sufficient detail to form a basis for the
assessment of risks of material misstatement and the design and performance of
further audit procedures

CATEGORIES OF ASSERTIONS

a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE - transactions and events that have been recorded
have occurred and pertain to the entity
2. COMPLETENESS- all transactions and events that should have been
recorded have been recorded.
3. ACCURACY- amounts and other data relating to recorded transactions
and events have been recorded appropriately
4. CUTOFF - transactions and events have been recorded in the correct
accounting period
5. CLASSIFICATION- transactions and events have been recorded in the
proper accounts

b. Assertions about account balances at the period end:

1. EXISTENCE-assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS- the entity holds or controls the right to
assets, and liabilities are obligations of the entity
3. COMPLETENESS- all assets, liabilities, and equity interests that
should have been recorded have been recorded
4. VALUATION AND ALLOCATION- assets, liabilities and equity interests
are included in the financial statements at appropriate amounts and
any resulting valuation or allocation adjustments are appropriately
recorded

c. Assertions about presentation and disclosure:

1. OCCURRENCE AND RIGHTS AND OBLIGATIONS

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 Disclosed events, transactions, and other matters have

occurred and pertain to the entity
2. COMPLETENESS
 All disclosures that should have been included in the
financial statements have been included
3. CLASSIFICATION AND UNDERSTANDABILITY
 Financial information is appropriately presented and
described and disclosures are clearly expressed
4. ACCURACY AND VALUATION
 Financial and other information are disclosed fairly and at
appropriate amounts

Audit procedures for obtaining audit evidence

1. RISK ASSESSMENT PROCEDURES
Obtain an understanding of the entity and its environment, including its
internal control, to assess the risk of material misstatement at the financial
statement and assertion levels
2. TESTS OF CONTROLS
When necessary or when the auditor has determined to do so, test the
operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level

3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include
analytical review procedures and tests of details

Examples of audit procedures

1. INSPECTION-Consists of examining records and documents, whether internal or
external in paper form, electronic form, or other media. Inspection of tangible
assets consists of physical examination of the assets.
2. OBSERVATION-Consists of looking at a process or procedure being performed
by others
3. INQUIRY-Consists of seeking information of knowledgeable persons, both
financial and nonfinancial, throughout the entity or outside the entity
4. CONFIRMATION-The process of obtaining a representation of information or of
an existing condition directly from a third party
5. RECALCULATION-Consists of checking the mathematical accuracy of
documents or records
6. REPERFORMANCE-The auditor’s independent execution of procedures or
controls that were originally performed as part of the entity’s internal control,
either manually or through the use of CAATs

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7. ANALYTICAL PROCEDURES-Consists of evaluations of financial information

made by a study of plausible relationships among both financial and nonfinancial
data. It also encompasses the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate
significantly from predicted amounts.

PSA 501 AUDIT EVIDENCE – ADDITIONAL CONSIDERATIONS ON SPECIFIC

ITEMS

Attendance at Physical Inventory Counting

1. When inventory is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by
attendance at physical inventory counting unless impracticable.

2. If unable to attend the physical inventory count on the date panned due to
unforeseen circumstances, the auditor should take or observe some physical
counts on an alternative date and, when necessary, perform tests of intervening
transactions.

3. Where attendance is impracticable, due to factors such as the nature and location
of the inventory, the auditor should consider whether alternative procedures
provide sufficient appropriate audit evidence of existence and condition to
conclude that the auditor need not make reference to a scope limitation.

4. In planning attendance at the physical inventory count or the alternative

procedures, the auditor would consider:
 The nature of the accounting and internal control systems used regarding
inventory.
 Inherent, control, and detection risks, and materiality related to inventory.
 Whether adequate procedures are expected to be established and proper
instructions issued for physical inventory counting.
 The timing of the count.
 The locations at which inventory is held.
 Whether an expert’s assistance is needed.

5. The auditor would review management’s instructions regarding:

 The application of control procedures, for example, the collection of used
stocksheets, accounting for unused stocksheets, and count and recount
procedures.

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 Accurate identification of the stage of completion of work in progress, of slow

moving, obsolete or damaged items and inventory by a third party, for example,
on consignment.
 Whether appropriate arrangements are made regarding the movement of
inventory between areas and the shipping and receipt of inventory before and
after the cutoff date.

6. To obtain assurance that management’s procedures are adequately implemented

the auditor would observe employee’s procedures and perform test counts.

7. The auditor would also consider cutoff procedures including details of the
movement of inventory just prior to, during, and after the count so that the
accounting for such movements can be checked at a later date.

8. The auditor would test the final inventory listing to assess whether it accurately
reflects actual inventory counts.

9. When inventory is under the custody and control of a third party, the auditor would
ordinarily obtain direct conformation from the third party as to the quantities and
condition of inventory held on behalf of the entity. Depending on the materiality of
this inventory, the auditor would consider:
 The integrity and independence of the third party.
 Observing, or arranging for another auditor to observe, the physical inventory
count.
 Obtaining another auditor’s report on the adequacy of third party’s accounting
and internal control systems for ensuring that inventory is correctly counted and
adequately safeguarded.
 Inspecting documentation regarding inventory held by third parties, for
example, warehouse receipts, or obtaining confirmation from other parties
when such inventory has been pledged as collateral.

Procedures regarding litigation and claims

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1. The auditor should carry out procedures in order to become aware of any litigation
and claims involving the entity, which may have a material effect on the financial
statements.

Such procedures would include:

 Make appropriate inquiries of management including obtaining representations.
 Review board minutes and correspondence with the entity’s lawyers.
 Examine legal expense accounts.
 Use any information obtained regarding the entity’s business including
information obtained from discussions with any in–house legal department.

2. When litigation or claims have been identified or when the auditor believes they
may exist, the auditor should seek direct communication with the entity’s lawyers.

3. The letter, which should be prepared by management and sent by the auditor,
should request the lawyer to communicate directly with the auditor. When it is
considered unlikely that the lawyer will respond to a general inquiry, the letter
would ordinarily specify:
 A list of litigation and claims.
 Management’s assessment of the outcome of the litigation or claim and its
estimate of the financial implications, including costs involved.
 A request that the lawyer confirms the reasonableness of management’s
assessments and provides the auditor with further information if the list is
considered by the lawyer to be incomplete or incorrect.

4. The auditor considers the status of legal matters up to date of the audit report.

5. If management refuses to give the auditor permission to communicate with the

entity’s lawyers, this would be a scope limitation and should ordinarily lead to a
qualified opinion or a disclaimer of opinion.

Valuation and disclosure of long-term investments

1. When long-term investments are material to the financial statements, the auditor
should obtain sufficient appropriate audit evidence regarding their valuation and
disclosure.

2. Audit procedures ordinarily include considering evidence as to whether the entity

has the ability to continue to hold the investments on a long-term basis and
discussing with management whether the entity will continue to hold the

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investments as long-term investments and obtaining written representations to that

effect.

3. Other procedures would ordinarily include considering related financial statements

and other information, such as market quotations, which provide an indication of
value and comparing such values to the carrying amount of the investments up to
the date of the auditor’s report.

Segment information
1. When segment information is material to the financial statements, the auditor
should obtain sufficient appropriate audit evidence regarding its disclosure in
accordance with the applicable financial reporting framework.

2. The auditor considers segment information in relation to the financial statements

taken as a whole, and is not ordinarily required to apply auditing procedures that
would be necessary to express an opinion on the segment information standing
alone.

3. Audit procedures regarding segment information ordinarily consist of analytical

procedures and other audit test appropriate in the circumstances.

4. The auditor would discuss with management the methods used in determining
segment information, and consider whether such methods are likely to result in
disclosure in accordance with GAAP and test the application of such methods.

PSA 505 EXTERNAL CONFIRMATIONS

1. External confirmation is the process of obtaining and evaluating audit evidence

through a direct communication from a third party in response to a request for
information about a particular item affecting assertions made by management in
the financial statements.

Use of positive and negative external confirmations

2. A positive external confirmation request asks the respondent to reply to the

auditor in all cases either by indicating the respondent’s agreement with the given
information, or by asking the respondent to fill in the information.

3. A negative external confirmation request asks the respondent to reply only in the
event of disagreement with the information provided in the request.

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4. Negative confirmation requests may be used to reduce the risk of material

misstatement to an acceptable level when:
 The assessed risk of material misstatement is lower.
 A large number of small balances are involved.
 A substantial number of errors are not expected.
 The auditor has no reason to believe that respondents will disregard these
requests.

5. When performing confirmation procedures, the auditor should maintain control over
the process of selecting those to whom a request will be sent, the preparation and
sending of confirmation requests, and the responses to those requests.

6. The auditor should perform alternative procedures where no response is received

to a positive external confirmation request. The alternative audit procedures should
be such as to provide the evidence the evidence about the financial statement
assertions that the confirmation request was intended to provide.

7. When the auditor forms a conclusion that the confirmation process and alternative
procedures have not provided sufficient appropriate audit evidence regarding an
assertion, the auditor should undertake additional procedures to obtain sufficient
audit evidence.

8. The auditor should evaluate whether the results of the external confirmation
process together with the results from any other procedures performed, provide
sufficient appropriate audit evidence regarding the assertion being audited.

PSA 230 (Revised) AUDIT DOCUMENTATION

1. The auditor should prepare, on a timely basis, audit documentation that provides:
 a sufficient and appropriate record of the basis for the auditor’s report; and

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 evidence that the audit was performed in accordance with PSAs and
applicable legal and regulatory requirements
2. “Audit documentation” means the record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor reached (terms such as
“working papers” or “work papers” are also sometimes used).
3. “experience auditor” means an individual (whether internal or external to the firm)
who has reasonable understanding of
 Audit processes;
 PSAs and applicable legal and regulatory requirements
 The business environment in which the entity operates; and
 Auditing and financial reporting issues relevant to the entity’s industry
4. Audit documentation may be recorded on paper or on electronic or other media
5. The auditor should prepare the audit documentation so as to enable an
experiences auditor, having no precious connection with the audit, to
understand:
 the nature, timing , and extent of the audit procedures performed to
comply with PSAs and applicable legal and regulatory requirements
 the results of the audit procedures and the audit evidence obtained; and
 significant matters arising during the audit and the conclusions reached
thereon
6. in documenting the nature, timing and extent of audit procedures performed, the
auditor should record the identifying characteristics of the specific items or
matters being tested
7. the auditor should document discussions of significant matters with management
and others on a timely basis
8. where, in exceptional circumstances, the auditor judges it necessary to depart
from a basic principle or an essential procedure that is relevant in the
circumstances of the audit, the auditor should document how the alternative audit
procedures performed achieved the objective of the audit, and, unless otherwise
clear, the reasons for the departure
9. the auditor should record:
 who performed the audit work and the date such work was completed
 who reviewed the audit work performed and the date and extent of such
review

Assembly of the final audit file

10. The auditor should complete the assembly of the final audit file on a timely basis
after the date of the auditor’s report. As PSQC 1 indicates, 60 days after the date
of the auditor’s report is ordinarily an appropriate time limit within which to
complete the assembly of the final audit file

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Reference:
Compilation of Lecture Notes by Dean Rene Boy R. Bacay, CPA, MBA, FRIAcc

For further discussion please refer to the link provided:

PSA 500 Audit Evidence- https://www.youtube.com/watch?v=Zr4WkgLlTO0

PSA 505 External Confirmations- https://www.youtube.com/watch?v=RAvoqHZDgbw

PSA 230 Audit Documentation- https://www.youtube.com/watch?v=qHNGrNf8f8g

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