Auditing & Assurance Principles

Lesson 3:
Audit Documentation, Audit Evidence and Audit Sampling

LUISITO V. CORREA JR., CPA, CAT, MBA

Faculty Member
BALIUAG UNIVERSITY
College of Business Administration and Accountancy
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 Let us pray in silence.

Thank You God for the gift of life and the gift of our families and friends.

We pray for the gift of knowledge and understanding.

We pray for the healing of our hearts, minds, bodies and spirits.

Bless us more that we can become blessings to those in need.

An in thy mercy, may we live in faith, hope and love according to Your Holy Will.

This we pray in the name of the Father, the Son and the Holy Spirit. Amen

O, Mary conceived without sin, pray for us who have recourse to thee.
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Scope of Lesson 3

01 Audit Documentation
02 Audit Evidence

03 Audit Sampling
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PSA 230

Audit Documentation

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Objective of Auditor for Documentation

Audit was in accordance

Basis for the with PSAs and applicable
auditor’s report legal/regulatory
requirements.

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Audit documentation is sufficient to enable an experienced auditor to understand:

a b c

The nature, The results of Significant

timing, and the audit matters,
extent of the procedures conclusions
audit performed, and reached, and
procedures the audit significant
performed evidence professional
obtained. judgments.

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Documenting the nature, timing and extent of audit procedures:

a a b c

The identifying Who performed Who reviewed

characteristics the audit work the audit work
of the specific and the date performed and
items or such work was the date and
matters tested completed. extent of such
review.

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Other documentation requirements

Departure from a Relevant Requirement

 If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a
PSA, the auditor shall document how the alternative audit procedures performed achieve the aim of that
requirement, and the reasons for the departure.

Matters Arising after the Date of the Auditor’s Report

 If the auditor performs new audit procedures or draws new conclusions after the date of the auditor’s report,
the auditor shall document:
a) The circumstances encountered.
b) The new or additional audit procedures performed, audit evidence obtained, and conclusions reached,
and their effect on the auditor’s report.
c) When and by whom the resulting changes to audit documentation were made and reviewed.

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 Examples of Audit Documentation

Letters of confirmation Summaries of

Correspondence Checklists and representation significant matters

Audit Issues/
Analyses
programs memoranda

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Other issues on documentation

The auditor may include abstracts or copies of the entity’s records as part of audit documentation.

Audit documentation, however, is not a substitute for the entity’s accounting records.

The auditor need not include in audit documentation superseded drafts of working papers and financial
statements

Oral explanations by the auditor do not represent adequate support for the work performed or conclusions
reached.

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Other issues on documentation

Compliance with the requirements of this PSA will result in the audit documentation being sufficient and
appropriate.

Audit documentation provides evidence that the audit complies with the PSAs.

It is neither necessary nor practicable for the auditor to document every matter considered, or
professional judgment made

An important factor in determining the form, content and extent of audit documentation of significant
matters is the extent of professional judgment exercised.

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Audit Program

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Audit
Engagement Letter

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Working Papers

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Management
Representation
Letter
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 PRACTICE PROBLEM 1
1. Audit documentation
___________________________ – The record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached (terms such as “working papers” or “workpapers” are also sometimes used)
Documentation
2. ___________________________ –The material (working papers) prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit.
Working papers
3. ___________________________ – A record of the auditor’s planning; nature, timing and extent of the auditing procedures
performed; and results of such procedures and the conclusions drawn from the evidence obtained. Working papers may be in the
form of data stored on paper, film, electronic media or other media.
Engagement letter
4. ___________________________ –It documents and confirms the auditor’s acceptance of the appointment, the
objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.
Audit file
5. ___________________________ – One or more folders or other storage media, in physical or electronic form, containing the records
that comprise the audit documentation for a specific engagement.
Audit program
6. ___________________________ – Sets out the nature, timing and extent of planned audit procedures required to
implement the overall audit plan. It serves as a set of instructions to assistants involved in the audit and as a means
to control the proper execution of the work.
Management representations – Representations made by management to the auditor during the course of an audit, either
7. ___________________________
unsolicited or in response to specific inquiries.
Completion memorandum
8. ___________________________ – A summary that describes the significant matters identified during the audit and how they were
addressed, or that includes cross-references to other relevant supporting audit
documentation that provides such information.
Written representation
9. ___________________________ – A written statement by management provided to the auditor to confirm certain matters or to
support other audit evidence. They do not include financial statements, the assertions therein, or supporting books and records.

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PSA 500

Audit Evidence

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 Sufficient
&
Appropriate

Audit Evidence

SUFFICIENCY APPROPRIATENESS

Measure of the quality of

Measure of the quantity of
evidence.
evidence.
Relevance and reliability
Evidence must be
adequate to support audit
Relevance = Connection
conclusion
between evidence and
assertion

Reliability = Influenced by
nature and source

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Audit Procedures for Obtaining Audit Evidence

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PRACTICE PROBLEM 2
Accounting records
1. _______________________ – The records of initial accounting 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 journal entries;
and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations
and disclosures.
Analytical procedures
2. _______________________ – Consist of evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data.
Appropriateness
3. _______________________ – The measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
Audit evidence
4. _______________________ – Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained in the accounting records
underlying the financial statements and other information.
External confirmation
5. _______________________ – Represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or other
medium.
Inquiry
6. _______________________ – Consists of seeking information of knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.
Inspection
7. _______________________ – Involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.
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 medium.
6. _______________________ – Consists of seeking information of knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.
PRACTICE
7. PROBLEM 2
_______________________ – Involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.
8. _______________________
Management’s expert – An individual or organization possessing expertise in a field other than
accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the
financial statements.
9. Observation
_______________________ – Consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s personnel, or of the performance of
control activities.
10. Recalculation
_______________________ – Consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
11. Relevance
_______________________ – Deals with the logical connection with, or bearing upon, the purpose of the
audit procedure and, where appropriate, the assertion under consideration
12. Reliability
_______________________ – Influenced by its source and its nature, and the circumstances under which
audit evidence is obtained, including the controls over its preparation and maintenance where relevant.
13. Reperformance
_______________________ – Involves the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control.
14. Sufficiency
_______________________ – The measure of the quantity of audit evidence. The quantity of the audit
evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by
the quality of such audit evidence.
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GAME TIME
PSA 530

Audit Sampling

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PRACTICE PROBLEM 3
1. _______________________
Anomalous error – It means an error that arises from an isolated event that has not recurred other
than on specifically identifiable occasions and is therefore not representative of errors in the population.
2. _______________________
Anomaly – A misstatement or deviation that is demonstrably not representative of
misstatements or deviations in a population.
3. _______________________
Audit sampling – The application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor
with a reasonable basis on which to draw conclusions about the entire population.
4. _______________________
Expected error – The error that the auditor expects to be present in the population.
5. _______________________
Non-sampling risk – The risk that the auditor reaches an erroneous conclusion for any reason not
related to sampling risk.
6. _______________________
Population – Population means the entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions.
7. _______________________
Sampling risk – The risk that the auditor’s conclusion based on a sample may be different from
the conclusion if the entire population were subjected to the same audit procedure.
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 related to sampling risk.
6. _______________________ – Population means the entire set of data from which a sample is selected and
PRACTICE PROBLEM 3
about which the auditor wishes to draw conclusions.
7. _______________________ – The risk that the auditor’s conclusion based on a sample may be different from
the conclusion if the entire population were subjected to the same audit procedure.
8. _______________________
Sampling unit – The individual items constituting a population.
9. _______________________
Statistical sampling – Statistical
This sampling means any approach to sampling that has the following
characteristics: random selection of a sample and the use of probability theory to evaluate sample results,
including measurement of sampling risk.
10. _______________________
Stratification – The process of dividing a population into subpopulations, each of which is a
group of sampling units which have similar characteristics (often monetary value).
11. _______________________
Tolerable error – It error means the maximum error in a population that the auditor is willing to
accept.
12. _______________________
Tolerable misstatement – A monetary amount set by the auditor in respect of which the auditor seeks to
obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the
actual misstatement in the population.
13. _______________________
Tolerable rate of deviation – A rate of deviation from prescribed internal control procedures set by the auditor
in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by
the auditor is not exceeded by the actual rate of deviation in the population.
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Method of selecting the sample

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Control Tests Substantive
Tests Statistical Sampling to
Estimate Results of Audit
Attribute Variable Procedures
Sampling Sampling

Discovery Mean-per-unit
sampling estimation

Sequential Difference
sampling estimation Classical variable sampling

Ratio
estimation

Probability-
proportional-
to-size
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PRACTICE PROBLEM 4
Mean-per-unit estimation

Step 1. Determine the audited value per sample

P171,000 ÷ 150 sample accounts = P1,140/account

Step 2. Multiply the value in no. 1 to the total number of accounts in the population

P1,140 x 3,400 AR SL accounts = P3,876,000 Total audited value of AR

P3,876,000 – P3,800,000 = P76,000 Total misstatements in AR (understatement)

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PRACTICE PROBLEM 4
Difference estimation

Step 1. Calculate the difference between the audit value and book value for the sample
P171,000 – P180,000 = (P9,000) misstatement in the sample

Step 2. Get the average difference or misstatement per sample

(P9,000) ÷ 150= (P60) misstatement per SL account

Step 3. Multiply the average difference by the number of accounts in the population

(P60) x 3,400 = (P204,000) Total misstatements in the population (overstatement)

Step 4. Add the total misstatement to the book value for the population

P3,800,000 - 204,000 = P3,596,000 Total audited value of the population

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PRACTICE PROBLEM 4
Ratio estimation

Step 1. Divide the sample's audit value by the sample's book value to get the ratio

P171,000 ÷ P180,000 = 0.95

Step 2. Multiply the derived ratio by the total book value of the population

0.95 x P3,800,000 = P3,610,000 Total audited value of AR

P3,610,000 – P3,800,000 = P190,000 Total misstatements in AR (overstatement)

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Sampling Risks
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PRACTICE PROBLEM 5
Type of Risk Sampling Risk Audit Test Effect on Audit

Risk of assessing
Tests of Control Efficiency
Alpha risk control risk too high
(Type I error)
Risk of incorrect rejection Substantive tests Efficiency

Risk of assessing
Tests of Control
Beta risk control risk too low Effectiveness
(Type II error)
Risk of incorrect acceptance Substantive tests
Effectiveness

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 Factor Effect on Sample Size

PRACTICE Based on PSA 530:

a. An increase in the auditor’s assessment of the risk of material misstatement
PROBLEM 5 b. An increase in the use of other substantive procedures directed at the same
Increase
Decrease
assertion

c. An increase in the auditor’s desired level of assurance that tolerable

Increase
misstatement is not exceeded by actual misstatement in the population

d. An increase in tolerable misstatement Decrease

e. An increase in the amount of misstatement the auditor expects to find in the Increase
population

f. Stratification of the population when appropriate Decrease

g. The number of sampling units in the population No effect
Other Factors:
h. Increase in acceptable level of detection risk Decrease
i. Increase in acceptable risk of overreliance Decrease
j. Increase in allowable risk of incorrect acceptance Decrease
k. Increase in expected deviation rate Increase
l. Increase in tolerable deviation rate Decrease
m. Increase in confidence level provided by control tests/substantive tests Increase
n. High frequency of misstatement Increase
o. Increase in estimated standard deviation Decrease LCorrea
Practice Questions 1
An auditor is preparing to sample accounts receivable for overstatement. A statistical sampling method that automatically
provides stratification when using systematic selection is
a. Attribute sampling.
b. Probability proportionate to size sampling
c. Ratio-estimation sampling.
d. Mean-per-unit (MPU) sampling.

Which of the following does not affects form, content & extent of documentation
a. Size and complexity of the entity
b. nature of audit team who will perform audit
c. identified Risk of material misstatement
d. audit methodology and tools to be used

_______ is the file containing the records and data that compromise the audit documentation for a specific engagement.
a. Audit file
b. Engagement file
c. Working file
d. Client‟s file

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Practice Questions 2
Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptable low level, and
thereby enable the auditor to draw reasonable conclusion on which to base the auditor’s opinion, is a matter of
a. Audit guidelines
b. Professional judgment
c. Experience
d. Requirement from management

An auditor wishes to sample 200 sales receipts from a population of 5,000 receipts issued during the last year. The
receipts have preprinted serial numbers and are arranged in chronological (and thus serial number) order. The auditor
randomly chooses a receipt from the first 25 receipts and then selects every 25th receipt thereafter. The sampling
procedure described here is called
a. Judgment interval sampling.
b. Monetary-unit sampling.
c. Variables sampling.
d. Systematic random sampling

Process of collecting and preparing working papers is known as __________.

a. Audit evidence
b. Planning an audit
c. Documentation
d. Policies and procedures
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Practice Questions 3
Audit evidence obtained directly by the auditor will not be reliable if:
a. the auditor lacks the qualifications to evaluate the evidence.
b. it is provided by the client’s attorney
c. the client denies its veracity.
d. it is impossible for the auditor to obtain additional corroboratory evidence.

Sampling risk can lead to two types of erroneous conclusions one of them is when test of control appear to be more
effective than they actually are which affects ________________and is more likely to lead to an inappropriate audit
opinion.
a. audit efficiency
b. audit effectiveness
c. audit quality
d. none of the above

Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit evidence.
b. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and its reliability in providing support
for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions.
c. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence
is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required).
d. Merely obtaining more audit evidence may compensate for its poor quality.
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Thank You
And
God Bless
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