BALIUAG UNIVERSITY

College of Business Administration and Accountancy

Operations Auditing
1st Trimester AY 2020 – 2021
Luisito V. Correa Jr. CPA, CAT, MBA

Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

I. Audit Documentation

 The objective of the auditor is to prepare documentation that provides:

a) A sufficient and appropriate record of the basis for the auditor’s report.
b) Evidence that the audit was planned and performed in accordance with PSAs and applicable legal and
regulatory requirements.

 Form, Content and Extent of Audit Documentation

 The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no
previous connection with the audit, to understand:
a) The nature, timing, and extent of the audit procedures performed to comply with the PSAs and applicable
legal and regulatory requirements.
b) The results of the audit procedures performed, and the audit evidence obtained.
c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional
judgments made in reaching those conclusions.

 In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:
a) The identifying characteristics of the specific items or matters tested.
b) Who performed the audit work and the date such work was completed.
c) Who reviewed the audit work performed and the date and extent of such review.

 The auditor shall document discussions of significant matters with management, those charged with
governance, and others, including the nature of the significant matters discussed and when and with whom
the discussions took place.

 If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding a
significant matter, the auditor shall document how the auditor addressed the inconsistency.

 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, in exceptional circumstances, the auditor performs new or additional 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.

 Examples of audit documentation include:

a) Audit programs
b) Analyses
c) Issues memoranda
d) Summaries of significant matters
e) Letters of confirmation and representation
f) Checklists
g) Correspondence (including e-mail) concerning significant

 Other issues on documentation

 The auditor may include abstracts or copies of the entity’s records (for example, significant and specific
contracts and agreements) as part of audit documentation. Audit documentation, however, is not a substitute
for the entity’s accounting records.

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Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

 The auditor need not include in audit documentation superseded drafts of working papers and financial
statements, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for
typographical or other errors, and duplicates of documents.
 Oral explanations by the auditor, on their own, do not represent adequate support for the work the auditor
performed or conclusions the auditor reached, but may be used to explain or clarify information contained in
the audit documentation.
 In principle, compliance with the requirements of this PSA will result in the audit documentation being
sufficient and appropriate in the circumstances. Other PSAs contain specific documentation requirements that
are intended to clarify the application of this PSA in the particular circumstances of those other PSAs.
 Audit documentation provides evidence that the audit complies with the PSAs. However, it is neither
necessary nor practicable for the auditor to document every matter considered, or professional judgment
made, in an audit.
 An important factor in determining the form, content and extent of audit documentation of significant matters
is the extent of professional judgment exercised in performing the work and evaluating the results.
Documentation of the professional judgments made, where significant, serves to explain the auditor’s
conclusions and to reinforce the quality of the judgment.
 The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary
(sometimes known as a completion memorandum) 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.

 Audit letters and documents

Document Timing Purpose
1. Engagement letter Pre-audit engagement Acceptance of client
2. Audit program Audit planning Document the planned nature,
extent and timing of audit
3. Working papers Audit test Document the audit evidence and
tests performed
4. Management representation Completing the audit Document management
letter responsibility for fair presentation
of the financial statements

PRACTICE PROBLEM 1: Identify the term being defined in each item. Refer to PSA 230, PSA 580 and PSA Glossary
of terms.

1. ___________________________ – 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)
2. ___________________________ –The material (working papers) prepared by and for, or obtained and
retained by the auditor in connection with the performance of the audit.
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. These may be in the form of data stored on paper, film, electronic media or other media.
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.
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.
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.
7. ___________________________ – Representations made by management to the auditor during the course
of an audit, either unsolicited or in response to specific inquiries.
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.
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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 Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

II. Audit Evidence

 Sufficient and appropriate audit evidence

 The auditor shall design and perform audit procedures that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit evidence.
 Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is
primarily obtained from audit procedures performed during the course of the audit. It may, however, also
include information obtained from other sources such as previous audits or a firm’s quality control procedures
for client acceptance and continuance.

 Information to Be Used as Audit Evidence

 When designing and performing audit procedures, the auditor shall consider the relevance and reliability of
the information to be used as audit evidence.
 When information to be used as audit evidence has been prepared using the work of a management’s expert,
the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the
auditor’s purposes,:
a) Evaluate the competence, capabilities and objectivity of that expert
b) Obtain an understanding of the work of that expert
c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.

 Audit Procedures for Obtaining Audit Evidence

a) Risk assessment procedures
b) Further audit procedures
i. Tests of controls
ii. Substantive procedures, including tests of details and substantive analytical procedures.

 Generalizations about the reliability of audit evidence

a) The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.
b) The reliability of audit evidence that is generated internally is increased when the related controls, including
those over its preparation and maintenance, 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, inquiry about the
application of a control).
d) Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than
evidence obtained orally (for example, a 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, or documents that have been filmed, digitized or otherwise transformed into electronic form,
the reliability of which may depend on the controls over their preparation and maintenance.

PRACTICE PROBLEM 2: Identify the audit term being defined in each item. Refer to PSA 500.
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.
2. _______________________ – Consist of evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data.
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.
4. _______________________ – Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. It includes both information contained in the accounting records underlying the
financial statements and other information.
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.
6. _______________________ – Consists of seeking information of knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.
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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 Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

8. _______________________ – 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. _______________________ – 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. _______________________ – Consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
11. _______________________ – Deals with the logical connection with, or bearing upon, the purpose of the
audit procedure and, where appropriate, the assertion under consideration
12. _______________________ – 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. _______________________ – Involves the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control.
14. _______________________ – The measure of the quantity of audit evidence. It is affected by the auditor’s
assessment of the risks of material misstatement and also by the quality of such audit evidence.

III. Audit Sampling

PRACTICE PROBLEM 3: Identify the audit term being defined in each item. Refer to PSA 530 and PSA Glossary of terms.
1. _______________________ – 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. _______________________ – A misstatement or deviation that is demonstrably not representative of
misstatements or deviations in a population.
3. _______________________ – 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. _______________________ – The error that the auditor expects to be present in the population.
5. _______________________ – The risk that the auditor reaches an erroneous conclusion for any reason not
related to sampling risk.
6. _______________________ – Population means the entire set of data from which a sample is selected and
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. _______________________ – The individual items constituting a population.
9. _______________________ – Statistical 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. _______________________ – 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. _______________________ – It error means the maximum error in a population that the auditor is willing to
accept.
12. _______________________ – 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. _______________________ – 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.

 Method of selecting the sample

1. Random-number sampling — Every sampling unit has the same probability of being selected, and every
combination of sampling units of equal size has the same probability of being selected. (applied through
random number generators, for example, random number tables)
2. Systematic sampling — the number of sampling units in the population is divided by the sample size to give
a sampling interval, each nth sampling unit thereafter is selected. The starting point is more likely a random
start.
3. Haphazard sampling — the auditor selects the sample without following a structured technique. Although no
structured technique is used, the auditor would nonetheless avoid any conscious bias or predictability.

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Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

4. Block sampling — involves selection of a block(s) of contiguous items from within the population. Block
selection cannot ordinarily be used in audit sampling because most populations are structured such that items
in a sequence can be expected to have similar characteristics to each other, but different characteristics from
items elsewhere in the population.
5. Monetary Unit Sampling — is a type of value-weighted selection (as described Variable Sampling) in which
sample size, selection and evaluation results in a conclusion in monetary amounts.

 Statistical Sampling for Substantive Tests and Control Tests

A. Attribute Sampling – A sampling plan enabling the auditors to estimate the deviation rate in a population. In
attribute sampling, each item in the population has an attribute of interest to the auditor. Appropriate
sampling for test of controls.
 Attribute sampling methods:
1. Discovery sampling – It is used when even one deviation is critical. It is most appropriate when the
expected deviation rate is zero or near zero. The sample size is calculated so that it will include at least
one instance of deviation if deviations occur in the population at a given rate.
2. Sequential (stop-or-go) sampling - A sampling plan for which the sample is selected in several steps,
with the need to perform each step conditional on the results of the previous steps. That is, the results
may either be so poor as to indicate that the control may not be relied upon, or so good as to justify
reliance at each step.

B. Variable Sampling – A sampling plan designed to estimate a numerical measurement of a population, such as
Peso value. It is used for discrete or continuous variables (i.e. weights or monetary amount). Appropriate
sampling for test of details.

(i) Classical Variable sampling methods:

1. Mean-per-unit estimation – A classical variable sampling plan enabling auditors to estimate the
average peso value of items in a population by determining the average value of items in a sample.
May be stratified or unstratified.
2. Difference estimation – A classical variable sampling plan that uses the difference between the
audited (correct) values and the book values of items in a sample to calculate the estimated total
audited value of the population.
3. Ratio estimation – A classical variable sampling plan enabling auditors to use the ratio of audited
(correct) values to book values of items in a sample to calculate the estimated total audited value of
the population.

(ii) Probability-proportional-to-size (PPS) sampling – A variables sampling procedure that uses attributes
theory to express a conclusion in monetary (Peso) amounts. It uses monetary unit as sampling unit. Also
called Monetary unit sampling (MUS).

PRACTICE PROBLEM 4: An auditor examines 150 samples of Account Receivables with a total recorded value
of P180,000. The total population includes 3,400 subsidiary accounts with a total book value of P3.8 million.
The audited amount of the sample is P171,000. Determine the estimated amount of the total accounts
receivable using classical variable sampling:

1. Mean-per-unit estimation

2. Difference estimation

3. Ratio estimation

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Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

 Sampling Risks
1. Risk of assessing control risk too high. The risk that the assessed level of control risk based on the sample is
greater than the true operating effectiveness of the control. That is, the auditor concludes that the system
operates less effectively than it actually does.
2. Risk of assessing control risk too low. This risk is the possibility that the assessed level of control risk based
on the sample is less than the true operating effectiveness of the controls. That is, the auditor concludes
that the system operates more effectively than it actually does.
3. Risk of incorrect acceptance. The risk that sample results indicate that a population is not materially
misstated when, in fact, it is materially misstated.
4. Risk of incorrect rejection. The risk that sample results indicate that a population is materially misstated
when, in fact, it is not.

PRACTICE PROBLEM 5: Identify the two types of alpha risk (type I) and the two beta risk (type II). Choose from
the sampling risk discussed above. Likewise, identify whether they are applicable in test of controls or test of
details (substantive test). Lastly, indicate whether the sampling risk affect audit effectiveness or efficiency.
Type of Risk Sampling Risk Audit Test Effect on Audit

Alpha risk
(Type I error)

Beta risk
(Type II error)

PRACTICE PROBLEM 6: Indicate whether the sample size will increase, decrease or there is no effect on sample
size given the following variables in sampling:
Factor Effect on Sample Size
Based on PSA 530:
a. An increase in the auditor’s assessment of the risk of material misstatement
b. An increase in the use of other substantive procedures directed at the same
assertion

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

misstatement is not exceeded by actual misstatement in the population

d. An increase in tolerable misstatement

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

f. Stratification of the population when appropriate

g. The number of sampling units in the population
Other Factors:
h. Increase in acceptable level of detection risk
i. Increase in acceptable risk of overreliance
j. Increase in allowable risk of incorrect acceptance
k. Increase in expected deviation rate
l. Increase in tolerable deviation rate
m. Increase in confidence level provided by control tests/substantive tests
n. High frequency of misstatement
o. Increase in estimated standard deviation

Note: Please study the PSA Glossary of terms. Some items are included in the quiz.

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Lesson 3: Audit Documentation, Audit Evidence and Audit Sampling LVC

References
Audit and Assurance Standards Council. (2009). Philippine Standards on Auditing 230: Audit Documentation.

Audit and Assurance Standards Council. (2009). Philippine Standards on Auditing 500: Audit Evidence.

Audit and Assurance Standards Council. (2009). Philippine Standards on Auditing 530: Audit Sampling.

Audit and Assurance Standards Council. (2002). Glossary of Terms.

Salosagcol, J., Tiu, M., & Hermosilla, R. (2009). Auditing Theory: A Guide in Understanding the AASC Pronouncements. GIC
Enterprises & Co., Inc.

Whittington, R. O. (2013). CPA Exam Review: Auditing and Attestation. John Wiley & Sons, Inc.

““For I know the thoughts that I think toward you, says the LORD, thoughts of peace and not of evil, to give you a future
and a hope.” Jeremiah 29:11

“If one dream should fall and break into a thousand pieces... never be afraid to pick one of those pieces up and begin again.
That's the beauty of being alive... We can always start all over again. Enjoy God's amazing opportunities bestowed on us.
Have faith in Him always.” Saint Bernadette Soubirous

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