Audit evidence and

documentation:
the framework
Definition of Audit Evidence
Audit evidence is all information used by the auditor on which the audit
opinion is based. The gathering and evaluation of audit evidence is a
cumulative and iterative process.

Types of Audit Evidence

The auditor obtains two types of audit evidence such as:
a. Underlying accounting records – 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.
b. Other information – All other evidence obtained by the auditor such as
minutes of meetings, confirmation from third parties and information
obtained from such audit procedures as inquiry, observation, and
inspection.

The auditor must obtain the two types of audit evidence above, which
must be consistent with each other and not doubtful as to its reliability.
Source of Audit Evidence

The following are the list of sources of audit

evidence:
 Performance of audit procedures. (Primary
source)
 Previous audits.
 Firm’s quality control procedures for client
acceptance and continuance
 Work of a management’s expert.
 Management representations.
 Other sources inside and outside the entity.
Primary Source of Audit Evidence: Audit Procedures
Audit procedures as to purpose:
a. Risk assessment procedures (RAP) – are the audit procedures performed
to obtain an understanding of the entity and its environment including the
enmity's internal control, to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement
and assertion levels, thereby providing a basis for designing and
implementing responses to the assessed risks of material misstatement;
and

b. Further audit procedure (FAP) which comprise:

 Tests of controls (ToC) – an audit procedure designed to evaluate the
operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level; and
 Substantive procedures (SP), comprising tests of details and substantive
analytical procedures – an audit procedure designed to detect material
misstatements at the assertion level.
Audit procedures as to types:
a. Inspection – involves examining records or documents, whether internal
or external, in paper form, electronic form, or other media, or a physical
examination of an asset.
b. 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.
c. External Confirmation – a direct written response to the auditor from a
third party (the confirming party), in paper form, or by electronic pr other
medium.
d. Recalculation – consists of checking the mathematical accuracy of
documents or records.
e. Reperformance – involves the auditor’s independent execution of
procedures or controls that were originally performed as part the entity’s
internal control.
f. Analytical Procedures – consist of evaluations of financial information
made by a study of plausible data. Analytical procedures also
encompass the investigation of identified fluctuations and relationships
deviate significantly from predicted amount.
g. Inquiry – consists of seeking information of knowledgeable persons, both
financial and non financial, within the entity or outside the entity.
 Types of Audit Procedures Linked According to Purpose
Types Purpose
Rap FAP
Toc SP
Inspection   
Observation   
External confirmation 
Recalculation 
Reperformance 
Analytical procedures  
Inquiry   
Reliability and Cost of Audit Procedures
The most reliable evidence gathering techniques (audit procedures)
should be used whenever they are cost effective. The quality of
internal controls has a significant effect on reliability. Furthermore, a
specific substantive audit procedure is rarely sufficient by itself to
provide competent evidence to satisfy the audit objective. However,
assuming good internal controls and the ability to choose a specific
method, a list of the most reliable to the least reliable evidence-
gathering techniques are in general:
 Recalculation,
 Inspection,
 Reperformance,
 Observation,
 Confirmation,
 Analytic procedures,
 inquiry.
The evidence-gathering procedures in order of cost from most costly to
least costly are in general:
 Confirmation (most costly),
 Inspection,
 Recalculation,
 Reperformance,
 Observation,
 Analytic procedures,
 Inquiry (least costly).

Inquiry is the most extensively used audit procedures. Although inquiry

may provide important audit evidence, and may even produce
evidence of a misstatement, inquiry alone ordinary does not provide
sufficient audit evidence of the absence of a material misstatement
at the assertion level, nor of the operating effectiveness of controls.
Sufficiency and Appropriateness of Audit Evidence
The auditor shall design and perform audit procedures to enable the
auditor to obtain sufficient appropriate audit evidence (SAAE) to be
able to draw reasonable conclusions on which to base the auditor’s
opinion. The sufficiency and appropriateness of audit evidence are
interrelated.

Sufficiency
Sufficiency is the measure of the quantity of evidence. The quantity of
audit evidence needed is affected by the auditor’s assessment of the
risks of misstatement (the higher the assessed risks, the more audit
evidence is likely to be required) and also by the quality, the less
may be required). Obtaining more audit evidence, however, may not
compensate for its poor quality.
Extent of Testing to Obtain Sufficient Evidence
An effective test provides appropriate audit evidence to an extent that,
taken with other audit evidence obtained or to be obtained, will be
sufficient for the auditor’s purposes.

In selecting items for testing, the auditor determines the relevance and
reliability of information to be used as audit evidence; the other
aspect of effectiveness (sufficiency) is an important consideration in
selecting items to test. The means available to the auditor for
selecting items for testing are:
 All items (100% examination)
 Specific items
 Audit sampling

The application of any one or combination of these means may be

appropriate depending on the particular circumstances, for example,
the risks of material misstatement related to the assertion being
tested, and the practicality and efficiency of the different means.
Appropriateness
Appropriateness is 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.

When designing and performing audit procedures, the auditor shall

consider the relevance and reliability of the information to be used
as audit evidence and reliability of the information upon which it is
based.
Relevance
Relevance deals with the logical connection with, or bearing upon, the
purpose of the audit procedure, direction of testing and, where
appropriate, the assertion under consideration.

Purpose of Audit Procedure

Audit procedures classified according to purpose are risks assessment
procedures (RAP), test of controls (ToC) and substantive
procedures (SP). These three procedure have different purposes
such as, to obtain understanding the test the operating effectiveness
of entity’s internal control and to detect material misstatements in
the financial statements, respectively.
Assertion
Audit evidence, to be relevant, must link directly to relevant assertions.
The auditor uses assertions in considering different types of
potential misstatements that may occur in the financial statements. It
is the reason why audit objectives follow and are closely elated to
assertions. In other words, assertions guide the auditor in the
performance of auditor procedures as to what appropriate audit
evidence to obtain.

A given set of audit procedures may provide audit evidence that is

relevant to certain assertions, but not others. For example,
inspection of documents related to the collection of receivables after
the period end may provide audit evidence regarding existence and
valuation, but not necessarily cutoff.
Directional testing
The relevance of information to be used as audit evidence may be
affected by the direction of testing. For example, if the purpose of an
audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts
payable may be a relevant audit procedure. On the other hand when
testing for understatement in the existence or valuation of accounts
payable, testing the recorded accounts payable would not be
relevant, but testing such information as subsequent disbursements,
unpaid invoices, suppliers’ statements, and unmatched receiving
report may be relevant.
Reliability
The reliability of information to be used as audit evidence, and therefore
of the audit evidence itself, is influenced by its source and its nature,
and the circumstances under which it is obtained, including the
controls over its preparation and maintenance where relevant.

Evidence is general more reliable when:

a. Obtained from independent sources;
b. The related controls are effective;
c. Obtained directly than indirectly or by inference;
In documentary form than oral; and
In original state than by photocopies or facsimiles.
Inconsistency in, or Doubts over Reliability of, Audit evidence
Obtaining audit evidence from different sources or of a different nature
may indicate that an individual item of audit evidence I not reliable,
such as when audit evidence from another. This may be the case
when, for example, responses to inquires of management, internal
audit, and others are inconsistent, or when response to inquiries of
those charged with governance made to corroborate the responses
to inquires of management are inconsistent with the response by
management. Specific documentation requirement if the auditor
identified information that is inconsistent with the auditor’s final
conclusion regarding a significant matter.
Audit documentation
Audit documentation (a.k.a. “working papers” or “workpapers”) is the
record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached.

The auditor shall prepare documentation to provide:

a. A sufficient and appropriate record of the basis for the auditor’s
report; and

b. Evidence that the audit was planned and performed in accordance

with PSAs and applicable legal and regulatory requirements.
Audit documentation serves a number of additional purposes, including the
following:
 Assisting the audit team to plan and perform the audit.
 Assisting members of the audit team responsible for supervision to
direct and supervise the audit work, and to discharge their review
responsibilities.
 Enabling the audit team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of quality control reviews and inspections.
 Enabling the conduct of external inspections in accordance with
applicable Leal, regulatory or other requirements.

Auditor’s documentation is normally stored in an audit file. Audit file refers to

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.
Timely Preparation of Audit Documentation
Preparing sufficient and appropriate audit documentation on a timely
basis helps to enhance the quality of the audit and facilitates the
effective review and evaluation of the audit evidence obtained and
conclusions reached before the auditor's report is finalized.

Form, Content and Extent of Audit Documentation

The auditor shall prepare audit documentation that is sufficient to
enable an experienced auditor having no precious 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; and
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; and
c. Who reviewed the audit work performed and the date and extent of
such review.

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

accounting records. Oral explanations by the auditor, on their own,
do not represent adequate support for the work the audit.
Types of Audit Documentation
Auditors generally classify audit documentation into two types:
a. Current files – related specifically to the current period’s audit. They
often include.
 Reconciliation of accounting records to FSs
 Lead schedules of major components of amounts in the FSs and
supporting detailed schedules
 Documentation of substantive procedures performed providing
evidence corroborating or contradicting management’s assertions
 The attorney’s letter and management’s representation letter
 Audit programs
b. Permanent (continuing) files – related to the company and contain
information with long-term significance. They are of ongoing interest
in any period under audit ad often include
 Debt agreements and pension contrasts
 Articles of incorporation
 Flowcharts of internal control
 Bond indenture agreements and lease agreements
 Analyses of capital stock & owners equity accounts
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.

Assembly and Retention of the Final Audit File

The auditor shall assemble the audit documentation on a timely basis,
ordinarily not more than 60 days after the date of the auditor’s
report. After the assembly, the auditor shall not delete or discard
audit documentation before the end of its retention period, which
ordinarily is no shorter than seven years from auditor’s report date.
End of Lecture 3