Audit Evidence and Documentation

Professor Kate Jelinek

g.g. checks. Includes:   (1) Accounting records underlying financial statements  e. contracts. industry thirdinformation. records supporting calculations  (2) Other information that corroborates the accounting records  e. meeting minutes. third-party confirmations.. invoices. info obtained through inquiry. observation or inspection of records or documents ..What is audit evidence?  It s all the information used by the auditor in arriving at the conclusion on which the audit opinion is based.

Collection of Audit Evidence  Procedures to Assess Risk    Understand organization Understand information system Preliminary analytical procedures  Procedures to Test Accounting Information     Substantive analytical procedures Tests of transactions Tests of accounts Tests of presentation and disclosure .

confirm A/R balance to support existence of receivables Completeness Rights and obligations Valuation or allocation Presentation and disclosure ..How do we know what to look at?  Management s assertions in the financial statements guide the auditor in planning the collection of audit evidence.g. 5 management assertions (GAAS)       Existence or occurrence e.

Using inquiry as a form of evidence (40%)  Overrelying on this method  7.Why is it important that we think about this?  Beasley. estimates (36%)  Failed to gather corroborating evidence. Hermanson (2001) study analyzed 45 cases of fraudfraud-related SEC enforcement actions against auditors from 198719871997. Gathering insufficient audit evidence (80%)  Insufficiency related to asset valuation and ownership. challenge mgt. assumptions . representations  6. mgt. Carcello. Obtaining inadequate evidence related to evaluate significant mgt. Top 10 deficiencies:   1.

inquiries.How do we evaluate evidence?  GAAS 3rd Standard of fieldwork: Sufficient competent evidential matter is to be obtained through inspection. observation. . and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

. occurrence of sales has a high inherent risk than the existence of petty cash  Size and characteristics of population  e. more audit evidence required if inventory is heterogeneous .What makes evidence sufficient?  Sufficiency is a function of:  Materiality of account  e.g...g. for a manufacturing company. inventory will most likely be the largest asset  Risk of material misstatement  e.g.

manner in which it was obtained (direct observation is better than inquiry of client personnel). evidence produced by a client with a strong IC system is better).  Reliability  Consider credibility of source evidence (external is better than internal). .What makes evidence competent?  Competency is a function of:  Relevance  Must adequately address one or more management assertions (Observation of inventory address the issue of inventory existence.. however. it does not relate to rights and obligations assertion). conditions under which is was obtained (i.e.

Types of audit evidence  Physical evidence (direct evidence) Confirmation (external corroborating evidence) Mathematical reconciliations (e.e. use audit software to recalculate Allowance for Doubtful Accounts) Analytical evidence Hearsay evidence (i..g. inquiry of client) Documentary (internal or external)      ..

Reliability continuum 1 Documentary (External) Documentary (Internal) 7 Hearsay Physical Confirm Mathematical Analytical .

Procedures used in collecting evidence             Examine detailed look Scan usually long reports or documents. BOD meeting minutes Compute create a new number independent of client calculation (e. real estate value) Recompute recalculate client-provided number clientFoot add columns of numers Trace from source to client s books Vouch from client s books to source Compare make sure two sources of evidence agree Inspect/Count used with physical evidence.g.. Verify amount recorded is correct Observe watch client perform procedure Inquire ask client to verify evidence or provide explanation . See if anything jumps out Read contracts.

an auditor could personally count all 25 funds another alternative is to count 5 and rely on the client s recorded amounts for the other 20.  However. To verify the existence of the client s 25 petty cash funds.  e.g.Cost/benefit analysis  Given time and cost constraints.. cost alone is never a valid basis for omitting an audit procedure for which there is not an alternative! . an auditor must use professional judgment to determine whether sufficient audit evidence has been obtained.

auditor must rely on evidence that is persuasive rather than conclusive. reasonable assurance is not obtained when the auditor relies on audit evidence that is less than persuasive. However. Usually.   .Other comments  The auditor is seldom convinced beyond all doubt that assertions in FS are presented fairly in all material respects.

and timing of work to be performed (e. confirm existence of cash by vouching items from client records to bank statements).g.. extent.  Contains audit procedures deemed necessary to obtain reasonable assurance that FS are presented fairly.Documentation  Auditor should prepare an audit program after considering nature. .

g.Documentation. memo summarizes A/R confirmation process. list of customer accounts supports A/R balance) Audit memos (e. e. including conclusion regarding A/R balance) Adjusting and reclassifying entries .. cont. Types of wp s:      Working trial balance Schedules and analyses (support TB amounts..g.  Audit evidence is documented in working papers.

cont. Examples are: Copies of articles of incorporation  Chart of accounts  Plant layout  Copies of long-term contracts long  Current file contains working papers related to executing current year s audit program.Documentation.  Working paper files:  Permanent files expected to be useful on future engagements. .

Documentation.  .  Working papers are the custody of the auditor. SOX requires the auditor to retain wp s for 7 years after that audit engagement. cont.