Chapter 10 PPT 4th Edition Revised

4 T H EDITION
Internal Auditing:
Assurance &
Advisory Services
Internal Auditing: Assurance &Internal

AdvisoryAuditing:
Services,Assurance
4th Edition&©Advisory
2017 byServices,
the Internal
4th Edition
Audit Foundation.
© 2017 by the Internal Audit Foundation.
CHAPTER 10
Audit Evidence and Working

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Internal Auditing: Assurance &Internal

AdvisoryAuditing:
Services,Assurance
4th Edition&©Advisory
2017 byServices,
the Internal
4th Edition
Audit Foundation.
© 2017 by the Internal Audit Foundation.
Chapter 10: Audit Evidence and Working
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LEARNING OBJECTIVES
◼ Understand what it means to gather and

evaluate sufficient appropriate audit
evidence.
◼ Know the manual procedures used by
internal auditors to gather audit evidence.
◼ Be familiar with selected computer-
assisted audit techniques, including
generalized audit software.
◼ Understand the importance of well-
prepared audit working papers.
Internal Auditing: Assurance & Advisory Services, 4th Edition © 2017 by the Internal Audit Foundation.
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STANDARDS RELEVANT TO
MANAGING THE INTERNAL AUDIT
FUNCTION
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AUDIT EVIDENCE
 The quality of internal auditors’ conclusions and advice depends on their

ability to gather and evaluate sufficient appropriate evidence to support
their conclusions and advice.
 Gathering sufficient appropriate evidence requires extensive interaction

and communication with auditee personnel throughout the engagement.
Such interactions and communications are critical to conducting the
engagement effectively and efficiently. It is important, therefore, for
internal auditors to be open, communicative, and collaborative.
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PROFESSIONAL SKEPTICISM AND
REASONABLE ASSURANCE
Professional skepticism means:
 Taking nothing for granted
 Continuously questioning what you hear and see
 Critically assessing audit evidence
 Not assuming that auditee personnel are either honest or dishonest
Internal Auditors provide reasonable (not absolute) assurance due to:

 The nature and extent of evidence gathered and the types of decisions made
 Reliance on evidence that is persuasive rather than absolutely convincing
 Audit decisions that are rarely black and white
 The fact that internal auditors’ conclusions and advice must be formed at a reasonable
cost within a reasonable length of time to add economic value
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PERSUASIVENESS OF AUDIT EVIDENCE
Audit evidence is persuasive if it enables the internal auditor to formulate

well-founded conclusions and advice confidently. To be persuasive, evidence
must be:

 Relevant. Is the evidence pertinent to the audit objective? Does it
logically support the internal auditor’s conclusion or advice?
 Reliable. Did the evidence come from a credible source? Did the
internal auditor directly obtain the evidence?
 Sufficient. Has the internal auditor obtained enough evidence? Do
different, but related, pieces of evidence corroborate each other?
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RELIABILITY OF
DOCUMENTARY
EVIDENCE
General guidelines for reliability and sufficiency of evidence include:

 Evidence obtained from independent third parties is more reliable than evidence
obtained from auditee personnel.
 Evidence produced by a process or system with effective controls is more reliable
than evidence produced by a process or system with ineffective controls.
 Evidence obtained directly by the internal auditor is more reliable than evidence
obtained indirectly.
 Documented evidence is more reliable than undocumented evidence.
 Timely evidence is more reliable than untimely evidence.
 Corroborated evidence is more sufficient than uncorroborated or contradictory
evidence.
 Larger samples produce more sufficient evidence than smaller samples.
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RELIABILITY OF
DOCUMENTARY
EVIDENCE (CONT’D)
Documentary evidence is a
significant portion of the evidence
gathered during most internal audit
engagements. The reliability of
documentary evidence depends,
to a large extent, on its origin and
the route it follows before being
examined by the internal auditor.
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AUDIT PROCEDURES
Audit procedures are specific tasks performed by the internal auditor to gather the
evidence required to achieve the prescribed audit objectives. They are applied during the
audit process to:
 Obtain a thorough understanding of the auditee, including the auditee’s objectives,
risks, and controls.
 Test the design adequacy and operating effectiveness of the targeted area’s system of
internal controls.
 Analyze plausible relationships among different elements of data.
 Directly test recorded financial and nonfinancial information for errors and fraud.
 Obtain sufficient appropriate evidence to achieve the prescribed audit objectives
involved in determining the nature, extent, and timing of audit procedures to perform.
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MANUAL AUDIT PROCEDURES
Commonly performed manual audit

procedures include:
 Inquiry
 Observation
 Inspection
 Vouching
 Tracing
 Reperformance
 Analytical procedures
 Confirmation
Manual Audit Procedures
Procedure Definition Examples
Inquiry asking questions • Circulate a questionnaire among senior
of auditee executives asking them to identify the "top 10"
personnel or third risks threatening the organization.
parties and • Ask the organization’s outside legal counsel to
obtaining their provide information about any litigation, claims,
oral or written and/or assessments against the organization.
responses. • Interview managers and employees involved in
the cash disbursements process to identify key
process controls.
Observation watching people, • Tour the auditee’s facility to gain a general
procedures, or understanding of day-to-day operations.
processes. • Observe the care with which employees count
the year-end physical inventory.
• Watch employees involved in executing and
recording cash disbursement transactions to
determine whether they are performing their
assigned responsibilities and only their assigned
responsibilities.
Inspection studying • Review the minutes of board of directors’
documents and meetings looking for authorization of significant
records and events (for example, the acquisition of another
physically company).
examining tangible • Inspect selected inventory items to determine
resource their condition and salability.
• Read the cash disbursements policies and
procedures to obtain an understanding of key
elements of the process (for example, assigned
roles and responsibilities)
Confirmatio obtaining direct • Confirm a sample of accounts receivable
n written verification subsidiary ledger balances with customers.
of the accuracy of • Confirm the principal balance of a notes payable
information from and interest rate with the lender.
independent third • Confirm cash account bank balances with banks.
parties
Vouching tracking • Vouch a sample of inventory items from the
information accounting records to the warehouse to see that
backward from the inventory items exist.
one document or • Vouch a sample of sales invoices to corresponding
record to a shipping documents to verify that the shipments
previously occurred.
prepared • Vouch a sample of check copies to supporting
document or voucher packages to test the validity of the
record, or to a checks.
tangible resource
Tracing tracking • Trace internal auditor test counts of inventory to

information the auditee’s inventory compilation records to
forward from one verify that the counts are properly included in the
document, record, compilation.
or tangible • Trace receiving reports for goods received to the
resource to a corresponding voucher and then to the voucher
subsequently register to verify that the receipts of goods are
prepared properly recorded as liabilities.
document or • Trace
Internal Auditing: Assurance & Advisory
checks dated within a period of several days
Services, 4 Edition © 2017 by the Internal Audit Foundation.
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record. Internal before and& after

Auditing: Assurance year-end
Advisory Services,
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4 Edition to the
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Recalculation Checking • Recalculate accumulated depreciation and
mathematical depreciation expense to verify that they
accuracy of client's were calculated correctly
records • Independently estimate the allowance for
doubtful accounts to test the
reasonableness of the accounting
department’s estimate
Reperformance redoing controls or • Reperform auditee-prepared bank
other procedure reconciliations to test whether they were
completed correctly.

Analytical Evaluating and • Prepare common-size financial statements for
procedures comparing the current year and preceding two years, look
financial and/or specifically for variances or unexpected trends.
non-financial data • Compare the organization’s common-size
for plausible financial statements with published industry
relationships and common-size information looking for
investigating unexpected inconsistencies
unexpected • Calculate accounts payable turnover for the
fluctuations. current year and preceding two years as
evidence of vendor payment periods.
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COMPUTER-ASSISTED AUDIT
TECHNIQUES
“In exercising due professional care, internal auditors must consider the use of
technology-based audit and other data analysis techniques.” (Standard 1220.A2)
ISACA defines a technology-based audit technique, or CAAT, as “any automated audit

technique, such as generalized audit software (GAS), test data generators, computerized
audit programs and specialized audit utilities.” Common CAATs include:
 Generalized audit software (GAS)
 Utility software
 Test data
 Application software tracing and mapping
 Audit expert systems
 Continuous auditing
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PURPOSES AND CONTENT OF
WORKING PAPERS
Because of the many purposes working papers serve, their importance cannot be
overstated. For example, working papers:
 Aid in planning and performing the engagement.
 Facilitate supervision of the engagement and review of the work completed.
 Indicate whether engagement objectives were achieved.
 Provide the principal support for the internal auditors’ communications to the
auditee, senior management, the board of directors, and appropriate third parties.
 Serve as a basis for evaluating the internal audit function’s quality assurance
program.
 Contribute to the professional development of the internal audit staff.
 Demonstrate the internal audit function’s compliance with The IIA’s International
Standards for the Professional Practice of Internal Auditing (Standards).
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TYPES OF WORKING PAPERS
A wide variety of working papers are prepared during an internal audit engagement. The
following list is intended to be illustrative rather than all-inclusive:
 Work programs used to document the nature, extent, and timing of the specific audit
procedures.
 Engagement time budgets and resource allocation worksheets.
 Questionnaires used to obtain information about the auditee, including its objectives,
risks, controls, operating activities, etc.
 Process maps or flowcharts used to document process activities, risks, and controls.
 Charts, graphs, and diagrams, such as a risk map used to plot the impact and
likelihood of business risks.
 Agendas for internal audit team meetings and meetings with the auditee.
 Narrative memoranda used to document the results of interviews and other meetings
with auditees.
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(CONT’D)
 Pertinent auditee organizational information, such as organization charts, job

descriptions, and operating and financial policies and procedures.
 Copies of source documents, such as purchase requisitions, purchase orders,
receiving reports, vendor invoices, vouchers, and checks.
 Copies of other important documents, such as minutes of meetings and contracts.
 IT-related documents, such as program listings and exception reports.
 Accounting records, such as trial balances and excerpts from journals and ledgers.
 Evidence obtained from third parties, such as confirmation responses from
customers and representations from outside legal counsel.
 Worksheets prepared by the internal auditor, such as a risk and control matrix used
to document process-level risks, key control descriptions, the internal auditor’s
evaluation of control design adequacy, the tests of controls performed, and the test
results.
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(CONT’D)
 Other types of working papers prepared by the internal auditor that reflect work
performed (for example, analytical procedures, computerized data analysis, and
direct tests of transactions, events, account balances, and performance
measurements).
 Evidence compiled by the auditee and tested by the internal auditor.
 Controls performed by the auditee and reperformed by the internal auditor (for
example, bank reconciliations).
 Written correspondence and documentation of oral correspondence with the auditee
during the engagement.
 The internal audit team’s write-ups of observations, recommendations, and
conclusions.
 Final engagement communications and management’s responses.
Examples of Working Papers
Examples of Working Papers
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EXAMPLES OF WORKING PAPERS
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GUIDELINES FOR WORKING
PAPER PREPARATION
Appropriate working paper standardization may include:

 A uniform cross-referencing system for all engagements.
 Consistent working paper layouts.
 Standardized “tick marks” (that is, symbols used on working papers to
represent specific audit procedures).
 A prescription for the types of information to store in permanent or
carry-forward files (that is, files containing pertinent information of
continuing importance for a particular auditee).
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GUIDELINES FOR WORKING
PAPER PREPARATION (CONT’D )
To stand on its own merits, each working paper should:

 Contain an appropriate index or reference number.
 Identify the engagement and describe the purpose or contents of the working paper.
 Be signed (or initialed) and dated by both the internal auditor who performed the work
and the internal auditor(s) who reviewed the work. (Note that such a signature may be
electronic.)
 Clearly identify the sources of auditee data included on the working paper.
 Include clear explanations of the specific procedures performed.
 Be clearly written and easy to understand by internal auditors unfamiliar with the work
performed (for example, an internal auditor who refers to the working paper at a later
date).
The bottom line is that the working paper should contain sufficient information for an
internal auditor, other than the one who performed the work, to be able to reperform it.
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THE LAST WORD ON WORKING
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4 T H EDITION

Internal Auditing: Assurance &Internal

Audit Evidence and Working

Internal Auditing: Assurance &Internal

◼ Understand what it means to gather and

 The quality of internal auditors’ conclusions and advice depends on their

 Gathering sufficient appropriate evidence requires extensive interaction

Internal Auditors provide reasonable (not absolute) assurance due to:

Audit evidence is persuasive if it enables the internal auditor to formulate

General guidelines for reliability and sufficiency of evidence include:

Commonly performed manual audit

Tracing tracking • Trace internal auditor test counts of inventory to

record. Internal before and& after

Procedure Definition Examples

Procedure Definition Examples

ISACA defines a technology-based audit technique, or CAAT, as “any automated audit

 Pertinent auditee organizational information, such as organization charts, job

Appropriate working paper standardization may include:

To stand on its own merits, each working paper should:

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