Audit Evidence
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Introduction
•Audit evidence is the information
auditors use when arriving at their
opinion on the fair presentation of the
client’s financial statements(Johnson and
Audit Evidence
Wiley , 2019)
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Audit Evidence
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Learning Objectives
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AUDITING STANDARDS
1 Define management assertions about classes
of
transactions, account balances, and
presentation and
disclosure.
2 Discuss the characteristic of audit evidence.
3 Explain the procedures for gathering audit
evidence.
4 Evaluate when it is appropriate to use work
of others.
5 Explain how auditors document the details of
evidence gathered in working papers.
Audit Evidence
Audit Evidence
• ISA 500 -Audit Evidence
• ISA 200-Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing
• ISA700- Forming an Opinion and Reporting on
Financial Statements
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•
https://www.ifac.org/system/files/downloads/ISA_200_standalone_2
009_Handbook.pdf
•
https://www.ifac.org/system/files/downloads/ISA_700_standalone_2
009_Handbook.pdf
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Management Assertions
An assertion is a statement or representation, explicit or
implied, made by management regarding the
recognition, measurement, presentation, and disclosure
of items included in the financial statements and notes.
Management also asserts that transactions are recorded
at the correct amount, represent a complete list of all
transactions, and are classified correctly.
During the risk assessment phase, auditors use
management assertions as a guide when determining
the different types of potential material misstatements
that could occur or what can go wrong in the financial
statements.
Management Assertions
Objective 1
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LO 1
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Management Assertions
Management Assertions
The assertions are divided into the three
categories:
(1) Assertions about classes of transactions
and events for the period under audit.
(2) Assertions that focus on account balances
at the end of the period.
(3) Assertions that focus on presentation and
disclosure in the financial statements and the
notes to the financial statements.
LO 1
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Management Assertions
(1) Occurrence: auditors gather evidence to
verify that recorded transactions and events,
such as sales and expenses, actually took
place and relate to the entity.
(2) Completeness: auditors gather evidence
that all transactions have been recorded and
the financial statements are not understated
or overstated because transactions have
been omitted.
LO 1
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Management Assertions
• Assertions that focus on account balances
at the end of the period include the
following:
(6)
Existence
(7) Rights and obligations
8) Completeness
(9) Valuation and allocation.
LO 1
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Assertions about classes of transactions and events
for the period under audit include the following 5:
(1) Occurrence
(2) Completeness.
(3) Accuracy:.
(4) Cutoff:.
(5) Classification:
LO 1
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Management Assertions
(3) Accuracy: auditors gather evidence that
transactions and events have been recorded at
appropriate amounts.
(4) Cutoff: auditors search for evidence that
transactions have been recorded in the correct
accounting period.
(5) Classification: auditors gather evidence that
transactions and events have been recorded in
the proper accounts.
LO 1
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Management Assertions
(6) Existence: auditors search for evidence
to verify that asset, liability, and equity
items on the Statement of Financial
Position actually exist.
(7) Rights and obligations: auditors
gather evidence to verify recorded assets
are owned by the entity and recorded
liabilities represent commitments of the
entity.
LO 1
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Management Assertions
Management Assertions
(8) Completeness: auditors search for
assets, liabilities, and equity items to ensure
they have been recorded.
(9) Valuation and allocation: auditors
search for evidence that assets, liabilities,
and equity items have been recorded at
appropriate amounts and allocated to the
correct general ledger accounts.
Audit Evidence
LO 1
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The last category of assertions focuses on
presentation and disclosure in the financial
statements and the notes to the financial
statement.
(10) Occurrence, rights and obligations:
(11) Completeness:
(12) Classification and understandability.
(13) Accuracy and Valuation:
LO 1
(10) Occurrence, rights and obligations:
auditors verify that all transactions, events, and
other matters disclosed in the notes to the
financial statements actually occurred and
pertain to the entity.
(11) Completeness: auditors verify that all
required and necessary disclosures and notes
have been included in the financial statements by
management.
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Management Assertions
Management Assertions
LO 1
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Management Assertions(Summary)
(12) Classification and understandability:
auditors verify that financial information is
appropriately presented and described, and
disclosures are clearly expressed.
(13) Accuracy and Valuation: auditors
verify that financial and other information
are disclosed fairly and in appropriate
amounts.
LO 1
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Audit Reasoning Example: Wells Fargo Scandal
Wells Fargo is an international banking giant headquartered in San Francisco. In 2016, news
broke that Wells Fargo employees had participated in various fraud schemes to increase
revenue. One of the schemes was charging auto loan customers for vehicle insurance without
their knowledge.
Which assertion about classes of transactions is violated with this scheme?
Wells Fargo was collecting actual payments from actual customers, so this wasn’t a case of
fictitious customers. But charging customers without their consent is fraudulent and violates
the occurrence assertion
Did these revenues actually occur?
. Why did Wells Fargo employees participate in this scheme?
The company had very aggressive internal sales goals with compensation tied to sales
performance. Wells Fargo management encouraged cross-selling to existing customers as a
way to boost revenues, and employees felt pressure to meet the lofty sales goals.
In July 2017, Wells Fargo announced “it would issue $80 million in refunds or account
adjustments to more than 570,000 auto loan customers who were charged for vehicle
insurance without their knowledge.” Consideration of the occurrence assertion for revenues
is a relevant assertion for all audits. Historically, many accounting frauds have involved
overstatement of revenues either through creation of fictitious revenue, improper periodend cutoff, and/or improper application of revenue recognition rules. Auditors spend
considerable time gathering evidence to support management’s assertion that recorded
revenue occurred and relates to the entity.
LO 1
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LO 1
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Characteristics of Audit Evidence
• Audit evidence is the information auditors use
when arriving at their opinion on the fair
presentation of the client’s financial statements.
• Responsibility of management and those
charged with governance to ensure the financial
statements are prepared in accordance with the
appropriate financial reporting framework.
• They are also responsible for ensuring that
accurate accounting records are maintained and
any potential misstatements are prevented, or
detected and corrected.
Characteristics of Audit
Evidence
Objective 2
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Characteristics of Audit Evidence
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• Appropriate refers to the quality of audit
evidence gathered.
• The concepts of quantity and quality are
interrelated, as the quality of evidence
gathered will affect the quantity required.
• Relevance of audit evidence refers to its
relationship to the assertion being tested.
• To gather relevant evidence for the
completeness assertion, auditors must use a
different procedure.
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LO 2
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Characteristics of Audit Evidence
Appropriate Audit Evidence:
Audit Evidence
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Sufficient Audit Evidence:
• Sufficient refers to the quantity of audit evidence
gathered.
• Essentially, auditors use professional judgment to
determine at what point they have gathered
enough evidence to support their opinion on the
financial statements.
• The quantity of evidence needed is affected by
the risk of material misstatement in a relevant
assertion for an account balance or class of
transactions.
Characteristics of Audit Evidence
LO 2
Audit Evidence
Characteristics of Audit Evidence
•The main Characteristics of Audit
Evidence
•Sufficient
•Appropriate
• Relevance
•Reliability
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LO 2
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• Reliability of audit evidence refers to the
source of the evidence and form or
nature of the evidence.
LO 2
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Characteristics of Audit Evidence
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Guidelines regarding the reliability of audit evidence include the
following:
1.
Evidence gathered from a knowledgeable source independent of
the client is more reliable than evidence gathered solely from
internal client sources.
The reliability of evidence generated internally from the client is
increased when the client’s internal controls over the information
are effective.
Evidence obtained directly by the auditor is more reliable than
evidence obtained indirectly by the auditor.
Evidence provided by original documents is more reliable than
evidence obtained from copies, scans, or faxes. However, this could
be mitigated if internal control over the duplication of documents
is effective.
Evidence that has been documented (paper or electronic form) is
more reliable than strictly oral evidence obtained by having a
discussion with an individual.
2.
3.
4.
5.
LO 2
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Characteristics of Audit Evidence
ILLUSTRATION 5.2 Examples of reliability of audit evidence
LO 2
Audit Risk and Sufficient Appropriate
Audit Evidence
1. A detection risk of 0.2 or 20% is low means that
there would be 20% risk that the auditor’s
procedures will not be effective in detecting a
material misstatement
2. Low detection risk is only appropriate if Inherent
& Control risks are high more evidence
3. A detection risk of 0.8 or 80% is high its means
that there would be 80% risk that the auditor’s
procedures will not be effective in detecting a
material misstatement.
4. High detection risk is only appropriate if Inherent
& Control risks are low need less evidence
ILLUSTRATION 5.4 Low risk assertion
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Audit Risk and Sufficient Appropriate
Audit Evidence
ILLUSTRATION 5.3 High risk assertion
LO 2
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LO 2
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Audit Risk and Sufficient Appropriate
Audit Evidence
• Audit risk affects the quantity and quality of evidence
gathered by an auditor during the risk response
phase.
• When there is a significant risk of material
misstatement with an assertion and the client’s
system of internal controls is not considered to be
effective at reducing that risk, detection risk is set as
low.
• When there is a low risk of material misstatement
with an assertion and the client’s system of internal
controls is considered effective at reducing risk,
detection risk is set as high.
LO 2
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Procedures for Gathering Audit
Evidence
Objective 3
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Procedures for Gathering Audit Evidence
• Audit procedures are the methods used
by auditors in gathering evidence, and
they are classified into three general
categories
• Risk assessment procedures:
• Tests of controls:
• Substantive procedures :
LO 3
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Procedures for Gathering Audit Evidence
• Auditors spend a considerable amount of time
obtaining and evaluating audit evidence in support
of management assertions. This process consumes a
high percentage of the total time spent on the audit.
• The primary source of the evidence is the client’s
accounting records.
• The accounting records consist of the records of
initial accounting entry and supporting records such
as checks, invoices, contracts, general and subsidiary
ledgers, and supporting spreadsheets and cost
allocations.
LO 3
Audit Evidence
Inspection of Documents and Assets
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Ways of Gathering Evidence
8 ways
1.Inspection
2.Observation
3.Inquiry
4.Confirmation
5.Recalculation
6.Reperformance
7.Analytical procedures
- Scanning
8.Computer Assisted Audit Techniques (CAATs) and Audit
Data Analytics (ADA)
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• Inspection involves the examination of documents and
physical assets.
• The documents could be internally or externally
generated and in paper or electronic form.
• Inspection of documents can be used as a risk
assessment procedure, test of controls, or a
substantive procedure.
• As a test of controls for example, auditors inspect
purchase orders for proper authorization by a manager
before a purchase is made.
• Auditors inspect vendor invoices in support of
management’s assertion of the valuation of inventory.
LO 3
Procedures for Gathering Audit Evidence
1. Risk assessment procedures: methods used to
gain an understanding of a client and his or her
industry for the purpose of identifying risk of
material misstatement.
2. Tests of controls: methods used to determine the
operating effectiveness of the client’s controls in
preventing, or detecting and correcting, material
misstatements at the assertion level.
3. Substantive procedures : methods designed to
detect material misstatements at the assertion
level. Two categories of substantive procedures
are tests of details and substantive analytical
procedures.
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Inspection of Documents and Assets
Vouching vs tracing
LO 3
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Inspection of Documents and Assets
• Auditors want to determine if transactions recorded
as sales revenue actually occurred.
• They start by selecting transactions from the sales
journal or ledger and then examining the underlying
source documents, such as a shipping document and
an invoice to the customer. This procedure is called
vouching.
• Vouching provides evidence that recorded
transactions actually occurred.
• Auditors will start with the underlying source
documents and work forward to follow the
transaction through to recording in the journal and
ledger.
LO 3
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Inquiry
• Inquiry involves asking questions (verbally or in written
form) of knowledgeable individuals internal or external
to the client.
• Inquiry is used when gaining an understanding of the
client and to corroborate other evidence gathered
throughout the audit.
• The results of inquiries of client personnel and third
parties are documented by the auditor.
• If the evidence is particularly important, auditors may
document the information more formally and ask the
other party (or parties) to the discussion to sign their
agreement.
LO 3
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Observation
• Observation is an audit procedure that
involves watching a process or procedure
being carried out by client personnel or
another party.
• Auditors must determine whether there is
evidence that the procedures observed have
been applied consistently throughout the
period under audit.
LO 3
Audit Evidence
Audit Reasoning Example: Evidence for Relevant
Assertion
Your client is PEPS a national chain of women’s clothing stores. There are 500 PEPs stores located in malls
across the Zambia . Inventory is a key account for PEP’s, and the existence assertion for inventory is
always a relevant assertion. As part of your risk assessment procedures, you meet with the national
inventory manager, Chamala, to inquire about internal controls over inventory and other issues about
inventory for the current year audit. Chamala says, “As you know, one of our biggest problems is
employee theft of our merchandise. We just recently decided to hire an outside company to perform our
annual physical inventory count rather than having our own employees perform the count. Although it
will be an additional cost for us, we think the benefits of an independent inventory count will be worth it.
It will deter employee theft and hopefully detect instances of theft that are occurring.” After your
meeting, you document Chamala’s responses to your inquiries. You are excited about the news of an
independent company performing the inventory count and discuss it with another member of your audit
team, John. You say to John, “Since an independent company is performing the count, I guess that means
we do not have to observe the physical inventory count anymore. We can use the report from the
independent company, right?” John thinks for a moment, then says, “I agree that it is an improvement in
internal controls to have an independent company physically count the inventory. But remember, we
have documented that the existence of inventory is a relevant assertion. Therefore, we must gather an
increased level of sufficient, appropriate evidence to support our conclusion.
Can they rely solely on inquiry of the client? Can they rely on the report from the independent company
that is counting the inventory? What do you think
John says I recommend that we still observe the physical inventory counting, even though it is being
performed by an independent company. As we have done before, we will select a sample of stores from
across the country and have auditors from our firm present while the inventory is being counted.” You
agree with John that having your auditors observe the physical inventory count provides more relevant
and reliable evidence to support the existence assertion for inventory.
LO 3
Audit Evidence
Confirmation
Confirmation
• The Confirmation Process uses external
confirmations.
• External confirmation is an audit procedure in
which the auditor corresponds directly with a
third party, either in paper or electronic form.
• Evidence obtained from external
confirmations is considered reliable because it
is obtained from an independent source
outside of the client.
Auditors determine the following for external confirmations:
1. What information should be confirmed or requested?
2. Who is the appropriate confirming third party?
3. How should the confirmation request be designed?
4. How will the third party respond directly to the auditor?
5. When should the confirmation request be sent?
6. If applicable, how should auditors follow up on requests
when the third party has not responded?
LO 3
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LO 3
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Confirmation
Confirmation
•
•
• Auditors should not use negative confirmations as
the sole audit procedure unless all of the following
conditions are present:
•
Some important confirmation include
A bank confirmation is a request for information about the
amount of cash held in the bank, details of any loans with
the bank, and details of any pledges of assets made to
guarantee loans.
Receivable confirmations can be sent to customers to verify
amounts owed to the client.
•
•
•
Auditors select the customers to whom they will send
confirmations.
Positive confirmations ask recipients to reply in all
circumstances.
Negative confirmations ask recipients to reply only if they
disagree with the information provided.
LO 3
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1. Auditors have assessed the risk of material
misstatement for accounts receivable as low.
2. Auditors have gathered sufficient appropriate evidence
that internal controls are effective.
3. The population of accounts receivable balances consists
of a large number of small account balances.
4. Auditors expect a low exception rate.
5. Auditors are not aware of any circumstances that would
cause the recipients to disregard the confirmation
request.
LO 3
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Recalculation
Reperformance
• Recalculation is the audit procedure of checking the
mathematical accuracy of documents or records.
• Recalculation can be performed manually or
electronically with the aid of computer software.
• Some recalculations are simple, such as footing a
column in a client-prepared spreadsheet.
• Other recalculations are more complex, such as
foreign currency translation, payroll taxes, interest
on loans outstanding, and depreciation.
• Reperformance involves the independent execution
of procedures or controls that were originally
performed by client personnel.
• The auditors will “re-do” a procedure that was
performed by the client to determine if the auditors
get the same result.
• Reperformance is commonly used as a test of
controls.
• Auditors reperform the act of agreeing all of the
source documents and verify that an approval
signature is on the packet.
LO 3
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LO 3
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Analytical Procedures
Scanning
• Analytical procedures are an evaluation of financial
information by studying plausible relationships
among both financial and nonfinancial data.
• During risk assessment, analytical procedures are
required and are used to identify accounts at risk of
material misstatement. This aids in planning the
audit.
• Analytical procedures can also be used as a
substantive procedure during the risk response
phase of the audit to gather sufficient appropriate
evidence.
• Scanning is a type of analytical procedure in which
auditors use their professional judgment to peruse
accounting data in order to identify unusual or
significant items that may be an indication of a
material misstatement.
• Scanning includes identification of unusual individual
items within an account balance or other accounting
records such as journals, reconciliations, and detailed
transaction reports.
• Once an unusual item is identified, auditors may
decide to further examine the item using other audit
procedures, such as inspection or recalculation.
LO 3
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LO 3
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Computer Assisted Audit Techniques (CAATs)
and Audit Data Analytics (ADA)
Computer Assisted Audit Techniques (CAATs)
and Audit Data Analytics (ADA)
• Using CAATs and ADA software makes the audit (1)
more comprehensive because each item in a client’s
file can be examined and subjected to a variety of
tests, and (2) more efficient because the computer can
handle large volumes of data, thereby reducing timeconsuming clerical tasks.
• CAATs and ADA can be used during risk assessment and
risk response.
• The main considerations in deciding whether to use
CAATs and ADA are the completeness of the client’s
records and the reliability of the client’s data.
• Auditors use computer assisted audit techniques
(CAATs) to assist with gathering evidence.
• Audit data analytics (ADA) is using software to
discover and analyze patterns, identify anomalies,
and extract other useful information from client
data.
• Visualization refers to the use of graphics to explain
and communicate findings.
•
LO 3
Typical visualization techniques include graphs,
charts, trend lines, scatter diagrams, and
dashboards.
Audit Evidence
LO 3
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Using the Work of Others
•
•
•
•
•
Evaluate when it is appropriate to
use work of others & Specialists
.
Others may include
Fellow audit team members
Specialist
Internal Auditors
Other External auditors
Objective 4
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LO 4
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Using the Work of Others
Using the Work of Others
• things the auditor should consider
before using the work of others
• Objectivity
• Independence
• Competence( qualification, experience)
• An audit requires many hours of work by a team of
auditors. The size of an audit team will vary
depending on the size and complexity of the client.
• The senior and associates perform the detailed
testing under the supervision of the manager.
• The partner holds ultimate responsibility for audit
decisions, supervision of the team members, and the
issuance of the final audit report.
• Throughout the engagement, as audit procedures are
completed and documented, they are reviewed by an
audit team member with seniority over the team
member who did the work.
LO 4
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LO 4
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Using the Work of Others
Using the Work of Others
• When assigning the audit team, an audit firm will
make sure it assigns individuals with appropriate
audit experience.
• An appropriate response to an identified risk may
be assigning an individual with the appropriate
amount and type of experience.
• The audit team will rely on the work of others
during the risk assessment and/or risk response
phase of the audit.
LO 4
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•
•
•
LO 4
A specialist is an individual or an organization with
expertise in a field other than accounting or auditing
whose work in that field is used by the auditors to assist
in obtaining sufficient appropriate audit evidence.
The specialist may be an employee of the accounting firm
or may be contracted by the accounting firm as needed.
Specialists may also be used to evaluate the quality of
inventory, such as taking samples of grain from a grain
elevator to determine if the grain has any bacteria or
other attributes that could affect its quality.
Also confirm revaluation of Assets
Audit Evidence
LO 4
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• Internal auditors are employees of the client who
perform assurance and consulting activities designed to
evaluate and improve the effectiveness of the entity’s
governance, risk management, and internal control
processes. In contrast, external auditors are
independent auditors contacted to perform a financial
statement and / or internal control audit.
• External auditors may (1) use the work of internal
auditors in gathering audit evidence and (2) use internal
auditors to provide direct assistance under the direction,
supervision, and review of the external auditors.
LO 4
• If external auditors intend to use the work of
internal auditors, they must first assess the
objectivity, competence, and processes of the
internal audit function.
• If external auditors determine that the
internal auditors are objective, competent,
and follow appropriate procedures; then the
next step is to determine how the internal
auditors’ work may affect the nature, timing,
and extent of the audit.
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Using the Work of Internal Auditors
Using the Work of Internal Auditors
LO 4
Audit Evidence
Using the Work of Internal Auditors
Using the Work of a Specialist
•
Typical structure of an audit team
Factors that impact objectivity and competence of internal auditors
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LO 4
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Using the Work of Internal Auditors
Using the Work of Internal Auditors
• Procedures planned or already performed by the
internal audit function may be the same as, or very
similar to, audit procedures the external auditor would
design and perform, particularly in the area of
evaluation of the performance of internal controls.
• When determining the extent to which the internal
auditors’ work will affect the auditors’ procedures,
external auditors consider materiality of the account
balance or transaction; risk of material misstatement
of the assertions related to the account balance,
transaction, or disclosure; and amount of subjectivity
involved in evaluating the evidence gathered.
LO 4
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Audit Reasoning Example: Consideration of
Internal Audit Function
One of Kathy’s first tasks has been to document Mary ’s transaction processes and internal controls. Can your
audit team use the work of Kathy’s team regarding the transaction flows and internal controls documentation?
Are Kathy and her team objective and competent?
You consider objectivity. Kathy is a CIA and therefore must comply with professional standards to maintain her
certification. The internal audit function reports to the board of directors, not to a member of management. No
one in the internal audit function is assigned managerial duties. Therefore, based on these factors, the internal
audit function seems to be objective. Now you consider competence. Kathy is a CIA, but she only has three years
of work experience. The rest of her department, a recent college graduate and an intern, are not experienced.
The internal audit department has only been functioning for a few months. Based on these factors, you do not
consider the internal audit function highly competent at this time. Therefore, for the current-year audit, you do
not plan to use any of the work of Mary’s internal auditors. However, over time, the internal audit function may
develop more competence, and you may consider using the work of the internal auditors or obtaining direct
assistance from them.
Audit Evidence
•
•
•
LO 4
External auditors have sole responsibility for expressing
an opinion on the fair presentation of the financial
statements.
External auditors may also obtain direct assistance from
internal auditors to carry out audit procedures the
external auditors would normally do themselves.
In this scenario, internal auditors would be under the
direction, supervision, and review of the external
auditors.
When determining the nature of work to be assigned to
internal auditors, external auditors should follow
established guidelines.
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Using the Work of Another Auditor
One of your clients is Mary Cookies Company. Mary,s produces various types of cookies and sells them at
grocery stores and convenience stores across the Zambia. Mary ’s is a family-run, private company, and it has
experienced significant growth over the last six years. The founder and chair of the board of directors, Mary , has
a goal of taking the company public one day, so she wants to start preparing the company to be run more like a
public company. Therefore, she has decided to create an internal audit function. Two months after the conclusion
of the prior-year audit, Mary hired Kathy to lead the internal audit function. Kathy has three years of internal
audit experience working at a public company, and she is a certified internal auditor (CIA). To add to her
department, Kathy has hired a recent college graduate who has taken courses in internal auditing, and she also
has a current college student who is interning part time. Kathy and her team will report directly to Mary and the
board of directors.
LO 4
•
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• Group financial statements include the financial
information of more than one entity, or component,
such as consolidated financial statements prepared
by a parent company.
• A component is an entity or business activity that is
required by the applicable financial reporting
framework to prepare financial information that will
be included in group financial statements.
• An audit of group financial statements is referred to
as a group audit.
LO 4
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Using the Work of Another Auditor
• The group engagement team will establish the
overall group audit strategy and communicate
with the component auditors.
• The component auditors are from a different
audit firm and gather evidence on a component
that will be used as audit evidence for the group
audit.
• The group engagement partner is the partner
responsible for the performance of the group
audit engagement and for the auditor’s report on
the group financial statements.
LO 4
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Explain how auditors document
the details of evidence gathered
in working papers
Objective 5
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Documentation—Audit Working Paper
Documentation—Audit Working Paper
• There are two types of audit working paper
files:
• Permanent working paper files: Documents
past, current, and on-going audits of the a
single client.
• Current working paper files: Document a
current audit of a single client
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Audit Evidence
• ISA s require auditors to document each stage of the
audit in their working papers in order to provide a
record of work completed and evidence gathered in
forming their audit opinion.
• Documentation is cross-referenced between working
papers that summarize the details of an account
balance and working papers that provide evidence of
the testing of that balance.
• Auditors document each stage of the audit and the
procedures used.
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Documentation—Audit Working Paper
1.
2.
3.
4.
Client name
Period under audit
Title describing the contents of the working paper
File reference indicating where the working paper fits in the
audit file
5. Initials identifying the preparer of the working paper together
with the date the working paper was prepared
6. Initials identifying the reviewer(s) of the working paper
together with the date(s) the paper was reviewed
7. Cross-referencing between working papers indicating whether
further work and evidence is summarized elsewhere
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• There are two types of audit working
paper files:
• Permanent working paper files:
Documents past, current, and on-going
audits of the a single client.
• Current working paper files: Document
a current audit of a single client.
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Audit Evidence
Permanent File
Contents of Permanent File
• The permanent file includes client information and
documentation that applies to multiple audits.
• In the first year of a continuing audit, auditors
develop information that will be relevant to future
audits.
• The information included in the permanent file is
checked and updated at the start of each annual
audit.
• The permanent file usually contains the client’s
head-office address, other locations, and contact
details.
• Details about key personnel and an organizational
chart are included in the permanent file.
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Documentation—Audit Working Paper
An audit working paper generally includes the following:
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•
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A client’s organizational chart includes details of
key roles within the organization and the names of
the people in those roles.
• The permanent file includes copies of long-term
contracts and agreements.
•
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These documents will be used to calculate interest
payable on outstanding long-term loans or enable
the assessment of any lease obligations.
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Contents of Permanent File
Contents of Permanent File
• The permanent file includes details of the client’s
board of directors and its subcommittees, such as the
audit committee.
• The file includes the minutes of significant meetings
held by the client, such as its board of directors’
meetings.
• The permanent file details a client’s primary
accounting policies and methodologies.
• Prior financial statements and audit reports are also
included in the permanent file.
• Details of prior analytical procedures are included
and added so auditors can observe changing
trends.
• Flowcharts and narratives detailing a client’s
system of internal controls are included in the
permanent file and amended as needed during
the risk assessment phase of each audit.
• Reports sent to the client during previous audits
will also be included in the permanent file.
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Contents of Current File
Current File
• The current file is developed as audit work is
performed and includes client information and
documentation that apply to the current year’s audit.
• Contents of the current file vary from client to client
depending on the accounts in the client’s financial
statements and the client’s activities.
• The current file includes the details of all testing and
evidence gathered in preparation of the audit report.
• It also includes correspondence among the auditors
and the client, the client’s bankers, and the client’s
lawyers who pertain to the current audit period.
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• Correspondence with other auditors, specialists, and
relevant third parties is included in the current file.
• The engagement letter is included in the current file,
along with the management letter detailing any
weaknesses uncovered in the client’s system of
internal control.
• Representation letters and confirmation letters are
also included in the current file.
• The current file includes extracts from the minutes of
important meetings, such as the board of directors’
meetings, that pertain to the current audit.
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Contents of Current File
Current File
• The current file includes details of the audit
planning process and the audit program.
• The current file also includes detailed
descriptions of evidence gathered, testing
conducted, and audit procedures performed.
• The current file details the analytical
procedures, tests of controls, and detailed
substantive testing undertaken, as well as the
conclusions drawn at the completion of
testing.
• Working papers are prepared and stored
electronically. Once the audit is concluded, the audit
firm usually retains a paper copy of working papers,
as well as an electronic copy of files and working
papers.
• An audit firm will back up electronic files and archive
working papers in a location that is secure.
• Each audit has a unique file name for ease of
identification, which usually includes the client’s
name and the year-end of the financial statements
being audited.
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Current File
Current File
Working paper example: Cash lead schedule
• Each current file created for an audit is divided into
unique sections with each section representing a
different element of the audit.
• Each section contains (1) a lead schedule that
summarizes the detail included in the financial
statements for a particular account and (2) supporting
working papers that provide evidence obtained related
to that account.
• Each working paper includes the client’s name, the
period under audit, a file reference, cross-references to
other parts of the audit file, details of the testing
conducted, comments/conclusions drawn, and
identification of the preparer and reviewers.
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Learning Objectives
Current File
Working paper example—Confirmations and related alternative procedures
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LO 5
Audit Evidence
1 Define management assertions about classes
of
transactions, account balances, and
presentation and
disclosure.
2 Discuss the characteristic of audit evidence.
3 Explain the procedures for gathering audit
evidence.
4 Evaluate when it is appropriate to use work
of others.
5 Explain how auditors document the details of
evidence gathered in working papers.
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References
Johnson, R.N., Wiley, L., Moroney, R., Campbell, F.
and Hamilton, J., 2019. Auditing: A Practical
Approach with Data Analytics. John Wiley & Sons.
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