WHAT YOU REALLY NEED TO KNOW
CHAPTER 8: AUDIT EVIDENCE AND ASSURANCE
Auditors obtain six basic types of evidence and use six general techniques to gather it. The six
techniques are (1) recalculation/reperformance, (2) observation, (3) confirmation, (4) enquiry, (5)
inspection, and (6) analysis. One or more of these techniques may be used no matter what account
balance, class of transactions, control procedure, or other information is under audit.
Recalculation is redoing calculations already performed by auditee personnel. This produces
compelling mathematical evidence as the auditee calculation is either right or wrong. Calculations
made using computer programs can be recalculated using auditing software. Recalculation provides
highly reliable evidence of mathematical accuracy, but the product is only as good as the
components; the auditor must audit every significant part of the original computation if recalculation
is to provide strong, persuasive evidence.
A related type of evidence is called reperformance. Usually applied in control testing, the auditor
independently executes a procedure of the organization’s internal control. This can provide
compelling evidence about the effectiveness of a control procedure.
Observation consists of looking at how policy or procedures is applied by others. It provides highly
reliable evidence as to performance or conditions at a given point in time, but it does not necessarily
reflect performance at other times or over long periods.
Confirmation consists of a written enquiry to verify accounting records. Direct correspondence with
independent external parties is a confirmation procedure widely used in auditing. Most transactions
involve external parties so confirmation has a lot of applications.
Enquiry generally involves collecting oral evidence from independent parties, auditee officials, and
employees. Evidence gathered by formal and informal enquiry of auditee personnel generally cannot
stand alone and must be corroborated by the findings of other procedures. Further enquiries could be
made and consistent responses provide an increased degree of assurance. Sometimes, however, the
auditor will hear conflicting evidence. The auditor will have to use considerable judgment in
reconciling the conflicting evidence or in deciding what additional evidence to gather.
Inspection consists of looking at records and documents or at assets with physical substance.
The procedures are of varying degrees of thoroughness: examining, perusing, reading, reviewing,
scanning, scrutinizing, and vouching. Physically inspecting tangible assets provides reliable evidence
of existence and may give some evidence of condition, and hence valuation, but it does not provide
reliable evidence of ownership. Physical inspection of formal documents with intrinsic value, such as
securities certificates, also provides reliable evidence about existence. Scanning makes use of
auditors’ alertness to unusual items and events in auditee documentation. The procedure usually
does not produce direct evidence itself, but it can raise questions for which other evidence must be
obtained.
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Audit Evidence and Assurance
Auditors obtain evidence about financial statement accounts by methods of study and comparison
called analysis. Auditing standards provide guidance on using analysis at the risk assessment and
overall conclusion stages of the audit, and also for when auditors use analysis as an evidencegathering procedure during the audit. When analysis is used to provide substantive evidence,
auditors need to be careful to use independent, reliable information for comparison purposes.
The audit process begins by obtaining an understanding of the auditee and its risks. There are a wide
variety of information sources auditors use to understand the auditee’s business, industry, and
environment. Information gathered in prior audits, and documented in the working papers, can also
provide relevant and reliable information on the organization and its internal control.
For first-time audits there is often no prior working paper information, so this can require more work
than in a repeat engagement. If this is a company’s first audit but not its first year of operation,
additional work includes establishing a starting place with reliable opening account balances for the
audit. Audit efficiency can also be increased by working with internal auditors.
Enquiries of management help the auditor assess what is significant to users. At the same time that
enquiries and interviews take place, the audit team can take a tour of the company’s physical
facilities to look for activities and things that should be reflected in the accounting records. Research
databases are valuable for acquiring and maintaining industry expertise. Specific information about
public companies can be found in registration statements and annual report filings with the
provincial securities commissions.
Auditing standards require auditors to obtain sufficient appropriate evidence to be the basis for an
opinion on financial statements. 12 The accounting records (journals, ledgers, accounting policy
manuals, computer files, and the like) are evidence of the bookkeeping but not appropriate
supporting evidence for the financial statements.
Appropriateness of evidence relates to the qualitative aspects of evidence. To be considered
appropriate, evidence must be relevant and reliable. Relevant audit evidence assists the auditor in
achieving the audit objectives. This means that it must relate to at least one of the financial statement
assertions, otherwise it is not relevant to the auditor.
The reliability of audit evidence depends on its nature and source. An auditor’s direct, personal
knowledge, obtained through physical observation and his or her own mathematical recalculations or
reperformance, is generally considered the most reliable evidence. Documentary evidence obtained
directly from independent external sources (external evidence) is considered very reliable.
Documentary evidence originating outside the auditee’s data processing system but received and
processed by the auditee (external-internal evidence) is generally considered reliable. Internal
evidence consisting of documents that are produced, circulated, and finally stored within the
auditee’s information system is generally considered low in reliability. Analysis using specific data
that the auditor has verified is considered fairly reliable. Spoken and written representations given
by the auditee’s officers, directors, owners, and employees are generally considered the least reliable
evidence. Such representations should be corroborated with other types of evidence
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Auditors must be careful about the appropriateness of evidence and choose the audit procedure
providing that which is the most reliable that can be obtained in a cost-effective manner, relative to a
particular audit objective.
Before, during, and after the field work period, the auditor monitors events that may affect an
auditee’s business risk, the client relationship, or the engagement. All the planning activities are
recorded and summarized in a planning document, sometimes referred to as the planning
memorandum. This document contains the results of analytical review, the decision on materiality
levels, and the risk assessment. It gives specific attention to the effect of these on the nature, extent,
and timing of audit resources needed to perform the work. It is evidence that GAAS has been
followed by planning the audit work.
Auditors use two types of audit programs to actually guide their field work. The internal control
program lists the specific procedures for gaining understanding of the auditee’s business transaction
processing systems and controls. The balance audit program lists the substantive procedures for
gathering direct evidence on the assertions (i.e., existence, completeness, valuation, ownership,
presentation) about dollar amounts in the account balances and related disclosures. Often,
standardized programs are used but they are modified for each specific client. These modified audit
programs also provide evidence that the audit has been properly planned.
An audit is not complete without proper working paper documentation. The planning document is a
key component of the audit documentation along with the audit programs. Documentation provides
a record of the auditor’s work for the purpose of file reviews, practice and regulatory inspections, or
in some cases to defend against a law suit. Working papers are the auditors’ record of compliance
with generally accepted auditing standards.
The auditor is the legal owner of the working papers, but professional ethics requires that there is
auditee consent before transferring them to a third party since some of the information in the working
papers is in confidence from the auditee. Audit files must be retained for several years as required by
professional accounting association rules and practice inspection procedures.
Working papers can be classified into three categories: (1) permanent file papers, (2) audit
administrative papers, and (3) audit evidence papers. The last two categories are often called the
current file because they relate to the audit of one year.
The permanent file contains information of continuing interest over many years’ audits of the same
auditee. This file can be used year after year, whereas each year’s current audit evidence papers are
filed away after they have served their purpose. Documents of permanent interest and applicability
include (1) copies or excerpts of the corporate charter and bylaws or partnership agreements; (2)
copies or excerpts of continuing contracts, such as leases, bond indentures, royalty agreements,
management bonus contracts, etc.; (3) a history of the company, its products and its markets; (4)
excerpts of minutes of shareholders’ and directors’ meetings on matters of lasting interest; and (5)
continuing schedules of accounts whose balances are carried forward for several years, such as share
capital, retained earnings, partnership capital and the like.
Administrative papers contain the documentation of the early planning phases of the audit. They
usually include the engagement letter, staff assignment notes, conclusions related to understanding
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the auditee’s business, results of preliminary analytical procedures, initial assessments of audit risks,
and initial assessments of audit materiality.
The current-year audit evidence working papers are typically organized in sections: major accounting
processes or cycles and balance sheet accounts. Each section contains a lead sheet that shows the
dollar amounts reported in the financial statements, summary of the audit objectives in relation the
account’s assertions, procedures performed, evidence obtained, and conclusions reached for that
section overall. These papers communicate the quality of the audit, so they must be clear, concise,
complete, neat, well indexed, and informative. Each separate working paper (or multiple pages that
go together) must be complete in the sense that it can be removed from the working paper file and
considered on its own, with proper cross-reference available to show how the paper fits in with the
others.
Auditing standards recommend that the working papers show (1) evidence that the work was
adequately planned and supervised, (2) a description of audit evidence obtained, (3) evidence of the
evaluation and disposition of misstatements, and (4) copies of letters or notes concerning audit
matters reported to the auditee.
Each paper is given an index number, like a book page number, so it can be found, removed, and
replaced without loss. An index number might consist of a section letter (e.g., C) and a page number
within that section (e.g., C-2). Each section could be given to a different audit team without affecting
other sections. Cross-indexing means noting the index of other paper(s) where work has been
performed so that the connections can be followed. Each paper is titled with the name of the
company, the period under audit date, and a descriptive title of the contents of the working paper. If
the paper was created by auditee personnel (rather than the auditor) this is noted in the title. The
auditor who performs the work and the supervisor who reviews it must sign the papers so that
personnel can be identified. The dates of performance and review are recorded on the working
papers so that reviewers can tell when the work was performed. Tick marks are the auditor’s
shorthand for indicating the work performed. They must always be accompanied by a full
explanation of the auditing work.
Electronic working papers boost productivity by automating many tasks, such as carrying
adjustments over to related working paper documents and the financial statements. An example of a
working paper software program used in public practice is Case Ware.
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