Chapter 4
Audit Evidence and
Audit Documentation
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Relationship of Audit
Evidence to the Audit Report
Financial
statements
LO# 1
Audit
report
Management assertions
about components of
financial statements
Audit
procedures
Evidence on the
fairness of the
financial statements
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LO# 2
Management Assertions
Completeness
Classification
Occurrence
Assertions about
classes of transactions
and events for the
period under audit
Accuracy
Cutoff
Authorization
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LO# 2
Management Assertions
Rights and
Obligations
Valuation
and allocation
Assertions about
end-of-the-period
account balances
Existence
Completeness
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LO# 2
Management Assertions
Classification and
understandability
Accuracy and
valuation
Assertions
about presentation
and disclosure
Completeness
Occurrence and
rights and obligations
4-5
Financial Statement Assertions
(The Assurance Bucket)
Existence or Occurrence
Completeness
Rights and Obligations
Valuation or Allocation
Presentation and Disclosure
4-6
LO# 3
Audit Procedures
Specific acts
performed by the auditor
to gather evidence to determine
if specific assertions are
being met.
Risk assessment
procedures
Test of
controls
Substantive
procedures
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Audit Procedures
Observation
Documentation
Confirmation
Comparisons
Inquiries
Test of Data
 Computation
 Tracing
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LO# 3
Audit Procedures
A
set of audit procedures prepared to test
assertions for a component of the financial
statements is referred to as an audit program.
Audit Program for Accounts Receivable
Management Assertions
Audit Procedures
Existence
Confirm receivables.
Rights and Obligations
Ask if receivables have been sold.
Completeness
Agree controlling account with total of subsidiary accounts.
Examine sales invoices immediately before and after year-end
for proper cutoff.
Valuation or allocation
Trace accounts from aged trial balance to subsidiary accounts.
Test the adequacy of the allowance account.
Presentation and disclosure
Look for amounts due from related parties.
Evaluate receivables for footnote disclosure.
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LO# 4
Audit Evidence
All the information used
by the auditor in arriving at
the conclusions on which the
audit opinion is based.
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LO# 4
Understanding the Conduct of an Audit via Audit
Evidence
Nature of audit evidence
Sufficiency and appropriateness
of audit evidence
Evaluation of audit evidence
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LO# 4
Nature of Audit Evidence
Records of
initial entries and
supporting records
General
and subsidiary
ledgers
Adjustments
to financial
statements
Invoices
Spreadsheets
supporting cost
allocations
Worksheets
Contracts
Other
computations,
reconciliations, and
disclosures
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LO# 4
Competence of Audit
Evidence
Measures Quality of Evidence
Relevant
Reliable
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LO# 4
Sufficiency of
Audit Evidence
Sufficiency is a measure of
the quantity of audit evidence.
Greater risk of
misstatement requires
a higher quantity
of audit evidence.
Higher quality
audit evidence results
in a lower quantity
of audit evidence.
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Appropriateness of
Audit Evidence
Relevance
Reliability
LO# 4
Appropriateness is a measure
of the quality of audit evidence.
Independent source of the evidence
Effectiveness of internal control
Auditor’s direct personal knowledge
Documentary evidence
Original documents
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Evaluation of
Audit Evidence
LO# 4
Proper evaluation of evidence
requires an understanding of the
Types of evidence available.
Relative reliability of available evidence.
An auditor should be thorough in searching
for evidence and unbiased in its evaluation.
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Audit Procedures for
Obtaining Audit Evidence
Inspection
of records and
documents
Inquiry
Confirmation
LO# 5
Recalculation
Observation
Scanning
Inspection
of tangible
assets
Reperformance
Analytical
procedures
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LO# 5
Audit Procedures for
Obtaining Audit Evidence
Inspection
of records and
documents
Evidence obtained from
external documents is more
reliable than evidence obtained
from internal documents.
Vouching
(Occurrence)
Source
Documents
Ledger
Tracing
(Completeness)
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Reliability of Records
Internal vs. External
LO# 5
Audit Procedures for
Obtaining Audit Evidence
Inspection
of records and
documents
Inquiry
In conducting inquiry, the auditor should:
• Consider the knowledge, objectivity,
experience, responsibility, and
qualifications of the person to be
questioned.
• Ask clear, concise, and relevant
questions.
• Use open or closed questions
appropriately.
• Listen actively and effectively.
• Consider the reactions and responses,
then ask follow-up questions.
• Evaluate the response.
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Audit Procedures for
Obtaining Audit Evidence
Inspection
of records and
documents
Inquiry
Information Frequently
Confirmed by Auditors
Cash balance
Accounts receivable
Inventory on consignment
Accounts payable
Bonds payable
Common stock outstanding
Insurance coverage
Collateral for loans
LO# 5
Source of Confirmation
Bank
Individual customers
Consignee
Individual vendors
Bondholders/trustee
Registrar/transfer agent
Insurance company
Creditors
Confirmation
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Audit Procedures for
Obtaining Audit Evidence
Recalculation - Determining the
mathematical accuracy of documents or
records.
Reperformance - The auditor’s
independent execution of procedures or
controls that were originally performed as
part of the internal control system.
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Audit Procedures for
Obtaining Audit Evidence
Observation - The process of watching a
process or procedure being performed by
others.
Inspection of Intangible Assets - Physical
examination of a tangible asset.
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Audit Procedures for
Obtaining Audit Evidence
Scanning - Review of accounting data to
identify significant or unusual items.
Analytical Procedures - Evaluations of
financial information made by a study of
plausible relationships among both
financial and nonfinancial data.
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Reliability of Types
of Evidence
Level Of Reliability
High
Medium
Low
LO# 6
Type of Evidence
Inspection of tangible assets
Reperformance
Recalculation
Inspection of records and documents
Scanning
Confirmation
Analytical procedures
Observation
Inquiry
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LO# 7
Audit Documentation
The auditor’s principal record of the
audit procedures performed, evidence
obtained, and conclusions reached.
Audit documentation (working papers) have two functions:
 To provide support for the audit report.
 To aid in the conduct and supervision of the audit.
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Content of Audit
Documentation
LO# 8
Audit documentation should:
Demonstrate how the audit complied with auditing
and related professional practice standards.
Support the basis for audit conclusions concerning
every material financial statement assertion.
Show that the underlying accounting records
agreed with the financial statements.
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Content of Audit
Documentation
LO# 8
Audit documentation should:
Include a written audit program detailing auditing
procedures necessary to accomplish audit objectives.
Enable a knowledgeable and experienced reviewer to:
Understand the nature, timing,
extent, and results of audit
procedures, evidence obtained
and conclusions reached.
Determine who performed
and reviewed the work,
as well as the dates
of the work and reviews.
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Content of Audit
Documentation
LO# 8
Most public accounting firms maintain
audit documentation in two types of files
Permanent files
Corporate charter
Chart of accounts
Organization chart
Accounting manual
Current files
Important contracts
Internal control documentation
Terms of stock and bond issues
Prior years’ analytical procedures
4-29
Content of Audit
Documentation
LO# 8
Most public accounting firms maintain
audit documentation in two types of files
Permanent files
Audit plan, audit report
Audit programs
Working trial balance
Minutes of meetings
Current files
Adjusting journal entries
Reclassification journal entries
Current financial statements
Working papers supporting accounts
4-30
LO# 8
Format of Audit Documentation
Heading
Client name
Title of the working paper
Client’s year-end date
Indexing and
cross-referencing
Notations that provide a trail
from financial statements to
audit documents.
Tick marks
Notations made next to
work paper items indicating
auditor/reviewer actions.
4-31
LO# 8
Audit Documentation
Audit documentation should be organized so
that audit team members and others can find
evidence supporting financial statement accounts.
All audit documentation is the property of the
auditor, including documents prepared
by the client at the auditor’s request.
The Sarbanes-Oxley Act of 2002 requires
audit documentation to be retained for seven
years from the completion date of the engagement.
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LO# 8
Audit Documentation
Audit Plan
Audit Programs
Working Trial Balance
Written memos
Account Analysis
Lead Sheet
Detail
Adjusting Entries
Reclassification Entries
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Workpaper Index
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End of Chapter 4
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