Chapter 5
Audit Evidence
and
Documentation
5-2
Management Assertions
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Existence or Occurrence--Assets, liabilities, and owners’ equity
accounts reflected in the financial statements exist; the recorded
transactions have occurred.
Completeness--All transactions, assets, liabilities, and elements of
owners’ equity that should be presented in the financial statements
are included.
Rights and Obligations--The client has rights to assets and obligations
to pay liabilities that are included in the financial statements.
Valuation or Allocation--Assets, liabilities, owners’ equity, revenues,
and expenses are presented at amounts that are determined in
accordance with generally accepted accounting principles.
Presentation and Disclosure--Accounts are described and classified in
the financial statements in accordance with generally accepted
accounting principles, and all material disclosures are provided.
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5-3
Audit Risk
Audit Risk =
=
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Risk of Material
Misstatement
Inherent
Risk
*
Risk That the
Auditors Fail to
the Misstatement
*
Control
Risk
*
Detection
Risk
Inherent Risk--Risk of a material misstatement occurring in an
assertion assuming no related internal controls.
Control Risk--Risk that a material misstatement in an assertion
will not be prevented or detected on a timely basis by the
company’s internal control.
Detection Risk--Risk that the auditors’ procedures will lead
them to conclude that a material misstatement does not exist in
an assertion when in fact such misstatement does exist.
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5-4
Audit Risk Formula
AR = IR * CR * DR
AR
IR
CR
DR
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=
=
=
=
Audit risk
Inherent risk
Control risk
Detection risk
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5-5
Audit Risk
McGraw-Hill/Irwin
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Competence of Evidential
Matter
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To be competent evidence must be:
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5-6
Valid
Relevant
Principles
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Independent sources have greater reliability
than those within the client organization.
Strong internal control increases reliability of
evidence created within the client organization.
Directly obtained evidence is more reliable than
evidence obtained second hand.
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5-7
Reliability of Certain Types of
Audit Evidence
RELIABILITY
High
Low
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TYPE
Physical
EXAMPLE
Inventory Observation
Documentary
External
External/Internal
Internal
Cutoff Bank Statement
Purchase Invoice
Sales Invoice
Client Representations
Management Representation
Letter
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5-8
Types of Evidence
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Accounting information system
Documentary evidence
Third-party representations
Physical evidence
Computations
Data interrelationships
Client representations
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5-9
Audit Procedures
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Accounting information system
Documentary evidence
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Tracing
Vouching
Inspection
Reconciliations
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Inquiries
Letters of representations
Third-party representations--Confirmation
Physical examination
Computations—Reperformance
Data interrelationships—Analytical procedures
Client representations
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5-10
Identifying Potential Misstatements
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Basic Approaches to Auditing
Accounting Estimates
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5-11
Review and test management’s
process for developing the estimate.
Independently develop an estimate
to compare to management’s
estimate.
Review subsequent events or
transactions bearing on the
estimate.
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5-12
Auditing Fair Values
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If the item is traded on an organized
market, fair value may be obtained
from market prices
If the item does not trade on an
organized market determine fair value
by:
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Analyzing to a similar market is possible
Using a valuation model
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5-13
Functions of Audit Documentation
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Primary functions:
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Support the auditors’ compliance with auditing
standards
Support the auditors’ opinion
Secondary functions:
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Assist continuing and new audit team members in
planning and performing the audit
Serves as a record of matters of continuing audit
interest
Assists in supervision and review of the audit
Demonstrates the accountability of team members
Assists internal reviewers, external peer reviewers,
PCAOB inspectors, and successor auditors in
performing their roles
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5-14
Sufficiency of Audit Documentation
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Audit documentation should be sufficient to:
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Enable an experienced auditor to understand
the work performed and the significant
conclusions reached
Identify who performed and reviewed the work
Show that the accounting agree or reconcile to
the financial statements
Audit documentation should include all
significant audit findings and the actions
taken to address them
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5-15
Types of Working Papers
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Audit administrative working papers
Working trial balance
Lead schedules
Adjusting journal entries and reclassification
entries
Supporting schedules
Analysis of a ledger account
Reconciliations
Computational working papers
Corroborating documents
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5-16
Types of Working Files
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Current files
Permanent files
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5-17
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5-18
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