AUDIT EVIDENCE, PROCEDURES

AND DOCUMENTATION


 Learning Objectives


Upon completion of this chapter you will
 Know the relationship between audit evidence and the auditor’s
report.
 Understand the basic concepts of audit evidence.
 Understand the use of assertions in obtaining audit evidence.
 Define audit procedures and understand their relationship to
assertions.
 Identify and define the audit procedures used for obtaining audit
evidence.
 Learn the objectives of audit documentations.
 Develop an understanding of the content, types, organization and
ownership of audit documentation.
 AUDIT EVIDENCE


 All information used by the auditor in arriving at the
conclusions on which the audit opinion is based, and
includes the information contained in the accounting
records and other information.
 Nature of Audit Evidence

1. Accounting records include the records of initial entries and supporting

records such as checks, invoices, contract, general and subsidiary ledger, journal
entries, etc.

 Management is responsible for the preparation of the financial statements
based on the accounting records of the entity.
 The auditor should obtain audit evidence by testing the accounting records.
 Accounting records alone do not provide sufficient appropriate audit evidence
on which to base an audit opinion on the F/S, the auditor obtain other audit
evidence.
2. Other information
a. Minutes of meetings
b. Confirmation from third parties
c. Industry analysts reports
d. Comparable data about competitors
e. Controls manuals
f. Information obtained by the auditor from such audit procedures as inquiry,
observation and inspection
g. Other information developed by or available to the auditor that permits the
auditor to reach conclusions through valid reasoning.
 The Appropriateness of Audit Evidence


Appropriateness
 Is the measure of the QUALITY of audit evidence,
that is, its RELEVANCE and its RELIABILTY.
 To be appropriate, audit evidence must be both
relevant and reliable in providing support for the
conclusions on which the auditor's opinion is based.
 RELEVANCE


The relevance of audit evidence refers to its relationship
to the assertion or to the objective of the control being
tested. The relevance of audit evidence depends on:
a. The design of the audit procedure used to test the
assertion or control, in particular whether it is
designed to (1) test the assertion or control directly
and (2) test for understatement or overstatement;
and
b. The timing of the audit procedure used to test the
assertion or control.
Reliability. The reliability of evidence depends on the nature and
source of the evidence and the circumstances under which it is
obtained. For example, in general:


 Evidence obtained from a knowledgeable source that is
independent of the company is more reliable than evidence
obtained only from internal company sources.
 The reliability of information generated internally by the
company is increased when the company's controls over that
information are effective.
 Evidence obtained directly by the auditor is more reliable than
evidence obtained indirectly.
 Evidence provided by original documents is more reliable than
evidence provided by photocopies or facsimiles, or documents
that have been filmed, digitized, or otherwise converted into
electronic form, the reliability of which depends on the controls
over the conversion and maintenance of those documents.
The auditor is not expected to be an expert in document
authentication.

However, if conditions indicate that a document may not
be authentic or that the terms in a document have been
modified but that the modifications have not been
disclosed to the auditor, the auditor should modify the
planned audit procedures or perform additional audit
procedures to respond to those conditions and should
evaluate the effect, if any, on the other aspects of the audit.
 Using Information Produced by the
Company

When using information produced by the company as
audit evidence, the auditor should evaluate whether the
information is sufficient and appropriate for purposes
of the audit by performing procedures to:
 Test the accuracy and completeness of the
information, or test the controls over the accuracy
and completeness of that information; and
 Evaluate whether the information is sufficiently
precise and detailed for purposes of the audit.
 Sufficiency of Audit Evidence


Sufficiency is the measure of the QUANTITY of audit evidence.
The quantity of audit evidence needed is affected by the risk of
misstatement
 The greater the risk, the more audit evidence is likely to be
required
 The higher the quality, the less the audit evidence that may be
required
 There is an inverse relationship between the sufficiency and
appropriateness of audit evidence
The auditor may find it necessary to rely on audit evidence that
is persuasive rather than conclusive
 The use of assertions in obtaining audit
evidence


Assertions used by the auditor fall into the following
categories:
a. Assertions about classes of transactions and events
for the period under audit
b. Assertions about account balances at the period end
c. Assertions about presentation and disclosure
 Assertions about classes of transactions and
events for the period under audit


a. Occurrence. Transactions and events that have been
recorded have occurred and pertain to the entity
b. Completeness. All transactions and events that should
have been recorded have been recorded
c. Accuracy. Amounts and other data relating to recorded
transactions and events have been recorded appropriately
d. Cutoff. Transactions and events have been recorded in
the correct accounting period.
e. Classification. Transactions and events have been
recorded in the proper accounts
 Assertions about account balances at the
period end


a. Existence. Assets, liabilities, and equity interest exist
b. Rights and Obligations. The entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity
c. Completeness. All assets, liabilities, and equity interests
that should have been recorded have been recorded
d. Valuation and allocation. Assets, liabilities and equity
interests are included in the F/S at appropriate amounts
and any resulting valuation or allocation adjustments are
appropriately recorded.
 Assertions about presentation and
disclosure

a. Occurrence and rights and obligations. Disclosed events
and transactions have occurred and pertain to the entity
b. Completeness. All disclosures that should have been
included in the financial statements have been included
c. Classification and understandability. Financial
information is appropriately presented and described
and disclosures are clearly expressed
d. Accuracy and valuation. Financial and other information
are disclosed fairly and at appropriate amounts
 AUDIT PROCEDURES


 Are specific acts or methods performed by the
auditor to gather evidence to determine if specific
assertions are being met.
 Audit procedures can be classified into
the following categories:


a. Risk assessment procedures, and
b. Further audit procedures, which consist of:
(1) Tests of controls, and
(2) Substantive procedures, including tests of details and
substantive analytical procedures.
 Risk Assessment Procedures (RAP)


Obtaining an understanding of the entity and its
environment, including its internal control, to assess the
risks of material misstatement at the F/S and relevant
assertions levels
 Tests of Controls


A test of controls is an audit procedure to test the
effectiveness of a control used by a client entity to
prevent or detect material misstatements. Depending
on the results of this test, auditors may choose to rely
upon a client's system of controls as part of their
auditing activities.
 Substantive testing.


The auditor's tests of the accuracy of monetary amounts
of transactions and account balances are known
as substantive testing.

Substantive procedures (or substantive tests) are those

activities performed by the auditor to detect material
misstatement or fraud at the assertion level. The
different assertions of balances are: existence, rights and
obligations, validity.
 The auditor obtains audit evidence by one or more of the
following procedures: (I-CORRIIA)
 Inspection of records/documents
 Confirmation 
 Observation
 Recalculation
 Reperformance
 Inspection of tangible assets
 Inquiry
 Analytical procedures
 
 uments
Inspection of records/doc

Consists of examining records or documents, whether internal or external, in paper, electronic

form.
Provides audit evidence of varying degrees of reliability, depending on their nature and


source.

Internal documents- one that has been prepared and used within the client’s organization
and is retained without going to an outside party such as a customer or a vendor.
Examples include duplicate sales invoice, and inventory receiving report.

External documents- one that has been in the hands of someone outside the client’s
organization and is a party to the transaction being documented.

Vouching
Refers to first selecting an item for testing from the underlying accounting data and then
examining the source document (corroborating information)
Used to establish the existence or occurrence of the selected item.

Tracing
Refers to selecting an accounting transactions (corroborating information) and tracing it
into the journal or ledger (underlying accounting data.)
Establishes the completeness of transactions
 
 With vouching, the auditor starts with a journal
entry or ledger balance and works back to the
original source documents. With tracing, the auditor
starts with the original source documents and works
forward to see whether the transaction was properly
recorded in the accounting system
 
 
Underlying accounting data
 Consist of the book of original entry and the general
and subsidiary legers, related accounting manuals

Corroborating evidence
 Includes both written and electronic information
(checks, invoices, contracts and minutes of meetings.
 Confirmation


The process of obtaining a representation of information or of
an existing condition directly from a third party.
 A specific type of inquiry.
 Frequently used in relation to account balances and their
components

External Confirmations
 Requires that the auditor should determine whether the use
of external confirmation is necessary to obtain sufficient
appropriate audit evidence to support specific assertions.
2 common types of confirmation request


1. Positive confirmations
2. Negative confirmations
 Positive confirmation

 Ask the recipient to respond in all circumstances.
 It may request the recipient to provide the information (called
blank form)
 Request the respondent to indicate whether he agrees with the
information
For example, a confirmation letter tells a customer that the client
company's records at year-end show an ending accounts receivable
balance for that customer of $500,000. If the customer agrees with
this number, it does not have to contact the auditor to confirm the
supplied information. The auditor will then assume that the
customer agrees with the information presented to it in the
confirmation.
 Negative confirmation


 The recipient is asked to respond only when the
information is incorrect
 Less competent than positive confirmation
 A negative confirmation is designed for use in
situations where a client company's internal controls
are already considered to be quite strong, so that the
confirmation process is used as a secondary audit
method for the accounts under review.
Observation
 Consists of looking at a process or procedure being performed by
others.

Recalculation 
 Consists of checking the mathematical accuracy of documents or
records

Reperformance
 Is the auditor’s independent execution of procedures or controls
that were originally performed as part of the entity’s internal
control.

Inspection of Tangible assets

 Consists of physical examination of the assets
 Provide appropriate audit evidence with respect to their existence

Inquiry
 Analytical procedures


Consist of evaluations of financial information made by
a study of plausible relationship among both financial
and nonfinancial data.
 Audit documentation 


Refers to the records or documentation of procedures
that auditors performed, the audit evidence that they
obtained and the conclusion that makes by them based
on the evidence obtained. Audit documentation is
sometimes called audit working paper or working
paper or audit file
Some working paper are prepared in hard-copy format.
 PURPOSE OF WORKING PAPERS


Working papers are prepared mainly to
 Assist the auditor in planning, performance, review
and supervision of the engagement.
 Support the auditor’s representation as to
compliance with Philippine Standards on Auditing
 Support the auditor’s opinion on financial statements
 
Working papers also assist the auditors in
 Planning future audits
 Providing information useful in rendering other
services
 Providing adequate defence in case of litigation
 FORM AND CONTENT OF WORKING PAPERS


a. Nature of the engagement
b. Form of the auditor’s report
c. Nature and complexity of the business
d. Nature and condition of the entity’s accounting and
internal control systems
e. Needs in the particular circumstances for direction,
supervision and review of work performed by
assistants.
f. Specific audit methodology and technology used in the
course of the audit
 
Types of files
1. Permanent files
2. Current files
 Permanent files


 Contain information about the client that are of
continuing relevance to the audit.
 Provide convenient source of information about the
audit that is of continuing significance from year to
year
A permanent audit file normally includes :


1. Information concerning the legal and organizational structure of the entity. In the case
of a company, this includes the Memorandum and Articles of Association. In the case
of a statutory corporation, this includes the Act and Regulations under which the
corporation functions.
2. Extracts or copies of important legal documents, agreements and minutes relevant
to the audit.
3. A record of the study and the evaluation of the internal controls related to
the accounting system. This might be in the form of narrative
descriptions,questionnaires or flow charts, or some combination thereof.
4. Copies of audited financial statements for previous years.
5. Analysis of significant ratios and trends.
6. Copies of management letters issued by the auditor, if any. Record of communication
with the retiring auditor, if any, before acceptance of the appointment as auditor.
7. Notes regarding significant accounting policies.
8. Significant audit observations of earlier years.
 Current files


Include all the information applicable to the year under
audit.
 The current file normally includes :

1. Correspondence relating to acceptance of annual reappointment.

2. Extracts of important matters in the minutes of Board Meetings and

General Meetings as relevant to audit.
3. Evidence of the planning process of the audit and audit programme.
4. Analysis of transactions and balances.
5. A record of the nature, timing and extent of auditing procedures
performed, and the results of such procedures.
6. Evidence that the work performed by assistants was supervised and
reviewed.
7. Copies of communication with other auditors, experts and other third
parties.
8. Letters of representation or confirmation received from the client.
9. Conclusions reached by the auditor concerning significant aspects of the
audit, including the manner in which exceptions and unusual matters, if
any, disclosed by the auditor’s procedures were resolved or treated.
10. Copies of the financial information being reported on and the related
audit reports.
 AUDIT PROGRAM


 An audit program is a set of directions that the auditor and its
team members need to follow for the proper execution of
the audit. After preparing an audit plan, the auditor allocates the
work and prepares a program which contains steps that
the audit team needs to follow while conducting an audit.

 Normally maintained in a separate file.

 An audit program, also called an audit plan, is an action plan that

documents what procedures an auditor will follow to validate
that an organization is in conformance with compliance
regulations.
 WORKING TRIAL BALANCE


 Is a listing of the general accounts with its year-end
balances as unadjusted amount directly obtained
from client, proposed audit adjustments and the
audited balance amount.
 Each line on the trial balance is supported by a lead
schedule.
Lead (Top) Schedule
 Contains the detailed accounts from the general ledger making
up the line item total.

Supporting Schedules

 These are the largest portion of audit documentation prepared
by auditors in support of specific amounts on the financial
statements.

Adjusting and Reclassification entries

 Adjusting entries are made to correct the discovered
misstatement in the client’s records.

Reclassification entries are made in the F/S to present the

accounting information properly.
 FORMAT OF WORKING PAPERS


May be prepared in both manually and electronically.
WP contains the following:
 Heading: name of the client, the title of the working


paper and the date covered by the examination.
 Indexing and Cross-referencing:
 Indexing is the use of lettering or numbering system in
the working paper.
 Tickmarks
 OWNERSHIP OF WORKING PAPERS


Property of the auditor
 
Confidentiality of Working Papers
 They cannot be shown, except under certain
circumstances to anyone without the client’s consent.
 Auditor can disclose confidential information even without the client’s consent when:
 


1. Disclosure is required by law
 To produce documents or to give evidence in the course of legal
proceedings
 To disclose to the appropriate public authorities infringements of law
which come to light
2. There is a professional duty or right to disclose
 To comply with technical standards and ethics requirements
 To protect professional interest of a professional accountant in legal
proceedings
 To comply with the quality review of a member body or professional
body
 To respond to an inquiry or investigation by a member body or
regulatory body