In our reasonings concerning matter

of fact, there are all imaginable

degrees of assurance, from the
highest certainty to the lowest species
of moral evidence. A wise man,
therefore, proportions his belief to
the evidence.
David Hume

Chapter 5
Evidence and
Documentation
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Generally Accepted Auditing

Standards- Fieldwork
1.
2.

3.

The auditor must adequately plan the work and

must properly supervise any assistants.
The auditor must obtain a sufficient
understanding of the entity and its environment,
including its internal control, to assess the risk of
material misstatement of the financial
statements whether due to error or fraud, and to
design the nature, timing, and extent of further
audit procedures.
The auditor must obtain sufficient
appropriate audit evidence by performing
audit procedures to afford a reasonable
basis for an opinion regarding the financial
statements under audit.

Relationship of Audit
Evidence to the Audit Report
Financial
statements

Management assertions
about components of
financial statements

Audit
procedures

LO# 1

Audit
report

Auditor reaches
a conclusion based
on the evidence
Provide evidence on the
fairness of the
financial statements
5-3

LO# 2

Management Assertions
Completeness

Classification

Occurrence
Assertions about
classes of transactions
and events for the
period under audit

Accuracy

Cutoff
Authorization

5-4

LO# 2

Management Assertions
Existence

Completeness
Assertions about
account balances
at the period end

Rights and
Obligations

Valuation
and allocation
5-5

LO# 2

Management Assertions
Classification and
understandability

Accuracy and
valuation

Assertions
about presentation
and disclosure

Completeness

Occurrence and
rights and obligations
5-6

LO# 2

Management Assertions

5-7

LO# 3

Audit Evidence
All the information, from
whatever source, used
by the auditor in arriving at
the conclusions on which the
audit opinion is based.

5-8

The Concepts of Audit

Evidence

LO# 3

Nature of audit evidence

Sufficiency and appropriateness

of audit evidence

Evaluation of audit evidence

5-9

LO# 3

Nature of Audit Evidence

Records of
initial entries and
supporting records

Invoices

Adjustments
to financial
statements

General
and subsidiary
ledgers

Worksheets

Spreadsheets
supporting cost
allocations

Contracts

Other
computations,
reconciliations, and
disclosures
5-10

LO# 3

Sufficiency of
Audit Evidence
Sufficiency is the 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.
5-11

Appropriateness of
Audit Evidence
Relevance
Reliability

LO# 3

Appropriateness is a measure
of the quality of audit evidence.
Independent source outside the entity
Effectiveness of internal control
Auditors direct personal knowledge
Documentary evidence
Original documents
5-12

Evaluation of
Audit Evidence

LO# 3

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.
5-13

LO# 4

Audit Procedures
Specific acts
performed by the auditor
to gather evidence about
whether specific assertions
are being met.

Risk assessment
procedures

Test of
controls

Substantive
procedures
5-14

LO# 4

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

Example Audit Procedures

Existence

Confirm accounts receivable.

Rights and obligations

Inquire of management whether receivables have

been sold.

Completeness

Agree total of accounts receivable subsidiary

ledger to accounts receivable control account.

Valuation or allocation

Test the adequacy of the allowance for doubtful

accounts.
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LO# 4

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

Tracing
(Completeness)

Journal
or
Ledger
5-16

Audit Procedures for

Obtaining Audit Evidence
Inspection
of tangible
assets

Observation

LO# 4

Physical examination of a
tangible asset.

The process of watching

a process or procedure
being performed by
others.

5-17

LO# 4

Audit Procedures for

Obtaining Audit Evidence
In conducting inquiry, the auditor should:
Consider the knowledge, objectivity,
experience, responsibility, and
qualifications of the individual to be
questioned.

Inquiry

Ask clear, concise, and relevant

questions.
Use open or closed questions
appropriately.
Listen actively and effectively.
Consider the reactions and responses
and ask follow-up questions.
Evaluate the response.
5-18

Audit Procedures for

Obtaining Audit Evidence

Confirmation

LO# 4

The process of obtaining a

representation of information or of
an existing condition directly from
a third party.

5-19

Audit Procedures for

Obtaining Audit Evidence
Recalculation

Reperformance

LO# 4

Determining the
mathematical accuracy of
documents or records.
The auditors independent
execution of procedures or
controls that were originally
performed by company
personnel.
5-20

Audit Procedures for

Obtaining Audit Evidence
Analytical
procedures

Scanning

LO# 4

Evaluations of financial
information made by a
study of plausible
relationships among both
financial and nonfinancial
data.
Review of accounting
data to identify
significant or unusual
items.
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LO# 9

Purposes of Analytical Procedures

Risk
Assessment
Procedures

Used to assist the auditor to better

understand the business and to plan the
nature, timing, and extent of audit
procedures.

Substantive
Analytical
Procedures

Used to obtain evidential matter about

particular assertions related to account
balances or classes of transactions.

Final
Analytical
Procedures

Used as an overall review of the financial

information in the final review stage of the
audit.
5-22

Reliability of Types
of Evidence

LO# 5

5-23

LO# 6

Filling the Assurance Bucket

5-24

LO# 6

Example of Filling the Assurance Buckets

for Each Assertion (Accounts Payable)

5-25

Audit Documentation Defined

Definition
The written record of the basis for the auditors
conclusions that provides the support for the auditor's
representations, whether those representations are
contained in the auditor's report or otherwise.
Objectives
Improve audit quality
Enhance public confidence
Contents
Planning and performance of the work
Procedures performed
Evidence obtained
Conclusions reached by the auditor

McGraw-Hill/Irwin

2007 by the McGraw-Hill Companies,

Inc. All rights reserved.

LO# 7

Audit Documentation
The auditors record of the
audit procedures performed, evidence
obtained, and conclusions reached.
Audit documentation (working papers) has three functions:
1 To provide support for the audit report.
2 To aid in the planning, performance, and supervision of
the audit.
3 To provide basis for quality reviews; to provide evidence
supporting the auditors significant conclusions.

5-27

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 the auditors conclusions
concerning each material financial statement
assertion.
Demonstrate that the underlying accounting
records agreed or reconciled with the financial
statements.
5-28

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.
5-29

Audit Documentation Files

Current

McGraw-Hill/Irwin

Audit Administrative Files - contain

documentation of the early planning
phases of the audit.
Audit Evidence Files contain the
specific assertions under audit, a record
of the procedures performed, the
evidence obtained, and decisions made in
the course of the audit. The most
important facet of audit evidence is
showing decision problems and
conclusions.

Permanent file contains information

of continuing audit significance over
many years.
Prior Year Working Papers
2007 by the McGraw-Hill Companies,
Inc. All rights reserved.

LO# 8

Format of Audit Documentation

Heading

Entity name
Title of the working paper
Entitys 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.
5-31

Illustrative Audit Documentation

Insert Exhibit
4.7

McGraw-Hill/Irwin

Information on Workpaper
Name, date, purpose,
page number
Procedures performed
and conclusions
reached by the auditor
Evidence that
auditor followed
general standards
and standards of
field work
Tick Mark Legend
Reviewers initials

2007 by the McGraw-Hill Companies,

Inc. All rights reserved.

Current Audit Documentation File Format

Documentation is grouped
behind the trial balance
according to balance sheet and
income statement captions.
Current assets usually appear
first, followed by fixed assets,
other assets, liabilities, equities,
income, and expense accounts.

McGraw-Hill/Irwin

A lead schedule is a summary

of the accounts or components in
an account group. Amounts on
these schedules should agree
with adjusted ledger and
financial statement balances.
2007 by the McGraw-Hill Companies,
Inc. All rights reserved.

Documentation Completion and Retention

PCAOB regulations require that all documentation must

be finalized within 45 days of the audit reports release
SOX requires that audit documentation, including
workpapers and other documents that form the basis of
the engagement, be retained for seven years following
the conclusion of the engagement (usually the audit
report date).
Additions/Amendments
Documentation may not be deleted or discarded
after report release date.
Additions must indicate
Date the information was added,
Name of preparer
Reason
McGraw-Hill/Irwin

2007 by the McGraw-Hill Companies,

Inc. All rights reserved.

Audit Documentation Ownership and

Confidentiality

Ownership
Auditors maintain ownership, even after
auditor-client relationship is over.
Confidentiality
Only can be made public with permission,
or if subpoenaed, or as part of a peer
review of firm practices, or as part of an
ethics investigation of firm personnel.

McGraw-Hill/Irwin

2007 by the McGraw-Hill Companies,

Inc. All rights reserved.

End of Chapter 5

5-36