02 C3 Audit Documentation and Audit Evidence

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Types of audit file

file
Permanent audit file
file
Permanent audit file should contain information which is Continuing Interest and relevance to succeeding
audits. The permanent file typically includes the following :
a) Information regarding legal and organisational structure of the entity.
b) Extracts or copies of important legal documents, agreements and minutes relevant to the audit
c) Record of study and evaluation of internal controls related to accounting system
d) Copies of audited of financial statements for previous years.
e) Analysis of significant ratios and trends.
f) Copies of management letters issued by the auditor, if any.
g) Record of communicating with the retiring auditor.
h) Notes regarding significant accounting policies.
i) Significant audit observations of earlier years.
Keywords Hooks
Continuing Interest and Permanent audit file should contain information, which is of continuing interest
relevance and relevance to succeeding audits.
Legal organisational structure
Legal documents
Internal Control
Previous Year
Trends
Management
Retire
Policies
Observation

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also be given.

Current audit file

file
Current audit file contains information relating to and relevant to the audit of current period. The information,
which may be contained in the current audit file, is given below:
a) Correspondence relating to acceptance of annual re-appointment.
b) Extracts of important matters in the minutes of the board meetings and general meeting as are relevant
to audit
c) Audit plan and audit programme.
d) Analysis of transactions and balances
e) Record of audit procedures and their results.
f) Evidence regarding the supervision and review of the work of assistants.
g) Copies of communication with other auditors (e.g. branch auditor), experts (e.g. lawyers, architects)
and other third parties (e.g. banks; debtors).
h) Copies of letters or notes concerning audit matters communicated to or discussed with client.
i) Management representations
j) Auditor's conclusions regarding significant matters.
k) Copies of financial statements being reported on and the related audit report.

also be given.

SA 500 Audit Evidence
Information contained in the accounting records & other information

from ICAI Study Material

also be given.

Factors to determine Sufficiency & Appropriateness
a. Degree of risk of misstatement.

b. The result of audit procedures i.e. any fraud & error detected by auditor.
c. Materiality of item.
d. Type of information available.
e. Experience gained during previous audit.
f. Trend shown by accounting ratios etc.
g. Size and Characteristics of the population
Audit Procedures to Obtain Audit Evidence
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing
➔ Risk assessment procedures; and
➔ Further audit procedures, which comprise:
◆ Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
◆ Substantive procedures, including tests of details and substantive analytical procedures.
➔ The audit procedures described below may be used as
◆ risk assessment procedures,
◆ tests of controls or
◆ substantive procedures,
● Depending on the context in which they are applied by the auditor.
1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
6. Analytical Procedure
7. Enquiry
Inspection
● examining records or documents,
○ whether internal or external,
○ in paper form, electronic form, or other media, or
● a physical examination of an asset.
● Inspection of records and documents provides audit evidence
○ of varying degrees of reliability,
○ depending on their nature and source and,
● Example - Documentation related to authorisation
Observation
● Observation consists of witnessing a process or procedure being performed by others.
● For example, the auditor may observe the counting of inventories being performed by client's personnel.

also be given.

External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written response to the
auditor from a third party ( the confirming party), in paper form, or by electronic or other medium.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
Re-performance
Re-performance involves the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
Analytical Procedures
● Analytical procedures consist of evaluations of financial information by a study of relationships among both
financial and non- financial data.
● Analytical Procedures refers to studying significant ratios and trends and investigating unusual fluctuations.
Inquiry

also be given.

Types of Audit Evidence

also be given.

Relevance and Reliability

also be given.

Reliability of Audit Evidence: As per SA 500 "Audit Evidence", the reliability of information to be used as audit
evidence, and therefore of the audit evidence itself, is influenced by its
● source and
● its nature, (Direct, indirect, oral, written or original, photocopies) and
● the circumstances under which it is obtained,
● including the controls over its preparation and maintenance where relevant.
Generalisations about the reliability of various kinds of audit evidence are subject to important exceptions.
Even when information to be used as audit evidence is obtained from sources external to the entity, circumstances
may exist that could affect its reliability.
For example, information obtained from an independent external source may not be reliable if the source is not
knowledgeable, or a management's expert may lack objectivity.
While recognising that exceptions may exist, the following generalisations about the reliability of audit evidence
may be useful
1. The reliability of audit evidence is increased when it is obtained from independent sources outside the
entity.
2. The reliability of audit evidence that is generated internally is increased when the related controls,
including those over its preparation and maintenance, imposed by the entity are effective.
3. Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the
application of a control).
4. Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than
evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable
than a subsequent oral representation of the matters discussed).
5. Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles, or documents that have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and maintenance.
6. Circumstance prevailing in the organisation can have severe impact on the reliability of the audit evidence.

also be given.

SA 505 - External Confirmation

Question - Explain the process of external confirmation. Give some examples where external confirmation can be
used as audit evidence. (M. Imp)
According to SA 505 on
● External Confirmation,
● it is the process of obtaining and evaluating
● through a direct communication
● from a third party
● information about a particular item affecting assertions made by the management in the financial
statements.
When using external confirmation procedures, the auditor shall maintain control over external control requests,
including:
1. Selecting the items for which confirmations are needed. (कौन से आइटमस के लए )
2. Determining the information to be confirmed or requested; ( या)
3. Selecting the appropriate confirming party; ( कस से )
4. Designing the confirmation requests, including determining that requests are properly addressed and
contain return information for responses to be sent directly to the auditor; and (Properly Designed,
Addressed, return information)
5. Sending the requests, including follow-up requests when applicable, to the confirming party. ( जो और फोलो
उप रखो)
Examples of situations where external confirmations may be used include the following
● Bank balances and other information from bankers.
● Accounts receivable balances.
● Stocks held by third parties.
● Property title deeds held by third parties.
● Investments purchased but delivery not taken.
● Loans from lenders.
● Accounts payable balances.
● Long outstanding share application money.
● Terms of Agreement or transaction with the third parties
Question
The accountant of C Ltd. has requested you, not to send balance confirmations to a particular group of
debtors since the said balances are under dispute and the matter is pending in the Court. Comment.
External Confirmation Requests: SA 505, “External Confirmations”, establishes standards on the auditor’s use of
external confirmation as a means of obtaining audit evidence.
It requires that the auditor should employ external confirmation procedures in consultation with the management.
The auditor may come across certain situations in which the management may request him not to seek external
confirmation from certain parties because of dispute with the debtors, etc.
The management, for example, might make such a request on the grounds that due to a dispute with the particular
debtor, the request for confirmation might aggravate the sensitive negotiations between the entity and the debtor.

also be given.

In such cases, when an auditor agrees to management’s request not to seek external confirmation regarding a
particular debtor, the auditor should consider validity of grounds for such a request and assess management’s
integrity and obtain evidence to support the same.
The auditor should also ask the management to submit its request in a written form, detailing therein the reasons
for such a request.
The auditor agrees to management’s request not to seek external confirmation regarding a particular matter, the
auditor should document the reasons for agreeing to the management’s request and should apply alternative
procedures to obtain sufficient appropriate evidence regarding that matter.
While considering the validity of request, in case the auditor reaches at a conclusion that the same was not valid, he
may appropriately modify the report.
In the present case, the accountant of C Ltd. Has requested the auditor not to send balance confirmation requests to
a particular group of debtors due to dispute.
It appears to be a valid ground. The auditor shall accept their request but he must perform alternative procedures.
Such as
● Examine Sales invoice.
● Discussion with lawyer with respect to recoverability of amount.
If he is satisfied after applying alternative procedure he shall express a clean opinion, otherwise he shall consider
modifying the audit report as per the circumstances.


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These notes are incomplete without our videos. Study from these notes at your own risk.

We keep on updating our books, notes and videos. You should

Types of audit file

Legal organisational structure

Current audit file

SA 500 Audit Evidence

Information contained in the accounting records & other information

Factors to determine Sufficiency & Appropriateness

a. Degree of risk of misstatement.

Audit Procedures to Obtain Audit Evidence

Types of Audit Evidence

Relevance and Reliability

SA 505 - External Confirmation

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