Lecture Auditing and assurance services (Second international edition) Chapter 4 Audit evidence and audit documentation

Chapter 4 Audit evidence and audit documentation. In this chapter you will understand the concept of audit risk, learn the form and components of the audit risk model, understand how to use the audit risk model, understand the auditors risk assessment process, learn how the auditor assesses the risk of material misstatement, understand the fraud risk assessment process,...

Audit Evidence

and Audit Documentation

Chapter Four

Relationship of Audit Evidence to the Audit Report

Management assertionsabout elements offinancial statements

Management assertionsabout elements offinancial statements

Financialstatements

Financialstatements

Auditprocedures

Auditprocedures

Auditreport

Auditreport

Provide evidence on the

fairness of thefinancial statements

Provide evidence on the

fairness of thefinancial statements

Management Assertions

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

Authorisation

Accuracy

Cut-off Cut-off

Classification

Management Assertions

Assertions about end-of-the-period account balances

Valuation and allocation

Valuation and allocation

Rights and obligations Rights and obligations

Management Assertions

Assertions about presentation and disclosure

Classification and understandability

Classification and understandability

Occurrence and rights and obligations

Occurrence and rights and obligations

Completeness

Accuracy and valuation Accuracy and valuation

Management Assertions

Audit Procedures

Specific acts performed by the auditor

to gather evidence to determine

if specific assertions are

being met.

Risk assessment procedures

Risk assessment procedures controlsTest of

Test of controls

Substantiveprocedures

Substantiveprocedures

Audit Procedures

A set of audit procedures prepared to test assertions for a component of the financial

statements is referred to as an audit plan.

A set of audit procedures prepared to test assertions for a component of the financial statements is referred to as an audit plan

audit opinion is based.

All the information, from whatever source, used

by the auditor in arriving at the conclusions on which the

audit opinion is based.

The Concepts of Audit

Evidence

Nature of audit evidence

Sufficiency and appropriateness

Nature of Audit Evidence

Records ofinitial entries andsupporting records

Records ofinitial entries andsupporting records

Invoices

Contracts

Generaland subsidiary

ledgers

Generaland subsidiary

ledgers

Adjustments

to financialstatements

Adjustments

to financialstatements

WorksheetsWorksheets

Spreadsheetssupporting costallocations

Spreadsheetssupporting costallocations

Othercomputations,reconciliations, and

disclosures

Othercomputations,reconciliations, and

disclosures

Sufficiency of Audit Evidence

a higher quantity

of audit evidence

Greater risk ofmisstatement requires

a higher quantity

of audit evidence

Higher quality audit evidence results

in a lower quantity

of audit evidence

Higher quality audit evidence results

in a lower quantity

of audit evidence

Appropriateness of Audit Evidence

Relevance Reliability

Knowledgeable independent source of the evidence

Knowledgeable independent source of the evidence

Effectiveness of internal controlAuditor’s direct personal knowledgeDocumentary evidence

Evaluation of Audit Evidence

Proper evaluation of evidence requires an understanding of the

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.

An auditor should be thorough in searching for evidence and unbiased in its evaluation.

Audit Procedures for Obtaining Audit Evidence

Inspection

of records anddocuments

Inspection

of records anddocuments

Inspection

of tangibleassets

Inspection

of tangibleassets Observation

Inquiry Confirmation Recalculation

Reperformance Analytical

proceduresAnalyticalprocedures Scanning

Audit Procedures for Obtaining Audit Evidence

Inspection

of records anddocuments

Inspection

of records anddocuments

Evidence obtained fromexternal documents is morereliable than evidence obtained

from internal documents

Evidence obtained fromexternal documents is morereliable than evidence obtained

from internal documents

Journal

or Ledger

Source Documents

Vouching

(Occurrence)

Tracing

Audit Procedures for Obtaining Audit Evidence

The process of watching a process or procedure being performed by others.

Observation

Inspection

of tangibleassets

Inspection

of tangibleassets

Physical examination of a tangible asset.

Audit Procedures for Obtaining Audit Evidence

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.

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.

Inquiry

Audit Procedures for Obtaining Audit Evidence

Confirmation

The reliability of evidence obtained through confirmations is directly affected by factors such as:

• The form of the confirmation.

• Prior experience with the entity.

• The nature of the information being confirmed.

• The intended respondent.

The process of obtaining a representation of information of

an existing condition directly

Audit Procedures for Obtaining Audit Evidence

Confirmation

Audit Procedures for Obtaining Audit Evidence

Determining the mathematical accuracy of documents or records.

Reperformance

Recalculation

The auditor’s independent execution of procedures or controls that were originally performed as part of the

internal control system.

Audit Procedures for Obtaining Audit Evidence

Review of accounting data to identify significant or

unusual items.

Scanning

Analyticalprocedures

Analyticalprocedures

Evaluations of financial information made by a study of plausible

relationships among both financial and nonfinancial data.

Reliability of Types

of Evidence

Audit Documentation

The auditor’s principal record of the audit procedures performed, evidence obtained, and conclusions reached.

The auditor’s principal record of the audit procedures performed, evidence obtained, and conclusions reached.

Provides also the basis for the review and inspection of the quality of the audit work Provides also the basis for the review and inspection of the quality of the audit work

Content of Audit Documentation

Audit documentation should:

Provide a sufficient and appropriate record

of the basis for the auditor’s report

Provide a sufficient and appropriate record

of the basis for the auditor’s report

Provide evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements

Provide evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements

Content of Audit Documentation

Audit documentation should:

Include the overall audit strategy and audit plan

Enable an experienced auditor to understand:

to comply with ISAs and applicable legal and regulatory requirements.

• The results of the audit procedures performed and the audit evidence obtained.

• Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgements made

Content of Audit Documentation

Most audit firms maintain audit documentation in two types of files

Most audit firms maintain audit documentation in two types of files

Permanent files Current files

Corporate charter Important contracts Chart of accounts Internal control documentation Organisation chart Terms of stock and bond issues Accounting manual Prior years’ analytical procedures

Content of Audit Documentation

Most audit firms maintain audit documentation in two types of files

Most audit firms maintain audit documentation in two types of files

Permanent files Current files

Overall audit strategy/ Current financial statements/audit report

Minutes of meetings

Overall audit strategy/ Current financial statements/audit report

Minutes of meetings

Format of Audit Documentation

Heading

Indexing andcross-referencing

Indexing andcross-referencing

Tick marks

Client nameTitle of the working paperClient’s year-end date

Client nameTitle of the working paperClient’s year-end date

Notations that provide a trailfrom financial statements to

Audit Documentation

Audit documentation should be organised sothat audit team members and others can findevidence supporting financial statement accounts

Audit documentation should be organised sothat audit team members and others can findevidence supporting financial statement accounts

All audit documentation is the property of the

auditor, including documents prepared

by the client at the auditor’s request

All audit documentation is the property of the

auditor, including documents prepared

by the client at the auditor’s request

ISQC1 requires audit documentation to be retained

ordinarily for minimum five years from

the date of the auditor’s report

ISQC1 requires audit documentation to be retained

ordinarily for minimum five years from

the date of the auditor’s report

End of Chapter 4