Chapter 5 Chapter 5

Evidence and Evidence and DocumentationDocumentation

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Relationship of AuditRelationship of AuditEvidence to the Audit ReportEvidence to the Audit Report

Management assertionsabout components offinancial statements

Financialstatements

Auditprocedures

Auditreport

Provide evidence on thefairness of the

financial statements

LO# 1

Auditor reaches a conclusion based

on the evidence

5-2

Management AssertionsManagement AssertionsLO# 2

5-3

The Concepts of AuditThe Concepts of AuditEvidenceEvidence

Nature of audit evidence

Sufficiency and appropriateness of audit evidence

Evaluation of audit evidence

LO# 3

5-4

Audit ProceduresAudit Procedures

Specific actsperformed by the auditorto gather evidence about

whether specific assertions are being met.

Risk assessment procedures

Test of controls

Substantiveprocedures

LO# 4

5-5

Audit ProceduresAudit Procedures

A set of audit procedures prepared to testassertions for a component of the financial

statements is referred to as an audit program.

Management Assertions Examples of Audit ProceduresExistence Confirm receivables.Rights and obligations Inquire if receivables have been sold or pledged.Completeness Agree controlling account with total of subsidiary accounts.

Select shipping documents immediatley prior to year end and ensure sales invoices were recorded.

Valuation or allocation Trace accounts from aged trial balance to subsidiary accounts.Test the adequacy of the allowance account.

Presentation and disclosure Look for amounts due from related parties.Evaluate receivables for footnote disclosure.

Audit Program for Accounts Receivable

LO# 4

5-6

Audit Procedures forAudit Procedures forObtaining Audit EvidenceObtaining Audit Evidence

Inspectionof records and

documents

LO# 4

Inspectionof tangible

assets

Observation

Inquiry

Confirmation

Recalculation Reperformance

Analyticalprocedures

Scanning

5-7

Reliability of TypesReliability of Typesof Evidenceof Evidence

LO# 5

5-8

Audit Testing HierarchyAudit Testing HierarchyFigure 5-3Figure 5-3 Audit Testing Hierarchy: An Evidence Decision Process for Testing Audit Testing Hierarchy: An Evidence Decision Process for Testing

Significant Balances or Classes of TransactionsSignificant Balances or Classes of Transactions

LO# 6

5-9

Audit DocumentationAudit DocumentationThe auditor’s principal record of the

audit procedures performed, evidence obtained, and conclusions reached.

Audit documentation (working papers) have two functions: To provide support for the audit report. To aid in the planning, performance, and supervision of the audit.

LO# 7

5-10

Content of AuditContent of AuditDocumentationDocumentation

Audit documentation should:

Demonstrate how the audit complied with auditing and related professional practice standards.

Support the basis for the auditor’s conclusions concerning each material financial statement assertion.

Demonstrate that the underlying accountingrecords agreed or reconciled with the financial statements.

LO# 8

5-11

Content of AuditContent of AuditDocumentationDocumentation

Audit documentation should:

Include a written audit program detailing auditingprocedures 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 performedand reviewed the work,

as well as the datesof the work and reviews.

LO# 8

5-12

Purposes of Analytical ProceduresPurposes of Analytical Procedures

Risk AssessmentProcedures

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.

LO# 9

5-13

Substantive Analytical Procedures Substantive Analytical Procedures Decision ProcessDecision Process

Figure 5-7Figure 5-7 Overview of the Auditor’s Decision Process for Substantive Overview of the Auditor’s Decision Process for Substantive Analytical ProceduresAnalytical Procedures

LO# 9

5-14

Financial RatiosFinancial Ratios Short-term Liquidity RatiosShort-term Liquidity Ratios Activity RatiosActivity Ratios Profitability RatiosProfitability Ratios Coverage RatiosCoverage Ratios

LO# 10

5-15

End of Chapter 5End of Chapter 5

5-16