Chapter 5

Evidence and Documentation

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

Relationship of Audit

Evidence to the Audit Report

Management assertions

about components of

financial statements

Financial

statements

Audit

procedures

Audit

report

Provide evidence on the

fairness of the

financial statements

LO# 1

Auditor reaches

a conclusion based

on the evidence

5-2

Management Assertions LO# 2

5-3

The Concepts of Audit

Evidence

Nature of audit evidence

Sufficiency and appropriateness

of audit evidence

Evaluation of audit evidence

LO# 3

5-4

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

LO# 4

5-5

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.

Management Assertions Examples of Audit Procedures

Existence 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 for

Obtaining Audit Evidence

Inspection

of records and

documents

LO# 4

Inspection

of tangible

assets

Observation

Inquiry

Confirmation

Recalculation Reperformance

Analytical

procedures

Scanning

5-7

Reliability of Types

of Evidence

LO# 5

5-8

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

Significant Balances or Classes of Transactions

LO# 6

5-9

Audit Documentation

The 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 Audit

Documentation 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 accounting

records agreed or reconciled with the financial

statements.

LO# 8

5-11

Content of Audit

Documentation 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.

LO# 8

5-12

Purposes of Analytical Procedures

Preliminary

Analytical

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.

LO# 9

5-13

Substantive Analytical Procedures

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

Analytical Procedures

LO# 9

5-14

Financial Ratios

Short-term Liquidity Ratios

Activity Ratios

Profitability Ratios

Coverage Ratios

LO# 10

5-15

End of Chapter 5

5-16