4-1

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Part Two

BASIC AUDITING CONCEPTS: MATERIALITY, AUDIT RISK, AND EVIDENCE

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Chapter 4

CHAPTER 4 AUDIT EVIDENCE : TYPES OF EVIDENCE, AND WORKING PAPER DOCUMENTATION

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EVIDENTIAL MATTER

Third standard of field work states. Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination. On a typical audit engagement, most of the auditor's work involves obtaining and evaluating evidence to test the fair presentation of the financial statements.

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THE RELATIONSHIP OF EVIDENTIAL MATTER TO THE AUDIT REPORT

Financial Statements
Management Assertions Audit Objectives

Audit Report

Audit Procedures

Evidence

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MANAGEMENT ASSERTIONS

Existence or occurrence Completeness Rights and obligations Valuation and allocation Presentation and disclosure

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AUDIT OBJECTIVES

Validity Completeness Cutoff Ownership Accuracy Valuation Classification Disclosure

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AUDIT PROCEDURES
Audit procedures are specific actions performed by the auditor to gather evidence to determine if specific audit objectives are being met. A set of audit procedures prepared to test audit objectives for a component of the financial statements is referred to as an audit program.

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BASIC CONCEPTS OF AUDIT EVIDENCE

The nature of audit evidence The sufficiency of audit evidence The appropriateness of audit evidence The evaluation of audit evidence

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THE NATURE OF AUDIT EVIDENCE

Accounting data that can be used to test audit objectives include the books of original entry, related accounting manuals, and records such as worksheets and spreadsheets that support amounts in the financial statements. Many times these data are in electronic form. Corroborating audit evidence includes both written and electronic information such as cheques, records of electronic transfers, invoices, contracts, minutes, confirmations, and written representations.

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SUFFICIENCY OF AUDIT EVIDENCE

The auditor relies on evidence that is persuasive rather than convincing in forming an opinion on a set of financial statements. This occurs for two reasons: Because of cost considerations, the auditor only examines a sample of the transactions that compose the account balance or class of transactions. Due to the nature of evidence, the auditor must often rely on evidence that is not perfectly reliable.

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THE APPROPRIATENESS OF AUDIT EVIDENCE

Evidence is considered appropriate when it is both relevant and reliable Relevance - The evidence must be relevant to the audit objective being tested. Reliability - Reliability refers to whether the type of evidence can be relied upon to signal the true state of an assertion or audit objective.

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GENERAL FACTORS FOR ASSESSING THE RELIABILITY OF EVIDENCE

Independence of the source of the evidence. Effectiveness of internal control. Auditor's direct personal knowledge.

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EVALUATION OF AUDIT EVIDENCE

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

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TYPES OF AUDIT EVIDENCE

Physical examination Reperformance Documentation Confirmation Analysis Inquiries of client personnel or management Observation

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DOCUMENTATION

Reliability of documentary evidence. Internal versus external evidence Documentary evidence related to audit objectives. Vouching versus tracing

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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.

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RELIABILITY OF THE TYPES OF EVIDENCE

Level of Reliability Type of Evidence High Medium Physical examination Reperformance Documentation Confirmation Analytical procedures Enquiries of client personnel or management Observation
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Low

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RELATIONSHIP OF EVIDENCE TO AUDIT OBJECTIVES AND ACTIVITIES

Table 4-6 shows the relationship of the types of evidence to audit objectives

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WORKING PAPERS

Working papers have two functions: to provide support for the auditor's report. to aid in the conduct and supervision of the audit

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TYPES OF WORKING PAPERS

Most CA firms maintain working papers in two types of files: permanent files current files

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FORMAT OF WORKING PAPERS

Heading Indexing and cross-referencing Tick marks

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ORGANIZATION OF WORKING PAPERS

The auditor's working papers need to be organized so that any member of the audit team (and others) can find the audit evidence that supports each financial statement account. See Figure 4-4.

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OWNERSHIP OF THE WORKING PAPERS

The working papers are the property of the auditor. This includes not only working papers prepared by the auditor but also working papers prepared by the client at the request of the auditor.

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2002 McGraw-Hill Ryerson Limited.